Skil Corporation - a Manufacturer of Portable Power Tools - Case Analysis

Skil Corporation - a manufacturer of portable power tools.

Acquired by Emerson Electric Company in March, 1979 for $58 mn.

Emerson Electric Company:

Originally a manufacturer of electric motors, fans; expanded to manufacturing consumer and industrial products - portable electric tools - and govt and defense products.

Primarily electrical and electronic equipment and tools.

Had a goal of being the best-cost producer in the industry.

Best cost producer = least cost + highest quality; resulting in superior value for the customer

Each division of the company measured in terms of growth and return on invested capital.

Had plans for growing 15% annually and doubling earnings by 1981; embarked on a program of acquisitions to meet the goal.

Traditionally, only acquired financially successful companies. Broke tradition when it acquired Skil Corp, which was a mediocre performer financially.

Portable power tools industry:

Portable power tools were hand-held and mostly electric powered. (exception: gasoline powered chain saw, pneumatic automotive tools)

Wide variety of sizes, prices and qualities

Typical product line of a company consisted of about 200 tools and accessories across various sizes and price points. A typical manufacturer had about 15 models.

Power tools used primarily for wood-working, metal working, automotive repair.

Power tools - Professional (Industrial) and Consumer

Professional tools - heavy duty use, higher horse power, longer useful life, higher price band, higher margins than consumer tools

With consumer tools getting more sophisticated, the distinction between professional and consumer tools reduced - more and more professional users turned to buying consumer tools.

Product improvement forms:

1. Power source: battery powered tools initially not successful, less power, lightweight motors, not suited for professional jobs. Largely regarded as consumer tools and used for 'touch-up' jobs; use of professional tools for the main job. Sales of cordless tools gradually started picking up by the late 70's.

2. Availability of lighter materials: Aluminium, magnesium, high strength plastic. U.S. competitors pioneered the use of high strength plastic to reduce costs, improve ergonomics and balance. Japanese and European competitors focussed on better control. Energy efficiency and safety also considered important.

New product development took almost 2-4 years at a cost of about 200,000 to 700,000 dollars a year.

Buyers:

Professional buyers included metalworkers, building contractors, carpenters, plumbers, technicians, electricians, and farmers, focussed largely on performance, quality, durability, service. Only moderately influenced by brand names - purchased what they perceived as the best individual tool of each type.

Contrarily, workers in factories were less particular about the quality of a tool and went with whichever tool was available in the stores easily.

Sales to the professional segment growing at 8% annually

Consumer tool buyers largely hobbyists and DIYers. More price sensitive than professionals, and more susceptible to brand advertising and promotions.

Consumer tools segment grew rapidly in the 1970's; by 1979, accounted for half of the US power tools market.

1978-79, cordless tools grew 50%.

In the UK, DIY market grew 23% annually, while the industrial market grew only 2%

1979:

Global portable power tools market = $2350 mn

US portable power tools market = $868 mn (37%)

Western Europe power tools market =33%

Japanese power tools market = 12.5%

Europe: tools mainly used on concrete

U.S.: tools mainly used on wood

Channels:

A number of channels (15) for distribution of power tools - specialized industrial outlets to mass merchandisers.

Industrial suppliers (plumbing, lumber, electrical, contractor, automotive repair, rental, mill suppy) - supplied professionals with specialized, high-priced tools

Consumer channels - mass-merchandisers, hardware stores, home centers, catalog showrooms, buying clubs ["Buying club" means any partnership, corporation, limited liability company, association, trust, or any other legal entity that offers memberships to consumers for a fee whereby such consumers may purchase consumer goods from such entity either exclusively from a catalog or at a membership fee. They are organized to help members purchase goods that might otherwise be difficult or expensive to obtain.]

Consumer tools buyers also started buying at industrial channels.

Industrial channels generally purchased directly from manufacturers; consumer