September 15, 1988
On March 23, 1979, Emerson Electric Company acquired Skil Corporation, a manufacturer of portable power tools, for $58 million. With sales of $2.6 billion in 1979, Emerson Electric produced a broad range of electrical and electronic products and systems.
Emerson Electric Company
Emerson Electric, originally a manufacturer of electric motors and fans, had gradually expanded into a broad range of consumer and industrial products. It classified its businesses into commercial and industrial components and systems; consumer goods (including portable electric tools); and government and defense products (see Table A).
Sales and Pretax Income of Emerson Electric by Business Segments ($ millions) 1978
Commercial and industrial
Government and defense
Source: Company annual reports
Emerson’s business units manufactured products principally in electrical and electronic fields, such as electric motors, controls, drives, and heating, ventilating, and air conditioning equipment. The company also manufactured power chain saws, gas cutting and welding equipment, vacuum cleaners, bench power tools (which it sold to Sears), and other consumer goods.
With a stated goal of being the so-called best-cost producer in as many of its markets as possible, Emerson stressed cost reduction. Emerson defined best cost as the lowest-cost producer of high-quality products, making its products a superior customer value. Each division was measured on growth and return on invested capital.
Cheng G. Ong wrote this case in collaboration with Professor Michael E. Porter on the basis of published materials and interviews with company executives. It is intended as a basis for class discussion rather than to illustrate effective or ineffective handling of an administrative situation.
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Emerson had embarked on a program of acquisitions to meet its aggressive goals of growing sales 15% annually and doubling earnings by 1981. Previously, Emerson had acquired only financially successful companies and had retained existing management. With the Skil acquisition, it broke precedent. Carried by a highly profitable electronic switch company, Skil had registered mediocre financial performance. Because of Emerson’s major position in the chain saw industry with its Beaird-Poulan Division, for antitrust reasons Emerson had to divest Skil’s $20 million in chain saw sales on acquiring Skil. From Emerson’s perspective, Skil was a turnaround situation. Chuck Knight, CEO of Emerson, wondered if Skil would represent a successful new diversification approach or prove that Emerson’s past acquisition philosophy had been correct. Jim Hardymon and Bill Davis, Emerson veterans installed as Skil’s new president and marketing vice president, had a more pressing problem. Faced with stiff competition from Black & Decker, Sears, and emerging Japanese competitors, Hardymon and Davis had to forge a new strategic direction.
The Portable Power Tool Industry
The power tool industry consisted of portable and stationary tools powered by electricity, gasoline, or air. Stationary...