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Case analysis of Henkel's new culture and the role of their CEO Rorsted.
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   9-502-019 REV: JUNE 18, 2003 ________________________________________________________________________________________________________________ Professor David Arnold prepared this case. HBS cases are developed solely as the basis for class discussion. Cases are not intended to serve as endorsements, sources of primary data, or illustrations of effective or ineffective management. This case was the winner of The Academy of International Business Case Competition 2002, sponsored by the Indiana University Center for International Business Education and Research (IU CIBER). IU CIBER is funded by a grant from the U.S. Department of Education. Copyright © 2001 President and Fellows of Harvard College. To order copies or request permission to reproduce materials, call 1-800-545-7685, write Harvard Business School Publishing, Boston, MA 02163, or go to http://www.hbsp.harvard.edu. 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—without the permission of Harvard Business School. DAVID ARNOLD Henkel KGaA: Detergents Division Global Branding Issues in the European Market On August 29, 2000, the senior executives of the Detergents and Household Cleaners Division of Henkel, the German consumer products giant, were gathering in a conference room in the company’s Düsseldorf headquarters. In the middle distance, the waters of the mighty River Rhine slipped smoothly and majestically by. Inside the room, by contrast, the atmosphere was tense, as the group considered the latest moves in a market characterized for decades by expensive and aggressive competition. Dr. Hans-Willi Schroiff, vice president of Market Research and Business Intelligence, was reviewing the past year’s developments in the European battles between Henkel and two of its long-standing competitors, Procter & Gamble (P&G) and Unilever: In the past year, both these companies have moved towards reorganizing themselves around global brand categories, rather than national subsidiaries. They say they’re doing it to concentrate their resources on a smaller portfolio of global power brands, and that the retailers are with them. Also, recently we’ve seen P&G undertake some re-branding and reallocation of its budgets. We know from our major account people that we are having to agree to more regional listings with the big retailers. It’s time to revisit our international marketing strategy, and check that we think we’re right by not following the same path. Henkel had long been committed to a strategy of strong local brands, reflecting both a philosophy of market responsiveness, and the organizational heritage resulting from a history of internationalization by acquisition. During the 1990s, the company embarked on a number of international standardization initiatives, mostly focused on product formulations and packaging. Successful as these were, the company’s international portfolio of detergent brands remained extensive and complex, and the prevalent attitude throughout the company’s sprawling corporate headquarters was pride in what many labeled the “European model,” of local “heritage” brands  backed up by a modern and integrated production network. Increasingly, this was contrasted with what was described as the “Anglo-American model of global power brands.” Dr Klaus Morwind, Executive vice president in charge of the Detergents and Household Cleaners Division, who had been the driving force and overseer of the recent moves towards international integration, commented:      P   l  e  a  s  e  n  o   t  e   t   h  a   t  y  o  u  a  r  e  n  o   t  p  e  r  m   i   t   t  e   d   t  o  r  e  p  r  o   d  u  c  e  o  r  r  e   d   i  s   t  r   i   b  u   t  e   i   t   f  o  r  a  n  y  o   t   h  e  r  p  u  r  p  o  s  e .   Y  o  u  a  r  e  p  e  r  m   i   t   t  e   d   t  o  v   i  e  w   t   h  e  m  a   t  e  r   i  a   l  o  n  -   l   i  n  e  a  n   d  p  r   i  n   t  a  c  o  p  y   f  o  r  y  o  u  r  p  e  r  s  o  n  a   l  u  s  e  u  n   t   i   l   2   6  -   O  c   t  -   2   0   1   4 .   P  u  r  c   h  a  s  e   d   f  o  r  u  s  e   b  y   S   t  e  p   h  a  n   i  e   B  e  n  g  s  o  n   2   6  -   O  c   t  -   2   0   1   3 .   O  r   d  e  r  r  e   f   F   2   1   6   2   5   6 .    E   d  u  c  a   t   i  o  n  a   l  m  a   t  e  r   i  a   l  s  u  p  p   l   i  e   d   b  y   T   h  e   C  a  s  e   C  e  n   t  r  e   C  o  p  y  r   i  g   h   t  e  n  c  o   d  e   d   A   7   6   H   M  -   J   U   J   9   K  -   P   J   M   N   9   I   O  r   d  e  r  r  e   f  e  r  e  n  c  e   F   2   1   6   2   5   6  502-019 Henkel KGaA: Detergents Division 2 The benefits of global standardization are clear. We have made production savings, and we have picked up bigger orders in some larger customers 1 . The other side of the ledger is much harder to account for, however. This is a market in which consumers have very varied preferences, so at some point a program of international standardization will cross a line at which consumer value is destroyed. It’s not easy for us, or our competitors, to identify where that line is, or what is the cost of crossing it. In general, we have moved towards that line only very cautiously, partly because of our heritage, which is very locally embedded, and partly  because local market penetration remains our primary goal. We’re rather pleased that we have still managed to gain many of the benefits of international standardization without risking our  brand strength. However, the overall trend is towards more standardized offerings, especially in light of the growing internationalization of our retail customers. So this is an issue we have to re-examine continually. The group had decided to review the brand strategy in two specific markets, Italy and Spain. These were markets in which Henkel’s flagship brand, Persil, was not present, for historical reasons. Italy and Spain were also among the markets in which P&G had made some recent re-branding moves. Did the trend in the competitive situation mean that Persil, the company’s obvious candidate in any battle between global power brands, should be introduced to those markets? Present at the meeting were the divisional international marketing chiefs for the company’s two leading brands: Marketing Director Dr. Joachim Bolz, responsible for Dixan, and Vice President Thomas Tönnesmann, responsible for Persil. Bolz commented: The big picture is one of opposing forces—the consumer wants local brands, the retailer wants international brands. We have marketing and production considerations. It’s not just about whether to build Persil into an even more global brand. It’s about the shape of the whole portfolio. Company Background Henkel & Cie had been founded by Fritz Henkel in 1876 in Aachen, Germany. Henkel’s Bleich-Soda (bleaching soda), one of Germany’s first consumer brands, proved such a success that only two years later the expanding company relocated to a plant in Düsseldorf, the nearest major commercial city. In 1884, the company began producing its own chemical raw materials, and in 1907 launched the world’s first self-acting laundry detergent 2 , named Persil after two important ingredients, perborate and silicate. Persil rapidly achieved market leadership, and its growth fuelled the company’s expansion, both outside Germany, and into other product categories, including adhesives, textiles, cosmetics and process chemicals. Henkel soon became Germany’s pre-eminent brand marketing company and a highly regarded national institution, a situation which remained true in 2000; for example, the on-going clean-up of outdated industrial plant in the former East Germany was known colloquially as “the Persil-ization of the East.” Over 100 members of the Henkel family still held a combined controlling stake in the holding company, Henkel KGaA, although shares had  been issued on the Frankfurt stock exchange since 1985. 1  As is usual in consumer goods industries, the word “customer” refers to a trade customer (i.e. a retailer or other distributor), and the word “consumer” refers to the end user of the product (i.e. the customer’s customer). 2  Self-acting = the clothes no longer need to be rubbed by hand.    P   l  e  a  s  e  n  o   t  e   t   h  a   t  y  o  u  a  r  e  n  o   t  p  e  r  m   i   t   t  e   d   t  o  r  e  p  r  o   d  u  c  e  o  r  r  e   d   i  s   t  r   i   b  u   t  e   i   t   f  o  r  a  n  y  o   t   h  e  r  p  u  r  p  o  s  e .   Y  o  u  a  r  e  p  e  r  m   i   t   t  e   d   t  o  v   i  e  w   t   h  e  m  a   t  e  r   i  a   l  o  n  -   l   i  n  e  a  n   d  p  r   i  n   t  a  c  o  p  y   f  o  r  y  o  u  r  p  e  r  s  o  n  a   l  u  s  e  u  n   t   i   l   2   6  -   O  c   t  -   2   0   1   4 .   P  u  r  c   h  a  s  e   d   f  o  r  u  s  e   b  y   S   t  e  p   h  a  n   i  e   B  e  n  g  s  o  n   2   6  -   O  c   t  -   2   0   1   3 .   O  r   d  e  r  r  e   f   F   2   1   6   2   5   6 .    E   d  u  c  a   t   i  o  n  a   l  m  a   t  e  r   i  a   l  s  u  p  p   l   i  e   d   b  y   T   h  e   C  a  s  e   C  e  n   t  r  e   C  o  p  y  r   i  g   h   t  e  n  c  o   d  e   d   A   7   6   H   M  -   J   U   J   9   K  -   P   J   M   N   9   I   O  r   d  e  r  r  e   f  e  r  e  n  c  e   F   2   1   6   2   5   6  Henkel KGaA: Detergents Division 502-019 3   Henkel achieved 1999 sales of 11.4 billion euros (  € ) 3 , of which 73% were earned outside Germany. The group was then organized into five divisions: Adhesives, Cosmetics and Toiletries, Detergents and Household Cleaners, Industrial and Institutional Hygiene, and Chemical Products 4 . Exhibit 1  shows the breakdown of these sales by division and region. The Detergents and Household Cleaners Division sales revenues,  € 2.6 billion, had grown 2.3% since 1998, compared with total Group sales growth of 4.1%, and its operating profit had grown 7.6% to  € 177 million, 21% of Group operating profits of  €  857 million. In laundry detergents, Henkel ranked second in Europe, and fourth worldwide. Despite being a major global player, its profile was uneven, with particularly low levels of activity and awareness in North America and the United Kingdom. This was for historical reasons: after World War II, as part of post-war reparations, the Allies awarded title of the Persil brand name to Lever in the United Kingdom and France, and while not formally prohibited from competing in the North American market, the company had realized that its resources would be better directed towards rebuilding its position in Europe. As its strong European base redeveloped, the company re-expanded internationally, including some judicious moves into the United States. By 2000, it owned 27% of Clorox, the California-based consumer brand company best known for its bleach products; and 25% of Minnesota-based Ecolab, a market leader in industrial and institutional hygiene. It had also entered a joint venture with the Dial Corporation, the first fruits of which had been the recent launch of Purex detergents in innovative gel and tablet formulations. European Detergents Market Laundry detergents were classified by the industry as heavy-duty detergents (HDD), and were mostly formulated for use in 60° to 90°C water, although product variants were also available in markets where many consumers washed at lower temperatures. Until the 1950s, powder formulations had dominated, but from the late 1970s onwards, liquid products, already dominant in the light-duty detergent category (LDD) 5 , had grown increasingly popular in the HDD category. Factors driving this trend included: a perception that liquids were less harsh on the skin: the need for manufacturers to reduce and/or eliminate phosphates from HDDs in response to environmental concerns; consumer demand for more concentrated products to reduce the environmental cost of product and packaging materials; and consumer preference for mixing a liquid detergent into a liquid washing medium (i.e. water), rather than dissolving a solid powder product. The presence and relative importance of these preferences differed by country. The rate of product innovation accelerated in the 1990s, with Henkel often at the fore. The most significant product development was the introduction of concentrated versions of both powders and liquids, known as “compact” products, the major benefits of which were environmental savings in ingredients and packaging, and the easier transport and storage of smaller units. Also introduced in the 1990s were gels and tablet forms of detergent, the benefits of which included more accurate dosing of the detergent. A proprietary product form introduced by Henkel was “Megaperls,” a pearl-granulated form of powder detergent, which also offered dosing benefits. This wave of innovation had expanded the product portfolio—Schroiff estimated that on average the number of SKUs under a major brand had increased by 50% in the 1990s. 3  In September 2000, 1 Euro = US$ 0.86. 4  The Chemical Products Division was de-merged later in FY 1999 into a separate company named Cognis. 5  LDD were used primarily for dishwashing, and treatments such as pre-wash stain removal or fabric softening.    P   l  e  a  s  e  n  o   t  e   t   h  a   t  y  o  u  a  r  e  n  o   t  p  e  r  m   i   t   t  e   d   t  o  r  e  p  r  o   d  u  c  e  o  r  r  e   d   i  s   t  r   i   b  u   t  e   i   t   f  o  r  a  n  y  o   t   h  e  r  p  u  r  p  o  s  e .   Y  o  u  a  r  e  p  e  r  m   i   t   t  e   d   t  o  v   i  e  w   t   h  e  m  a   t  e  r   i  a   l  o  n  -   l   i  n  e  a  n   d  p  r   i  n   t  a  c  o  p  y   f  o  r  y  o  u  r  p  e  r  s  o  n  a   l  u  s  e  u  n   t   i   l   2   6  -   O  c   t  -   2   0   1   4 .   P  u  r  c   h  a  s  e   d   f  o  r  u  s  e   b  y   S   t  e  p   h  a  n   i  e   B  e  n  g  s  o  n   2   6  -   O  c   t  -   2   0   1   3 .   O  r   d  e  r  r  e   f   F   2   1   6   2   5   6 .    E   d  u  c  a   t   i  o  n  a   l  m  a   t  e  r   i  a   l  s  u  p  p   l   i  e   d   b  y   T   h  e   C  a  s  e   C  e  n   t  r  e   C  o  p  y  r   i  g   h   t  e  n  c  o   d  e   d   A   7   6   H   M  -   J   U   J   9   K  -   P   J   M   N   9   I   O  r   d  e  r  r  e   f  e  r  e  n  c  e   F   2   1   6   2   5   6  502-019 Henkel KGaA: Detergents Division 4 Exhibit 2  shows market size and growth rate for the major European markets, as well as the same data for the United States for comparison. P&G enjoyed the leadership position in most European markets, with the notable exception of Henkel’s home German market, but the leading three brands varied by country (see Exhibit 3 ). An average industry cost structure is shown in Exhibit 4 . Gross margins had been increasing slightly in the period 1995-2000, mainly because of production cost savings; the introduction of compacts, for example, had reduced packaging costs. Gross margins also varied widely according to product form, with liquids averaging 50% and powders 30% due to the more complex production process required. Manufacturers had not managed to retain all these productivity benefits, as increasingly powerful retailers negotiated lower prices. Consumers “At the consumer level, the pressure is for localization,” commented Schroiff. “The big picture into which virtually all our consumer research fits is that there are significant differences by country in both purchasing and usage habits. Laundry and home cleaning are very culturally grounded activities, in which traditions and preferences have been passed down through generations.” Some dimensions of difference emerging from this research are summarized in Exhibit 5 . One of the factors behind these variations was a north-south divide within Europe, which had long been recognized in the industry. Schroiff explained Southern Europeans have traditionally washed in lower temperatures than their northern counterparts, for obvious climate-related reasons. They have therefore favored less powerful detergents, which they often use in combination with bleach. By contrast, the northern European markets favor powerful detergents in hotter water, and for the most part dislike  bleach in their laundry. In recent years, the environmental sensitivity of the northern Europeans has also fuelled many of the market’s innovations, and it is fair to say now that these northern countries are the lead markets in HDD detergents. The growing liquid sector had achieved different levels of penetration in the major European markets since the early 1980s. In the 1990s, there was even greater variation in the adoption of compact detergents, which achieved category leadership in the environmentally conscious markets of Northern Europe, but which were regarded as one of industry’s marketing failures in the southern markets. Morwind recalled that the industry’s experience with compacts had been one of the industry’s greatest mistakes: The whole industry was behind compacts. Manufacturers were aware that this was an innovation-driven market, and this was seen as an innovation with a clear rational value to offer the consumer. The retailers, of course, liked compacts because they took less shelf space for the same or higher price pack. Unfortunately, consumers in southern Europe were not interested. They like their big boxes! The most common dimension of consumer segmentation, and therefore of brand positioning, was the continuum from ‘Performance’ to ‘Care’. Performance brands generally emphasized cleaning power and product attributes, whereas Care brands focused on the softness and longevity of the washed clothes, and highlighted the importance of cared-for clothes in the lives of families. Research revealed that many consumers viewed this as a trade-off; for example, the more powerful cleaning agents in performance detergents were perceived as more likely to damage the fabric or threaten color fastness. Schroiff commented that “segmentation patterns are mostly derived from this basic difference, which taps deep feelings about how clothes (and often the family household in general) should be cared for. Layered over this are local differences in areas such as preferences for certain    P   l  e  a  s  e  n  o   t  e   t   h  a   t  y  o  u  a  r  e  n  o   t  p  e  r  m   i   t   t  e   d   t  o  r  e  p  r  o   d  u  c  e  o  r  r  e   d   i  s   t  r   i   b  u   t  e   i   t   f  o  r  a  n  y  o   t   h  e  r  p  u  r  p  o  s  e .   Y  o  u  a  r  e  p  e  r  m   i   t   t  e   d   t  o  v   i  e  w   t   h  e  m  a   t  e  r   i  a   l  o  n  -   l   i  n  e  a  n   d  p  r   i  n   t  a  c  o  p  y   f  o  r  y  o  u  r  p  e  r  s  o  n  a   l  u  s  e  u  n   t   i   l   2   6  -   O  c   t  -   2   0   1   4 .   P  u  r  c   h  a  s  e   d   f  o  r  u  s  e   b  y   S   t  e  p   h  a  n   i  e   B  e  n  g  s  o  n   2   6  -   O  c   t  -   2   0   1   3 .   O  r   d  e  r  r  e   f   F   2   1   6   2   5   6 .    E   d  u  c  a   t   i  o  n  a   l  m  a   t  e  r   i  a   l  s  u  p  p   l   i  e   d   b  y   T   h  e   C  a  s  e   C  e  n   t  r  e   C  o  p  y  r   i  g   h   t  e  n  c  o   d  e   d   A   7   6   H   M  -   J   U   J   9   K  -   P   J   M   N   9   I   O  r   d  e  r  r  e   f  e  r  e  n  c  e   F   2   1   6   2   5   6
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