Clorox vs. P&G: How an Incumbent Deters Potential Entrants

Columbia Professor Rita McGrath recently tweeted a link to this interview of former P&G CEO A.G. Lafley, and she noted that it is a terrific example of competitive gamesmanship.  It sure is!  Here's what Lafley said, when asked to describe one of his failures at P&G:


"In the 1980s P&G tried to get into the bleach business. We had a differentiated and superior product—a color-safe low-temperature bleach. We created a brand called Vibrant. We went to test-market in Portland, Maine.  We thought the test market was so far from Oakland, California, where Clorox was headquartered, that maybe we could fly under the radar there. So we went in with what we thought was a winning launch plan: full retail distribution, heavy sampling and couponing, and major TV advertising. All designed to drive high consumer awareness and trial of a new bleach brand and a better bleach product.  Do you know what Clorox did? They gave every household in Portland, Maine, a free gallon of Clorox bleach—delivered to the front door. Game, set, match to Clorox. We’d already bought all the advertising. We’d spent most of the launch money on sampling and couponing. And nobody in Portland, Maine, was going to need bleach for several months. I think they even gave consumers a $1 off coupon for the next gallon. They basically sent us a message that said, “Don’t ever think about entering the bleach category.”

When teaching strategy, I talk to students about how incumbents can use various techniques to deter potential entrants.  In some cases, though, those moves to aggressively fight entrants can be very costly.  To cut prices substantially, for instance, can be very expensive.  If you are a large incumbent, and the entrant is quite small, a large price cut can be a costly way to try to keep a start-up out of your market.  Here, though, Clorox found a way to send a powerful SIGNAL that they were READY to fight aggressively, and that was enough to make P&G rethink their move into the bleach business.  The beauty of an effective signal, such as this one, is that it is far less expensive than ACTUALLY HAVING TO FIGHT THE WAR.   The neat thing about this story, of course, is also that Clorox was so good at scanning its environment that it was able to detect this move by P&G even at such an embryonic stage.  Great firms pay close attention to possible future entrants, and they have thought in advance about who might attack their position.  Clorox seems to have done so in this case.