Accounting Information for Business Decision

Dr. Ismail Gomaa

DBA-ESL-08

Submitted by:
Manal Abou El-Seoud
Basile Artigaud
Philip Guindi

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 Introduction to Henkel

Friedrich ("Fritz") Karl Henkel

(1848 to 1930)

German entrepreneur
and founder of the Henkel Group

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 Henkel’s History

World
1930 War II
Shares (1939-
distributed 1945)
1920s between Most of
Growth and three children Infrastructur
Diversified in e Destroyed,
Glues Started
1876 selling
Henkel personal
Founded care
(Laundry
Detergent
Business)

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 Henkel’s History

2008
14 billion
125 Countries
1985 55K Employees
Expanded capital
by offering non- Adhesive Technology
(48%)
Voting Shares to Laundry & Home Care
the public (30%)
1965 Cosmetics & Toiletries
(22%)
Persil on German
TV

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 Henkel’s Product Portfolio
Sales by 2008

14 Billion USDs
EMEA 64%
48% 22% North America 19%
Adhesive Personal Care
Asia-Pacific 11%
Latin America 6%
(Surface (Cosmetics &
Treatments, Toiletries)
Sealants) 125 Countries
55,00 Employees
20% of employees based in Germany
Detergent
Comfortable Growth
(Laundry & Home 8% Sales increase YoY
Care) 10.3% EBIT Margin

Complacent, Lacking competitive Spirit

30%

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 Competitor Analysis

Competitor Competitor Profile Henkel’s Business Line Henkel’s Henkel’s

Corresponding Positioning
Brand
3M 60 Countries Adhesive Loctite
18.1 Billion & Pritt (Henkel Market Leader
invented the first
Glue Stick)
P&G 180 Counties Laundry & Personal Care Dial
50.4 Billion Schwarzkopf
Persil
Unilever 150 Countries
40.5 Billion Small Player

L’Oreal 130 Countries

17.5 Billion

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 Henkel’s Product Portfolio

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 Henkel’s CEO - Kasper Rørsted
Biography

 1995 Joined Compaq and rose to Vice President & General

Manager of Europe & EMEA

 2002 Compaq acquired by HP continued in same positions

and reached responsibility of 40K people and 30 Billion
Dollars

 2004 fired from Compaq following a disappointing quarter

along with other executives

 Got several job offers but decided to go to Henkel in 2005

(as executive Vice President for Human Resources,
Purchasing, Information Technology and Infra Structure),
seeing a clear path to CEO position.

 2008, announced as Henkel’s new CEO.

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 H2 2008 – The Downfall

 Global Financial Crisis affected the key markets for

Henkel

 Personal Care & beauty experienced cut back on

spending (Consumers Traded to lower-priced
brands & Basic Products)

 Rising costs for raw materials caused increase

product prices

 Henkel reported
 58% drop in Q3 net profit
 Shares fell 39% (Nov 6th) since year start

Henkel had to become relevant or will be made

irrelevant

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 Henkel’s Transformation
November 2008

Rorsted, committed to transforming Henkel in an

ambitious 4 year plan (2012) with the following targets
through what he called a “Winning Culture”:

The EBIT of 14% was a very ambitious target which

many analysists had no clue how Rorsted was going to
achieve.

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 Case Analysis

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 The Challenge and the problem statement

 Henkel faced several serious issues.

 Henkel management was settled in

the third place or fourth place , they
never wanted to be the best , to be
the leader.

In fact, one analyst commented that

Henkel was characterized by
“complacency and lack of
competitive spirit’

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 The strategy
 Henkel’s new CEO, Kasper Rorsted was
determined to change the way the company was
run and to create “a winning culture”.

 Rorsted wanted to transform the business into a

leaner more performance driven company.

In order to catalyze the organization, he

introduced changes that included both tangible
financial and performance targets (hard things)
and an overhaul of company culture (soft things).

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 Henkel’s Cultural
Transformation

New Performance
Vision & Goals
Management System

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 Efficiency and Focus

 Rorsted implemented efficiency financial

measures:
 Acquisition to consolidate its worldwide
leadership position in adhesives
 Consolidating manufacturing sites
 Divesting underperforming activities or non-
strategic brands (exit the laundry and home
care business in China)
 Cost efficiencies in administration and
procurement
 Shifting tasks to shared service-centers for
finance, human resources and sales &
marketing.

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 Corporate Tagline

Henkel wanted to
A brand likeinaevery
be a winner friend
market they
compete in

Excellence is our passion

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 Vision & Values
Henkel had a vision statement and a set of company values.
But they were neither well-known nor relevant to either day-to-day decision-making or
evaluation of employee performance.

Vision
A global Leader in brands and Technology

In 2010, Rorsted replaced the original list of 10 unused values with five new ones

5 Values
1) We put our CUSTOMERS at the center of what we do
2) We value, challenge and reward our PEOPLE
3) We drive excellent sustainable FINANCIAL performance
4) We are committed to leader in SUSTAINABILITY
5) We build our future on our FAMILY business foundation

Rorsted wanted employees to embrace the new core values that were communicated
through weekly workshops, daily meetings. Values provided practical guidance.
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 Management Control System

Management and agent

relationship
Aligns managers’ interests with
firm’s interests
Key issues
Self-interest of the employee
Goal incongruence
Moral hazard

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 Goal Congruence
Exists when individuals and groups aim for the same organizational goals through their decision-making

Toolkits to visualize the future

1) Celebrating Henkel's realization of 2012 goals
2) Describing the failure to meet them and the negative
consequence

Management Goal

Organization Goal

Employee Goal
Bonus plan that includes
personal, business and
Organizational
performance would align
employees toward the
same direction to propel
the business
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 Stretch Goals
Setting new stretch goals to reach its full potential.

In the past , Henkel imposed easy targets and objectives which caused the employees to be
complacent.

Setting stretch goals that put the employees out of their comfort zone; to create a result-
oriented work climate

Pros
 Encourage Innovation
 Can break stereotypes of what is possible
 Can push complacent originations to get out of
their routine
 Requires thinking differently, revolution not
evolution, qualitative not quantitative change.
Cons
 Can be terribly demotivating
 May encourage unethical behavior
 May lead to excess risk taking
 Cause burn-out

Stretch goals need to be about human excellence, they need to appeal to what is best in us.

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 The Paradox Of Stretch Goals: Research of Duke University

 Green quadrant: Rest on their

laurels, to be conservative, risk-
averse and to set back
 Take the moonshot or the Hail Mary
path challenge
 Alternatives: small goals to reach
small incremental wins to build up
resources / small losses;
experiences
 By setting and pursuing stretch
goals, Rorsted got the most out of
his employees ;it also encouraged
stronger team -work, more
collaboration, and significantly more
creativity
 Stretch goals created a result-
oriented work climate.

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 Performance Management

Implementing a new performance

management system which increased
the potential and performance of
every employee, and the company
(outperforming through goals and
feedback).

They would be ranked on individual

performance, which significantly
affected managers’ bonuses.

 Each individual, is reviewed in

“Development Roundtables” or DRT

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 Forced Ranking

 To illustrate, an employee who

scored 100% on her two
individual KPIs and earned a “T”
(150%) rating from the DRT
process would have an overall
individual score of 125% ([100 +
150] ÷ 2).

 Goal congruence; risks if the

individual is ranked top but
surrounded by reluctant people!

 Vicious targets ( Henkel did not

reach its potential, team players)

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 “Simplicity is the ultimate Sophistication” - Steve Jobs

 Simplifying all aspects of the company

 Eliminating the under performing activities or non-strategic brands to
focus more on its competitive assets.
 Cutting a complex scorecards with twenty plus key performing
indicators into three KPI’s.
 Reducing the ten values into five core values
 Simplifying the performance management(incentives)
 By simplifying things across the business ; there is now more
understanding and communication around the company’s winning
culture.

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 Case Questions

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 1) The Winning Culture

A winning culture is a business culture that is marked by being Lean &

performance driven.

Transforming to a winning culture requires an organization to leave its

complacent spirit behind and embrace a more competitive spirit,
driven with goal achievement and strong financial performance.

Rorsted’s winning Culture was composed of three strategic Priorities

1) Achieving full Business Potential

2) Customer Focus
3) Building a robust Global Team
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 Winning Culture - Strategies

1) Devoting extra resources to top-performing brands and high-potential

markets

2) Tough decision (divested underperforming activities or non-strategic brands)

for Sustainable Growth (exit laundry and home care business in China)
Achieving full
Business Potential 3) Consolidating its worldwide leadership position in adhesives (3.7 Billion Dollar
Acquisition) “National Starch & Chemical Company”

4) Cost efficiencies in administration and procurement through improvements in

capacity utilization at their various production sites

1) Being the top brand of choice (“Dial” from rank 5 to 1 in USA)

Customer Focus 2) Stop using the word "Customer" for any internal entity to focus on external
customers

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 Winning Culture - Strategies

Phase 1 (Hard Decisions)

1) Consistently communicate the new strategic priorities (Management
visits)
2) Translate them into actions in each business unit
3) Process standardization and automation
Building a robust
Phase 2 (Soft – Cultural Transformation)
Global Team 1) Cultural Transformation (buy-in was essential)
2) Focus on financial goals and Priorities
3) Transformed Goals and Values to resonate more with the competitive
nature aspired (360 degrees communication Campaign)
4) 3 to 4 hour workshops (by Business Managers) held to discuss vision and
goals and use a toolkit (to link ROI, due dates, etc...)

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 2) Rorsted Approach

 Challenged the Status Quo and recognized Henkel’s possible potential.

 Rorsted’ s ambition was not modest to show that he was truly against any
complacent spirit, it also attracted attention to Henkel.

 Is driven by targets and especially financial targets, Rorsted recognizes that

in a competitive market it is easy to become obsolete if you are not leading
the market

 Rorsted started with all the hard decisions that needed to be taken,
including acquisitions and closing down of certain plants and markets, his
decision was based on improving the financial state of Henkel

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 2) Rorsted Approach
 Rorsted selection of his executive staff was exquisite, the right people to lead
the corporate communications and Human resource management for
performance evaluations for example.

 The change management needed to drive the new culture was healthy,
involving the right people, continuous and solid communication, coaching
and supporting managers to support the organizational goals on each level
(using toolkits and workshops).

 Rorsted didn’t disregard developing the culture, but indeed pushed to

develop the needed “winning culture” as soon as he completed executing
the hard decisions needed.

 Understanding that cultural transformation would take a while and cannot be

implemented on spot.

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 2) Rorsted Approach

Sales Growth = percentage change in sales over a

given time period

• Measures how quickly a company has been

growing its sales.
• Helps understand whether the demand for a
company's products or services will be increasing
in the future.

EBIT Margin = (operating earnings) / (quarterly sales)

• Allows investors to understand true business costs

• Lower EBIT Margins indicate lower profitability
when comparing against its competitors
(competitive landscape or a issue just within the
company).

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 2) Rorsted Approach

ROCE = EBIT/Capital Employed

= EBIT/(Total Assets – Current Liabilities)
Market Size = Number of individuals in a certain
market segment who are potential buyers
• A profitability ratio
• Measures how efficiently a company is using its
• Useful to determine market size before launching
capital to generate profits.
a new product or service.
• Commonly used by investors to determine
whether a company is suitable to invest in or not.
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 3) Risks of Rorsted’s Approach
1) The Forced Ranking System has many downsides, including

 Creating unhealthy competitive spirit Internally

(Possibility of unethical behavior)
 Possible victimized employees with goal correlation
 Losing wrongly allocated talent
 Legal risks for firing some
 Alienating some of the talent population

2) Stretch Targets also have some downsides including:

 Employee burnout and increased stress levels
 Promoting unhealthy corporate culture (work life
balance challenges)

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 3) Risks of Rorsted’s Approach

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 4) Assuming that the 2012 EBIT margin goal is achieved, how should
Rorsted motivate high performance for the next five years?

• Keep focus on financial performance

Business • Grow more in emerging markets
• Diversify for bigger market share in Laundry and Personal care

• Utilize more components of Transformational Leadership.

Global • Eliminate Stretch Goals, Forced Ranking System – use more feedback
systems in performance management (Add on goals, small wins)
Team • Use more Down-Up approaches
• Employee satisfaction

Customers • Focus on customer satisfaction and customer loyalty

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 4) Assuming that the 2012 EBIT margin goal is achieved, how should
Rorsted motivate high performance for the next five years?

1) Start embedding a more inspirational leadership model rather that the existing
transformational leadership that was used between 2008 and 2012.

2) Consider more modern management practices that are more suited to millennial generation
1) Motivate by developmental goals
2) Eliminate forced ranking systems
3) Create more smart goals rather than stretch goals

3) Consider involving more feedback from individual contributors (Think Tanks, Design Thinking,
etc..)

4) Use Nudge Theory philosophy for change management.

5) Keep same focus on financial performance

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 4) Assuming that the 2012 EBIT margin goal is achieved, how should
Rorsted motivate high performance for the next five years?

6) Explore longer term financial winning and not short term only

7) Explore opportunities for growth after the effects of the 2008 global crisis is done

8) Consider diversification in order to compete with P&G as well as Unilever, possibly

acquisitions in Laundry and personal care business.

9) Expand in emerging markets

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 Thank you

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 Henkel & Stretch Goals

Rorsted designed ambitious Stretch targets for

Henkel, which led many analyst to wonder if this
was achievable or only wishful thinking

1) Sales growth of 3% to 5%
8.1% @ 2008, -3.9% 2009

2) Adjusted EBIT growth of 14%

10.3%@ 2008, 10% @2009

3) Adjusted earnings per preferred share of 10%

App. -50% 2008 to 2009

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