Monday, July 12, 2010

Procter & Gamble Product Strategy Changes

In a fascinating article from the Financial Times on Procter & Gamble (P&G), we see how P&G is responding to an economic downturn in terms of their product strategies. P&G states that consumer behavior changed during the downturn and that P&G responded to this change in behavior and changes in their rivals behavior by changing the types of products they currently product and introducing similar products.

This addresses two issues that pop up in some of the courses that I teach. One is the effect of producing similar products on the firms profits and the other is the effect of a change in consumer behavior when firms produce differentiated products.

In class I go over the model in which a firm (such as a monopolist) produces similar versions of essentially the same product - much like P&G producing "basic" products to compete against private label brands. The dilemma for a firm like P&G is cannibalizing its premium version product if consumers switch from the premium version to the "basic" version against the impact of greater competition by rivals (i.e. private labels) on the firms premium brand. Not an easy choice to make, but it can be worked out in a theoretical model.

The other is how changes in consumer preferences between two goods have an effect on the firms profitability. This one is easy to think through - the more similar the products of the two firms, the lower the likely profits will be and visa-versa. The modeling of this can get a little tricky, but at the end we can see the effect of changes in consumer preferences between the two goods does have the expected effect. The issue I normally glance over is why consumer preferences change in the first place, and in the article posted above, we have an example of this exact phenomina.

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