Spring

11

Gillette Company: Pressure to Change

Case Analysis
Preparer: Tina Khaladze

Table of Contents
HISTORY INTERNAL STRENGTHS AND WEAKNESSES EXTERNAL ENVIRONMENT ANALYSIS OPPORTUNITIES THREATS PORTERS FIVE FORCES PEST ANALYSIS EVALUATION OF SWOT ANALYSIS BUSINESS-LEVEL STRATEGY STRUCTURE AND CONTROL SYSTEMS RECOMMENDATIONS CITATION 3 5 7 7 7 8 10 11 12 15 16 19

History
The razor of the 21st century can be tracked to the accomplishments of Americans, King C. Gillette and William Nickerson. They invented, in collaboration, the first razor with a safe, inexpensive, disposable blade. This led to the founding of the Gillette Company in 1901 selling its first razors in 1903. Users did not have to repeatedly sharpen the blade. Gillette, on the other hand, benefited from a lucrative repeat business selling blades. In three years, Gillette had manufacturing and sales operations in Canada, England, Mexico and soon enough in China, South America and Europe. accounted for 60% of Gillettes total sales. Several months before Gillettes original patent expired in 1921, the company introduced a new and improved razor for $5, the same price as the original model and lowered the price from the original to $1. This led to cheap imitations. Previously a luxury, daily home shaving was introduced to the masses. A wide range of prices and encouraging customers to trade up, or choose a new product continued in the 21st century. Gillette focused on product innovation and sought to always offer the very best product. In the early 1950s, Gillette bought Toni, womens beauty products, marking their entry into markets beyond shaving. For the next five decades, the company entered and exited some businesses. However, razors and blades remained Gillettes largest and most profitable product. With the help of technology, they were able to earn market shares in excess of 70% in the US and 50% worldwide. Under chairman and CEO Colman Mockler Gillette defeated several hostile takeover attempts between 1986 and 1988, convincing shareholders that the future was brighter for them if Gillette remained independent. In 1988, Warren Buffett bought $600 million in stock to become the companys largest shareholder (about 10%). Gillette reorganized, closed factories
3

In 2000, non-US sales

and started taking care of its operations and increasing efficiencies to protect themselves from future takeover attempts. In the 1980s and 1990s, the company saw rapid growth from emerging international markets, mostly China and Eastern Europe due to the collapse of the Soviet Union. Gillette also introduced several key new products, one of them being the highly successful Sens shaving system, in 1988. Gillette was very well respected on Wall Street. In January 1991, Mockler died unexpectedly. Al Zei, an employee at Gillette since the late 1960s, working mostly overseas, was his successor. Zeien turned his focus on international markets and on product lines outside of the blade and razor business. In 1996, Gillette acquired Duracell. From 1997-2000 sales stagnated, and market share and profits declined. In 2000, Gillette sold its struggling stationary products group. Still, in 2001, Gillette held number one market share positions worldwide with razors, blades, and shave preparations for men and women, manual and power toothbrushes and alkaline batteries. Is success blinding? After the 1998 Asian currency crisis, later spread into Russia and Latin America, the continued rate of high growth became totally unrealistic. The company was restructured several times and costs were cut. Everyone was working hard to focus on Gillettes issues and why the company was missing numbers. But they were not doing what they were supposed to do, spend time with their customers. Gillettes service levels were well below industry expectations and standards. Gillette was not benchmarking itself against competitors but was blinded by past success. Some executives believed that Gillettes historic success had masked some underlying problems that came to light when the company stopped performing. There was a level of
4

conservatism in the company culture and a reluctance to change. Some other problems will resurface after analysis of internal state, external environment and business strategies of Gillette.

Internal Strengths and Weaknesses

Strengths
Century old company; well-established brand. Large brands within Gillette Gillette gained advantage by owning a patent and know how Absence of a strong competitor in blades and razors High quality, innovative products Repeat business from blades generated high cash flow Leading market shares in all core categories and high margins relative to peer companies Historically high growth, premium categories Strong balance sheet Product differentiation with some products, low cost strategy with others Fast International expansion and market

Weaknesses
Old corporate culture Original patent expired in 1921 Lack of accountability. Didnt deliver promises No sales growth and declining operating margins since 1997 Declining market shares in major categories except for refill blades Advertising expenditures, as a percent of sales had declined significantly despite new product launches while trade sales promotion had increased, companies Selling, general and administrative expenditures were rising since the introduction of its new organization structure in 1998 Gillettes accounts receivables, inventory comparing unfavorably to peer

domination

turnover, and return on invested capital all

5

 Strong global presence and broad distribution network Diverse product lines and businesses Defeated several takeover attempts Trade-up strategy with razors and blades; overall good marketing with this product line targeting men and women Despite sales growth slowing down significantly in 1997, profits remained strong

underperformed its competitors Gillette made unsuccessful attempts of

reorganization Too much dependence on several core product lines Gillette had to exit some businesses that it started For 14 consecutive quarters Gillette had failed to hit earnings estimates. Too slow to respond to competition Organizational separation Poor market awareness and marketing strategies with some product lines Poor customer service Trade Loading More form than function Too focused on the books rather than market Blinding success Poor organizational structure and compensation system

External Environment Analysis

Opportunities
Product diversification International expansion Europe and North America strong markets In less mature markets growth rates expected to be higher Gillette still having a great potential to succeed Jim Kilts, a new CEO, marketing savvy outsider, could save the company and make actual change

Threats
Having to drop unsuccessful product lines Industry saturation Threat of becoming a takeover target Political, economical, social, and technological risks related to international markets High levels of competition in major markets (North America, Europe, Japan) Consumer income levels dropping; downward price pressure from customers and consumers Recessions in key emerging growth markets - Asia Pacific, Eastern Europe and Latin America Currency fluctuations in Western Europe Consolidation among retailers Introduction of private labels; risk of being dropped as a supplier Acquisitions in the industry and growth of the competitors False, optimistic projections

 Kilts not certain how much time he would have or how much patience he should have expected from investors, Wall Street, Gillettes board of Directors, customers and employees

Porters Five Forces

Degree of Rivalry
From 1997-2000 sales stagnated, and market shares and profits declined. Gillette had to exit some businesses that it started. In 2000, Gillette sold its struggling stationary products group. For 14 consecutive quarters Gillette had failed to hit earnings estimates. The company had seemingly lost its way over the past four years facing stagnant sales, declining profits, market shares and stock prices. The company had a poor business and financial performance. Gillette quickly expanded and dominated international markets. The company had been very innovative and made high quality products. It was open to product diversification, trying out new businesses, entering and often exiting. Despite sales growth slowing down significantly in 1997, profits remained high. Europe and North America were strong markets for Gillette in the late 90s. There were risks related to international markets (political, economical, social, and technological environments, currency exchange etc). Other companies have been a threat to the future take over of Gillette. Gillette competed for retail customers as well as for individual consumers. The major geographic markets of North America, Europe, and Japan were generally mature, highly competitive, and had low population growth. In less mature markets, consumer income levels were lower and cultural differences forced product companies to develop new business and marketing strategies. Despite being strong, Europe and North America were mature, slow growing markets. Key emerging growth markets in Asia Pacific, Eastern Europe, and Latin America entered recessions. There were currency fluctuations in Eastern Europe without meaningful inflation
8

during this period. In 1999, the battery industry sales surged partially, due to consumers fears about potential Y2K power outages, but in 2000 they plummeted as they had purchased stockpiles.

Threat of New Entrants

Barriers to Entry Gillette issued a patent as a protection from new entrants. The original patent expired in 1921. However, the company already had a well-established brand. The company owned a technology that no one else had in the industry, which gave it a competitive advantage and created a barrier for new entrants. Even though the company was in a strong competitive position, there was still a threat of its future takeover.

Threat of Substitutes
Introduction of private labels by retailers caused a substitution of manufacturers products and was a threat for Gillette to be dropped off as a supplier. The company was loosing market share in several key product categories.

Supplier Power
Gillette was a dominant supplier in the industry, having a monopoly at one point. The high quality and a well-known brand of Gillette was much wanted by retailers. However, the company happened to be in the position of being under the risk of being dropped as a supplier. Retailers introduced private labels, which also increased competition and a possibility to be dropped off as a supplier. Wal-Mart accounted for roughly 12% of Gillette sales and it

introduced its own private label.

Buyer Power
Gillette had a high level of brand identity, influential purchasing point for customers and consumers. The company had to have a product diversification, differentiation with some of the

product lines and low cost strategy with others. In less mature international markets, consumer low income levels and cultural differences forced the company to develop new strategies. Customers had a lot of power. Retailers consolidated on both national and international scales. They started demanding better prices and terms from manufacturers such as Gillette. In the late 1990s, sales growth slowed down and there was downward price pressure from customers and consumers. Manufacturers started seeking growth through increased operational efficiencies. Many companies adjusted their product portfolios through acquisitions to focus on fewer core product categories rather than being small players in many segments. This meant increased competition for Gillette.

PEST Analysis
Political Factors
Breakdown of the Soviet Union opened markets in Eastern European countries such as Belarus, Ukraine, Baltic, as well as Central Asian, Transcaucasia countries and Russia.

Economic Factors
As companies expanded their operations into more countries, managing international currency issues became more critical. As competition became more global, especially with the introduction of the euro, the currency of whole regions could move together, in one direction, for long periods of time. Gillette could not offset currency losses as much as the company was exposed to systematic risk. Key emerging growth markets in Asia Pacific, Eastern Europe, and Latin America entered recessions. There were currency fluctuations in Eastern Europe without meaningful inflation during this period.

10

Social Factors
There was low population growth in the major geographic markets of North America, Europe, and Japan. Cultural differences in less mature international markets influenced business strategic decisions of Gillette.

Technological Factors
Gillette is a century old company with a strong image and a well-known brand. The company gained competitive advantage by issuing a patent and being the first of its kind on the market. They had a know how and owned a technology that no one else did. On top of all, selling blades brought lucrative repeat business to the company and generated a high cash flow.

Evaluation of SWOT Analysis

Gillette was loosing market share in several key product categories. Yet, Gillette

continued to project high growth rates and built organizational infrastructure to support assumed growth. Besides all of the risks, there were some prospects in the company. In less mature markets, growth rates were expected to be higher. Consumer product companies were trying to adjust lower consumer income levels and cultural differences in less mature markets and developed new business and marketing strategies. As an example, products covered a broad range of price points, from disposables at the low end to Gillettes premier product, the Mach3 at the high end. To meet financial growth targets, Gillette continued trade loading that put them in a hole in the start of the next quarter and caused a wide swing in sales, which stayed flat for two months and spiked in a month. Also, retailers would often wait until the end of the quarter to buy when they expected to get lower prices.
11

This is a situation when form overrides the function. Managers were paying more attention to short term financial goals and efficiency than long-term effectiveness. Gillette began reducing advertisement expenditures in an attempt to cut costs as a response to stagnant sales and failing market shares. It also launched initiatives to improve working capital and reduce accounts receivables, but these initiatives were difficult to implement because trade loading was continuing in the face of still-high targets. Wall Street analysts and the investment community encouraged aggressive sales targets. Gillette was unable to deliver on promises. The company was again not addressing the real problem of trade loading. Instead, they were cutting advertising costs, which, along with listening to trade analysts, could have helped in the long run. Gillette needed a new marketing savvy outsider at the top to save the company and make actual change. They found Jim Kilts, even though the company had previously been averse to outsiders. He had had branding experience, successful track, and large names on the record, had reconstructed firms and even started one. In 2001, hoping to bring necessary change, Gillette appointed Jim Kilts as its new CEO.

Business-level strategy
Gillette employed product differentiation strategy with new products and a low cost strategy with older products such as disposable razors and some other business lines one of them being Duracell batteries. They priced them accordingly and had a wide range of prices. Gillette operated primarily in deodorants, oral care and shaving products. The consumer products industry also consisted of categories such as hair care, skin care, cosmetics and fragrances. Consumer products companies introduced new products frequently but not new product categories. Retailers typically sold several top brands and often their own labels.
12

Consumer products companies competed on several fronts: brand recognition by consumers, performance, quality, and price of their products, advertising creativity and expenditures, and service and responsiveness to their retail buyers. So it was important to maintain competitive advantage on many levels, keep up with efficiency and compete strategically. In 1996, Gillette acquired Duracell, the worlds largest alkaline battery company for $7 billion in stock. Alkaline batteries were a high growth industry. Duracell was a strong company known for providing a superior service to its retail customers. Gillette expected scale economies on the selling and distribution side. In 2001, Gillette held number one market share position worldwide with some of its products. Of all Gillettes businesses, competition was the least intense in blades and razors. The absence of a strong competitor was due largely to Gillettes product and market share leadership, from technological and manufacturing advantages, for most of the 20th century. Gillettes core business, blades and razors, accounted for 37% of Gillette sales and 62% of its profits. With high market shares and high profit margins blades and razors were a large source of cash. Gillett marketed blades and razors very well. They targeted both men and women with different razors and blades. Gillette employed a trade-up strategy encouraging consumers to never go back to old products once a new, more advanced product was introduced. Indeed, Gillettes market shares in the US were over 70% for razors and blades, and a declining 50% for disposables. Gillettes efforts to advance brush technology, as well as its link with the dental profession, earned it the leading position in the industry. Innovation in oral care gave it both high growth and high profit margins, and about 25% of the toothbrush market.

13

In 1967, Gillette acquired Braun, a German company that made electric shavers and small appliances for the kitchen and bathroom. Braun was strong in Europe, and Gillette used its international sales force to expand Brauns reach. Brauns technological expertise, such as in electro-mechanical devices, did not exist elsewhere in Gillette. Since 1950 Gillette entered and exited personal care related categories. Sales dropped in 2000 when Gillette divested its hair care brands. Gillette was too slow to respond to a new competitor introducing battery-powered brushes in the US for the price of Gillettes manual toothbrushes, despite being a market leader in both toothbrushes and batteries. Part of the delay in launching battery brushes was attributed to the organizational separation inside Gillette. The oral care business management group handled toothbrush issues and Braun handled the technical development of power brushes. Gillette underestimated differences between the battery business and its razor and blade business when it acquired Duracell. The company attempted to manage them the same way. Gillettes segmentation and trade-up strategy did not work, as consumers did not perceive a significant enough value difference among battery brands. Also, brand loyalty in batteries was lower than with most shaving and personal care products. Competition on price, combined with a growing overcapacity in battery manufacturing in the industry, led to declining prices, increased trade promotion spending, and tight margins. Customer service levels dropped

significantly, and Duracells market share (just over 40%) was declining. All these happened with initial expectations that acquiring Duracell, known for superior service, would result in high growth.

14

Structure and Control Systems

Part of the delay in launching battery brushes was attributed to the organizational separation inside Gillette. The oral care business management group handled toothbrush issues and Braun handled the technical development of power brushes. Gillette was able to defeat several hostile takeover attempts by reorganizing and developing operational efficiency. Investors believed in the company. It was popular on Wall Street. However, there were some flaws in the way the company conducted business on operational and organizational levels. Poor Reorganization. As an attempt to restore company performance, achieve cost savings and respond to retail consolidation, Zeien initiated a major reorganization in January of 1999. Instead of each

business having its own worldwide organization, he created a matrix structure putting functional activities into separate global organizations. Costs were reduced. It was a good idea but poorly implemented. Matrix organization caused unclear roles and responsibilities. While matrix-style structures have their advantages in meeting customer needs, they often create conflict and confusion in organizations. They could result in a lot more inefficiency because employees need to talk to each other, have more meetings and it is often unclear who is making the decision. Old culture. Ineffective compensation system. The Gillette culture was characterized as a place valuing seniority over competency. Matrix structure also brought in unclear lines of accountabilities. The company had a poor compensation system that did not discriminate well between levels of performance. The

organization was too friendly rather than realistic and healthy. This was an old environment, where targets were so unrealistic that missing commitments was commonplace.
15

Recommendations
One of the first issues Kilts needs to address is the organizational structure in Gillette. This is a very important issue for an organization of a size such as Gillette. There is a possibility of an organizational separation, which was the case in the company, because it is so large. Departments need to be more interactive, collaborative and there should be exchange of knowledge between people working in separate departments. There should be departments for some functional and strategic areas overall for the organization. Gillette had an attempt of matrix structure, which was not successful because employees had conflicts with reporting. It also caused unclear roles and responsibilities. The solution for Gillette should be integration of separate departments with clearly defined roles of employees. I support matrix structure for this organization but it should be implemented well. Secondly, Kilts should address problems related to the corporate culture of the company. He should change the whole mentality and communicate current issues clearly, so that employees and executives are aware of Gillettes problems and take them seriously. He should create a healthy environment where incentives are given fairly and straighten out compensation system. Kilts should also emphasize marketing in the organization so that Gillette does not make the same mistakes as it did by approaching the battery business the same way as the razor and blade business. Integration does not mean that every business unit should use the same strategy, especially if product lines are so different. When an organization has several business units, it is possible and even necessary for each business to have a separate strategy. However, goals should be aligned with the corporations overall objective. Gillette should do something about trade loading as it has bad consequences. It gets harder to predict sales and therefore manage them. Gillette has had a huge problem with
16

prioritizing. Pressure from managers at headquarters seemed to drive trade loading in an effort to achieve company sales targets. However, over the long term it made it hard to manage sales for field sales managers. This hindered the ability to generate accurate forecasts, but they hesitated to challenge this practice too strongly. Company allowed for form to override function. Managers at Gillette have been staring into books, listening to what Wall Street has to dictate and following short term financial goals with unreasonably estimated projections instead of listening and responding to the market needs and pursuing long term goals. Most importantly, the company should protect itself from risks associated with international markets. The inherent nature of conducting international business is risky as it exposes the organization to additional threats not existent domestically. Gillette should manage currency issues more effectively, hedging itself against risks related to exchange rates on financial markets. The company should also chose new product lines much more carefully so that it does not end up constantly adding and withdrawing from businesses. Resources are wasted in R&D, production, management and than withdrawal of the product internationally. Focusing on marketing on international level is also extremely beneficial for Gillette. The company will establish a better brand identity, learn about international markets by conducting market research and customize marketing and other business strategies to different cultures. By raising brand awareness and establishing a strong brand, Gillette will not have to worry so much about downward price pressure from consumers as well as customers and being replaced by private labels or dropped as a supplier because it will be able to differentiate itself from other products and create more demand. If Kilts follows these recommendations, improves organizational structure, the state of corporate culture, puts more efforts in domestic as well as international marketing, stops trade

17

loading, improves international business strategies and hedges itself against international risks, Gillette will be in a much better competitive position domestically and internationally.

18

Citation
Ranter, R. M., and Weber, J. (2004). Gillette Company (A): Pressure for Change. In Ranter, R. M., Confidence: How Winning Streaks & Losing Streaks Begin & End (285-296). New York: Crown.

19