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Hanson_Ch14.indd
Case studies
Introduction A summary of the case
analysis process C-2
Preparing an effective
case analysis – the full
story C-5
Case 1 Hearing with the aid of
implanted technology: The
case of Cochlear™, an
Australian high-technology
leader C-19
Case 2 The Australian retail wars:
Coles Myer and Woolworths
attle for
and value C-26
Case 3 eBay.com: Profitably
managing growth from
start-up to 2000 C-32
Case 4 Gillette and the men’s
wet-shaving market C-50
Case 5 Gunns and the greens:
Governance issues in
Tasmania C-70
Case 6 Growth at Hu
ard’s
Foods? C-79
Case 7 Incat Tasmania’s race for
international success:
Blue-riband strategies C-89
Case 8 The Golden Arches in
India: A case of strategic
adaptation C-95
Case 9 Monsanto: Better
living through genetic
engineering? C-106
Case 10 Nucor Corporation and the
US steel industry C-121
Case 11 Philip Condit and the
Boeing 777: From design and
development to production
and sales C-152
Case 12 Resene Paints C-168
Case 13 Sony Corporation: The vision
of tomo
ow C-184
C-2
Introduction
A summary of the case
analysis process
Dallas Hanson
University of Tasmania
Case analysis is an essential part of a strategic man-
agement course and is also perhaps the most enter-
taining part of such a course. The ‘full story’ that
follows this summary gives you considerable detail
about how to go about a case analysis, but for now
here is a
ief account.
Before we start, a word about attitude: make it a
eal exercise; you have a set of historical facts and use
a rigorous system to work out what strategies should
e followed. All the cases are about real companies,
and one of the entertaining bits of the analysis pro-
cess is to compare what you have said they should do
with what they really have done. So, it is best not to
check the Net to see cu
ent strategies until you have
completed your analysis.
What follows is one analytical system, a fairly
tight one that you may want to adapt according to
how much time you have and the style of the case.
External analysis
Step 1 What industry is it?
You must decide on this early. This is an important
step, because it changes the analysis – for example,
your industry analysis will yield different conclusions
depending on what industry you determine.
Step 2 General environment analysis
Analyse the six generic elements – economic, socio-
cultural, global, technological, political/legal and
demographic – and work out what the important
facts are. There may be many issues and facts in each
element, but you put down only the important ones.
It is also important to avoid the common e
or of over-
emphasis on the firm in question. So, assuming the
firm operates in the Australian ice-cream industry,
the demographic analysis may have this comment: ‘A
large baby boomer generation is now becoming more
health-conscious. This presents opportunities in health
foods and healthy alternatives for conventional foods.
It also presents opportunities for low-fat ice creams.’
Or, in analysing the demographics of the Cochlear™
firm, you may conclude that there is a global market of
1.8 million profoundly deaf people and that this pro-
vides a huge undeveloped market for the implantable
hearing devices industry.
Step 3 The industry environment
Analyse the five forces (that is, supplier power, buyer
power, potential entrants, substitute products and
ivalry among competitors) and explain
iefly what
is significant for each. For example, what are the
issues involved in new entrants into the industry? For
Introduction • A summary of the case analysis process C-3
the implantable hearing devices industry, these may
include the need for understanding of intricate new
technology, possession of a reputation in the global
deaf community for safe and effective product devel-
opment, and links to research institutions. This makes
the industry hard to enter. Each force needs a
ief dis-
cussion followed by a short conclusion.
One extra consideration before you pull the anal-
ysis together and work out if this is an attractive
industry (the main conclusion) is: Is there a key force
or forces in your industry? Porter argues that there is
a key force in any industry, one that exerts more influ-
ence than the other forces.
Now, is it an attractive industry? You need to
explain,
iefly, why or why not. Bear in mind that
it is often not a clear decision because the forces are
mixed – for example, there may be little concern about
new entrants, suppliers or substitutes, but buyers may
e fickle and rivalry high. In such cases, the key force
analysis is very important
Remember: it is the industry you analyse, not the
firm.
Step 4 Competitive environment
Is there a strategic group that you need to take account
of? What is the rivalry like in this group? What capa-
ilities do the relevant firms have? What strategies do
they follow? What threats do they represent?
Step 5 You now have material about
opportunities and threats
It is easy to pull this together from the four steps you
have now completed.
Internal analysis
Step 6 The firm’s resources, tangible and
intangible
List all relevant resources. It is useful to distinguish
etween tangible and intangible resources. Remem-
er: firms have many resources.
At this point, if you have the skills and time, you
can analyse the financial information that almost all
cases provide. This provides material for a financial
esources paragraph.
Step 7 Capabilities identification
Here you make a list of capabilities. Capabilities tell
you what the firm can do.
Remember: each firm may have a dozen or more
capabilities, so include some that are very unlikely to
e core competencies. This is a difficult step, because
you must explain the capabilities carefully to indicate
what the firm really does. For example, Cochlear has
a capability for research in cochlear-related technol-
ogy. It does not have a generic research capability.
Step 8 Core competency analysis
For each capability, indicate which of the four tests
for a core competency it meets. An easy way to do this
is through use of a table. For example:
Rare? Valuable?
Costly to
imitate?
Non-
substitutable
Logistics
management
in cochlear
technologies Yes Yes No No
Research
knowledge and
skill in cochlear-
elated areas Yes Yes Yes Yes
Etc.
This is an important step, because the core compe-
tencies are fundamental in the strategies you suggest
– firms use their core competencies.
Step 9 Weaknesses
What major weaknesses does the firm have – for
example, old technology, very limited finance and poor
cash flow, no succession planning?
Step 10 Pulling it togethe
You now have all the material for an excellent
SWOT (strengths/weaknesses, opportunities/threats)
analysis. Pull together the earlier identification of
opportunities and threats (step 5) with the internal
analysis you have done. This resources-based, theory-
oriented system gives you a powerful vocabulary
to describe what simpler systems call ‘strengths’,
and the other elements of the system allow you to
systematically identify other significant factors in
the mix.
C-4 Introduction • A summary of the case analysis process
Step 11 Cu
ent strategies
Work out the firm’s cu
ent strategies.
Step 12 Strategies
Here you take advantage of opportunities and handle
threats. You should be able to make use of core com-
petencies to do this.
You may need strategies at the business level, cor-
porate level and international level (but it depends on
the industry and on whether all are required). Also,
ear in mind that you may need to specify functional-
level strategies to fit the generic strategies at the
usiness level. For example, if your ice-cream compa-
ny adopts a differentiation strategy, you must specify
how it is differentiated (on what grounds – low fat?)
and there must be associated innovation and market-
ing strategies (or, in the corporate-level strategy, a
supporting acquisition strategy may be used to handle
the innovation issue).
Make a list of alternative possibilities and use
the external and internal analyses that you have con-
ducted to assess them. Choose one set of alternatives.
How do these differ from cu
ent strategies?
Make sure the strategies chosen fit in with your
earlier analysis. Use all the conclusions in the earlier
analysis. For example (and bear in mind that this is
simplified to make the idea clearer), if you are in a
ivalrous industry which has good growth prospects
ecause of useful demographic change and you have
good financial resources, you may argue for expan-
sion into the new segment using available resources.
If the finances were not there, this strategy would be
difficult to support.
Using the Cochlear™ case
as a training case
This case analysis process is easy to use once you have
learned it, and the best way to learn is to try it out. The
Cochlear™ case in this book is designed as a training
case to help you do this. Don’t be concerned if you get
a slightly different analysis to other people: one of the
glories of case analysis is that they are never ‘right’;
some are, however, more plausible than others.
C-5
Preparing an effective case
analysis – the full story
In most strategic management courses, cases are used
extensively as a teaching tool.1 A key reason is that
cases provide active learners with opportunities to
use the strategic management process to identify and
solve organisational problems. Thus, by analysing
situations that are described in cases and presenting
the results, active learners (that is, students) become
skilled at effectively using the tools, techniques and
concepts that combine to form the strategic manage-
ment process.
The cases that follow are concerned with actual
companies. Presented within the cases are problems
and situations that managers and those with whom
they work must analyse and resolve. As you will see,
a strategic management case can focus on an entire
industry, a single organisation, or a business unit of
a large, diversified firm. The strategic management
issues facing not-for-profit organisations also can be
examined using the case analysis method.
Basically, the case analysis method calls for a care-
ful diagnosis of an organisation’s cu
ent conditions
(as manifested by its external and internal environ-
ments) so that appropriate strategic actions can be
ecommended in light of the firm’s strategic intent and
strategic mission. Strategic actions are taken to devel-
op and then use a firm’s core competencies to select
and implement different strategies, including business-
level, corporate-level, acquisition and restructuring,
international and cooperative strategies. Thus, appro-
priate strategic actions help the firm to survive in the
long run as it creates and uses competitive advantages
as the foundation for achieving strategic competitive-
ness and earning above-average returns. The case
method that we are recommending to you has a rich
heritage as a pedagogical approach to the study and
understanding of managerial effectiveness.2
As an active learner, your preparation is critical
to successful use of the case analysis method. With-
out careful study and analysis, active learners lack the
insights required to participate fully in the discussion
of a firm’s situation and the strategic actions that are
appropriate.
Instructors adopt different approaches in their
application of the case analysis method. Some require
active learners/students to use a specific analytical
procedure to examine an organisation; others pro-
vide less structure, expecting students to learn by
developing their own unique analytical method. Still
other instructors believe that a moderately structured
framework should be used to analyse a firm’s situa-
tion and make appropriate recommendations. Your
lecturer or tutor will determine the specific approach
you take. The approach we are presenting to you is a
moderately structured framework.
We divide our discussion of a moderately struc-
tured case analysis method framework into four
sections. First, we describe the importance of under-
standing the skills active learners can acquire through
effective use of the case analysis method. In the sec-
ond section, we provide you with a process-oriented
framework. This framework can be of value in your
efforts to analyse cases and then present the results of
your work. Using this framework in a classroom set-
ting yields valuable experiences that can, in turn, help
you to successfully complete assignments that you
will receive from your employer. The third section
C-6
is where we describe
iefly what you can expect to
occur during in-class case discussions. As this descrip-
tion shows, the relationship and interactions between
instructors and active learners/students during case
discussions are different than they are during lectures.
In the final section, we present a moderately struc-
tured framework that we believe can help you to pre-
pare effective oral and written presentations. Written
and oral communication skills also are valued highly
in many organisational settings; hence, their develop-
ment today can serve you well in the future.
Skills gained through use of
the case analysis method
The case analysis method is based on a philosophy
that combines knowledge acquisition with significant
involvement from students as active learners. In the
words of Alfred North Whitehead, this philosophy
‘rejects the doctrine that students had first learned
passively, and then, having learned should apply
knowledge’.3 In contrast to this philosophy, the case
analysis method is based on principles that were elab-
orated upon by John Dewey:
Only by wrestling with the conditions of this
problem at hand, seeking and finding his own way
out, does [the student] think ... If he cannot devise
his own solution (not, of course, in isolation, but
in co
espondence with the teacher and other
pupils) and find his own way out he will not learn,
not even if he can recite some co
ect answer with
a hundred percent accuracy.4
The case analysis method
ings reality into the
classroom. When developed and presented effectively,
with rich and interesting detail, cases keep conceptu-
al discussions grounded in reality. Experience shows
that simple fictional accounts of situations and collec-
tions of actual organisational data and articles from
public sources are not as effective for learning as fully
developed cases. A comprehensive case presents you
with a partial clinical study of a real-life situation that
faced managers as well as other stakeholders, includ-
ing employees. A case presented in na
ative form
provides motivation for involvement with and analy-
sis of a specific situation. By framing alternative stra-
tegic actions and by confronting the complexity and
ambiguity of the practical world, case analysis pro-
vides extraordinary power for your involvement with
a personal learning experience. Some of the poten-
tial consequences of using the case method are sum-
marised in Exhibit 1.
As Exhibit 1 suggests, the case analysis meth-
od can assist active learners in the development of
their analytical and judgement skills. Case analy-
sis also helps students to learn how to ask the right
questions. By this we mean questions that focus on
the core strategic issues that are included in a case.
Active learners/students with managerial aspirations
can improve their ability to identify underlying prob-
lems rather than focusing on superficial symptoms as
they develop skills at asking probing, yet appropriate,
questions.
The collection of cases your instructor chooses to
assign can expose you to a wide variety of organisa-
tions and decision situations. This approach vicari-
ously
oadens your experience base and provides
insights into many types of managerial situations,
Exhibit 1
1 Case analysis requires students to practise important managerial skills – diagnosing, making decisions, observing, listening and
persuading – while preparing for a case discussion.
2 Cases require students to relate analysis and action, to develop realistic and concrete actions despite the complexity and
partial knowledge characterising the situation being studied.
3 Students must confront the intractability of reality – complete with absence of needed information, an imbalance between
needs and available resources, and conflicts among competing objectives.
4 Students develop a general managerial point of view – where responsibility is sensitive to action in a diverse environmental
context.
Source: C.C. Lundberg and C. Enz, 1993, ‘A framework for student case preparation’, Case Research Journal, 13 (summer), p. 134.
Introduction • Preparing an effective case analysis
C-7
tasks and responsibilities. Such indirect experience
can help you to make a more informed career deci-
sion about the industry and managerial situation
you believe will prove to be challenging and satisfy-
ing. Finally, experience in analysing cases definitely
enhances your problem-solving skills, and research
indicates that the case method for this subject is better
than the lecture method.5
Furthermore, when your instructor requires oral
and written presentations, your communication skills
will be honed through use of the case method. Of
course, these added skills depend on your prepara-
tion as well as your instructor’s facilitation of learn-
ing. However, the primary responsibility for learning
is yours. The quality of case discussion is generally
acknowledged to require, at a minimum, a thorough
mastery of case facts and some independent analysis
of them. The case method therefore first requires that
you read and think carefully about each case. Addi-
tional comments about the preparation you should
complete to successfully discuss a case appear in the
next section.
Student preparation for
case discussion
If you are inexperienced with the case method,
you may need to alter your study habits. A lecture-
oriented course may not require you to do intensive
preparation for each class period. In such a course,
you have the latitude to work through assigned read-
ings and review lecture notes according to your own
schedule. However, an assigned case requires signifi-
cant and conscientious preparation before class. With-
out it, you will be unable to contribute meaningfully
to in-class discussion. Therefore, careful reading and
thinking about case facts, as well as reasoned anal-
yses and the development of alternative solutions to
case problems, are essential. Recommended alterna-
tives should flow logically from core problems iden-
tified through study of the case. Exhibit 2 shows a
set of steps that can help you to familiarise yourself
with a case, identify problems and propose strategic
actions that increase the probability that a firm will
achieve strategic competitiveness and earn above-
average returns.
Exhibit 2
Step 1:
Gaining familiarity
a In general – determine who, what, how, where and when (the critical facts of the case).
In detail – identify the places, persons, activities and contexts of the situation.
c Recognise the degree of certainty/uncertainty of acquired information.
Step 2:
Recognising symptoms
a List all indicators (including stated ‘problems’) that something is not as expected or as desired.
Ensure that symptoms are not assumed to be the problem. (Symptoms should lead to
identification of the problem.)
Step 3:
Identifying goals
a Identify critical statements by major parties (e.g. people, groups, the work unit, etc.).
List all goals of the major parties that exist or can be reasonably infe
ed.
Step 4:
Conducting the analysis
a Decide which ideas, models and theories seem useful.
Apply these conceptual tools to the situation.
c As new information is revealed, cycle back to sub-steps (a) and (b).
Step 5:
Making the diagnosis
a Identify predicaments (goal inconsistencies).
Identify problems (discrepancies between goals and performance).
c Prioritise predicaments/problems regarding timing, importance, etc.
Step 6:
Doing the action planning
a Specify and prioritise the criteria used to choose action alternatives.
Discover or invent feasible action alternatives.
c Examine the probable consequences of action alternatives.
d Select a course of action.
e Design an implementation plan/schedule.
f Create a plan for assessing the action to be implemented.
Source: C. C. Lundberg and C. Enz, 1993, ‘A framework for student case preparation’, Case Research Journal, 13 (summer), p. 144.
Introduction • Preparing an effective case analysis
C-8
Gaining familiarity
The first step of an effective case analysis process calls
for you to become familiar with the facts featured in
the case and the focal firm’s situation. Initially, you
should become familiar with the focal firm’s general
situation (for example, who, what, how, where and
when). Thorough familiarisation demands apprecia-
tion of the nuances, as well as the major issues, in
the case.
Gaining familiarity with a situation requires you to
study several situational levels, including interactions
etween and among individuals within groups, busi-
ness units, the corporate office, the local communi-
ty and the society at large. Recognising relationships
within and among levels facilitates a more thorough
understanding of the specific case situation.
It is also important that you evaluate information
on a continuum of certainty. Information that is
verifiable by several sources and judged along similar
dimensions can be classified as a fact. Information
epresenting someone’s perceptual judgement of a par-
ticular situation is refe
ed to as an inference. Infor-
mation gleaned from a situation that is not verifiable
is classified as speculation. Finally, information that is
independent of verifiable sources and arises through
individual or group discussion is an assumption.
Obviously, case analysts and organisational decision
makers prefer having access to facts over inferences,
speculations and assumptions.
Personal feelings, judgements and opinions evolve
when you are analysing a case. It is important to be
aware of your own feelings about the case and to
evaluate the accuracy of perceived ‘facts’ to ensure
that the objectivity of your work is maximised.
Recognising symptoms
Recognition of symptoms is the second step of an
effective case analysis process. A symptom is an indi-
cation that something is not as you or someone else
thinks it should be. You may be tempted to co
ect the
symptoms instead of searching for true problems. True
problems are the conditions or situations requiring
solution before the performance of an organisation,
usiness unit or individual can improve. Identifying
and listing symptoms early in the case analysis process
tends to reduce the temptation to label symptoms as
problems. The focus of your analysis should be on the
actual causes of a problem, rather than on its symptoms.
Thus, it is important to remember that symptoms are
indicators of problems; subsequent work facilitates
discovery of critical causes of problems that your case
ecommendations must address.
Identifying goals
The third step of effective case analysis calls for
you to identify the goals of the major organisations,
usiness units and/or individuals in a case. As appro-
priate, you should also identify each firm’s strategic
intent and strategic mission. Typically, these direc-
tion-setting statements (goals, strategic intents and
strategic missions) are derived from comments made
y central characters in the organisation, business
unit or top management team as described in the
case and/or from public documents (for example, an
annual report).
Completing this step successfully can sometimes be
difficult. Nonetheless, the outcomes you attain from
this step are essential to an effective case analysis
ecause identifying goals, intent and mission helps
you to clarify the main problems featured in a case
and to evaluate alternative solutions to those problems.
Direction-setting statements are not always stated
publicly or prepared in written format. When this
occurs, you must infer goals from other available fac-
tual data and information.
Conducting the analysis
The fourth step of effective case analysis is concerned
with acquiring a systematic understanding of a situ-
ation. Occasionally, cases are analysed in a less-than-
thorough manner. Such analyses may be a product of
a busy schedule or of the difficulty and complexity of
the issues described in a particular case. Sometimes
you will face pressures on your limited amounts of
time and may believe that you can understand the sit-
uation described in a case without systematic analy-
sis of all the facts. However, experience shows that
familiarity with a case’s facts is a necessary, but insuf-
ficient, step in the development of effective solutions
– solutions that can enhance a firm’s strategic com-
petitiveness. In fact, a less-than-thorough analysis
typically results in an emphasis on symptoms, rather
than on problems and their causes. To analyse a case
Introduction • Preparing an effective case analysis
C-9
effectively, you should be sceptical of quick or easy
approaches and answers.
A systematic analysis helps you to understand
a situation and determine what can work and prob-
ably what will not work. Key linkages and under-
lying causal networks based on the history of the firm
ecome apparent. In this way, you can separate causal
networks from symptoms.
Also, because the quality of a case analysis depends
on applying appropriate tools, it is important that you
use the ideas, models and theories that seem to be use-
ful for evaluating and solving individual and unique
situations. As you consider facts and symptoms, a
useful theory may become apparent. Of course, hav-
ing familiarity with conceptual models may be impor-
tant in the effective analysis of a situation. Successful
students and successful organisational strategists add
to their intellectual tool kits on a continual basis.
Making the diagnosis
The fifth step of effective case analysis – diagnosis – is
the process of identifying and clarifying the roots of
the problems by comparing goals with facts. In this
step, it is useful to search for predicaments. Predica-
ments are situations in which goals do not fit with
known facts. When you evaluate the actual perfor-
mance of an organisation, business unit or individual,
you may identify over- or under-achievement (relative
to established goals). Of course, single-problem situa-
tions are rare. Accordingly, you should recognise that
the case situations you study probably will be com-
plex in nature.
Effective diagnosis requires you to determine
the problems affecting longer-term performance and
those requiring immediate handling. Understanding
these issues will aid your efforts to prioritise prob-
lems and predicaments, given available resources and
existing constraints.
Doing the action planning
The final step of an effective case analysis process is
called action planning. Action planning is the process
of identifying appropriate alternative actions. In the
action planning step, you select the criteria you will
use to evaluate the identified alternatives. You may
derive these criteria from the analyses; typically, they
are related to key strategic situations facing the focal
organisation. Furthermore, it is important that you
prioritise these criteria to ensure a rational and effec-
tive evaluation of alternative courses of action.
Typically, managers ‘satisfice’ when selecting
courses of action; that is, they find acceptable courses
of action that meet most of the chosen evaluation
criteria. A rule of thumb that has proved valuable to
strategic decision makers is to select an alternative
that leaves other plausible alternatives available if the
one selected fails.
Once you have selected the best alternative, you
must specify an implementation plan. Developing an
implementation plan serves as a reality check on the
feasibility of your alternatives. Thus, it is important
that you give thoughtful consideration to all issues
associated with the implementation of the selected
alternatives.
What to expect from
in-class case discussions
Classroom discussions of cases differ significantly
from lectures. The case method calls for instructors to
guide the discussion, encourage student participation
and solicit alternative views. When alternative views
are not forthcoming, instructors typically adopt one
view so that students can be challenged to respond
to it thoughtfully. Often students’ work is evaluated
in terms of both the quantity and the quality of their
contributions to in-class case discussions. Students
enefit by having their views judged against those of
their peers and by responding to challenges by other
class members and/or the instructor.
During case discussions, instructors listen, ques-
tion and probe to extend the analysis of case issues.
In the course of these actions, peers or the instructor
may challenge an individual’s views and the validity
of alternative perspectives that have been expressed.
These challenges are offered in a constructive man-
ner; their intent is to help students develop their ana-
lytical and communication skills. Instructors should
encourage students to be innovative and original in
the development and presentation of their ideas. Over
the course of an individual discussion, students can
develop a more complex view of the case, benefiting
from the diverse inputs of their peers and instructor.
Introduction • Preparing an effective case analysis
C-10
Among other benefits, experience with multiple-case
discussions should help students to increase their
knowledge of the advantages and disadvantages of
group decision-making processes.
Student peers as well as the instructor value com-
ments that contribute to the discussion. To offer
elevant contributions, you are encouraged to use
independent thought and, through discussions with
your peers outside of class, to refine your thinking. We
also encourage you to avoid using ‘I think’, ‘I believe’
and ‘I feel’ to discuss your inputs to a case analysis
process. Instead, consider using a less emotion-laden
phrase, such as ‘My analysis shows’. This highlights
the logical nature of the approach you have taken to
complete the six steps of an effective case analysis
process.
When preparing for an in-class case discussion,
you should plan to use the case data to explain your
assessment of the situation. Assume that your peers
and instructor know the case facts. In addition, it is
good practice to prepare notes before class discus-
sions and use them as you explain your view. Effective
notes signal to classmates and the instructor that you
are prepared to engage in a thorough discussion of a
case. Moreover, thorough notes eliminate the need for
you to memorise the facts and figures needed to dis-
cuss a case successfully.
The case analysis process just described can help
you prepare to effectively discuss a case during class
meetings. Adherence to this process results in consid-
eration of the issues required to identify a focal firm’s
problems and to propose strategic actions through
which the firm can increase the probability that it will
achieve strategic competitiveness.
In some instances, your instructor may ask
you to prepare either an oral or a written analysis
of a particular case. Typically, such an assignment
demands even more thorough study and analysis of
the case contents. At your instructor’s discretion, oral
and written analyses may be completed by individuals
or by groups of two or more people. The informat-
ion and insights gained through completing the six
steps shown in Exhibit 2 are often of value in the
development of an oral or written analysis. However,
when preparing an oral or written presentation, you
must consider the overall framework in which your
information and inputs will be presented. Such a
framework is the focus of the next section.
Preparing an oral/written
case strategic plan
Experience shows that two types of thinking are nec-
essary in order to develop an effective oral or written
presentation (see Exhibit 3). The upper part of the
model in Exhibit 3 outlines the analysis stage of case
preparation.
In the analysis stage, you should first analyse the
general external environmental issues affecting the
firm. Next, your environmental analysis should focus
on the particular industry (or industries, in the case
of a diversified company) in which a firm operates.
Finally, you should examine the competitive environ-
ment of the focal firm. Through study of the three
levels of the external environment, you will be able to
identify a firm’s opportunities and threats. Following
the external environmental analysis is the analysis of
the firm’s internal environment, which results in the
identification of the firm’s strengths and weaknesses.
As noted in Exhibit 3, you must then change the
focus from analysis to synthesis. Specifically, you
must synthesise information gained from your analy-
sis of the firm’s internal and external environments.
Synthesising information allows you to generate alter-
natives that can resolve the significant problems or
challenges facing the focal firm. Once you identify a
est alternative, from an evaluation based on prede-
termined criteria and goals, you must explore imple-
mentation actions.
Exhibits 4 and 5 outline the sections that should
e included in either an oral or a written strategic
plan presentation: introduction (strategic intent and
mission), situation analysis, statements of strengths/
weaknesses and opportunities/threats, strategy for-
mulation and implementation plan. These sections,
which can be completed only through use of the two
types of thinking featured in Exhibit 3, are described
in the following discussion. Familiarity with the con-
tents of your textbook’s 13 chapters is helpful because
the general outline for an oral or a written strategic
plan shown in Exhibit 5 is based on an understand-
ing of the strategic management process detailed in
those chapters.
Introduction • Preparing an effective case analysis
C-11
External environment analysis
As shown in Exhibit 5, a general starting place for
completing a situation analysis is the external envi-
onment. The external environment is composed of
outside conditions that affect a firm’s performance.
Your analysis of the environment should consider the
effects of the general environment on the focal firm.
Following that evaluation, you should analyse the
industry and competitor environmental trends.
These trends or conditions in the external environ-
ment shape the firm’s strategic intent and mission.
The external environment analysis essentially indi-
cates what a firm might choose to do. Often called an
environmental scan, an analysis of the external envi-
onment allows a firm to identify key conditions that
are beyond its direct control. The purpose of studying
the external environment is to identify a firm’s oppor-
tunities and threats. Opportunities are conditions in
the external environment that appear to have the
potential to contribute to a firm’s success. In essence,
opportunities represent possibilities. Threats are
conditions in the external environment that appear
to have the potential to prevent a firm’s success. In
essence, threats represent potential constraints.
When studying the external environment, the
focus is on trying to predict the future (in terms of
local, regional, and international trends and issues)
and to predict the expected effects on a firm’s oper-
ations. The external environment features conditions
in the
oader society and in the industry (area of
competition) that influence the firm’s possibilities
and constraints. Areas to be considered (to identify
opportunities and threats) when studying the general
environment are listed in Exhibit 6. Many of these
issues are explained more fully in Chapter 2.
Once you analyse the general environmental
trends, you should study their effect on the focal indus-
try. Often the same environmental trend may have a
significantly different impact on separate industries,
or it may affect firms within the same industry differ-
ently. For instance, with deregulation of the airline
industry in the United States, older, established air-
lines had a significant decrease in profitability, while
many smaller airlines, such as Southwest Airlines,
Exhibit 3 Types of thinking in case preparation: Analysis and synthesis
ANALYSIS
External environment
General environment
Industry environment
Competitor environment
Internal environment
Statements of
strengths,
weaknesses,
opportunities
and threats
Alternatives
Evaluations of alternatives
Implementation
SYNTHESIS
Introduction • Preparing an effective case analysis
C-12
Exhibit 5 Strategic planning and its parts
• Strategic planning is a process through which a firm determines what it seeks to accomplish and the actions required to
achieve desired outcomes
✓ Strategic planning, then, is a process that we use to determine what (outcomes to be reached) and how (actions to be taken
to reach outcomes)
• The effective strategic plan for a firm would include statements and details about the following:
✓ Opportunities (possibilities) and threats (constraints)
✓ Strengths (what we do especially well) and weaknesses (deficiencies)
✓ Strategic intent (an indication of a firm’s ideal state)
✓ Strategic mission (purpose and scope of a firm’s operations in product and market terms)
✓ Key result areas (KRAs) (categories of activities where efforts must take place to reach the mission and intent)
✓ Strategies (actions for each KRA to be completed within one to five years)
✓ Objectives (specific statements detailing actions for each strategy that are to be completed in one year or less)
✓ Cost linkages (relationships between actions and financial resources)
Exhibit 4 Strategic planning process
Strategic intent
Strategic mission
Strategies
• 1 to 5 years
• Cost linkages
Objectives
• 1 year or less
• Cost linkages
Key result areas
• Required efforts
• Cost linkages
External environment
• Opportunities (possibilities)
• Threats (constraints)
Internal environment
• Strengths
• Weaknesses
Introduction • Preparing an effective case analysis
C-13
with lower cost structures and greater flexibility, were
able to aggressively enter new markets.
Porter’s five forces model is a useful tool for ana-
lysing the specific industry (see Chapter 2). Careful
study of how the five competitive forces (that is, sup-
plier power, buyer power, potential entrants, substi-
tute products and rivalry among competitors) affect
a firm’s strategy is important. These forces may cre-
ate threats or opportunities relative to the specific
usiness-level strategies (that is, differentiation, cost
leadership, focus) being implemented. Often a stra-
tegic group’s analysis reveals how different environ-
mental trends are affecting industry competitors.
Strategic group analysis is useful for understanding
the industry’s competitive structures and firm con-
straints and possibilities within those structures.
Firms also need to analyse each of their primary
competitors. This analysis should identify their com-
petitors’ cu
ent strategies, strategic intent, strategic
mission, capabilities, core competencies and compet-
itive response profile. This information is useful to
the focal firm in formulating an appropriate strategic
intent and mission.
Internal environment analysis
The internal environment is composed of strengths
and weaknesses internal to a firm that influence its
strategic competitiveness. The purpose of completing
an analysis of a firm’s internal environment is to iden-
tify its strengths and weaknesses. The strengths and
weaknesses in a firm’s internal environment shape
the strategic intent and strategic mission. The inter-
nal environment essentially indicates what a firm
Exhibit 6 Sample general environmental categories
Technology • Information technology continues to become cheaper and have more practical
applications
• Database technology allows organisation of complex data and distribution of information
• Telecommunications technology and networks increasingly provide fast transmission of all
sources of data, including voice, written communications and video information
Demographic trends • Computerised design and manufacturing technologies continue to facilitate quality and
flexibility
• Regional changes in population due to migration
• Changing ethnic composition of the population
• Ageing of the population
• Ageing of the baby boomer generation
Economic trends • Interest rates
• Inflation rates
• Savings rates
• Trade deficits
• Budget deficits
• Exchange rates
Political/legal environment • Antitrust enforcement
• Tax policy changes
• Environmental protection laws
• Extent of regulation/deregulation
• Developing countries privatising state monopolies
• State-owned industries
Socio-cultural environment • Increasing proportion of women in the workforce
• Awareness of health and fitness issues
• Concern for the environment
• Concern for customers
Global environment • Cu
ency exchange rates
• Free trade agreements
• Trade deficits
• New or developing markets
Introduction • Preparing an effective case analysis
C-14
can do. Capabilities or skills that allow a firm to do
something that others cannot do or that allow a firm
to do something better than others do it are called
strengths. Strengths can be categorised as something
that a firm does especially well. Strengths help a firm
to take advantage of external opportunities or over-
come external threats. Capabilities or skill deficien-
cies that prevent a firm from completing an important
activity as well as others do it are called weaknesses.
Weaknesses have the potential to prevent a firm from
taking advantage of external opportunities or suc-
ceeding in efforts to overcome external threats. Thus,
weaknesses can be thought of as something the firm
needs to improve.
Analysis of the primary and support activities of
the value chain provides opportunities to understand
how external environmental trends affect the spe-
cific activities of a firm. Such analysis helps to high-
light strengths and weaknesses. (See Chapter 3 for an
explanation of the value chain.) For the purposes of
preparing an oral or written presentation, it is impor-
tant to note that strengths are internal resources and
capabilities that have the potential to be core com-
petencies. Weaknesses, on the other hand, have the
potential to place a firm at a competitive disadvantage
in relation to its rivals.
When evaluating the internal characteristics of
the firm, your analysis of the functional activities
emphasised is critical. For example, if the strategy of
the firm is primarily technology-driven, it is important
to evaluate the firm’s R&D activities. If the strategy
is market-driven, marketing functional activities are
of paramount importance. If a firm has financial diffi-
culties, critical financial ratios would require careful
evaluation. In fact, because of the importance of
financial health, most cases require financial analysis.
The appendix lists and operationally defines several
common financial ratios. Included are exhibits des-
cribing profitability, liquidity, leverage, activity and
shareholders’ return ratios. Other firm characteristics
that should be examined to study the internal environ-
ment effectively include leadership, organisational
culture, structure and control systems.
Identification of strategic intent
and mission
Strategic intent is associated with a mind-set that
managers seek to imbue within the company. Essen-
tially, a mind-set captures how we view the world
and our intended role in it. Strategic intent reflects
or identifies a firm’s ideal state. Strategic intent flows
from a firm’s opportunities, threats, strengths and
weaknesses. However, the main influence on strate-
gic intent is a firm’s strengths. Strategic intent should
eflect a firm’s intended character and a commitment
to ‘stretch’ available resources and strengths in order
to reach strategies and objectives. Examples of strate-
gic intent include:
• The relentless pursuit of perfection (Lexus).
• To be the top performer in everything that we do
(Phillips Petroleum).
• We are dedicated to being the world’s best at
inging people together (AT&T).
The strategic mission flows from a firm’s strate-
gic intent; it is a statement used to describe a firm’s
unique intent and the scope of its operations in prod-
uct and market terms. In its most basic form, the stra-
tegic mission indicates to stakeholders what a firm
seeks to accomplish. An effective strategic mission
eflects a firm’s individuality and reveals its leader-
ship’s predisposition(s). The useful strategic mission
shows how a firm differs from others and defines
oundaries within which the firm intends to operate.
For example:
• Cochlear’s mission is to have ‘clinical teams and
ecipients em
ace Cochlear as their partner in
hearing for life’.
• Coca-Cola Amatil’s mission is to have market
leadership in every te
itory.
Hints for presenting an
effective strategic plan
There may be a temptation to spend most of your
oral or written case analysis on the results from the
analysis. It is important, however, that the analysis
of a case should not be over-emphasised relative to
Introduction • Preparing an effective case analysis
C-15
the synthesis of results gained from your analytical
efforts – what does the analysis mean for the organi-
sation (see Exhibit 3)?
Strategy formulation: Choosing key
esult areas
Once you have identified strengths and weaknesses,
determined the firm’s core competencies (if any), and
formulated a strategic intent and mission, you have a
picture of what the firm is and what challenges and
threats it faces.
You can now determine alternative key result
areas (KRAs). Each of these is a category of activi-
ties that helps to accomplish the strategic intent of the
firm. For example, KRAs for Cochlear may include
to remain a leader in hearing implant technology and
to build links with hearing clinicians in Southeast
Asia. Each alternative should be feasible (that is, it
should match the firm’s strengths, capabilities and,
especially, core competencies), and feasibility should
e demonstrated. In addition, you should show how
each alternative takes advantage of the environmental
opportunity or avoids
uffers against environmental
threats. Developing carefully thought-out alternatives
equires synthesis of your analyses and creates greater
credibility in oral and written case presentations.
Once you develop a strong set of alternative
KRAs, you must evaluate the set to choose the best
ones. Your choice should be defensible and provide
enefits over the other alternatives. Thus, it is impor-
tant that both the alternative development and evalu-
ation of alternatives be thorough. The choice of the
est alternative should be explained and defended.
For the two Cochlear KRAs presented earlier, the
strategies are clear and in both cases they take advan-
tage of competencies within the company and oppor-
tunities in the external environment.
Key result area implementation
After selecting the most appropriate KRAs (that is,
those with the highest probability of enhancing a
firm’s strategic competitiveness), you must consider
effective implementation. Effective synthesis is impor-
tant to ensure that you have considered and evaluated
all critical implementation issues. Issues you might
consider include the structural changes necessary to
implement the new strategies and objectives associ-
ated with each KRA. In addition, leadership changes
and new controls or incentives may be necessary to
implement these strategic actions. The implementa-
tion actions you recommend should be explicit and
thoroughly explained. Occasionally, careful evalua-
tion of implementation actions may show the strat-
egy to be less favourable than you originally thought.
(You may find that the capabilities required to imple-
ment the strategy are absent and unobtainable.) A
strategy is only as good as the firm’s ability to imple-
ment it effectively. Therefore, expending the effort to
determine effective implementation is important.
Process issues
You should ensure that your presentation (either oral
or written) has logical consistency throughout. For
example, if your presentation identifies one purpose,
ut your analysis focuses on issues that differ from
the stated purpose, the logical inconsistency will be
apparent. Likewise, your alternatives should flow
from the configuration of strengths, weaknesses,
opportunities and threats you identified through the
internal and external analyses.
Thoroughness and clarity also are critical to an
effective presentation. Thoroughness is represented
y the comprehensiveness of the analysis and alterna-
tive generation. Furthermore, clarity in the results of
the analyses, selection of the best alternative KRAs
and strategies, and design of implementation actions
are important. For example, your statement of the
strengths and weaknesses should flow clearly and
logically from the internal analyses presented, and
these should be reflected in KRAs and strategies.
Presentations (oral or written) that show logi-
cal consistency, thoroughness and clarity of purpose,
effective analyses, and feasible recommendations are
more effective and will receive more positive evalua-
tions. Being able to withstand tough questions from
peers after your presentation will build credibility for
your strategic plan presentation. Furthermore, devel-
oping the skills necessary to make such presentations
will enhance your future job performance and career
success.
Introduction • Preparing an effective case analysis
C-16
Appendix: Financial analysis in case studies
Exhibit A-1 Profitability ratios
Ratio Formula What it shows
1 Return on total assets Profits after taxes
Total assets
The net return on total investment
of the firm
or o
Profits after taxes + interest
Total assets
The return on both creditors’ and
shareholders’ investments
2 Return on shareholders’ equity
(or return on net worth)
Profits after taxes
Total shareholders’ equity
How effectively the company is
utilising shareholders’ funds
3 Return on ordinary equity Profit after taxes – preference share dividends
Total shareholders’ equity – par value of
preference shares
The net return to ordinary
shareholders
4 Operating profit margin
(or return on sales)
Profits before taxes and before interest
Sales
The firm’s profitability from
egular operations
5 Net profit margin
(or net return on sales)
Profits after taxes
Sales
The firm’s net profit as a
percentage of total sales
Exhibit A-2 Liquidity ratios
Ratio Formula What it shows
1 Cu
ent ratio Cu
ent assets
Cu
ent liabilities
The firm’s ability to meet its cu
ent financial
liabilities
2 Quick ratio (or acid-test ratio) Cu
ent assets – inventory
Cu
ent liabilities
The firm’s ability to pay off short-term
obligations without relying on sales of
inventory
3 Inventory to net working capital Inventory
Cu
ent assets – cu
ent liabilities
The extent to which the firm’s working capital
is tied up in inventory
Introduction • Preparing an effective case analysis
C-17
Exhibit A-3 Leverage ratios
Ratio Formula What it shows
1 Debt-to-assets Total debt
Total assets
Total bo
owed funds as a percentage of total
assets
2 Debt-to-equity Total debt
Total shareholders’ equity
Bo
owed funds versus the funds provided by
shareholders
3 Long-term debt-to-equity Long-term debt
Total shareholders’ equity
Leverage used by the firm
4 Times-interest-earned
(or coverage ratio)
Profits before interest and taxes
Total interest charges
The firm’s ability to meet all interest payments
5 Fixed charge coverage Profits before taxes and interest
+ lease obligations
Total interest charges
+ lease obligations
The firm’s ability to meet all fixed-charge
obligations, including lease payments
Exhibit A-4 Activity ratios
Ratio Formula What it shows
1 Inventory turnover Sales
Inventory of finished goods
The effectiveness of the firm in employing
inventory
2 Fixed assets turnover Sales
Fixed assets
The effectiveness of the firm in utilising plant
and equipment
3 Total assets turnover Sales
Total assets
The effectiveness of the firm in utilising total
assets
4 Accounts receivable turnover Annual credit sales
Accounts receivable
How many times the total receivables have
een collected during the accounting period
5 Average collection period Accounts receivable
Average daily sales
The average length of time the firm waits to
collect payments after sales
Introduction • Preparing an effective case analysis
C-18
Exhibit A-5 Shareholders’ return ratios
Ratio Formula What it shows
1 Dividend yield on ordinary
shares
Annual dividends per share
Cu
ent market price per share
A measure of return to ordinary shareholders
in the form of dividends
2 Price–earnings ratio Cu
ent market price per share
After-tax earnings per share
An indication of market perception of the firm.
Usually, the faster-growing or less risky firms
tend to have higher PE ratios than the slower-
growing or more risky firms
3 Dividend payout ratio Annual dividends per share
After-tax earnings per share
An indication of dividends paid out as a
percentage of profits
4 Cash flow per share After-tax profits + depreciation
Number of ordinary shares outstanding
A measure of total cash per share available for
use by the firm
Notes
1 M. A. Lundberg, B. B. Levin and H. I. Ha
ington, 2000, Who
Learns What from Cases and How? The Research Base for Teaching
and Learning with Cases (Englewood Cliffs, NJ: Lawrence Erlbaum
Associates).
2 L. B. Barnes, A. J. Nelson and C. R. Christensen, 1994, Teaching
and the Case Method: Text, Cases and Readings (Boston: Harvard
Business School Press); C. C. Lundberg, 1993, ‘Introduction to
the case method’, in C. M. Vance (ed.), Mastering Management
Education (Newbury Park, Calif. : Sage); C. Christensen, 1989,
Teaching and the Case Method (Boston: Harvard Business School
Publishing Division).
3 C. C. Lundberg and E. Enz, 1993, ‘A framework for student
case preparation’, Case Research Journal, 13 (summer), p. 133.
4 J. Solitis, 1971, ‘John Dewey’, in L. E. Deighton (ed.), Encyclopedia
of Education (New York: Macmillan and The Free Press).
5 F. Bocker, 1987, ‘Is case teaching more effective than lecture
teaching in business administration? An exploratory analysis’,
Interfaces, 17(5), pp. 64–71.
Introduction • Preparing an effective case analysis
C-19
Case 1
Hearing with the aid of
implanted technology:
The case of Cochlear™, an Australian
high-technology leade
Dallas Hanson Mark Wickham
University of Tasmania University of Tasmania
The Cochlear company of
Australia: The situation
Cochlear™ is a leading Australian company specialis-
ing in cochlear devices – that is, implantable hearing
devices. It is the world leader in this market and a pro-
minent innovator in the high-technology niche within
which it operates. Cochlear originated in Australia
ut now sells globally in an increasingly competitive
market.
There are several problems cu
ently facing the
company. Within the global deaf community there is
a serious debate about the use of technology to aid
hearing in the profoundly deaf, and this obviously
threatens the market. Second, and more significantly,
in 2002 there was a major issue when the US Food
and Drug Administration (FDA) issued a notification
that it had received news of possible associations
etween cochlear implants and meningitis. In late
2003 a new CEO, Chris Roberts, took over. What are
his options?
The Cochlear implant technology
A cochlear implant is a small electronic device that
helps a profoundly (completely) deaf person to have
a sense of sound. It is different from a hearing aid
ecause it helps to compensate for damaged or non-
functional parts of the ear, while a hearing aid ampli-
fies sound. The implant has four parts:
• a tiny but sensitive microphone that picks up
sound
• a speech processor that selects and a
anges
useful sounds
• a transmitter and receiver that turns these
sounds into electrical impulses
• a series of electrodes that are surgically
implanted in the inner ear, which pick up the
eceiver’s impulses and transmit them to the
ain. (This process is analogous to how hearing
people hear sounds.)
The cochlear implant technology is getting more
sophisticated all the time. It is a fast-moving technol-
ogy, and changes are further enhancing the capacity
C-20 Case 1 • Hearing with the aid of implanted technology: Cochlea
of the devices as well as making them smaller and
therefore more socially acceptable.
Implanting the devices is a surgical procedure that
has some risks. It is also expensive because it requires
an experienced surgeon. Exhibit 1 is a diagrammatic
epresentation of the device.
A recent Cochlear company annual report out-
lines the details of this technology and indicates its
intricacy:
Introduction to the Nucleus® 3 system
The unique features of the Nucleus® 3 system
include:
Longest battery life on the market: The ESPrit™
3G speech processor is the only processor on the
market with a battery life that lasts up to three
days. Few inte
uptions and clear sound means
etter hearing.
Unique Whisper setting provides more sound:
The ESPrit 3G is the only speech processor on the
market that features a special Whisper setting
designed to make soft sounds more audible –
like rain falling or a person calling from another
oom.
Wireless FM and in-built telecoil: An in-built
telecoil allows you to use the telephone with no
additional attachments. The wireless FM provides
access to sound in a variety of settings including
cinemas, museums, meetings, classrooms, and
wherever an FM system is in place for hearing-
impaired participants. No additional cables are
necessary.
The only pre-curved (contoured) electrode
a
ay on the market: The Nucleus® 24 Contour™
implant is the first implant choice for surgeons.
It features a pre-curved electrode a
ay, which
has two important benefits: 1) The curve of the
a
ay puts the electrodes as close as possible to
the hearing fibers in the cochlea to allow for the
distinct sound. 2) The pre-curved shape of the
a
ay matches the shape of the cochlea, which
helps to protect its delicate structure.
Titanium implant casing for best reliability:
Nucleus® implants are durable and reliable and
are made from Titanium. The Nucleus 24 Contour
has never fractured on impact. Nucleus is built for
a lifetime of use.
Removable magnet for safe MRI: Nucleus is the
first implant to feature the removable magnet for
MRI. This allows recipients to have a full-strength
MRI if they require one.1
Exhibit 1 How the Nucleus® 3 system works
1 A directional microphone picks up sound.
2 Sound is sent from the microphone to the speech processor.
3 The speech processor analyses and digitises the sound into coded
signals.
4 Coded signals are sent to the transmitter via radio frequency.
5 The transmitter sends the code across the skin to the internal
implant.
6 The internal implant converts the code to electrical signals.
7 The signals are sent to the electrodes to stimulate the remaining
nerve fi
es.
8 The signals are recognised as sounds by the
ain, producing a
hearing sensation.
Case 1 • Hearing with the aid of implanted technology: Cochlear C-21
Cochlear, the company
The history of Cochlear’s Nucleus® device goes back to
1967, when Graeme Clark started research on multi-
channel cochlear implants. In 1978, Professor Clark
implanted Rodney Saunders with a multi-channel
cochlear device, and by 1982 a 22-channel device
was implanted in Graham Ca
ick. (The more chan-
nels, basically, the better the hearing.) In 1985 the
22-channel Nucleus device was approved by the FDA
for use in adults, and in 1990 for use in children. By
1998, 10 000 children had been implanted, and by
2001 more than 36 000 adults and children had been
implanted.2
Cochlear’s technology has kept improving, and
each component improvement improves the overall
system. In 2003 the company announced a further
significant improvement to its basic product: the
Nucleus® 24 Contour Advance™ was designed to
minimise trauma to the delicate cochlear structures
during implant surgery. It also developed a new Micro-
Link Adaptor for use with the speech processor and
eceiver. (This was a product of the alliance Cochlear
has with European technology firm Phonok AG.) In
ecent years the company has continually enhanced
the capacity, and further minimised the size, of its
Nucleus devices. Cochlear has won many awards for
innovation – for example, the Medical Design Excel-
lence Award in 2001 (an internationally prestigious
achievement).
The 2002/03 financial year also included a record
esult financially. Profit after tax increased by 45 per
cent to A$58.2 million and earnings per share were
up 44 per cent. There were also record unit sales, up
Exhibit 2 Statement of financial performance
Cochlear Limited and its controlled entities for the year ended 30 June 2003
Consolidated Company
2003
$000
2002
$000
2003
$000
2002
$000
Revenue from ordinary activities 290 045 256 201 205 044 187 752
Expenses 209 239 204 021 131 110 136 448
Bo
owing costs 796 1 150 153 195
Profit from ordinary activities before related income tax expense 80 010 51 030 73 781 51 109
Income tax expense relating to ordinary activities 21 797 10 920 19 892 11 952
Net profit attributable to members of the parent entity 58 213 40 110 53 889 39 157
Non-owner transaction changes in equity
Translation adjustment in general reserve (8) 3 – –
Net (decrease)/increase in retained profits on the initial adoption of:
Revised AASB 1028, ‘Employee Benefits’ (116) – (90) –
AASB 1044, ‘Provisions, Contingent Liabilities and Contingent Assets’ 311 – 2 411 –
Net exchange difference relating to self-sustaining foreign operations (4 737) 2 507 – –
Total changes in equity from non-owner related transactions
attributable to the members of the parent entity 53 663 42 620 56 210 39 157
Basic earnings per share (cents)
Ordinary shares 110.0 76.6
Diluted earnings per share (cents)
Ordinary shares 110.0 76.6
C-22 Case 1 • Hearing with the aid of implanted technology: Cochlea
19 per cent on the previous year. Sales in the United
States were strong; in Europe they were steady; and
in Asia there was strong growth before the SARS out-
eak of 2002 affected the market. Some 9328 devices
were sold during the financial year, and at A$50 000
for lifetime care this indicated a very good year. It
took Cochlear 20 years to sell 30 000 systems, but in
the last couple of years it has sold another 20 000.3
Exhibit 2 shows the statement of financial perfor-
mance for the 2002/03 financial year.
Cochlear’s manufacturing facilities are world class
and have had repeated upgrades in order to maintain
this status.
The firm is very focused on R&D and devotes
15 per cent of total revenue to research. As well as
220 research staff, it has major long-term research
links with the CRC (Co-operative Research Centre)
for Cochlear Implant and Hearing Aid Innovation in
Melbourne, as well as with the University of Melb-
ourne itself. In addition, Cochlear has collaborative
esearch a
angements with 90 other partners in 35
countries.4
The organisation is very determined to maintain
excellent links with implant recipients and the sur-
geons and audiologists that work with them. In 2002,
70 surgeons attended the Sydney facility through
Cochlear’s ongoing visiting surgeon program.
Cochlear has 630 staff in 70 countries. It has an
excellent training system for new staff. For exam-
ple, in 2002, 43 new staff attended the Sydney head-
quarters for intensive training in the technology of
implants and all aspects of the implantation process,
including surgery. Cochlear is proud of the ethnic
diversity of its staff – the Sydney office includes staff
from 60 nations.
The board is made up of eight independent non-
executive directors, the CEO, and one other execu-
tive director. Cochlear has a great committee system
and all meetings are well documented. In September
2002, Cochlear was named in the top three Australian
companies for best corporate governance by Investor
Relations Magazine.
The external world for the
industry
Hearing impairment
Hearing impairment ranges from mild to profound,
and some people can hear some frequencies but not
others. Mild hearing loss means that people can hear
in quiet, one-to-one, situations but have problems in
noisy environments such as cafés and bars. At the
moderate level of loss, people find difficulty in hear-
ing normal speech at any distance over a metre and
are unlikely to hear well in crowded social situations.
Profound hearing loss means that a person cannot
hear a normal speaking voice or normal sounds. They
may be helped by hearing aids, but tend to rely heav-
ily on speech reading or sign language. Those with
high-frequency loss (often caused by exposure to loud
noises) can hear the person speaking but have diffi-
culty hearing all the sounds. For example, the higher-
pitched consonants such as P, S, F and CH may be
confused, so ‘sun’ may be heard as ‘fun’ or ‘pat’ heard
as ‘sat’.5
The market for cochlear devices is the pro-
foundly deaf. The number of such people is diffi-
cult to determine. The UK National Deaf Children’s
Society (NDCS) suggests that one in 1000 children
are born with severe/profound hearing problems.6
The (Australian) Bionic Ear Institute estimates the
potential market in the West plus Japan as 3 million
devices. In China, there are possibly 35 000 people
orn each year who would benefit from the device.7
Even when discounted for unwillingness to risk the
operation or lack of money, the numbers are huge.
The companies competing in the industry concen-
trate on the United States and European markets and
have barely penetrated the wider global market.
The political/legal environment
The cochlear industry is part of the general medical
technology industry. Regulation is therefore signifi-
cant and the US Food and Drug Administration is
Case 1 • Hearing with the aid of implanted technology: Cochlear C-23
the most significant regulator because its findings
have weight worldwide. The FDA must approve new
devices before they can be sold in the United States.
The FDA was also the initiator of the 2002 meningitis
scare, which affected the whole industry.
The global aspect
The cochlear market has gradually expanded beyond
Australia, the United States and Europe. Cochlear
itself established its European offices in 1987 and
an office in Japan and Hong Kong in the 1990s,
while China was a major target in 2001. Cochlear
devices are now sold in more than 60 nations. Given
that profound deafness is a problem globally, it can
e expected that the global market will continue to
expand.
Economics and cochlear devices
Cochlear devices cost around A$50 000 for a life-
time service.8 Demand worldwide therefore comes
from relatively affluent individuals, medical insur-
ance companies and government organisations. It is
possibly limited in poorer nations. However, within
the OECD the middle to upper income groups are
increasingly prosperous and these people are a poten-
tial market without government help. On the other
hand, medical and insurance systems are gradually
coming under increasing pressure as government tax
incomes struggle to cope with competing demands for
health, education and welfare services.9
In 2003 the global economy was expected to take
an upturn, while Australia continued a phase of con-
tinued prosperity and Europe and the United States
were basically stable in economic terms.
The meningitis crisis in the
Cochlear implant industry
On 24 July 2002 the FDA issued a notification that it
had reports of a link between cochlear implants and
acterial meningitis (a potentially fatal infection of
the lining of the surface of the
ain). There were 43
such cases and 11 people died. There were reports that
implants had been withdrawn from sale in Germany,
France and Spain. On 25 July the FDA updated its
warning and said it had now learned of 118 cases.10
Cochlear responded to the crisis quickly. Graeme
Clark claimed that the infection was related to a
design change by their competitor, Advanced Bionics,
that created ‘dead space’ within the ear, thus provid-
ing a home for bacteria. Professor Clark commented
that, ‘It is a very great problem of engineers per se
designing something without due recourse to biolo-
gists and medical people.’11 Advanced Bionics tempo-
arily withdrew its product from sale.
The neuro-technology industry (the generic
industry for implantable devices) bulletin commented
on this scare: ‘One side benefit of the relative lack
of media exposure that the neural prosthesis industry
eceives is that this crisis has not gained the inten-
sive public scrutiny that has greeted other industries
when confronted with unflattering data or allega-
tions.’12 The scare nevertheless received significant
media attention and Cochlear’s share price dropped
sharply. Advanced Bionics advanced a reputation for
crisis management with its suspension from sales and
detailed explanations of problems to its stakeholders.
The meningitis scare has had a long-term ripple
effect on the industry, and doubt remains despite a
climb in share prices to those similar to levels prior
to the scare. The deaf community and the medical
profession have an ongoing debate about cochlear
implants. For example, Blake Papsin, the director of
the Cochlear implant program in Toronto, Canada,
in early 2003, said:
In coming to terms with the relation between
cochlear implants and meningitis, we should not
lose sight of the benefit of this technology. For
many children, the cochlear implant is a marvel
that has allowed them to attain or regain hearing
and speech. The growing number of candidates
for cochlear implants, at least in Canada centres,
eflects a conservative application of this technology
ased on the responsible evaluation of outcomes.13
This debate simmers in deaf culture. It is made
more complex by advances in other areas of neuro-
technology that are leading to useful devices such
C-24 Case 1 • Hearing with the aid of implanted technology: Cochlea
as artificial sight. In addition, the increasing accep-
tance of altered body technology may impact on the
cochlear industry: many now feel it is normal to alter
ody parts by surgery – for example, with pectoral
enhancement or
east enlargement – and this could
affect the ‘normality’ of a cochlear implant in the
wider (as distinct from deaf) culture.
Debate about the idea of
Cochlear implants in the
deaf community
The background to a vigorous debate about the
active benefits of a cochlear implant is encapsulated
in a 2002 letter from Robert Adam, President of the
Australian Association of the Deaf:
The truth is obvious: a cochlear implant is not a
cure for deafness. Let me expand on this a little.
The Royal Institute for the deaf in the UK has a
fact sheet which mi
ors the Australian Association
of the Deaf’s view succinctly: A child with an
implant will still be profoundly deaf when not
wearing the implant. When wearing the implant,
the child will be considered hard of hearing, or
severely deaf, in the sense that a person with a
hearing aid is described as hard of hearing.
The deaf culture is not just about a language
– it is also about community, history and art. Like
many minority cultures, there is a strong tradition
of stories and folklore that is passed on from one
generation to the next. There have been many
captivating and moving stories about the way deaf
people lived in the past and about how deaf culture
has endured despite attempts to ‘cure’ deafness.14
In 2000 in the United States the debate was high-
lighted by a film documentary called Sound and Fury,
which portrayed the Artinian family. The father,
Pete, is deaf and has three deaf children. His family
includes
other Chris and his wife Mari. They had a
deaf baby and decided to have an implant. Pete and his
wife Nita, leading anti-implant campaigners, object-
ed but were then astonished when their own daughter
equested an implant. Pete and Nita were afraid that
their daughter would lose contact with deaf culture if
she had an implant, so they decided to move to a more
deaf-culture-oriented community. This complex fam-
ily drama appealed to the US media, and the idea of a
deaf culture contrasted with the benefits of cochlear
implants became a subject of general debate.
In 2003 the tenor of the debate in the United States
changed with the entry of Miss USA 1995, Heather
Whitestone McCallum. She became profoundly deaf
in infancy and had an implant in 2002. She then
sprang into action, lo
ying federal politicians for the
industry, appearing on top-rating television shows,
such as Good Morning America, and appearing in
print media such as the bestselling USA Today. She
has been credited with helping to change the US gov-
ernment’s mind on cochlear support: the government
had been talking in 2002 of reducing funding for the
implant procedure but ended up increasing it.15
Competitors in the
industry
Advanced Bionics is a private US company founded
in 1993, which is dedicated to the development of
neuron-stimulation products – implantable devices
that direct electrical impulses to nerves and muscles.
The chairman, Alfred Mann, says the company aims
to ‘enable the deaf to hear, the blind to see, and the
lame to walk’. The company originated when Dr
Robert Schindler from the University of California’s
San Francisco cochlear program approached Mann
for funding. Mann was already highly successful in
implantable devices, the founder of a major heart
pacemaker company (Pacemaker Systems) and high-
tech wearable insulin-delivering pumps (MiniMed).
In 2003 the Alfred Mann Foundation (Mann’s phil-
anthropic research organisation) was working with
Robert Greenberg, the CEO of Mann’s company
Second Sight, a company devoted to the development
of implants to enable vision. The implants would
enable people with retinal disintegration to see.
Greenberg claimed in 2003 that three people have
een implanted and that the results were ‘pleasing’.16
Advanced Bioniocs has developed and sold the Clar-
ion cochlear implant. This had, in 2002, about 15 per
cent of the US market.
Case 1 • Hearing with the aid of implanted technology: Cochlear C-25
AllHear Inc. Designs
This company manufactures and sells cochlear
implants. The founder, Dr William House, produced
a cochlear device in 1984 in conjunction with the 3M
Corporation, one of the world’s leading innovation-
driven corporations. The AllHear cochlear implant
is unique because it uses a single short electrode that
apparently does not destroy residue of hearing.17 In
2003, AllHear’s cochlear implants were not approved
y the FDA for general sale in the United States.
Med-El
Med-El produces the COMBI-40+ cochlear implant
system. It has collaborative a
angements with a
ange of universities. Med-El has eight subsidiaries
and nine service centres throughout the world. It is a
fierce competitor.
Back to Cochlear, the
company
The previous CEO, Jack Mahoney, was a successful
leader after succeeding the well-known Catherine Liv-
ingstone in 2001. He delivered on ambitious growth
and profit targets in 2002/03. He received a pack-
age in 2002 worth $1.8 million, including a $416 845
performance-based bonus and had $100 000 in stock
options, which remained unaffected by the new plan.
In late 2003 he announced his resignation and
a new CEO, Chris Roberts, took over in Fe
uary
2004. Roberts faced the classic challenges of the new
CEO of a reasonably successful company – how to
continue a record of advancing sales, profits and inno-
vation. In addition, he must cope with the competi-
tion and the social and medical issues that threaten
the industry. Roberts had been CEO of ResMed, an
Australian company that makes and innovates in sleep
apnoea products. (Sleep apnoea is a condition where
a person’s airways become blocked, often as a result
of being overweight, causing them to wake up, some-
times many times a night. It is a good area for busi-
ness, as cases of apnoea are on the increase. ResMed
is number one in Europe for these products.
Soon after Roberts took over at Cochlear, the
share price dropped by 30 per cent. The European
markets were worse than expected, and the American
market was tight because the federal health budget
was tighter, and the major competitor in the United
States, Advanced Bionics, had been rejuvenated.
Cochlear is still the market leader, but its competitors
are coming on strong.18
What strategies do you suggest CEO Chris Roberts
use to achieve his aims?
Notes
1 www.cochlear.com.
2 Ibid.
3 N. Gluyas, ‘Cochlear’, The Australian, 1 December 2003.
4 www.cochlear.com.
5 Australian Association of the Deaf, 2003.
6 NDCS, 2003.
7 Gluyas, ‘Cochlear’.
8 Ibid.
9 OECD, 2002.
10 www.lieffca
asser.com/cochlear.htm.
11 Quoted in ibid.
12 Neurotech Business Report, August 2003.
13 MAT, accessed on www.cmaj.ca.
14 Herald-Sun, 26 March 2002.
15 Australian Financial Review, 20 August 2003.
16 www.healthyhearing.com.
17 Ibid. ; www.allhear.com.
18 B. Foley, 2004, ‘Cochlear needs a good doctor’, Australian
Financial Review, 4 Fe
uary, p. 21.
C-26
Case 2
The Australian retail wars:
Coles Myer and Woolworths battle for
and value
Mark Wickham Dallas Hanson
University of Tasmania University of Tasmania
Introduction
Throughout the 1990s, the chronic poor performance
of Australia’s largest ‘food’ and ‘general merchan-
dise’ retail firms, Coles Myer and Woolworths, led
analysts and investors alike to abandon their shares
in droves. Both chains were dogged by underperform-
ing divisions, global economic uncertainty, and a
lack of strategic vision perceived as endemic to the
sector. Since 2000, however, both companies have
managed to implement significant strategic changes
to their business operations, and by 2003 had once
again found favour with the investment community.
The strategic changes have included diversification
into new retailing sectors such as petrol and credit
cards, the restructuring of their supply chain logis-
tics, and the advancement of their information tech-
nology capabilities. Each move has been greeted with
increased earnings and the associated investor opti-
mism, although the question remains as to how Coles
Myer and Woolworths can continue to deliver the
outstanding results of 2003 in an uncertain economic
future.
The Australian ‘food’ and
‘general merchandise’
etail sectors, 1996–2002
Despite the global economic decline experienced since
the Asian financial crisis of 1997/98, and the economic
and social shocks of the World Trade Center attacks in
2001, the Australian retailing sector has experienced
obust year-on-year growth since 1995/96. Exhibit 1
indicates the robust nature of Australian retail spend-
ing during this period. The strength of Australia’s
etail spending has been attributed to relatively high
consumer and business confidence, relatively low offi-
cial interest rates and stable employment levels.1 The
food and general merchandise retail sectors have con-
tributed significantly to Australia’s retailing success
story, and closely reflect the success, and dominance,
of Coles Myer’s and Woolworths’
anding strategies
since 2000. Coles Myer’s and Woolworths’ domina-
tion of the food and general merchandise sectors is
eflected by their combined revenues, which in the
financial year ended 2003 accounted for close to 80
per cent of the sector’s total.2
Case 2 • The Australian retail wars: Coles Myer and Woolworths C-27
Exhibit 1 Australian retail sales figures, 1995/96–2001/02
Food
etailing
General
merchandise
Clothing
and soft
goods
etailing
Household
goods
etailing
Recreational
goods
etailing
Other
etailing
Hospitality
and services Total
$mn $mn $mn $mn $mn $mn $mn $mn
1995/96 57 996 12 315 8 882 12 591 7 623 12 307 25 002 135 885
1996/97 58 406 12 241 8 758 13 795 7 251 12 742 23 603 136 411
1997/98 60 453 12 593 8 989 14 314 7 391 13 835 23 965 141 220
1998 /99 61 482 12 994 10 068 14 717 7 492 14 639 26 007 147 081
1999/00 62 218 13 768 10 781 17 344 7 612 15 863 27 363 154 884
2000 /01 62 004 13 140 10 213 17 972 7 310 17 020 27 563 155 222
2001/02 63 340 13 714 11 005 20 554 7 393 18 785 25 584 163 374
Source: Commsec.
The best of times: A tale of
two retailers
The Australian food retailing industry consists of
a virtual duopoly between Coles Myer and Wool-
worths. The combined sales of the two retail giants
exceed A$55 billion, and provide employment for
some 300 000 workers.3 The Coles Myer empire was
established in 1985 with Coles’ acquisition of Grace
Brothers, and by 2003 consisted of 14 distinct busi-
ness units spanning both the food and general mer-
chandise retailing sectors. In its food division are the
Coles Supermarket chain of stores, its Bi-Lo discount
supermarkets, and the Internet-based Coles Online
and Shopfast Online. In its general merchandise divi-
sion are the Myer’s Grace Brothers department store,
the Megamart chain of electrical and furniture retail-
ers, the Target department stores, Kmart’s cut-price
department store, the OfficeWorks chain and Ha
is
Technology. Recently, the company also launched its
Coles Express stores, which merchandise a limited
ange of grocery items from selected petrol stations
in Victoria.4
In 2003, the Woolworths retailing empire con-
sisted of three food and four general merchandise
usinesses. Woolworths’ food businesses included
their Woolworths and Safeway supermarkets, and the
BWS (Beer, Wines and Spirits) chain of liquor outlets.
Its general merchandise businesses include the Big W
chain of discount department stores, the Dick Smith
chain of electronic equipment stores, the Tandy chain
of electrical merchandise stores, and the Plus Petrol
service stations.5
Despite the fact that Coles Myer remains the coun-
try’s largest food retailer, its growth year on year lags
ehind that of Woolworths, which has delivered 22
per cent increases in its earnings for the period 2000
to 2002. Coles Myer, on the other hand, has achieved
growth rates that are commensurate with CPI increas-
es, and has tended to play ‘catch-up retailing’ on
everything from supply chain management to fuel dis-
counts. One strategy that Coles Myer uses that acts as
a real point of difference in the supermarket game is
its concentration on the development of house
ands
(that is, its Coles, Reliance and Farmland
ands).
Cu
ently, house
ands account for approximately
8 per cent of Coles Myer’s store-keeping units (SKUs),
with the company planning to increase these to 15
per cent over the next three years. Woolworths, on
the other hand, is concentrating on the promotion of
everyday low price (EDLP) points for well-established
national
ands, a strategy that it bo
owed heavi-
ly from the success of the Wal-Mart chain of stores
in the United States.6 By taking on the demonstra-
ly successful aspects of Wal-Mart’s EDLP strategy,
Woolworths has turned around its loss-making gen-
eral merchandise operations and has streaked ahead
of its major competitors.7 In particular, Woolworths’
EDLP has worked well in its Big W chain, where it has
C-28 Case 2 • The Australian retail wars: Coles Myer and Woolworths
proven to be a competitive advantage against Coles’
Kmart and Target divisions, which maintained a
‘high–low’ pricing strategy.8
A question of leadership
and strategy
Despite the multi-point competition that exists
etween the two companies, their leadership could
not be any more divergent. In September 2001, and
without any prior experience in the industry, John
Fletcher was appointed as the chief executive officer
of Australia’s largest retailer, Coles Myer Ltd. Before
his appointment at Coles Myer, Fletcher spent almost
his entire professional career at Brambles Industries,
a resource sector firm that supplied on- and off-site
logistics for mining companies operating in Austra-
lia.9 Early in his career, Fletcher was charged with
accounting responsibilities at Brambles, but his man-
agerial skills were soon recognised and developed by
the company, who promoted him to CEO in 1993. By
comparison, Roger Co
ett, the CEO of Woolworths
Ltd, has been involved in the Australian retail indus-
try for more than 30 years, initially working as a ser-
vice assistant for Grace Brothers in the 1960s, which,
ironically, became part of the Coles Myer empire in
1985. Co
ett has also been heavily involved with the
management of the Wal-Mart chain of supermarket
and general merchandise stores in the United States,
where he has attended annual general meetings and
other pivotal strategy meetings. It was from this inter-
action that Co
ett adopted the Australian version of
the EDLP strategy that has to date been highly valu-
able for the Woolworths business.10
Fletcher assumed the CEO position at Coles Myer
during a very interesting time for the company. Aside
from its supermarket division, which had experi-
enced strong growth since Dennis Eck took control
in the mid-1990s, the remainder of the group was
dogged by well-documented, and seemingly chronic,
underperformance. In addition, Fletcher’s a
ival was
met with a series of boardroom upheavals and the
culmination of years of shareholder discontent.11 The
eight years’ experience at the helm of one of Australia’s
largest resource companies between 1993 and 2001,
however, did little to prepare him for the tumultuous
period that he would endure at Coles Myer during
2002, a year that he was to describe as ‘as tough as
any year that I have had in my professional life’. At the
same time, Roger Co
ett was enjoying a third consec-
utive year-on-year profit growth of approximately 10
per cent, and had plans to acquire the Franklins’ chain
of supermarkets to further its growth ambitions. The
source of Woolworths’ much-heralded performance
has been attributed to Co
ett’s implementation of
a strategy named ‘Project Refresh’ in 1999. Project
Refresh sought to restructure the company’s supply
chain, and to introduce new technology and the new
EDLP structure to its supermarkets. Added to this
was its successful foray into the petrol-retailing sector
in 1997 (a strategy that drew no competitive response
from Coles Myer at the time), which resulted in Wool-
worths capturing valuable market share points from
Coles Supermarkets between 1999 and 2002. By the
end of 2002, the Australian food and general mer-
chandise retail sectors were valued at approximately
$75 billion, and Woolworths had managed to cap-
ture 40 per cent compared with Coles’ 36 per cent, a
fact reflected in Woolworths’ share price which had
grown from $4.20 in 1999 to $13 in 2002. Coles’
share price during the same period had fallen from
$9 to $6.
2003: The Coles Myer
empire strikes back
After indications that the Coles Myer empire might be
oken into its constituent ‘parts’ due to the chronic
underperformance of a number of its divisions,12 John
Fletcher instead announced a bold plan to confront
Woolworths head-on in the war for corporate
and
value in early 2003. The corporate
and ‘battles’ had
een comprehensively won by Woolworths between
1997 and 2002, with the company achieving 400 per
cent sales growth on their multi-point direct compe-
tition items during this time. Woolworths had also
managed to position itself as The Fresh Food People
during this period, a marketing triumph not matched
y the Coles Myer food retailers. In response to Coles
Myer’s relatively poor performance and its ‘second
mover’ status in the food and general merchandise
sectors, Fletcher promised his shareholders that by
Case 2 • The Australian retail wars: Coles Myer and Woolworths C-29
2007, Coles Myer would become the leaders of retail-
market innovation and value, and double the com-
pany’s profit levels achieved in 2003. The first
oad-
side in this ‘battle of the
ands’ was to occur early
in 2003 in the liquor segment of the food-retailing
sector.
In April 2003, Coles Myer announced that it had
acquired the Theo’s chain of ‘premium’ liquor out-
lets located in Sydney and Melbourne. Woolworths
had already been in control of the Cheaper Liquor
Company in various states, but had not been involved
with this premium end of the market. Almost imme-
diately, Woolworths undertook a similar acquisition
of the Dan Murphy’s franchise (for a reported $260
million), also located in Sydney and Melbourne.13 The
move almost immediately resulted in the reduction
of prices charged by both outlets. Coles Myer had
acquired Theo’s as a real point of difference between
the two companies’ offerings; however, Woolworths’
implementation of its EDLP strategy forced Coles
Myer to similarly cut its prices as a competitive neces-
sity. Woolworths’ ability to minimise its supply chain
costs (a benefit of the four-year-old Project Refresh
strategy) enabled the company to maintain greater
margins in this price war than Coles Myer could man-
age, a fact reflected in the two companies’ 2002/03
financial reports (see Exhibit 2 later in this case).
In May 2003, some six years after Woolworths’
initial foray into the retail petrol sector had seen it
capture 11 per cent of the market, Coles Myer agreed
to pay $94 million to Shell Petroleum for the right to
operate its own petrol discount chain in 584 of Shell’s
service stations. The alliance between the two compa-
nies was negotiated on the understanding that the
elationship would last for 20 years. Up until this
point, Coles Myer had undertaken a token competi-
tive response to Woolworths’ 1997 Plus Petrol scheme
y offering its customers discount vouchers to the
Mobil chain of petrol retailers. The problem with this
initial response was that, unlike Woolworths’ Plus
Petrol stations, which were located in close proximity
to its stores, the Coles–Mobil discount offer did not
allow the customer to ‘cash in’ on the value-adding
offer at the point of purchase. Of the company’s even-
tual strategic move into retail petrol, Fletcher stated:
‘Coles [does] not want a price war, but will react to
Woolworths’ pricing in this market.’14 In response to
this competitive action, Woolworths reversed its long-
unning ‘house-
and’ fuel strategy by unveiling an
equity joint venture with the Caltex franchise of petrol
etailers in August 2003 – a move that closely
mimicked Coles Myer’s alliance with Shell. The equi-
ty joint venture was the company’s response to the
Coles–Shell alliance, a move that the company had
widely criticised at its launch in July 2003.15 In line
with the announcement was a commitment by the
company to wind down its home
and Plus Petrol
service stations in favour of re-
anding them as
Caltex service stations.16 The deal with Caltex was to
add an additional 180 retail petrol outlets to Wool-
worths’ existing 287 Plus Petrol outlets. Essentially,
this move ensured that Woolworths would have 450
outlets in head-to-head competition with Coles Myer’s
580 outlets nation-wide.17 Roger Co
ett claimed that
the joint venture with Caltex had nothing to do with
Coles Myer’s alliance with Shell, instead stating that
the strategy overcame the difficulties the company
was having in finding new retail outlet sites for its
growing Plus Petrol division.18
The new financial year 2003/04 began with two
important announcements from Fletcher. The first
concerned a Coles Myer alliance with the Nation-
al Australia Bank to revamp the company’s long-
unning Fly Buys reward program. The second was
the introduction of a major cost-cutting strategy that
mi
ored Woolworths’ Project Refresh launched some
four years earlier. In July 2003, Coles Myer and the
National Australia Bank announced that they had
signed an agreement to revamp the Fly Buys loyalty
program to include a credit card facility. Jon Wood,
a senior Coles Myer executive, said that the enhance-
ment of the Fly Buys card was an important part of
Coles Myer’s strategy to provide a comprehensive and
valuable offer for all of its customers, especially given
the announcement that the company’s famous share-
holder discount card was to be discontinued. Of the
Fly Buys strategy, Wood stated: ‘Fly Buys is Austra-
lia’s largest loyalty program and we are moving to
put more value into the program for our customers.
Together with our partners at the National [Australia
Bank], we will be revamping the program to offer
more points, better rewards and other benefits.’19
The replacement card was to be known as the Source
card, and included a credit facility that represented
C-30 Case 2 • The Australian retail wars: Coles Myer and Woolworths
Exhibit 2 Financial results for Woolworths Limited and Coles Myer Limited, 2001/02 and 2002/03
Woolworths financials 28 Coles Myer financials29
(A$ million) 2001/02 2002/03 2001/02 2002/03
Sales 25 239.4 26 321.4 25 688.7 27 016.6
Pre-tax profit 782.2 (3%) 906.0 (3.4%) 491.0 (1.9%) 617.2 (2.3%)
Net profit 564.4 (2.2%) 650.6 (2.5%) 353.8 (1.4%) 429.5 (1.6%)
EPS 50.2 58.1 26.1 32.2
Dividend 15.0 18.0 25.5 26.0
Sources: Commsec Securities Home Page, www.commsec.com.au.
Coles Myer’s initial foray into Australia’s $100 bil-
lion Capital Card Market (that is, credit cards). Coles
Myer already operates a loyalty card program that con-
sists of 1.7 million Coles Myer Card holders (a chain-
specific line of credit) but did not have the ‘universal
usage capability’. The company’s new Source credit
card meant that Coles Myer could differentiate itself
from Woolworths by offering a full credit card capa-
ility alongside a long-standing and valued rewards
program and a private label store credit card.
Fletcher’s second announcement was his inten-
tion to emulate the success of Woolworths’ Project
Refresh, a plan that would entail major cost-cutting
strategies within the company.20 Fletcher planned to
save up to $1 billion by making its 65 000 suppliers
shoulder more of its supply chain costs in a program
designed to close the performance gap with Wool-
worths. Fletcher intended to change the way Coles
Myer buys its $18 billion of merchandise by cutting
its stock on hand and by forcing its suppliers to move
to a just-in-time approach to delivery. The company
flagged to its employees that it intends to cut the num-
er of its distribution centres from 41 to 24, and will
use improved technology to reduce costs and stream-
line deliveries to stores.21 Also part of this strategy
are plans to pressure its suppliers to adopt the same
IT systems that it uses in its warehouses and stores so
that it can build a more efficient e-trading platform.
Fletcher said that the company would invest between
$800 million and $900 million over the next five years
as part of this cost-cutting strategy that is expected to
deliver benefits of $425 million a year from 2007/08
onwards.22
By August 2003, there was already some evidence
that Coles Myer’s strategies were bearing fruit for
Fletcher’s shareholders. Sales in the group lifted by
a substantial 6.1 per cent at $27 billion, marginally
ahead of Woolworths’ $26.3 billion. The stock mar-
ket also responded well to Fletcher’s performance,
with Coles Myer shares rising 29 per cent during the
year, while Woolworths’ shares remained steady.23
Still a concern for the company was the food and
liquor sales, which grew by only 1.5 per cent, as
opposed to Woolworths’ 5.4 per cent.24 The statistics
served to underline the competitive advantage that
Woolworths had over the Coles Myer empire. Exhibit
2 presents the economic results for both firms dur-
ing the 2002/03 financial year. Despite the appar-
ent success of Coles Myer’s strategies in address-
ing its performance gap with Woolworths, Co
ett
was confident that Woolworths would continue to
achieve its recent double-digit profit growth. Indeed,
despite Coles Myer’s seemingly effective strategis-
ing, the financial year ended 2003 witnessed Wool-
worths notching up its best annual result in five
years. The company’s 16.5 per cent increase in profit
to $610 million was powered by higher margins in
its supermarket, liquor, petrol and general merchan-
dise operations.25 Co
ett also revealed that its cost
savings program, Project Refresh, had delivered the
promised savings to the company of some $1.7 billion
over the previous four years.26 Co
ett announced
that the company would maintain its profit growth
forecasts of between 10 and 15 per cent for the
2003/04 financial year, despite the uncertain outlook
for the food and liquor divisions, and the increased
competition from Coles and the German outfit,
Aldi.27 Co
ett stated that Woolworths’ strategy to
emain differentiated from Coles Myer while adding
greater value to their customers’ shopping experience
Case 2 • The Australian retail wars: Coles Myer and Woolworths C-31
was of utmost importance in Australia’s retailing
industry, and flagged a possible diversification into
the pharmaceutical market. In November 2003,
Co
ett solidified this by announcing that Wool-
worths planned to open a number of fully stocked
pharmacies and ‘health and beauty stores’ in its super-
market chain.30
The challenge for both Fletcher and Co
ett in
2004 centres on their ability to continue to add value
to their customers’ shopping experience while simul-
taneously maintaining shareholder returns. The ques-
tion, therefore, is how the two men might best strat-
egise for this result given the increasing market power
of the two dominant firms, and the multi-point com-
petitiveness inherent to their operations.
Notes
1 L. Schmidt and S. Lloyd, 2003, ‘Monsters of retail’, Business
Review Weekly, 13–19 November, p. 38.
2 Ibid.
3 P. Switzer, 2003, ‘Call for codes to cu
growth of retail giants’,
The Australian, 2 September, p. 29.
4 ‘Our
ands’, 2003, Coles Myer Home Page, 10 November,
www.coles.com.au.
5 ‘Our
ands’, 2003, Woolworths Home Page, 10 November,
www.woolworths.com.au.
6 ‘Woolies and Coles both forging ahead’, Australian Financial
Review, 15 August, p. 76.
7 S. Mitchell, 2003, ‘Roger Co
ett’s other BIG W’, BOSS
Magazine, October.
8 N. Shoe
idge, 2003, ‘Woolies stands by its low-price strategy’,
Australian Financial Review, 18 August, p. 45.
9 S. Evans, 2003, ‘Coles targets $1 billion squeeze on suppliers’,
Australian Financial Review, September, p. 1.
10 Mitchell, ’Roger Co
ett’s other Big W’.
11 S. Long, 2002, ‘Mayhem in the Coles-Myer boardroom’, ABC
PM, 10 September.
12 R. Gluyas, 2002, ‘Coles Myer
eak-up looms’, The Australian,
7 June, p. 19.
13 M. Westfield, 2003, ‘Woolies squeezes rivals, suppliers’, The
Australian, 25 March, p. 19.
14 K. Jiminez, 2003, ‘Coles in discount fuel link ’, The Australian,
28 May, p. 21.
15 G. Elliott, 2003, ‘Woolies ties up Caltex deal’, The Australian,
22 August, p. 17.
16 T. Hardcourt, 2003, ‘Woolies changes tack – and to Caltex’,
Australian Financial Review, 22 August, p. 56.
17 Elliott, ‘Woolies ties up Caltex deal’.
18 I. Howarth and S. Mitchell, 2003, ‘Co
ett defends petrol
strategy’, Australian Financial Review, 25 August, p. 14.
19 ‘Coles Myer and National increase Fly Buys commitment’,
2003, National Australia Bank Home Page, 1 July, 11 November,
www.national.com.au.
20 ‘Woolies and Coles both forging ahead’, p. 76.
21 CNN News Service, 2003, ‘Australia’s biggest retailer Coles
Myer says a transformation of its supply chain will help its
profit goal of Aust. $800 million ($536 million) by 2006’,
25 September.
22 Ibid.
23 S. Mitchell, 2003, ‘Woolies vows to beat Coles threat’,
Australian Financial Review, 26 August, p. 1.
24 S. Evans, 2003, ‘Sales rise lifts Coles profit’, Australian Financial
Review, 15 August, p. 55.
25 Mitchell, ‘Woolies vows to beat Coles threat’, p. 1.
26 Ibid.
27 Ibid.
28 Woolworths Home Page, www.woolworths.com.au.
29 ‘Corporate Report 2002–03’, 2003, Coles Myer Home Page,
10 November, http:
corporate.colesmyer.com.au.
30 Schmidt and Lloyd, ‘Monsters of retail’, p. 38.
C-32
Case 3
eBay.com*:
Profitably managing growth from
start-up to 2000
Dale Pudney Marius van der Merwe Gary J. Stockport
University of Cape Town University of Cape Town University of Western Australia
* This case study was written by Dale Pudney and Marius van der Merwe, MBA students at the University of Cape Town, under the supervision of
Professor Gary J. Stockport, Graduate School of Management, University of Western Australia. It is intended to be used as the basis for class discussion
ather than to illustrate either effective or ineffective handling of a management situation.
This case was compiled from published sources.
© 2001 G. J. Stockport, University of Western Australia, Perth, Australia.
Introduction
It was 21 November 2000, and Meg Whitman was
considering the events of the last few days. As the
chief executive officer (CEO), she had led eBay.com
to its position as the world’s largest person-to-person
(P2P) trading community, but the share price had just
fallen 20 per cent to US$34.75 when eBay’s share was
downgraded from a ‘buy’ to a ‘neutral’ by Lehman
Brothers, a global investment bank, because of con-
cerns over eBay’s aggressive sales forecasts. The pre-
vious day, eBay had announced the launch of a new
product, application programming interface software
that would enable other web companies to display
eBay auctions on their sites.
The company had experienced explosive growth
from start-up when the founder and cu
ent chair-
man, Pie
e Omidyar, launched eBay in September
1995. While most e-commerce companies were mak-
ing significant losses by spending aggressively to build
their customer and revenue bases, eBay had remained
profitable since the beginning. In the three-month
period to September 2000, US$1.4 billion worth of
goods were transacted on eBay, with items listed in
more than 4320 categories. The company had 18.9
million registered users at the end of the period and
had captured over 80 per cent of the on-line auction
market with its closest competitors being Yahoo! and
Amazon.com.
Background to eBay
Pie
e Omidya
Pie
e Omidyar was born in Paris, France in 1967 and
moved to Washington, DC in the United States with
his parents at the age of six. From an early age he was
interested in computers and he wrote a program to
print catalogue cards for the school li
ary at the age
of 14. In 1988, he graduated with a Bachelor’s degree
in Computer Science from Tufts University. He ini-
tially worked as a developer of consumer application
Case 3 • eBay.com C-33
software such as MacDraw, for Claris, a software
subsidiary of Apple Computer. In 1991, he was one of
the founders of Ink Development, which later became
eShop, an early e-commerce site that was bought by
Microsoft in 1996.
Person-to-person (P2P) trading
prior to 1995
In traditional P2P trading forums, it is sometimes dif-
ficult for buyers to find pricing benchmarks to ensure
that the prices that they pay co
espond to the proper
value of the item. It was estimated that in 1995,
US$100 billion was traded annually in the following
forums:
• Newspaper classifieds: Users listed items that
were for sale or wanted, normally in locally
distributed newspapers. The classifieds
typically generated more than 50 per cent of
local newspapers’ revenues from listing fees.
The buyers usually inspected the items before
purchasing and may have collected and paid
for the items in person. As a consequence of the
proximity of buyers and sellers, the items could
have been larger items that were difficult to
transport over long distances.
• Flea markets and garage sales: Sellers stocked
items for sale either at their homes or at
organised markets. Buyers were typically
looking for bargains or interesting artefacts. The
uyers were able to inspect the items and needed
to pay for them before they could collect.
• Auction houses: Sellers took items that were
for sale to auction houses where buyers could
inspect them before the auction. Buyers needed
to pay a registration fee in order to bid and were
equired to be at the auction or have a proxy
idder. The highest bidder won the auction and
normally paid the auction house. The auction
house typically deducted a percentage of the sale
price and paid the balance to the seller.
The opportunity
In the early 1990s, Silicon Valley was quickly turning
its attention away from electronics manufacturers
towards new Internet-based start-ups that ma
ied
existing technology to new business models. Internet
usage growth and the provision of the infrastructure
equired to ensure acceptable data transmission speeds
were, however, uncertain. Analysts were also unsure
whether people would purchase goods of value from
distant strangers without seeing them beforehand.
Omidyar was writing code for communications-
software maker General Magic in 1995 when he
started to think about the possibility of on-line
auctions. He said the following about his idea:
I had been thinking about how to create an
effi cient marketplace – a level playing field, where
everyone had access to the same information and
could compete on the same terms as everyone else.
Not just a site where big corporations sold stuff
to consumers and bombarded them with ads, but
ather one where people ‘traded’ with each other
… I thought, if you could
ing enough people
together and let them pay whatever they thought
something was worth … real values could be
ealised and it could ultimately be a fairer system
– a win-win for buyers and sellers.1
Start-up in 1995
eBay (then AuctionWeb) was launched on Labour
Day, 1 September 1995, using a website that was
hosted by Omidyar’s US$30 per month Internet ser-
vice provider (ISP). The site was located at www.ebay.
com. The company operated from Omidyar’s apart-
ment with only the website, a filing cabinet, an old
school desk and a laptop computer. The site was not
much more than a simple marketplace where sellers
listed items and buyers bid for them. Omidyar made
no guarantees about the goods being sold, took no
esponsibility and settled no disputes. There were no
fees, no registration, no search engine and, for the
first month, no customers.
Omidyar’s only attempt at marketing was to list
eBay on the National Center for Supercomputing
Applications’ What’s Cool site. Despite this, so many
people visited the site that by Fe
uary 1996 Omidyar
had to institute a fee of 10 cents per listing to recoup
the ISP costs which by then had risen to US$250 per
month. By the end of March 1996, eBay showed a
profit. Omidyar had kept his day job at General
Magic, but the traffic to the site became so intense
that he had to concentrate on eBay full-time and the
C-34 Case 3 • eBay.com
ISP asked him to take the site elsewhere. He there-
fore bought his own web server and installed it in his
apartment.
Omidyar developed software that was capable
of supporting a robust scalable website and transac-
tion processing system to provide real-time reporting
on the cu
ent auctions. The system was scalable to
educe the initial investment but enabled expansions
when an increasing number of auctions demanded it.
By July 1996, Omidyar needed to move the
operation to a one-room office and hire a part-time
employee. The risks that the business faced at that
stage were substantial and with ba
iers to entry
eing low there was nothing to stop the large Internet
players such as America Online (AOL) (ISP and Inter-
net portal), Amazon.com (on-line book retailer) and
Yahoo! (search engine and Internet portal) from
stealing the opportunity. As the business was based
on collectors’ items, changes in the cu
ent fads could
have affected the revenues significantly. At one stage,
trading of Beanie Babies generated 7 per cent of eBay’s
evenues.
The business concept
Omidyar asked one of his friends, Jeff Skoll, to join the
company as its first president in August 1996 and his
ole was to turn the concept into a business. He had
a Master’s in Business Administration (MBA) degree
Exhibit 1 Quarterly financial results and statistics
1998 1999 2000
Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3
Financial data
Revenue
(’000) 13 998 19 480 21 731 30 930 42 801 49 479 58 525 73 919 85 753 97 399 113 377
Gross profit
(’000) 16 194 17 364 24 980 34 824 38 534 41 444 52 334 62 481 73 756 89 465
Gross margin
(%) 83.1 79.9 80.8 81.4 77.9 70.8 72.9 75.7 78.9
Operating
expenses (’000) 11 996 15 504 21 365 27 063 43 166 46 478 51 883 62 029 65 026 75 149
Net income
(’000) 2 279 461 2 639 3 765 816 1 186 4 895 6 288 11 590 15 211
Net profitability
(’000) 14.0 2.1 8.5 8.8 1.6 2.0 6.6 7.3 11.9 13.4
Registered users
(mn) 0.85 1.3 2.2 3.8 5.6 7.7 10.0 12.6 15.8 18.9
No. of auctions
(mn) 6.6 9.2 13.6 22.9 29.3 36.2 41.0 53.6 62.5 68.5
Growth (%)
Revenue (per
quarter) 39 12 42 38 16 18 26 16 14 16
Net income –83 472 43 –78 45 313 28 84 31
Registered users 53 69 73 47 38 30 26 25 20
No. of auctions 39 48 68 28 24 13 31 17 10
Auctions/
egistered user 7.1 6.2 6.0 5.2 4.7 4.1 4.3 4.0 3.6
Revenue/auction 2.95 2.36 2.27 1.87 1.69 1.62 1.80 1.60 1.56 1.66
Notes: All figures in US dollars. Source: eBay financial statements.
The registered users figures include everyone who had ever registered on the site and does not reflect cu
ently active users.
Growth figures are growth per quarter.
Revenue figures exclude refunds to sellers due to site outages.
Case 3 • eBay.com C-35
from Stanford University and had wide experience in
managing distribution channels of on-line news infor-
mation, computer consulting and computer rentals.
The business concept was to provide P2P auctions
on the Internet. Using the Internet, buyers and sellers
could access a larger market, which was important for
those collectors who could not find people with simi-
lar interests in their areas. By providing a marketplace
for buyers and sellers to trade their collectibles on the
Internet in an auction format, the buyers set the price
for items based on demand. When more potential
uyers bid on the items, sellers received higher prices.
As the buyers and sellers may be from different parts
of the United States and even the world, the items that
were sold were typically collectibles that were easy to
deliver long distances.
The eBay process was simple and easy to under-
stand. Sellers could list items for sale and pay a small
listing fee, which depended on where and how the
listing was presented and whether the seller required
a reserve price. The seller chose the auction duration
during which buyers could bid for the item. At the
end of the auction, eBay notified the seller and the
winning bidder, following which they made their own
a
angements for payment and delivery of the goods.
The seller was also charged a percentage of the final
value of the transaction. Over time, eBay added ser-
vices to this simple model to improve the user experi-
ence and thereby increase user loyalty and retention.
eBay has been profitable from start-up and although
its business was seasonal with volatile revenues, the
company had maintained high gross margins of about
70–80 per cent (see Exhibit 1). The only costs of goods
sold were computing infrastructure and customer ser-
vice expenses. eBay’s business model did not require
it to keep any inventory, establish an extensive distri-
ution network or have a large staff complement. Its
product range was also determined by the size of its
community and their listings and not by eBay’s prod-
uct development staff.
The listing fees and final value fees charged by
eBay are shown in Exhibits 2 and 3. For example, if
a seller listed a collection of rare stamps on eBay and
the maximum bid is US$24, they would have paid a
50 cent insertion fee when they listed the item, assum-
ing that the listing was not emphasised in any way.
They would also have paid 5 per cent of the final sale
price if the item was sold. eBay would have received
Exhibit 2 Fee to place an item listing
Opening value or reserve price Insertion fee
$0.01 – $9.99 $0.25
$10.00 – $24.99 $0.50
$25.00 – $49.99 $1.00
$50.00 and up $2.00
Real estate and automotive categories $50.00
Reserve price less than $25.00 $0.50
Reserve price of $25.00 or more $1.00
Notes: Source: www.eBay.com, November 2000.
1 All prices in US dollars.
2 Additional fees are charged for enhancing the listing in any way.
Exhibit 3 Additional fee if the item sells
Closing value Final value fee
$0 – $25.00 5% of the closing value
$25.01 – $1000 5% of the initial $25.00 ($1.25), plus 2.5% of the remaining closing balance
Over $1000 5% of the initial $25.00 ($1.25), plus 2.5% of the initial $25 – $1000 ($24.38),
plus 1.25% of the remaining closing value balance
Notes: Source: www.eBay.com, November 2000.
1 All prices in US dollars.
2 There is no final value fee for the real estate and automotive categories.
3 Sellers may have the final value fee refunded if the high bidder does not pay.
C-36 Case 3 • eBay.com
US$1.60 for the listing if the auction closed. If the
seller had a reserve price of US$24.50 on the item, the
auction would not have closed, so eBay would have
eceived the insertion fee and a 50 cent fee for the
eserve price which was only payable if the item did
not sell.
Building the team
In June 1997, Omidyar and Skoll realised that they
would need capital and management expertise if eBay
was to realise its full potential. They approached
venture capitalists Benchmark Capital who invested
US$5 million for shares and wa
ants worth 22 per
cent of the company. Bob Kagle, a partner at Bench-
mark Capital, became a board member of eBay.
This money was never used, but the agreement gave
them access to Benchmark’s network of potential
CEOs, marketing gurus, consultants and bankers.
eBay needed this to help them build the business and
ecruit talented management. One of the first mem-
ers of the management team was Gary Bengier,
who was hired in November 1997 as the chief finan-
cial officer (CFO). He was responsible for develop-
ing the financial strategy and vision of the company
and maintaining a corporate culture of financial dis-
cipline and prudence, and for equipping eBay for an
eventual public offering of its shares.
Benchmark persuaded Meg Whitman to leave her
job as general manager of Has
o’s pre-school divi-
sion to become president and CEO of eBay. She was
a strong and decisive executive without the need-to-
dominate personality, which meant that there was a
good fit with eBay’s existing culture of being open
to the voices of customers and employees. Whitman
was impressed by the fact that eBay was doing some-
thing that could not be done effectively off-line and
y the emotional connection between the eBay users
and the service. Whitman
ought global marketing
and
and management experience with her when she
joined in Fe
uary 1998. Her previous work included
eing a vice president at Bain & Company and devel-
oping Stride Rite’s Internet strategy. She had an MBA
from Harvard Business School and a BA in Econom-
ics from Princeton.
Whitman recognised the need for other advis-
ers on the board who understood the challenges of
expanding into new markets and could provide advice
and feedback. Again, Benchmark was instrumental
in finding people such as Howard Schultz, chairman
and CEO of Sta
ucks, and Scott Cook, chairman of
Intuit. Whitman also went on to build her manage-
ment team, and details of the other top-level manage-
ment at eBay are given in Exhibit 4.
Building the community of
users
Many of eBay’s early customers were the result of
efe
als. eBay’s loyal customers performed the mar-
keting and sales function through word of mouth to
ing new customers to the community. eBay under-
took limited marketing but had entered into cross-
promotional agreements with the following:
• Banner advertisement on web portals such as
Netscape, Excite and Yahoo!.
• America Online (AOL) – provided an auction
service for AOL’s classified section which gave
eBay access to AOL’s more than 10 million users.
• ZAuction, a vendor-sourced auction site, which
was a leading provider of computer products,
electronic equipment and other
and name
consumer goods.
Omidyar created a platform where ‘anybody could
sell anything’ and did not interfere in the user trans-
actions. Most of eBay’s sellers were serious collectors
and small traders who used eBay as their storefront to
access a large market across the United States and the
world. eBay provided a facility whereby users could
interact with each other through the use of discussion
oards and later through a chat room called the eBay
Café. The eBay Café was similar to a traditional cof-
fee shop where users could relax, catch up on news
and hearsay, and exchange information. It
ought
users back to the site every day and they sometimes
communicated directly with each other. One frequent
user of the eBay Café described it as follows:
At the eBay Café you will meet a bunch of caring
and friendly folks talking, helping, laughing, and
at times even complaining about varied subjects. I
have found and met some great folks here. If you
ever need help with almost ANYTHING, if you
have some tips, tricks or a good story or two to
share … the Café is the place.2
Case 3 • eBay.com C-37
When eBay tried to impose changes on users, such
as pricing changes, the users expressed their disap-
pointment through these discussion forums. eBay
trusted its users’ suggestions for improving the site,
and by giving its customers what they wanted, eBay
was improving both customer retention and loyal-
ty. One analyst commented that eBay’s community
was critical for attracting and retaining buyers and
sellers:
eBay has found a natural feedback loop where
creating a critical mass of bidders increases the
price obtained by sellers, which increases the
number of sellers, which attracts more bidders, et
cetera.3
Initially, there was no way to ensure that what
was being bought was real or that the goods would
e paid for. The anonymity and physical distance
etween buyers and sellers on the Internet encour-
aged counterfeiting and fraud. In message-board post-
ings to Omidyar, the eBay users suggested that he set
up a system for buyers and sellers to rate each other.
This became known as the Feedback Forum and was
a peer-review reporting system. Buyers and sellers
ate each other and comment on how their business
Exhibit 4 Summary of eBay management at November 2000
Pie
e Omidyar (33), founder and chairman, oversees strategic direction and growth, model and site development, and community
advocacy. He has a BS in Computer Science from Tufts University. His previous jobs include founder, Ink Development Corp.,
developer of consumer applications for Claris, a subsidiary of Apple Computer, and General Magic.
Meg Whitman (43), president and CEO, is responsible for building a successful business while delivering on customer needs and
expectations. Her focus is on the user experience, creating a fun, efficient and safe forum for on-line person-to-person trading.
She develops the work ethic and culture of eBay as a fun, open and trusting environment and keeps the organisation focused
on the big picture objectives and key priorities. She has an MBA from Harvard and a BA in Economics from Princeton. Previous
jobs include general manager for Has
o Inc.’s pre-school division, global marketing of Playskool and Mr. Potato Head
ands;
president and CEO of Florists Transworld Delivery; president of Stride Rite and executive vice president at Keds Division; senior
vice president of marketing for the Walt Disney Company’s consumer products; vice president at Bain & Company; and
and
manager at Procter & Gamble.
Gary Bengier (45), chief financial officer, is responsible for developing the financial strategy and vision as well as maintaining a
corporate culture of financial discipline and prudence for eBay. He has an MBA from Harvard and a BBA in Computer Science
and Operations Research, Kent State University. Previous jobs include CFO, Vxtreme, financial officer at Compass Design
Automation, and senior financial posts at Kenetech Corp. and Qume Corp.
Brian Swette (45), chief operating officer, helps to build the eBay community as well as creating an environment for trade by
esponding to the community and introducing new categories. He has a BA in Economics from Arizona State University. His
previous jobs include executive vice president and chief marketing officer, Pepsi-Cola Company, responsible for worldwide
marketing and advertising efforts for Pepsi, and
and manager at Procter & Gamble.
Maynard We
(43), president, eBay Technologies, oversees eBay’s technology strategies, engineering, architecture and site
operations. He has a BA from Florida Atlantic University. Previous jobs include senior vice president and CIO at Gateway, Inc.
Mike Wilson, chief scientist, is responsible for site architecture. Previous jobs include chief architect and project manager at Ink
Development Corp.
Jeff Skoll (35), vice president, strategic planning and analysis, is responsible for competitive analysis, new business planning and
incubation, as well as overall strategic direction. He has an MBA from Stanford University and a BS in Electrical Engineering from
the University of Toronto. His previous jobs include manager of the distribution channels of on-line news information for Knight-
Ridder Information and founder of Skoll Engineering.
Steve Westly, senior vice president, international and general manager of premium services, is responsible for business development,
corporate communications, mergers, acquisitions and partnerships. He has an MBA and a BA from Stanford University. Previous
jobs include vice president, WhoWhere?
Jeff Jordan, vice president and general manager of regionals and services, oversees eBay’s regional business and end-to-end services
which has the goal of making it easier to trade on the site. He has an MBA from Stanford University and a BA in Political Science
and Psychology from Amherst College. Previous jobs include president of Reel.com.
Source: www.eBay.com, November 2000.
C-38 Case 3 • eBay.com
together went. When launching this, Omidyar laid
out eBay’s guiding philosophy:
eBay wouldn’t exist if it wasn’t for our community
… At eBay, our customer experience is based on
how our customers deal with our other customers.
They rarely deal directly with the company. So
how do you control the customer-to-customer
experience? We can’t control how one person
treats another … The only thing we can do is
to influence customer behaviour by encouraging
them to adopt certain values. And those values are
to assume that people are basically good, to give
people the benefit of the doubt, and to treat people
with respect.4
Company values
Omidyar hoped that his auction community would
eflect the values of honesty, openness, equality,
empowerment, trust, mutual respect and mutual
esponsibility. eBay’s Mission Statement says:
eBay was founded with the belief that people are
honest and trustworthy. We believe that each
of our customers, whether a buyer or a seller, is
an individual who deserves to be treated with
espect.5
To instil these values into the community, Omidyar
maintained that they had to be em
aced by the com-
pany and its employees because everything that the
company did, such as the website, press releases and
strategic partnerships, indirectly influenced the com-
munity. When Meg Whitman joined eBay, her chal-
lenge was to develop the work ethic and culture of
eBay as a fun, open and trusting environment and
keep the organisation focused on the big-picture
objectives and key priorities. eBay had a ‘no penal-
ty’ operating culture where there were no penalties
for making mistakes or being on the wrong side of
an issue which could muzzle employees or suppress
new ideas. Whitman met with all new recruits and
other staff on Mondays to tell them about the culture
and make sure that they knew what was expected of
them. eBay also
ought some of its customers to the
head offices regularly to talk to employees about their
experiences.
Coping with customer service
By the end of 1997, more than 3 million items worth
US$94 million had been sold on eBay, resulting in total
evenues of US$5.7 million and US$900 000 profit.
eBay had achieved these results with only 76 employ-
ees. The average value of each item sold was about
US$31, with 6 per cent of this going to eBay’s reve-
nues. The number of auctions per day had increased
from 1500 at the end of 1996 to about 150 000 at the
end of 1997. As the number of users increased, eBay
started to find it difficult to provide customer service
to the members of the community. Simple questions
such as ‘How do I list an item?’ or ‘How do I buy
an item?’ were answered using a self-service on-line
help function which had prominent links from the
eBay home page. Other queries were more difficult
and needed knowledgeable users or service agents to
answer. Users placed queries on bulletin boards dedi-
cated to the discussion of specific issues of the busi-
ness, such as help, registration, listing and shipping,
which were sometimes answered by other members
of the community and at other times by eBay. As part
of building their on-line community, eBay had con-
tracted active, enthusiastic and knowledgeable users
of the site to respond to requests for help. These inde-
pendent contractors worked from home to answer
emailed questions and those that were posted on the
ulletin boards. eBay also decided to employ and
supervise the customer service representatives directly
to better understand customers’ problems and control
the quality of customer service. Nevertheless, not all
of the users were satisfied with the customer service
that eBay offered.
Building trust and loyalty
To work with the community to improve the services
that were offered and develop trust and loyalty, eBay
launched SafeHa
or in Fe
uary 1998. SafeHa
or
included the following elements:
• Verified User Program: eBay verified user
information during registration and had
partnered with Equifax to provide a higher level
of verification if required.
• Feedback Forum: buyers and sellers rated their
experience with each other as positive, neutral
or negative. The user profile followed the user
Case 3 • eBay.com C-39
everywhere on eBay. Estimates suggested that
users were willing to pay up to 30 per cent more
in certain markets for items sold by someone
with a high feedback rating.
• Insurance: Lloyds of London provided insurance
for users with a net non-negative feedback rating
on their auctions up to US$200 subject to an
excess of US$25.
• Shill Bidding Policy: suspended users who bid
on an item with the intent to drive up the price
without buying it.
• Non-paying Bidder Policy: non-paying bidders
were warned and then suspended.
eBay’s policies and service had helped them to
develop a loyal community of buyers and sellers. One
user described the eBay experience as follows.
I visit eBay to transact auction business because
it has a superior universe of sellers and bidders
and quality and quantity of listings. The people
visiting eBay are generally loyalists, while the
average person visiting Amazon.com is there to
uy a book, but I’d hazard a guess that he isn’t
going to stick around for an hour.6
eBay also provided facilities that users could per-
sonalise, such as the ‘My eBay’ and ‘About Me’ sec-
tions. ‘My eBay’ was a tool that users could person-
alise to keep track of their favourite categories, view
items they were selling or bidding on, check their
ecent account balance and feedback, or update their
contact information. An ‘About Me’ page could be set
up by users to tell other eBay users about themselves
and their feedback rating, which helped to improve
the credibility and trust among the users. Not all
users were happy with the services, however, and this
can be seen in the following message taken from the
discussion boards.
Am I the only one that thinks the ‘Watch This
Item’ link in auctions is driving sellers to the
poorhouse? Geez … Bidding is bad enough without
encouraging bidders not to bid.7
Brand building
In a company that had always disdained advertis-
ing, Whitman employed Pepsi’s head of marketing,
Brian Swette, as senior vice president of marketing
in October 1998 to oversee international expansion,
marketing and customer support efforts for eBay. He
had worldwide
and-building experience with both
the Pepsi-Cola Company and Procter & Gamble. His
focus was on increasing
and awareness both nation-
ally and internationally and on making eBay one of
the most accessible and successful e-commerce sites
on the Internet.
eBay found that small traders and serious collec-
tors were the most active site users. Many of the trad-
ers were small businesses who had used eBay as their
storefront or as a supplement to their existing stores.
These users contributed 80 per cent of the total reve-
nues but only constituted 20 per cent of the registered
users. As a result, eBay decided to reduce its presence
in
oadband portals and concentrate its marketing
and
and-building resources on these users. This
included advertising in many niche publications read
y serious collectors and exhibiting at collectors’ trade
shows. eBay subsequently launched its first national
print and
oadcast advertising campaign in October
1998 in order to increase awareness of the compa-
ny’s
and with The Acme Idea Company, a strategic
and creative consultancy committed exclusively to the
uilding of
ands. The national radio campaign was
aired on more than 12 000 stations across the Unit-
ed States for five weeks. The print campaign includ-
ed adverts in Parade, People, Entertainment Weekly,
Newsweek and Sports Illustrated and over 70 distinct
collecting publications, reaching people who had an
active passion – for example, for coins, stamps, dolls
or photography.
eBay also instituted the PowerSellers program to
enefit the bulk sellers. The program was designed to
meet the needs of users who were running a full-time
on-line trading business on eBay with benefits and
privileges designed to make selling easier and more
profitable. There were three different program levels,
– namely: Bronze, Silver and Gold – which were
achieved with minimum monthly sales on eBay of
US$2000, US$10 000 and US$25 000, respectively.
eBay offered these users additional services depend-
ing upon the level that they had achieved. These ben-
efits included the PowerSellers logo to distinguish
users on the site, dedicated email customer support,
participation in the eBay Success Stories program (to
e profiled for use in press-related events), invitations
C-40 Case 3 • eBay.com
to special events, specialist customer phone support,
dedicated account managers and support hotlines.
A member of the PowerSellers customer-service
program complained that her email and phone calls
egularly went unanswered: ‘I feel like I’m in a co-
dependent relationship. I write to them, I get no
esponse. I e-mail them, nothing. I’m being abused.’8
On 25 March 1999, eBay and AOL expanded
their existing relationship and announced a four-year
strategic alliance to expand person-to-person com-
merce and community building on AOL and its fam-
ily of
ands. The agreement gave eBay prominent
presence across the domestic and international AOL
family of
ands, including AOL, AOL.com, Com-
puServe, Netscape’s Netcenter, ICQ and Digital City.
According to the agreement, eBay was to pay AOL
US$75 million over the term of the agreement and
AOL was entitled to all advertising revenues gener-
ated by the co-
anded sites and to act as the exclusive
third-party advertising sales force for advertising sold
on eBay’s website. They created customised and co-
anded sites for AOL’s multiple
ands that included
comprehensive listings, feedback and ratings, message
oards and select content from eBay. eBay was to pro-
mote AOL as its prefe
ed Internet ISP and enable its
users to download ICQ (communication software that
enables chat, voice, message board, data conferenc-
ing, file transfer or games on the Internet) on its web-
site as well as to integrate AOL’s ‘My News’ feature
into its ‘My eBay’ feature. AOL, in return, undertook
to promote eBay to its member community of over 16
million. As a part of the agreement, the companies
were to work together to facilitate eBay’s expansion
into international markets, and AOL helped to launch
eBay’s expansion into regional markets through the
promotion of eBay on Digital City, a complete guide
to activities in the US’s largest cities.
The challenges of growth
Exhibit 1 contains eBay’s key quarterly financial
esults from the beginning of 1998 to the third quar-
ter of 2000, indicating its growth and profitability
during this period. eBay never had any formal plan
to develop the business, but rather took advantage of
opportunities as they arose. Opportunistic behaviour
was bound by a clear goal to be ‘the world’s largest
P2P online auction company’ and a focused strategy
with five elements:
• strengthening the eBay
and
• expanding the user base
•
oadening the trading platform by increasing
product categories and promoting new ones
• fostering community affinity
• enhancing site features and functionality.
International expansion
While the Internet was available to users around the
world, trading goods across borders involved diffi-
culties such as cu
ency conversions, different duties,
taxes and regulations, as well as high delivery costs.
To build their user base and access the users in other
countries, eBay needed to open country-specific sites.
It started to expand into the international markets
early in 1999. The company identified the following
possible strategies to enter these new markets:
• building a new user community
• acquiring a company that was already in the
local trading market
• partnering with strong local companies.
eBay started its international expansion in the UK
and Canada (www.ca.ebay.com). eBay’s community
in the UK (www.ebay.co.uk) was built from the grass-
oots by local management with on-line marketing
and local events. eBay rolled this service out to Aus-
tralia (www.ebay.com.au), Japan (www.ebayjapan.
co.jp) and France (www.fr.ebay.com).
In March 1999, some German entrepreneurs cop-
ied eBay’s source code and set up a mi
or-image of
the eBay site under the name of Alando.de in Germa-
ny. The site quickly established itself as the leading
on-line trading company among Germany’s 10 mil-
lion Internet users and soon attracted eBay’s atten-
tion. When it acquired Alando on 22 June 1999, it
had 50 000 registered users and 80 000 items listed
in 500 categories. The site was later renamed www.
ebay.de, which gave German users access to eBay’s
worldwide community of active buyers and sellers.
eBay launched its local site in Australia in October
1999 in a joint venture with a leading Internet media
company in Australia, PBL Online. To promote the
launch of the website, eBay Australia waived all list-
ing fees for a limited period and this provided sell-
ers with an even greater reason to list their items on
Case 3 • eBay.com C-41
www.ebay.com.au. In Fe
uary 2000, eBay Japan
was launched as a joint venture with NEC. The deal
ought together eBay’s unrivalled trading presence
and NEC, one of the world’s most innovative technol-
ogy companies with a commanding presence in the
Japanese market. As part of the agreement, NEC took
an equity stake in eBay Japan and promoted the site
in many ways, including through its BIGLOBE ISP,
personal computer products and off-line marketing
campaigns. The international sites contain:
• country-specific categories and content,
eflecting popular local collectibles
• the ability to trade local items in the local
cu
ency with content in the local language
• access to a worldwide community of traders.
International sellers can list their item so that
it can be viewed from any eBay site, and buyers
can view items listed anywhere in the world,
with items denominated in the local cu
ency
and in US dollars
• local discussion boards that allow the country’s
community to get the most out of the website
and a country-specific chat room.
Amazon.com enters the
on-line auction market
New competitors in the on-line auction market were
surfacing every day, encouraged by the low ba
iers to
entry and eBay’s success. The first major competitor
was Onsale, which was already an established B2C
site. Yahoo!, Lycos, Excite, Microsoft’s MSN and
many smaller niche competitors followed, but all of
them found that attracting buyers and sellers was dif-
ficult. Exhibit 5 compares a few of the major on-line
auctions sites as at October 2000 by their inventory of
listed items, bidding activity, services and fees, design
and functionality, customer support and the commu-
nity.
In April 1999, Amazon.com launched its auction
site which was remarkably similar to eBay’s and made
it easy for buyers and sellers to move across to Ama-
zon. Amazon did not charge any fees for the first few
months and offered additional services such as cross-
promotion to relevant Amazon retail sites, credit card
payments and buyer guarantees by underwriting the
isks of a seller failing to send an item or where the
item is ‘materially different’ from the description.
Amazon achieved 100 000 auctions per day within a
few months, but the number of listings started to fall
when Amazon introduced charges. While the services
it offered were superior to eBay’s, it was not able to
eak into the market that was already dominated by
eBay. One of the sellers summarised his reasons for
staying with eBay:
I’ve posted auctions on just about every site you
can imagine (but) I pretty much stick with eBay.
The buyers are there. I’m established there. My
feedback rating establishes me as an upstanding
member of the community. I don’t have those
atings on other sites because I don’t do much
usiness on any of them. I’d rather stay where I’m
known.9
By being the first on-line auction to be able to
scale up and acquire a critical mass of buyers and sell-
ers in its community of users, eBay was able to suc-
cessfully fend off attacks from Internet
ands that
were better recognised and offered better services.
eBay’s community of buyers meant that sellers were
less likely to move to competitor sites.
Improved customer service
equired
Following Amazon’s launch with superior services,
eBay launched services to assist its community with
shipping (April 1999), credit card payments, escrow
services, electronic stamps and a customer support
centre (May 1999). These services were offered by
entering into alliances with the following:
• iShip.com provided information to e-merchants
and buyers regarding shipping costs and options.
• MBE provided the
icks-and-mortar support
for packing and shipping.
• Billpoint facilitated person-to-person credit card
payments on the Internet.
• iEscrow enabled buyers to pay an escrow service
when they bought an item. This was when a
uyer placed money in the custody of a trusted
escrow service. The money was then paid to the
seller once a specified set of conditions was met,
such as the buyer receiving and approving the
goods.
C-42 Case 3 • eBay.com
Exhibit 5 Auction site competitor comparisons
Auction site Inventory
Bidding
activity
Services &
fees
Customer
support
Design &
functionality Community
321Gone ● ●
Amazon.com ■ ■ ● ■
AuctionAddict.com • ● ●
Auctions.com ● ● ● ● •
Bid.com • • ● ● N/A
Bidbay.com • ● ●
BoxLot ● ● ●
CityAuction ● ● ●
CNET Auctions ● ● •
Collecting Nation ● ● ●
Comic Exchange ● ● ●
Dell Auction ● ● ● •
eBay ■ ● ● ● ■
edeal ● ● ●
eHammer ● ■ ● ● •
eO
is.com • ● ■ ● •
eRock.net • ● ●
eWanted.com ● ● ●
Excite Auctions ■ ● •
First Auction ● ● ● N/A
Gavelnet.com • ● ●
GoAuction ● ● ● ● •
Gold’s Auction • ■ ● ● ●
Go Network Auction • ● ● ●
Haggle Online ●
Lycos Auctions ● ■ ●
MSN Auctions ● ● ●
Musichotbid.com ● • ■ •
Onsale ● ● ● N/A
Popula ● ● ● ●
Pottery Auction ● ■ ●
Sothebys.com ■ ● ● ● ● N/A
SportsAuction ● N/A ● ● N/A
Teletrade N/A ● ● N/A
uBid ● ● ● ■ ● N/A
Up4Sale ● ●
Wantads.com ● ● ● •
Xoom.com Auctions ● ● ● ●
Yahoo Auctions ■ ● ● • ■
Yahoo Store ● N/A ● ■ N/A
ZDNet Auction ● ● ●
Excellent = ■, good = ●, average = , below average = •. Source: www.auctionwatch.com/awdaily
eviews
atings.html, November 2000.
Case 3 • eBay.com C-43
• e-Stamp allowed people to buy and print postage
on-line to avoid queues at post offices where
sellers needed to hand letters that weigh more
than 16 ounces directly to a postal clerk.
eBay established its first remote customer support
centre in Salt Lake City in order to stay ahead of the
needs of the on-line community. Its main responsibil-
ity was to interact via email with the eBay community
on a 24-hour basis and provide live customer support
on eBay’s customer support bulletin boards, such as
the ‘Support Q&A Board’, ‘Support Q&A For New
Users’ and ‘Help with Images and HTML’. One user
described his experience of eBay’s customer support.
I think we should spread the word for people to
start using Amazon.com. Maybe then eBay will
increase their customer service and see to it that
their system is working instead of pissing people
off. No wonder they are offering Billpoint for free.
You can’t count on it. eBay is not there to help. At
least not readily. I have sent 3 emails to support
and have heard NOTHING.10
eBay still did not have its customer support up to
the level of its competitors and this remained a prob-
lem for the users.
eBay acquires
icks-and-mortar
usinesses
With the on-line auction market being so competitive,
eBay found it difficult to increase its fees. The only
way to increase its revenues was to improve the traffic
volumes by deepening the penetration into the North
American market, expand internationally and raise
the average price of goods sold. On 26 April 1999,
eBay announced that it had agreed to acquire San
Francisco-based Butterfield & Butterfield (B&B), one
of the world’s largest and most prestigious auction
houses. This acquisition enabled eBay to accelerate
its penetration into higher-priced items on a global
asis because of B&B’s expertise in premium mar-
kets and extensive relationships with dealers, auction
houses and individuals throughout North America,
Europe and Asia. B&B had begun providing auctions
over the Internet through its relationship with a local
company, but ended the a
angement three weeks
prior to the announcement in order to work with
eBay. eBay used this acquisition to start its ‘great col-
lections’ speciality site and other antique categories.
Prior to this acquisition, eBay’s average auction closed
at only about US$47, of which eBay’s fee was about
US$3. The average B&B auction closed at US$1400,
of which the house’s fee was almost US$400. Buy-
ing into the high-end auction business might not have
increased the amount of interaction on the discus-
sion boards or chat rooms, but it promised to boost
eBay’s revenues. Shortly afterwards, on 18 May 1999,
eBay announced that it had acquired Kruse Interna-
tional, one of the world’s most respected and well-
established
ands in the collector automobile mar-
ket. This strategic acquisition enabled eBay to move
into this market and continue to offer higher-priced
items to its community. Kruse participated in approx-
imately 40 car auctions each year and had held events
in 46 US states, the United Kingdom and Japan. eBay
used expertise gained through this acquisition and
other alliances with CarClub.com and Autotrader.
com to introduce a new automotive section on the
eBay site for collectable and other used cars and offer
users related additional services.
eBay introduces local sites
To further increase eBay’s penetration into higher-
priced goods, eBay accessed the market for goods that
were difficult to ship long distances, such as cars and
large appliances that would have normally been sold
through the local newspaper classifieds owing to their
size or fragile nature. Late in 1999, eBay launched
‘eBay: Go Local’ with a campaign called ‘from our
homepage to your hometown’ whereby eBay toured
30 communities across the United States, and intro-
duced a pilot site in Los Angeles. At the end of 1999,
there was a local site for 63 cities in the US and others
internationally, with a regional flavour in order to
connect local buyers and sellers. Buyers could also
inspect the goods before they bid. The separate local
sites were accessible through the ‘Go Local’ area on
the eBay home page.
eBay Local featured local categories and allowed
members to
owse through and trade items of local
interest, such as memorabilia from popular regional
sports teams, political collectibles and antique post-
cards cele
ating the region’s heritage. The local site
was completely integrated into eBay’s worldwide
C-44 Case 3 • eBay.com
listings so sellers could list locally while everyone on
eBay could see the item.
Computing infrastructure
The aggressive marketing and expansion during late
1998 and early 1999 resulted in rapid increases in
demand upon the computing infrastructure that sup-
ported the on-line auctions. By the end of June 1999,
eBay had 5.6 million registered users and had con-
ducted 29.4 million auctions (about 250 000 per day)
with gross merchandise sales of US$622 million dur-
ing the previous three-month period. The increas-
ing traffic to the website required constant expan-
sion and upgrading of the technology. Frequent site
outages and downtime for maintenance was a seri-
ous problem for the growing company. A number of
the small traders, who depended on eBay for a living,
attributed the ‘downs’ in their business to site crashes,
pages not loading, system slowdowns and slow end-
of-auction notices. During June 1999, eBay experi-
enced a three-day string of outages because of prob-
lems with its server operating system software which
co
upted their databases. A report of the event even
appeared on the front page of the New York Times
and it was estimated that these outages cost the com-
pany US$3–5 million in refunds to sellers. The share
price fell by 25 per cent and the web page viewing fig-
ures halved for the week after the outage. Other costs
that could not be quantified were the lost revenues
from those customers who got frustrated with the site
and defected to competitors’ sites. eBay instituted an
automatic auction extension policy which meant that
any outage lasting for two hours or more resulted in
an automatic lengthening in the time allowed to place
ids. As a result of the outages, Whitman decided to
uild excess capacity, but she decided that the addi-
tional cost would be small when compared to the cost
of outages and poor site performance. She set the goal
of building the infrastructure to 10 times the required
capacity.
In October 1999, eBay outsourced its back-end
Internet technology to AboveNet Communications
and Exodus Communications. It outsourced its web
servers, database servers and Internet routers, and
elied on the companies to provide increased network
andwidth for its millions of active buyers and sell-
ers. These companies had front-end web servers that
were linked to eBay’s proprietary database and appli-
cation servers and were all located at AboveNet’s and
Exodus’s locations. The servers were located in tem-
perature-controlled facilities with superior fire con-
trol, security and redundant power systems, and were
housed in seismically
aced racks. These companies
were also the primary service provider for Yahoo!,
Lycos and other major on-line companies.
Expanding the product range
As of August 1999, eBay’s
and was recognised by
91 million US adults, compared to 118 million for
Amazon.com. eBay’s challenge, however, was to turn
this awareness of its
and into registered users (7.7
million at the time) and revenues. This was becoming
more difficult as new competition was entering the
market all the time. In September 1999, FairMarket.
com announced that it would form an auction net-
work including Microsoft’s MSN, Excite@Home and
Lycos. Alta Vista, Xoom.com, Outpost.com, ZDNet,
CompUSA and Ticketmaster soon joined the net-
work. Each of the networked sites accessed a single
database, so any auction that was listed on one of the
sites was automatically listed on all of the other part-
ner sites which increased the number of buyers that
was available for each member. The FairMarket net-
work was intended to appeal to the big
and names
that did not want their items listed next to collect-
ibles and other ‘junk’. The eBay share price dropped
7 per cent on the news. Amazon had also launched its
zshops whereby merchants could retail their goods in
a fixed-price format which competed with the many
small traders who used eBay as their storefront but
did not require the sale to be in an auction format.
In order to increase its revenues with this increased
competition, eBay acquired Half.com in June 1999,
a fixed-price, person-to-person trading marketplace
to
oaden the buying and selling choices for eBay’s
trading community and expand eBay’s trading plat-
form. Half.com had created an efficient, user-friendly
marketplace where buyers and sellers could trade
used books, CDs, movies and video games at fixed
prices that were at least half of the list price. In the
first quarter of 2000, eBay also launched its Business
Exchange site, which was to enable small businesses
to trade with each other in business-related categories
such as computer and industrial equipment, power
Case 3 • eBay.com C-45
tools, office furniture, and consumables such as print-
er toner. While some business-to-business trading had
always taken place on the site, the intention of this site
was to expand this and further increase eBay’s reach
into higher-priced goods.
On 8 Fe
uary 2000, eBay and the Walt Disney
Corporation announced a comprehensive four-year
agreement in which eBay would ultimately become
the on-line trading service across all of Disney’s Inter-
net properties, including the GO Network portal.
The companies intended to develop, implement and
promote a co-
anded person-to-person trading site
for the GO Network at www.ebay.go.com. In addi-
tion, the companies collaborated on the development
of several merchant-to-person trading sites in an auc-
tion format for Disney.com, ESPN.com and ABC.
com that showcase unique, exclusive and authenticat-
ed products, props and memorabilia from throughout
The Walt Disney Company, including Walt Disney
Studios, Disneyland and Walt Disney World, ESPN
Cable Networks and ABC Television.
On 20 November 2000, eBay launched its Appli-
cation Programming Interface (API) that would allow
other companies to display eBay auctions on their
independent websites. Companies would be able to
subscribe to specific auction and fixed-price catego-
ies on the eBay site. eBay had developed the software
itself and the software made it easier for program-
mers to create software applications without having
to write all the code for basic features such as screen
menus and printing capabilities. eBay executives
elieved that the syndicated listings would appeal to
other Internet commerce and media sites that wanted
to give users more shopping options without build-
ing their own stores. Websites that wanted eBay list-
ings would not receive any fees of transactions exe-
cuted through their site unless they owned the listed
items. The company believed that it would eventually
e able to persuade some sites that already sold goods
to replace their in-house e-commerce systems with
eBay’s technology.
eBay at the end of 2000
eBay had created a convenient, efficient and enter-
taining marketplace where buyers and sellers could
list, bid for and trade goods. eBay was the intermedi-
ary and only provided the marketspace for buyers and
sellers to trade and did not take any responsibility for
the actual transaction. To attract and retain buyers
and sellers, eBay gave users access to value-added ser-
vices that made the transaction simpler. To improve
loyalty to the site, eBay had also developed an on-line
community where collectors and other users could
interact. The site created excitement for buyers who
searched for and bid on items that they hoped would
e bargain buys. As one customer noted:
I’d recommend eBay Auction services to everyone!
I attend many estate auctions on a regular basis in
the Kentucky area. I have found the same thrills on
eBay as I do at the real estate public auctions.11
Most trading took place in an auction format
where the trade took place between the seller and the
highest bidder, if the bid was above the reserve price
(where applicable). More details of the different auc-
tion formats are contained in Exhibit 6. eBay did not
take any ownership in or agency for the goods. Its
neutrality eliminates some of the concerns that face
other businesses, such as sourcing and supplying
goods, inventory, responsibility, payment collections
or shipping. This was important for eBay to maintain,
as implementing systems to perform these functions
would have significant costs associated with them and
would require additional resources.
Auction aggregators introduce a
new threat
At the end of 1999, auction aggregators such as Auc-
tionWatch.com started to pose a threat to individ-
ual on-line auctions such as eBay. These sites acted
as a portal and they collected data on the auctions
that were available on the individual auction sites
and displayed similar items from the competing sites
together. Buyers could therefore see all of the required
items at one time and compare prices. This was a sig-
nificant threat to eBay, whose success in the past was
due to its established community of buyers and sellers
choosing eBay over other competitors. eBay installed
technical measures to try to block AuctionWatch
servers from accessing its website. This only worked
for about a month, until AuctionWatch designed soft-
ware to get through the security features. eBay con-
sequently threatened legal action, claiming that these
C-46 Case 3 • eBay.com
sites were illegally accessing its site, making unautho-
ised copies of its content, and displaying the content
in incomplete and confusing ways. While the users
provided most of the content on its site, such as item
descriptions and photographs, eBay maintained that
the content that it generated (number of bids, length
of the auction, etc.) was its property.
Counterfeit, illegal and other
questionable listings
While on-line publishers are responsible for the con-
tent of their sites as an on-line venue, eBay was not,
according to the Digital Millennium Copyright Act
(DMCA) of 1998. People were, however, selling ille-
gal items such as human kidneys, marijuana and
counterfeit software, and controversial items such as
Nazi memorabilia and pornographic material. While
eBay had adopted a hands-off approach to what its
customers sold on the site, Shultz advised the board
that these items affected the character of the com-
pany. eBay consequently changed its description to a
‘venue where anybody can sell practically anything on
earth’ and issued a list of items that were restricted on
the site.
eBay had faced several lawsuits questioning the
eBay business model where people claimed that eBay
should take responsibility for the authenticity of items
sold on the site. An example of this was where eBay
was sued by someone who bought a collector’s base-
all card that turned out to be a fake. Checking every
item that is listed on the site would have required
an army of content checkers, and if eBay had tried
to verify the legality of all of the items it probably
would have been liable for those items that slipped
through its inspections. On 21 November 2000, a
French judge ordered Yahoo! to block French users
from visiting websites that sold Nazi memorabilia.
This ruling meant that all websites would be subject
to the laws and norms of all other countries in the
world, which was a move away from the US-inspired
openness and freedom ethos. Critics suspected that
this ruling may have prompted other governments to
police websites in an attempt to get them to comply
with their local laws.
Exhibit 6 Comparison of auction formats
Dutch auction: The seller places one or more identical items on sale for a minimum price for a set time. When the auction ends,
the highest bidder wins the item(s) at their bid price. Remaining items are sold to other bidders in order of price, quality and
time.
Reserve price: The seller lists a ‘reserve bid price’. Buyers are allowed to place bids for any amount above or below the reserve
price, but the seller has the option to disregard any of the bids below the reserve price. The bidders do not normally know
the reserve price.
Express auction: Short timed auctions generally lasting between one-half to one hour. The quick turn-around offers a heightened
auction experience.
Reverse auction: The seller and not the buyer bears the risk of not being successful. The buyer lists what is required at the
price they are willing to pay for it. Sellers bid for the business. The bidder can remain anonymous, and a maximum price can
e established to maintain the price within a budget. This type of auction format is not offered by eBay. Priceline.com is well
known for offering reverse auctions.
Sealed bid auctions: Bidders are only aware of the reserve price and bid without knowing the amounts of other incoming bids.
All bids are automatically opened at the end date of the auction and the highest bidder wins.
Sniping: Placing a bid in the closing minutes or seconds of an auction. Any bid placed before the auction ends is allowed on eBay
ut not on some other sites.
Proxy bidding: Placing a proxy bid at the maximum limit users are willing to bid for an item will result in the system bidding on
the bidder’s behalf each time a new bidder places a bid. The system will ensure that the proxy bidder’s bid is one increment
higher than the previous bid until the user’s maximum limit is reached.
Source: Various.
Case 3 • eBay.com C-47
Exhibit 8 Comparison of financial performance of dotcoms
Performance measure eBay Yahoo! Priceline Amazon
Revenues1 (mn) 113.4 295.5 341.3 637.9
Net income1 (mn) 15.2 47.7 (191.9) (240.5)
Gross margin2 (%) 74.58 85.45 15.40 21.06
Operating margin2 (%) 2.35 27.46 –97.04 –33.08
Profit margin2 (%) 7.50 21.33 –96.18 –35.79
Recent share price3 36.94 40.88 2.53 28.94
Market capitalisation3 (mn) 9 895.62 22 825.54 426.50 10 306.96
Number of employees4 138 1 992 373 7 600
Notes: Source: www.marketguide.com, November 2000.
1 All amounts in US dollars.
2 Revenue and net income for three months to 30 September 2000.
3 Margins for 12 months to 30 September 2000.
4 Share price as at 24 November 2000.
5 Employees as at 31 December 1999.
Exhibit 7 Websites’ audiences and average time per month
Ranking Website Unique audience (’000)
Time per person
(hrs:min:sec)
1 AOL Websites 64 744 00:43:29
2 Yahoo! 63 720 01:41:00
3 MSN 51 424 01:19:37
4 Microsoft 34 614 00:12:31
5 Lycos Network 33 708 00:21:28
6 Excite@Home 32 085 00:35:09
7 Walt Disney Internet Group 27 076 00:33:41
8 Time Warner 23 250 00:24:14
9 About the Human Internet 22 262 00:10:45
10 Amazon 21 837 00:16:06
11 AltaVista 18 560 00:21:41
12 CNET Networks 18 525 00:16:06
13 NBC Internet 18 423 00:14:51
14 eBay 17 010 02:10:49
15 eUniverse Network 16 003 00:18:01
16 LookSmart 15 840 00:07:39
17 Ask Jeeves 14 671 00:10:30
18 Real Network 12 265 00:06:46
19 American Greetings 11 856 00:11:49
20 Earthlink 11 602 00:17:15
21 AT&T 11 196 00:15:45
22 Uproar 11 113 00:42:35
23 The Go2Net Network 10 752 00:13:25
24 GoTo.com 10 564 00:04:15
25 Viacom International 10 178 00:14:21
Source: Nielsen NetRatings.
C-48 Case 3 • eBay.com
The future
In the third quarter of 2000, US$1.4 billion worth
of goods were traded on eBay in 68.5 million auc-
tions, which generated US$113.4 million of revenue
and US$15.2 million in net profit for the company.
At the end of September 2000, eBay had 18.9 million
egistered users. When releasing these results, eBay
announced a revenue goal of US$3 billion in 2005,
with sites in 25 countries, representing the majority of
the world’s Internet users. Exhibit 7 gives the Nielsen
NetRatings of the top 25 websites for October 2000
(combined at-home and at-work data), where eBay
eceived 17 million unique visitors who spent an aver-
age of 2 hours 10 minutes on the site for the month.
What was important to Whitman was the fact that
eBay was making a profit, while many other e-com-
merce companies were making significant losses while
uilding their user base and establishing distribution
networks (see Exhibit 8).
However, on 20 November 2000, Lehman
Brothers downgraded eBay’s share from a ‘buy’ to a
‘neutral’, citing eBay’s ‘aggressive 2005 sales projec-
tion’ as a concern. The share price fell 20 per cent on
the news. The analyst at Lehman Brothers said that
eBay’s core business was slowing down and that the
new business initiatives were more costly than initial
estimates. The staff complement had increased with
the growth, which meant that the company was being
challenged to maintain the culture and values among
the new recruits. Whitman knew that her greatest
challenge would be to keep eBay focused while grow-
ing the company. Considering the share downgrade,
Whitman was sure that the analyst was over-reacting
on the forecasts. Over the past five years, eBay had
een an example of e-commerce success for Internet
and
icks-and-mortar companies alike. It had trans-
formed the auction business, which had allowed it to
ecome the world’s largest P2P on-line auction com-
pany, achieving a higher value than many established
Fortune 500 companies. Overcoming challenges was
an everyday part of the environment, for which eBay
had set the example. But the future may
ing as many
threats as previously there were opportunities.
Exhibit 9 A
ief history of auctions
The auction format of selling emerged almost from the beginning of time, when people first began to barter trade with each
other. The word ‘auction’ is derived from a Latin word, which means a gradual increase.
The earliest record of an organised auction was of the annual ma
iage market of Babylon in about 500 BC. Once a year the
men of Babylon would gather around while a herald (auctioneer) would accept bids for maidens. The herald would begin the
auction with the most ‘beautiful’ girls and work his way through to the ‘ugliest’. Ancient Romans also auctioned goods. One of
the most astonishing auctions in history occu
ed in the year AD 193 when no less than the entire Roman Empire was ‘tossed
on the block’ by the Praetorian Guard. First they killed Pertinax, the emperor, and then they announced that the highest
idder could claim the empire. As the Roman Empire came to an end, there were fewer and fewer auctions.
The earliest reference to the auction as practised in Great Britain is from 1595, but there are no more references until the
end of the 17th century. At that time, auctions were held in taverns and coffee houses to sell art. At the beginning of the 17th
century, four types of auctions developed which shaped how cu
ent auctions are conducted today. The four types were:
1 Auctions using a ‘hammer’ as we know it today.
2 Hourglass auctions: Bids were accepted until the last grain of sand was left at the top of the hourglass. The last bid called
efore the glass was empty, won.
3 Candle auction: The same idea as the hourglass auction.
4 Dutch auction: This is when the auctioneer begins at a higher price and quotes smaller and smaller bids until there
is a buyer.
Sotheby’s and Christies were founded in 1744 and 1766, respectively.
Sources: www.bendisauctions.com/orgin.htm; http:
iml.jou.ufl.edu/projects/Spring2000/McKenzie/History.html; www.webcom.com/agorics/
auctions/auction9.html.
Case 3 • eBay.com C-49
References
The Australian eBay site can be explored at www.ebay.com.au. Users
can search for items in Australia or worldwide, and can set up the
‘My eBay’ function to track auctions.
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139(11).
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AuctionGuide.com., 2000, www.auctionguide.com.
AuctionWatch, 2000, www.auctionwatch.com.
Bloomberg News, 1999, ‘eBay founders give up billions to repay
loans’, Cnet.com, June, viewed 23 September 2000, www.cnet.
com.
Butterfield & Butterfield, 2000, www.butterfields.com.
CiscoWorld, 2000, Case Study: ‘Keeping outages at bay at eBay’,
5 October, www.ciscoworldmagazine.com.
Clampet, E., 1999, ‘eBay enhances services with acquisitions’, May,
viewed 23 September 2000, www.internews.com.
Cohen, A., 1999, ‘The eBay revolution: How the online auctioneer
triggered a revolution of its own’, Time Magazine, viewed
16 October 2000, www.time.com.
Dayal, S., H. Landesberg and M. Zeisser, 2000, ‘Building digital
ands’,
The McKinsey Quarterly 2, pp. 42–51.
eBay Annual Report, 1999, Form 10-K: Annual Report for eBay Inc. for
fiscal year ended December 31, 1998.
eBay Annual Report, 2000, Form 10-K: Annual Report for eBay Inc. for
fiscal year ended December 31, 1999.
eBay Quarterly Financial Statements, 2000, Form 10-Q: Quarterly
Report for eBay Inc. for the quarterly period ended June 30, 2000.
eBay Quarterly Financial Statements, 2000, Form 10-Q: Quarterly Report
for eBay Inc. for the quarterly period ended March 31, 2000.
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Report for eBay Inc. for the quarterly period ended September 30,
2000.
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eBay.com, 2000, www.ebay.co.uk (United Kingdom).
eBay.com, 2000, www.ebay.com.au (Australia).
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eBay.com, 2000, www.fr.ebay.com (France).
Ellington, D., D. Ficeli, P. Jaturaputpaibul and K. Kellam, 1999, Issues
Facing Consumer-Oriented Online Auctions (MBA, Owen Graduate
School of Management, Vande
ilt University), 17 October
2000, http:
mba99.vande
ilt.edu.
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ester Research, 2000, ‘Fo
ester findings: Internet commerce’,
17 September, www.fo
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viewed 23 October, www.fortune.com.
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fortune.com.
Himelstein, L., 1999, ‘Q&A with Meg Whitman: What’s behind the
oom at eBay’, Business Week, www.businessweek.com.
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vendor pilot asset sales and auction’, US Chief Financial
Officer’s Council Auction White Paper, 13 October, www.
financenet.gov.
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October, viewed 23 September 2000, www.internews.com.
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campaign’, InterNews.com, October, viewed 23 September
2000, www.internews.com.
Jannarkar, S., 1999, ‘eBay buys Butterfield & Butterfield’, Cnet.com,
April, viewed 26 September 2000, www.cnet.com.
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Lee, J., 1998, ‘Why eBay is flying’, Fortune Magazine, 138(11).
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2 October 2000, www.business2.com.
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y property’, October, viewed 28 November 2000, www.
nielsen-netratings.com.
Reichheld, F. R and P. Schefter, 2000, ‘E-Loyalty: Your secret weapon
on the web’, Harvard Business Review, July–August, pp. 105–13.
Roberts, L., 2000, ‘eBay thinks global, big-time’, 25 September, www.
marketwatch.com.
Roth, D., 1999, ‘Meg muscles eBay uptown’, Fortune Magazine,
140(1).
Sellers, P., 1999, ‘Powerful women: These women rule’, Fortune
Magazine, 140(8).
Silicon Valley, 1999, ‘Return to 1st person: Pie
e Omidyar’,
Siliconvalley.com, 23 September 2000, www.sv.com.
Street, D., 1999’, Amazon.com: From start-up to the new millennium
(MBA Research Report, University of Cape Town).
Tedeschi, R., 1999, ‘Using discounts to build a client base’, New York
Times, 31 May.
The Standard, 1999, ‘Profile: Pie
e Omidyar’, 15 September 2000,
www.thestandard.com.
Wall Street Journal, 2000, ‘Stocks declined, dragged down by analyst
downgrades, election’, Wall Street Journal, 20 November, www.
wsj.com.
Wingfield, N., 2000, ‘eBay aims to be operating system for all
e-commerce on the Internet’, Wall Street Journal, 20 November,
www.wsj.com.
Yahoo! Auctions, 2000, auctions.yahoo.com.
Notes
1 D. Bunnell, 2000, The eBay Phenomenon: Business Secrets Behind
the World’s Hottest Internet (New York: John Wiley & Sons,
Inc.). Copyright John Wiley & Sons Limited. Reproduced by
permission.
2 Ibid.
3 Ibid.
4 Ibid.
5 Various, 2000, Epinions.com – Reviews of eBay, 21 November,
www.epinions.com.
6 K. Ha
od, 1999, ‘Amazon.com vs. eBay’, Letter to Fortune, 5 July
1999, viewed 23 October 2000, www.fortune.com.
7 Bunnell, The eBay Phenomenon.
8 Ibid.
9 Ibid.
10 www.ebay.com.
11 Various, 2000, Epinions.com – Reviews of eBay.
C-50
Case 4
Gillette and the men’s
wet-shaving market
Lew G. Brown Jennifer M. Hart
University of North Carolina at Greensboro University of North Carolina at Greensboro
SAN FRANCISCO
On a spring morning in 1989, Michael Johnson dried
himself and stepped from the shower in his San Fran-
cisco Marina District condominium. He moved to the
sink and started to slide open the drawer in the cabi-
net beneath the sink. Then he remembered that he had
thrown away his last Atra blade yesterday. He heard
his wife, Susan, walk past the bathroom.
‘Hey, Susan, did you remember to pick up some blades
for me yesterday?’
‘Yes, I think I put them in your drawer.’
‘Oh, okay, here they are.’ Michael saw the bottom of
the blade package and pulled the drawer open.
‘Oh, no! These are Trac II blades, Susan, I use an
Atra.’
‘I’m so
y. I looked at all the packages at the drug-
store, but I couldn’t remember which type of razor
you have. Can’t you use the Trac II blades on your
azor?’
‘No. They don’t fit.’
‘Well, I bought some disposable razors. Just use one
of those.’
‘Well, where are they?’
‘Look below the sink. They’re in a big bag.’
‘I see them. Wow, 10 razors for $1.97! Must have been
on sale.’
‘I guess so. I usually look for the best deal. Seems to
me that all those razors are the same, and the drug-
store usually has one
and or another on sale.’
‘Why don’t you buy some of those shavers made for
women?’
‘I’ve tried those, but it seems that they’re just like the
ones made for men, only they’ve dyed the plastic pink
or some pastel colour. Why should I pay more for
colour?’
‘Why don’t you just use disposables?’ Susan contin-
ued. ‘They are simpler to buy, and you just throw
them away. And you can’t beat the price.’
‘Well, the few times I’ve tried them they didn’t seem
to shave as well as a regular razor. Perhaps they’ve
improved. Do they work for you?’
‘Yes, they work fine. And they sure are better than the
heavy razors if you drop one on your foot while you’re
in the shower!’
‘Never thought about that. I see your point. Well, I’ll
give the disposable a try.’
Case 4 • Gillette and the men’s wet-shaving market C-51
History of shaving
Anthropologists do not know exactly when or even
why men began to shave. Researchers do know that
prehistoric cave drawings clearly present men who
were beardless. Apparently these men shaved with
clamshells or sharpened animal teeth. As society
developed, primitive men learned to sharpen flint
implements. Members of the early Egyptian dynas-
ties as far back as 7000 years ago shaved their faces
and heads, probably to deny their enemies anything
to grab during hand-to-hand combat. Egyptians later
fashioned copper razors and, in time,
onze blades.
Craftsmen formed these early razors as crescent-
shaped knife blades, like hatchets or meat cleavers, or
even as circular blades with a handle extending from
the centre. By the Iron Age, craftsmen were able to
fashion blades that were considerably more efficient
than the early flint, copper and
onze versions.
Before the introduction of the safety razor, men
used a straight-edged, hook-type razor and found
shaving a tedious, difficult and time-consuming task.
The typical man struggled through shaving twice a
week at most. The shaver had to sharpen the blade
(a process called stropping) before each use and had
to have an expert cutler hone the blade each month.
As a result, men often cut themselves while shaving;
and few men had the patience and acquired the nec-
essary skill to become good shavers. Most men in the
1800s agreed with the old Russian prove
: ‘It is eas-
ier to bear a child once a year than to shave every
day.’ Only the rich could afford a daily ba
er shave,
which also often had its disadvantages because many
a
ers were unclean.
Before King C. Gillette of Boston invented the
safety razor in 1895, he tinkered with other inventions
in pursuit of a product which, once used, would be
thrown away. The customer would have to buy more,
and the business would build a long-term stream of
sales and profits with each new customer.
‘On one particular morning when I started to
shave,’ wrote Gillette about the dawn of his inven-
tion, ‘I found my razor dull, and it was not only dull
ut beyond the point of successful stropping and it
needed honing, for which it must be taken to a bar-
er or cutler. As I stood there with the razor in my
hand, my eyes resting on it as lightly as a bird settling
down on its nest, the Gillette razor was born.’ Gillette
immediately wrote to his wife, who was visiting rela-
tives, ‘I’ve got it; our fortune is made.’
Gillette had envisioned a ‘permanent’ razor han-
dle on to which the shaver placed a thin, razor ‘blade’
with two sharpened edges. The shaver would place a
top over the blade and attach it to the handle so that
only the sharpened edges of the blade were exposed,
thus producing a ‘safe’ shave. A man would shave
with the blade until it became dull and then would
simply throw the used blade away and replace it. Gil-
lette knew his concept would revolutionise the process
of shaving; however, he had no idea that his creation
would permanently change men’s shaving habits.
Shaving in the 1980s
Following the invention of the safety razor, the men’s
shaving industry in the United States grew slowly but
surely through the First World War. A period of rapid
growth followed, and the industry saw many product
innovations. By 1989, US domestic razor and blade
sales (the wet-shave market) had grown to a US$770
million industry. A man could use three types of wet
shavers to remove facial hair. Most men used the dis-
posable razor – a cheap, plastic-handled razor that
lasted for eight to 10 shaves on average. Permanent
azors, called blade and razor systems, were also pop-
ular. These razors required new blades every 11 to
14 shaves. Customers could purchase razor handles
and blade cartridges together, or they could purchase
packages of blade cartridges as refills. The third cate-
gory of wet shavers included injector and double-edge
azors and accounted for a small share of the razor
market. Between 1980 and 1988, disposable razors
had risen from a 22 per cent to a 41.5 per cent market
share of dollar sales. During the same period, cartridge
systems had fallen from 50 per cent to 45.8 per cent
and injector and double-edge types had fallen from
28 per cent to 12.7 per cent. In addition, the develop-
ment of the electric razor had spawned the dry-shave
market, which accounted for about US$250 million
in sales by 1988.
Despite the popularity of disposable razors,
manufacturers found that the razors were expen-
sive to make and generated very little profit. In 1988,
some industry analysts estimated that manufacturers
C-52 Case 4 • Gillette and the men’s wet-shaving market
earned three times more on a razor and blade system
than on a disposable razor. Also, retailers prefe
ed
to sell razor systems because they took up less room
on display racks and the retailers made more mon-
ey on refill sales. However, retailers liked to promote
disposable razors to generate traffic. As a result, US
etailers allocated 55 per cent of their blade and razor
stock to disposable razors, 40 per cent to systems and
5 per cent to double-edge razors.
Electric razors also posed a threat to razor and
lade systems. Unit sales of electric razors jumped
from 6.2 million in 1981 to 8.8 million in 1987. Low-
priced imports from the Far East drove demand for
electric razors up and prices down during this period.
Nonetheless, fewer than 30 per cent of men used elec-
tric razors, and most of these also used wet-shaving
systems.
Industry analysts predicted that manufacturers’
sales of personal care products would continue to
grow. However, the slowing of the overall US econo-
my in the late 1980s meant that sales increases result-
ing from an expanding market would be minimal and
companies would have to fight for market share to
continue to increase sales.
By 1988 the Gillette Company dominated the wet-
shave market with a 60 per cent share of worldwide
azor market revenue and a 61.9 per cent share of the
US market. Gillette also had a stake in the dry-shave
usiness through its Braun subsidiary. The other play-
ers in the wet-shave market were Schick with 16.2 per
cent of market revenues, BIC with 9.3 per cent, and
others, including Wilkinson Sword, with the remain-
ing 12.6 per cent.
The Gillette Company
King Gillette took eight years to perfect his safety
azor. In 1903, the first year of marketing, the Amer-
ican Safety Razor Company sold 51 razors and 168
lades. Gillette promoted the safety razor as a saver
of both time and money. Early ads proclaimed that
the razor would save US$52 and 15 days’ shaving
time each year and that the blades required no strop-
ping or honing. During its second year, Gillette sold
90 884 razors and 123 648 blades. By its third year,
azor sales were rising at a rate of 400 per cent per
year, and blade sales were booming at an annual rate
of 1000 per cent. In that year, the company opened its
first overseas
anch in London.
Such success attracted much attention, and com-
petition quickly developed. By 1906, consumers had
at least a dozen safety razors from which to choose.
The Gillette razor sold for US$5, as did the Zinn
azor made by the Gem Cutlery Company. Others,
such as the Ever Ready, Gem Junior and Enders, sold
for as little as US$1.
With the benefit of a 17-year patent, Gillette found
himself in a very advantageous position. However, it
was not until the First World War that the safety razor
gained wide consumer acceptance. One day in 1917,
King Gillette had a visionary idea: have the govern-
ment present a Gillette razor to every soldier, sailor
and marine. In this way, millions of men just entering
the shaving age would adopt the self-shaving habit. By
March 1918, Gillette had booked orders from the US
military for 519 750 razors, more than it had sold in
any single year in its history. During the First World
War, the government bought 4 180 000 Gillette razors
as well as smaller quantities of competitive models.
Although King Gillette believed in the quality of
his product, he realised that marketing, especially dis-
tribution and advertising, would be the key to suc-
cess. From the beginning, Gillette set aside 25 cents
per razor for advertising and by 1905 had increased
the amount to 50 cents. Over the years, Gillette used
cartoon ads, radio shows, musical slogans and theme
songs, prizes, contests and cross-promotions to push
its products. Perhaps, however, consumers best remem-
er Gillette for its Cavalcade of Sports programs that
egan in 1939 with the company’s sponsorship of the
World Series. Millions of men soon came to know
Sharpie the Pa
ot and the tag line, ‘Look Sharp! Feel
Sharp! Be Sharp!’
Gillette had always been an industry innovator.
In 1932, Gillette introduced the Gillette Blue Blade,
which was the premier men’s razor for many years.
In 1938, the company introduced the Gillette Thin
Blade; in 1946, it introduced the first blade dispenser
that eliminated the need to unwrap individual blades;
in 1959, it introduced the first silicone-coated blade,
the Super Blue Blade. The success of the Super Blue
Blade caused Gillette to close 1961 with a command-
ing 70 per cent share of the overall razor and blade
Case 4 • Gillette and the men’s wet-shaving market C-53
market and a 90 per cent share of the double-edge
market, the only market in which it competed.
In 1948, Gillette began to diversity into new mar-
kets through acquisition. The company purchased the
Toni Company to extend its reach into the women’s
grooming-aid market. In 1954, the company bought
Paper Mate, a leading marker of writing instruments.
In 1962, it acquired the Sterilon Corporation, which
manufactured disposable hospital supplies. As a result
of these moves, a marketing survey found that the
public associated Gillette with personal grooming as
much as, or more than, with blades and razors.
In 1988, the Gillette Company was a leading pro-
ducer of men’s and women’s grooming aids. Exhibit 1
lists the company’s major divisions. Exhibits 2 and 3
show the percentages and dollar volumes of net sales
Exhibit 1 Gillette product lines by company division, 1988
Blades and razors Stationery products
Toiletries and
cosmetics Oral B products Braun products
Trac II
Atra
Good News
Paper Mate
Liquid Pape
Flai
Waterman
Write Bros.
Adorn
Toni
Right Guard
Silkience
Soft and Dri
Foamy
Dry Look
Dry Idea
White Rain
Lustrasilk
Oral B tooth
ushes Electric razors
Lady Elegance
Clocks
Coffee grinders and
makers
Exhibit 2 Gillette’s sales and operating profits by product line, 1986–88 (US$mn)
1988 1987 1986
Product line Sales Profits Sales Profits Sales Profits
Blades and razors $1 147 $406 $1 031 $334 $903 $274
Toiletries and cosmetics 1 019 79 926 99 854 69
Stationery products 385 56 320 34 298 11
Braun products 824 85 703 72 657 63
Oral B 202 18 183 7 148 8
Other 5 (0.1) 4 2 48 (1)
Totals $3 582 $643 $3 167 $548 $2 908 $424
Source: Gillette Company Annual Reports, 1985–88.
Exhibit 3 Gillette’s net sales and profit by business, 1984–88 (per cent)
Blades
and razors
Toiletries
and cosmetics
Stationery
products
Braun
products
Oral B
products
Year Sales Profits Sales Profits Sales Profits Sales Profits Sales Profits
1988 32 61 28 14 11 9 23 13 6 3
1987 33 61 29 18 10 6 22 13 6 2
1986 32 64 30 16 11 3 20 15 5 2
1985 33 68 31 15 11 2 17 13 6 3
1984 34 69 30 15 12 3 17 12 3 2
Source: Gillette Company Annual Reports, 1985–88.
C-54 Case 4 • Gillette and the men’s wet-shaving market
and profits from operations for each of the company’s
major business segments. Exhibits 4 and 5 present
income statements and balance sheets for 1986–88.
Despite its diversification, Gillette continued to
ealise the importance of blade and razor sales to the
company’s overall health. Gillette had a strong foot-
hold in the razor and blade market, and it intended
to use this dominance to help it achieve the compa-
ny’s goal – ‘sustained profitable growth’. To reach this
goal, Gillette’s mission statement indicated that the
company should pursue ‘strong technical and market-
ing efforts to assure vitality in major existing prod-
uct lines; selective diversification, both internally
and through acquisition; the elimination of product
and business areas with low growth or limited profit
potential; and strict control over product costs, over-
head expenses, and working capital’.
Gillette introduced a number of innovative shav-
ing systems in the 1970s and 1980s as part of its
strategy to sustain growth. Gillette claimed that Trac
II, the first twin-blade shaver, represented the most
evolutionary shaving advance ever. The develop-
ment of the twin-blade razor derived from shaving
esearchers’ discovery that shaving causes whiskers to
e
iefly lifted up out of the follicle during shaving,
a process called ‘hysteresis’ by technicians. Gillette
invented the twin-blade system so that the first blade
would cut the whisker and the second blade would
cut it again before it receded. This system produced a
closer shave than a traditional one-blade system. Gil-
lette also developed a clog-free, dual-blade cartridge
for the Trac II system.
Because consumer test data showed a 9-to-1
preference for Trac II over panellists’ cu
ent razors,
Gillette raced to get the product to market. Gillette
supported Trac II’s 1971 introduction, which was the
largest new product introduction in shaving history,
with a US$10 million advertising and promotion bud-
get. Gillette cut its advertising budgets for its other
ands drastically to support Trac II. The double-
edge portion of the advertising budget decreased from
47 per cent in 1971 to 11 per cent in 1972. Gillette
easoned that growth must come at the expense of
other
ands. Thus, it concentrated its advertising and
promotion on its newest shaving product and reduced
support for its established lines.
Gillette launched Trac II during a World Series
promotion and made it the most frequently advertised
shaving system in America during its introductory
period. Trac II users turned out to be predominantly
young, college-educated men who lived in metropoli-
tan and subu
an areas and earned higher incomes.
Exhibit 4 Gillette income statements, 1986–88 (US$mn except for per share and stock price data)
1988 1987 1986
Net sales $3 581.2 $3 166.8 $2 818.3
Cost of sales 1 487.4 1 342.3 1 183.8
Other expenses 1 479.8 1 301.3 1 412.0
Operating income 614.0 523.2 222.5
Other income 37.2 30.9 38.2
Earnings before interest and tax 651.2 545.1 260.7
Interest expense 138.3 112.5 85.2
Non-operating expense 64.3 50.1 124.0
Earnings before tax 448.6 391.5 51.5
Tax 180.1 161.6 35.7
Earnings after tax 268.5 229.9 15.8
Earnings per share 2.45 2.00 0.12
Average common shares outstanding (000) 109 559 115 072 127 344
Dividends paid per share $0.86 $0.785 $0.68
Stock price range
High
Low
$49
$29 1/8
$45 7/8
$17 5/8
$34 1/2
$17 1/8
Source: Gillette Company Annual Reports, 1986–88.
Case 4 • Gillette and the men’s wet-shaving market C-55
As the fastest-growing shaving product on the market
for five years, Trac II drove the switch to twin blades.
The
and reached its peak in 1976 when consumers
purchased 485 million blades and 7 million razors.
Late in 1976, Gillette, apparently in response to
BIC’s pending entrance into the US market, launched
Good News!, the first disposable razor for men sold
in the United States. In 1975, BIC had introduced the
first disposable shaver in Europe; and by 1976 BIC
had begun to sell disposable razors in Canada. Gillette
ealised that BIC would move its disposable razor into
the United States after its Canadian introduction, so
it promptly
ought out a new blue plastic disposable
shaver with a twin-blade head. By year’s end, Gillette
also made Good News! available in Austria, Canada,
France, Italy, Switzerland, Belgium, Greece, Germany
and Spain.
Unfortunately for Gillette, Good News! was real-
ly bad news. The disposable shaver delivered lower
profit margins than razor and blade systems, and
it undercut sales of other Gillette products. Good
News! sold for much less than the retail price of a
Trac II cartridge. Gillette marketed Good News! on
price and convenience, not performance; but the com-
pany envisioned the product as a step-up item leading
to its traditional high-quality shaving systems.
This contain-and-switch strategy did not succeed.
Consumers liked the price and the convenience of dis-
posable razors, and millions of Trac II razors began
to gather dust in medicine chests across the country.
Many Trac II users figured out that for as little as
25 cents, they could get the same cartridge mounted
on a plastic handle that they had been buying for 56
cents to put on their Trac II handle. Further, dispos-
able razors created an opening for competitors in a
category that Gillette had long dominated.
Gillette felt sure, however, that disposable razors
would never gain more than a 7 per cent share of
the market. The disposable razor market share soon
soared past 10 per cent, forcing Gillette into continu-
al upward revisions of its estimates. In terms of units
sold, disposable razors reached a 22 per cent market
share by 1980 and a 50 per cent share by 1988.
BIC’s and Gillette’s successful introduction of
the disposable razor represented a watershed event in
‘commoditisation’ – the process of converting well-
differentiated products into commodities. Status,
quality and perceived value had always played prima-
y roles in the marketing of personal care products.
But consumers were now showing that they would
forgo performance and prestige in a shaving product
– about as close and personal as one can get.
Exhibit 5 Gillette balance sheets, 1986–88 (US$mn)
1988 1987 1986
Assets Cash $156.4 $119.1 $94.8
Receivables 729.1 680.1 608.8
Inventories 653.4 594.5 603.1
Other cu
ent assets 200.8 184.5 183.0
Total cu
ent assets 1 739.7 1 578.2 1 489.7
Fixed assets, net 683.1 664.4 637.3
Other assets 445.1 448.6 412.5
Total assets 2 867.9 2 731.2 2 539.5
Liabilities and equity Cu
ent liabilities* 965.4 960.5 900.7
Long-term debt 1 675.2 839.6 915.2
Other long-term liabilities 311.9 331.7 262.8
Equity† $ (84.6) $ 599.4 $ 460.8
* Includes cu
ent portion of long-term debt: 1988 = $9.6, 1987 = $41.0, 1986 = $7.6. Source: Gillette Company Annual Reports, 1986–88.
† Includes retained earnings: 1988 = $1261.6, 1987 = $1 083.8, 1986 = $944.3.
C-56 Case 4 • Gillette and the men’s wet-shaving market
In 1977, Gillette introduced a new blade and razor
system at the expense of Trac II. It launched Atra
with a US$7 million advertising campaign and over
50 million US$2 rebate coupons. Atra (which stands
for Automatic Tracking Razor Action) was the first
twin-blade shaving cartridge with a pivoting head.
Engineers had designed the head to follow a man’s
facial contours for a closer shave. Researchers began
developing the product in Gillette’s UK research and
development lab in 1970. They had established a goal
of improving the high-performance standards of twin-
lade shaving and specifically enhancing the Trac II
effect. The company’s scientists discovered that mov-
ing the hand and face was not the most effective way
to achieve the best blade–face shaving angle. The
azor head itself produced a better shave if it pivoted
so as to maintain the most effective shaving angle.
Marketers selected the name ‘Atra’ after two years of
extensive consumer testing.
Atra quickly achieved a 7 per cent share of the
lade market and about one-third of the razor mar-
ket. The company introduced Atra in Europe a year
later under the
and name ‘Contour’. Although Atra
increased Gillette’s share of the razor market, 40
per cent of Trac II users switched to Atra in the first
year.
In the early 1980s, Gillette introduced most of
the new disposable razors and product enhance-
ments. Both Swivel (launched in 1980) and Good
News! Pivot (1984) were disposable razors featur-
ing movable heads. Gillette announced Atra Plus (the
first razor with the patented Lu
a-smooth lu
icat-
ing strip) in 1985 just as BIC began to move into the
United States from Canada with the BIC shaver for
sensitive skin. A few months later, Gillette ushered in
Micro Trac – the first disposable razor with an ultra-
slim head. Gillette priced the Micro Trac lower than
any other Gillette disposable razor. The company
claimed to have designed a state-of-the-art manufac-
turing process for Micro Trac. The process required
less plastic, thus minimising bulk and reducing man-
ufacturing costs. Analysts claimed that Gillette was
trying to
acket the market with Atra Plus (with a
etail price of US$3.99 to US$4.95) and Micro Trac
(US$0.99), and protect its market share with prod-
ucts on both ends of the price and usage scale. Gillette
also teased Wall Street with hints that, by the end
of 1986, it would be introducing yet another state-
of-the-art shaving system that could revolutionise the
shaving business.
Despite these product innovations and intro-
ductions in the early 1980s, Gillette primarily focused
its energies on its global markets and strategies. By
1985, it was marketing 800 products in more than
200 countries. The company felt a need at this time to
coordinate its marketing efforts, first regionally and
then globally.
Unfortunately for Gillette’s management team,
others noticed its strong international capabilities.
Ronald Perelman, chairman of the Revlon Group,
attempted an unfriendly takeover in November 1986.
To fend off the takeover, Gillette bought back 9.2
million shares of its stock from Perelman and sad-
dled itself with additional long-term debt to finance
the stock repurchase. Gillette’s payment to Perelman
increased the company’s debt load from US$827 mil-
lion to US$1.1 billion, and put its debt-to-equity ratio
at 70 per cent. Gillette and Perelman signed an agree-
ment preventing Perelman from attempting another
takeover until 1996.
In 1988, just as Gillette returned its attention
to new product development and global marketing,
Coniston Partners, after obtaining 6 per cent of Gil-
lette’s stock, engaged the company in a proxy bat-
tle for four seats on its 12-person board. Coniston’s
interest had been piqued by the Gillette–Perelman
US$549 million stock buyback and its payment of
US$9 million in expenses to Perelman. Coniston and
some shareholders felt Gillette’s board and manage-
ment had repeatedly taken actions that prohibited its
shareholders from realising their shares’ full value.
When the balloting concluded, Gillette’s management
won by a na
ow margin – 52 to 48 per cent. Coniston
made US$13 million in the stock buyback program
that Gillette offered to all shareholders, but Conis-
ton agreed not to make another run at Gillette until
1991. This second takeover attempt forced Gillette to
increase its debt load to US$2 billion and pushed its
total equity negative to (US$84.6 million).
More importantly, both takeover battles forced
Gillette to ‘wake up’. Gillette closed or sold its Jafra
Cosmetics operations in 11 countries and jettisoned
weak operations such as Misco, Inc. (a computer sup-
plies business), and S.T. Dupont (a luxury lighter,
Case 4 • Gillette and the men’s wet-shaving market C-57
clock and watchmaker). The company also thinned
its workforce in many divisions, such as its 15 per cent
staff reduction at the Paper Mate pen unit. Despite
this pruning, Gillette’s sales for 1988 grew 13 per cent
to US$3.6 billion, and profits soared 17 per cent to
US$268 million.
Despite Gillette’s concentration on fending off
takeover attempts, it continued to enhance its razor
and blade products. In 1986, it introduced the Con-
tour Plus in its first pan-European razor launch. The
company marketed Contour Plus with one identity
and one strategy. In 1988, the company introduced
Trac II Plus, Good News! Pivot Plus and Daisy Plus
– versions of its existing products with the Lu
a-
smooth lu
icating strip.
Schick
Warner-Lambert’s Schick served as the second major
competitor in the wet-shaving business. Warner-Lam-
ert, incorporated in 1920 under the name William
R. Warner & Company, manufactured chemicals and
pharmaceuticals. Numerous mergers and acquisitions
over 70 years resulted in Warner-Lambert’s involve-
ment in developing, manufacturing and marketing
a widely diversified line of beauty, health and well-
eing products. The company also became a major
producer of mints and chewing gums, such as Den-
tyne, Sticklets and Trident. Exhibit 6 presents a list of
Warner-Lambert’s products by division as of 1988.
Warner-Lambert entered the wet-shaving busi-
ness through a merger with Eversharp in 1970. Ever-
sharp, a long-time competitor in the wet-shave indus-
try, owned the Schick trademark and had owned the
Paper Mate Pen Company prior to selling it to Gillette
in 1955. Schick’s razors and blades produced US$180
million in revenue in 1987, or 5.2 per cent of Warner-
Lambert’s worldwide sales. (Refer to Exhibit 7 for
operating results by division, and Exhibits 8 and 9
for income statement and balance sheet data.)
In 1989, Schick held approximately a 16.2 per
cent US market share, down from its 1980 share
of 23.8 per cent. Schick’s market share was
oken
down as follows: blade systems, 8.8 per cent; dispos-
able razors, 4.1 per cent; and double-edged blades
and injectors, 3.3 per cent.
Schick’s loss of market share in the 1980s occu
ed
for two reasons. First, even though Schick pioneered
the injector razor system (it controlled 80 per cent of
this market by 1979), it did not market a disposable
azor until mid-1984 – eight years after the first dis-
posable razors appeared. Second, for years Warner-
Lambert had been channelling Schick’s cash flow to
its research and development in drugs.
In 1986, the company changed its philosophy: it
allocated US$70 million to Schick for a three-year
Exhibit 6 Warner-Lambert product lines by company division, 1988
Ethical pharmaceuticals Gums and mints
Non-prescription
products Other products
Parke-Davis drugs Dentyne
Sticklets
Beemans
Trident
Freshen-up
Bu
licious
Chiclets
Clorets
Certs
Dynamints
Junior Mints
Sugar Daddy
Sugar Babies
Charleston Chew
Rascals
Benadryl
Caladryl
Rolaids
Sinuta
Listerex
Lu
aderm
Anusol
Tucks
Halls
Benylin
Listerine
Listermint
Efferdent
Effergrip
Schick razors
Ultrex razors
Personal Touch
Tetra Aquarium
Source: Moody’s Industrial Manual.
C-58 Case 4 • Gillette and the men’s wet-shaving market
Exhibit 7 Warner-Lambert’s net sales and operating profit by division, 1985–88 (US$mn)
Net sales Operating profit/(loss)
Division 1988 1987 1986 1985 1988 1987 1986 1985
Healthcare Ethical products $1 213 $1 093 $ 964 $ 880 $ 420 $ 351 $ 246 $ 224
Non-prescription
products 1 296 1 195 1 077 992 305 256 176 177
Total healthcare 2 509 2 288 2 041 1 872 725 607 422 401
Gums and mints 918 777 678 626 187 173 122 138
Other products* 481 420 384 334 92 86 61 72
Divested businesses (464)
R&D (259) (232) (202) (208)
Net sales and
operating profit 3 908 3 485 3 103 3 200 745 634 599 (61)
* Other products include Schick razors, which accounted for US$180 million in revenue in 1987.
Source: Warner-Lambert Company Annual Report, 1987; Moody’s Industrial Manual.
Exhibit 8 Warner-Lambert income statements, 1986–88 (US$000)
1988 1987 1986
Net sales $3 908 400 $3 484 700 $3 102 918
Cost of sales 1 351 700 1 169 700 1 052 781
Other expenses 2 012 100 1 819 800 1 616 323
Operating income 544 600 495 200 433 814
Other income 61 900 58 500 69 611
Earnings before interest and tax 606 500 553 700 503 425
Interest expense 68 200 60 900 66 544
Earnings before tax 538 300 492 800 436 881
Tax 198 000 197 000 136 297
Non-recu
ing item – – 8 400
Earnings after tax 340 000 295 800 308 984
Retained earnings 1 577 400 1 384 100 1 023 218
Earnings per share 5.00 4.15 4.18
Average common shares outstanding (000) 68 035 71 355 73 985
Dividends paid per share 2.16 1.77 1.59
Stock price range
High
Low
$79 1/2
$59 7/8
$87 1/2
$48 1/4
$63 1/8
$45
Source: Moody’s Industrial Manual.
period and granted Schick its own sales force. In spite
of Schick’s loss of market share, company execu-
tives felt they had room to play catch-up, especially
y exploiting new technologies. In late 1988, Schick
evealed that it planned to conduct ‘gue
illa war-
fare’ by throwing its marketing resources and efforts
into new technological advances in disposable razors.
As a result, Warner-Lambert planned to allocate the
ulk of its US$8 million razor advertising budget to
marketing its na
ow-headed disposable razor, Slim
Twin, which it introduced in August 1988.
Schick believed that the US unit demand for dis-
posable razors would increase to 55 per cent of the
market by the early 1990s from its 50 per cent share
in 1988. Schick executives based this belief on their
feeling that men would rather pay 30 cents for a
Case 4 • Gillette and the men’s wet-shaving market C-59
disposable razor than 75 cents for a refill blade. In
1988, Schick held an estimated 9.9 per cent share of
dollar sales in the disposable razor market.
Schick generated approximately 67 per cent of its
evenues overseas. Also, it earned higher profit mar-
gins on its non-domestic sales – 20 per cent versus
its 15 per cent domestic margin. Europe and Japan
epresented the bulk of Schick’s international busi-
ness, accounting for 38 per cent and 52 per cent,
espectively, of 1988’s overseas sales. Schick’s Euro-
pean business consisted of 70 per cent systems and 29
per cent disposable razors, but Gillette’s systems and
disposable razor sales were 4.5 and 6 times larger,
espectively.
However, Schick dominated in Japan. Warner-
Lambert held over 60 per cent of Japan’s wet-shave
market. Although Japan had typically been an electric
shaver market (55 per cent of Japanese shavers use elec-
tric razors), Schick achieved an excellent record and
eputation in Japan. Both Schick and Gillette entered
the Japanese market in 1962; and their vigorous com-
petition eventually drove Japanese competitors from
the industry, which by 1988 generated US$190 mil-
lion in sales. Gillette’s attempt to crack the market
flopped because it tried to sell razors using its own
salespeople, a strategy that failed because Gillette
did not have the distribution network available to
Japanese companies. Schick, meanwhile, chose to
leave the distribution to Seiko Corporation. Seiko
imported razors from the United States and then sold
them to wholesalers nationwide. By 1988, Schick gen-
erated roughly 40 per cent of its sales and 35 per cent
of its profits in Japan. Disposable razors accounted
for almost 80 per cent of those figures.
BIC Corporation
The roots of the BIC Corporation, which was founded
y Marcel Bich in the United States in 1958, were in
France. In 1945, Bich, who had been the production
manager for a French ink manufacturer, bought a
factory outside Paris to produce parts for fountain
pens and mechanical lead pencils. In his new busi-
ness, Bich became one of the first manufacturers
to purchase presses to work with plastics. With his
knowledge of inks and experience with plastics and
moulding machines, Bich set himself up to become
the largest pen manufacturer in the world. In 1949,
Bich introduced his version of the modern ballpoint
pen, originally invented in 1939, which he called
‘BIC’, a shortened, easy-to-remember version of his
own name. He supported the pen with memorable,
effective advertising; and its sales surpassed even his
own expectations.
Realising that a mass-produced disposable
allpoint pen had universal appeal, Bich turned his
Exhibit 9 Warner-Lambert balance sheets, 1986–88 (US$000)
1988 1987 1986
Assets Cash $176 000 $24 100 $26 791
Receivables 525 200 469 900 445 743
Inventories 381 400 379 000 317 212
Other cu
ent assets 181 300 379 600 720 322
Total cu
ent assets 1 264 500 1 252 600 1 510 068
Fixed assets, net 1 053 000 959 800 819 291
Other assets 385 300 263 500 186 564
Total assets 2 702 800 2 475 900 2 515 923
Liabilities and equity Cu
ent liabilities* 1 025 200 974 300 969 806
Cu
ent portion of long-term
debt
7 100 4 200 143 259
Long-term debt 318 200 293 800 342 112
Equity $ 998 600 $ 874 400 $ 907 322
* Includes cu
ent portion of long-term debt. Source: Moody’s Industrial Manual.
C-60 Case 4 • Gillette and the men’s wet-shaving market
attention to the US market. In 1958, he purchased
the Waterman Pen Company of Connecticut and then
incorporated as Waterman-BIC Pen Corporation.
The company changed its name to BIC Pen in 1971
and finally adopted the name BIC Corporation for the
publicly owned corporation in 1982.
After establishing itself as the country’s largest
pen maker, BIC attacked another market – the dispos-
able lighter market. When BIC introduced its lighter
in 1973, the total disposable lighter market stood at
only 50 million units. By 1984, BIC had become so
successful at manufacturing and marketing its dis-
posable lighters that Gillette, its primary competitor,
abandoned the lighter market. Gillette sold its Crick-
et division to Swedish Match, Stockholm, the man-
ufacturer of Wilkinson razors. By 1989, the dispos-
able lighter market had grown to nearly 500 million
units, and BIC lighters accounted for 60 per cent of
the market.
Not content to compete just in the writing and
lighting markets, BIC decided to enter the US shav-
ing market in 1976. A year earlier, the company had
launched the BIC Shaver in Europe and Canada.
BIC’s entrance into the US razor market started an
intense rivalry with Gillette. Admittedly, the compa-
nies were not strangers to each other – for years they
had competed for market share in the pen and lighter
industries. Despite the fact that razors were Gillette’s
primary business and an area where the company had
no intention of relinquishing market share, BIC estab-
lished a niche in the US disposable-razor market.
BIC, like Gillette, frequently introduced new razor
products and product enhancements. In January
1985, following a successful Canadian test in 1984,
BIC announced the BIC Shaver for Sensitive Skin. BIC
claimed that 42 per cent of the men surveyed reported
that they had sensitive skin, while 51 per cent of those
who had heavy beards reported that they had sensi-
tive skin. Thus, BIC felt there was a clear need for a
shaver that addressed this special shaving problem.
The US$10 million ad campaign for the BIC Shaver
for Sensitive Skin featured John McEnroe, a highly
anked and well-known tennis professional, discuss-
ing good and bad backhands and normal and sen-
sitive skin. BIC repositioned the original BIC white
shaver as the shaver men with normal skin should use,
while it promoted the new BIC Orange as the razor
for sensitive skin.
BIC also tried its commodity strategy on sail-
oards, car-top ca
iers and perfume. In 1982, BIC
introduced a sailboard model at about half the price
of existing products. The product generated nothing
ut red ink. In April 1989, the company launched BIC
perfumes with US$15 million in advertising support.
BIC’s foray into fragrances was as disappointing as its
sailboard attempt. Throughout the year, Parfum BIC
lost money, forcing management to concentrate its
efforts on reformulating its selling theme, advertising,
packaging and price points. Many retailers rejected
the product, sticking BIC with expensive manufac-
turing facilities in Europe. BIC found that consumers’
perceptions of commodities did not translate equally
into every category. For example, many women cut
corners elsewhere just to spend lavishly on their per-
fume. The last thing they wanted to see was their
favourite scent being hawked to the masses.
Despite these failures, BIC Corporation was the
undisputed king of the commoditisers. BIC’s success
with pens and razors demonstrated the upside poten-
tial of commoditisation, while its failures with sail-
oards and perfumes illustrated the limitations. BIC
concentrated its efforts on designing, manufacturing
and delivering the ‘best’ quality products at the lowest
possible prices. And although the company produced
large quantities of disposable products (for example,
over 1 million pens a day), it claimed that each prod-
uct was invested with the BIC philosophy: ‘maximum
service, minimum price’.
One of BIC’s greatest assets was its retail distribu-
tion strength. The high profile the company enjoyed at
supermarkets and drugstores enabled it to win loca-
tions in the aisles and display space at the checkout
– the best positioning.
Even though BIC controlled only the number three
spot in the wet-shaving market by 1989, it had exert-
ed quite an influence since its razors first entered the
US market in 1976. In 1988, BIC’s razors generated
US$52 million in sales with a net income of US$9.4
million; BIC held a 22.4 per cent share of dollar sales
in the disposable razor market. Exhibit 10 presents
operating data by product line, and Exhibits 11 and
12 give income statement and balance sheet data.
Case 4 • Gillette and the men’s wet-shaving market C-61
The introduction of the disposable razor revo-
lutionised the industry and cut into system razor
profits. However, despite the low profit margins in
disposable razors and the fact that the industry lead-
er, Gillette, emphasised razor and blade systems, BIC
emained bullish on the disposable razor market. In
1989, a spokesperson for BIC claimed that BIC ‘was
going to stick to what consumers liked’. The com-
pany planned to continue marketing only single-
lade, disposable shavers. BIC stated that it planned
to maintain its strategy of underpricing competi-
tors, but it would also introduce improvements such
as the patented metal guard in its BIC Metal Shaver.
Research revealed that the BIC Metal Shaver provided
some incremental, rather than substitute, sales for its
shaver product line. BIC executives believed that the
BIC Metal Shaver would reach a 5–8 per cent market
share by 1990.
Exhibit 10 BIC Corporation’s net sales and income before taxes, 1986–88 (US$mn)
1988 1987 1986
Net sales Writing instruments $118.5 $106.7 $91.7
Lighters 113.9 120.0 115.0
Shavers 51.9 47.1 49.6
Sport 10.6 16.8 11.3
Total 294.9 290.6 267.6
Profit/(loss) before taxes Writing instruments 16.7 17.5 15.0
Lighters 22.9 28.2 28.5
Shavers 9.4 8.5 8.0
Sport (4.7) (3.5) (3.6)
Totals 44.3 50.7 47.9
Source: BIC Corporation, Annual Reports, 1986–88.
Exhibit 11 BIC Corporation consolidated income statements, 1986–88 (US$000)
1988 1987 1986
Net sales $294 878 $290 616 $267 624
Cost of sales 172 542 165 705 147 602
Other expenses 81 023 73 785 67 697
Operating income 41 313 51 126 52 325
Other income 4 119 1 836 7 534
Earnings before interest and tax 45 432 52 962 59 859
Interest expense 1 097 2 301 11 982
Earnings before tax 44 335 50 661 47 877
Tax 17 573 21 944 24 170
Extraordinary credit – – 2 486*
Utilisation of operating loss ca
y forward 2 800 – –
Earnings after tax 29 562 28 717 26 193
Retained earnings 159 942 142 501 121 784
Earnings per share 2.44 2.37 2.16
Average common shares outstanding (000) 12 121 12 121 12 121
Dividends paid per share 0.75 0.66 0.48
Stock price range
High
Low
$30 3/8
$24 3/8
$34 7/8
$16 1/2
$35
$23 1/4
* Gain from elimination of debt. Source: Moody’s Industrial Manual; BIC Annual Reports.
C-62 Case 4 • Gillette and the men’s wet-shaving market
Wilkinson Sword
Swedish Match Holding Incorporated’s subsidiary,
Wilkinson Sword, came in as the fourth player in the
US market. Swedish Match Holding was a wholly
owned subsidiary of Swedish Match AB, Stockholm,
Sweden. The parent company owned subsidiaries in
the United States that imported and sold doors, pro-
duced resilient and wood flooring, and manufactured
anded razors, blades, self-sharpening scissors and
gourmet kitchen knives. (Exhibits 13 and 14 present
income statement and balance sheet data on Swedish
Match AB.)
A group of swordsmiths founded Wilkinson in
1772. Soldiers used Wilkinson swords at Waterloo,
at the charge of the Light Brigade and in the Boer
War. However, as the sword declined as a combat
weapon, Wilkinson retreated to producing presen-
tation and ceremonial swords. By 1890, Wilkinson’s
cutlers had begun to produce straight razors, and by
1898 it was producing safety razors similar to King
Gillette’s. When Gillette’s blades became popular in
England, Wilkinson made stroppers to resharpen used
lades. Wilkinson failed in the razor market, however,
and dropped out during the Second World War.
By 1954, Wilkinson decided to look again at the
shaving market. Manufacturers used ca
on steel to
make most razor blades at that time, and such blades
lost their serviceability rapidly due to mechanical and
chemical damage. Gillette and other firms had experi-
mented with stainless steel blades; but they had found
that despite their longer-lasting nature, the blades did
not sharpen well. But some men liked the durability;
and a few small companies produced stainless steel
lades.
Wilkinson purchased one small German compa-
ny and put Wilkinson Sword blades on the market in
1956. Wilkinson developed a coating for the stainless
lades (in the same fashion that Gillette had coated
the Super Blue Blade) that masked their rough edges,
allowing the blades to give a comfortable shave and to
last two to five times longer than conventional blades.
Wilkinson called the new blade the Super Sword-
Edge. Wilkinson introduced the blades in England
in 1961 and in the United States in 1962, and they
ecame a phenomenon. Schick and American Safety
Razor followed a year later with their own stainless
steel blades, the Krona-Plus and Personna. Gillette
finally responded in late 1963 with its own stainless
steel blade; and by early 1964 Gillette’s blades were
outselling Wilkinson, Schick and Personna combined.
Wilkinson, however, had forever changed the nature
of the razor blade.
Exhibit 12 BIC Corporation balance sheets, 1986–88 (US$000)
1988 1987 1986
Assets Cash $5 314 $4 673 $5 047
Certificates of deposit 3 117 803 6 401
Receivables, net 43 629 41 704 32 960
Inventories 70 930 59 779 50 058
Other cu
ent assets 37 603 47 385 34 898
Defe
ed income taxes 7 939 6 691 5 622
Total cu
ent assets 168 532 161 035 134 986
Fixed assets, net 74 973 62 797 58 385
Total assets 243 505 223 832 193 371
Liabilities and equity Cu
ent liabilities* 55 031 54 034 45 104
Cu
ent portion of long-term debt 157 247 287
Long-term debt 1 521 1 511 1 789
Equity $181 194 $164 068 $142 848
* Includes cu
ent portion of long-term debt. Source: Moody’s Industrial Manual.
Case 4 • Gillette and the men’s wet-shaving market C-63
In 1988, Wilkinson Sword claimed to have a 4
per cent share of the US wet-shave market; and it was
predicting a 6 per cent share by mid-1990. Industry
analysts, however, did not confirm even the 4 per cent
share; they projected Wilkinson’s share to be closer
to 1 per cent. Wilkinson introduced many new prod-
ucts over the years, but they generally proved to be
short-lived. The company never really developed its
US franchise.
However, in late 1988, Wilkinson boasted that it
was going to challenge the wet-shave category leader
y introducing Ultra-Glide, its first lu
icating shav-
ing system. Wilkinson designed Ultra-Glide to go
head-to-head with Gillette’s Atra Plus and Schick’s
Super II Plus and Ultrex Plus. Wilkinson claimed that
Ultra-Glide represented a
eakthrough in shaving
technology because of an ingredient, hydromer, in its
patented lu
icating strip. According to Wilkinson,
the Ultra-Glide strip left less residue on the face and
provided a smoother, more comfortable shave by cre-
ating a cushion of moisture between the razor and
the skin.
Wilkinson introduced Ultra-Glide in March 1989
and supported it with a US$5 million advertising and
promotional campaign (versus the Atra Plus US$80
million multimedia investment in the United States).
Wilkinson priced Ultra-Glide 5–8 per cent less than
Atra Plus. Wilkinson was undaunted by Gillette’s
heavier advertising investment, and it expected to cash
in on its rival’s strong marketing muscle. Wilkinson
Exhibit 13 Swedish Match AB income statements, 1986–88 (US$000)
1988 1987 1986
Net sales $2 814 662 $2 505 047 $1 529 704
Cost of sales N/A N/A N/A
Operating expenses 2 541 128 2 291 023 1 387 360
Other expenses 108 206 95 420 48 711
Earnings before interest 165 328 118 604 93 633
Interest expense 5 386 19 084 21 618
Earnings before tax 159 942 99 520 72 015
Tax 57 612 29 996 39 165
Earnings after tax 102 330 69 554 32 850
Dividends paid per share 0.53 0.51 1.75
Stock price range
High
Low
22.53
$15.00
19.65
$11.06
66.75
$22.00
Source: Moody’s Industrial Manual.
Exhibit 14 Swedish Match AB balance sheets, 1986–88 (US$000)
1988 1987 1986
Assets Cash and securities $ 159 616 $ 117 027 $323 993
Receivables 611 372 561 479 297 321
Inventories 421 563 415 116 258 858
Total cu
ent assets 1 192 551 1 093 622 880 172
Fixed assets, net 707 664 671 409 397 411
Other assets 161 085 132 799 93 211
Total assets 2 061 300 1 897 830 370 794
Liabilities and equity Cu
ent liabilities 996 214 905 778 576 534
Cu
ent portion long-term debt
Long-term debt 298 505 316 542 244 118
Equity
Source: Moody’s Industrial Manual.
C-64 Case 4 • Gillette and the men’s wet-shaving market
did not expect to overtake Gillette but felt its drive
should help it capture a double-digit US market share
within two to three years.
Many were sceptical about Wilkinson’s self-
predicted market share growth. One industry analyst
stated, ‘Gillette dominates this business. Some upstart
won’t do anything.’ One Gillette official claimed his
company was unfazed by Wilkinson. In fact, he was
quoted as saying, in late 1988, ‘They [Wilkinson]
don’t have a business in the US; they don’t exist.’
Nonetheless, Gillette became enraged and filed
legal challenges when Wilkinson’s television ads for
Ultra-Glide
oke in May 1989. The ads stated that
Ultra-Glide’s lu
icating strip was six times smoother
than Gillette’s strip and that men prefe
ed it to the
industry leader’s. All three major networks had reser-
vations about continuing to air the comparison com-
mercials. CBS and NBC stated that they were going
to delay airing the company’s ads until Wilkinson
esponded to questions they had about its ad claims.
In an 11th-hour counterattack, Wilkinson accused
Gillette of false advertising and of trying to monopo-
lise the wet-shave market.
GILLETTE’S SOUTH BOSTON PLANT
Robert Squires left his work station in the facilities
engineering section of Gillette’s South Boston manu-
facturing facility and headed for the shave test lab. He
entered the lab area and walked down a na
ow hall.
On his right were a series of small cubicles Gillette had
designed to resemble the sink area of a typical bath-
oom. Robert opened the door of his assigned cubicle
precisely at his scheduled 10 a.m. time. He removed
his dress shirt and tie, hanging them on a hook beside
the sink. Sliding the mi
or up as one would a window,
Robert looked into the lab area. Rose McCluskey, a
lab assistant, greeted him.
‘Morning, Robert. See you’re right on time as usual.
I’ve got your things all ready for you.’ Rose reached
into a recessed area on her side of the cubicle’s wall
and handed Robert his razor, shave cream, aftershave
lotion and a clean towel.
‘Thanks, Rose. Hope you’re having a good day. Any-
thing new you’ve got me trying today?’
‘You know I can’t tell you that. It might spoil your
objectivity. Here’s your card.’ Rose handed Robert a
shaving evaluation card (see Exhibit 15).
Robert Squires had been shaving at the South
Boston Plant off and on for all of his 25 years with
Gillette. He was one of 200 men who shaved every
work day at the plant. Gillette used these shavers to
compare its products’ effectiveness with competitors’
products. The shavers also conducted R&D testing of
new products and quality control testing for manu-
facturing. An additional seven to eight panels of 250
Exhibit 15 Gillette shaving evaluation card
NUMB. CODE STA TEST # NAME EMP. # DATE
IN-PLANT SHAVE TEST SCORECARD
INSTRUCTIONS: Please check one box in each column
Overall
evaluation of
shave
Freedom
from nicks
and cuts Caution Closeness Smoothness Comfort
❏ Excellent
❏ Very good
❏ Good
❏ Fai
❏ Poo
❏ Excellent
❏ Very good
❏ Good
❏ Fai
❏ Poo
❏ Exceptionally
safe
❏ Unusually safe
❏ Average
❏ Slight caution
needed
❏ Excessive
caution needed
❏ Exceptionally
close
❏ Very close
❏ Average
❏ Fai
❏ Poo
❏ Exceptionally
smooth
❏ Very smooth
❏ Average
❏ Slight pull
❏ Excessive pull
❏ Exceptionally
comfortable
❏ Very
comfortable
❏ Average comfort
smoothness
❏ Slight i
itation
❏ Excessive
i
itation
Source: The Gillette Company.
Case 4 • Gillette and the men’s wet-shaving market C-65
men each shaved every day in their homes around the
country, primarily conducting R&D shave testing.
Like Robert, each shaver completed a shave eval-
uation card following every shave. Lab assistants
like Rose entered data from the evaluations to allow
Gillette researchers to analyse the performance of each
shaving device. If a product passed R&D hurdles, it
ecame the responsibility of the marketing research
staff to conduct consumer-use testing. Such consum-
er testing employed 2000 to 3000 men who tested
products in their homes.
From its research, Gillette had learned that the
average man had 30 000 whiskers on his face that
grew at the rate of half an inch (1.3 centimetres) per
month. He shaved 5.8 times a week and spent three
to four minutes shaving each time. A man with a life
span of 70 years would shave more than 20 000 times,
spending 3350 hours (130 days) removing 27.5 feet
(8.4 metres) of facial hair. Yet, despite all the time
and effort involved in shaving, surveys found that if a
cream were available that would eliminate facial hair
and shaving, most men would not use it.
Robert finished shaving and rinsed his face and shaver.
He glanced at the shaving head. A pretty good shave,
he thought. The cartridge had two blades, but it
seemed different. Robert marked his evaluation card
and slid it across the counter to Rose.
William Mazeroski, manager of the South Boston
shave test lab, walked into the lab area ca
ying com-
puter printouts with the statistical analysis of last
week’s shave test data.
Noticing Robert, William stopped. ‘Morning, Robert.
How was your shave?’
‘Pretty good. What am I using?’
‘Robert, you are always trying to get me to tell you
what we’re testing! We have control groups and exper-
imental groups. I can’t tell you which you are in, but
I was just looking at last week’s results, and I can tell
you that it looks like we are making progress. We’ve
een testing versions of a new product since 1979, and
I think we’re about to get it right. Of course, I don’t
know if we’ll introduce it or even if we can make it in
large quantities, but it looks good.’
‘Well, that’s interesting. At least I know I’m involved
in progress. And, if we do decide to produce a new
shaver, we’ll have to design and build the machines to
make it ourselves because there is nowhere to go to
purchase blade-making machinery. Well, I’ve got to
get back now; see you tomo
ow.’
Thirty-seventh floor,
The Prudential Cente
Paul Hankins leaned over the credenza in his 37th-
floor office in Boston’s Prudential Center office build-
ing and admired the beauty of the scene that spread
efore him. Paul felt as though he was watching an
impressionistic painting in motion. Beyond the green
treetops and red
ick buildings of Boston’s fashion-
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