The Gillette Company was founded in 1901 in a small office in Boston. Since its departure, Gillette has positioned itself as one of the most recognizable brands not only through their safety razor blades, but also through corporate diversification. This included the acquisition of a number of major companies, most recently Duracell. Prior to this acquisition, the Duracell Corporation had been the leading producer of alkaline batteries in the United States and maintained consistent growth in revenues from 1991-1996. Since their purchase of Duracell, their stock price has fallen 45% to a low of $34.
The issue for Gillette is to determine if they can promote the profitable growth of their acquisition. Decision Criteria The main criteria that will be used to evaluate the key issues Duracell is currently facing, is weather Gillette’s acquisition does in fact create a good synergy between the two companies (Gillette ; Duracell). A synergy can be defined as the working of two things together, to produce an effect that’s greater than their individual parts. Therefore, one must evaluate whether the acquisition was actually in the company’s best interest. This is tied into the second decision criteria, growth.
Gillette needs to ensure that the growth of their company, as well as their new acquisition, Duracell’s growth remains profitable. Prior to the acquisition of Duracell, Gillette had been experiencing a consistent growth of 17% per year for the previous six years and was the industry leader in the personal shaver industry. Analysis External: The external environment in which Duracell is operating holds many interesting characteristics, which we can use and analyze in order to see how Duracell compares to the competition.
Porters 5 forces of competition illustrate a very useful outline for us to analyze the current competition n the battery industry. Duracell holds a competitive advantage with resources available to manufacture their own products and ability to sell such products to other discount store brands. Customers who buy batteries in today’s market are most likely to make purchases on impulse. 75% of alkaline battery sales are made on impulse and there is an extreme importance on in store displays in areas where customers can satisfy these impulses. Customers are also becoming increasingly price sensitive and depending less on the brand name and the features new batteries may obtain.
Fortunately for the battery industry there is little to no substitutions available. A main source of competition and frustration for Duracell is the recent increase of new entrants into the market. Established electronic manufacturers like Sony, Kodak and Panasonic are starting to introduce batteries of their own in order to complement the products they already produce. With consumers becoming increasingly price sensitive a new niche has opened up in the market. This niche is becoming saturated with discount store brand batteries, which have been gaining market share steadily in recent years.
These new discount brands aren’t to be taken lightly because as of 2000, 52. 5% of all alkaline battery sales were in discount retailing stores. With a number of new entrants into the market rivalry has become even fiercer. Duracell has two main competitors in the industry: Energizer and Rayovac. As of 2000 Duracell had the majority of the market share with 43. 38%, Energizer 29. 83% and Rayovac 12. 45% with a number of store brands holding the remaining 14. 24%. Duracell and Energizer are constantly at each other’s throats with frequent technological upgrades in order to one up the other.
Rayovac is relatively new in the industry and has gained a substantial amount of the market share. Rayovac however doesn’t participate in the technological war, instead they offer a battery that is comparable to Duracell and Energizer products but offered at a price of 15% less. Rayovac has quickly become a major player in the industry and since their initial offering they have had 16 straight quarters of revenue growth. The rivalry in this industry has become so intense that it is not uncommon for these companies to bring each other to court for various claims made in their new product launches.
Outside of the competitive environment potential opportunities in large developing economies (like India) have an untapped market with regard to the alkaline batteries. The conversion from zinc-carbon batteries to alkaline was much slower outside the United States then anticipated and this hindered international sales for some battery companies. Alkaline batteries in these foreign markets only make up 3% compared to 70% in the United States. The reason for the slow conversion in the foreign markets is due to tough economic times and the high cost associated with setting up manufacturing facilities capable of alkaline production.
Internal: Prior to Gillette acquiring Duracell in 1996, the Duracell Corporation maintained a constant growth in revenue (about 8% annually). Gillette and Duracell both held strong relationships with many vendors worldwide and sustained a strong channel of distribution. Upon the acquisition of Duracell, Gillette eliminated 4,700 jobs, closed 14 plants and also replaced Duracell’s advertising agency with that of Gillette. These changes resulted in savings of $200 million and decreases in their operations margins from 30% in 1998, to 16% in 2000.
The debt to equity ratio has been increased from 1. 2 in 1998 to 4. 41 in 2000. This increase is most likely due to increases in advertising costs (caused by continuous new product releases) and costs of research and development in order to remain competitive within the industry. Gillette adopted the same business strategy with regards to the battery industry as they had used with their namesake safety razors. This strategy involved continuous product and technological upgrades. The new products developed by Duracell were marked up at a 20% premium from their Coppertop counterparts. The VRINE model demonstrated that Gillette had no real competitive advantage.
They do however possess some value through potential business synergies (pairing their electronic devices with Duracell batteries). In using established distribution channels as well as advertising from other established Gillette businesses, the option of pairing products is somewhat valuable. The battery market is very price sensitive and as a result price is the only real product differentiator. Alternatives ; Recommendations When deciding what to do with Duracell, Gillette is faced with a number of alternatives. Firstly, Gillette has the option of continuing with Duracell in the battery market, a status quo.
This would be beneficial, as it would allow them to continue to operate in this industry that allowed them to diversify their operations. It allows them to remain competitive to a certain extent, as they will continue to improve their current technologies and release new products. The disadvantage to this choice of strategy is that they will slowly continue to struggle and eventually become less and less profitable. It is basically a means to an end. The second alternative is to re-evaluate the strategy they currently are implementing, and make improvements where necessary.
These improvements would be to stop their product cannibalization, create product uniformity and implement a low cost battery to compete in the discount market. In addition to this Duracell should consider entering international markets such as India, and European countries that currently use the wet cell battery form. This would provide Duracell with two options. One would be to introduce the lower-end line of alkaline batteries to these markets and gain a first mover advantage. Currently, only 3 percent of this international market is alkaline compared to 70 percent in the USA.
Eventually, these underdeveloped countries will improve, and the battery technologies used will be the alkaline battery. The other option would be, instead of providing this market with the new alkaline technology, to begin manufacturing their own line of wet cell batteries to compete in these markets against the current players. By entering the international markets with the alkaline battery, the company would have a significant advantage over their competitors, than if they entered with their own version of the wet cell battery, as according to the VRINE model.
The fact that the alkaline technology allows a longer lasting battery provides value, and the fact that they would have this first mover advantage would demonstrate their product’s rarity. In terms of inimitability and non-substitutability, Duracell would not have any advantage. The technology in the batteries is already around in the North American markets, Duracell would only be bringing it into untapped markets, and thus it is not inimitable. In terms of substitutability, the market that they would be entering into uses the wet cell battery, thus these are the product substitutes.
Another element of the strategy reformulation is the implementation of a less-expensive battery to compete against Energizer’s Eveready and the entire Rayovac line in the North American markets. Currently they are continuously bringing up new technologies and constant product improvements, creating somewhat of a technology war between the three companies. In addition to this they seemed to have failed to realize that they are in a price war with these competitors over their customers.
Consumers have acquired a perception that one battery is the same as another, and that the little extra charge length (if any) that you may get out of one with newer technology, does not really justify its price mark-up. Thus, if Duracell lowered the price of their “Coppertop” battery by 15%-20% to compete against the entire Rayovac line, and Energizer’s Eveready brand, it might be able to gain some market share from those consumers who are price sensitive.
Instead of reducing their price for the “Coppertop” battery, Duracell may also consider actually purchasing Rayovac and then using Rayovac’s line of batteries to compete with Energizer’s Eveready line. This would allow them to have a considerable advantage in market share and would allow them to muscle their primary competitor, Energizer around. Not only this, but it would bring in the expertise they need to manage Duracell properly. Currently, Rayovac is the only company of the three that experienced both growth in revenues, and operating margin. We have valued Rayovac at 3. 5 billion (700 million in revenues x 5 years).
Even in their recent decline, Duracell’s revenues are over three times those of Rayovac. With the current growth that Rayovac is experiencing, coupled with the decline that Duracell is facing, it would certainly be a viable option for Duracell to consider purchasing Rayovac, and using them as a lifeboat through these troubles; allowing them to feed off of the experiences of Rayovac and, perhaps implement some of the things that are going well for them, into the Duracell company. Finally, the third alternative would be to divest from Duracell and sell it off to one of their competitors.
Since Gillette’s acquisition of Duracell, profit margins and growth have continuously been falling from where they once were. At some point in time, when an acquisition is continuously on the decline, the company must ask themselves “when is enough, enough? ” and either liquidate their assets, or sell them off to another player who is perhaps more experienced in managing this sort of company. The negative side to this however is that they lose the synergy that they’ve created in being able to offer these two products through the various distribution channels they have between the two.
In addition to this, the company will have to be sold at a loss, which after just being acquired relatively recently. Implementation After careful analysis of Gillette, Duracell and the battery industry we have initiated an implementation plan which we believe will fix Gillette’s poor profitability growth. We have decided that in order to facilitate Gillette’s full profitability potential we will have to make some strategic organizational and marketing changes as well as expand our market overseas. We will lay out all the timelines and specific changes we plan to implement from our alternatives in this next section of our review.
We felt that the main source of competition and threat to Duracell was the change to price sensitivity and the organizations that are currently catering to this new customer needs. Therefore effective immediately we are going to cut prices by 20% across the board for all our products. This will enable Duracell to compete with Rayovac, who sells batteries that are comparable in performance and superior in price. Essentially this will make our copper top battery a direct competitor with Rayovac’s products and our premium Ultra line will still have an inflated price (because of technological upgrades) but at a more affordable cost.
We feel that this strategy will put Energizer on their heels and in a reactive strategic mode while at the same time we put the heat on Rayovac and their products. Prices being equal Duracell’s brand awareness and superior reputation will inevitably be the deciding factor in customers picking our brand over Rayovac’s. We do realize that slashing prices will affect revenue’s and other changes must be associated in order to counteract the lower prices of the products. Along with the price changes we’ve decided that the fierce technology war with Energizer is no longer worth the money and efforts.
Therefore along with slashing prices immediately we will also halt all product upgrades for the next 18 months. We will leave the current technological capabilities in the Ultra line as is for the next 18 months. With customer needs focused on price and not minuscule technological upgrades we think this strategy will better fit the industry for right now. Research and development (R;D) is still very important and feel that it is more effective at a slower rate. Customers will be able to differentiate between new and old and justify spending the extra amount because upgrades will be sufficient as opposed to the previous frequent tiny upgrades.
These gradual upgrades and releases will consequently save Duracell money in advertising and R;D that will help counteract the price slashes. From the information given in the case it is unclear exactly how much money Duracell could save in the R;D department but it is safe to say it would be in the tens of millions per year. Duracell’s last major product update release cost the company 140 million dollars worldwide in advertising. With postponing product updates to a more gradual pace Duracell could save a significant amount of money every year. In regards to advertising in general we would make strategic changes to this area as well.
Batteries are mainly bought on impulse, which makes in store displays, shelf space and in store location very important. Currently Duracell is focused on mass media and technological characteristic advertising. Upon inspection Duracell needs to transfer time and energy to in-store displays and product placement so a customer’s eyes are drawn to their products and therefore increase the likelihood of them being purchased. We plan to fulfill our current advertising campaigns, than reposition our advertising efforts more towards in-store, point of purchase advertising and displays in order to attract the spontaneity of battery consumers.
Our current campaigns should be completed within a year in which case our new advertising efforts and campaigns would be rolled out. With these subtle strategic changes we feel that we can fine-tune Duracell’s operations and position ourselves more competitively which will hopefully yield to an increase in profitable growth for years to come. Secondly we really fell that there is huge potential in the overseas market with alkaline batteries. We would like to expand overseas with our copper top alkaline battery.
Alkaline batteries aren’t popular at the time but we feel investing in making a wet cell battery would be a sunken cost, as it’s only a matter of time till they are extinct. Therefore we are willing to take a risk and invest our resources, time and money into these untapped markets with our alkaline copper top battery. Markets like India, China and Western Europe are huge markets with massive opportunity. Our group strongly feels that the rewards of being a first mover overseas will greatly outweigh the risks in the long run and help us gain huge competitive advantage over Energizer.
In the near future we think markets like China, India and Western Europe will become technologically and economically advanced. The cost of alkaline batteries is what is holding this technology back in said markets, but as time goes on and technology advances these prices will decrease and benefits of the alkaline battery will be enjoyed globally. We plan to execute this plan exactly one year from now. One year because it will give us time to implement all our strategic changes in the US and have a good grasp on the new operations. After one year we plan to have 2 inventory storage facilities where we can utilize the 3 markets overseas.
We don’t won’t to fully commit with a production facility right away and feel that shipping massive amounts of product at once to these facilities will be a cost effective way in beginning to penetrate the markets. One facility will be located in Germany and the other in Eastern India in order to efficiently distribute all market effectively. After one year of renting these two storage facilities we will evaluate our level of success, and then determine if it’s worthwhile investing in a production facility for alkaline batteries. We fully believe that this plan will exponentially help Duracell grow its sales and revenues for the long run.
As well with such drastic changes in our strategies and markets we will have Energizer and other competitors thrown way off and have them scrambling for answers. We feel that all these changes are necessary in order for Duracell to operate more efficiently and enjoy profitable growth. The timelines give us enough to execute these changes to our liking and still stay very aggressive in the market. If our suggestions of strategic change and expansion of our market do not fix Duracell’s profitable growth we have a contingency plan in place.
After two years of implementing our changes we will re-evaluate our position in the market and decide if we should continue with Duracell or divest. After two years we will have been overseas one full year and will know whether we would like to continue or not with our efforts in those markets. As well, our strategic changes will have been in place two full years and if they have proved to be successful we would see these beneficial results. Hence two years seemed like a very appropriate timeline for us to make a very critical decision of whether or not to divest from Duracell.