DURACELLProduct Differentiation vs.

Cost Leadership

Dear Mr. Kilt,

Duracell’s competitive advantage of having access to Gillette’s vast distribution channels and

its core competency of trusted products and even more effective marketing strategies has been critical

to your firm’s success over the years, and must be taken into consideration when deciding whether to

switch from your current product differentiation strategy to a cost-leadership strategy. This switch may

help improve the profitability of Duracell, and ultimately Gillette. I will first outline the benefits and

drawbacks of changing your strategy, followed by my recommendation and reasoning.

PROS: By becoming a cost-leader, you experience two major benefits.

Firstly, you will experience greater profits as opposed to a product differentiation strategy due

to higher profit margins. Cost-leadership does not explicitly imply that Duracell charge the lowest

price; the firm simply strives to incur the least costs to achieve the highest profit margin while

avoiding a possible price war. The current market for batteries is extremely competitive, and

customers are becoming more price-sensitive, looking for the best bargain. In order to have an

opportunity to pass on savings to consumers, Duracell needs to look to reduce costs in primary

activities of the value chain. This is most likely to occur in inbound and outbound logistics and as well

as R&D, where Duracell invests significantly to try to ‘out-do’ Energizer. Duracell can capitalize on

its completive advantage of Gillette’s vast and established distribution network to minimize shipping

times, quick delivery if needed and to cut transportation costs by shipping in bulk. What is more,

switching to a cost-leadership strategy would significantly mean a decrease in R&D expenses. Barring

any groundbreaking technological advancements in the near future, research shows that there are no

significant differences in the quality of ‘high performance’ brands. As these finding are becoming

more available to the public, technology is not the most important aspect of the purchase, but rather

price and impulse. Duracell would not have to compete so fiercely with Energizer to produce the most

‘durable’ battery, but the firm does have to make sure it is up to par with the premium brand quality.

In short, with increased savings in the value chain, Duracell can achieve a higher margin and stand in a

better position to pass on savings to its consumers.

Secondly, switching to a cost-leadership strategy would also allow Duracell to increase market

share into new/developing markets (like Asia). 80% of sales are from North America, and only 20%

are accounted for from the rest of the world. This 20% figure has not experience significant growth

because of the Duracell’s price. With the current product differentiation strategy, too much focus is

placed on having the most ‘durable’ battery, which is big factor on R&D costs, and the premium

charged for this marginal increase in quality is not of value to consumers in Asia. A cost-leadership

strategy will give flexibility to lower prices if need be to combat the price-sensitivity of consumers in

these new and developing areas. The Duracell brand is indeed ‘trusted everywhere’ thanks to effective

marketing campaigns, and lowering prices in abovementioned markets will undoubtedly increase sales.

This is something the firm would have been able to do had it continued its product differentiation

approach.

CONS: There are however, some drawbacks of switching to a cost-leadership strategy.

For one, the image of the brand will be changed in the eyes of the public. Consumers associate

Duracell to be a brand synonymous with the best quality, which is the main selling point in its

invaluable marketing campaigns. By switching to switch to a cost leadership strategy, the firm would

not be actively striving to produce the longest lasting battery, but rather just reliable batteries up to par

with competitors like Energizer. Duracell will now have to compete on a whole new basis, and this

decrease in product value in the public’s eye might create confusion of the brand image, which may

lead to lower sales. Additionally, if the quality is not up to par with other premium brands, the firm

might lose certain customer segments, like medical professionals and the army, whose sole reason for

continuously choosing Duracell is for its leading quality and durability.

Second, if the switch from your product differentiation strategy to the new cost-leadership

strategy is managed properly, Duracell might be ‘stuck in the middle’. This refers to a firm which is

identified with neither strategy. Research depicts that firms that said ‘stuck in the middle’ perform the

worst in a study of 1,800 strategic business units. The transition between strategies will take time to

get used to, and if Duracell does not have a unified plan to ease this shift in strategy, the firm might

still strive to be a quality leader but end up being inferior to the actual leader, while not increasing

their profit margins significantly. Needless to say, this might be a severe blow to its bottom line.

RECOMMENDATIONS & REASONING: It is my recommendation that you do indeed switch

strategies, as it is clear that the gains from switching to a cost-leadership strategies outweighs the

drawbacks, and will make your firm more sustainable and profitable. You are also more likely to

experience the originally intended synergy when Gillette first acquired Duracell: leverage Duracell’s

sales by taking advantage of its brand recognition and Gillette’s distribution networks. The Value

Chain Analysis in Appendix B shows why profit margins increase with the new strategy graphically.

The then-added ability to lower prices from the higher profit margins is most crucial to the

development of the Duracell brand not only in North America, but new and emerging markets as well.

Exhibit 5 clearly shows that most purchases of batteries are at discount stores, and price is one of the

bigger criteria when buying batteries. Successful implementation of the new strategy in the price-

sensitive Asian market could provide a massive windfall for the firm. To show the potential

effectiveness of a cost-leadership strategy in today’s price-sensitive markets, Rayovac, the cost leader

in the batter industry, has increased its operating margin every year, and it now stands 67% higher than

its 1995 figures. While product-differentiators Duracell and Energizer vigorously tried to develop the

longest lasting battery (and had to charge a premium for the extra R&D costs), Rayovac provided

consumers with an appropriate quality at a 15-20% discount to Energizer and Duracell. Emulating

Rayovac’s strategy, but with Duracell’s quality and brand image, will lead to even better financial

results for the firm. However, a clear plan must be constructed and followed closely to ensure your

firm will not be ‘stuck in the middle’. In conclusion, I feel my recommendation will increase not only

Duracell’s bottom line for years and come, but consequently Gillette’s as well.

APPENDIX A – FROM DIFFERENTIATION STRATEGY TO COST LEADERSHIP

PROS CONSIncreased Profit Margins and Overall Profitability

- Customer mentality is one that is geared to buy batteries based on cost, rather than quality, though the quality must be appropriate

- A cost leadership would mean the firm look for savings in primary activities of the value chain

- In Duracell’s case, most likely to save in inbound/outbound logistics, as it can use the distribution network of Gillette

- Switching to cost leadership would also mean less money spent on R&D, because they would not be as focused on having the most durable battery

- have to take advantage of economies of scale and logistical dominance of Gillette

Brand Image Loss- People assume Duracell to be a

brand synonymous with quality, and if they were to switch to a cost leadership strategy, they would inevitably decrease at least some parts in quality through savings at certain points in the value chain

- This switch will confuse consumers and the is not good for the image of the firm

- Lose a certain customer base that needs the most reliable project

Breaking into New Markets- Duracell’s competitive advantage has always been

of its ability to use the vast distribution networks of Gillette

- Duracell’s core competency has been its effective marketing strategies to create consumer demands based on said technology

- A cost leadership strategy allows the firm to breaking into new/developing markets (like Asia) by offering a reasonable price to consumers, something they would have been able to do had it continued its differentiation approach

- Offering a lower cost does not mean your margins will decrease margins, as they are saving more on inbound/outbound logistics

- The firm can leverage their sales by taking advantage of their status as a leading, established battery manufacturer to ensure success while making full use of Gillette’s distribution network in new areas

Possibility of being ‘stuck in the middle’

- When firms are associated with neither a cost-leadership or a product differentiation strategy

- Could occur if management is not synchronized with its new brand image

- Firm might still try to be a quality leader and come second to the quality leader, and at the same time not actually increase its margins

APPENDIX B – VALUE CHAIN EFFECTS