Rayovac Case Study

Executive Summary

Rayovac Corporation is contemplating expanding its rechargeable batteries line. This would be a shift from the alkaline disposable batteries. Currently, the company is the third largest battery maker, after Duracell and Energizer.

Like all profit-making organizations, Rayovac is interested in maximizing its return on investment. The company intends to maximize shareholder value through growth. Battery consumers are divided into two groups based on size of purchase. There are individual (family) consumers and manufacturing customers.

The threat of new entrants in this industry is insignificant. The current industry players already own all the patents related to manufacture. Since the market is composed mainly of individual buyers, the overall bargaining power of buyers is relatively low. There is stiff competition among the top three industry players Duracell, Energizer and Rayovac. This is evident in the guerrilla tactics employed in their advertisement campaigns.

A financial analysis was conducted to determine whether the rechargeable batteries option is viable. The Ansoff’s growth matrix has also been used to determine the strategic options available to Rayovac. According to these findings, it is not worthwhile for the company to implement the strategy. Rather, it should focus on market penetration and market growth.

Problem Statement

Rayovac Corporation is contemplating expanding its rechargeable batteries line. This would be a shift from the alkaline disposable batteries. Currently, the company is the third largest battery maker, after Duracell and Energizer. The market is yet to adopt the concept of rechargeable batteries fully.

This is both an opportunity and a threat. It could be an opportunity for market growth or a fad, which may pass. Mr Falconi needs to decide whether to seek other means of creating sustainable competitive advantage in the disposable batteries market or to change the strategy to focus on rechargeable batteries.

Rayovac needs answers to several questions before making this strategic decision. If they make the investment, will the company grow to be the market leader in this product line? Will the market embrace the product? Will the company have enough cash to execute the strategy? Which marketing strategies should be adopted if the plan is implemented? How are competitors likely to respond? Will this strategy grow the overall business?

Situational Analysis

Rayovac History

Rayovac was founded in the early 1900s. Initially, it was called The French battery Company. The name was changed to Rayovac in the 1930s. In 1933, the company patented a hearing aid. This began the journey to dominate the hearing aid market. Currently, Rayovac is the market leader in wearable hearing aids.

In the years 1930-1988, Rayovac concentrated on manufacturing batteries for consumer products such as radios, flashlights and computer clocks. The company acquired several patents in this department. However, it did not manage to unseat the two market leaders Duracell and Energizer. In 1990, the company shifted its focus to Heavy Duty and Industrial products.

The company launched a campaign to use renewable batteries in 1995 with Michael Jordan as the brand ambassador. The project did not do as well as expected. Despite this fact, Rayovac continued to develop and bring to market different chargers for the rechargeable batteries. The advertisement campaign with Michael Jordan created some brand equity for Rayovac. The company secured 20% of the rechargeable batteries market.

Company Mission, Goals and Objectives

Like all profit-making organizations, Rayovac is interested in maximizing its return on investment. The company intends to maximize shareholder value through growth. This growth should be achieved with minimal sacrifice of profits from existing products. This goal creates a conflict of interest. Growth in the rechargeable batteries segment will ultimately lead to decline in the alkaline battery segment.

Rayovac is committed to environmental sustainability. The company aims at creating safe environments and minimizing damage by recycling and reusing. Whichever strategy Rayovac chooses to pursue, it should conform to these policies, goals and objectives.

Finally, Rayovac aims at being the market leader in the industry. If the rechargeable batteries strategy can aid in achieving this goal, then the company will pursue it.

Customers

Battery consumers can be divided into two groups based on size of purchase. There are individual (family) consumers and manufacturing customers. Manufacturing customers buy batteries on a large scale to include in their products. Individual consumers can be divided into heavy technology users and medium technology users.

Heavy technology users use batteries for high-drain gadgets, replace batteries frequently and purchase impulsively. Medium technology users purchase based on price replace their batteries less often and use low- drain gadgets. The medium users compose the bulk of battery markets. However, the heavy users would be the ideal consumers of rechargeable batteries.

The market for batteries is growing due to the increased popularity of high drain devices such as laptops and cameras. Traditional alkaline batteries account for 70% of the market in Canada. However, experts have pointed out that this product has reached its peak. Little innovation can be done on these batteries.

Rechargeable batteries account for only 10% of the market. Though they are more convenient, customers are yet to adapt to these batteries. The cost of the chargers put many consumers off. Rayovac’s major competitors are focused on the alkaline battery. This presents an opportunity for Rayovac to focus on the rechargeable battery, which has potential for market growth.

Major Competitors

Duracell

Proctor & Gamble (P&G) currently own the Duracell brand. P&G has extensive distribution networks for its consumer products all over the world. This is a source of competitive advantage for Duracell. The company offers batteries with long life and charges a premium price in return. Duracell is currently the market leader in consumer batteries in the US due to this strategy. The company also serves 39% of the batteries market worldwide.

Duracell competes on innovation of the alkaline battery. The market recognizes this fact since Duracell batteries are very durable. This association of Duracell’s batteries with long-life is a source of brand equity. The company has also executed a growth by acquisition strategy. It acquired both Geep of India and Rocket of South Korea. These two companies were market leaders in their regions. Duracell has managed to expand its worldwide reach through them.

Energizer

Eveready Battery Company was formed in 1896. It later renamed to Energizer. It is currently the world’s largest battery company followed closely by Duracell. The company advertises using the “Energizer Bunny”. The brand recognition has grown greatly due to this campaign. Its competitors have tried to copy this strategy without much success. Rayovac entered into an agreement with Disneyland to use their cartoon characters in its adverts. This campaign has not borne much fruit.

Ralston Purina Co. had acquired energizer. Later, Energizer left the portfolio to become Energizer Holdings. Soon after, the company acquired a razor and sword blade company. This created a portfolio similar to Duracell and intensified their competition. Energizer’s competitive advantage is based on strong brand equity and excellent distribution channels in the batteries and flashlights market.

Industry Analysis

Porter’s 5 Forces Analysis

Threat of New Entrants

The threat of new entrants in the batteries industry is quite low. The current industry players already own all the patents related to manufacture. Thus, a new entrant would need to obtain permission to use their specialist knowledge.

The capital requirements to start a battery company are relatively high. This locks out many potential competitors. The only new entrants who pose a threat are the manufacturing customers who may decide to practise backward integration. However, this is highly unlikely since making batteries is not one of their core competencies.

The current industry players control most distribution channels. Their brand names have been established for decades now. Most customers are already loyal to one or two brands. It would be difficult for them to switch to a new supplier. These marketing issues make the threat of new entrants a weak force in this industry. The weakness of this threat is evident in the inability of large Japanese firms such as Sony to gain market share in the batteries market.

Bargaining Power of Buyers

Battery consumers are divided into individual purchasers and manufacturers. Manufacturers purchase batteries to include them in their products while individual users buy them for home use in their electronics. Individual buyers have little bargaining power. They are price takers. Majority of battery buyers are individual consumers.

Manufacturers have more bargaining power than individuals do. They can negotiate for discounts based on scale. Battery companies have to keep these large consumers happy or lose their large purchases. Since the market is composed mainly of individual buyers, the overall bargaining power of buyers is relatively low.

Bargaining Power of Suppliers

The bargaining power of suppliers in an industry is low if there are many fragmented suppliers and the switching costs are low. This is the case in the batteries industry. There are many suppliers of the necessary chemicals. Companies can also obtain packaging and marketing materials from many different suppliers. Actually, suppliers compete for the industry’s attention. This leads to price wars and reduces suppliers’ bargaining power.

Specialist employees in Research and Design have a high bargaining power. They supply the company with skills that are crucial to survival in an industry driven by innovation. There are also few such specialists. This gives them advantage in negotiating for their salaries.

Threat of Substitute Products

Solar power and electricity are the major substitute products for batteries. People can use the two to run their electronics instead of batteries. However, batteries still have the advantage of portability. They are also more reliable. For instance, it would be almost impossible to use solar power during winter. Electricity on the other hand is liable to power cuts. Solar power is clean energy. This is its major attraction.

The available substitutes are cheaper and more inconvenient than batteries. The initial outlay required to acquire solar panels is quite high. Electricity is expensive. Therefore, this force is weak in this industry.

Competitive Rivalry Within the Industry

There is stiff competition among the top three industry players Duracell, Energizer and Rayovac. This is evident in the guerrilla tactics employed in their advertisement campaigns. There are also price wars with Rayovac pricing its products slightly lower than the others do. The fact that Duracell and Energizer have similar product portfolios serves to intensify their rivalry further. This rivalry should be kept in check to avoid reducing the industry’s profit potential.

SWOT analysis for Rayovac Corporation

A SWOT analysis helps to establish a company’s strategic position. Both internal and external factors critical to Rayovac’s success will be examined. The results will guide the next step of decision-making.

Strengths

Rayovac already launched an advertisement campaign with Michael Jordan. This campaign increased their brand equity. If the company were to launch another campaign, the product would not be new to consumers; rather, they would be reminded to use it. Currently, Rayovac is the market leader in rechargeable batteries in Europe. It also controls 5% of the small American market. This position can enable Rayovac to drive the trends in this segment.

The company is also under a strong leadership team. Mr. Falconi has 27 years of experience in the batteries industry. He has also previously worked for competitor, Duracell.

Weaknesses

Rayovac’s major weakness is lack of the core competencies in the manufacture of rechargeable batteries. In order to grow its market share, Rayovac would have to rely on Japanese suppliers. This could develop into a threat later. Rayovac is currently lagging behind industry leaders in terms of sales of alkaline batteries. This means that it has little influence over this market.

Opportunities

Duracell and Energizer are both focused on the alkaline battery market. Rayovac could take advantage of this to grow its market share in the rechargeable battery segment. Technological developments have led to a growing demand in high-drain gadgets. Majority of rechargeable battery users purchase them for use in these high-drain gadgets. This trend could lead to further growth in the rechargeable battery market.

The world is becoming environmentally conscious. This trend has caught up in Europe, where rechargeable batteries are gaining popularity. With all the green campaigns, the rest of the world is likely to follow suit. If this happens, Rayovac can position its batteries as environmental-friendly in order to gain sales.

Threats

The largest threat facing Rayovac is its competitor’s likely retaliation. There is no way to predict how far Duracell and Energizer are willing to go to protect their market share. Alkaline batteries are more profitable than rechargeable batteries. This is why the market leaders are unwilling to shift to rechargeable batteries.

There is also the risk that the market may fail to embrace the product. Rayovac may make heavy investments and fail to recoup. This threat can be mitigated by carrying out extensive market research before commencement. The company can also carry out consumer education.

Financial analysis

This aim of a financial analysis is to establish whether a project is economically feasible. There are two options open to Rayovac. It could enter the market and employ a volume strategy or a niche strategy. Each strategy’s projections are shown in the tables. The Rayovac case study contains some information that will be used to conduct an analysis.

We are provided with the projected market sales growth of the rechargeable batteries segment in Canada. We are also given the potential market share growth of Rayovac in this country. By multiplying the two, we can obtain the projected sales Rayovac expects to make in subsequent years.

The above computations show that sales will grow much faster if the Volume strategy is adopted. However, before a decision is made, we have to consider other factors such as contribution margin. The Canadian market is said to represent approximately 20% of the North American market. Using this assumption, we project the North American sales to be as follows:

The gap between sales from the volume strategy and those from the niche strategy continues to widen as the years progress. If this were the sole decision criteria, Rayovac would choose the volume strategy. The impact of these strategies on total sales can be shown by adding the Canadian and North American projected sales.

This table is useful in showing how Rayovac’s major markets would fair if the company adopted the proposed strategies.

Contribution

Contribution is the difference between sales and variable costs. Variable costs are considered because they are the incremental cost of making one extra battery. In manufacturing industries, many fixed costs are also likely to be sunk costs and therefore not useful for decision-making.

If Rayovac adopts a volume strategy, it will have to sell the batteries at a lower price in order to attract the mass markets. The contribution margin for such a strategy is 45%. The projected contribution is obtained by multiplying the margin by the projected Rayovac sales in that year.

The niche strategy yields a higher contribution margin of 60%. This strategy would entail selling in specialist stores. The company can then charge a higher price than in the volume strategy. During the first two years, the Niche strategy seems slightly better than the volume strategy. However, in the end, the volume strategy will yield more in terms of contribution.

If Rayovac adopts a volume strategy, it will have to sell the batteries at a lower price in order to attract the mass markets. The contribution margin for such a strategy is 45%. The projected contribution is obtained by multiplying the margin by the projected Rayovac sales in that year.

The niche strategy yields a higher contribution margin of 60%. This strategy would entail selling in specialist stores. The company can then charge a premium price. During the first two years, the Niche strategy seems slightly better than the volume strategy. However, in the end, the volume strategy will yield more in terms of contribution.

One of the major expenditures in expanding the rechargeable batteries line is advertising costs. The cost depends on whether Rayovac adopts a niche or volume strategy. The costs associated with the niche strategy vary between 7% and 5% of the contribution. The costs associated with the volume strategy vary between 10% and 6%.

The advertising cost was obtained by multiplying the projected proportion of contribution by the contribution obtained earlier. The volume strategy has a higher advertising cost than the niche strategy in all the years. The company should ensure it could meet the required advertisement costs before settling on a strategy.

The net contribution represents the money that will be available to cover fixed costs and profit. This figure is very crucial in decision-making. In this case, it is obtained by subtracting the previously computed advertising costs from the projected contribution.

The niche strategy is only attractive for the first two years. Thereafter, the volume strategy produces much higher returns. The company should therefore opt for the volume strategy. If the company chooses the niche strategy over the volume strategy, the difference in net contribution is shown below.

If the company makes the wrong strategic choice, it stands to lose over $15 million in the years subsequent to 2006.

Other Financial Considerations

Exhibit 7 shows that Duracell made a profit of $ 325 million in North America during the 2004 financial year. According to these projections, Rayovac is likely to make sales of $120 million in North America by 2010. Rayovac needs to triple these sales if it hopes to beat Duracell. The reality is this might take decades.

Rechargeable batteries have a much lower profit margin than alkaline batteries. Actually, for each $2 made on the sale of a rechargeable battery, $ 250 is lost in alkaline battery sales. The company needs to come up with innovative ways to close this gap. If this does not happen, much revenue will be lost. Rayovac will end up making losses. This is quite undesirable. The final consideration is whether the company has the resources available to execute the plan. If there is no spare cash, Rayovac needs to consider credit.

Strategic Marketing Options

After examining Rayovac’s operating environment and the financial implications of the strategies, it is important to explore the options available to the company. In this paper, we choose to do so within the framework of the Product-Market growth matrix. This matrix shows the options Rayovac can pursue to grow its overall market share in the batteries segment.

Market Penetration

This strategy involves Rayovac defending its current market position. It can also attempt to grow its market share in the segments it currently operates. Rayovac’s present product portfolio contains nine major products. The most famous product in the portfolio is alkaline batteries. These batteries are useful for many home devices such as flashlights, remotes and toy cars. Most lone consumers purchase these products. They come in different sizes for different gadgets. The sizes are AAA, AA, C, D and 9V.

The second largest product is the rechargeable batteries line. These batteries come in similar sizes to their alkaline counterparts. However, they can be re-charged and re used several times. They come with special chargers for this purpose. They are used in high-drain gadgets such as digital cameras and music players. This product line is environmental friendly

Rayovac has a flashlights range too. There are outdoor and general-purpose flashlights. The company also makes flashlights for industrial use. This range also contains light bulbs. The fourth product line is the hearing aid range. Currently, Rayovac is the market leader in this market.

The company enjoys competitive advantage created by the first mover advantage they possess. Rayovac holds several patents for manufacturing hearing aids. The company was the first to develop a wearable hearing aid battery. It continues to dominate 60% of the world market.

Rayovac has a flashlights range too. There are outdoor and general-purpose flashlights. The company also makes flashlights for industrial use. This range also contains light bulbs. The fourth product line is the hearing aid range. Currently, Rayovac is the market leader in this market.

The company enjoys competitive advantage created by the first mover advantage they possess. Rayovac holds several patents for manufacturing hearing aids. The company was the first to develop a wearable hearing aid battery. It continues to dominate 60% of the world market.

The heavy-duty batteries are created specifically for devices such as clocks and smoke detectors. These devices discharge batteries slowly and are used rarely. The special feature in these batteries is long life. Rayovac also deals in lithium, specialty and lantern batteries. The final category is industrial batteries. The major purchaser of these products is manufacturing companies.

Rayovac’s major market is Canada and South America. Unlike Duracell and Energizer, the company’s global distribution network is poor. A market penetration strategy involves defending the market share currently held. Rayovac can accomplish this through aggressive marketing campaigns. The company can acquire other smaller battery manufacturers in a bid to increase its market share. This strategy is likely to provoke guerrilla tactics from Duracell and Energizer.

Product Development

This strategy entails introduction of new products into the markets Rayovac currently operates. The rechargeable batteries strategy falls under this category. Rechargeable batteries are relatively new to the market. Consumers are yet to adopt their use. This is the perfect opportunity for product development.

The European market is likely to adopt the product faster than the American and Canadian markets. This is due to their concerns for the environment and preference for long-lasting products. Rayovac could focus on controlling this market before competitors respond. Afterwards, the strategy can be implemented in America and Canada. This strategy is likely to succeed because Rayovac already has brand equity in this segment.

The risk that competitors will respond aggressively is lower than in the market penetration strategy. This is because this strategy does not directly attack their market share. Rayovac also needs to consider the possibility of its suppliers integrating forward. Suppliers have a high bargaining power since they possess core competencies in manufacturing rechargeable batteries.

The risk that competitors will respond aggressively is lower than in the market penetration strategy. This is because this strategy does not directly attack their market share. Rayovac also needs to consider the possibility of its suppliers integrating forward. Suppliers have a high bargaining power since they possess core competencies in manufacturing rechargeable batteries.

Market Development

A market development strategy would require Rayovac to take its existing products to new markets. This strategy is ideal if Rayovac reckons it will be unable to unseat the current market leaders. It is necessary when customers already have strong brand loyalty and are unwilling to switch suppliers. There is a growing demand for electronics in Africa and Asia. The company should consider exporting to these continents.

The advantage associated with new markets is that consumers have no brand loyalty. Thus, with a creative advertising campaign, Rayovac can create brand equity for its products. If adopted, this strategy will require extensive market research and massive expenditure on advertisement and Public relations exercises. However, the results are long lasting.

Rayovac needs an extensive distribution network if this strategy is to succeed. This is where strategic alliances become necessary. The company can negotiate with a large consumer company such as Unilever to carry their products in the latter’s distribution channels for a fee. Energizer and Duracell already have global networks. If Rayovac hopes to compete in the same league, it must acquire equal or better channels.

Diversification

Diversification entails creating and innovating new products. These products are then sold in new markets. This is the most drastic strategy. However, it presents the most opportunity for growth. Diversification is also the most expensive growth strategy to implement. It requires investment in both research and development and advertisement.

The company needs to carry out market research in the proposed new market to establish customer needs. Thereafter, it should develop products to meet these needs. The marketing function should then ensure that the market is aware of the product’s existence.

Solar panels are a viable diversification option. There is a high demand for clean energy in the West. On the other hand, in Africa and Asia, there is a high demand for a cheaper source of energy than electricity. Solar energy is a solution to both. Rayovac can use the knowledge it has acquired so far in developing batteries that can power vehicles. With the depletion of crude oil, the world is ready for innovative solutions to the problem of gasoline.

Decision Criteria

Profit Potential

The strategy chosen should maximize Ryovac’s profit or increase it substantially. A business needs profit to sustain its operations, meet its financial obligations and still pay a dividend to shareholders. Any business that is constantly making losses is not sustainable. Profit potential of a strategy will be benchmarked against the market leaders’ current profit. If a strategy fails to demonstrate reasonable profit potential, it will not be adopted.

Cost

Rayovac must consider the cost of implementing the strategies. The company does not have unlimited resources. Therefore, the resources must be used efficiently and effectively. Drastic changes are indicators of a costly strategy. The strategy chosen should be one, which Rayovac can afford to implement.

Environmental Impact

Rayovac cannot ignore the environmental impact of its operations. The company must be conscious of the current global trend towards sustainable living. Therefore, though alkaline batteries are profitable, they may lose that edge in future when consumers’ decision criterion is based on environmental impact.

Risk

How much risk does a strategy pose? Risk refers to the probability that things may not work out as planned. A risky investment is one that involves much uncertainty. There are no projections to support the claims. It is one based on pure speculation. Such investments should be avoided. The investment chosen should expose Rayovac to moderate risk.

Strategic Marketing Choice

I would recommend that Rayovac pursue two growth strategies. The first is market penetration and the second market development. Market penetration will enable the company to maintain its current share of the market. Market development on the other hand will facilitate revenue growth from these new markets.

Market penetration is a low cost and low risk strategy. This is because Rayovac will be dealing with a familiar market. Market development is also low cost because the products to be sold are already there. Since they have succeeded in Rayovac’s current market, it is probable that with proper marketing, they will succeed in the new markets.

Rayovac should not adopt the rechargeable batteries strategy. This strategy has a low profit potential yet it may have high initial costs. There is also no certainty that there will be market growth in this segment. Even if there is growth, Duracell and Energizer have such strong brand recognition that consumers are likely to purchase their rechargeable batteries over Rayovac’s batteries. This strategy is too risky. If it fails, Rayovac will be left to lag behind in both the alkaline and rechargeable batteries segments.

Strategic Implementation and Control

The market penetration strategy requires a fresh advertisement campaign that will attract new users. The campaign should focus on young men who buy batteries often for their electronics. There should also be a second campaign focused on mothers who control house budgets and control home purchases.

This campaign should encourage buyers to switch to Rayovac because it provides value at low price. It should emphasize durability to challenge Duracell’s position. The products should also be priced slightly lower than competitors’ products. This will capture the attention of shoppers who buy based on price. Rayovac should position its batteries as the environmental friendly option.

Market development requires careful study of the new market before any move is made. The company should determine which products would perform best and how to position them. If the market requires cheap products, then Rayovac should compete on price. However if the market requires high performance products, Rayovac should compete on efficiency.

These strategies should be monitored on an annual basis. If there are no sales increases, then the company should take corrective measures. This may involve slight alteration of the current strategy or complete abandonment all together.