Gillette is proud to have diverse workforce, which according to the executives at the company, adds to its value. Diverse workforce creates an environment where innovation and creativity are easily produced. In fact, Gillette claims that the foundation of the company’s human resources philosophy is a strong policy as well as effective attainment of its policy. Gillette believes in training, which can be seen in the fact that Gillette invests $125 million each year in worldwide employee training and development programs. Gillette strongly believes in the fact that when employees get the right training, they improve their skills and achieve personal recognition and success. Additionally, the firm supports the empowerment of hard and dedicated employees.
Functional areas
Human Resources
In its long existence of almost 100 years, Gillette has become one of the most diversified companies worldwide. This is reflected in the fact that the company has 38 manufacturing facilities in 19 countries, and its product distribution is in over 200 countries around the world. Currently, the workforce consists of about 39,800 employees. Gillette puts great emphasis on awareness and elimination of environmental, health, and safety (EHS) risks to its employees and to the communities in which it operates. The Gillette Company is aware that its employees worldwide contribute to the success of the company. This is the major reason why Gillette invests over $125 million each year in employee training and development programs. The company’s goal is to ensure safe and healthful working conditions in all of its facilities.
Gillette has a variety of different training programs, which are offered to all employees. Site teams regularly receive training in the technical and communications aspect of safety. The training program highlights several key points such as effective communication, rapid response, corrective action, repair and restoration, and resumption of business activities. An example of the effectiveness of the company’s training program was the Santa Monica Manufacturing Center’s return to operation within a few days after the southern California earthquake in January 1994.
Gillette’s success in reducing workplace accidents has also brought some new benefits to the company; an example is the U.S Worker’s Compensation. In 1997, Worker’s Compensation claims costs were $0.09 per hour compared to $0.26 per hour in 1990. This was a decrease of 64%. In addition, fewer accidents mean a decrease in indirect cost or overhead savings.
The company’s excellent safety performance is the result of several policies and procedures, which are designed primarily to accomplish long-term objectives and goals. This is why the company especially focuses on providing safe and healthful facilities, as well as training and education.
Gillette also offers some benefits to its employees, such as the Employee Stock Ownership Plan (ESOP). It was established to assist Gillette's employees in financing retiree medical costs. ESOP shares also reduce the company’s obligations over the period of allocation.
Marketing
From the early beginnings of the company, it has been realized that marketing, in particular distribution and advertising, would play an essential role in the company’s success. Distribution plays an important part in the company’s system. To satisfy the global demand for all of its products, Gillette established 38 manufacturing facilities in 19 countries. The company distributes these products through wholesalers, retailers, and agents in over 200 countries. Sometimes, not enough emphasis is put on a company’s performance in transportation and distribution. However, Gillette conducted a case study in Mexico, where the company studied traditional measures of delivery time, customer service, and cost in order to improve its performance.
The most important aspect of Gillette’s marketing plan is, by far, its advertising. From the beginning, in 1903, Gillette took 25 cents for every razor aide in order to capitalize on its advertising. Only two years after, in 1905, the advertising amount increased to 50 cents per razor. Over the following years, Gillette grew at a very fast pace. To create awareness and put emphasis on a push strategy, the company expanded its advertising mediums and started to use cartoon ads, radio shows, prizes, contests, and cross-promotions just to name a few. Another successful event for Gillette was the sponsorship of the World Series in 1939. This is when the slogan “Look Sharp! Feel Sharp! Be Sharp!” became famous and recognized by millions of men.
Nowadays, advertising still plays an essential part in Gillette’s marketing strategy. Advertising spending was $606 million in 1999, which included sampling. In the same year, $1,202 million were spent on sales promotion. Spending in 1999 included the continued major marketing effort behind the Match3 shaving system and the Duracell Ultra battery. However, there was also an increased support for new products, such as the Oral-B toothbrush. Advertising spending in the previous years amounted to $613 million in 1998 and $641 million in 1997.
Since Gillette was the first company that invented the first safety razor, it always had been an industry innovator. Throughout the years, Gillette was constantly introducing new products to the market. Here are a few examples of introductions:
1932 Blue Blade (premier men’s razor)
1938 Thin Blade
1946 First blade dispenser; eliminated need to unwrap individual blades
1959 Super Blue Blade (silicon-coated blade)
To sustain growth, Gillette kept introducing innovative shaving systems in the 1970’s and 1980’s. One of its most successful products introduced to the market was Trac II, the first twin-blade shaver, which was introduced in 1971. This was also the largest new product introduction in the shaving history, and accounted for over $10 million in advertising and promotion; however, for its other brands, Gillette was forced to cut its advertising budget. Trac II, was targeted towards young, college-educated men in metropolitan areas, with stable income. For the next five years, Trac II was the fastest growing shaving product on the market.
In the 1980’s Gillette’s main focus was on its global markets and strategies. In the mid 80’s Gillette was marketing over 800 products in more than 200 countries. Overall, it can be seen that new, innovative products are driving Gillette’s performance. 1999 was the sixth consecutive year in which at least 40% of sales came from products that have been introduced within the previous five years.
Another main focus in Gillette’s marketing strategy is research and development. R&D costs, included in selling, general and administrative expenses, amounted to $223 million in 1999, $209 million in 1998, and $212 million in 1997. This was an increase of 6% in 1999, versus a decrease of 2% in 1998. Gillette is very concerned about the customer satisfaction, and it tries to provide the best quality products. This is why the company invests into research and compares its’ product effectiveness with competitors’ products. R&D testing is conducted for new products, while quality control testing is conducted for manufacturing processes. Customers can also complete shave evaluation cards. This allows Gillette researchers to analyze the performance of the different shaving devices.
Financial Ratios
Quick Ratio= Current Assets-Inventories
Current Liabilities
1988 1987 1986
Gillette 1.13 1.02 .98
Warner-Lambert “Schick” .86 .90 1.23
BIC Corporation 1.77 1.87 1.88
Swedish Match AB “Wilkinson Sword” .77 .75 1.08
The quick ratio determines how is the company’s short-term liquidity. Looking at Gillette’s ratio, each year the company is becoming more liquid. The reason for Gillette’s low liquidity ratio in 1986 is due to the attempted hostile takeover of the company, which caused the company to use long-term debt to finance its defense. When looking at the industry competitors', Gillette’s liquidity ratios seem to be above average.
Debt Ratio= Total Liabilities
Total Assets
1988 1987 1986
Gillette 1.03 .78 .82
Warner-Lambert “Schick” .50 .51 .58
BIC Corporation .23 .25 .24
Swedish Match AB “Wilkinson Sword” .63 .64 2.21
The debt ratio measures the company’s relative amount of debt and equity financing. Gillette has a high debt ratio compared to the rest of the industry. This is fairly common for a company of its size. In 1988 Gillette’s debt ratio soared, making the company riskier. This is due to another attempted hostile takeover, which increased the company’s debt load.
Asset Turnover= Sales
Total Assets
1988 1987 1986
Gillette 1.25 1.16 1.11
Warner-Lambert “Schick” 1.45 1.41 1.23
BIC Corporation 1.21 1.30 1.38
Swedish Match AB “Wilkinson Sword” 1.37 1.32 4.1
The asset turnover ratio measures the efficiency of asset utilization. Gillette’s asset turnover is rising every year (1986-1988). This means that the company is using its assets more efficiently. Compared to the overall industry, Gillette seems to be around the industry average.
Return on Assets= Net Profit After Tax * 100
Total Assets
1988 1987 1986
Gillette 9.36 8.42 .62
Warner-Lambert “Schick” 12.58 11.95 12.28
BIC Corporation 12.14 12.83 13.55
Swedish Match AB “Wilkinson Sword” 4.96 3.66 8.86
The return on asset ratio determines the productivity of the company’s assets. Gillette’s 1988 and 1987 return on asset ratios are fair. This means that the company is making a decent profit relative to its assets. The ratios are a little lower than two of the competitors; however are not the lowest. Gillette’s 1986 ratio is extremely low. This is once again due to the trouble caused by an attempted hostile takeover. Gillette was forced to buy back 9.2 million shares of its own stock in order to fend off the attack, resulting in the low ratio.
Inventory Turnover= Cost of Goods Sold
Average Inventory
1988 1987 1986
Gillette 2.28 2.26 1.96
Warner-Lambert “Schick” 3.54 3.09 3.32
BIC Corporation 2.43 2.77 2.95
Swedish Match AB “Wilkinson Sword” X X X
The inventory turnover ratio measures the management’s ability to control investment in inventory. The higher the number is, the worse it is for the company since the ratio tells how efficient a company is at turning over its turnover. Gillette’s inventory turnover has remained fairly constant over the years, and seems to be around the industry's average, meaning the company’s inventory is being used efficient relative to the rest of the industry.
Net Profit Margin= Net Profit After Tax * 100
Sales
1988 1987 1986
Gillette 7.50 7.26 .56
Warner-Lambert “Schick” 8.70 8.49 9.96
BIC Corporation 10.03 9.88 9.79
Swedish Match AB “Wilkinson Sword” 3.64 2.78 2.15
The net profit margin ratio tells how efficient the company is after all expenses are considered. In 1986 Gillette seems to be a disaster. Its ratio is much lower than the industry’s competitors. This shows the negative effects of the hostile takeover attempt, and how close the company came to crumbling. Since 1986, Gillette appears to be operating fairly efficiently, and in line with the industry average. Being such a large company, it is hard for the company to operate extremely efficiently.
SWOT analysis
The Gillette Company is the global leader in nearly a dozen major consumer products categories, principally in the grooming, portable power and oral care markets. Gillette's history as industry leader is an important strength, which the company can rely on. Company’s ability to generate long-term, profitable growth in a changing global marketplace rests on several fundamental strengths. These include constantly increasing accumulation of knowledge in its core businesses, innovative products, and enormous manufacturing capability that produces billions of products reliably, efficiently, and cost-effectively. Strong and enduring brand loyalty is another strength which the company should preserve. Older consumers have displayed preference for razor systems and they recognize Gillette as the industry leader. However, the younger male population has not been targeted as strongly by Gillette, and many feel that all the razors are the same. A major weakness on Gillette's part is the failure to capture this younger segment of the market. Diverse workforce is another strength of Gillette, which adds to company’s value.
Marketing plan is an area which sets this company apart from its competitors. The marketing plan for each new product is designed so flawlessly and in detail that success is almost inevitable. Gillette’s image of an industry innovator as well as the knowledge about the market and consumer’s needs, which can be seen in its successful marketing plan are major sources of Gillette’s sustainable competitive advantage.
Gillette does not have many weaknesses. As mentioned above, a failure to capture the younger segment of the population as well as minorities is company’s major weakness. The company has been losing its market share in the disposables market, causing profits to decrease. In addition, the retail packaging and display are not unique, and consequently the products are perceived as tired.
There are several opportunities which Gillette could take advantage of. The success of the new razor system in consumer testing represents a valuable opportunity for the company. There is also plenty of opportunity in the disposable razor market, with the advancements in the plastic industry, which would allow Gillette to manufacture an affordable, high-quality razor. Minorities and younger consumers are not targeted at all, which would give Gillette an opportunity to be the first company to capture this target market. Women’s market is growing at an annual compound rate of 27 percent, which presents another possibility for Gillette. The increasing popularity of disposable razors is the biggest threat to Gillette’s profitability. Competitors are still far behind, and they do not represent a threat to Gillette.
Strategic Direction
The goal of the Gillette Company is skillful marketing of superior technology in order to achieve worldwide leadership and sustained profitable growth. To reach this goal, company focuses on being a leader in all of the businesses in which it operates. This can be clearly seen in its mission statement:
“Our mission is to achieve or enhance clear leadership, worldwide, in the existing or new core consumer product categories in which we choose to compete.”(www.gillette.com)
The current core categories in which Gillette competes are:
· Male grooming products, including razors, blades, electric shavers and shaving preparations, and deodorants and antiperspirants
· Female grooming products, including wet shaving products, hair removal and hair appliances, and deodorants and antiperspirants
· Alkaline and specialty batteries
· Oral care products, including toothbrushes, inter-dental products and oral care appliances
· High-quality small household appliances, including coffeemakers and food preparation products (www.gillette.com)
Three main businesses which generate more than three-quarters of sales and even higher proportion of profits are grooming, including both male and female, portable power, and oral care. Gillette’s performance depends on new products, based on the fact that at least 40 percent of company’s sales come from products launched within the previous five years. In conclusion, The Gillette Company is a global leader and an extremely successful organization.
The vision of Gillette is clearly visible in its goal of sustained profitable growth and worldwide leadership. Company strives to hold the position of the global leader in its three primary businesses, and at the same time to achieve high profits. This goal is pursued in global businesses that are large and healthy, with great potential derived from normal market development, and stimulated by new products; all of these qualities can be clearly seen in Gillette’s powerful grooming, portable power and oral care franchises.
In order to pursue its mission, Gillette lives by the following values: people, customer focus, and good citizenship. The company employees dedicated workforce who is motivated and committed to company’s success. Gillette believes in the benefits found in diversity of people, ideas and cultures. The company is also dedicated to consumers by offering products of the highest levels of performance for value, as well as providing quality service. Finally, Gillette complies with applicable government laws and regulations, and contributes to the community in which it operates.
In conclusion, The Gillette Company’s enterprise strategy is to continue being a global leader in the primary businesses in which it operates. Company seems to give the highest priority to its employees, customers, and the shareholders.
Based on our analysis, this appears to be the appropriate enterprise strategy for Gillette. The company has been following this strategy since its beginnings, and it has proven to be very successful. There is no reason why continuing with this strategy will be less successful than in the past. Currently, there are no trends in the external environment which are strong enough to affect company’s success and cause the change of the strategy. This strategy strives to capitalize on Gillette’s strength of being a market leader and innovator, while at the same time to eliminate declining profits. Gillette currently operates in four businesses, and is undisputable market leader in three of them. There is no need for the company to eliminate any of its existing businesses, since all of them are profitable. It is also not recommended that the company expands into other areas since it would cause strain on manufacturing and production. Overall, the current strategic direction of the company is appropriate, and Gillette should continue pursuing it.
Evaluation of Alternatives
After careful evaluation of Gillette’s strengths, weaknesses, opportunities and threats, we have selected three alternatives, which the company could pursue. The Gillette Company is the world leader in male grooming products that include blades and razors, a variety of different shaving preparations, as well as electric shavers.
The first alternative involves the introduction of a new men’s razor system. This alternative seems to capitalize on Gillette’s sustainable competitive advantage of an industry innovator and global leader, especially in the men’s wet shaving market. This alternative also takes advantage of the success of the new razor system in consumer testing; according to the research, this new razor system provides a 25 percent better shave, which would again put Gillette in front of its competitors.
The second alternative involves entry into the disposable razor market with an affordable high quality razor. This alternative capitalizes on a perceived trend that the disposable razor market will approach 100 percent by the mid to late 1990’s. Many competitors are ahead of Gillette, and the company has been losing its market share. By implementing this alternative, Gillette would be able to regain its leadership position, increase profits, and meet consumer’s needs.
The third alternative involves increasing emphasis on the women’s segment in the wet shaving market, as well as targeting younger consumers and minorities. By implementing this strategy, Gillette would capitalize on the opportunity that the women’s segment is growing at the annual compound rate of 27 percent. It would also eliminate one of Gillette’s major weaknesses, which is the failure to capture the younger segment of the population and the minorities.
The First Alternative: Introduce the new razor system for men
The first alternative, which Gillette could pursue, involves launching a new system razor for men. The profitability of the company has been declining due to the increasing market share of disposables. In order to avoid continuing profit loss, it is evident that a new, improved razor system must be introduced. Gillette would attract disposable users as well as those currently shaving with a competitor’s product by channeling advertising and promotional efforts toward this new system. Introducing the new, superior system into the market in which competitive pricing is forcing profits to decline, would add value to Gillette because it secures progression toward company’s goal of “sustained profitable growth.”
Introducing a new razor system involves several costs. The largest cost, which Gillette faces, is the cost of launching the new system into the market. The company has already invested a lot of money into research and development, and the reports indicate that the new shaver is doing well in the tests. There is also a cost of advertising, which is essential in order to make consumers aware of the new product. The advertising campaign would be highly expensive because it would include all media vehicles, such as print advertisements, TV commercials as well as the Internet. Other costs include distribution costs of delivering the product to the sellers; sales promotion costs of sampling, point of purchase and in-aisle displays; and cannibalization costs, which include losing sales of other Gillette products to the new razor system.
This alternative would make a great fit within the organization. The introduction of the new razor system would help Gillette maintain its competitive advantage by introducing this product innovation before its competitors. With a support of a strong advertising campaign, Gillette would also increase consumer recognition, especially with the younger consumers. The company would be able to execute this alternative successfully since it already had previous experience with other razor systems, such as Trac II, Atra, and Sensor Excel. All three of these systems proved to be very successful in men’s wet-shaving market. This alternative would fit with the corporate culture since it is consistent with the current strategic direction of the company of holding the leadership position in the grooming market. It is also consistent with Gillette’s current focus on men’s wet shaving market. Finally, this alternative would fit with Gillette’s major, sustainable, competitive advantage of being an industry innovator.
The risk associated with choosing this alternative involves losing the market share of the disposable segment of the wet-shaving market. Additionally, the consumers could not respond favorably to the new razor system, which is highly unlikely; nonetheless, this would cause large decrease in profits. There is no threat from competitors introducing a similar product, since Gillette has been an industry innovator since the beginning of this century.
Overall, introducing a new razor system for men would add value to the company by increasing profits that are currently declining; it would not incur extremely large costs other than advertising, and it would make a great fit with the current Gillette’s strategic direction of being an industry innovator, without creating substantial risk. In addition, the company would not need to change its focus, which is the men’s wet shaving market. The introduction of a new razor system would be the most beneficial to Gillette’s long-term success.
The Second Alternative: Focus on the Disposable Razor Market
The second alternative is to concentrate on disposable razors, which given the current trend will approach 100 percent of the market by the mid to late 1990’s. The Gillette Company is the leading producer of grooming aids. Gillette controls 56 percent of the blade market and 58 percent of the disposable razor market, even though the company’s market share is declining. Based on these numbers, concentrating on disposable razors would take advantage of the organization’s strengths. Manufacturing disposable razors will add value to the organization, as it will reposition The Gillette Company as the undisputable industry leader. The company’s profits are declining; however, concentrating on disposable razors will help to create a profit. Disposable razors can be manufactured inexpensively, while meeting market demands. This allows for a substantial profit to be made. Gillette needs to accept the transition to disposable razors and begin to attempt to segment the disposable razor market based on performance.
Accepting this transition does entail organizational costs. Gillette is fortunate to already manufacture disposable razors, so the transformation should be fairly simple. Gillette will encounter some transformation costs, as it needs to change manufacturing lines from the production of razor blades to disposable razors. Gillette already spends money and time on the research and development of disposable razors, but needs to allocate more funds towards the development of new and improved disposable razors. The existing razor blades budget will be reduced since Gillette will be concentrating more on new disposable razors. The company will still manufacture razor blades, but at a smaller magnitude. Since its beginning, The Gillette Company has normally budgeted a large sum of funds for advertising expenditures. Its current advertising spending has fallen from $61 million in 1975 to $15 million currently. The company will need to spend more on advertising than its current $15 million; however, will have to shift the scope of its campaign. These costs might seem substantial at first, but will benefit Gillette once the disposable razor has taken advantage of the growing trend and established itself in the marketplace.
The alternative of concentrating on the production of disposable razors fits perfectly within the organizations current structure. Gillette currently manufactures disposable razors, so already has the knowledge and machinery to do so. Being an industry innovator, in the early 1980’s, Gillette introduced most of the new disposable razors. Its razors possessed features such as movable heads, the patented Lubra-smooth lubricating strip, and the first ultra-slim head. When producing the Micro-Trac, the company claimed to have designed a state-of-the-art manufacturing process that requires less plastic, thus minimizing bulk and reducing costs. Using this knowledge, Gillette can produce several varieties of disposable razors that cater the needs of the growing market while keeping their manufacturing costs low. This strategy will allow Gillette to charge a higher price in order to provide the company with a sufficient profit per razor. The organization is currently seeking ideas to improve the company’s slipping profits and market share. This alternative requires Gillette to slightly change its current strategic direction of focusing on razors blades to one that concentrates on disposable razors.
Every alternative has a certain amount of risk associated with it, as does this one. Industry analysts estimated that manufacturers earned three times more profit on a razor and blade system than on a disposable razor. Retailers prefer to sell razor systems for two reasons: they take up less room on display racks and make more money on refill sales; however, they still allocate the majority of their stock to disposable razors since they generate a large amount of store traffic. By changing the focus of its strategic direction, Gillette would be taking a large risk; if the perceived trend of disposable razors eventually taking over the market turned out to be false. Gillette’s competitors may perceive another trend, which may be the correct one and capture the market. This alternative allows industry competitors the chance to capture the razor blade market, since Gillette will be concentrating on the disposable razor market while neglecting the other markets. Since its opening, The Gillette Company has established a reputation as an industry leader and innovator. Changing anything in company's operations allows the chance for its reputation to be damaged or even destroyed. That is why this alternative is no more risky than any other change The Gillette Company makes.
Overall, we believe that the alternative of concentrating on disposable razors is needed to adapt to the current trend of disposable razors approaching 100 percent of the market by the mid to late 1990’s. This alternative will add value to the organization, influence organizational and product costs, and fit within the organizations’ structure without creating substantial risk. The Gillette Company is an extremely large and powerful company, which might encounter some hardships, but will survive. By choosing to focus on disposable razors, Gillette will overcome its current problems, while increasing profit and market share.
The Third Alternative: Focus on the women’s segment, teenagers and minorities
The third alternative that Gillette could pursue is to increase the emphasis on the women’s shaving sector, and to target other segments of the population. These would include teenagers, African-Americans, and other minorities. It is important to get young women familiar with Gillette’s products. According to the U.S Census Bureau, women’s segment in the age group 12-19 in the U.S is expected to grow by almost 15% by the year 2001. Female teens spend over $7.5 billion on health and beauty care products each year. This is a great opportunity which Gillette can take advantage of.
African-Americans would also be an effective target market, since more than 12 million black men suffer from PFB (pseudofolliculitis barbae)- Shaving Bumps. PFB is an inflammatory condition which leads to irritation, infection, bump formation, and discoloration of the skin. However, not only black men and women suffer from this problem. White women also suffer from PFB, which mainly affects the skin in the bikini areas, underarms, legs, and other shaved areas. To avoid skin irritation, it is recommended to use the sharpest blades available on the market. This puts Gillette in a favorable position, since Gillette Sensor razor is known as the sharpest blade currently available on the market.
Increased emphasis on segments other than the male grooming sector, will add value to the organization in several ways. Due to Gillette’s reputation and strong brand recognition, many potential consumers would be attracted to the increased variety of Gillette’s products. By implementing this alternative, the company would increase its customer base, and as a result, sales would increase. Since Gillette has captured the men’s sector and is currently the leading manufacturer, the company has great potential to capture the teen and women’s market. Focusing on this new target group would allow Gillette to incur additional profits, which would add value to the company.
However, to add a new line of products and to focus on a different target market would increase organizational costs. The advantage that Gillette has is that no technological research has to be done. The only difference would be in the production process regarding the shape of the razors and the use of different colors like pink, purple, and lime. Another costly factor would be advertising and market research. This would be a crucial factor, since Gillette has to make people aware of its new products. Another cost would be sales promotion cost, which would include the cost of sampling and point of purchase displays. Sales promotion is crucial, especially when targeting teenagers; this is needed in order to bring them into the Gillette franchise at an early age. The introduction new line, as well as the shift of focus from male to female shaving products would increase organizational costs. However, in the long run Gillette would profit from this decision.
This alternative fits very well with the organizational structure. Because of the fact that Gillette is an industry innovator, the new emphasis on women’s shaving products would have a great fit with the company. In addition, no other shaving company has focused on the teen and women’s market yet; which gives Gillette again the advantage of being the first on the market. However, Gillette’s strategic direction would shift from the men’s sector into the women’s sector.
There are a few risks associated with this alternative. The first risk that Gillette might face is that the target market might not respond favorably to the new line offered by the company. There is also a possibility that the company might fail to reach the target market and therefore will not be able to generate enough profits. Consequently, the company would lose money. Another constant threat is competition that might introduce some other product, which might be perceived as better than Gillette’s. However, since Gillette is known as being an industry innovator and leader, this alternative is not seen to be more risky than other introductions made by Gillette.
Overall, this last alternative adds value to the organization and creates great fit with the organizational structure. However, it involves incremental product and manufacturing costs. There is also substantial risk in case the new target market does not respond favorably, which would have detrimental consequences for Gillette.
Summary
All three alternatives present an opportunity to not only increase profits but to increase consumer awareness as well. All three alternatives add value to Gillette, but not all alternatives produce the right “fit” for the company. Some alternatives show a rather large amount of costs associated with it. Risk also plays a major role in the decision-making process. Focusing on a disposable razor market was rated average in all four criteria, while targeting a new segment had a rather high amount of risk connected with it. The highest overall as well as individual scores were given to the first alternative, which is the launching of the new razor system for men. This is all shown in the following Payoff Matrix.
Payoff Matrix
Value Added Cost Fit Risk Total
1. Introduce New Razor 4 1 5 4 14
System for men
2. Focus on Disposable 3 3 3 2 11
Razor Market
3. Focus on Women, Teens 2 2 2 4 10
& Minorities Segment
*scale 1 worst- 5 best
Recommendation
The recommendation for Gillette is to introduce the new razor system geared towards men. Gillette’s profitability has been declining due to the increasing market share of disposables; therefore the company needs to reconsider its future plans. By introducing the new razor system, Gillette will secure progress towards its goal, sustained profitable growth. Research & Development is currently being conducted on the new razor system and tests have reported positive results.
The introduction of the new system will bring many benefits to the company. First, advertising campaign designed for this new product will reinvigorate the razor system market, which has been losing consumers to disposables. Second, the strong advertising campaign will not only increase the brand awareness, but it will also reach the younger target market. Finally, the company will maintain its competitive advantage of being an industry innovator, by beating its competitors to the market.
Even though there are several alternatives, which Gillette could pursue, introducing a new men’s razor system will be the most beneficial to the company’s long-term success.
Implementation and Control
Gillette’s strategic direction is to be an industry innovator and the global leader while achieving sustainable profitable growth. The company’s main focus has been on the men’s wet shaving market, therefore introducing a new razor system for men is consistent with both Gillette’s direction and focus. This alternative gives Gillette an opportunity to stay in the men’s shaving market where it is already a powerful leader, introduce a better performing product before its competitors, and eventually increase its profits. In order to better understand how we plan to implement this alternative, the following is the detailed explanation of the three functional areas: marketing, research and development, and finance. These three functional areas are crucial in order to successfully implement this strategic plan.
Marketing Strategy
Introduction of a new razor system geared towards male population would require a global launch. The faster the new product is in the market, the faster will new users switch from competitor’s product and the faster will existing Gillette’s customers try it. This sort of fast introduction is necessary in order to improve financial results, and also to prevent competitors from stealing the idea. Initially, product should be introduced in the markets in United States and Europe. The introduction to Latin America, Australia and Asia would follow right after. The product should be targeted to all males who shave. This would basically include all adults in the age group 18-65.
The first step which is crucial for success of any product is choosing the right name. Gillette has to come up with a name for the new razor system which will reflect masculinity and power. In addition, the name would have to work well in all markets
The new razor system should be positioned as a premium product. This is necessary in order to distinguish the brand from the competitors. Gillette already possesses the image of high quality and performance. The tests show that the new system produces a 25 percent better shave than Sensor Excel, which is currently a leader in the men’s wet shaving market. The premium quality of the new system should be reflected in its price. Many consumers perceive more expensive products as better quality, and their preference increases as the price increases. This is the reason why Gillette should price its new system higher than any of its previous offerings. The highest priced razor system currently on the market is Sensor Excel, another of Gillette’s products; it is the most successful product ever introduced in the wet shaving market. The company needs to be very aggressive in its pricing of the new razor system. It is recommended that Gillette prices the new system 20 to 30 percent higher than Sensor Excel.
It would be necessary for Gillette to also manufacture refill cartridges and blades. These should be also priced the same way as the razor system, 20 to 30 percent above the price of Sensor Excel. At this point of time, it is not recommended for the company to introduce any additional products that would supplement the product line, at least until the razor system establishes itself in the market.
In order to achieve a branded look, Gillette needs to create a single look for feel for the entire global campaign. The packaging, point of purchase displays as well as support material should be the same around the world. Fundamental, strategic move is to invest in strong advertising. The primary growth driver is the media. This is why the advertising campaign should embrace every medium, from television to billboards to the Internet. The campaign should also include print and radio; essentially it should be a multifaceted effort. The plan should be to get the new system everywhere, to make it a part of the landscape. Currently, Gillette’s advertising budget is divided equally between razor systems and disposables. However, to it would be necessary for the company to revise this budget and allocate more money towards the new razor system. Disposables should get less money, since they are not profitable, and continue to sell regardless.
It is also essential to get the support from the retailers. Sales promotion, especially sampling, is crucial to win over disposable users. One of the reasons why sampling is so effective is because a lot of people are not aware of the difference in the quality of the shave; trying out a razor system, especially Gillette’s razor system, is a whole new world. Displays are another part of sales promotion, which is very important for several reasons. Big displays with excellent visibility create credibility and image of high quality before the consumer even tries the product. They also help consumers easily locate the product.
Since the product would probably take off immediately, manufacturing must insure that it has enough capacity to minimize out-of-stock situations. Gillette must produce in advance enough cartridges and razors, so when the product is launched everything goes smoothly. Gillette should also continue with market research and testing of the consumers wants. The trends are changing constantly, and in order to stay on top of things, the company must have full knowledge of the environment. Gillette must at all times be aware of not only its customers, but also its competitors. Even though company is a powerful leader, knowledge of its competitive environment is what will help it stay there.
R&D/ Technology Strategy
Introducing a new razor system for men requires a dedicated and detailed research and development program. Because Gillette is an industry leader and innovator, the company knows its customers better than competitors do. Therefore, the company has to constantly test, measure, and rate products, as well as recognize customer preferences.
Before putting a new men’s razor system on the market, it is crucial for Gillette to test the product with thousands of men. Recent test studies showed that shaving creates certain reactions in men; most of them find shaving time-consuming, irritating, and often unpleasant. Knowing this fact, Gillette should focus on developing a razor with extremely sharp blades that would allow a close, comfortable shave that is less irritating.
However, R&D is very costly and time consuming. The industry demands that R&D has to be completed in a smart and efficient way. Many companies translate this into working faster; therefore R&D departments are trying to emphasize internal integration with business units, external integration with specialized experts, and a close look at R&D projects. It is important to develop a partnership between the business and research management in order to ensure a strategic alignment. Such studies can take anywhere from five to ten years. This seems like a long period of time, but is certainly necessary in order to introduce a new, improved product successfully to the market. Tests and research should not only be done on the safety and product improvement; more importantly, tests should be conducted with potential customers in order to see how they perceive the new product and what they prefer in a new razor system for men.
Gillette should conduct test studies in major cities, with consumers of all age groups (15-65+) and ethnic backgrounds. After the product has been distributed to potential customers, studies could be done in form of focus groups, surveys, and special evaluation cards that rate the product. Focus groups would be helpful in obtaining honest opinions of customers regarding the new product; in particular what they liked and disliked about the new razor. In addition, it gives the researcher immediate feedback. Surveys and evaluation cards are another useful method to obtain customers thoughts about the tested product. Both could be distributed at the time the product is being tested. The selected customers should be allowed some time in order to get used to the new product. After the product has been used consistently for a certain time period, costumers should complete a survey or one of the evaluation cards.
R&D is a very expensive method. For example, Gillette spent $223 million in 1999, and $209 million in 1998 for research studies, which was about 35% of sales. This indicates, that the company should at least invest $210 million in the next R&D program, when introducing the new razor system. Gillette is certainly capable of doing so, considering the fact that the company is an industry leader from its beginning. Over the years, Gillette established a good reputation by producing high quality, reliable, efficient and cost effective products. Its innovative products include meaningful technological advances, not seen in its competitors. The company maintains its top position by working hard and focusing its resources on R&D and marketing.
Financial Strategy
The primary purpose of a financial strategy is to provide The Gillette Company with the capital structure and funds that are appropriate for implementing growth and competitive strategies. The finance and accounting functions play a strategic role within Gillette because they control the money, which is one of the most important resources needed to implement strategies. In order to implement a strategy, two resources of funds are needed: large amounts of capital for growth and maintenance-related objectives and expense budgets to support the daily activities of the company.
The Gillette Company must devise a financial strategy in order to allocate the funds needed to implement its strategy of designing a new razor system geared toward the needs of the male population. Its financial strategy for introducing a new razor system must include a plan to raise capital, a plan to report financial information to stockholders, establish a minimum required return for the planned introduction, and a plan to allocate overhead costs.
In deciding on how to raise the capital needed for its development of a new men’s razor, The Gillette Company must choose whether to use debt, equity, or internal financing. Based on empirical evidence, corporations use a signaling theory when faced with the decision on how to raise the necessary capital needed to complete a project (Finance 3414, Intermediate Corporate Finance). The signaling theory states that a corporation’s first choice of raising capital is with internal financing, its second is by selling some current assets, third is to use debt, and its last choice is financing through equity. In The Gillette Company’s case, equity should not be used. Financing with equity
sends a negative signal to the market. Gillette is currently experiencing a decline in profits as well as a decrease of its market share. In 1988, Gillette experienced its second hostile takeover attempt in two years, which forced its debt load to increase to $2 billion and total equity to decrease to negative ($84.6 million); when combining these circumstances it creates an uncertainty about the future direction of the company. Since the market is somewhat uncertain about the direction The Gillette Company is heading to, it is looking for any signs from the company. Issuing equity would send a negative signal to the market, which would cause both Gillette’s image and value to suffer.
Being such a large company, Gillette may raise a portion of the necessary capital by selling some of its currents assets, such as marketable securities; however the company should concentrate the majority of its financing through the use of debt. Being in its current position, Gillette needs to closely monitor the amount of debt it undertakes. Even though The Gillette Company’s debt ratio is well above the industry’s average, it can still handle more debt. Gillette is still the industry leader, and controls an enormous worldwide operation. These reasons are why the company has more debt than the rest of the industry, and is also why it can handle more of it. As long as Gillette is aware of its debt and has a good strategic plan, the company will not overwhelm itself with debt. Besides, there are advantages of using debt to raise capital. The first advantage is the leverage debt creates for the company. Second, there are tax benefits for the company that accompany debt. Raising capital by using debt is only temporary since debt must be paid back. The Gillette Company will pay off its debt with the increase in revenues from its new men’s razor system.
The Gillette Company will not have to change any of its reporting methods. Gillette is constantly introducing new disposable and razor systems, so even though they are manufacturing a new product, it is not a new process for the company. Gillette currently combines all of its companies into consolidated reports, but does provide stockholders with financial reports for each industry segment. The new razor system will be located under the Gillette business segment. The Gillette Company’s method of reporting financial data to stockholders allows the stockholders to observe how the company is operating as a whole, as well as which industry segments are generating profits or losses.
A required rate of return is the minimal rate of return necessary to attract an investor to purchase or hold a security. Cost of capital is the composite of the individual cost of financing incurred by each capital source (Foundations of Finance, Keown, 2001). The alternative of introducing a new razor blade system geared toward the male population will increase The Gillette Company’s risk. An increase in risk requires a higher required rate of return. This means that this alternative must earn a higher rate of return than Gillette’s overall required rate of return. If the planned product launch cannot produce the required rate of return, the shareholder’s wealth of The Gillette Company will be depleted. The project’s beta, which means risk, must first be calculated in order to estimate the required rate of return of introducing a new men’s razor system. The project’s beta is then used in the WACC formula, which must be used to estimate the required rate of return in relation to the cost of capital. WACC stands for weighted average cost of capital. The Gillette Company needs to estimate the before and after WACC in order to calculate the required rate of return for the new product. WACC is extremely difficult to estimate. It consists of Kd, which requires current prices and yields, Ks, which requires CAPM to first be determined, and Kp, which needs Gillette’s current dividends and floatation costs. Because of being such a large company, and the manufacturing of a new razor system being such a large project, The Gillette Company should seek the advise of several underwriters to give them their own independent quotes.
The Gillette Company is an extremely large international company, with its products being recognized throughout the world. Manufacturing a new men’s razor system is an expansion of its current business. The company developed the image of being the industry innovator, therefore, it has to and will continue to launch new and improved products in order to increase its cash flows and market share. Overhead costs are human resources and executive salary. The Gillette Company will have to temporarily increase its marketing budget in order to promote the new razor. All other allocations of overhead costs will remain equal. Whether Gillette uses direct labor, machine use, activity, or sales volume (which it most likely uses) as the basis for allocating overhead costs, the percentage allocated to the new men’s razor system will be based on the existing amounts.
The purpose of this financial strategy is to provide The Gillette Company with the capital structure and funds that are appropriate for implementing its planned manufacturing of a new razor system, which will be geared toward the male population. The cost of capital and required rate of return must be calculated to see if Gillette’s chosen alternative is the correct competitive strategy for this particular company. Money, being one of the most important resources needed to implement a strategy, must be managed carefully in order to avoid depleting the shareholder and company’s wealth.
Schedule of Major Implementation Events
1st year
§ Launch the product in North America and Europe
§ Create a powerful advertising campaign, including utilization of all media vehicles
§ Convince the retailers to support the introduction
§ Emphasis on sales promotions, in particular sampling and displays
§ Premium pricing in order to create the perception of high quality
§ Manufacture in advance to prevent out-of-stock situations
§ Borrow money in order to finance the introduction of the new product
§ Allocate the overhead costs
§ Calculate the required rate of return in order to estimate when Gillette will start making profits
§ Conduct testing of the new product
§ Research consumer preferences
2nd year
§ Launch the product in Latin America, Australia and Asia
§ Continue with a strong advertising campaign
§ Continue with strong sales promotions, especially sampling
§ Monitor the external as well as the internal environment
§ Monitor the competition
§ Continue with consumer testing around the world
§ Monitor the success of the product in all markets
3rd year
§ Continue with a strong advertising campaign
§ Continue with strong sales promotions, especially sampling
§ Continue monitoring the success of the product in all markets
§ Continue with consumer testing around the world
§ Monitor the external as well as the internal environment
§ Conduct a financial analysis to estimate company’s financial situation
§ Monitor the competition
4th year
§ Introduce a female version of the new razor system
§ Slightly decrease advertising
§ Keep strong sales promotion, in particular sampling
§ Continue monitoring the success of the product in all markets
§ Continue with consumer testing around the world
§ Monitor the external as well as the internal environment
§ Monitor the competition
5th year
§ Continue with a moderate advertising campaign
§ Continue monitoring the success of the product in all markets
§ Continue with consumer testing around the world
§ Monitor the external as well as the internal environment
§ Monitor the competition
Objectives and Assumptions
It is recommended that the company introduces a new men’s razor system to the market. Before the launching takes place, Gillette has to set the objectives which should be achieved with the implementation of this alternative. The objectives should be as follows:
1. Gain a market share of 15% in the men’s razor system market in the first year;
gain a market share of 20% in the second year; gain a market share of 30% in the third year
2. Increase product awareness of the new razor system to 65 percent by creating a strong advertising campaign, and emphasizing sales promotions
3. Increase Gillette's profit margin to 10 % at the end if the first year of introduction
We believe that the first objective is achievable, since we plan to attract both disposable users and the users of competitor’s product. The second objective seems reasonable, especially considering the strength of our advertising campaign. Reaching two out of every three men who shave is a very attainable goal. The third objective could be achieved as well, since BIC, one of Gillette’s major competitors, has been able to attain a 10% profit margin. The introduction of the new razor system would make Gillette more profitable.
Gillette should monitor progress made towards achieving these objectives annually. This can be done through market research, by looking at the estimated market share percentages. Brand awareness can be monitored through surveys. The financial situation of the company will reflect the profitability and success of the new razor system.
Competitors should be monitored on a regular basis, since they represent a threat for Gillette. In addition, the company should also monitor any external trends regarding changing consumer preferences. In its internal environment, Gillette must pay attention to the financial situation of other business units, in order to ensure sustained profitable growth. The company must also stay on top of technological advancements and R&D to maintain global leadership.