The Corporation: STRATEGIES
The secret of a great innovation machine? Never relax
Amid airtight security, workers at the Gillette Co.'s World Shaving Headquarters in South Boston are putting the finishing touches on the long-awaited successor to Sensor, the world's most successful razor. The stakes are high: To maintain Gillette's double-digit growth, the new razor must top Sensor, sold as "the best a man can get." Developing a new razor might seem like child's play for Gillette, which has dominated shaving for decades. But it has been a tortured, six-year marathon, involving thousands of shaving tests and design modifications.
But even as Gillette's marketers gear up for their biggest product launch ever --the new razor is expected to hit stores this spring along with a multimillion dollar global marketing blitz --a team of Ph.D scientists is using the latest high-tech equipment to burrow even deeper into the mysteries of shaving. There's high-speed video that can capture the act of a blade cutting a single whisker and even a microscope capable of examining a blade at atomic level. The mission is to create the next shaving breakthrough. Expected debut: 2006.
In coming months, the launch will get all the attention. But it's in labs like these that the more significant Gillette story is unfolding. They are at the heart of one of the consumer world's great innovation machines--a machine dedicated not just to churning out new products but to inventing entirely new ways of making them.
Now, Chief Executive Alfred M. Zeien wants to throw this machine into overdrive across Gillette's entire family of consumer products--from its Oral-B toothbrushes and Braun appliances to recently acquired Duracell batteries. He predicts that 50% of Gillette's sales will soon come from products introduced within the past five years, up from 41% in 1996 and twice the level of innovation at the average consumer-products company. But his ultimate aim is even more audacious. "If I can't make the next five years better than the last five," when Gillette net earnings grew at a sterling 17% annual clip, vows Zeien, "I wouldn't think I was doing a good job."
It's an especially tall order for a mass marketer like Gillette. Indeed, a recent Mercer Management Consulting study of 50 top consumer packaged-goods companies--including Coca-Cola, Procter & Gamble, and Johnson & Johnson--found that only 17 managed to achieve above-industry-average growth in both sales and profits from 1985 to 1990. More tellingly, just 7 of these 17 maintained this excellence during the following five years. True, Gillette--along with J&J and P&G--was among the stellar seven. But the study's sobering suggestion is that most of these seven are doomed to fall over the coming five years, if only because of the sheer difficulty of continually finding new products and markets that can excel.
OUT OF STEAM? The odds seem even steeper in this era of low inflation, which makes it all but impossible to pass along cost increases. The supposed global cornucopia also has become more elusive, given the strong dollar and Asian flu. No wonder investors are edgy. It was bad enough that Gillette's sales grew just 3% in the first nine months of 1997--a far cry from the 9% pace of the past five years. But after Gillette advised analysts to modestly downgrade their 1997 estimates--from 17% to a 15% earnings increase--Gillette's stock plunged 24% below its July peak of $106. Investors worried that Gillette's steady growth machine was finally running out of steam --making it far harder to justify the sky-high price/earnings ratio of 41 times expected 1997 profits that its stock was then commanding. "Gillette took the `p' out of predictable," says Morgan Stanley & Co. analyst Brenda Lee Landry, "and made people worry about the long term."
In part, that's because slow sales in Germany and Japan at its Braun division raised questions about Gillette's dependence on foreign markets to keep up its growth. Yet Gillette's problems in 1997 may prove less of a harbinger than first feared. Earnings were also hurt because it was a transition year in which the company absorbed Duracell even as it slowed shipments of its old razor products in anticipation of the launch this year. "People overreacted" to last summer's earnings revision, argues Landry. With many major investors still bullish, the stock has since recovered almost fully, to $100. "Their prospects are spectacular," says Jay Freedman of institutional shareholder Lincoln Capital.
Zeien's strategy is built on Gillette's three great strengths. He's planning the most ambitious rollout of products in company history, with the razor just the beginning. It will be followed by a radically new toothbrush from Oral-B and a line of female-friendly razors designed to more than double that $250 million business. In time, he also hopes for battery breakthroughs that will leave the Energizer bunny in the dust.
Second, to ensure that earnings continue to outstrip revenue growth, Zeien plans to continue cutting manufacturing costs a full 4% annually, giving Gillette a huge edge in an era of low inflation. Third, Zeien is counting on Gillette's global strengths to produce growth overseas. True, those gains may be temporarily slowed by turmoil in Asia and the strong dollar. But longer term, few companies are better positioned. Some 1.2 billion people around the world now use at least one Gillette product daily, up from 800 million in 1990. With many of them now buying the cheapest products Gillette sells, Zeien figures over time the company can induce them to trade up.
Gillette's future hinges on a process its execs call "Gillettifying" a business. The model is Sensor, introduced at a time when even some Gillette executives feared blades were about to become a commodity, dominated by cheap disposables. Sensor reversed that trend by proving consumers could be induced to pay a premium for a high-tech shaving system delivering superior performance. Since 1990, Sensor and Sensor Excel have grabbed a leading 27% share of the U.S. market. The lessons: spend whatever it takes to gain technology supremacy in a category, and then produce innovative products that will capture consumers, even at premium prices.
To fulfill this promise, Gillette must overcome major challenges. Since King C. Gillette invented the safety razor early in the 20th century, the simple act of shaving has powered Gillette. But after the acquisition of Duracell International Inc., only 29% of sales and 52% of operating profits come from blades, the lowest levels ever. Now, at least half of Gillette's growth must come from other businesses--like batteries, toothbrushes, and toiletries--in which it faces far fiercer competition and has been far less successful in generating profits.
At the same time, Gillette faces a major transition. Zeien, 67, is nearing the end of the third one-year extension of his employment contract. Zeien refuses to be pinned down on when he'll step aside, saying only that it's "up to the board." But he is carefully grooming his No.2, President Michael C. Hawley, 59, for the top job. When Zeien retires, Gillette will suddenly be in the hands of a man who, while highly regarded internally, is largely unknown outside (page 76).
And Zeien's leadership has been a crucial element of Gillette's success. By 1985, profits were flat, and sales had increased hardly at all since 1980. "There seemed to be little sense of urgency... to stretch, set tough goals, and make strong moves to reassure restless shareholders," writes Gorden McKibben in a new history of Gillette to be published by Harvard Business School Press on Jan. 25. Highly vulnerable, Gillette faced a takeover bid from Ronald O. Perelman in 1986, and then a 1988 proxy fight.
Those narrowly won battles were a "wake-up call," says Zeien, who took over in early 1991 determined to shake things up. He insisted that Gillette must be the world leader, or have a plan to become leader, in all of its core businesses. He further decreed that at least 50 cents of every dollar in operating profit be plowed back into three growth drivers: research and development, capital spending, and advertising.
The results? Gillette is now the world leader in 13 product categories, accounting for 81% of its 1996 sales--up from just 50% in 1991. Although driven in part by acquisitions, sales have more than doubled since 1991, to 1996's $9.7 billion, while net earnings soared 189%, to $1.2 billion. All told, it has posted 29 quarters of double-digit earnings gains. This has pushed Gillette's market value to $56 billion, 14 times what raider Perelman offered in 1986.
ENGLISH BORN. The new razor will be the first major test of whether Gillette can keep it up. To increase sales in the mature shaving market, Gillette must persuade men to pay a huge premium for the new razor--probably 15% to 25% over the current $5.25 U.S. retail price for a five-pack of Sensor Excels.
To meet such product-development challenges, Gillette religiously devotes 2.2% of its annual sales, or over $200 million, to R&D, roughly twice the average for consumer products. The company then uses a highly disciplined process to perfect its ideas. The original concept for Sensor, for instance, emerged all the way back in 1979. Gillette then developed seven different versions under the code name Flag. The winner incorporated many ideas from the six losers and 22 patentable innovations on top of the original idea. In similar fashion, Gillette set up three competing teams to produce what would be its breakthrough clear-gel deodorant, a product that has propelled that business to 21.5% of the U.S. market, its highest level in two decades. And the prototype for the new razor--which emerged from the company's lab in Reading, Britain in the early '90s--had to compete against two or three other contenders. Along the way, the razor was subjected to more than 15,000 shave tests.
To be sure, innovation is a goal of all major consumer-products companies. But the difference Gillette's approach can make is perhaps best illustrated by Oral-B, which Gillette acquired in 1984. At the time, "there wasn't a single person in R&D, and a new toothbrush hadn't been introduced since 1957," says Jacques Legarde, the executive vice-president who oversees Oral-B. Today, Gillette has a team of 150 researching manual plaque removal, "more than any other company in the world," he brags.
It has already produced a stream of new products--from a floss made with a proprietary fiber, to its top-of-the-line Advantage toothbrush, which retails for $3.49, compared with 99 cents for the brush Oral-B sold in 1984. This has pushed sales at Oral-B to $548 million, up from $110 million in 1984.
But Oral-B is just half the story. In 1989, Legarde ordered researchers at Braun, the German consumer-appliance giant Gillette acquired in 1967, to marry their expertise with Oral-B's bristles to create an electric toothbrush. The result --the Braun Oral-B Plaque Remover --is now the world leader, with over $400 million in annual sales. And with that market still tiny, Legarde figures Gillette can double its overall oral-care business to $2 billion in five years by marketing to aging baby boomers.
"TWO DWARFS." Because only the best ideas make it through Gillette's innovation process, "they're one of the few consumer-products companies that really pick their shots," says Suzanne Hogan, a senior partner at marketing consultants Lippincott & Margulies Inc. Rather than "come out with a new razor every year," she adds, "they wait until they have something meaningful, and then go to the market with a bang."
But unlike Sensor in 1990, this time Gillette's new razor won't have the field to itself. Warner-Lambert Co.'s Schick--a distant second--soon will launch its largest ad campaign in history to promote its new Schick Protector shaving system. The bright-red Protector has blades wrapped with microfine wires to prevent nicks and cuts. Even so, "you're looking at Godzilla vs. the two dwarfs," Schick and Bic Corp., says Jack Trout, a Greenwich (Conn.) marketing consultant. Even Dick Jordan, Schick's vice-president of global business management, concedes Gillette "is a formidable competitor."
Yet Gillette is more than a new-products pipeline; it's equally expert at figuring out ways to make them more cheaply. To meet its annual 4% cost-cutting goal, engineers never stop searching for ways to run machinery faster and more efficiently. Such incremental gains have helped cut the cost of making Sensor by 30% since 1993, while slashing the costs of Oral-B's Advantage a huge 60%. Meanwhile, materials costs have been trimmed 10% to 15% by intensifying competition between suppliers.
But the truly big manufacturing gains come when Gillette introduces products. Few companies "marry product and process innovation" to the same degree as Gillette, says Harvard Business School Professor Rosabeth Moss Kanter. After Zeien was told the new razor would be too expensive to produce with the setup Gillette has used to make cartridges since they were introduced in 1971, for example, he ordered the engineers to invent a new one. It was a staggering undertaking, requiring Gillette to "bring on 196 different pieces of equipment, each one essentially designed by us," says Executive Vice-President Robert G. King. The new system will spit out cartridges twice as fast as that used to make Sensor, enabling Gillette to roll out the razor in just over two years, half the time it took for Sensor.
Zeien hasn't managed to Gillettify everything. The biggest failure: an inability to gain a dominant edge in its nearly $1 billion writing-instrument business. Gillette achieved world leadership in pens by buying Parker for $458 million in 1993, creating a stable that included the low-priced Paper Mate and top-end Waterman pens. But it has yet to come up with a home-run product. "It's a much more challenging area" than shaving, admits Dr. John C. Terry, director of Gillette's Boston R&D lab. Some critics believe it's time to exit the business, but Zeien insists new products will save the day.
Braun also continues to weigh down Gillette's performance. Despite some successes, it is still burdened by slow-moving products such as electric razors, a big factor in last summer's earnings downgrade. To fix this, Braun is looking increasingly to faster-growing products, such as the electric toothbrush and personal-diagnostic equipment.
Perhaps the most pressing challenge is Duracell, acquired for over $7 billion in stock in late 1996. Duracell is already the world's leading producer of alkaline batteries, with nearly 50% of the U.S. market. Now, Gillette is determined "to escalate growth above and beyond that," says Edward F. DeGraan, the executive vice-president who took charge in early 1997. It's tripling spending on alkaline battery R&D. The aim, says DeGraan, is to build batteries so superior that the Duracell name will gain the same potency as the "Intel inside" logo.
But that's a huge challenge in what's essentially a commodity market, and most outsiders are skeptical. "I don't foresee any breakthroughs," says Martin Hersch, a battery expert at consultants Freedonia Group. Even if he's right, Gillette can do a lot to power Duracell simply by distributing its products more globally. Duracell--which in 1996 got only 20% of its sales from beyond North America and Europe--"didn't have the international organization" to exploit this opening, says Zeien. But Gillette does. That's why one of Gillette's first moves was to fold Duracell's distributors into its global juggernaut.
To be sure, Gillette is hardly immune to global turmoil. "Our growth [in Asia] might be less than what it has been for the next one to two years," concedes Jurgen Wedel, the executive vice-president heading Gillette's International Group. But he argues that Gillette will be far less affected than most. Asia still accounts for less than 10% of Gillette's sales. And Gillette has had success managing through troubled times.
Consider the former Soviet Union, one of the world's most challenging markets. When Gillette first opened its St. Petersburg office in 1992, it was all but unknown to Russian consumers and managed sales of just $150,000 a month. Gillette soon caught consumers' attention with colorful ads on billboards and buses. They then took their "best a man can get" campaign to televised sports. Today, the Gillette name is recognized by some 80% of Russia's city-dwellers, and Gillette has a leading 50% share of the Russian blade market. Gillette is expanding its marketing focus to promote batteries, toiletries, and toothbrushes. As it does, Wedel predicts Russian sales should explode to $500 million within five years, up from $200 million now.
As it pushes into brave new markets, Hawley readily admits Gillette "will hit some bumps along the way." But most observers are convinced that it still has a long ways to roll. Wall Street analysts expect Gillette earnings to grow at an 18% clip over the next five years, "slightly more than double the rate for the S&P 500," says Charles Hill, director of research at First Call Corp. And most are recommending the stock.
Of course, there are no guarantees. If Gillette's management becomes overconfident and complacent, it will begin to slip up and miss opportunities, just as it did in the early '80s. But say this for Al Zeien: He has laid a solid foundation for continued excellence. Now it's up to Hawley and his successors to execute.By William C. Symonds in Boston, with Carol Matlack in Moscow andReturn to top