Group Member: Alex Fridman, John Chuang, Jeff Marker, Yan Wu, Deepak Pandey
Disclaimer: This case was done by my group and me and the analysis indicates our understanding of this case.
Use the Corporate Strategy Triangle to evaluate Newell’s corporate strategy. Do you think this corporate strategy is effective?
Newell’s goal is to increase its sales and profitability by offering a comprehensive range of products and reliable service to the mass retail channel. Newell has chosen to develop its product line through key acquisitions, rather than internal organic growth. The strategy succeeds based on their two pronged approach of following an established acquisition process (Newellization) and ensuring corporate continuity across the division to support its performance in the market. This strategy helps Newell successfully diversify their portfolio of products for mass retailers (Exhibit #1).
Newell’s key resources and capabilities are tailored around the company’s needs for growth and their customers need for diversity and efficient distribution. The company’s product range (21 product lines) and depth (good, better, best) creates huge incentive for retailers to stock product from only one supplier. Their logistics operation with nearly 100% first-pass line fill and expanding global presence help the company improve and expand with their customers (mass-merchandisers). The process of “Newellization” is a valuable resource to the company by which Newell acquire, convert, and integrate a new acquisition (products) into their existing product lines within a short lead time. This process provides them an opportunity to gain additional market share in key distribution channels. The company’s emphasis on firms (with high brand awareness and a low cost structure) after Newellization creates an offering in the market which is difficult to imitate (Exhibit #2).
For the success of their corporate strategy, corporate office does a good job of seamless linking of its structure, system & processes (SSP) with its businesses and resources. For example, Newell uses a formalized training process in order to link corporate vision to the values and resources at the division level. The company ensures that they obtain candidates that are best suited to exceed expectation in their demanding environment by using a rigorous selection process in which only one out of ten candidates is selected. In addition, the company provides Newell University to instill company values and strategies in employees. This coherence allows managers to establish a brand image for their product, meet performance and delivery expectations while adhering to the overall company goal of increasing sales and profitability.
Newell’s strategic success is evidenced by its financial performance thus far. Newell’s businesses are separated into three divisions: Hardware, Home-Furnishings, Office Products/Housewares. These businesses comprise 46%, 28%, 26% of the company’s revenue respectively. While deviation most likely exists for COGS amongst companies, Newell tries to maintain COGS and SG&A at ~67.5% and 14.5% of net revenue for the entire division (Exhibit #3). Their ability to control costs at the division level has lead to consistent growth and profitability, returning ~ 9% net income as a percentage of sales. This has been one of the critical reasons that their 10 year average return to its investors was 13% above the industry average. Considering that Newell focuses on growth via expansion, the acquired firms that have contributed to this growth integrated seamlessly within the overall company through the process.
Do you think Newell’s acquisition of Calphalon creates value? How?
The addition of Calphalon to Newell’s Housewares division creates value for Newell by extending its reach into the non-mass merchandise market. This approach allows Newell to offer a premium product with strong brand recognition without cannibalizing existing cookware at mass retailers. By acquiring a company that has core competencies in the high end retail segment, Newell is branching out into non-saturated markets where products haven’t reached critical mass. While most of Newell’s product offerings are utilitarian, Calphalon’s cookware products are considered to be an emotional purchase for the premium end user. Calphalon caters to these end users by deploying a skilled sales force, offering product demonstrations, and conducting product training to the distribution channels. Newell can look to leverage this capability across its divisions to differentiate its product portfolio and protect its market share from low cost competitors.
Newell can apply its capabilities of “Newellization” to control Calphalon’s increasing COGS and high SG&A (36%) expenses. At the same time they can maintain the target firm’s internal competencies that make the brand appealing to the premium end user (Exhibit #4).
Although we believe that Calphalon acquisition will create value to Newell, it potentially can present considerable challenges. There is a delicate balance between “Newellization” and protecting the integrity of the Calphalon brand. The typical approach to “Newellization” has been one of absorption. Newell keeps the brand name of the target firm and discards the existing people and processes. Calphalon has built its brand equity, in large part, because of the efforts of its sales force and its focus on educating retailers and end users on the product. If taken too far, “Newellization” may erode Calphalon’s premium service and destroy the barrier of entry for premium competitors at high end retailers.
Although we believe that Calphalon acquisition will create value to Newell, it potentially can present considerable challenges. There is a delicate balance between “Newellization” and protecting the integrity of the Calphalon brand. The typical approach to “Newellization” has been one of absorption. Newell keeps the brand name of the target firm and discards the existing people and processes. Calphalon has built its brand equity, in large part, because of the efforts of its sales force and its focus on educating retailers and end users on the product. If taken too far, “Newellization” may erode Calphalon’s premium service and destroy the barrier of entry for premium competitors at high end retailers.
Do you think Newell’s acquisition of Rubbermaid creates value? How?
Rubbermaid fits within Newell’s criteria for acquisition. Rubbermaid has strong brand equity with significant shelf space at mass retailers but has inefficiency within its operations. The rising costs of resin contributed COGS 73% as a percentage of sales in 2007, coupled with logistics and service problems, have diminished Rubbermaid’s potential profits (Exhibit #3). For 1992-1994 Rubbermaid’s performance i.e. COGS (~67%) and SG&A (~17%) was in line with Newell’s COGS and SG&A during the same period, ~67.5% and ~15.5% respectively. Newell can leverage its operational and financial systems and synergies of the existing brands to improve Rubbermaid deteriorating position. By controlling Rubbermaid’s costs, Newell could potentially return the company to ~9%-11% net income as a percentage of sales. In addition, acquiring Rubbermaid will value Newell over the $10 billion market cap. The increased market capitalization will serve to counter the increasing market power of the volume retailers as they try to erode Newell’s margins.
Rubbermaid fits well with Newell’s two pronged corporate strategy, however, the $5 billion acquisition costs looks to be overvalued according to financial forecasts post-“Newellization” (Exhibit #3). The net present value of future cash flows of Rubbermaid at time of acquisition is approximately $2.2 billion, less than half of the actual acquisition price. This makes any kind of potential value creation irrelevant since Newell would need to overcome the market premium in terms of either future savings or increased growth. What Rubbermaid does possess pre-acquisition is $2.49B in working capital and only $377M in total debt which may make it a more appealing acquisition target and may justify the price premium (Exhibit #5).
The degree to which this acquisition adds value depends on Newell’s ability to absorb Rubbermaid into its existing corporate structure. The sheer size of Rubbermaid (75% of Newell’s revenue in 1997) points to a longer “Newellization” process than the standard 6 month period. If the “Newellization” process drags out, Newell will be forced to invest more of its time and resources into integrating Rubbermaid. This may leave less time to focus on new acquisitions. There is also a strong chance that absorbing Rubbermaid is the incorrect approach to integration. Newell will need to work with the majority Rubbermaid’s existing workforce and management team, there are simply too many to replace. In addition, Rubbermaid’s excellence in new product development adds value to Newell. If Newell were to absorb Rubbermaid, it could risk alienating the new work force and destroy the processes that promote new product development. Overall, we will recommend an extreme caution before we can say about the potential value added by Rubbermaid to Newell.
Do you think Newell’s corporate strategy would work in 2011? If yes, why? If not, what would you change?
NO. We believe Newell will have hard time with their strategy if they don’t review it very carefully. While Newell’s value proposition to the mass retailer (a diverse product portfolio and reliable delivery) should be as effective in 2011 as it was in 1997, a change in the economy and the shift to mass retailers is a cause for concern. Retailers such as Walmart, with an 11.3% (Exhibit #6) market share in 2009, have emerged to dominate the landscape in the US. With end users increasingly looking to mass retailers for a variety of product needs, Newell’s focus on dominating shelf space through the offering of non-seasonal tiered products may allow it to see a corresponding increase in sales, but expose it to price pressure. This is not what Newell wants because Newell prides itself on quality products with quality service at a quality price.
While Newell’s strategy to cater to a growing distribution channel should increase revenue, it also exposes the firm to more risk in 2011. As mass-retailers have shifted to a low cost model, it will become increasingly difficult for Newell to maintain their target margins and returns to investors. The continued market growth of mass retailers allows them to place downward pressure on the price of goods. Newell’s value proposition to retailers does not insulate them from this pressure. If Newell is unable, or unwilling, to lower its price, mass retailers will simply fill their product and delivery needs from their increasing pool of potential suppliers. Newell’s decision to work strictly with suppliers limits its bargaining power in this situation. In order to survive under this model, Newell will have to change its approach from differentiator to that of a cost leader. However, it may be difficult for Newell to compete with other cost leaders in the industry. Newell operates over 21 distinct product divisions, each with its own management team. Though it has a reputation for operational efficiency, Newell may be unable to match the cost structure of firms operating with less overhead and fewer product lines.
In order to limit the power of mass retailers, Newell should look to develop a pull strategy similar to that of its new acquisition, Calphalon. A pull strategy would force Newell to retain the brands that end users value and divest those that do not. Though the approach is different, it does not represent a major shift in the way Newell markets itself to the mass retailers. By maintaining a portfolio of products valued by the end user, Newell is providing value to the mass retailer in the form of increased sales and customer traffic. This approach has the benefit of being difficult for the competition to imitate. By differentiating itself from the low cost players, Newell will have more bargaining power to keep mass retailers from pushing down on prices (Exhibit #7).
Historically, Newell has maintained COGS and SG&A 68% and 14.5% respectively, of net sales.
