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Strategic Report

Elizabeth Davis

Damyan Nikolov

Emily S. George

19 April 2004

The Gillette Company/ 2

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Background 3

Financial Analysis 6

Porter’s Five-Forces Analysis 12

Evaluation of A Key Issue 17

Conclusions 20


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Background

History

The Gillette Company, incorporated in 1917, manufactures and sells various consumer products

worldwide. The Company has five principal business segments: Blades and Razors, Duracell, Oral Care,

Braun and Personal Care. It is the world’s number-one maker of shaving supplies as well as batteries. In

2000, the Company sold its stationery products business to Newell Rubbermaid and its hair care lines to

Diamond Products. The Company's products are sold in over 200 countries and territories. The

majority of its sales, 60%, are made outside of the United States and it has production facilities in 15

countries. Gillette’s largest customer, Wal-Mart Stores, Inc., and its affiliates, accounted for 13% of

sales in 2003.

The company was begun in 1901 by King Gillette and William Nickerson. The two men sold their

safety razors beginning in 1903. By 1905, their first overseas operation in London was established, after

selling over 90,000 razor units in 1904. The company launched its self-shaving system by selling shaving

kits to the US military during WWI. It continued their efforts to capture the market by distributing free

razors through banks and boxes of Wrigley’s gum, thus winning millions of new customers. At the

same time foreign expansion was continuing and by 1923 accounted for 30% of sales. The company

began to diversify in 1948 with the purchase of Toni, which developed into the Personal Care Division.

During the 1960s and 1970s the company acquired Right Guard deodorant, and Braun. 1984 brought

Oral-B and the company thus branched into dental care. In 2004, Gillette bought Rembrant Tooth

Whitening in order to bolster the Oral B products line.

Products

Blades and Razors

The Company’s main staple and what it is best known for are its blades and razors. Gillette sells male

shaving systems under the Mach3Turbo, Mach3, SensorExcel, Sensor, Atra and Trac II brands, and

disposable razors under the Custom Plus and Good News brands. On November 7, 2002, the Company

introduced the Sensor3 premium disposable razor for men and women, its newest triple-blade product,

which was available to consumers in North America beginning in Spring 2003. Gillette's female shaving

systems are sold under the Gillette for Women Venus, SensorExcel for Women and Sensor for Women

brands, and disposable razors are sold under the Agility and Daisy brands. The Gillette Company's

major competitors worldwide in blades and razors include Energizer Holdings, Inc. and Societe Bic S.A.


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Duracell

Duracell is the number-one selling battery in the world. The Company's range of alkaline batteries

includes the Duracell CopperTop and the newly-introduced Duracell Ultra alkaline batteries and

Duracell primary lithium, zinc air and rechargeable nickel-metal hydride batteries. Duracell is in the

process of recovering from a flawed advertising strategy for the Ultra battery that failed to bring in

business due to consumer’s inability to significantly differentiate it from the typical Duracell alkaline

battery, thus inspiring it to begin the “Trusted Everywhere’ campaign as well as engage in severe price

cutting so as to enhance the Company’s competitiveness in the face of private label and value brands.

Oral Care

The Gillette Company offers manual toothbrushes under the Oral-B brand and power toothbrushes

under the Braun and Oral-B brands. Oral care is one of the company’s strongest consumer products as

it continually has double digit sales increases in both manual and power toothbrushes. The Company

just launched a new advertising campaign, “Brush Like a Dentist”, which is currently the highest-rated

campaign ever in the oral care business. Gillette made a recent purchase of Rembrant Tooth Whitening

to offer a toothpaste and teeth whitener in its oral care line.

Braun

The Company sells electric shavers under the Braun brand and hair epilators under the Silk-Epil brand.

It also sells small household and personal diagnostic appliances under the Braun brand. Braun has

recently undergone some serious changes to both strengthen operations as well as reduce costs. It has

reorganized and improved its use of capital and also removed slow-moving products from its line.

Finally, Braun introduced several mid-priced shavers that are droving double-digit market share gains.

Personal Care

The Company sells shaving preparations, after-shave products and deodorants and antiperspirants under

the Gillette Series, Satin Care, Right Guard, Soft & Dri and Dry Idea brands. The Personal Care

division is currently undergoing extensive research and development for the introduction of new

products and advertising campaigns in the coming year.


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Functional Excellence

The Functional Excellence initiative is an essential part of the Company’s strategy for future success.

The goals of the initiative are to free up capital as well as to achieve the right organizational structure for

the firm. It is a tool that the Gillette is using to achieve best-in-class capabilities and performance. In

order to bring the company on par with its industry peers, the Functional Excellence initiative will drive

continual change and innovation.

The Functional Excellence initiative has changed the outlook of the Company. Due to stepped-up

marketing and the introduction of new brands, especially in the disposable razor market, Gillette has

made optimistic predictions about reversing their recent market share losses. Duracell, which has been

lagging behind in earning due to high prices and some failed marketing and advertising campaigns, has

begun to rebound. Duracell has begun a restaging of the brand through the “Trusted Everywhere” ad

campaign, which has been effective. In the Asian markets Duracell’s rebound is due mostly to the

acquisition of Nanfu, one of Chin’s leading battery companies. Since the acquisition, Duracell’s profit

has increased 62% over the preceding months. Duracell has also been engaging in price-cutting, with an

average cut of 30%, to be more competitive in the battery market amongst value lines and private labels.

This ‘price-deal realignment’ initiative has improved the operating profit and margin through changed

sourcing and manufacturing fronts.

Braun has also made significant gains in its market share in Europe as well as in Japan due to

significant increases in the popularity of the Acitvator and Flex XP2 electronic shavers. In the Middle

East, Africa and Asian markets, there has been strong growth in women’s hair epilator sales.

Despite the recent introduction of the Shick Quattro into the Razor and Blade market, the Mach 3

has had significant performance gains. The razor’s global share has increased by 3%, up to 28%. These

gains are occurring in all markets, with the Russian market growing at a significantly increased rate.

Traditionally most companies have experienced significant losses in Latin America, however Gillette

has managed to make impressive sales gains in that region. This growth was driven by double-digit

advertising spending. Many companies have been pulling out of the Latin American market; however,

Gillette has remained in the market there and has thus been able to capitalize on the lack of competition.

The growth in Latin America is in sync with the growth of Gillette’s foreign presence. 70% of Gillette’s

employees are located outside of the United States and foreign markets account for almost 30% of sales.


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Financial Analysis

Past Year Stock Performance

Gillette’s stock price has continued to rise over the past year despite the entrance of many products

from competitors. Major climbs and falls in the price have occurred at times when the Company

released a new report, as occurred in May and November of 2003. Since the introduction of the Schick

Quattro razor, Gillette’s stock price has climbed, which is an indicator of its dominance over the razors

and blade industry. The success of other segments has also contributed to this rise in stock price.

REVENUE BREAKDOWN

($ millions) 2003 % of total 2002

% of total 2001

% of total

Blades & Razors $3,869 42% $3,435 41% $3,200 40% Duracell $2,015 22% $1,898 22% $1,953 24% Oral Care $1,327 14% $1,249 15% $1,149 14% Braun $1,177 13% $1,056 12% $981 12% Personal Care $864 9% $816 10% $801 10% $9,252 100% $8,453 100% $8,084 100%

2003 Revenue Breakdown

Blades & RazorsDuracellOral CareBraunPersonal Care


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Each of Gillette’s operating segments had higher revenue in 2003 compared to 2002 and thus the

percentage contribution of each remained essentially constant. The blades and razors industry became more

competitive in 2003, due to the introduction of new low-priced entries. The Company was able, however,

to maintain market share and improve its posisition in the market with new product introductions, such as

the Mach3, as well as increased levels of advertising. Duracell’s battery business is involved in a very

competitive industry that is experiencing deflationary prices and a reduction in category value. Duracell

introduced a new price-realignment program which has been successful as the company has been able to

grow revenue and maintain market share. The Oral Care business’ growth has been driven by the

introduction of new products. Gillette’s acquisition of Rembrant Whitenting Systems should only help the

Oral Care business to continue to grow. Braun’s growth has been driven by their focus on the dry-shaving

market and the initiative to ensure that each product line will at a minimum return greater than its cost of

capital. The Personal Care segment has been growing through the introduction of new products

introductions and greater cost reductions.

2003 Company Overview

The Gillette Company achieved record earnings per share in 2003, driven by record net sales coupled with

lower costs and significant share repurchase activity. Net sales increased 9%, reflecting favorable

volume/mix and a 5% favorable exchange impact. Net sales growth was supported by a 28% increase in

advertising. New Blades and Razors products drove significant growth for both the category and the

Company, in spite of increased competition. Duracell delivered against the objectives of its North America

price-deal realignment program by reducing pricing and lowering trade and consumer spending. This

strategy, coupled with cost-reduction initiatives, resulted in a significant increase in profit, despite aggressive

deflationary pricing activity from price-value brands. Oral Care sales and market share increased, with the

higher share partially offset by lower pricing and unfavorable mix in an increasingly competitive

environment. Braun posted an increase in net sales that was significantly aided by exchange. However, profit

from operations was down year-on-year, reflecting unfavorable product mix and higher Euro-driven costs.

Personal Care had a solid year, increasing market share, sales, and profit from operations.


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Income Statement

% of % of % of Net Net Net Years Ended December 31, 2003 Sales 2002 Sales 2001 Sales ----------------------------------------------------------------------------------------------------------------------------------------- (millions) Net sales $9,252 $8,453 $8,084 Gross profit $5,544 59.9 $4,942 58.5 $4,677 57.9 Advertising $ 827 8.9 $ 647 7.7 $ 576 7.1 Sales promotion $ 376 4.1 $ 319 3.8 $ 319 3.9 Other selling, general and administrative (SGexpense $2,338 25.3 $2,206 26.1 $2,112 26.1 Total SGAexpense $3,541 38.3 $3,172 37.5 $3,007 37.2 Profit from operations $2,003 21.7 $1,809 21.4 $1,498 18.5 Income from continuing operations $1,375 14.9 $1,209 14.3 $ 910 11.3 Net income $1,385 15.0 $1,216 14.4 $ 910 11.3 Net income per common share from continuing operations, diluted $ 1.34 $ 1.14 $ 0.86 Net income per common share, diluted $ 1.35 $ 1.15 $ 0.86

Operating Metrics Broken Down by Segment

Blades & Oral Personal Total Years Ended December 31 Razors Duracell Care Braun Care Company ----------------------------------------------------------------------------------------------------------------------------------------- (millions or percentages) Net sales, 2003 $3,869 $2,015 $1,327 $1,177 $864 $9,252 Net sales, 2002 $3,435 $1,898 $1,248 $1,056 $816 $8,453 % Incr/(Decr) vs. 2002 13 6 6 11 6 9 Impact of exchange 6 4 5 9 4 5 Impact of volume/mix 5 5 2 3 1 4 Impact of pricing 2 (3) (1) (1) 1 - Profit from operations (PFO) PFO, 2003 $1,426 $ 348 $ 218 $ 49 $ 73 $ 2,003 PFO, 2002 $1,299 $ 233 $ 222 $ 75 $ 51 $1,809 % Incr/(Decr) vs. 2002 10 49 (2) (35) 43 11 PFO as % of net sales, 2003 36.8 17.2 16.4 4.1 8.4 21.7 PFO as % of net sales, 2002 37.8 12.3 17.8 7.1 6.2 21.4

The Blades and Razors segment enjoyed 2003 net sales of $3.87 billion, an increase of 13% over the

preceding year. The sales growth was driven by the strength of Gillette’s premium and disposable

shaving products as well as the introduction of the Mach3 turbo series into international markets. The

most expensive blades remain the primary source of growth in the industry as the rate of consumer


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trade-up is accelerating, driving the Company to expect continued demand growth for the premium

shaving systems in 2004.

Duracell’s sales of $2.02 billion were a 6% increase over 2002 numbers. This growth was driven by

‘pantry-loading’ in North America, due to the increased demand related to homeland security concerns,

blackouts, and hurricanes. The sales increase was partially offset by lower pricing through the price-deal

realignment initiative. Duracell discontinued its free-cell giveaway program and thus suffered a loss of

60% in free cell sales. Advertising spending increased by double digit percentage behind the ‘Trusted

Everywhere’ campaign, however the 50% retail price gap between Duracell and low price brands is

starting to erode Duracell’s market share, which is forcing the company to continually redefine its

marketing plans.

The Oral Care segment’s sales of $1.33 billion were 6% higher than 2002, due mainly to the success

of new products in manual and power categories, as well as an improved product mix. The acquisition

of Rembrandt Tooth Whitening System will help the Company to enter the toothpaste and whitening

markets and engage in further engage in cross-selling in this segment.

Braun’s sales in 2003 were up 11% from 2002, to $11.18 billion. This was due to gains in the electric

shaver markets as well as the household products market. The SARS epidemic led to a jump in the sales

of Thermoscan thermometers in the first half of the year. The company continues to make huge gains

in the European and Russian markets, which will continue to increase as the company inrroduces more

of their products into these markets.

Gillette’s personal care segment’s sales grew by 6% due to gains in their two core businesses, shave

preparations and deodorants. These gains are attributed to increased marketing investment and the

immediate success of new products. This encouraging news led Gillette to finalize its plans for the

shipping of several new products, including Gillette Complete Skin Care, and Right Guard Cool Spray.

Cash Flow

2003 2002 2001 Free GAAP Free GAAP Free GAAP Cash Cash Cash Cash Cash Cash Years ended December 31, Flow Flow Flow Flow Flow Flow ----------------------------------------------------------------------------------------------------------------------------------------- (millions) Net cash provided by operating activities $2,640 $ 2,640 $2,077 $ 2,077 $2,092 $2,092 Additions to property, plant and equipment (408) (405) (624) Disposals of property, plant and equipment 45 43 59 Free cash flow $2,277 $1,715 $1,527


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Net cash used in investing activities $ (518) $ (362) $ (564) Net cash used in financing activities $(2,250) $(1,844) $ (735) Effect of exchange rate changes on cash 8 5 (1) Net cash provided (used) by discontinued operations - (22) 93 Increase (decrease) in cash and cash equivalents $ (120) $ (146) $ 885

Gillette’s cash-generating abilities continued to strengthen and grow during 2003. Cash provided by

operations remains the company’s primary source of funds to finance operations, capital expenditures,

share repurchases and dividends. Gillette analyzes its free cash flow as a measure of its liquidity, as well

as its ability to fund future growth in the Company and to provide a return to investors. The firm does

not account for it as a measure of the residual cash flow which is available for discretionary expenditures.

Market Capitalization Comparison

Market

Capitalization % Total

P&G 1,327,162,000 43.90%

Gillette 38,890,500 1.25%

Energizer 3,780,000 0.10%

Other 1,304,967,500 43.20%

Industry 3,019,800,000 100.00%

From this chart, Gillette would seem to be a small company; however, upon further examination,

one discovers that Proctor and Gamble competes in many more markets and industries than Gillette.

Thus, Gillette’s most direct formidable competitor is Energizer. The two companies compete head-to-

head for the number-one and -two spots in their shared industries, namely the razor and blade industry

(Gillette vs. Schick) and the battery industry (Duracell vs. Energizer). A comparison of the market

capitalization rates of these two companies reveals that Gillette has a market capitalization rate 10 times

larger than that of Energizer, demonstrating the Company’s influential position in the market.

FINANCIAL COMPARISON Gillette Energizer P&G

Valuation R/Os

PE (TTM) 28.3 10.45 24.85

Beta 0.25 NA -0.15

Price to Sales 4.22 1.51 2.82


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Price to Book 17.29 4.44 7.8

Dividends

Payout Ratio (TTM) 36.14 0 39.47

Growth Rates

Sales (TTM) vs TTM 1 Yr. Ago 9.45 41.7 12.23

Sales - 5 Yr. Growth Rate 9.04 3.04 3.15

Capital Spending -5 Yr. Growth Rate -100 -6.62 -10.35

Financial Condition

Quick Ratio (MRQ) 0.57 0.7 0.6

Current Ratio (MRQ) 1.3 1.67 0.97

LT Debt to Equity (MRQ) 1.49 1.08 0.68

Total Debt to Equity (MRQ) 1.49 1.19 1.09

Interest Coverage (TTM) 32.2 9.7 15.9

Profitability Ratios

Gross Margin (TTM) 59.38% 42.93% 50.28%

Gross Margin - 5 Yr. Avg. 67.23 43.60% 46.29%

EBITDA Margin (TTM) 21.65 12.11 22.4

EBITDA - 5 Yr. Avg. 25.31 16.7 20.62

Operating Margin (TTM) 20.90% 10.85% 18.10%

Operating Margin - 5 Yr. Avg. 15.60% 11% 15.60%

Net Profit Margin (TTM) 15% 78.03% 12.00%

Net Profit Margin - 5 Yr. Avg. 12.30% 8% 9.79%

Management Effectiveness

Return On Assets (TTM) 13.91% 7.88% 10.80%

Return On Assets - 5 Yr. Avg. 10.59% 7.24% 10.99%

Return On Investment (TTM) 21.06% 11.30% 18.60%

Return On Investment - 5 Yr. Avg. 17.62% 10.14% 18.60%

Return On Equity (TTM) 64.50% 25.50% 34.17%

Return On Equity - 5 Yr. Avg. 45.62% 14.78% 34.14%

Overall, Gillette’s financial position reflects the mature nature of both the Company and the

industries in which it competes. Maturity is underscored by the large dividend payout. Also, Gillette’s

P/E ratio is below the market average due to the relatively large and mature market situation wherein

growth prospects are minimal. Gillette is a highly leveraged company as exemplified by the total debt to

equity ratio. The Company’s return on equity (ROE) is relatively high at first glance. However, it is

significantly higher than should be expected because of the number of impending lawsuits regarding the

Mach 3 and the Shick Quattro as well as the pension payments of the company. Despite litigation, the


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Company is best viewed a stable, non-cyclical, and risk-averse firm, as reflected by its Beta coefficient

of .25.

Due to the changing climate of the overall marketplace with the growth of Wal-Mart and the

introduction of many new low-cost products, the Functional Excellence initiative will be more vital as

the Company is required to cut prices and generally streamline the Company so it is able to maintain its

historical place.

All told, though, the comparative financial analysis figures for Gillette do reveal that the Company is

presently in a strong position--in relation not only to its nearest competitor, but also to industry leader

Proctor and Gamble. Gillette has effectively positioned itself so as to be a formidable company that will

further challenge this consumer products giant as it expands. Gillette has the money to make it grow

and if its financial trends continue, it will be a very profitable company in the next few years.

Porter’s Five-Forces Analysis

Internal Rivalry

There are numerous companies which compete in the consumer products market, especially in the

industries where Gillette’s portfolio segments operate. Each of these respective markets is fairly mature,

which limits the amount of mobility within them. However, Gillette has managed to achieve a

dominant position in each segment over the years. The introduction of lower-cost private label

products in large quantities has begun to shift the industry and change the practices of the leading

companies.

The razor blade industry is the most mature of the markets in which Gillette competes and is the

market in which Gillette is the most well-known. They have a commanding market share of over 28%

in the market, with the closet competitor, Shick (a subsidiary of Energizer) holding the next highest

share with 21% of the market. Despite the introduction of new low-cost razors from private label

companies such as Wal-Mart and Costco, as well as the introduction of the Schick Quattro razor,

Gillette’s market share has increased by over three percent in the past three years. This indicates that

there is extreme customer loyalty as well as brand recognition within this market. This has led to

increased outlays for research and development and advertising by all companies to convince customers

to continue to try their new and better products.

The battery industry in which Gillette competes under the Duracell label is also a mature industry

that has been constantly changing and developing over time. Duracell is the major player in the market

with over 30% of the market share. Energizer is the other major player with almost an equal market


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share. These companies have been the leading innovators and players in this market since the invention

of the battery. The introduction of the low-cost and private-label batteries has caused both companies

to spend more money on research and development as well as in advertising. Out of this new need

came the introduction of “Duracell Ultra.” The execution of the marketing and advertising plan for this

product failed, allowing Energizer to gain considerable ground from Gillette.

There are two different main uses for batteries, in hospitals and in our private homes. Hospitals

require their battery to be the best and longest-lasting battery and thus are less interested in the low-cost

rival batteries. They do not consider the price of low-cost batteries as these products lack public

widespread public respect and potential liability. The attitude of this hospital segment contrasts to that

of consumers, who will often make purchase decisions based solely on price.

Gillette also competes in the luxury personal care and household goods markets under the Oral B,

Braun and Right Guard names. These markets are not as mature as the battery or razor markets, but

they are very saturated due to the wide range of available products. Oral B makes a number of different

products in the dental care market including toothbrushes and toothpastes, both of which provide heavy

competition due to people’s changing and different preferences. Thus, the need for variety in the

market is high. As a consequence, the profit margin of many industry firms is low. Oral B has not

found a niche in the market, which has prohibited it from fully reaching it potential. Braun is in a

precarious position as each of its products faces a unique set of of competitors—many of which

specialize in this given product area.

Entry

The mature nature of most of the markets in which Gillette competes in makes it hard for new

companies to enter. In the recent past the only new entrants have been the private labels which are able

to offer low cost products. Due to the high cost of entry, other companies attempting to enter any of

the markets with any niche other than the low cost entrant have failed quickly as they were never able to

generate any cash flow or have enough sales so as to not be bankrupt by the end of their first year of

operation. This is in a large part due to the first mover advantage which is inherently beneficial in these

markets as a way to capture an audience and maintain their loyalty.

Gillette has always been the world leader in razor production since it began. Schick has a long

history of razor and blade production as well. Thus the market has a very high concentration ratio.

However, as exemplified by the Mach 3 and the Quattro, Gillette continues to have the first mover

advantage, as they did here coming out with a multiple razor bladed razors. The entrance of Schick into

this field did nothing but boost the market share of Gillette. The low cost razors are of a different


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nature and Gillette does not invest heavily in their low cost razors due not only to the simplicity but also

to the notion that the people who do use disposable razors will continue to buy the same kind, and

going off name recognition they will remain the lead position.

The battery market has had a surprisingly large number of entrants in the recent years, however due

to the various characteristics of the market, such as the concentration ratio and the substantial costs

associated with operating in the market. This is due primarily to the entry of private labels into the

market which has the ability to attain the large capital outlays as well as access to easy distribution. The

companies who are not associated with private labels, such as Rayovac, have had a hard time remaining

in the market. The increase in the number of companies competing in the market has driven the price

of even the top end batteries down considerably. Duracell is struggling with this as they are being

undercut by many competitors, including their main competitor Energizer. The company has begun to

slash their prices, however to retain their position in the market the prices of their batteries will have to

fall along with those of the rest of the market which amounts to about 20-30%.

Oral Care, Braun and Personal Care all have easier entry into their markets that the razor or battery

markets due not only to lower costs, the variety of products offered but also due to the continual

development of the market due to new technology and innovation. Thus the first mover advantage is

the most important factor in attaining status in the markets. In this way, if a company is able to come

up with a new idea, they create their own sub market which they control and monopolize. They also

have the ability to bundle and or cross sell their products which can be very effective and create

significant barriers to entry for companies threatening to enter into a particular submarket.

Substitutes and Complements

There are many substitutes available in each of the markets in which Gillette competes in due not only

to their competitors but also the nature of the markets allows for many alternatives which provide the

same services. There are not many complements in the same ways depending on the specific object or

tool which is being discussed.

The razor blade industry grew out of the necessity for a man to be able to shave his face easily and

quickly. However, many substitutes and complements have developed. It is true that the classic barber

shop shave is the best substitute for a razor blade due mostly to the luxorious feeling which it gives.

Thus the main substitutes are the increases in quality of the razor blade, such as an upgrade from a Bic

to a Mach 3 razor. The only issue with these substitutes is that it is very possible to steal from your own

products market share. Electric razors provide the highest upgrade from non-electric razors, as they are

a faster and more efficient way of shaving, whether it be face or legs. The complements in the market


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are shaving gel and after shave, which are deemed necessary in most cases. These products are

purchased essentially on a one to one basis with razors and are often marketed along with the razors of

the particular maker.

Batteries are very different in that they are purchased in order to make other gadgets work.

Currently there are no real substitutes for batteries, unless the long life battery is considered to be its

own product. The situation does allow for numerous complementary products, these being all of the

battery operated products on the market. The developments in technology are beginning to alter the

battery market as there are now solar powered gadgets and other products which are beginning to

reduce the role of batteries in society.

Oral Care, Braun and Personal Care are not essential good, thus they have substitutes in their

respective markets but not few complements. Low end private labels are the main competitive

substitutes for each of these markets, however high end products are also available. The range of

substitutes depends on the exact product, as well as does the existence of complementary goods.

Supplier Power

The key inputs are different for each of the different markets; however they are all based off the same

idea. Once a product is developed, Gillette produces it in one of their factories in India or China.

There is not much supplier power in these markets due to the current economic conditions in the third

world countries. The people in China and India are not concerned with the wages they are being paid so

much as that they are being paid any amount due in part to a lack of a union. There is no shortage of

workers either due to over population problems in the countries.

Buyer Power

With such a wide range of products offered, there are many different categories of buyers, including

general consumers, hospitals, the government, beauty salons, and schools. These groups can however

be divided up into two groups, professional and recreational users. General consumers have their own

group while the others are all in the professional group. This distinction is very important as the two

groups as each has very distinct needs and requirements which they look for when they are purchasing

their products. The general consumer is most concerned with price and thus exerts considerable

influence on the prices of products offered in the markets. Regardless of the quality of the product, if

there is another one at half the price, the consumer will buy the cheaper product. Consumers are brand

loyal as well. Once a person finds the brand and type of product he or she likes, he or she will continue

to buy that brand unless they can be convinced that another product is significantly better.


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This loyalty is also common among warehouse retailers. When stores such as Walmart and Costco

find a certain brand of product is selling better than another, they purchase more and more of that

brand, eventually eliminating the others from their shelves, which in turn eliminates those brands from

competing in the markets. Brands are only able to enter onto the shelves of these stores by offering the

product for free or at significantly lower prices than the lowest price before. Consumers also talk by

word of mouth about products which indicate the importance of quality to them as well.

Although quality maybe important to consumers, it is not their primary concern like it for

professionals. Hospitals are not concerned with the price of a product as they are the most concerned

with how long the product will last and how well it works. If a battery is placed in a patient’s heart to

keep it beating, the doctors will use the battery that they believe will last the longest and have the least

chance of malfunctioning. This same logic applies to beauty supplies and teeth cleaning mechanisms

and brushes as these professionals again want to use the highest quality.

This puts the manufacturers in a difficulr position as they must produce the highest quality product

at the lowest price so as to please both sets of purchasers. The best bet a manufacturer can do given the

situation is to make a high quality product and through advertising as well as brand loyalty which has

developed over the years, entice consumers to buy the product. If hospitals start to use a certain kind of

battery, general consumers will begin to buy that battery because it is what the hospitals use and thus if

the hospital uses it, it must be good logic sets in. Out of this cycle arises an advertising strategy, as

happened with Duracell and their “Trusted Everywhere” ad campaign. Thus the buyers exhibit a

significant amount of power over the prices and marketing of the products.

Evaluation of A Key Issue

The Battery Problem

After an in depth analysis of Gillette, we have determined that the major problem in the company rests

with Duracell and the battery industry. Although this is considered a mature industry, it is constantly

changing due to changes in technology and the necessities of society. Currently Duracell, Gillette’s

battery entity, is revamping their marketing and advertising campaign; however we believe they need to

refocus their R&D energies if they want to continue their position as the industry leader.

The battery industry is currently divided into two sub-markets, primary and secondary. The primary

market consists of disposable batteries, which are used on an every day basis by consumers and

comprise over 90% of battery sales. The secondary market, which has been growing at a rapid pace, is


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composed of the rechargeable batteries, which are becoming more important to society as technology

continues to develop in the communications and media fields.

Most of the battery industry is concentrated in the primary market which is generally considered to

be a mature market. It has developed into a market whose growth is driven by increases in replacement

sales. This is due to the availability of these batteries to the general public. Lead acid and alkaline are

the most common primary batteries currently. However, the recent availability of lithium to the general

public has begun to change this.

The secondary market, which is currently composed of nickel metal hydride, lithium polymer, and

lithium ion batteries, deals with areas considered juvenile industries which have and have the potential to

experience exponential growth. Now common place markets which are served by secondary batteries

are: portable computers, computer memory preservation, mobile telephone and portable video cameras.

In the near future the secondary battery market will begin to move into new markets which have high

potential for success, such as that for electric vehicles, utility load leveling and remote power storage.

In the past the secondary batteries have developed into primary battery sources. Lithium containing

and nickel hydrogen were a specialized niche 10 years ago and are now available to the general consumer

and are experiencing great success. Thus, today’s secondary batteries will develop into the primary

market as secondary battery makers are able to manage higher voltage systems as their flexibility in

shape, size and contour have proven to be of increased consumer interest.

The development of new products will allow for the improved performance of batteries as well as an

increase in their use in society as they will lead to new battery products which will begin to replace more

conventional resources such as the combustion engine and utility AC power. Many current products

that require batteries, such as laptops, cell phones and camcorders, have short life cycles, which require

battery market participants to closely monitor changes in the applications and consequently continually

modify their batteries.

Thus, the goal of battery designers is the development of portable accumulators that are able to

store large amounts electricity for long periods of time and allows for repeated charge and discharge

cycles as well as be inexpensive. It will become essential for battery producers to form long term

relationships with electronic companies to ensure the use of their batteries in the products.

Duracell is the market leader in the battery industry, and has historically concentrated its efforts on

products in the primary battery market. Due to early presence in the market, Duracell was able to attain

a market leader position in what developed into a two company market with Energizer. This position

provided Duracell with a comfortable cushion which led to a lack of innovation or investment in R&D


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in the past. However, the past few years have brought major changes not only in the market but also in

the technology behind the product.

The rapid growth of Wal-Mart and Costco and the introduction of their low price brands have

turned the primary market for batteries into a search good market, with brand loyalty falling dramatically.

The low cost batteries are on average priced 50% lower than the comparable product offered by

Duracell. Duracell has managed to cut their prices by 20-30% on most of their products through the

Functional Excellence Initiative, and are relying on advertising and customer loyalty to help them

continue to be profitable and hold onto market share. The current primary market for batteries is fading

into extinction due to the recent growth in new technological fields which has necessitated the

development of long lasting rechargeable batteries. Due to its stable position in the battery industry

previously Duracell did not invest heavily into R&D in these arenas.

Thus, the Duracell is facing two large problems. The company is heavily invested in the general

consumer primary battery market, which not only is being phased out due to new technology, but has

developed into a search goods market, with new low priced products which are pricing Duracell out of

the market. The heavy investment in the primary market poses another problem for Duracell as they

have neglected the rapidly developing secondary battery market, which will, as lithium batteries have

recently done, become the major driver in the primary market. Without a change in strategy and refocus

of R&D money, the company is in jeopardy of losing its market leader position due to its inability to

change and develop with the changing technology of the era.

The battery industry is one that must keep evolving and changing as new products are introduced

into the market, which require specialized batteries. The past twenty years have seen very little change

in the both the uses of batteries as well as their chemical makeup. Thus, the industry grew into a mature

market with Duracell and Energizer both staking claims to over 30% of the market. Duracell fell behind

in R&D and investment in the development of a secondary battery component to its business. Recent

technological advances are pushing the current secondary market into the primary market, thus phasing

out the alkaline and lead batteries of the past.

The obvious solution for Duracell is to increase their investment in R&D to develop long lasting,

durable quality rechargeable batteries comprised of the more efficient and powerful nickel metal hydride,

lithium polymer and lithium ion compositions. By changing their R&D focus to develop this battery

technology, Duracell will be able to maintain if not increase their market share and thus leading position

in the battery industry.

Currently Duracell is in the process of revamping their marketing and advertising campaign, and are

pumping more money into the ‘Trusted Everywhere’ campaign.In the current market, the company is


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not getting the benefit which justifies this new expense. Batteries have developed into a search good,

and Duracell is unable to compete on a price level with the new low cost brands, thus their customers

are brand loyal. These individuals do not need to be bought over with ads to make them purchase

Duracell batteries, and by running the ads the company faces a small chance, under 5%, of attracting

new customers who previously were purchasing low cost or Energizer brand products. Thus, if the

company were to cut advertising cost by 15%, they would be able to continue to have a successful

advertising campaign, just not to the current extent to which it is.

Duracell’s R&D focus has been on the development of their primary batteries, specifically the

alkaline and recently the lithium battery. The company has not focused its resources on the future of

the industry, which is currently what they must do in order to continue to be a major player in the

market. An increase in 15% for R&D would allow the company to further focus its efforts on the

development of new battery technologies as well as speed up the development and production process.

As the company owns most all of its production facilities, it will not be as difficult to convert their

current machines to accommodate the new product. If Duracell is able to do this in a timely and

efficient way, the Company, will be able to gain a first mover advantage in the new product markets.

Due to its capabilities and reputation in the market Duracell should be able to form contracts and

relationships with electronic producers such as Sony, Hitachi and Motorola, for exclusive rights to their

products. In this way Duracell will be able to grasp a large portion of the market as they will be the

industry leader in the production of the newest technologies.

The first mover advantage is extremely important in the battery industry as many companies develop

their product around specific battery capabilities. Thus, if Duracell is able to attain this position, even

for a brieft period, their batteries and technologies will become the bench mark from which electronic

devices are built around. This will become greatly advantageous as new products such as electric cars

become more prevalent in society.

Currently Enegizer, Duracell’s leading competitor in the battery industry is not focusing significant

R&D energies on the secondary market as they are focusing on the development of their Lithium 2

battery, which has recently been introduced into the market. This battery, although more powerful and

efficient than the alkaline or lead acid models, is not on the same level with the nickel metal hydride or

lithium polymer batteries. The lithium battery is also not able to be marketed in the rechargeable field,

which is where the future of the battery industry lies, as society becomes more dependent on portable

electronic devices, such as cell phones, lap tops and digital cameras. If Duracell is able to capitalize on

this opportunity, they will be able to essentially capture the entire market, which, when the secondary

market becomes the primary one, will give Duracell essentially complete market control.


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Conclusions

As a company, Gillette is doing very well and is in a good situation for the future. All of its market

segments are growing in most categories. The firm is in a position of market dominance, which allows it

to invest more heavily in R&D in all industries as all are continually changing and developing. The

Company’s ability to introduce new products as well as extend the life of established products is going

to depend on the Company’s ability to identify changing consumer tastes and needs and to develop new

technologies, differentiate their products, and gain market acceptance of new products.

The battery industry is of specific concern for Gillette, as the industry is rapidly changing. Duracell

does not currently invest heavily in R&D, thus growth could be hurt by: technological or design

changes in portable electronic devices that use batteries as power sources; continued improvement in

the service life of primary batteries; improvements in recharable battery technology; or the development

of new battery technologies. However, if Duracell is able to invest more heavily in these changing

technologies, it will be able to obtain the first-mover advantage in the electoronic industry battery

supplier, which will givem them the reassurance of a dominant market position even in the face of the

low-cost batteries being sold by WalMart and Costco. Further, Duracell should not lose sight of the

hospital market segment that remains low to its trust-worthy quality level.


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References

“2002 Annual Report and 2003 Proxy Statement.” The Gillette Company. Boston: 17 March 2003.

“Form 10-K” The Gillette Company. Boston: 1 March 2004.

Jakubik, Christopher. Personal Interview. 8 April 2004.

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