Marit Loewer

Otto Beisheim School of Management

It was a Friday morning in May 2008 when Andreas Tlie chimneys at the enormous production site were Welsch, General Manager of the German department already bellowing smoke, even at this early hour. As of Henkel Adhesives Technologies for Consumers Welsch walked to the impressive glass building where and Craftsmen, arrived early at the Henkel site in his office was located, he thought about his upcoming Diisseldorf-Holthausen, Germany (see Exhibit 1). meeting with company marketing executives. A

Exhibit 1 Henkel site in Dusseldorf-Holthausen

Henkel Headquarters Dusseldorf-Holthausen

Marit Loewer prepared this case under the supervision of Professors Lutz Kaufmann and Matthias Koch to provide material for class discussion. The.authors do not intend to illustrate either effective or ineffective handling of a managerial situation. The authors may have disguised certain names and other identifying information to protect confidentiality.

Copyright O 2009 by WHU. No part of this publication may be reproduced, stored in a retrieval system, used in a spreadsheet, or transmitted in any form or by any means-electronic, mechanical, photocopying, recording, or otherwise-v~ithout the permission of the supervising author. We continuously want to improve

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gloomy forecast awaited him in the latest consumer report: Gasoline prices kept rising and further looming price increases caused German consumers to worry about their purchasing power. Concerns about price stability and uncertainty resulting from the financial crisis and the flagging U.S. economy fueled economic fears among German consumers. This news would certainly influence Henkel's business and increase the imp0rtanc.e of today's meeting.

Upon his arrival at the conference room, he spoke to his marketing managers:

Company Profile: Henkel AG & P Co. KGaA Based in Diisseldorf, Germany, Henkel AG & Co. KGaA was an international group with worldwide presence 8 and listed on the London Stock Exchange. Its sales % were 13,074 million (see Exhibit 2) and employed ? approximately 53,000 people in the fiscal year 2007. 3 Henkel was among the most internationally aligned < German-based companies in the global marketplace. $ Consumers in approximately 125 countries around E

W e are facing a challenging situation. As we already the world trusted in brands and technologies that

know, the growth of our markets has slowed down in originated on the Henkel production line. The company

recent years and the raw material price increase puts was organized into three operational business sectors:

pressure on our margins. But even worse now, one of Laundry & Home Care, Cosmetics/Toiletries, and

our competitors in the adhesives business is just about Adhesives Technologies (see Exhibit 3). It was the

to enter one of our core categories with very low prices. umbrella company for well-known brands such as Persil,

This will certainly affect our sales numbers. The time Schwarzkopf, Pritt, and Pattex. . - - has come where we have to develop a long-term strategy in order to escape the constant war for market share with our competitors. Competing for an ever smaller

History of Henkel market is not a solution. This new strategy is of utmost Founded in 1876 as Henkel & Cie in Aachen by 28-year- importance for the adhesives business, if we want to old merchant Fritz Henkel (see Exhibit 4), the company's stayput as market leaders in the long run. It has to be first successful product was a washing powder based developed quickly as senior management expects it in on water-glass. In contrast to all similar products, which two days! were at that time sold loose, this heavy-duty detergent

Exhibit 2 Key Financial Data of Henkel AG & Co. KGaA for 2006-2007

Key Financials

Fiaures in mill. euros 2006 2007 Change F"' '7

Sales 12,740 13,074 +2.6%

Operating profit (EBIT) 1,298 1,344 +3.5%

Return on sales (EBIT) in % 10.2 A +0.1 pp

Net earnings 87 1 +8.0%

Earnings after minority interests 855 ' 921 +7.7%

Earnings per preferred share ( ' I in euros 1.99 +7.5'/0

Return on capltal employed (ROCE) in % 14.5 +0.9 pp

Capital expenditures on property, plant, and equipment 431 470 +9.0% -- , Research and development expenses 340 350 +2.9%

Employees (annual average) number 51,716 . 52,303 +1.1% ('1 basis: share split (1:3) of June 18, 2007 pp = percentage points

CHer*I12009 1

- Exhibit 3 Henkel Business Sectors

Three Areas of Competence

was marketed in handy packets. It was a huge success, Persil, the first self-acting laundry detergent, became and, two years later, Henkel relocated his company to the pillar for the company's growth and helped radically Diisseldorf by the Rhine to take advantage of logistics simplify the laborious and time-consuming household and better sales opportunities. In the years to come, chore ofdoing laundry. However, Fritz Henkel did more many innovations were developed at Henkel. In 1907, than revolutionize laundry care. He was also a pioneer

Exhibit 4 The Founder of the company

Company Founder Fritz Henkel

1 . Pioneer of brand-name products d J Honorary cltlzen of Vohl and Wallau in Hesse.

f Rengsdorf tn the Westerwald, and Dusseldorf (Germany)

The descendants of h ~ s three children, Fr~tz Jr.

(below left), Hugo, and Emmy, still hold the

major~ty of the ord~nary shares of Renkel XGaA

March 20. 1848 - March 1,1930

of modern brand management. He systematically raised awareness about Persil in the general public by means of innovative and sensational advertising campaigns. Ever since then, the combination of outstanding product quality and intelligent brand management has been the cornerstone of Henkel's success. In 1922, the product range was extended to adhesives, and, in 1950, Henkel entered the cosmetics markets with the acquisition of TheraChemie (hair colorants). The Henkel brand grew very quickly as a result of international expansion.

Henkel's diverse product range and strengths that ranged from modern consumer products for everyday use to complex chemical and technical system solutions for industrial consumers influenced the company to con- centrate on its corporate identity. Branded products and technologies were identified as strategic pillars for the future, and four business sectors were defined: Laundry and Home Care, Cosmetics/Toiletries, Consumer and Craftsmen Adhesives, and Henkel Technolgies (indus- trial and engineering adhesives, sealants, and surface treatments). The slogan "A Brand Like a Friend" was introduced to convince consumers to embrace the broad variety of Henkel products and facilitate the perception of Henkel as a brand, not a corporation. Henkel's intention was to suggest proximity to the customer and foster their trust in Henkel quality.

The latest major acquisition was completed in March 2008: Henkel took over the Adhesives and Electronic Materials business from Akzo Nobel, previously owned

- v.

by National Starch. Following the integration, Henkel's - - 5 , Adhesive Technologies business sector was expected to 2 increase to around 7.5 billion in annualized sales in G 2008. By completing this acquisition, Henkel further strengthened its leading position in the global adhesives 9 markets, particularly in the industrial segment. L

Adhesive Technologies Business Sector Effective April 1, 2007, the previously separately nianaged business sectors of "Consumer and Craftsmen Adhesives" and "Henkel Technologies" were merged to form the Adhesive Technologies sector. This enabled the adoption of a unified market approach with better utilization of core competencies of both businesses. The Adhesive Technologies business sector offered adhesives, sealants, and surface treatment products for use in household and office applications for the do- it-yourself populace, professional craftsmen, and for industrial and engineering applications. The new sector was the world leader in its segment, with about 5,711 million in sales in 2007, accounting for 43 percent of Henkel revenues overall (see Exhibit 5). In view of the heavily fragmented competitor landscape with over 1,500 vendors and a relatively small number of global players offering a comparable product portfolio, the business sector saw itself as market leader in each

Exhibit 5 Sales and EBIT by Business Sector

1 Sales and EBlT by business sector 2007 Sales: 13,074 mill. euros E BIT: 1,344 mill. euros

..n, / BIT bus ness sectors 1.452 mill euros . . L 70 E BIT Corporate -108 m~ll euros

r j EBIT percentages excluding Cowrate i 2 E Laundry & Home Care . Adhesives Technologies f ? . Cosmtics/'roiletries 1 Corporate

ct categories. The variety of markets for adhesives was unmatched: the packaging industry, auto manufacturers, aircraft building, power plants, steel- mills, tin-can producers, and powerhouses were all customers of Henkel adhesives. Different competitors existed in each of these markets, and often each competitor only served a special niche and sector. Only very few companies were active in as many segments as Henkel, and this was the reason that Henkel was almost

I 1 ' triple the size of its next best competitor. $ (11 $

I - Adhesive Technologies for Consumers and 'I Professionals in Germany I The market catering to consumers and professionals for 11 I adhesive technology in Germany was also complex, with 1 I

many different segments and sub-segments. Henkel was 11 exceptional in that it offered so many different products

'I under one corporate umbrella (see Exhibit 6).

Products were available for different customer segments. Consumers were divided into the two

1 subgroups of householdsloffices, which were offered i products for repair jobs and handcrafts, and "do- I/ it-yourself' customers with products for renovation and I1 repairing. On the other hand, there were professionals

I to whom Henkel offered products for construction and intensive usage, such as External Thermal Insulation I Composite Systems. Sales channels for the customer segments were very different: products for consumers I were sold in do-it-yourself (DIY) stores, specialist

j i Exhibit 6 Sub-brands under the Henkel Brand

IJ I

shops, drugstores, and food retailing shops. Driven by the ever-growing discount channel, price had become a key parameter in all trade negotiations and even in the colnmunicatioll of the trade itself.

The products for professionals were sold in specialist stores, and producers had to follow a completely different approach in this channel. Sales representatives would contact the relevant craftsmen-painters, tilers, floorers, and so on-individually, as each one of them chose the products they would use and had to be convinced about the advantages of new products. The craftsmen were a rather conservative group who mostly trusted in products they already knew and worked with for a long time. Thus, they were difficult to convince about the advantages of new products, and it took the sales representatives about five to six visits per person to gain a new customer. Therefore, the quantity and quality of sales representatives were, understandably, key factors in how well a product sold. Professionals tended to stick with products with which they were familiar in order to avoid customer complaints. Craftsmen faced several challenges in earning new customers, including their high hourly wages and the challenge of showing, in advance, that their work was superior to that of others in the field and, as such, worthy of a higher salary. The most common way for customers to make their choice was through looking at ads for craftsmen in the Yellow Pages. No ranking system of any kind existed for craftsmen, and customers were often very hesitant

to order such professional services because they were unsure of the quality they would receive in return.

Henkel offered its customers (the do-it-yourself category and professionals) high-quality products (see Exhibit 7), as this was traditionally the way to differen- tiate the firm's products from the competition. Many customers were not familiar with Henkel brands, but instead knew the sub-brands, as Henkel did r~ot invest in the overall Henkel name. The Henkel organization was built on these sub-brands because product managers for each sub-unit developed their own marketing strategy for the products of their sub-brand. Therefore, customer confidence had to be established for each sub-brand, and only some were already well known. Brands like Pritt, Pattex, and Ponal were the most popular brands in the DIY segment.

Adding new features to improve their products was anothermethodHenkelusedtooutperformitscompetitors. Their product range was constantly expanding and different products had been developed for every possible area of application. However, in the DIY segment, this complexity did not make the task of choosing the "right" product easy for consumers. Information about renovation products in the DIY stores was not always sufficient, and qualified store personnel were sometimes difficult to find. Also, other supplementary information sources were rare. Customers could not access sufficient information about the proper application of a product, the required quantity for a certain renovation job, or

Exhibit 7 Products of Henkel Adhesives Technologies

new product information. Most women avoided DIY b' stores completely because the brand image and product ;

descriptions were very technical. Traditionally, it was a G man's task to maintain the house, and although many women were doing craftwork to decorate their homes, 9 they felt less comfortable with renovation work. In addition, women preferred models and concrete samples g of how a house would look after renovation so as to get 2 z some inspiration, but these samples were hard to come by. Even in the professional segment, the broad product $ range was not appreciated by all customers: some 5 preferred to have a "universal" product for a certain task, since, from their point of view, many new products did not offer additional value.

Overall, it was difficult for Henkel to increase the number of products sold as its products had already achieved solid market positions. On the other hand, it was difficult to meaningfully influence the size of differ- ent markets in that each market was affected by trends associated with primary materials, such as tiles and wall- paper, as well as individuals' overall inclination to build and renovate.

The entire market had undergone a drastic down- turn over the past 10 years. The reunion of East and West Germany in 1989 led to several years of strong growth. First, the population of East Germany entered the market and added another 13 million consumers. Second, East Germany was under-served by distribution channels for renovation products and many new DIY

Adhesives Technologies Product Portfolio

L@Fr'Z :\ technomelt Adlesi". Rfn wchb, Sirto QL] -[3m wallpaper pastes PVC pipe adhesives ceiling, wall covering flooring adhesives

and tile adhesives waterproofing home decoration products products * thermal insulation sealants products

polyurethane foam fillers coatings cyanoacrylates roofing products contact adhesives glue sticks wood glues glue rollers assembly adhesives correction products

adhesive tapes industrial adhesives and sealants surface treatment products

* industrial cleaning agents resins soldering pastes

lubricants preformed parts

IT-

: stores had to be set up. Third, the foundations of most a, Y

houses in East Germany were very old and in need of r + renovation. Moreover, many new buildings were erected

after the reunion, sponsored by the government through tax incentives. All these factors caused a boom in the industry that lasted until the late 1990s. There were few

! new competitors because of the entry barriers created by 0 a the need for significant capital investments to enter the -

industry. During the boom, many existing competitors built new:capacities to be able to respond quickly and

% g adequately to the high demand.

After 10 years of prosperity in the industry, the German DIY market became saturated with the 3,300 DIY stores that were built over the years and saw a decrease in public building licenses, which in turn reduced the demand for renovation material. Also, the percentage of homeowners in Germany was one of the lowest in Europe. Eventually the market began to shrink and competition intensified to secure and gain larger shares of a declining market.

The competition in the adhesives market for con- sumers and craftsmen was diversified among different product segments and target groups. In the adhesives segment for households and offices, UHU was the larg- est competitor in Germany. The company was part of the Bolton Group, a privately owned Italian business. UHU's product range was comparable to Henkel's in this segment. But UHU had one specific advantage- their adhesive "Alleskleber" was well known to every German since childhood and nearly synonymous with household adhesives. It was widely available and sold in supermarkets as well as stationery shops and malls, and, therefore, had the largest market share.

For the professional craftsmen target group, it was important to offer direct contact between the producer and client for support and product enhancements, technical advice, addressing complaints, and warranty support. Product innovations were another factor that companies used to attract customers. Henkel saw itself as an innovator in the industry and built its strategy around innovation. This positioned Henkel in the premium segment, but the strategy often deployed by competitors was to battle over price-the tighter the market, the fiercer the price war. This hurt every competitor. Henkel was very proud of its broad product range, which accentuated its unique image in the competitive landscape. Often, other companies tried to emulate Henkel's advantage by expanding their product portfolio to capture a share of the shrinlung market, so as to reduce the factor of differentiation in competition.

Besides shrinking markets, increasing energy prices also cut into profitability. Henkel was highly dependent on energy prices in terms of product manufacturing and transportation. Since oil was the base for many of

Henkel's products, oil prices directly influenced Henkel's profit margins. Employee salaries were also continu- ously rising. Henkel was a member of the IG Chemie, the industrial union for chemical companies that was very successful in negotiating higher wages.

In the long run, consumer markets were projected to stagnate. Low birth rates in Germany would lead to a lower population and a higher average age in the future. The typical age limit for doing DIY work was just 50 years, and this demographic development would lead to a shrinking target customer group.

The Business Situation for the Adhesives Technologies Department The overall adhesives market influenced the business sit- uation of Henkel's Adhesives Technologies department. Even if it was able to hold profits at the same level as the previous year, its profitability would be below expecta- tions. In addition to the impact ofhigh raw material costs and increasing salaries negotiated by the IG Chemie, it also had to compete successfully against its competitors in each business segment.

For example, in the tiler segment, the company PCI-a subsidiary of BASF-held a 28 percent market share and was the market leader, while Henkel's mar- ket share was at single digits. Even though PC1 was the major player, it was not the most aggressive on price. These international companies entered the local mar- ket from outside Germany because Germany was still attractive: Requirements for quality standards for reno- vation work were comparably high. Local professional craftsmen appreciated high-quality products and prod- uct innovations offered by these international compa- nies, as compared to other countries, in order to avoid customer complaints.

Italian producer Mapei entered the German market in 2006. It was number one internationally in the tiler segment with 1.3 billion turnover. It acquired several companies, including Soppro, which were already active in the German market and had local knowledge. These companies then received orders at such low prices that none of the local producers could compete with them. For these projects, they then assigned sub-contracts to tilers who had to use Mapei's products for their work. Henkel's strategy was different. It tried to gain market share by developing superior products. Henkel tried to convince tilers of the quality of its products with incre- mental product innovations. Henkel's developers had produced a "low dust" tile adhesive, which was healthier for tilers to work with. Another innovation was a "light- weight" tile adhesive. The product usage results of 25 kg

(55 Ib) were comparative to jobs done with 80 kg (176 lb) of a conventional tile adhesive.

Nevertheless, Henkel's product innovations were not systematically based on current customer needs, but rather on technical feasibility. Market research completed by other departments recognized new trends in consumer behavior, such as the preference for wellness and health products and the awareness for eco-friendly goods. However, these trends were not incorporated during d e ~ e l o ~ m e n t of new adhesives products. Research and development was laboratory-driven rather than customer-driven. Therefore, products became increasingly specialized and equipped with new features that would allow them to be used with all possible materials and situations. The product range that served the same purpose widened.

In all, products became increasingly comparable throughout the industry. In the long run, incremen- tal improvements would not assure business success because of the saturated market for adhesives. A further specialization in adhesives would not increase demand, but would only take away some market share from an existing product. It was a spiraling race with competitors trying to gain some temporary market share.

As a response to this development, Henkel's strat- egy was two-fold. First, Henkel strived to be better than

.-

its competition. It aimed to gain market share through \ ,

innovation, POS excellence, distribution expansion, and better marketing concepts. Second, profitability was to G be secured by cost-saving projects, simplification of processes, and improvements in the organization. 9

Andreas Welsch's introductory speech to his marketing executives included a presentation on the current business situation and the latest consumer report. 2 e It caused a lively discussion in the room about how to develop a long-term strategy for the department of $ Adhesives Technologies for Consumers and Craftsmen. Different possibilities were debated, which led to the conclusion that in thelong run, the competition could not be beaten by incremental improvements of the existing products. A promising alternative would be to expand the existing market by creating new and uncontested market space where competition would be irrelevant. New target groups would expand the customer pool and alleviate the pressure of fighting with the competitors over the same customers.

Welsch was pleased with the direction the discussion was talung and announced that this meeting should be the luckoff for a Blue Ocean Strategy implementation. A creative but structured process to develop ideas for. new markets and customer groups had to be started- and there was no time to lose.