Problem Statement

Prior to Kasper Rorsted taking over as CEO in 2008, Henkel enjoyed comfortable growth and profits.
However, the company faced several challenges related to complacency and the impact of the global
financial crisis, which significantly affected its key markets. One of the main issues Henkel
encountered was the perception of being a "happy underperformer" with a lack of competitive
drive. Despite achieving sales of €14 billion in 2008 and holding a significant position in the
consumer goods industry, concerns persisted about the company's complacency and its ability to
sustain growth and profitability.

The following key data and figures from the case shed light on the problem:

1. In 2008, Henkel reported sales of €14 billion, marking an 8% increase from the previous year.
While this growth was positive, doubts lingered about the company's capacity to achieve
faster and more robust growth compared to its competitors.
2. The EBIT margin in 2008 stood at 10.3%, indicating profitability. However, it may have been
seen as relatively lower compared to industry peers or market expectations.
3. Henkel faced fierce competition in the consumer goods industry, especially in the laundry
and personal care segments. Major brands like Dial soap, Schwarzkopf hair care products,
and Persil laundry detergent had to contend with global brands from much larger
competitors like Procter & Gamble, Unilever, and L'Oreal.
4. By the second half of 2008, the global financial crisis and subsequent economic slowdown
began impacting Henkel's key markets. Reduced consumer spending, a shift to lower-priced
brands, and a focus on essential products all contributed to a decline in volume growth
across Henkel's business units.
5. Some Henkel executives and analysts perceived the company as complacent, often labeling
it a "happy underperformer" consistently ranking as number two or three in the market.
6. The company's culture promoted long employee tenure and a history of delivering positive
feedback, even to underperforming employees. The lack of differentiation in performance
evaluation and the absence of challenging performance targets added to the perception of
complacency.
Industry Analysis

The consumer goods industry is a highly competitive sector that offers a wide range of products for
daily living and personal care. Henkel is focused on manufacturing and selling various items,
including adhesives, sealants, laundry detergents, home care products, shampoos, hair care
products, skin creams, deodorants, and toothpaste.

Porter's 5 forces analysis of the consumer goods industry:

1. Threat of new entrants: Moderate to high. Established multinational giants have significant
advantages in economies of scale, brand recognition, and distribution networks. Nevertheless, there
are opportunities for new players to enter niche markets or introduce innovative products.

2. Bargaining Power of Buyers: Extremely High. Consumers have many choices and can easily switch
brands based on factors like price, quality, and brand perception.

3. Bargaining Power of Suppliers: Moderate to high, depending on the specific product. Suppliers
may hold some negotiating power.

4. Threat of substitutes: High. There are numerous alternatives for most consumer products,
enabling customers to switch between brands or product categories based on preferences, price
changes, or emerging trends. Additionally, technological advancements can lead to the development
of innovative products that disrupt traditional markets.

5. Competitive rivalry: High. The industry's fragmented nature and the presence of strong regional
players contribute to fierce competition. Companies use aggressive marketing, new product
launches, and price competition to gain a competitive advantage. Differentiation through branding,
product innovation, and customer experience is vital for maintaining a competitive position.

In summary, the consumer goods industry is fiercely competitive, offering a wide array of products
for consumers. Henkel competes in this challenging landscape, and companies must focus on
differentiation and innovation to succeed in the market.
Company Analysis

Henkel's Position in the Industry:

In 2008, Henkel reported sales of €14 billion, conducting business operations in 125 countries
worldwide. The majority of its sales (64%) came from the EMEA region, followed by North America
(19%), Asia-Pacific (11%), and Latin America (6%).

Henkel operates within three major business units:

1. Adhesive Technologies: Accounting for 48% of overall sales, this unit offers products like sealants
and surface treatments for both industrial customers and consumers.

2. Laundry and Home Care: Contributing 30% of sales, this unit provides products such as detergents
and home care items.

3. Cosmetics/Toiletries: Contributing 22% of sales, this unit offers products like shampoos, hair
coloring, skin creams, deodorants, and toothpaste.

Competitive Landscape:

Henkel holds a leading position in the adhesives business, competing with companies like 3M, which
is also a significant player with global operations and reported sales of €18.1 billion in 2008.
However, in the laundry and personal care segments, Henkel faces competition from larger global
brands like Procter & Gamble, Unilever, and L'Oreal, which boast more extensive product portfolios
and a stronger global presence.

Henkel's Strategy Before Kasper Rorsted:

1. Cost Leadership: Henkel adopted elements of a cost leadership strategy in its Adhesive
Technologies business unit. Being an industry leader in adhesives, it competed effectively with
companies like 3M. Its strong position was a result of efficient production, supply chain
management, and cost optimization, enabling the company to offer competitive prices to both
industrial customers and consumers.

2. Differentiation: In its Laundry and Home Care and Cosmetics/Toiletries business units, Henkel
pursued a differentiation strategy. Despite facing tough competition from global giants like Procter &
Gamble, Unilever, and L'Oreal, Henkel distinguished itself through unique product offerings and
innovative solutions in personal care and home care segments. The company tailored its personal
care products, including shampoos, hair coloring, skin creams, deodorants, and toothpaste, to meet
specific consumer needs and preferences.

Structure and Culture:

The case data indicates that Henkel's organizational structure was likely hierarchical, consisting of
multiple business units or divisions.Before Kasper Rorsted took over as CEO, the company's work
culture was described as complacent, and there were concerns about the lack of a strong
competitive spirit. The term "happy underperformer" was used to characterize the culture,
suggesting contentment with the status quo despite stability and positive aspects. Henkel had a
culture of long employee tenure and a history of delivering positive feedback, even to
underperforming employees. This lack of differentiation in performance evaluation and the absence
of challenging performance targets contributed to the perception of complacency.
Recommendation

The statement suggests that the top-performing employees may reach a point of saturation where
they are unable to further improve their performance. The introduction of a new performance model
puts a significant amount of stress on the employees, leading them to constantly feel under scrutiny
and pressure to meet high expectations. In this new model, employees are expected to perform at
150% capacity, which can be demotivating and contrary to Vroom's expectancy theory, which states
that motivation is influenced by the belief that effort will lead to improved performance.

As a result of these factors, top performers may feel discouraged from striving to improve further, as
they believe they are already giving their best effort. This can lead to a decline in their motivation
and overall job satisfaction. Moreover, the high-pressure environment and unrealistic expectations
may push some employees to consider leaving the organization, seeking more sustainable and
supportive work cultures elsewhere.

Ultimately, if this performance model is not adjusted to consider individual capabilities and
motivation factors, it may lead to an increase in employee turnover, negatively impacting the
organization's stability and productivity. A sustainable and thriving work culture should promote
employee growth, recognize achievements, and align performance expectations with employees'
abilities, fostering a positive and motivated workforce.