Gillettes Acquisiton of Duracell Essay

Published: 2020-04-22 08:24:05
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The purpose of this report is to first discuss the reasons why Duracells performance has been decreasing over the past four years, and then recommend some strategic actions Gillette should take to turn Duracell around. This report will begin by providing a brief introduction on the acquisition of Duracell by Gillette, followed by the reasons it lacked success, and finally end with the proposed recommendations for Duracell. Currently, Gillettes operating segments include personal grooming, small appliances, and oral care products, and the portable power segment.

In the portable power segment, Duracells major competitors consist of Energizer and Rayovac while new and emerging ones included Sony, Kodak, Panasonic, and other private label brands. The collective entrance of these competitors in the 1990s is the primary reasons for Gillettes lack of success in the battery industry, discussed below. The key reason Gillette has been unable to achieve the same success in batteries that it has with shaving products is due to the competitive dynamics in the alkaline battery industry.

The period of four years from 1997 to 2000 experienced rapid technological innovation in the alkaline battery industry by not only the major players but also from new and small entrants in the industry. Two of these small players were Sony and Panasonic. Sony introduced its Stamina Line of batteries in 1997, which was quickly followed by Panasonics Panasonic Plus to compete with Duracells Copper top line. Within the same year, the Rayovac Corporation replaced its existing battery with the Rayovac Maximum and priced the product at 20 per cent below the two industry giants Duracell and Energizer.

In the following year (1998), however, Gillette launched its first upgrade of Duracells offerings named the Duracell Ultra. This new line did not replace the original Copper Top line that was competing with the product of Sony and Panasonic in the previous year but rather, followed Gillettes regular move with shaving upgrades of placing a premium on its items. Therefore, Ultra was priced at a 20 per cent premium over the older technology. Nonetheless, the competition was still pouring in.

The advent of Energizers Advanced Formula happened to be in the same month as Gillettes Ultra and was claimed to last nine percent longer than the than the Ultra. The major drawback for Gillette, however, was that no price premium was placed on the new upgrade by Energizer and was introduced at the same price point as its previous product. In contrast to Energizers upgrade as well as stiff competition from other players, Gillette launched the new Ultra in February of 1999 which claimed better performance.

This was rebutted by Energizers super premium line of batteries described as e2 (launched in June 2000) and was priced four to six percent higher than Ultra. Finally, in the same month, Duracell announced its third generation of Ultra with more efficiency but no increase in price. This all showed Gillettes inconsistency in terms of pricing and lack of strategy. It is clear that the introduction of the Ultra led to a series of new innovations of alkaline batteries by both Energizer and Gillette.

Gillette had hoped that its innovations would be differentiated products and be perceived industry-wide as unique and valued. However, the company set too high a price premium in order to achieve differentiation for batteries and customers simply did not accept the price/performance proposition Duracell offered its customers. Further, the differentiation strategy that must provide uniqueness valued by customers did not exist as customers perceived batteries to be commodities. One publication of Consumer Reports even indicated that the moral on battery shopping is simple: buy by price.

This clearly contradicts Gilletts strategy of price premiums for differentiated offerings and is the prime reason for Gillettes lack of success. In other segments of Gillettes business, such as personal grooming, customers are willing to pay premiums for shaving products because they feel an attachment to those products as they are used daily. Attempting to transfer this strategy onto batteries did not work because customers perceived batteries as a commodity not used in their daily routine.

On the other hand, companies like Rayovac have simply followed a cost leadership strategy and have seen increases in their operating margin of 32% from 1998 to 1999 and 66% from 1999 to 2000, respectively. The reasons for Gilletts lack of success in batteries have been outlined above. In terms of strategic actions that Gillette should take, it first needs to deviate from its differentiation only policy that it has used for its shaving products because it is clear that batteries are perceived as a commodity and customers will not accept high price premiums.

The proposed recommendation is to achieve competitive advantage by integrating an overall cost leadership strategy with differentiation. This type of strategy is generally harder for competitors to duplicate and will enable Gillette to provide two types of value to customers: differentiated attributes (high quality in batteries, reputation) and lower prices (through lower costs in value-creating activities). The idea is to provide unique value to customers in an efficient manner.

In other words, Gillette needs to adopt the cost leadership strategy and attain parity on the basis of differentiation relative to competitors. Duracell needs to be able to stay on par with competitors with respect to differentiated products. In effect, the company needs to pursue overall cost leadership positions in its batteries segment, but still needs to pay attention to emerging higher performance alkaline batteries. In more practical terms, Gillette can first achieve cost differentiation with an aggressive approach to adopting efficient-scale facilities.

Tight cost and overhead control can lead to economies of scale where per unit costs will significantly decrease with larger production runs, larger facilities, and allocating fixed costs (such as marketing and R&D) across more units produced. On the other hand, closing down plants in areas of slumping sales can lead to greater efficiencies in costs. Together, these policies will protect Gillette from rivalry of competitors such as Energizer and Rayovac (and new entrants) due to Duracells strong existing market share (43%) and reputation in the industry.

Moreover, Gillette needs to eliminate small costs that can cumulate over a period of time to yield substantial gains. For example, marketing expenses have accumulated to $370 million from 1998 to 2000 simply because of new product launches each year but without necessity for batteries. These expenses can be controlled by simply conducting secondary market research and analyzing external sources more carefully such as Consumer Reports as they have indicated that consumers are buying batteries by price.

Finally, Duracell can still provide its customers the unique value they desire through its reputation and brand loyalty. Introducing a new and improved product with high quality every two years (rather than every year) will allow customers to seek new quality and value while maintaining customer loyalty. These are the proposed recommendations for Gillette when considering a turnaround strategy for the portable power segment and Duracell.

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