CASE STUDY AND EXPLAINATION

Running Head : Gillette : Case Study

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Date Gillette Company was one of the best performing companies in the United States in the 1980s . The company dealt with the production of shaving blades and razors . Gillette had managed to acquire the largest market share in the US and the European markets . However , the company faced huge competition based on the introduction into the market other disposable razors that threatened to convert the shaving-products industry to a commodity market . Gillette had continued in the production of

non-disposable razors and they were clearly losing out to those manufacturing disposable ones . The company , however , managed to launch a product , Sensor , a twin blade razor , and the new product lifted them to profitability (The Economist News

The economic theory of cross-price elasticity of demand was employed by Gillette to raise the demand for its new product . Cross price elasticity of demand measures the rate of response of quantity demanded for one good based on price change of another good . The goods may be complementary or substitute goods . An increase in price for one of the complementary good causes a decrease in demand for both goods . An increase in price for one of the substitute goods causes an increase in demand for the other . If the demand for the new Gillette product would be high , they needed to launch their product at a reasonable price . This was the only way to change demand to their favor since the prices of other commodities in the market could not be altered

The price offered for Sensor was much lower than that of other non-disposable razors . This may be interpreted as an increase in price for substitute goods . This offering of low price amounts to an increase in the other substitute goods . When the price of one substitute good increases , demand for the other good increases . This was the scenario created by Gillette . The demand for Sensor rose very fast which ensured huge sales for the product . By making the prices of the other products in the market higher than for their own , the company succeeded in shifting demand to their favor thus applying the cross-price elasticity of demand . Gillette must have known that the products in their industry are largely responsive to price changes

The economy of scale is the other economic theory that was successfully applied by Gillette . This theory is concerned with lowering the unit cost of production for the company 's as the output increases . When a company manages to lower its cost of production , it offers cheaper prices to the customers giving it a competitive advantage over the competitors . In the application of this economic theory , Gillette produced large numbers of razors thus enabling them to lower the cost per unit . That Gillette launched the product across the American and the European market means that they must have released many products

The company also exploited other aspects of internal economies of scale The company had previously run into financial crisis and...