Question 1. Success of Newell Corporate Strategy
The strategy of Newell Corporation can be described as a strategy of related diversification. The diversification strategy may seem unrelated because Newell was acquiring companies from different industries (office products, picture frames, cookware etc.), but in fact the diversification was related on the basis of:
1) Deploying the unique resources of the company (management relationship with retailers, logistics etc.)
2) Using the same channels of distribution (Wall-mart, Kmart, etc)
3) Common characteristics of the products: low-technology, non- seasonal, non- cyclical, non-fashionable .
The most representative quantitative data that proves the success of the Newell strategy is 10 years average return of 31% for investors, that was much higher than average market return of 18%.
Also we can mention the stable growth of revenues and profit of the company, but these figures may be not very representative, because the growth in revenues could be a result of extensive growth of the company (if you acquire a lot of companies, your sales will grow for sure, but it is not an indicator of success). What is more important is a stable growth in earning per share in 1992-1997 from $1,05 to $1,82.
Another indicator of stable financial situation in the company was a high level of liquidity. This fact could be mention not only on the level of competitive strategy, but also on the level of corporate strategy because the policy of relationship with buyers was determined at a corporate center. So, all the companies were collecting receivable rather quickly and had a high level of liquidity as well as a whole corporation.
Question 2. Newell’s Strategic Triangle
Vision, Goals & Objectives
Vision. ‘Newell as a manufacturer and a full- service marketer of consumer products serving the needs of volume purchases’.
Goals &Objectives. What stands behind the vision, is that to serve the customers as best as it is possible and to provide them with the best quality products and services. Only by performing on the highest level, Newell Company can increase it’s strength and efficiency. The main goal of the company is to capture and maintain the best possible position as a manufacturer and a supplier in the market. By acting dynamically and undoubtedly, the company’s target is to overwhelm competition to reassure the profitability of their businesses in order to serve best the whole corporation. In order to achieve the goals, Newell set several main objectives, which are mainly constituted by key financial targets:
• Achieve sales and earnings per share growth averaging 15% per year
• Maintain return on beginning equity at 20% or above
• Increase our dividend consistent with earnings growth
• Maintain prudent degree of leverage
The objectives stated can be considered as specific, because they touch key aspects of companies financial performance. What is more, they are measurable and attainable. Finally, they can be easily realized and traced.
Resources
There were 4 main resources in the company that were valuable, rare, inimitable, non-substitutable (VRIN):
Strategic Cooperation. One of the biggest competences, which Newell managed to achieve and use in their business, was establishing hi-tech information channels with the main retailers. This extremely important tool, enabled the company to communicate with their clients easier and faster and that lead to the increase of cooperation efficiency. What is more, Newell put a lot of effort in maintaining a strong base of clients by active collaboration between the main companies (meetings between key executives; transparent policy; participation in planning activities). One of the key to Newell’s success was the way how they chose their main customers. Due to the fact that the market was oligopolic ,the corporation offered their products and services only to big retailers with a very strong position in the market.
Business Variety. Through a huge number of acquisitions, Newell managed to enlarge and diversify its range of products, still being able to stay focus on the core product (low- tech, non- seasonal, non- cyclical, not fashionable). The corporation did not want to enter any market, that would not fit the strategy line. What is more, they did not hesitate in exiting from the markets, which the enterprise predicted to become weaker, even the symptoms were not visible. What is more they could combine a good financial stability with a low level of costs. This was crucial because the majority of manufacturers from the market were not able to control cost generating factors.
Experience & Brand. Newell started its business in the beginning of XXth century. Due to increased demand for house and DIY products they managed to become successful early. Through years, they strictly held to the strategy to increase the production volume, lower the costs and serve mainly large customers. Choosing the right acquisition targets, which were the companies, that could fit their strategy, they were able to maintain their position in the market becoming more and more experienced. What is more they were recognized by the retailers as a very reliable company. By improving the quality of services and products, they managed to become a corporation with a very good reputation.
Professional Staff. In order to gain and maintain control over the vastly growing corporation, Newell had to employ people, that would be able to become a link between the business units and the corporate center. The company knew, that the job offer should be very well prepared in order to attract the best applicants. The training performed was very intensive and the tests made for applicants were extremely hard, but the benefits from working in Newell were very big.
Structure & Processes
Corporate Structure. The structure of Newell company is made to maintain the flexibility and, on the other hand, order in relations between corporate center. The corporate office was not small (over 300 employees), but it was needed in order to control and coordinate different aspects of a huge corporation working together.
Corporate Management. One of the most effective resources, which Newell managed to establish, was the cooperation within the corporation. Strong links between business units were created in order to make the information and technology exchange more flexible and efficient. Though, every department could work independently in some areas, all of them were controlled by supervisors, that were assuring if all the activities performed by particular units go hand- in- hand with the corporation’s general strategy. The reason for separating business units and the corporate center, was that holding would not want acquisitions to have a bad influence on the units.
Businesses & Market Attractiveness
Buyer Power. In the home and hardware market, the power of retailers which were the main business partners of Newell, was very strong., the concentration of buyers is much higher than of companies within the industry. The main enterprises are in control of 80% of the market (WallMart, Kmart). They had a very big influence on prices, demand and production. What is more, they set a lot of entry barriers to ensure their domination.
Degree of Rivalry. There were a lot of manufacturers existing in the market. Newell managed to quickly become one of the best and to overwhelm them. Becoming stronger and bigger was the key to be successful in this quickly emerging market. On the other hand, one of the crucial tactic was to acquire smaller manufacturers, that could become competitors in the future. Though the risk of competition is rather low, it increases.
Threat of Substitutes. There were a lot of potential substitutes for products produced by Newell. That is why it was so crucial to rapidly develop their product range and perform acquisitions to gain dominance in the market and be in control of new products appearances.
Supplier Power. The suppliers were not in a good position. It was extremely hard to gain advantage by supplying the market with unique resources. What is more, due to a large number of companies, the supplier’s market was not concentrated. Finally there was no opportunity for forward vertical integration.
Threat of Entry. In the beginning, there were not many entry barriers and it was possible, that new companies would enter the market. It was also a crucial factor, that lead Newell to be interested in obtaining control over the market as quickly as possible. Only then, through economies of scale, they were able to make the market less attractive for potential newcomers. There is also a barrier of low switching costs.
Question 3. Linkage between competitive advantage at the business unit level and a corporate advantage
To answer this question we have to understand whether the corporate center in Newell created value or not. The answer to this question is “definitely yes”. After acquiring the company, Newell started a process of “Newellization” (process of streamlining focused on operational efficiency and profitability) in acquired company and the company started to demonstrate much better results.
The main source of the value creation by corporate center was unique resources of the company. Newell added these resources to acquired companies and they started to thrive. For example they used their unique knowledge of how to manage relationship with buyers or how to cut costs. Another very useful resource was their knowledge in integrating of acquired companies. This process is always very complicated and there are a lot of difficulties, but Newell were able to integrate acquired companies very quick.
But it was not the only one source of the value creation. After acquiring the company Newell introduced there and integrated financial system, a sales and order processing system and a flexible manufacturing system. All these systems also improved the performance of acquired companies.
Anchor Hocking is a good example of “Newelisation” and value creation by the corporate center. Costs in the company were cut significantly plus average length of time needed to fill a customer order was decreased from 18 days to 1 week.
Another source of value creation is access to channels of distribution. Newell had a well-established relationship with all key retailers like Wall-Mart. So, acquired company could also use this access to channels of distribution.
So, to sum up we can say that corporate center of Newell definitely created value for all the business units and created a competitive advantage for them. On the other hand, competitive advantage of business units reinforced corporate advantage of the whole corporation. When all business units were doing well, the company generated more profit that could be invested in new acquisitions and in further reinforcement of competitive advantage as well as of corporate advantage.
Questions 4. Challenges for Newell in the 90s
In 1994, Newell develop a growth strategy in order to expand beyond its domestic market. The company decides to conquer new foreign market by its acquisition of Corning’s House. By extending its market by selling abroad, the company faces a higher demand and increases its sales by 17% in 1997. To sustain its expansion and enter rapidly in foreign market, Newell acquires other local foreign manufacturers and by doing so gained a direct access to implant itself in the local market. The convergent need of its customers allows Newell to develop successful globalization strategy.
The US retail industry structure changed. The retailers became more important and thanks to their size, they gained a lot of power over their suppliers. This is a threat for Newell because their buyers can impose the kind and quantity of merchandise, but also can influence the price and scheduling in their favor. To avoid retailers to introduce a competitor to some stores, Newell were forced to be able to achieve and manage with greater efficiencies their warehouse and distribution systems.
As the technology improved, point-of-sale data on every product sold the previous day allow the merchandiser to know precisely the demand. This encourages, in 1998, some retailers like Wal-Mart to use a system known as ‘cross-docking’ in order to eliminate inventory. This system requires on-time delivery of the correct order because if the suppliers didn’t manage the ship delivery to be on time, the trucks to the stores were gone.
To achieve efficiency, each Newell division pursue a single goal : deliver product and services to mass retailers, and to assure a superior customer service, each division focus on its own profit performance. In 1970, Newell goal was to maintain 95% line-fill (the measure of stock available when an order was received) and 95% on time delivery which is higher than industry average but these standard increased to 100% pushed by the industry average standard.
Newell need to increase their earning and their sales in the same measure so that they assure a rising profitability but at the same time internal growth is stimulated by launching new products.
In 1998, Newell was in a dominant position in each of the categories in which they competed and a powerful player. Trough acquisition, consolidation and integration in each category to achieve economy of scale and benefit from a cost advantage. Newell achieve to obtain what they called a “critical mass” when they attain a certain size allowing them to lower offering to maintain high entry barriers.
Questions 5-6. Calphalon and Rubbermaid acquisitions
Newell is a broad-range manufacturer of basic home and hardware products. The main buyers of their goods are huge retailers such as Wal-Mart and Kmart. Newell’s center of attention is to produce low-technology, non-seasonal, non-cyclical, non-fashionable high volume, low cost products that provide the company significant economies of scale. So Newell acquires companies only with a similar product profile to their own.
The emergence of large-scale mass retailers like Wal-Mart or Kmart changed the character of the retail history in US, which resulted in considerable power over suppliers, especially in pricing and scheduling. Suppliers had to optimized all aspects of the supply chain. Newell developed its EDI system for transmitting purchase order, invoices, and payments directly to retailers and supplied 5 of the top 10 US retailers in US. Newell’s established relationships and distribution channels will allow the company to leverage new acquisitions to sell more products and gain market share. Part of the company’s vision was Globalization and Newell was committed to follow its customers overseas, especially when large retailers such as Wal-Mart became more global. Feeling the push for expand internationally, Newell acquired more and more companies that allowed it to go into foreign markets in the mid 1990s.
Newell wanted to make brand names more recognizable, so felt need to buy stronger brand names, which would catch the attention and protect the company’s shelf space at different price points for each product category.
Calphalon
Newell had a strategy of acquiring firms that had operating margins of less than 10%,Calphalon had an operating margin 4.42% around 1997. Acquiring Calphalon which had low operating margin, enables Newell to achieve substantial cost savings by using its expertise to bring discipline to Calphalon’s financial, organization and manufacturing businesses. Newell had owns cookware brands such as WearEver, Panex, and Mirro which had strong position on the market. In acquiring cookware company, Newell could generate synergies by eliminating duplicate activities and improving economies of scale in purchasing. Newell was focus on profit growth or profitability not for sales growth, so Calphalon with low operating margins and high cost of products sold, would be a good candidate for cost savings. Calphalon’ product line that required a different sales strategy from Newell’s other products. SG&A expenses was much higher than Newell’s other products because of the specialized sales and marketing strategy, there may not be important savings in SG&A in this acquisition. The most important assets in an Newell’s acquisitions was shelf space, acquisition of Calphalon gave access to additional market segments and distribution channels. Moreover, the stores that Newell and Calphalon currently supply are complementary to one another. Calphalon had strong brand name that could help counter the increasing market power of Newell’s primary customers extend Newell’s cookware product line to the top of the market.
Calphalon runs its business substantially different than Newell, so there is a greater risk possible that Newell may not be able to successfully implement its ’Newellization’ process. Moreover, SG&A expense is totally different than for Newell. Calphalon is also a much bigger company compared to other previous Newell’s acquisitions. Fact that they do not offer high volume products that are priced at a level that would appeal mass-retailers and hence this shift in Strategy could be another risk. Acquiring Calphalon would result in a significant shift in Newell’s corporate strategy for its cookware product line. Because of the above we suppose that Calphalon is not a good takeover target
Rubbermaid
Rubbermaid exactly like Newell, manufactured high-volume products, so Newell could leverage its current resources and infrastructure to integrate with Rubbermaid. That will provide Newell with the opportunity to further produce with economies of scale, reducing the firm’s production and marginal costs. Newell had a strategy of acquiring firms that had operating margins of less than 10%, Rubbermaid‘s operating margin was 9.75% in 1997. The purchase of Rubbermaid would also eliminate a key competitor. What is more it would allow Newell to increase its market capitalization to over $10 billion which would garner more attention to Newell and its products make the company more competitive within the industry. It’s very important that Newell ware not offering plastics product. Acquiring a nationally recognized company like Rubbermaid which was the most admired company in America according to Fortune magazine. Newell’s current reputation as one of the most efficient shippers in the market, could influence in positive way on demand on Rubbermaid’s products.
This acquisition was in line with the Newell’s strategy to broaden its product line, increase its brand recognition, improve its global presence from a customer perspective, and boost its market cap over $10B. Most of the issues that Rubbermaid faced such as slow shipping, weak customer service, and inefficient operations were areas that Newell excelled in and turned around for other acquired companies. From its past acquisitions, Newell demonstrated its ability to strip inefficiencies from acquired companies and successfully integrate them as profitable businesses within the firm. Although Rubbermaid was Newell’s largest acquisition ever, it was surprising that they closed the deal in a matter of two weeks. This could imply that decision to purchase Rubbermaid was based on emotion rather than properly evaluating the company’s financials and making a more objective decision. Despite the possible problems with Newellization’ process, we suppose that Rubbermaid is a good takeover target.
Rubbermaid's business couldn't afford to stay in business without Walmart, which refused Rubbermaid's request to control pricing. Rubbermaid's business collapsed shortly thereafter. Most of its physical assets had to be sold off at discount prices to satisfy its creditors; its biggest remaining asset was the Rubbermaid brand name itself.
Question 7. Present situation of Newell-Rubbermaid
The Newell Rubbermaid has been re-born with new CEO Mark Ketchum. The transformation began immediately, current model wasn’t working and what needed to change. His new vision for the company: to be a global company of brands that matter and great people, known for best in class results. “Our vision says we are going to invest in our brands. We are going to invest in our people. And we are going to do that on a global stage. In the end, the measure of our success is in ‘best in class’ performance.”
Ketchum’s team conducted a analysis of Newell Rubbermaid’s portfolio and they found that about 30-40 percent of it didn’t fit the qualifications of brands that did or could matter. For the most part, they were either too commoditized, in categories that were of low interest to consumers or were in competitive or price-oriented environments with low profit margins.
The second step in Ketchum’s plan was to create a business model that could support brand building and innovation.
The company focused on two vectors: Newell Rubbermaid’s supply chain and its standard business processes. On the supply chain side, many of its plants were operating at less than full capacity in high-cost countries. They cut the number of factories by two-thirds, sourcing out a number of products to third-party companies.
The other area the company focused on was standard business processes. While it was into a lot of different product categories (baby products, office products, beauty and style, etc.)
Today, the new Newell Rubbermaid’s portfolio includes three business segments and 13 business units that generated net sales of $5.6 billion and a gross profit margin of 36.7 percent in 2009. More than 10 years after the merger, the Newell stock price was still valued at less than half of the 1999 pre-merger price.