Skil Corporation

The acquiring company Emerson had a strategy of producing low cost and high quality products. It started on a program of acquisitions to meets its aggressive goals of growing sales 15% annually. It had acquired only financially successful companies. But in 1979, it acquired Skil Corporation, a financially mediocre and low performing company for $58 million. Skil was a leading manufacturer of portable power tools serving the professional and consumer markets, the circular saw being the strongest and best seller amongst those tools, which it also invented, and was amongst the top three in power tools market share holdings in U.S. Other power tools that Skil manufactured included mid-priced drills and roto hammers. Skil manufactured multiple different models for different countries, depending upon the local needs of the market. Under increasing competitive pressure, Skils financial results had not been high and attractive, although reported profitability had improved in recent years. It sold through all distribution channels but was well established in hardware stores and had a strong position in circular saws in contractor supply channels. Its sales force serviced all distributors except the mass merchandisers. Skil seldom advertised and relied more on product publicity. It sold tools on a worldwide basis, with its greatest international strength in Europe. Emerson has a task at hand to improve the market share of Skil Corporation given that the industry is saturated and has competitors like Black and Decker and Sears. Here we have to apply 5 forces to analyze the buyers, new entrants, rivalry etc

1. Analysis of the structure of the Portable Electric Tool Industry Industry Structure Attractiveness: Moderate / Low ROE=10%, Profit margin=4% on average This is primarily because of high rivalry between competitors. Despite of the low threats from other factors impacting industry structure, the industry is currently witnessing heavy rivalry because of slow industry growth and high number of existing competitors.
2. Changes in Industry structure in 1979

Some changes are as follow The Rivalry between competitors was gradually focusing on price because of continually reducing product differentiation. Companies like Makita are leading the pricing based rivalry to gain a quick market share (sometimes 20% to 30% below mkt price). This might impact the already low industry profitability badly if other companies follow suit and start pricing aggressively. Companies are investing heavily on automation to increase production efficiencies and

volumes. Black & Decker is investing heavily on automation and computerization of processes. This would help them in reducing the cost of production and at the same time increase the quality of their products. At the same time they would aggressively target bigger market shares to break even on their investments. ( because they need large sales) A lot of integration was happening in the industry. Joint Ventures, Mergers and acquisitions were then popular words. As Emerson Electric Company acquiring Skil Corporation, Amstar acquiring Milwaukee and Robert Bosch acquiring Stanley. This is good for industry profitability as this would reduce competition and increase profiting production. Home centers were emerging as an important distribution channel clearly indicating the growth of the domestic/do-it-yourself consumer segment. The changes in industry structure in late 70s were indication of profitable and attractive future of portable electric power tool industry.
3. Skills competitive strategy in 1979 & its relative position. (Will write later)

Some imp points In 1979, portable electric power tools accounted for the majority of industry volume. A typical company product line consist of about 200 tools + accessories. A typical manufacturer had 15 models. Major use were woodworking, metal working & automotive repairs. Power tools divided as professional ( industrial) and consumer tools. Now, difference between consumer and professional tools were blurring. Both were being used interchangeably, in developing world. Powerful battery backed wireless consumer tools were emerging. Available lighter material reduced cost greatly. Design development of new tool took 3 years at a cost $450000 average a year. Mfg a new model took 500000$ average,

Buyers

Professional were very knowledgeable about tools and concerned with performance quality durability. Less concerned about Brand name. growing at 8% a yr. Consumer were hobbyist and do-it-yourselfers. More price conscious than professional. Fond of cordless tools. Major US Europe japan. In Europe tools used for concrete and in US for Wood.

The major costs for consumer tools Material cost Final assembly Major Costs for Professional tools Material Machining

With automation the cost get reduced by 5% With automation, more capital is needed and more sales are required to be break even.

Competition More than 70 manufacturer worldwide. 20 in US. Rest in Europe and Japan.

1979 shares of world tool mkt Black n Decker 31% Makita 11% Bosch 11% Hitachi Japan 8% Skil 7% In US Market

Black n decker no 1 Sears no 2 Skil No 3 More in exihibit 3 Black & Decker The market leader with highest sales & Brand recognition, more than 40% sales of US Heavy expenditure on advertisement in print media and tv, budget in 1978 $47.3 million, 20% more than 1977 Oldest & largest power tool manufacturer Product line extremely broad 280 models Sold to all distribution channels , extremely strong position in consumer channel Distribution system involved more than 100,000 outlets worldwide 104 company-owned service centres in US & 221 in 45 countries Strong brand reputation Tools priced below most of its competitors Company was nonunion Company began replacing single task machine with machining system, computerization, plants were partly automated 3 years payback on investment in automation More and more and more technology brought in Reduced work in process inventory Due to automation, labuor time decreased from 1 hr to 30 minz R&D in US & 4 other countries, budget more than $15million

Sears After sales service

Directed at middle class customers Outsourced from vendors, specifically from Singer Excellent reputation for service, a major selling tool Singer manufactured tools for Sears Singer was believed to enjoy above-average profitability

Rockwell Just over 6% of mkt Product line matched B n D Aggressive grow through advertising Line of 130 tools

Milwaukee Since 1924, now its acquired by Amstar in 1976 Directed professional mkt 280 models More than 5000 distributors in US and Canada Very strong brand image in professional Strong position in contractor supply in high-priced drills Priced above other brands

Makita Concentrated on professional mkt Woodworking Priced aggressively, smtimez 20% to 30% below Low priced material used

They convince user that they were as good as conventional tools bt less expensive Cost conscious, awarded employees for cost saving ideas High quality with aggressive pricing

Rebert Bosch It acquired Stanley tools in 1979 Hitachi Sales in US less than $1million Industrial world class quality

SKIL Corp Specialty in circular saws, it invented Skil had been managed by single family Due to increasing competition, financial results low, improved in 1977-78 Circul;ar saw, single strong product ever Skil encouraged to develop new models Product performance rather than commonality 1n 1978 it had 93 engineers in rnd. R n D budgeted $ 2.7 million Tools were metallic mostly and metal housing Well stablished in hardware stores Strong position in circular saws in contractor supply channels In 1979, 76 service centrs Skil seldom advertised, relying more in product publicity, budget less than any other competitor