Randal C. Picker on “Gillette’s Strange History with the Razor and Blade Strategy

Randal C. Picker

Here is an excerpt from an article written by Randal C. Picker for the Harvard Business Review blog. To read the complete article, check out other articles and resources, and/or sign up for a free subscription to Harvard Business Review’s Daily Alerts, please click here

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In 1904, King Gillette — who names their kid King? — received two patents on razors, blades, and the combination of the two. As the patents make clear, Gillette had a clear vision of the markets that he would create: “Hence,” stated the patent application, “I am able to produce and sell my blades so cheaply that the user may buy them in quantities and throw them away when dull without making the expense … as great as that of keeping the prior blades sharp.”

But Gillette did more than invent a new razor and a new blade. As Chris Anderson notes in his recent business bestseller, Free, Gillette invented an entire business strategy, one that’s still invoked in business schools and implemented today across many industries — from VCRs and DVD players to video game systems like the Xbox and now ebook readers. It’s pretty simple: invest in an installed base by selling a product at low prices or even giving them away, then sell a related product at high prices to recoup the prior investment. King Gillette launched us down this road.

Or did he? In a recent draft paper, I have looked at the early days of Gillette, and the actual facts from the dawn of the disposable razor blades market are quite confounding. Gillette’s 1904 patents gave it the power to block entry into the installed base of handles that it would create. While other firms could and did enter the replaceable-blade market with their own handles and blades, no one could produce Gillette-style handles or blades during the life of the patents.

From 1904 through 1921, Gillette could have played razors-and-blades — low-price or free handles and expensive blades — but didn’t. Instead, Gillette set a high price for its handle and fought to maintain those high prices during the life of the patents. The firm understood to have invented razors-and-blades as a business strategy did not play that strategy at the point that it was best situated to do so.

It was only in 1921, when the 1904 patents expired, that Gillette started to play something like razors-and-blades, though the actual facts are much more interesting. Before the expiration of the Gillette patents, the replaceable-blade market was segmented, with Gillette occupying the high end with razor sets listing at $5.00 and other brands such as Ever-Ready and Gem Junior occupying the low-end with sets listing at $1.00.

Given Gillette’s high prices for its handle, it had cause to fear duplicative entries into the handles market when its patents expired, but it had a solution: in 1921, it dropped its old handle prices to match those of its replaceable-blade competitors. And Gillette simultaneously introduced a new patented razor handle sold at its traditional high price point. Gillette was now selling a product line, with the old-style Gillette priced to compete at the low-end and the new Gillette occupying the high end. Gillette foreclosed low-end entry by doing it itself and also offered an upgrade path with the new handle.

Gillette’s pricing strategy for its replacement blades showed a remarkable stickiness. By 1909, the Gillette list price for a dozen blades was $1 and Gillette maintained that price until 1924, though there clearly was discounting off of list. In 1924, Gillette reduced the number of blades in a pack from 12 to 10 but maintained the $1.00 list price — a real price jump if not a nominal one.

If Gillette had finally understood razors-and-blades they might have coupled their new low-end razor with higher blade prices, and the two changes do roughly coincide. But the other event, of course, was the expiration of the 1904 blade patents and eventual entry of Gillette blade competitors. That should have pushed blade prices down and made it difficult for Gillette to play razors-and-blades.

With the expiration of the patents, Gillette no longer had a way to tie the blades to the handles and thus, at least on paper, seemed to have no good way to play razors-and-blades. With the expiration of the patents, other companies could now make cheaper blades for Gillette’s handles, undercutting Gillette’s prices and therefore the strategy. So how did Gillette remain profitable, given that it missed its apparent dominant strategy? With sale of razor sets to the U.S. government during World War I and the jump in handle sales with the introduction of the low-price old-style handle, Gillette’s installed based jumped rapidly and the profits followed.

So it was exactly at that point — when it seemed no longer possible — that Gillette played something like razors-and-blades. That was also, incongruously, when it made the most money. Razors-and-blades seems to have worked at the point where the theory suggests that it shouldn’t have.

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Randal C. Picker is the Paul H. and Theo Leffmann Professor of Commercial Law; Senior Fellow, the Computation Institute of the University of Chicago and Argonne National Laboratory. Picker’s primary areas of interest are the laws relating to intellectual property, competition policy and regulated industries, and applications of game theory and agent-based computer simulations to the law. He is the co-author of Game Theory and the Law.

Empowered: A book review by Bob Morris

Empowered: Unleash Your Employees, Energize Your Customers, and Transform Your Business
Josh Bernoff and Ted Schadler
Harvard Business Press (2010)

Many years ago, Southwest Airlines’ then chairman and CEO, Herb Kelleher, explained his company’s competitive advantage: “Our people. We take really good care of them, they take really good care of our customers, and then our customers take really good care of our shareholders.” I recalled those comments as I began to read this book in which Josh Bernoff and Ted Schadler explain how to create what Ben McConnell and Jackie Huba characterize as “customer evangelists” by first creating “highly empowered and resourceful operatives: HEROes for short.”

To a much greater extent than at any prior time that I can recall, customers today are self-directed, and, yes, self-empowered. They have instant access to more and better sources of information about just anything they may be thinking about purchasing. Moreover, they have more and better choices re when, where, and how to make a purchase. It is imperative, therefore, that everyone who interacts with a customer be empowered (i.e. have the authority) to make whatever decision and/or take whatever action may be necessary to solve a customer’s problem or in some other way provide whatever assistance a customer may need.

Bernoff and Schadler make brilliant use of various reader-friendly devices, such as Tables, Figures, mini-case studies, and bullet point checklists. For example, Table 1-1 (on Page 13) illustrates how “the forces in the groundswell power shift apply in the marketplace and the workplace in terms of (a) groundswell technology trends (e.g. smart mobile devices), how customers are empowered by it (e.g. get information about products and share it regardless of location), how to serve customers with it (e.g. create mobile applications to provide information to customers), and how workers benefit from it (e.g. collaborate with colleagues and partners from any location). Mini-case studies include those of Best Buy (Pages 7-11), Black & Decker (21-23), Thomson Reuters (31-34), Ford (46-50), Intuit (63-68), Zappos (68-71), the NFL Philadelphia Eagles (85-88), NHL (105-107), Sunbelt Rentals (141-142), and IBM Blue (166-169).

Most of the material in this book consists of information, insights, and advice that, Bernoff and Schadler fervently hope, will help business leaders to empower employees, to develop and then support HERoes. In most of the organizations with which I have been associated, however, senior-level executives tend not to see themselves as “employees”; moreover, they are reluctant to empower those whom they do view as employees. (I wish I had a dollar for every time I heard one of the C-Suiters refer to non-executives as “them.”) Of course, as they clearly indicate in their book, Bernoff and Schadler fully understand how difficult it will be for many of their readers to become change agents in a company “at the start of the journey toward empowering [its] HERoes.”

What to do? Here is what they suggest: “First, spend some time learning how mobile, video, cloud, and social technologies work…Second, don’t just identify customer problems, imagine solutions…Third, reach out to people who can help…Fourth, build a plan [such as the Effort-Value Evaluation in Chapter 2]…If your project affects customers or employees, you’ll generally need some management approval – but you’ll have to balance the need to get approvals higher up in the organization with the ability to get started.”

First is good – Better is better (Facebook won!)

Facebook owns its market, maybe the whole world!  But it wasn’t first – it was just simpler to use, (and very, very, very, very competitive).

Here’s the key quote:

Campus Network figured it out first. Facebook just executed it better.

Read about this here: The Other Social Network: It launched first. It had cooler features. Why did Columbia’s Campus Network lose out to Harvard’s Facebook? by Christopher Beam.

From Roger Staubach to Title IX Babies – Athletic Endeavor Really Can Lead to Business Success

Roger Staubach: Super Bowl Winner in Football -- Super Bowl winner in Business (Real Estate)

Legendary is not a strong enough word.  Here in Dallas, whatever punch the word “legendary” carries, it is not enough to describe the name Roger Staubach.  The winner of two Super Bowls for the Dallas Cowboys, Roger Staubach is simply the man.  And his success on the field carried over into a vast Real Estate success.  When I moved to Dallas in 1987, it seemed that the name Roger Staubach was always staring at me from one corner or another.

We have always known that athletic contests build some kind of inner something that carries over into life in ways that are almost too numerous to mention, or even fully grasp.  Now researchers are trying to find those ways.

And it is true for women as well as men.  In a fascinating article on the Daily Beast, Female Jocks Rule the World by Danielle Friedman, we learn quite a bit about this.  Here are a number of excerpts.  (I will follow with a few observations of my own).

Athletic women make more money and hold more upper-management positions than those who shun sports—and their numbers are growing. Danielle Friedman on why it pays to play.

But the young entrepreneurs have undoubtedly carried lessons from their days as varsity athletes into the boardroom, attributing many of their managerial skills to their sporty pasts.

“Our coach always had us write our goals on the back of our hands to be constantly reminded of them, to give one example,” says Jenny Carter Fleiss, who was captain of her track team in Riverdale, New York. “Today, I still keep a list of my personal goals posted right in front of me—and encourage everyone else at Rent the Runway to do this—as a constant reminder of the bigger-picture things we’re working on.”

Perhaps not surprisingly, Carter Fleiss and Hyman are in good company. Former high school and college athletes of all abilities hold positions of power in an array of arenas, from Sarah Palin (basketball) to Ellen DeGeneres (tennis). Eight-two percent of executive businesswomen played organized sports after elementary school, according to a 2002 study by mutual fund company Oppenheimer, and evidence suggests that figure will likely rise over the next few decades, as more post-Title IX babies enter the workforce.

“There’s a whole lot of anecdotal evidence that disparities between women and men in the workplace are caused by a lack of athletic training and experience,” says Kathryn Kolbert, director of the Athena Center for Leadership Studies at Barnard College. “We’d now like to do the research to prove it.”

In addition to gaining valuable skills, women who played (or passionately follow, for that matter) sports gain unique access to “boys” networks that they’d otherwise be excluded from, experts say. Also compelling: The Oppenheimer study found that one in six adult women identify themselves as athletic—but the figure rises to almost half of women who make more than $75,000.

Stevenson found that ramping up girls’ participation in sports had a direct effect on their education and employment, explaining about 20 percent of the increase in education and about 40 percent of the rise in employment for women ages 25 to 34,

“It’s not just that the people who are going to do well in life play sports, but that sports help people do better in life,” Stevenson told Parker-Pope. “While I only show this for girls, it’s reasonable to believe it’s true for boys as well.”

…evidence suggests that participating in an organized sport can benefit nearly all women, deeply instilling lessons from the value of practice to teamwork, says Kolbert. It provides participants with a peer group, and a feeling of inclusion. And perhaps most importantly, it helps cultivate resilience.

My observations:
I was a tennis player.  (The operative word is “was”).  I was ranked fairly high in Texas my Senior year in high school, had a great, great experience on my tennis teams, both in high school and in college, and my college degree was substantially paid for by my tennis scholarship.  I was good – not anywhere near great (I could not challenge the best – and in my years, the best was Trinity University), but good.

To this day, when I run into an old tennis buddy or opponent, my heart beats faster, and the conversation just starts flying.

In my years studying business success, the wisdom of a good coach or athlete seems to lift the level of the thought and conversation.  On this blog, the single most viewed article we’ve ever had (fueled somewhat by his death) was about John Wooden – simply the greatest coach who ever lived.  (Here’s the article: Wisdom from Coach Wooden: “A coach is someone who can give correction without creating resentment”).  And blog posts about Peyton Manning, Coach Bear Bryant, Tony Dungy, John Madden, all have brought more than the average number of page views than articles about the other mere mortals in business seem to generate.

And in one area of business endeavor, the illustrations just seem to come in an avalanche:  the 10,000 hour rule, and the need for deliberate practice, is simply best explained by athletic discipline success stories (though music stories, dance stories, and many others, could certainly make the point in powerful ways also).  Though Malcolm Gladwell includes stories of Bill Gates and the Beatles in his discussion of the 10,000 hour rule in Outliers, he begins it with stories of Canadian Junior Hockey and international junior soccer competition.

And if you want to understand the impact of, the power of, work ethic and discipline and the need for constant improvement, you may as well just bow down to the legendary practices of such athletes as Michael Jordan and Jerry Rice and Peyton Manning and Nolan Ryan and…

And if you want the best cautionary tales, just check into stories of athletes who could have been great, but lacked those qualities that could have kept them on the path to such greatness.  (For one such cautionary tale, just consider the tale of one-game-wonder Clint Longley, the “mad bomber.”  A great quarterback that never was…)

The article I quoted above offers a lot to help us understand the power of such athletic undergirdings to business success.  But here’s something else to throw in the mix.  When I read about deliberate practice, the place/role of a good coach, the 10,000 hour rule, I do look back on my athletic successes, but my athletic failures and disappointments are what I really remember.  And in remembering those, I feel somewhat driven to do better at this chapter of my life.  Maybe the challenge of athletic disappointment drives us to do better at doing better later in life.

I guess all of this is my way of saying that I am not surprised at the evidence that athletic endeavor — practice, teamwork, competition, the role of a good coach — all help lead to success later in life.

And for women to rise as fast as they have after the adoption of Title IX — well, let’s just say we shouldn’t be surprised.