# HARVARD |BUSINESS|SCHOOL 9-101-010 crEcogyss. MILLER. . Bausch & Lomb, Inc. (A) "Basch & Lomb has eheriomencl future” . ECHO Daniel E. Gill, ousch & Lomb, Inc, November 22, 1992, Buffilo News Bausch & Lomb, Inc. (B&L) a.ierufacturr of optical and health care products headquartered in Rochester, New York, was set to realize i 10th consecitive year of increases int net sales and earnings from continuing. aperations:befote non-recurring charges when Gill. made this statement (Exhibits 1 and 2). This string of Successes had been created with a combination of strong product innovation, savvy marketing, andia senior management team focused on tight financial management. However, BEL success had attracted attention and competition. Thus, to fulfill Gill's prediction of a phenomenal future, BL's senior management team could not rely on their past successes. Instead, they would need to use those successes:as a base on‘which they could build an even stronger and more efficient B&L. 2 Company Background & , 11853, John Jacob Bausch, a German immigrant, opened a.smali optical goods store in Rochester, New York. Shortly thereafter, Henry Lomb loaned Bausch $60 and became his business partner. The two men experienced almost immediate success due to Bausch’s invention of hard-rubber eyeglass isames, which were considerably more durable than the wire frames ofthe day. In 1912, BEL began producing optical-quality glass. “Until.this timesisuch glass was typically imported from Europe. During World War {, the company supplied the'U-S. military with lenses for binoculars, searchlights, telescopes, and riflescopes. In 1929, the US. Army Air Caeps asked B&L to ‘manufacture a prodiuct that would reduce sun glare for pilots. The company responded with Ray-Bat sunglasses. During World War IL, BL produced over three million pounds of lenses.for the US. military, which honored the company by naming a ship after Henry Lomb.-Ivthe 19506:B&L. won an “Oscar” from the US. Academy of Motion Picture Aris and Sciences for its Cinemasagp¥ lens, Over the 25-year period leading up t0 1995 B&eL enjoyed a string of hit products that made its past achievements soem almost inconsequential. In 1971 he US, Food and Drug Administation (ED) approved forsale « new vsior-corection device pioneered by the comparty~-sof contact lensed In {he 1900, the populeriy of Ray-Ban sunglasses seared efter being featured in mavies such a8 Risky Business and Tep Gun. In 1982, ReNu contact lens solution, « patented dual-purpose cleaier/! ‘rfemors Giese 8 lee and Chistes Foe props hs cne HS csc are developed aba he tai for es casio. Cans Noret ian Suerve anossnan sourteot peony dom, lasranansafesectieo hecive managers opie ©2000 Presiden ond Felons of Haran Case, Tossa ope of rqunpuemion to epratce mateals, ll { A55 7H, SRE Hamer Busters Show Fublching Bos, eA IES oe po te np! wen Romp harvard Ne por of this pubcaten may be Tepredonca sumed rh tense! syst sce ns spessshet or teuontiod It any tm of Oy an moos lear chan RiRSpring mona o otheiten hoa he poison of Harete Busan S00.roms Bausch & Lomb, Ine. (8) see can, became BEL’s single best-selling product despite having been launched only four years [As of 1893, BEL’s operations were split batweed two business segments. The Optics Segment \aprimaily-eonisod of selling premiunepriced sunglasses under such brand names a8 Ray-Ban and Healtheare Segment was divided into three product sectors—Personal Health, Medical, Ra and Biomedical. The Personal Health Sector comprised products purchased directly by consumers in health and Deauty séetions of pharmacies, grocery ‘stores, and mass merchandise outlets. These products included ReNu. and Boston contact ens solutions, Clear Choice mouthwash, Cural and Soft Sense skin moisturizers, and Inferplak power toothbrushes: B&L also produced various over-the-counter ‘medications such as hayfever remedies, artificial teary, nasal and ocular decongestants, analgesics, {ood supplements, sedatives;aiid sleep aids: ‘The Medical Sector Comprised contact lenses, ophthalmic pharmaceuticals, hearing aids, dental implants, and other products soldto health cate, professionals’ or which were obtainable by consumers only through a prescription. B&L’s product line of soft contact lenses included such brand names a5 SeeQuence, Ceaistis, Matélistand Optiea. Through 1993 acquisitions, Miraele-Ear hearing aides and Steri-Oss dental implants were added to this sector’s product mix. ! ‘The Biomedical Sector comprised products supplied to customers engaged in pharmaceutical cesses rods were ard ough BUL'8.ChvesRrver Laborato Subilry and included purpose-bred animals and bicengineéred proteins,” BEL's top management monitored the performancifif each'sector using an aggressive set of sales and other financial performance goals. As president af the Contact lens division, Harold O. Johnson had led the division to meet or exceed Sales goals fbr each of the 48 months between 1989 and 1992 ‘and report double-digit revenue growth for each of those years. ‘The Healthcare Segment accounted for approximately two-thirds of B&&L’s net sales between 1992 and 1993 (Exhibit 3). Exhibit 4 describes the breakdown ofthis segments 1992-1993 net sales by product sector. vo . af New Sales Strategy ' usd In 1987, Johnson & Johnéon, Ine. (J&) introduced disposable soft contact lenses undier the Actnue brand name? BA&L initially chose not to develap disposables, but the company: was forced to backtrack when this market quickly expancied. Exhibit 6 describes the peruentage of US. soft contact Jens wearers using disposable, planned replacement, arid conventional lenses in 1992: ancl 19932 BKL’s executives now realized that they were in the unfamiliar sole of playing aith-up with a competitor. The situation was made even more difficult by the fact that gains if the disposable contact lens market threatened B&L's lucrative conventional lens brands. Thus, BéeL was'in the: tricky position of needing to capture a share ofthe disposable market while still effectively managing, 2 The sources for many of the demils regarding BEL's intemal management and sles strtesies are Mark Margont “Numbers Game at Beusch & Lomb?” Busines Wes, December 19,1994, and the Securities and Fxchange Administstive Proceeding file No, +6888 2 Disposals ate designed to be worn for upto two weeks before being Haroven ava. 5 planned replacement lees are designed a be rplaad everyone 1 sx months, Canvoatonal lenses are designed to be replaced ona yest bass 24 Basch & Lomb, Ine (8) s01010 Sata _iine'cufrénty larger, and nore profitable, conventional lens market. Given the tradition of tight flnaneial management at the company, this needed to be done without a large increase in the resources consumed by the contact lens division. , ' ty Pecember 1993, BEL held a meeting with its U.S. contact lens distributors to unveil a new sales Soigifategy {or'conventional soft contact lenses. Exhibit,5 provides information on the geographic mix ‘Of the eBmpany’s 1992-1983 contact lens xpvenues. Johnson announced that direct shipments of Condghtional lenses fo high-volume customers were going t0 be cut. Instead, this business would be chantieled throug distributors 50 the, company could free up marketing resources to compete more effectively with J). ' BEL felt that the new distribution arningement’ would motivate the company’s distributors to increase their focus on and:promotion of conventional contact lenses. Fuster, B&eL’s own sales force would then be able to cus on the disposable and planned replacement lens that appeared to be the Jaret of the futures ‘Thus; the new distibution strategy was part of the attempt to gain a portion of Jéel’s business while simultaneously maintaining conventional lens sales. ‘Asa result of BEL’ stzategié move, Jonson tld the distributors that they would have fo increase inventories of conventional? Jensts inorder te ensure that demand could be met. He then asked the distributors to absorb BAL’s entine inventory af approximately 1.8 million pais of conventional lehs. Moreover, these purchases had i be made by December 25, the day on which B&L closed its books for the 1993 fiscal year. ' 5 i if [B&L's distributors weleémed the zhane to develop new business, but several questioned whether the new business warranted the relatively large increase in Inventory BAL felt was necessary to begin the program. Further, there was uncertainty regatdling the reaction of the high-volume customers, Would they really be willing to order conventignal contacts from a distributor while continuing © deal with B&L for many of their other purchages?” Johnson responded with reassurances and a plan to assist the distributors. This plan included Johnson himself encouraging the large customers to do business with the distributors, the cfeatior of a “Premier Vision” marketing plan that, among other things, would allow distributors to award frequent flyer points to small.and mid-size customers that purchased increased quantities 9f contact lens and a financial incentive package that would reward any distributors able to increase B&L’s market share of the conventional lens business. As a further incentive to embrace the plan, Johnson anounced that aity distributor failing to comply would be permanently cut off irom doing business With the company "!0> fh Thirty of B&L's origital 32 distributors accepted the plan. For most distributors this represented a substantial increase in conventional lens inventory. In fact, B&L had to increase the-credit limits of 11 of the distributors; in at least one case the limit was increased by more than allowed the distributors to receive the inventory, but also placed many'of'tiem in position. In one extreme example, a distibutor with an approximate net worth of as to purchase inventory worth $2.5 million. In response to the increased risks, fohnson asked Ermin lanancone, contact lens divisional controller, and Kurt Matsumoto, director of distrivator sales)-to supplement B&L’s normal credit review procedures by' requiring signed promissory notes for the amounts owed. . g “The sales activity related to this new program resulted in an additional $22 million of net sveriues and was a factor in BEL being able to state in ils 1993 annual report that “contact lens revertues rose 13% over 1992 and finished the year strongly.” Txhibit 7 describes the criteria for recognition of revenues and gains as prescribed by the Financial Accounting Standards Board (FASB), which sets guidelines for accounting procedures of US, companies. Exhibit § consists of the audit opinion for BEL's 1993 financial statements