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MM 5012 Business Strategy

GROUP SUMMARY ASSIGNMENT BLUE OCEAN STRATEGY AT HENKEL
Syndicate 2 Executive 46 (Great Leader Syndicate) 29111311 29111328 29111329 29111338 29111344 29111384 29111387 29111393 Haidir Afesina HendraWinata MitaListyatri AndekPrabowo AprianEkaRahadi ChairunnisaMirhelina N F X KresnaPaska Agung Indri P

MASTER OF BUSINESS ADMINISTRATION SCHOOL OF BUSINESS AND MANAGEMENT INSTITUT TEKNOLOGI BANDUNG 2013 PAGE 8of 10

Syndicate 2 X46

Syndicate II – MBA ITB X.46

Blue Ocean Strategy at Henkel

1. CASE SYNOPSIS Since its inception 137 years ago, Henkel has been known as the predominant company in Adhesive industry. Founded in 1876 as Henkel & Cie in Aachen by 28-year old merchant Fritz Henkel, Henkel holds globally leading market positions both in the consumer and industrial businesses with well-known and brands Loctite. such as Persil, on the

Schwarzkopf

Focuses

innovative strategy of the company, which was driving force of the company to become a leader in 1990s German market. Henkel operates worldwide with leading brands and technologies in three business areas: Laundry & Home Care, Cosmetics/Toiletries and Adhesive Technologies. It has developed a range of products in 125 countries, from modern consumer ones for everyday use to complex chemical and technical system solutions for industrial consumers and also unique from other competitors.Since 2002, Henkel has been its oval corporate logo and the claim “A Brand like a Friend”. The tagline intention to foster customer`s trust in Henkel quality and also facilitate the perception of Henkel as a brand, not corporation. Together, these two components represent an umbrella brand for the entire company with all of its products and services. The case deals specifically with the difficult market situation of an overcrowded and stagnating market. Thus Henkel's resulting consideration to implement the blue ocean strategy. Andreas Welsch, General Manager of the German department of Henkel Adhesives Technologies for Consumers and Craftsmen and his marketing executives have to develop a long-term, sustainable strategy, in order to avoid a continuous fight for market share with competitors in the adhesives market. They have to introduce changes that would include both tangible financial and performance targets, and an overhaul of company culture.

2.

ISSUES and PROBLEMS

The growth of Henkel`s market has slow down along the increasing price of raw material (energy prices are increases and unsustainable) that impacted to Henkel margins. In addition there is competitor that would enter the market with a very low price. Therefore the objectives are to develop new customer groups to tap new markets.

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Blue Ocean Strategy at Henkel

3.

ANALYSIS

To successfully deal with this uncertainty and to achieve strategic competitiveness and thrive, firms must be aware of and fully understand the different segments of the external and internal environment and the relation within (Ireland, Hoskisson and Hitt, 2011). 3.1 External Analysis 3.1.1 PEST (Politic, Economy, Social and Technology) It gives the overviewed of macro-environment of the industry that describe the opportunities and threat (Ireland, Hoskisson and Hitt, 2011). Politic : The globalization reduces the trade barrier that resulted in reduction production cost from the IT production. However, it creates tight competition between global and local product. Thus merger and acquisition are also a strategy to help Henkel expand its international global brand. Economy : By focusing on emerging and developing Asian market especially India and China, Henkel could achieve substantial growth on these high growth markets. In fact, the market of adhesive product is saturated. Investing on new projects such as building a warehouse or headquarter also help the company to achieve its long sustainable growth. On the other side, the economic slowdown of Euro zone and US, along with the increasing price of raw material and energy are becoming the threat that cannot be ignore. Social : In recent years, people are becoming emotional buyers. Means Henkel has to maintain their customer relationship carefully through its products and services. Thus there is a potential increasing demand based on the social lifestyle. Technology : Henkel`s innovation in Adhesive Technology business sector that offered products for household and office applications help it to be the world leader in its segment.

From the financial perspective on exhibit 5, $5,711 or 43% of Henkel revenues generate from Adhesive Technology sector, it givessignificant effect to Henkel financial performance.Its sector increasing Henkel Financial Performance of revenue and market with indicator Compound Annual Growth Rate(CAGR) as shown inTable 1 below.

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Blue Ocean Strategy at Henkel

Table1Compound Annual Growth Rate (CAGR) of Henkel 2006 – 2007
2006 Revenue Operating Profit Margin Net Profit Margin Operating Expenses to Revenue Market Earnings per prefferd share (1)
Source: Exhibit 2

2007 10.3% 7.20% 89.7% 2.14

CAGR (%) 0.43% 2.59% -0.05% 3.68%

10.2% 6.84% 89.8% 1.99

Above shown that positive growth of the revenue from its CAGR is 2.59% in net profit margin along with the efficiency in operating expenses for 0.05% from 2006 to 2007.3.68% positive growth also occurs in earnings per preferred share to show that the financial performance is successful indicator to the Henkel strategy in 2007. Thus Henkel still considered has a strong financial position.

3.1.2 Porter Five Forces According to Porter (1980), to make it possible to map the strategic categories in the industry, identify and classify industry participants according to their competitive strategies. Often, an industry has a number of firms pursuing several strategies. Therefore, Porter`s five forces framework explains the industry`s competitiveness.

Table 2Matrix of Porter Five Forces FORCES Thereat of New Entrants ANALYSIS Lots of products are already established with high brand awareness and generating customer loyalty so competition focus to cost advantage, distribution channel economic of scale Brands that compete offer almost the same benefit and almost the same price. However it`s a price sensitive. The few suppliersmake it on powerful position that impact to higher cost for the company. Means lowering industry profitability ATTRACTIVENESS Unattractive

Bargaining Power of Buyer

Unattractive

Bargaining Power of Supplier

Attractive

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Blue Ocean Strategy at Henkel

FORCES Threat of Substitute

ANALYSIS Rapid change in ICT (Information Communication and Technology), make differentiation in the industry narrower. Customer can shift to multitasking product. Except innovation, many company in this industry compete in seeking the way to reduce cost to give the lowest price to the customer

ATTRACTIVENESS Unattractive

Rivalry Among Existing Competitor

Unattractive

The objective of strategy is a sustainable competitive advantage, which may come from any part of the organization’s operation. The market is the judge of this advantage. Therefore it needs a careful brand strategy to ensure company`s position in the consumer’s mind to produce a perception of advantage. Based on Porters framework, the Adhesive industry is not an attractive industry to enter. An established companies in the industries compete fiercely among them prevent other player to come in. Huge capital and wide distribution is needed to achieve economic scale. Thus the innovation is needed to differentiate from others and become more profitable.

3.2 Internal Analysis 3.2.1 Value Chain Analysis Value chain described the sequence activities within an organization that design, produce, sell, deliver and support its products or service (Ireland, Hoskisson and Hitt, 2011). Therefore to be effective, value chain analysis needs to recognize and understand the relationship between primary and support activities.

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Above is Henkel`s value chain activities. The primary activities are: (1) Research &Development (2) Product safety (3) Raw Materials (4) Production (5) Logistics (6) Use: fostering sustainable consumption (7) Usage: Industrial business, and (8) Packages &disposal.

The support activities are procurement, human resources, infrastructure and general support. Primary activities and support activities are linked to each other. Henkel has to see that the activities not just a cost, but also a step that has to add some increment value to the finished product or service. With the sorting activities in the value chain, in order to reduce operating costs to do the pattern of out sourcing. However, out sourcing can only be done in areas that do not create value or areas at a substantial disadvantage compared to competitors. Therefore the selective strategy has to be done as competitive advantage arises from the activities in a company`s value chain. In order to perform different from competitor, Henkel has to meet different needs and/or same needs at lower cost as its value. Thus it has advantage to sustainable higher process and/or lower costs to compete on strategy.

3.2.2 Resources Based Analysis Categorized as tangible or intangible, resources can be defined as inputs into a firm’s production process, such as capital equipment, the skills of individual employees, patents, finances, and

talented managers (Ireland, Hoskisson and Hitt, 2011).Capability is the capacity for a set of resources to perform a task or an activity in an integrative manner(Ireland, Hoskisson and Hitt, 2011). As core competencies are resources and capabilities that serve as a source of competitive advantage for a firm over its rivals, it should be met the four criteria;

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Blue Ocean Strategy at Henkel

a) Rare (capabilities that are not possessed by competitors) b) Valuable (capabilities that help a firm neutralize threats or opportunities) c) Costly to imitate capabilities (capabilities that other firms cannot easily develop) d) Non-substitutable capabilities (capabilities that do not have strategic equivalents)

Although the market condition of adhesive product is saturated in adhesive market describe in previous section, resource based view emphasizes building competitive advantage through capturing superior profits, stemming from fundamental firm-level resources and capabilities. Henkel has some unique resources, which integrated to be unique capability and finally lead to core competency to gain competitive advantage. The table below depicts the tangible and intangible resources which already presence in the Henkel environment. From integrated bundling of the tangible and intangible resources, the capability to perform outstanding activity within Henkel can be catch up.

Table4 Criteria for Sustainable Competitive Advantage

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Blue Ocean Strategy at Henkel

If we combine the resources and the capability of Henkel, the core competency of Henkel located in both aspect (Table 5): 1. a. Tangible Organization. Henkel has large product portfolio. Although different competitors existed in each market from its huge products (Exhibit 6), each competitor often only served a special niche and sector. In addition, only few companies were active in as many segments as Henkel did. Therefore this is the reason Henkel was almost triple the size of its next best competitor. Furthermore, with its international expansion strategy, Henkel can rapidly grow its brand image. Henkel’s diverse product range and strengths ranged from modern consumer product for everyday use to complex chemical and technical system solution for industrial customer.

2.

Intangible a. Innovation

Henkel invest in R&D in big portion as shown in Exhibit 2, compare to capital expenditure, R&D expenses is around 78.8% in 2006 and in 74.4% in 2007. From this data we can understandably why Henkel being the first self-acting laundry detergent in 1907.

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Blue Ocean Strategy at Henkel

b.

Reputation From reputation view, customer care of Henkel gives optimum support product enhancement, technical advice, addressing complaint and warranty support. Thus it makes Henkel receive positive image from their customer. Thus it fits to its tagline i.e. A brand like a friend. Although Henkel brand is not really familiar to customer, as not all sub-brand Henkel invested to that. However customer familiar to its sub-brand likes Pritt, Patex, and Ponal. This is because their sub-brand strategy applied to product managers to develop their own marketing strategy.

Table5Combination Criteria for Sustainable Competitive Advantage

3.2.3 Brand Management Brand is an offer and designed for customer experience with 80% focusing internally and 20% externally (Keller, 2008). With the statement of “A brand like a friend”and its graphic depiction, the task has been successfully solved. The company is no longer a faraway factory, but a “friend,” a familiar person. This describes a new identity. An offer is always a commitment, too. Not only must the products and services satisfy this claim, but the employees as well. In creating a corporate brand, Henkel was breaking new ground in an industry that had traditionally been dominated by product-oriented marketing. The company name had stayed in the background, since it was already very well known in the German domestic market. The situation was different in the international environment, in which Henkel, with its broad range of products, naturally found it more difficult to make its name known. Thus it decided to introduce Henkel as corporate brand.

The corporate brand is an increasingly vital strategic element in corporate management, especially for Henkel that operate worldwide. At the same time, in a more competitive environment, a corporate brand is an additional value creator and a driver of corporate success. The value contributed by the corporate brand takes many forms, as its effect is internal as well as external. Henkel with a strong brand presence that essentially means a good reputation and high awareness, are more valuable and more attractive to shareholders. Not only that but also have better qualified

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Blue Ocean Strategy at Henkel

employees, more loyal customers, and better suppliers. In addition it is more crisis-proof, and find it much easier to impose their general operating conditions. The success of corporate brand management is based not least on the corporate culture shared by the employees (Keller, 2008). This brand understanding, lived within the Company, makes external target groups trust Henkel and makes customers prefer Henkel products. Therefore, Henkel is manifested in an increase in brand and corporate value. Here corporate design is turned into real corporate management, with concrete effects on employee motivation and market penetration.

4. CONCLUSIONS and RECOMMENDATIONS 4.1 Conclusions It concluded that Henkel as a leading manufacturer and supplier of consumer and industrial goods, lead position worldwide in laundry and home care, cosmetics and toiletries, and consumer and craftsmen adhesives segments. A strong market position in most of its operating segments enhances the brand image of the company. However competition from large players and private labels could be a threat for company’s market position and could also lose its market share.

Strengths

: Strong financial position, product innovation, broad product portfolio, strong R&D, intelligent brand management

Weaknesses

: Weak presence in Asia compare with competitors such as P&G, Unilever

Opportunities : Focus on developing and emerging countries (Asia), invest on new projects, positive market outlook for home care and laundry segments Threats : Increasing competitive pressure, economic slowdown in US and Eurozone, inflation impact to operating cost Both Porter’s five forces model and Resource basedview may appear to be different, but they are actually complementary when integrated. From Porter`s five forces that define the industry structure and position approach helps a firm to understand its competitive environment while the resource-based view helps it to evaluate its ability to exploit strengths andrespond to identified weaknesses.

4.2. Recommendation From analysis above, the authors give the recommendation for its Blue Ocean Strategy. The strategy will focus on value innovation and value pioneering in order to gain market share. Blue Ocean Strategy is creating uncontested market space to make the competition irrelevant by

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Blue Ocean Strategy at Henkel

pursuing of differentiation and low cost in capturing untapped demand (Kim and Mauborgne, 2005). However to implement the strategy, it depends on the company environment itself.

ELIMINATE
Eliminate total number if its brand and create a focus "Masterbrand"

RAISE
Personal care (Hair & body), Innovation based on customer oriented Green product

REDUCE
Carbon foot print Technically terms

CREATE
DIY segment (easy to use) Product for women Green Products

Moreover, Henkel created a long-term strategy through its brand management; 1. Brand Development This team is focusing on creating and developing a long-term strategy. It brings the brand evolving to the future by creating the innovation in order to build the image. Thus it centralized in globe scope. 2. Brand Building This team is bringing the brand live in the marketplace. It is decentralized in major geographic region. In other words, it is a short-term strategy.

5. LESSONS LEARNED The lessons learned that could be taken from the case are; 1. Firms has to be able to identify its resources in order to figure the strength and weaknesses with competitors by analyzing both of external and internal environment 2. Firms has to determine its capabilities so that allow them to do better to create the opportunity to face its threat 3. Firms has to select the strategy that best allow it to utilize its resources and capabilities to achieve sustainable competitive advantage

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Blue Ocean Strategy at Henkel

REFERENCES

Ireland, R.D, Hoskisson, R.E, and Hitt, M.A (2011), The Management of Strategy; Concept & Cases, 9th Edition, South-WesternCengage Learning Keller, Kevin Lane (2008) Strategic Brand Management, 3rd Edition, Pearson: Prentice Hall

Kim, W Chan and Mauborgne, Renee (2005), Blue Ocean Strategy, Harvard

Porter, Michael E (1980), Competitive Strategy, Techniques for Analyzing Industries and Competitors, Free Press/Simon &Chuster

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