Back in the late 1950s, a P&G chemist named Vic Mills had a profound dislike for cleaning his grandson’s cloth diapers; he was convinced there had to be a better way and began studying the nascent disposable-diaper product segment, which then represented less than 1 percent of the billions of diaper changes in the United States every year.
After studying first-generation disposable baby diapers from around the world, and after several designs failed in premarket consumer tests, P&G tested a three-layer, rectangular pad design (a plastic back sheet, absorbent wadding material, and water-repellent top sheet) in Peoria, Illinois, in December 1961. It failed, too. Mothers liked the disposable diaper product, but the $0.10-per-diaper price was too high. After another six market tests, further refinements in design and engineering, and the development of an entirely new manufacturing process, P&G finally had a success—this time at $0.06 a diaper.
The company launched the new diaper as Pampers. Throughout the rest of the 1960s and the 1970s, Pampers built significant unit volume and dollar sales by converting cloth-diaper users to disposables users. P&G effectively created a new category and easily won a leading share in it. Looking back, the Pampers story is a great example of strategic insight and vision. A better product fulfilled an unmet consumer need, delivered a better user experience, and created better total consumer value. In Peter Drucker’s terms, Pampers disposable baby diapers "created customers" and served them better than competitors did.
By the mid-1970s, Pampers had achieved a 75 percent share in the United States and had been expanded to about 75 countries worldwide.
Imagine what Pampers could have become, then, had P&G chosen a different strategy in 1976. That’s when it introduced a second diaper brand, Luvs, which featured an hourglass-shaped pad with elastic gathers. Luvs delivered superior fit, absorbency, and comfort for about a 30 percent price premium to Pampers. The decision to launch Luvs with a better product might have been the most unfortunate strategic miscalculation in P&G history. So why did P&G introduce a new brand rather than improving or extending the existing brand? First, company practice at the time dictated a multibrand strategy—a new brand for every new product in each category—and the approach seemed to be working well in laundry detergents and several other categories. Second, the new design would drive higher operating costs and required considerable investment in manufacturing capital; projections suggested that a 20 percent retail price premium would be needed to hold margins, and the company worried that current users would reject a premium-priced line of Pampers. So, Pampers stayed the same and the advanced design was introduced at the premium price as Luvs.
Unfortunately, the company had miscalculated. While consumers virtually always say they won’t buy (or even try) an improved product if it is sold at a higher price, those same consumers often change their minds when the product and usage experience are clearly better and the price premium still represents value. This turned out to be the case with shaped diapers, and Pampers suffered.
Then, a new threat emerged. In 1978, Kimberly-Clark introduced Huggies, a new brand with a Luvs-like hourglass shape, a better fit, and an improved tape fastening system. On the strength of its new product, Huggies surged to a 30 percent market share. Meanwhile, the introduction of Luvs did little to bring new consumers to P&G. Instead, it split the Pampers market share between two brands. P&G still sold more diapers overall, but Pampers and Luvs individually ranked behind Huggies in market share.
Future CEO John Pepper, who had assumed control of the U.S. operation around this time, recalls a series of focus groups that left him "in a cold sweat." Every single mom using Huggies, Luvs, or Pampers preferred the shaped diaper. Mothers had decided.So, finally, did P&G.
In 1984, CEO John Smale approved the decision to move Pampers to the shaped diaper design as well. P&G launched Ultra Pampers, a design with the hourglass shape, a new, proprietary absorbent gel, a leak-proof waist-shield, elastic leg gathers, and a breathable leg cuff. The company invested $500 million in capital to build and run new diaper lines and another $250 million in marketing and sales promotion. Ultra Pampers was a success, in the sense that it converted most Pampers users to the new-generation product design and moved Pampers back ahead of Luvs in market share. But it did not provide a definitive win against Huggies in the United States; nor did it resolve the tension between Pampers and Luvs—two virtually identical products that P&G struggled mightily (but unsuccessfully) to differentiate with advertising for another decade.
Finally, in the 1990s, Luvs was repositioned as a simpler, more basic value offering.
—A.G. Lafley is the former chairman and CEO of Proctor & Gamble. Roger L. Martin is the dean of the Rotman School of Management at the University of Toronto.
—Excerpted with permission from Playing to Win, available this week from Harvard Business Review Press.
[Image: Flickr user Sergiu Bacioiu]