Pennzoil Essay

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Force 1: Industry Competitors/ Rivalry among existing firms: High and steady There is strong competition between products manufactured by various firms in the industry. The number of competing products are large and with deep pockets. Along with large and financial strong players the industry is also characterized by presence of large number of private brands though their share of market share seems to be declining from 39.5% in 1979 to 13.1% in 1988 (Exhibit 4). To facilitate sales firms try to improve their brand awareness through media advertising and the value offered by them vs. competitors. The media advertising expenditures for motor oils grew at CAGR of 9% from 1975 to 1988 and the same for Pennzoil grew by 17% during the intervening period. Thus it is evident that Pennzoil was aggressive in building brand awareness through spending on advertising. Price competition seems to play an important role as rivals compete on price through deep discount pricing. Though Pennzoil has avoided being drawn into price wars, it has increased budget on promotions. This can reduce profitability in near term. (Page 12 of case) The impact of stricter environmental laws introduced in 1989 by several states is unclear so far. But more stringent environmental regulations can potentially increase unit costs and also constitute entry as well as exit barriers. (Page 2) Force 2: Threat of Entry/ Potential entrant: High and steady The barrier to entry in lubricating oil industry is moderately high and steady. Relatively large amount of equipment are required to start operations and capital requirement is moderate ($8 MM, page 6). Also substantial amount of working capital is required for building brand names as well as creating distribution channels. The presence of entrenched players who are vertically integrated and with strong brand image poses a substantial barrier to

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