Skil Corporation

Harvard Business School 9-389-005 op y September 15, 1988 Skil Corporation On March 23, 1979, Emerson Electric Company acquired Skil Corporation, a manufacturer of portable power tools, for $58 million. With sales of $2. 6 billion in 1979, Emerson Electric produced a broad range of electrical and electronic products and systems. tC Emerson Electric Company Emerson Electric, originally a manufacturer of electric motors and fans, had gradually expanded into a broad range of consumer and industrial products.It classified its businesses into commercial and industrial components and systems; consumer goods (including portable electric tools); and government and defense products (see Table A). Table A Sales and Pretax Income of Emerson Electric by Business Segments ($ millions) 1978 Pretax Income No Sales Commercial and industrial Consumer Government and defense Intercompany sales $1,380 698 176 (20) $201 123 21 1979 Sales Pretax Income $1,570 865 199 (20) $232 141 24 Source: Company annua l reportsEmerson’s business units manufactured products principally in electrical and electronic fields, such as electric motors, controls, drives, and heating, ventilating, and air conditioning equipment. The company also manufactured power chain saws, gas cutting and welding equipment, vacuum cleaners, bench power tools (which it sold to Sears), and other consumer goods. Do With a stated goal of being the so-called best-cost producer in as many of its markets as possible, Emerson stressed cost reduction. Emerson defined best cost as the lowest-cost producer of high-quality products, making its products a superior customer value.Each division was measured on growth and return on invested capital. Cheng G. Ong wrote this case in collaboration with Professor Michael E. Porter on the basis of published materials and interviews with company executives. It is intended as a basis for class discussion rather than to illustrate effective or ineffective handling of an administrative situation. Copyright  © 1988 by the President and Fellows of Harvard College. To order copies or request permission to reproduce materials, call 1-800-545-7685 or write Harvard Business School Publishing, Boston, MA 02163.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. 1 Copying or posting is an infringement of copyright. [email  protected] harvard. edu or 617-783-7860. 389-005 Skil Corporation op y Emerson had embarked on a program of acquisitions to meet its aggressive goals of growing sales 15% annually and doubling earnings by 1981. Previously, Emerson had acquired only financially successful companies and had retained existing management.With the Skil acquisition, it broke precedent. Carried by a highly profitable electronic switch company, Skil had regist ered mediocre financial performance. Because of Emerson’s major position in the chain saw industry with its Beaird-Poulan Division, for antitrust reasons Emerson had to divest Skil’s $20 million in chain saw sales on acquiring Skil. From Emerson’s perspective, Skil was a turnaround situation. Chuck Knight, CEO of Emerson, wondered if Skil would represent a successful new diversification approach or prove that Emerson’s past acquisition philosophy had been correct.Jim Hardymon and Bill Davis, Emerson veterans installed as Skil’s new president and marketing vice president, had a more pressing problem. Faced with stiff competition from Black & Decker, Sears, and emerging Japanese competitors, Hardymon and Davis had to forge a new strategic direction. tC The Portable Power Tool Industry The power tool industry consisted of portable and stationary tools powered by electricity, gasoline, or air. Stationary tools such as table saws, band saws, radial arm saws, large grinders, and sanders were large, heavy units mounted on floor stands. Portable tools were hand held and mostly powered by an electric motor.The gasoline-powered chain saw was one of the few portable tools with a nonelectric engine. Pneumatic power was largely restricted to automotive tools such as grinders, buffers, impact wrenches, drills, and hammers. In 1979, portable electric power tools accounted for the majority of industry volume. No Portable electric power tools came in a wide range of sizes, prices, and qualities. Principal products were saws (circular, reciprocating, sabre, or jig); drills (corded or cordless, regular or hammer); and sanders (disc, orbital, belt, or combined sander/grinders). Other products included outers, planes, roto hammers, impact wrenches, polishers, and screwdrivers. Exhibit 1 shows domestic U. S. sales of portable tools by type of tool. A typical company product line consisted of about 200 tools plus accessories, for which a variety of sizes and price points were available. The portable power tool market was becoming increasingly segmented by price point. Circular saws, for example, ranged in price from $24. 99 to $199. 99 with typically 20 price points in between, each point designating a certain level of quality, durability, horsepower, and other product features. A typical manufacturer had 15 models. DoPortable electric power tools were used primarily for woodworking, metalworking, or automotive repair. Power tools could be broadly divided into professional (also called industrial) and consumer categories. Professional tools were designed for heavy-duty use and had higher horsepower and a longer useful life. They were markedly superior in quality and precision to those designed for the consumer market. For example, the gears for a professional saw were made of steel, whereas consumer saw gears were made from powdered metal, a lower-strength material. Professional tools sold at higher prices and gross margins t han consumer tools.For example, while a professional drill retailed at $100 or more, a consumer drill typically cost less than $50. The average gross margin for a consumer drill was 37% compared with 45% for a professional drill. Within both markets, the range of price, quality, and size gradations was wide. As consumer tools were becoming more sophisticated and of higher quality, however, the traditional distinction between consumer and professional tools was blurring. As a result, more and more tradespeople and other professionals were buying consumer tools, especially in developing countries where both markets were served through the same channels. Copying or posting is an infringement of copyright. [email  protected] harvard. edu or 617-783-7860. Skil Corporation 389-005 op y Product improvement in portable power tools took several forms. First was the use of battery power. Although the first cordless drill, driven by nickel cadmium batteries, was introduced in the early 1960s , cordless tools did not become commercially successful until the early 1970s. Cordless tools were generally less powerful than corded ones because of the limits of battery power and lightweight motors. They were generally regarded as consumer tools.As battery technology improved, professionals began using cordless tools for quick â€Å"touch-up† jobs while using corded professional tools for the main job. By the late 1970s, sales of cordless tools were growing rapidly. tC The second improvement was the availability of lighter materials, such as aluminum, magnesium, and plastic. For example, Skil and Black & Decker, leading U. S. competitors, had pioneered the use of high-strength plastic in consumer tools and had lowered their costs significantly. Tools were also being redesigned for improved ergonomics and balance.Japanese and European manufacturers had taken the lead in creating tools with better-fitting handles and improved gripping surfaces, thus providing better control for the user. Producers were also designing tools to be more energy efficient. Safety was the final area of development. Saws and other tools increasingly had features such as impact resistance, safety switches, and guards. Typically, using a team of four to six engineers, the design development for a new tool took two to four years, at a cost of $200,000 to $700,000 a year. Manufacturing a new model required $250,000 to $800,000 in tooling. Buyers NoProfessional buyers of tools were a highly diverse group that included metalworkers, building contractors, carpenters, plumbers, electricians, and farmers. They were concerned with performance, quality, durability, and service. They were very knowledgeable about portable electric power tools, which were often the primary tools used in the professional’s work. Tradespeople frequently purchased what they perceived as the best individual tool of each type and were only moderately influenced by the brand name. Portable electric powe r tools were also used in manufacturing firms for production activities and plant maintenance.Users in factories were generally less concerned than tradespeople about a tool’s quality and generally purchased whichever brand was available at their supply stores. Sales to the professional segment were growing steadily at 8% per year. Do Consumers were mainly hobbyists and do-it-yourselfers who bought mostly drills and circular saws. Consumer users tended to be more price conscious than professionals and more susceptible to brand advertising and promotions. The consumer segment had grown rapidly in the early 1970s and by 1979 accounted for half the U. S. power tool market.The growth rate for consumer tools varied greatly by individual product category. For example, between 1978 and 1979 alone, sales of cordless tools grew 50%. In the United Kingdom, the do-it-yourself market was growing at 23% annually and the industrial market, at about 2%. The do-it-yourself market in Europe w as projected to grow at a similar rate. In 1979, the portable electric power tool market was approaching $2,350 million worldwide, with about $868 million of that in the United States. Western Europe represented about one-third of the world market and Japan, 12. %. Table B shows the sales distribution of portable electric tools by geographic region. Developed country markets were similar in their channels and product varieties, although safety and electrical standards differed. In Europe, the industrial segment had traditionally dominated, and Black & Decker had pioneered the introduction of consumer tools. European tool designs tended to be more stylish than American ones. In Europe, tools were used primarily on concrete, and in the United States, on wood. 3 Copying or posting is an infringement of copyright.[email  protected] harvard. edu or 617-783-7860. 389-005 World Portable Electric Power Tool Market in 1979 (sales by geographic region) Region Dollar sales United States West ern Europe Japan/Far East Latin America Canada Australia Other Total 37. 0% 34. 5 12. 5 3. 7 3. 1 2. 2 7. 0 100. 0% Units 40. 0% 32. 2 12. 5 3. 3 3. 3 2. 2 6. 5 100. 0% Channels op y Table B Skil Corporation No tC There were 15 separate distribution channels for power tools, ranging from specialized industrial outlets to mass merchandisers. Exhibit 1 gives estimated sales and growth rate by channel.Traditionally, industrial suppliers supplied professionals with their job needs and carried a broad range of higher-priced tools. Consumer channels such as hardware stores and mass merchandisers carried tools for consumers. With the advent of the do-it-yourself market in the mid-1970s, consumers also began shopping at more industrial channels such as lumber and building materials supply stores. These do-it-yourself consumers demanded higher quality and more features in their tools. By 1979, these stores were being partially displaced by home centers, which catered to both professionals an d consumers.A substantial volume of professional tools was increasingly sold through consumer channels. There were significant product and price point overlaps between the high-price consumer channels and the contractor and mill supply outlets. Industrial channels included plumbing supply, electrical supply, contractor supply, automotive repair, tool rental, mill supply, and lumber/building materials supply outlets. Consumer channels included mass merchandisers, hardware stores, home centers, and new outlets such as catalog showrooms and buying clubs.Consumer channels had not developed fully outside the United States and Europe but were emerging in Japan. Industrial channels generally purchased directly from manufacturers; consumer channels were served direct, through wholesalers, or via buying groups. Both types of channels provided customer assistance, while manufacturers supplied service and repairs through company service centers. Fast service was a strong factor in stimulating sales, especially to tradespeople who relied on their tools for their livelihoods. Do Industrial Channels Contractor supply. In 1979, there were about 750 contractor supply stores in the United States.These stores supplied building contractors with a variety of products, ranging from fasteners and tools to generators and building materials. This channel stocked a complete line of portable power tools from many different manufacturers, including at least the top two brands for each tool. Usually independent or part of small chains, contractor supply outlets purchased portable power tools directly from manufacturers. It was a common practice for manufacturers to train the contractor supply outlet’s sales force in selling their new tools to tradespeople and contractors at job sites.Portable electric power tools represented 20% to 30% of a contractor supply outlet’s total business and were generally priced below tools sold through other industrial channels. Mill supply. Mi ll supply stores were usually small, independent outlets buying directly from manufacturers. In 1979, there were about 1,100 mill supply houses in the United States. These outlets 4 Copying or posting is an infringement of copyright. [email  protected] harvard. edu or 617-783-7860. Skil Corporation 389-005 op y carried a broad line of products for factories, ranging from food to work clothes to tools.Although power tools comprised only 1% to 2% of total sales for mill supply stores, they were the most important channel for portable electric power tool sales to factories. Mill supply stores carried a limited line of portable power tools, selecting their assortment from only a couple of manufacturers. They sold mostly drills and grinders for metalworking and maintenance. Mill supply stores expected fast delivery of tools from manufacturers since customers often purchased tools on the spur of the moment. Portable power tools were usually sold at abovemarket prices. tC Tool specialist s.The 300 tool specialists in the United States were mostly independent single outlets whose primary buyer groups were general contractors and manufacturing workers. In 1979, sales of portable power tools were $45 million, growing at an estimated 5% annually. Tool specialists carried the greatest number of product lines, especially low-volume tools. The tools carried were usually the brand leader, high-priced, of professional quality, and sold at prices similar to those of contractor supply outlets. Electric-powered tools constituted about 30% of total sales. Plumbing and electrical supply outlets.In 1979, there were about 700 plumbing and 1,800 electrical supply outlets in the United States. Although several electrical supply chains were large and some were consolidating, plumbing and electrical supply outlets were usually small, independent stores; Graybar, Westinghouse, and General Electric maintained national electrical distributorships. These outlets carried a limited line of h igh-priced tools, especially reciprocating saws and drills, for sale to plumbers and electricians, respectively. Tools represented a minor (1% to 2%) portion of their total business.These outlets normally stocked only one or two brands and bought directly from the manufacturers. No Lumber/building materials supply outlets. These outlets stocked products similar to those in contractor supply stores, but concentrated more on materials. They carried a limited line of portable electric tools, those most in demand by contractors. Automotive distributors. These distributors supplied a wide range of products to the automotive service industry. The portable power tools they carried, such as grinders and impact wrenches, represented less than 1% of total sales. Tool and equipment rental outlets.These outlets rented higher-priced tools such as roto hammers and large sanders to tradespeople, contractors, or do-it-yourselfers for the occasional job. There were a few national rental companies. C onsumer Channels Do Mass merchandisers. Department stores such as Sears, J. C. Penney, and Montgomery Ward and discount merchandisers like K Mart were the largest sellers of portable power tools, accounting for almost 40% of U. S. consumer portable power tool sales in 1979. Sears sold private-label tools under its Craftsman line, which was primarily manufactured by Singer Company.Sears was the most significant single consumer outlet for portable electric power tools. Montgomery Ward and J. C. Penney sold Black & Decker, Skil, and Rockwell products under those brands and private labels. Department stores carried low- to mid-price point products for the middle market, while discounters concentrated on low-price point items. Mass merchandisers generally carried a narrow range of branded consumer tools. Sears offered the broadest line of all consumer channels. Sears, for example, stocked six to ten circular saws, while K Mart stocked two.Discount merchants frequently engaged in aggressi ve promotional campaigns, and tools were often highly discounted, sometimes to the level of the wholesale price of 5 Copying or posting is an infringement of copyright. [email  protected] harvard. edu or 617-783-7860. 389-005 Skil Corporation op y the tool to a hardware-store. Customer service was generally limited, although Sears offered aftersales service. Hardware stores. Independent hardware stores and chains offered a broad range of consumer tools and accessories, and some professional tools, often from several manufacturers.Hardware stores offered high levels of customer purchase assistance and service. Manufacturers sold direct to hardware chains and buying groups or through wholesalers. In 1979, there were 5,000 hardware stores serviced by 200 wholesalers. Manufacturers frequently engaged in cooperative advertising with this channel. Sales of portable power tools through hardware stores had been static. Home centers. Home centers were an emerging channel in 1979. They carr ied a wide range of merchandise connected to the home, including tools, lumber, lawn mowers, and general hardware.Home centers carried broad lines of tools at a number of price points but tended to avoid the lowestpriced consumer lines. Home centers offered customer purchase assistance and service. They had partly replaced traditional lumberyards. Other Channels tC Both consumers and professionals shopped at home centers. Consumer-oriented centers carried fewer product lines and lower-priced items than professional home centers or hardware stores. Home centers competed with mass merchandisers for consumer sales. Home center sales were $83 million in 1979 and growing rapidly at 12% to 14% per annum. NoOther smaller channels included government supply agencies, military supply stores, catalog showrooms, agricultural and farm supply outlets, premium and incentive supply outlets, hobby stores, and general merchandise stores. Marketing Most companies maintained a sales force to call on t he channels. The sales forces provided training to the outlet’s sales teams and demonstrated tools at job sites and in the store. They also maintained the company’s product displays. Tools were sold to each channel using different price lists with different discount structures. High-volume channels could qualify for volume discounts.Cooperative advertising with major channels was a common promotional practice by manufacturers. Catalogs and point-of-sale merchandising at industrial channels supplemented co-op advertisements. All the manufacturers also participated in trade shows. Do Competitors that targeted consumer users engaged in heavy media advertising. Exhibit 2 gives the advertising expenditures of major manufacturers. Manufacturing Portable electric power tools generally consisted of an outer shell, an electric motor, and screw machine parts such as gears and shafts, switches and attachments.The manufacture of portable electric tools involved fabrication and ass embly of these components. Parts fabrication technologies included machining, die casting, metal stamping, and heat treatment. The motor housing and tool handle were often made of molded plastic. Professional tools usually had more aluminum diecast parts than consumer tools. Purchased materials, machining, diecasting/ molding, motor win ding and assembly, and final assembly were the most significant costs in manufacturing. Diecasting and molding were subject 6 Copying or posting is an infringement of copyright.[email  protected] harvard. edu or 617-783-7860. Skil Corporation 389-005 op y to the most significant economies of scale. In-house diecasting and molding reduced costs by about 20% over purchased components. The costs of molding, machining, and diecasting depended on the volume per part. The cost of motor and final assembly was determined by the volume per product family, that is, product lines that could be produced with the same manufacturing process. Purchased materials were the least scale-sensitive of the cost elements, with cost falling by only 3% when volume was doubled.Table C gives an approximate breakdown of manufacturing costs for a typical manufacturer. Table C Breakdown of Manufacturing Costs Consumer Tool 56% 5 5 14 20 100% 43% 25 14 10 8 100% tC Purchased materials Machining Diecasting and molding Motor assembly Final assembly Total Industrial Tool No Manufacturers could achieve significant cost savings through automation. Single-task machines like screw machines and grinders were being replaced by machining systems. A typical machining system cost $400,000, but the cost could be much higher.An automated motor production line cost $3 million and required that a million motors be produced a year to break even. Hitachi, a Japanese competitor, and several European manufacturers had invested heavily in automation and developed lines of tools from common base designs. Table D shows estimates of the percentage of total manufacturing cost, wit h and without automation, represented by each part of a circular saw with annual production of 100,000 units. Table D Estimates of Manufacturing Costs Saw Without Automation (% Unit Costs) 25. 0% 23. 0 5. 0 2. 0 1. 5 Do Housing MotorElectrical Bearings Packaging With Automation (% Unit Costs) 20. 0% 20. 0 5. 0 2. 0 4. 0 Manufacturers varied in their levels of integration, but none were completely integrated. The largest manufacturers produced attachments such as saw blades or feet for jigsaws, which smaller manufacturers purchased from outside suppliers. No tool manufacturer possessed the technology or scale to produce all the necessary components. Critical components that directly affected the performance of the tool (i. e. , parts that required machining or diecasting) were generally fabricated in-house.Most manufacturers also produced the motor, which consisted of two basic parts, the armature and the field. Proper balancing of the 7 Copying or posting is an infringement of copyr ight. [email  protected] harvard. edu or 617-783-7860. 389-005 Skil Corporation op y armature was critical to the performance of a tool. A motor’s power depended on the number and size of the laminations. Because of the high cost of the equipment and the long changeover time per model, lamination stamping was extremely scale-sensitive. A lamination press cost between $750,000 and $1 million, and a set of tooling dies cost $250,000.Production of about 10 million of a particular lamination size was required to break even. Typical motors required 10 to 20 laminations each. Manufacturers could purchase all the main components for power tools from specialized suppliers who sold to a variety of industries. Many supplier industries were mature, and some components were sourced from abroad. The components most often purchased included batteries, direct-current motors, metal stampings, plastic resins and parts, powdered metal parts, switches, cord sets, motor laminations, saw blades , ball bearings, and packaging.The cost of most purchased materials was determined by the overall volume purchased. Table E gives an approximate breakdown of costs as a percentage of sales for a typical manufacturer. Estimated Costs as a Percentage of Sales tC Table E Materials and supplies Direct labor Indirect labor and overhead Advertising expense Sales force expense Competition 35%—53% 6%—8% 10%—22% 4%—10% 4%—8% No In the 1960s and early 1970s, more than 70 manufacturers worldwide made portable electric tools, with approximately 20 located in the United States and the balance in Europe and Japan. Until the mid-1970s, competition in ower tools was largely domestic. Except for Black & Decker and Skil, few competitors exported or manufactured abroad. When manufacturers began selling in foreign markets, they differed in their marketing approach to buyers in different countries. U. S. manufacturers produced a different and wider line of products in their foreign plants compared with that produced for U. S. sale. Japanese manufacturers tended to offer the same range of products worldwide from plants in Japan. Table F lists the brand share of dollar sales in the world market in 1979. Table F Brand Share of World Portable Electric Power Tool Market, 1979Company 31. 1% 11. 1 10. 7 8. 3 7. 1 5. 0 4. 3 3. 5 2. 6 1. 9 1. 5 1. 4 1. 0 1. 0 9. 5 Do Black & Decker Makita Bosch Hitachi Skil AEG Singer Milwaukee Metabo Rockwell Peugeot Fein Elu Ryobi Others Percentage 8 Copying or posting is an infringement of copyright. [email  protected] harvard. edu or 617-783-7860. Skil Corporation 389-005 op y In 1979, there were approximately a dozen manufacturers of portable electric power tools competing in the U. S. market. Of these, seven were U. S. companies. Exhibit 3 shows the share of major companies by distribution channel in the United States.Black & Decker had a U. S. market share estimated at 40% to 43% of total dollar sales. Sears Roeb uck was in second position, with an estimated 16% to 20% market share. Skil was third with about 15%. The balance was held by Milwaukee, Rockwell, small specialist producers, various private-label manufacturers, and some emerging foreign competitors. In the industrial tool segment, Milwaukee was market leader with approximately 25% market share. Black & Decker was second with an estimated 20% market share. In third position was Skil with about 15%. Exhibit 4 lists selected financial data for the major U.S. portable electric tool manufacturers. tC Black & Decker Manufacturing Company. Black & Decker manufactured a broad line of electric and cordless portable power tools, portable air tools, and stationary and gasoline-powered equipment. In the late 1960s, Black & Decker moved into lawn care and began manufacturing lawn mowers and hedge trimmers. A chain saw company, McCulloch Corporation, was acquired in 1974. McCulloch began manufacturing moped engines in 1979. In the same year, Bla ck & Decker introduced its hand-held rechargeable vacuum cleaner. In 1979, worldwide sales were $1. billion. Portable electric tools represented about 75% of Black & Decker’s overall sales. The company’s goal was a yearly 15% growth in sales and earnings per share. In 1979, Black & Decker appointed the first person outside the Black and Decker families to head the company. No Black & Decker was known as the world’s oldest and largest power tool manufacturer. Black & Decker segmented the portable power tool industry into consumer and professional markets. Its product line was extremely broad and consisted of 280 models designed specially for either the professional or consumer markets.The company was best known for its consumer drills and industrial sander/grinder. Black & Decker’s line was designed around approximately 200 motor sizes. 1 Table G shows Black & Decker’s sales by market category. Black & Decker sold to virtually all distribution chann els, including national merchandisers such as K Mart, J. C. Penney, and Montgomery Ward. It had an extremely strong position in consumer channels, especially in low-priced drills and saws. In industrial channels, Black & Decker had established leadership in most product categories in mill upply outlets by focusing on the largest regionally dominant distributors where they were the sole line. The company’s products were in more than 70% of all U. S. homes. In the United Kingdom, Black & Decker had a 90% market share. Black & Decker’s distribution system involved more than 100,000 outlets worldwide. The company sold direct, through wholesalers to smaller outlets and via its network of 104 company-owned service centers in the United States and 221 in 45 foreign markets. Black & Decker’s service centers were supplemented by several hundred authorized service centers operated by independent local owners.Do Black & Decker enjoyed an extremely strong brand reputation a mong both consumers and industrial users. Black & Decker’s tools were priced below most of its competitors’. The company spent heavily on print and prime- time television advertising. Its worldwide advertising budget for 1978 was $47. 3 million, a 20% increase over 1977. Black & Decker had 31 plants in 10 countries. The company was largely nonunion, with only one unionized plant. Manufacturing was divided between professional and consumer tools. Each division produced tools for its own market. Black & Decker plants were partly automated.The company required a three-year payback on its investment in automation. In 1979, the company began replacing single-task machines with machining systems. The machining system comprised four units, an automatic sawing machine, a facing and centering unit, and two tracers. 1In 1979, Black & Decker’s U. K. company had reduced its number of models from 130 tools to 50. 9 Copying or posting is an infringement of copyright. [email  protected] harvard. edu or 617-783-7860. 389-005 Skil Corporation op y In late 1978, the company began to standardize its motors and armature shafts. Its U. K. plant produced 3. million consumer motors with one standard field lamination and one armature shaft; the different power requirements were achieved through variations in the windings, produced on an automated winding line. Black & Decker had developed its own â€Å"production flow† system, a combination of conventional flow-line techniques and group technology, in which machine tools were grouped around the production needs of components rather than components distributed among successive production processes. To reduce its work-in-process inventory, the company relied on computerization to organize the flow of parts through its plants.Black & Decker first adopted group technology and related automation in the mid-1960s. It applied the technique to the production of 7 ? -inch power handsaws, with a resulting decrease in direct labor from one hour per saw to 30 minutes and a 16% reduction in selling price. Black & Decker was one of the most vertically integrated manufacturers in the United States. Table G tC Foreign subsidiaries were responsible for marketing and product development in their markets. Research and development was conducted in the United States and four other countries on a budget exceeding $15 million.Each manufacturing facility had its own engineering staff. Black & Decker transacted 60% of its total business outside the United States. Black & Decker’s distribution of sales by geographic area is shown in Table G. Distribution of Black & Decker Sales By Market Category (percent) 1978 1977 63% 28 9 63% 28 9 1979 1978 1977 1976 1975 $531. 9 480. 0 193. 2 $386. 4 414. 5 159. 0 $311. 4 361. 7 138. 5 $277. 8 334. 5 135. 9 $249. 0 293. 2 111. 7 67% 25 8 No Consumer products Professional products Service 1979 By Geographic Area ($ millions) Europe United States Pacific 1976 63% 2 6 11 1975 58% 31 1 Source: Black & Decker Annual Report, 1979. Do Sears Roebuck & Company/Singer Company. Sears Roebuck & Company operated 866 retail stores, 1,388 miscellaneous other stores (mostly catalog stores), and 14 catalog merchandise distribution centers. Sears also provided after-sales service at its retail centers. Positioned as a general-line retailer, Sears carried a broad mix of lines directed at the middle-class customer. Many Sears products were sourced from outside vendors and sold under a variety of Sears brand names. Sears had by far the highest sales of power tools of any single retailer.Sears’ own brand, Craftsman, had been an established trademark for more than 55 years. Craftsman portable power tools were seen as a consumer line and priced moderately. Sears’ excellent reputation for service was a major Sears advantage in selling power tools. Portable power tool sales at Sears had been flat. Singer manufactured all of the portable power tools for Sears, which for more than 40 years had been its sole tool customer in the United States. Singer also produced lawn and garden appliances and floor care products for Sears. In 1979, Singer’s total sales were $2. 9 billion. The company also manufactured sewing machines, furniture, and air conditioning and heating equipment for consumers, and aerospace and marine systems for the government. 10 Copying or posting is an infringement of copyright. [email  protected] harvard. edu or 617-783-7860. Skil Corporation 389-005 op y Singer manufactured 50 models of portable power tools in two plants. Its pricing was on a known-cost basis. Sears paid Singer an agreed-on markup over its actual costs, which were disclosed to Sears. Sears owned most of the specialized tooling.In 1979, Singer and Sears marketed power tools for the first time in Brazil under both the Craftsman and Singer trademarks. Singer was believed to enjoy above-average profitability in power tools. Rockwell Internationa l Corporation. Rockwell International was a diversified company operating in the automotive, aerospace, electronics, energy, graphics, textile, and power tool industries. Rockwell had entered the power tool business in the early 1960s with the acquisition of Porter Cable, a well-respected industrial portable tool manufacturer, and Delta, an industrial stationary tool company.The company then marketed professional tools under the Rockwell label. tC Rockwell’s power tool division was estimated to hold just over 6% of the market. Rockwell tools had been sold through industrial channels until the late 1970s, when the company began marketing a new line of tools to consumers through mass merchandisers, hardware stores, and other retailers. Rockwell’s new product line matched Black & Decker’s. Rockwell set out to aggressively grow the business through heavy advertising. The company advertised to end users through comparative advertisements in trade and consumer magazin es.Rockwell’s bench top (stationary) power tools became quite popular among consumer users, although progress in portable tools had been modest: Rockwell produced a line of 130 tools in three plants. It had both company-owned service centers and a network of authorized independents throughout the United States and Canada. Components had been standardized so that 80% of the repairs involved 40% of the parts, lessening inventory requirements. Rockwell entered the U. K. market with its line of consumer tools in the late 1970s and suffered losses.In 1979, Rockwell took a $35 million write-off in consumer tools. No Milwaukee Tools. Milwaukee Tools was a subsidiary of Amstar Corporation, the largest producer of sweeteners in the United States, with sales of $1,056. 4 million in 1979. Milwaukee had been producing portable electric tools since 1924 and was acquired by Amstar in 1976. Amstar’s Industrial Products Group consisted of Milwaukee and other companies producing hoists , jacks, fluid joints, couplings, and other industrial tools and equipment. Sweeteners accounted for 84% of Amstar’s sales, although it was seeking greater diversification.Sugar prices were severely depressed in 1979 and were expected to be soft for the next few years. Milwaukee concentrated on tools for the professional market. Its line consisted of about 280 models of portable electric tools manufactured in three plants. The Milwaukee Sawzall and drill were the company’s best-known tools. Milwaukee sold through more than 5,000 distributors in the United States and Canada serving industrial channels. It had a very strong brand image in the professional market and a good position in all industrial channels, especially plumbing and electrical supply outlets.Milwaukee had established a strong position in contractor supply in high-priced drills and reciprocating saws. Milwaukee’s tools were priced above other brands. Do Makita Electric Works Ltd. Makita Electric Wo rks (Japan) was originally a motor repair shop. It entered the power tool market in the 1950s. By 1979, its annual sales approached $250 million, with international sales accounting for about 45%. Makita concentrated on tools for the professional market, especially for woodworking. The company had 250 professional-quality tool models in its product line.There were strong similarities in Makita tools sold in domestic and overseas markets. Makita priced its tools aggressively, sometimes 20% to 30% below prevailing market prices for the normal professional tools. Makita had pioneered the introduction of lower-priced materials on professional tools (for example, plastic versus metal housings). To sell its tools, Makita had to convince users they were as good as conventional tools but less expensive. 11 Copying or posting is an infringement of copyright. [email  protected] harvard. edu or 617-783-7860. 89-005 Skil Corporation op y Makita manufactured tools in two plants located in Japa n. Dedicated equipment manufactured specific product families. The cost-conscious company awarded employees for recommendations on cost savings or new product ideas. In Japan, Makita had 400 salespeople selling directly to retail outlets. Makita’s sales in the U. S. market had grown from less than $10 million in 1976 to approximately $25 million in 1979. Makita was making a major push for U. S. market share, combining high quality with aggressive pricing.In 1979, Makita sold primarily through industrial channels, although it had an aggressive direct sales force selling at job sites. Robert Bosch Gmbh. Robert Bosch (West Germany) was the second-largest portable electric power tool manufacturer in the world. The company manufactured a variety of products and equipment, ranging from automotive parts to production machinery and systems. In 1979, sales of portable electric power tools were approximately $400 million; $22 million were in the U. S. market. tC Bosch had a very strong position in Europe and distributed through all channels.The company manufactured about 250 models in six plants located throughout Europe. In the United States, the company concentrated on the professional segment. In 1979, it acquired Stanley Tool’s portable power tool business in the United States. Stanley was a strong brand name in routers. Hitachi. Backed by Japan’s largest electrical manufacturer, Hitachi had portable electric power tool sales in 1979 of $175 million, commanding about 40% of the market in Japan. Sales in the United States were less than $1 million. No Hitachi’s power tools were of industrial quality, primarily for metalworking.The company was regarded as an industry leader in several tools. Tools were designed for the world market and manufactured in one plant located in Japan. Others. AEG Telefunken of Germany was an established manufacturer of portable electric power tools in Europe. Ingersoll-Rand, a U. S. manufacturer, also produced po rtable electric tools under its Millers Falls brand. Skil Corporation Skil Corporation was founded in the 1920s in Chicago. Its original product was the circular saw, which it invented, but gradually it expanded into other power tools.Skil had a long history of introducing new products. It had a number of industry firsts or near firsts to its credit, including an early cordless drill, the first portable electric saw, and the first consumer electric hedge trimmer. Do Skil entered the Canadian market in 1946. In the 1950s, Skil invented the roto hammer but, while retaining manufacturing rights, sold the patents to Hilti, a company in Liechtenstein, to raise cash. In the 1960s, the company began producing lower-priced tools for consumers. During the same period, Skil began manufacturing in Europe and Australia.In the 1970s, the company entered markets in the Far East and Latin America. In the 1960s, Skil developed an electronic switch and formed a new company, Capax, in the Netherlands to produce and supply electronic switches to Skil and other power tool manufacturers. Various competitors soon used electronic variable speed switches to control speed in many tools. The Capax subsidiary was still highly profitable. Since its inception, Skil had been managed by members of one family that had controlling interest in the company.Under increasing competitive pressure, Skil’s financial results had not been 12 Copying or posting is an infringement of copyright. [email  protected] harvard. edu or 617-783-7860. Skil Corporation 389-005 op y stellar, although reported profitability had improved in recent years. Exhibits 5, 6, and 7 give recent Skil financial results. Products Skil served both the professional and consumer markets. It had a broad product line, including all significant types of tools in numerous shapes and variations at all price points. In the United States, more than 130 models employed 11 motor frame sizes.Skil also had about 150 different Europ ean models and about 75 for the rest of the world. Its circular saw line remained Skil’s single strongest product area. The company also had good positions in mid-priced drills and roto hammers. tC Skil engineers were encouraged to aggressively develop new models, and the company strove for the best product performance rather than commonality with other models. New designs were released for manufacturing at one of Skil’s plants. In 1978, Skil had 93 engineers and technicians employed in its research laboratories.Expenditure for research and engineering was approximately $2. 7 million. Skil product designs varied in different countries according to local needs. In circular saws, for example, Skil had seven different U. S. saws, two European versions, two Canadian versions, and two for other export markets, totaling 35 models using 12 different motors worldwide. Skil had a higher percentage of professional tools in its product mix than Black & Decker. Skil tools were pre dominantly metallic, with cut steel gears and metal housings. Channels No Skil sold through all the distribution channels for power tools.Skil was well established in hardware stores and had a strong position in circular saws in contractor supply channels due primarily to a â€Å"worm drive† professional saw that was the industry standard. Skil tools were also sold through department stores. The company’s major domestic accounts were with Montgomery Ward and J. C. Penney, which represented 10% of its sales in the United States. Skil’s sales force serviced all its distributors except the mass merchandisers, who were sold to direct, and hardware stores, which were served through wholesalers.The company had 2,200 customers, including 200 wholesalers, which serviced hardware stores. From the beginning, the company had established service centers throughout the country. In 1979, it had 76 company-owned service centers and 427 authorized service stations throughout th e United States. Marketing Do Skil’s 150-person sales force was broadly specialized by channel. Merchandising techniques included self-contained displays that show-cased promotional tools to the consumer. Skil seldom advertised (except in cooperative programs with channels), relying more on product publicity.Occasionally the company sponsored sales promotions and consumer media advertising campaigns in magazines, newspapers, and television. Manufacturing Skil manufactured products in 13 plants throughout North America, Western Europe, and Australia. Plants were dedicated to either component fabrication or assembly. Components plants were generally single-function facilities for such activities as diecasting, screw machining, saw blade manufacture, and motors production. The most popular motor frame size was manufactured in five 13 Copying or posting is an infringement of copyright.[email  protected] harvard. edu or 617-783-7860. 389-005 Skil Corporation op y plants located in four countries, with annual production ranging from 50,000 units to 800,000 units per plant. Annual motor production in other frame sizes varied from 12,000 units to 870,000 units per plant. In the United States (Illinois, Arkansas, and New York), three feeder plants produced components and four manufacturing plants produced different products. The Netherlands had two plants, one for electronic switches, as did Canada; Australia and Brazil (a joint venture) had one each.Skil plants were partly automated with motor winding lines and some machining centers. Skil’s newest plant in Heber Springs, Arkansas, had opened in 1979. International Do No tC Skil sold tools on a worldwide basis, with its greatest international strength in Europe. The company’s worldwide operations were divided into three regions: the United States, Europe, and Other. Each was autonomous and had plants that produced the full product line for that region. A network of country managers was responsib le for sales and service in each country. 14 Copying or posting is an infringement of copyright.[email  protected] harvard. edu or 617-783-7860. Skil Corporation U. S. Portable Electric Power Tool Market in 1979: Product Sales by Distribution Channel ($ millions) Consumer Mass Merchandisers Circular saws Drills—corded Drills—cordless Jigsaws Orbital sanders Belt sanders Roto hammers Sander/grinders Planes Miscellaneous Parts/service Total Percentage growth $ 40 36 3 21 19 11 — 6 2 29 22 $189 2%–4% Industrial Hardware/ Home Centers $ 37 37 9 12 7 6 — 3 1 37 42 $191 Mill Supply Contractor Supply Plumbing/ Electrical $ 20 46 2 3 5 8 4 26 1 14 15 $144 2%–3% $ 36 32 3 3 2 8 6 0 2 11 12 $135 2%–3% $2 25 2 2 1 1 3 2 — 13 11 $ 62 2%–3% Others/ Service Total $8 19 1 1 3 1 19 2 — 18 75 $147 $143 195 20 42 37 35 32 59 6 122 177 $868 Do No tC Product op y Exhibit 1 389-005 15 Copying or posting is an infringement of copyrig ht. [email  protected] harvard. edu or 617-783-7860. 389-005 U. S. National Consumer Advertising of Portable Electric Tools by Leading Manufacturers, 1975–1979 ($ thousands) 1975 1976 1977 1978 1979 $2,613. 5 178. 7 1,793. 5 590. 1 51. 2 $4,479. 3 — 3,506. 1 973. 2 — $6,487. 6 12. 8 6,339. 4 135. 4 — $6,208. 3 — 5,560. 1 648. 2 — $1,222. 258. 4 345. 3 618. 3 — — $870. 6 318. 6 — 396. 0 — 156. 0 $2,147. 3 761. 4 1,252. 7 77. 0 — 56. 2 $320. 5 217. 7 — 102. 8 — — $1,038. 5 270. 8 767. 7 — — — $1,769. 8 584. 4 1,169. 7 — 15. 7 — $2,541. 7 950. 1 1,425. 2 — 164. 6 1. 8 $3,808. 1 926. 4 1,608. 2 1,163. 8 109. 7 — $4,252. 7 699. 8 2,712. 2 771. 2 69. 5 — $940. 3 106. 4 256. 9 577. 0 — — $1,800. 4 153. 6 — 1,645. 0 — 1. 8 $852. 7 — — 848. 2 — 4. 5 $1,342. 2 — 1,217. 7 13. 8 110. 7 $2,724. 9 99. 9 1,839. 3 699. 9 85. 8 Rockwell Total Magazines Network TV Spot TV Outdoor Newspaper $1,396. 8 434. 2 927. 9 33. 3 1. 4 —No tC Black & Decker Total Magazines Network TV Spot TV Newspapers Sears Total Magazines Network TV Spot TV Radio Outdoor op y Exhibit 2 Skil Corporation Skil Total Magazines Network TV Spot TV Radio Outdoor — — — — — — Source: Leading National Advertisers, Inc. , â€Å"National Advertising Investments. † Includes companies spending $25,000 or more on the combination of national magazines, newspaper supplements, network TV, network radio, spot TV, and outdoor advertising. The data do not include cooperative advertising by retailers, the cost of which is shared by manufacturers. DoNote: No data on advertising expenditures for portable electric tools were available for Bosch, Milwaukee, and Makita. 16 Copying or posting is an infringement of copyright. [email  protected] harvard. edu or 617-783 -7860. Skil Corporation U. S. Portable Electric Power Tool Market in 1979: Brand Sales by Distribution Channel ($ millions) op y Exhibit 3 389-005 Hardware/ Home Centers Skil Black & Decker Milwaukee Rockwell Bosch AEG Millers Falls Makita Hilti Singer Wen Total $8 54 — 9 — — — — — 107 11 $189 $ 44 115 6 14 — — — 2 — — 10 $191 Mill Supply $ 12 93 11 13 7 3 2 3 — — — $144 ContractorSupply Plumbing/ Electrical Others/ Service Total $ 26 36 33 11 10 3 5 11 — — — $135 $1 13 35 2 3 2 2 4 — — — $62 $ 15 63 10 5 5 2 1 4 32 9 1 $147 $106 374 95 54 25 10 10 24 32 116 22 $868 Do No tC Company Mass Merchandisers 17 Copying or posting is an infringement of copyright. [email  protected] harvard. edu or 617-783-7860. 389-005 Selected Financial Information on Portable Electric Tool Manufacturers ($ millions) 1976 Black & Decker Sales Net income ROS % Debt/eq uity % ROE % Capital expenditures 1978 811. 7 51. 7 6. 4 0. 22 13. 4 29. 4 959. 9 66. 2 6. 9 0. 20 15. 6 38. 3 1,205. 0 94. 4 7. 8 Skil Corporation INSTITUTE OF BUSINESS MANAGEMENT SKIL CORPORATION CASE ANALYSIS STRATEGIC MANAGEMENT SECTION: C ASSIGNMENT #: 3 INSTRUCTOR: ABDUL QADIR MOLVI DATE: 12TH MARCH, 2013 Q1. What is your analysis of structure of possible Electric Power Tool Industry? According to the Porter’s Five Forces Analysis the industry is moderately attractive. Q2. How the industry structure is changing? Are these changes for better or worse? The power tool industry consisted of portable and stationary tools with wide range of sizes prices and qualities.The industry was becoming increasingly segmented by price point, with each point representing a certain level of quality. The power tools were broadly divided into two categories; professional/industrial and consumer. The professional tools were superior in quality and therefore were sold at higher prices and greater gross margins than the consumer tools. However, as the consumer tools were becoming more sophisticated and of better quality the distinction bet ween both the categories started to blur.As technology was improving the trends of usage of power tools changed (corded tools were replaced by cordless ones). The other improvement was the availability of lighter materials (aluminum, magnesium and plastic). This helped in lowering the costs of production. Also, energy efficient tools were developed and safety was emphasized as an area of development. All the occurring changes reflected growth potential in the power tool industry.Some of the changing factors which indicated the potential for development, betterment and growth of the industry include the increasing emphasis on quality, safety, more energy efficient products, advancements in technology and wide ranges of product with varying prices. Q3. What was Skil’s competitive strategy in 1979? How would you evaluate its relative position? In 1979 Skil Corporation had 76 company owned service centers and 427 authorized service stations throughout United States. It followed a lower-priced tools strategy for its consumers.Also, it differed in its strategy while catering to each country’s (where it exported or manufactured) particular needs. The corporation encouraged its’ engineers to aggressively develop new models and strive for the best product performance. Skil hardly advertised its products and relied mostly on product publicity. It catered to both professional and consumer markets. Initially, circular saws were strongest product among the contractor supply channel because of the industry standard for a professional saw which any other competitor did not match.The circular saws remained Skil’s strongest product area. The evaluation of Skil Corporation’s relative position indicates that it was focusing on new products in existing markets. In short, it was inclined towards new product development. Q4. What strategic options does Skil Corporation have? According to the analysis of Porter’s Five Competitive Forces Mode l the industry was moderately attractive. On the other hand we can also notice that the competition was extremely fierce in the industry by analyzing the brand shares given in the case:Company| Percentage| Black & Decker| 31. 1%| Makita| 11. 1%| Bosch| 10. 7%| Hitachi| 8. 3%| Skil| 7. 1%| AEG| 5. 0%| Singer| 4. 3%| Miiwaukee| 3. 5%| Matabo| 2. 8%| Rockwell| 1. 9%| In this situation it’s not just merely selection and implementation of a strategy that matters but also the right selection (out of the options) and adequate implementation along with follow-up. Following were the strategic options for Skil Corporation: * To go for mergers & acquisitions in order to increase sales and profitability. To use defensive strategies in order to put obstacles in the path of would-be challengers and fortify the company’s present position while undertaking actions to dissuade rivals from even trying to attack. * To use best-cost strategy. This strategy would have enabled Skil to creat e strong market presence by giving buyers more value for the money. * To go for divestment. Q5. What strategy will you recommend to Skil Corporation? Skil can gain its strong position back in the market if it follows certain strategies such as: * Focusing on a particular segment or broadening its distribution horizon to more than just the departmental stores.In short, Skil’s relative position in the market of only around 7% share (1979) is clearly due to the company trying to please more markets than it is capable of and hence, focus and integration could ensure a better position to an extent. * Considerably more spend on consumer advertising. According to the figures shown in Exhibit 2, it is quite evident that the advertising spend of Black & Decker in 1978 was approximately 300% more than Skil Corp.