Writing a review of a biography on Warren Buffett in a recent Harvard Business Review, Microsoft’s BillGates remarked that “over time, most business assets will be affected by technology’s broad reach-although Gillette and Coca-Cola should be safe.” Maybe, but it was not so long ago that the fortunes of the blade maker founded by King C. Gillette in 1901 looked anything but safe.
During the 1980s, the Boston-based personal-care products company enjoyed a commanding lead in disposable razors, a market that had taken off largely as a result of the efforts of France‘s Bic. The disposables segment, generally less profitable for manufacturers, eventually grew to half of all shaving market sales. As Gillette’s profit margins became squeezed, it attracted the unwelcome attention of various predators, among them, Revlon’s Ron Perelman and Coniston Partners, a New York-based KKR clone.
Surviving four unsuccessful takeover attempts, Alfred M. Zeien (pronounced Zane), Gillette’s chairman and chief executive since February 1991, was determined to make his company as invulnerable as possible. He refocused the company’s strategy on global growth, employing the latest technology and developing a cosmopolitan management force to see it through. Today, 70 percent of its total sales and operating profits are generated outside the U.S., making Gillette among the more international companies of the Fortune 500. In addition to its blades and toiletries, which are worldwide market leaders, the company has become the market leader in fancy pens since its acquisitions of Parker Pen (in 1992) and Waterman of France (1987). It had already acquired Braun (1984) and Oral-B (1967), enabling Gillette to move into leading positions in electric shavers, personal appliances, and toothbrushes.
A marine engineer who ran General Dynamics’ shipyard in Quincy, MA, before coming to Gillette, the 66-year-old Zeien is as loquacious as he is impatient with those who don’t share his convictions. And he has many. Don’t compare his company with other consumer-products corporations, he says: Gillette operates more like a pharmaceutical maker, with deep investment in long-term innovations for new products that ultimately will command a market premium. Gillette, he says, isn’t obsessed with market share; it’s technology-driven. Zeien talks about “shaving systems” with the sort of technical gusto one expects from a Boeing or Hughes engineer.
Its geographic expansion in the last five years has transformed Gillette from a U.S.-centered transnational to a multicentered, world-class player. Like Coca-Cola’s products, all Gillette products are global (but distribution may be local). As Zeien explains in the following interview, Gillette uses the blade business to blaze a trail in an overseas market. Initially, margins may be small, but as soon as other products, such as hair-care appliances and toothbrushes, follow the same distribution channel, costs go down and profits zoom. It’s a neat strategy for the $6.7 billion company, which in 1987 was considered dead meat by Wall Street’s vulture capitalists.
Zeien gets excited about technology. He takes pride in the fact that the company spends more on the design and development of new production equipment than it does on new products. The aim is to cut manufacturing costs by at least 4 percent a year. The Sensor razor’s cost has dropped by more than a third since its introduction. This boosts operating margins (see chart below) and keeps low-cost generics and knock-offs at bay.
Zeien takes a global view of technology, too. Gillette maintains its major R&D facilities in the U.S., Germany, and the U.K., and technicians in China and India have access to the same technology as those based in the U.S. The home market is not always the first to get new products. SensorExcel was made in the U.S., first launched in Europe.
So what gives Gillette its sharp edge? Like any CEO, Zeien likes to talk about product innovations, but human-resource issues are his chief concern. Internationally trained line managers are to Gillette what the telegraph was to the early railroads. With 34,000 employees spread over 200 countries and territories, the company is as cosmopolitan as Royal Dutch/Shell or ABB. If there’s anything that keeps Zeien up at night, it’s the detail of grooming the right people. In their recent book “Maximum Leadership,” Bain & Co. consultants Charles Farkas and Phillippe de Backer state that Zeien “personally conducts 800 performance reviews annually.” Strictly speaking, that isn’t true-if he did, he’d have time to do little else. But he does make it his business to monitor that many reviews with his senior managers during the better part of June each year.
Zeien’s foremost concern is twofold: First, he aims to more than double the number of expatriate managers from the roughly 350 in place today to 700 by the turn of the century. Second, he wants to increase the number of American-born expatriate managers, now about 15 percent of the total. It will be no small feat: He points out it takes more than 10 years to develop a Gillette manager. And that’s only the baseline.
Recently he talked with CE’s editor-in-chief, J.P. Donlon, at Gillette’s Prudential Towers headquarters overlooking Boston‘s Back Bay.
What’s left to change in this mature business?
The blade business is about 38 percent of our sales; about 68 percent of our profit. One would think that as we grow our other businesses faster than the blade business, we’d be reducing our profitability. But that has not been the case. Instead, we’ve been making the blade business more profitable, and the other businesses more profitable at an even faster rate.
Product development is a big part of what will grow our business. When we launched our latest product, for example, the Excel, its successor was in development.
When we launched Sensor, Excel was in development. We have more than 10 candidates for the next generation in the research labs.
This wasn’t always the case, though. The Sensor wasn’t in development when the Trac II was launched.
Yes, the rollout time has been reduced. The Sensor, for example, took four years from the time we launched it until it was sold into the last world market. The Excel took three years.
In the developed world, the thrust of the blade business is this sequence of events: introduce new products, capture customers, upgrade customers, earn more per captured customer. Once we capture the customer, we have high loyalty.
In the developing world, on the other hand, our job is to build market share, and ultimately upgrade customers to better products. Unlike other consumer-products companies, we didn’t have to generate the category because it’s already there.
PLANTING THE SEEDS
Do you have different strategies for different global markets?
We treat the world globally. We offer the same products, message, marketing plan, everything, everywhere in the world. It’s true we may sell more of Product A in New York and more of Product K in Bangladesh. Some things have changed in the last five years. First is focus: Our mission is perfectly clear.
We only want to be in core businesses in which we are the worldwide leader or have a plan in place to be the worldwide leader. Second is speed: Reduce the time it takes to develop a product, roll it out globally, make decisions, and grow the business. You must have an organization that can move fast.
How does one move faster?
It has to do with the rate at which we can build management.
We have to build our management team-senior and middle managers-at 20 percent a year to grow the business 20 percent. The opportunities far exceed the number of people we can throw at them.
Are you hiring at that rate?
It’s a question of resource allocation. It takes about 14 years to develop a manager.
If we hire someone who is in the mid- to late 20s, he or she becomes a manager by the mid-30s. The other day, I asked a couple of geographic managers what their plan was for a recent European acquisition. They said, “We just bought the darned thing three weeks ago, what do you want?” Well, I want to see the plan-and if there isn’t anybody to work on it, I want to find someone.
One problem we face is that fewer and fewer of our managers are Americans. Gillette is an attractive company to a foreign national, more so than it is to an American. You’re born in Pakistan, and you study at an American university; you speak English well. You say, “Gee, if I work for Gillette, I can work in four or five countries, it’s a nice career.” So Gillette is a magnet that attracts more and more non-Americans. And we have to find a way to solve this problem, to get the U.S. passport population up among our managers, because this is still home base. We have objectives for each of the sections, and I get a note now every time we hire an American.
You’ve said that people shouldn’t look at Gillette as a consumer-products company, but more as a pharmaceutical. Why?
A successful pharmaceutical plots its business on a spreadsheet with a series of bars, each of which represent past, current, and future products in the market. A successful pharmaceutical has those bars lined up, so it is deriving high profits from one end and has the potential for high profits down the line.
An unsuccessful pharmaceutical doesn’t have anything in the pipeline. Or the generics are killing the one whose patent just expired. A good part of managing our business, like pharmaceuticals, is to have those bars carefully smoothed:
You’re not just reacting to your competitors. You’re orchestrating and commanding business.
To what degree is Gillette affected by private-label products?
Much of our business is in categories in which there is insignificant differ ence between the generic’s cost and the patented brand’s. If a customer buys 26 Sensor blades a year for 75 cents apiece, he’s spending about $20 a year. He can buy generic blades for $10, saving $10 a year. Every morning, he’s going to say, “Yeah, not a good shave, but I’m saving $10 a year.” [Laughs.]
What new products do you have in the pipeline?
I never talk about a product until it’s about to be launched. But we know what the next generation is for shaving, and we have at least five contenders for the generation after that.
How many permutations on shaving can you create?
We’re selling an experience-and there’s no end to improving an experience, because you can’t define it. How would you define a visit to a restaurant? Do you rate it by the food quality? The service, the ambiance, whether you felt good that day? Hundreds of things affect your satisfaction with that visit, so there are any number of ways to better that experience. It’s the same with shaving.
THE COHESION OF SUCCESS
What ties Gillette’s disparate businesses together?
The common denominator in all of our products is that they are global, not regional. Second, management of all of our products must be interchangeable, because the factors that lead to success are common. Our successful managers, for example, have been involved with two or three product lines. All of our products must be manufactured in large quantities so we can be the low-cost producer. And they have to be in businesses that are susceptible to technology.
And any business we’re in has to add to the benefits of our core blade business. Here’s how it works: In most countries, we lead with the blade business, which doesn’t make much money. We lead with that business, because we don’t have to create a market for blades-it’s easy to move into a pre-existing business, offer a better product, and capture market share. We then bring in two or three other businesses, and suddenly, the blade business becomes quite profitable. First, the blade business was paying for this warehouse. In come toothbrushes and hair-care appliances. So, while the blade business used to pay 100 percent of the warehouse’s overhead, now it’s paying 15 percent. Boom, the blade business is profitable.
Your market capitalization is four times what it was five years ago, and you’re sitting on a nice pile of cash. What areas are you looking at for acquisitions?
We have been making acquisitions within our core businesses. Any businesses we acquire will add more to our rate of earnings growth than it would be without the acquisition. It’s the rate of earnings growth, not absolute numbers. That’s what our investors expect of us. Growth. If they had wanted security, they would have bought a utility.
In which international markets are you concentrating your efforts?
The largest growth rates are in the “nearly new” markets. A “new” market is one in which we move in and do $3 mil lion in business. The next year, we might do $6 million. It may be 100 percent growth, but it’s still only $3 million.
The “nearly new” markets are those we’ve been in for three to five years. There, it may be a $25 million or $30 million business, and it’s growing. Poland is a good example. Our business there is growing at about 60 percent and accounts for about $75 million.
What international market has the most untapped potential for you?
India. It is still somewhat restricted, but it has the potential to add big numbers. It’s a bigger blade market than the U.S., and if we can figure out how to do this right, it can mean enormous business.
ALL IN THE ENGINEERING
What is Gillette’s competitive advantage?
The heart of our business is our ability to develop new products. We have more people involved in the development of the processes-the designing and building of equipment to make Gillette products-than we have in the design or development of the products themselves.
We have four laboratories for research only, and eight laboratories that develop new products. And we have three engineering centers that develop processes and build equipment. This gives us control of the process and the ability to make proprietary products. Consequently, we have never-ending productivity improvement and continual innovation.
What is your primary challenge as CEO?
I hate to sound hackneyed, but my challenge is to make sure I leave this business to my successor with greater prospects for the future. But I expect to be around for a couple of years.