After thoroughly analyzing your company, we have come up with several recommendations for you to consider. To begin, we believe that Henkel should continue with the lowcost reduction strategy across the board. In doing so, this will ensure that you do not spend money in areas that money does not need to be spent. We also believe that there is great possibility for acquisitions within the company; primarily in the cosmetic toiletry business segment. If the aforementioned segment were to be acquired, there would be potential for Henkel’s global market to increase from its current two percent. Additionally, we also feel as though divestment may be a worthwhile strategy for you to consider, particularly in regards to the brands from the slowgrowth laundry detergent segment. We suggest this be cause of Henkel’s operation expansion in nonChinese emerging markets; such as Latin America, Russia, India and the Middle East. In shedding your lowgrowth brands, Henkel has the opportunity to redirect the cash from underperforming operations and reinvest into these new emerging, fastergrowing, higher margin segments; specifically the cosmetics and adhesive segments.
It is important to note that emerging markets currently offer the highest profit margins due to the demand for manufacturing using adhesive technologies and also the most favorable demographics for expansion for your cosmetic toiletries segment. We recommend that Henkel will do it’s best to oversee productivity at its overseas plants and thereby try to minimize the effects of escalating petroleum and other raw materials’ prices that are used in the making of adhesives, laundry detergents, and cosmetic toiletry products. However, if this is an unattainable goal, we suggest that, at the very least, Henkel passes along the increase in prices to their consumers in terms of raising the prices of their goods.
We also suggest that you keep in mind the possibility of a weakening economy in the EuroZone and of the Euro currency. This makes its globally produced products more expensive in its home markets, limiting the company’s ability to raise prices to sustain EBIT margin growth.
In addition, there are also other important issues that you need to consider when moving forward. First of all, the demand in emerging markets is slowing due to political turmoil and adverse events. There are also continuing problems in regards to doing business in China; mainly in the adhesives and cosmetic toiletry segments given the probable slow down in that economy. Furthermore, there is also continued pressure on sales growth due to the consolidation among rivals in the higher margin cosmetic toiletries business which currently represents 22 percent of corporate sales.
Our final recommendation is in regards to the management team. To them, we recommend that they ask for employee feedback regarding their techniques and management styles. We recommend this because management is very keen on their ways of deciding which employees stay and which employees go, however there is no employee feedback regarding the evaluation grid deeming if employees find this strategy reasonable or accurate. If management were to receive feedback from their employees, it will help improve employee morale and communication between all levels of the organization.
Details To Support Our Recommendations
Henkel uses a lowcost strategy. While they may not be necessarily using the lowest prices for their products, they are maintaining price, while focusing on higher profit margins. Seeking to change this attitude of contentment, Rorsted implemented a multistep change initiative aimed at building a “winning culture.” With that in mind, Rorsted introduced a new set of five company values, replacing the previous list of ten values. These values were believed to provide the foundation for tough decisions. Henkel’s new culture was also reflected in the new company tagline, “Excellence is our Passion,” used in corporate branding for both internal and external audiences. This was meant to push the belief of employees seeing their own contributions.
Since 2008, management have implemented what they define as ‘soft’ and ‘hard’ initiatives to support their strategy. Hard initiatives focus on reducing costs, investing in high potential markets and divesting less profitable businesses. Henkel quickly addressed this focus by acquiring National Chemical and Starch Company for ₠3.7 billion within the year. The transaction allowed the company to globalize their adhesive technologies business and establish a strong 16 percent market share. Additionally, management has invested significant capital to grow the Dial toiletries line. The reputable brand allows the product to increase sales volume compared to competitive rivals in existing markets. Finally, Henkel shut down a large number of high cost factories. Through this consolidation, the company was able to move towards a more efficient process with reduced capacity. The combination of these hard initiatives quickly allowed the firm to become leader and take advantage of external opportunities existing in the market.
On the other hand, the soft initiatives strive for cultural changes that complement company strategy. This has been done by consolidating company values, developing a new performance management system and linking bonus compensation with specific company goals. By reducing their values from ten to five, Henkel establishes a concise focus that can easily be communicated throughout the company. These values should also be well embraced considering they were established via surveys with various levels of management. Furthermore, the employee evaluation grid seen in exhibit 1, is also strong performance tool because its grades employees based on both performance and potential. Such feedback provides strong incentive to be innovative in hopes of moving up in the company internally.
Finally, bonus compensation are linked to the performance at three different levels in the company: group, team, and individual. If an employee’s group and team beats their goals, they receive greater bonuses. The remaining contribution is based on one’s evaluation grid feedback. This compensation strategy will be effective because its incentivizes workers to add value at all levels for the firm. That said, the soft initiatives install by Henkel allow the company to improve its internal environment. In summary, Henkel’s new initiatives have created concise values, have a dedicated management, and appropriately reward top employees. The installed characteristics create a highperformance culture with a cando spirit that can successfully execute their lowcost provider strategy.