Case Study 1: Electrolux

Alexandra Toni Irina Nicoleta Scarlat Oana Marin Angelo Catrachile Mircea Buga Lucian Negoi

Table of Contents
Electrolux. Summary of the case study...................................................3 Identification of the problem.................................................................3 Alternative solutions for solving the problem.........................................4 Solution 1. Advantages and disadvantages..........................................................5 Solution 2. Advantages and disadvantages..........................................................5 Solution 3. Advantages and disadvantages..........................................................6 Selecting the optimal solution. A cost-benefit analysis............................6 Implementing the optimal solution.........................................................8 Resources needed................................................................................................8 Diminishing the disadvantages............................................................................8 Implementation steps..........................................................................................8

1.

ELECTROLUX -

SUMMARY OF THE CASE STUDY

The study of the Electrolux Company is very interesting, taking into account its world share of sales, its expanding strategy and the decisions that were made by its managers over the years. The wish of the managers to obtain economies of scale was highlighted by the fact that Electrolux expanded its global strategy by acquiring smaller companies that produced household equipment even if these companies had different product lines. Its main product was vacuum cleaners until the 1960s, when the firm managed to expand by creating its very own plants of production of vacuum cleaners. The next decade of its expansion, Electrolux started acquiring smaller companies such as Facit, Tappan, Arthur Martin, Therma, Husqvarna, companies which were producing other types of electrical appliances and thus, Electrolux invested in them in order to enlarge its portfolio of clients. In the 1980s, Electrolux shifted from horizontal expansion to the vertical one by acquiring Granges, Swedens biggest metal producer and fabricator, an acquisition that was highly debated between economic analysts, because of the size and the total diversified profile of this company. Even so, Electrolux succeeded in taking over a company which was also a target for competitive companies. Besides becoming a raw materials supplier, Electrolux managed to self-supply itself with aluminium, copper, plastics and other materials necessary to produce the marketed appliances. After this acquisition, Electrolux started again acquisitions of home appliance equipment by merging with Zanussi and White Consolidated Industries and thus becoming a world leader in the sales of appliances. However, the leadership in the worlds market was challenged by Whirlpool, a company that has merged with the appliances section of Phillips, a very important player in the worlds market. However, the Electrolux president Anders Scharp realised that the high degree of industry concentration will no longer allow for growth through acquiring household appliances. Because of these expansionist policies of Electroluxs managers over the years, it was very hard for this giant to achieve a standardization of its products and brand names and this fact was proved by the very large range of products. Since sales have been increasing much more rapidly than profits and standardisation is hard to be put in practice, critics wonder whether Electrolux will be able to reach its profit targets further on.

2.

IDENTIFICATION

OF THE PROBLEM

Electrolux was found in the situation of facing the problem it had created on its own. Because of the need of taking over the global market, it also faced 3

unexpected negative aspects. The biggest mistake it has done was not taking into consideration that along with the internationalization, costs would increase and competition also. Acquiring firms locally known in different parts of the World was a good choice as far as economies of scale were concerned, but not as far as costs were. The Swedish market was too small but didnt create high spending. I would imagine Electrolux as a very optimistic member of the market, maybe too confident on its powers of creating a monopoly and also not having a clear realistic vision of what was happening internationally. More to it, Electrolux was thinking too domestically and considered not to change its tactics even though the number of members on the supply side was going to increase. Electrolux also seemed to make other mistakes as buying just because it saw competition doing the same thing (an automatic response to Beijerinvests acquisition was buying Granges) and buying producers which developed not only its chain of products but also others very different from its own. First, it was a luxury it could afford for himself, but as costs increased it became a burden. Most of the times, it bought companies just for small insignificant parts of their production. Although the profile of the firm was different, the slightest fact that a few of their products were of the same line as those of Electrolux, made Electrolux have no second thoughts concerning their decision. As a conclusion, I would state Electroluxs issue as lacking maturity and responsibility: it didnt look further, on the long run, and it didnt take into consideration the branding aspects, which can be a very effective arm against competition. If it had thought of branding it would have taken into consideration the public perception of its products and never have taken the risk so early to change it chains of products (so that it would be harder for customers to find themselves in the old Electrolux style). The main negative effects on the company were the costly operations Electrolux had to deal with. The causes were: the Husqvarna case, which shows the results of a too extended acquisition Electrolux dealt to sell the motorcycle product line, but had to cope with the chain-saw product line. Instead of fighting harder in order sell the chain-saw product line, Electrolux started to acquire different competitors on the chain saw market in order to develop this market as well. Another cause leading to negative effects was the lack of control over what it bought: there were many firms which on their market were powerful and were acting on their own, not responding to the main headquarters strategies. Then there were the negative effects, caused by the firms decision to take over the global market, through the standardization of their kitchen chain. To standardize such a product, which is very subjective by definition, can bring high expenditures and the risky operation was finally recognized even by Electrolux. Also, the way they looked to the demand side must have been a cause for their not so satisfying results: they considered the customer to accept the Electrolux brand whatever the product and to manifest a loyal behaviour. This didnt happen as it was still an early stage for that, and the customers on other markets related themselves more to other brands then Electrolux.

Another cause for the negative situation in which they found themselves was not taking seriously the power of their competitors, and overestimating their own power. When they had to deal with Whirlpool the effects were tremendous, in terms of costs. On total, the effects were high costs, time consuming projects which didnt pay off and the 1990 period in which the company was in a critical situation.

3.

ALTERNATIVE

SOLUTIONS FOR SOLVING THE

INTERNATIONALISATION PROBLEM

The strategy of Electrolux evolved significantly over time. If at the very beginning Electrolux was a small company trying hard to build its own facilities for selling vacuum cleaners in Sweden, each decade brought about a daring option. They began extending themselves firstly at horizontal level and then at vertical one, seeing only the sky as a limit. Since the strategy of going abroad was chosen to be made through massive acquisitions its direct investment has increased a lot over time thus leading to sales evolving higher than profits, but proportionate with costs. Should Electrolux have taken over Granges? Electrolux had minimized raw material costs by taking over Granges and integrating its aluminium, copper and plastics into the appliance production. This should lead to the pay off for the $175 million which Electrolux used to buy Granges, although Electrolux had liquidities from selling all the unrelated companies a few years before. By the other hand, if Electrolux wouldnt had taken over Granges, it could easily continue its international horizontal expansion by acquiring more international firms and trying as before to increase the sales for those firms. This action influenced the marketing strategy by limiting the expansion which Electrolux was probably predicted from the following years. An alternative for taking over Granges, could had been acquiring a smaller international company or trying to obtain convenient contracts with local companies for the raw materials, in order to use in a proper way the marketing budget which could mean increasing the brand awareness. Another objective on the marketing agenda should have been to invest in customer satisfaction, by creating dedicated department which should make the brand appear more stable for the customers rather than continuing the massive acquisition process at the expense of consumer satisfaction. The problems that Electrolux is now facing are a result of it failing to stop the expansionist strategy at an acceptable level and realising afterwards that standardisation may not work well, while the costs exceed the benefits. The weak consumer awareness that brands have together with their huge number make it very expensive for Electrolux to recover the huge fixed investments while being profitable on the long run. Further on, alternative solutions will be discussed and one solution for Electrolux problem will be chosen in the end. SOLUTION 1
ADVANTAGES AND DISADVANTAGES

A good solution to this problem would be the limitation of all these acquires, and thus concentrating over the companies that had similar product lines. By this, 5

it was not needed to change the character and the image of the corporation by having widely diversified range of products and Electrolux would not have to invest in so many companies and relocate its resources in its basic product lines. The advantages of this policy would be the creation of stronger ties among Electroluxs basic operations and focusing on a few segments of the world market while having a smaller amount of products that need to be promoted in all market niches or segments. The disadvantage of this solution would be the fact that Electrolux would not have the same number of sales because of the limited product range. Moreover, some market niches will be lost, niches which would be taken over by competitive companies. Even so, Electrolux could maximize its sales by offering to its customers the best products. If the company is oriented into making a large amount of products, some of them will not be the best among its competitors because of the fact that the company cannot focus in so many areas of production and become the best in all. SOLUTION 2
ADVANTAGES AND DISADVANTAGES

Since Electrolux admitted its difficulty in streamlining operations one solution could be the standardization of products or in other words diminishing the variety of choices. Creating a super-product has it advantages and disadvantages, but it is an idea that deserves to be taken into consideration since managing a high variety of products proves to be unsuccessful over time.

Among the advantages that product standardisation implies we can state the fact that it boosts up the companys image. A product known at a global level by consumers all over the world could only be beneficial, since consumer awareness means higher profits and thus a higher profitability for the company. Moreover, money can be raised from selling different product lines which have been developed over time and whose value added can turn out to be profitable for the company. Among the disadvantages we find the hardness of cost levelling while trying to keep the same quality everywhere. Moreover, care has to be taken when standardizing products some products do need a certain degree of adaptation. SOLUTION 3
ADVANTAGES AND DISADVANTAGES

Electrolux chose diversification in their product acquisition. They didnt follow a technique friendly to standardization. They seemed very confident on their brand awareness, which they thought to be the answer to their higher profits despite the higher costs incurred. An alternative solution to their problem would be to reconsider their acquisition process, while paying more attention to marketing and advertising costs and campaigns. These would include surveys and research made at a deeper level, in order for Electrolux to better know its customers. A team of experts in marketing techniques should be hired first phase, monthly watching their evolution. As it was mentioned before, increased customer awareness and a smaller product portfolio will bring about increased revenues and 6

profitability. On the other hand, increased marketing efforts will reside in higher costs and this is considered to be the main disadvantage of this solution since Electrolux is not in the position to afford higher costs.

4.

SELECTING

THE OPTIMAL SOLUTION. A COST-BENEFIT ANALYSIS

In the previous chapter various alternative solutions for solving the Electroluxs problems were stated by different employees of the company. The goal of this very chapter is to choose the solution or the mix of solutions that best fits the needs of the company. The first solution to be discussed is that concerning future acquisitions. As the president of Electrolux mentioned, there are no future possibilities for growth through acquiring household-appliance firms since on the very moment there are two main competitors on the market. Thus the firm has to develop from within rather than from without as it has been accustomed in order to grab market share from its main competitor, Whirpool. Since a cartel would be illegal and the competition and antitrust laws will make illegal future take-overs, the company has to find other ways of developing itseld. In order to increase profitability it should no longer take over different firms and reverse the take-overs that proved out not to be profitable for the company. It is true that some market niches will be lost and that the volume of sales would decrease, but the company is interested in the rate of return and not in the volume of sales. Thus, the disadvantages of this first solution are small comparable with the disadvantages. As a result Electrolux should develop two main product lines home appliances in which it is among the world leaders and chain saw in which it is the absolute leader. Into the home appliances product line Electrolux should also integrate washing machines and cooking and kitchen equipment. In which regards the chain saw division, Electroluxs management should choose to found another brand (Electrosaw) in order to characterise better the chain saw division and to increase customer awareness. This specialisation will definitely lead to higher profits through a high volume of sales and lack of useless spending. In which regards the take-overs that should be reversed, the two commercial cleaning service firms should be sold in order to reach specialisation and to divide the products into two main product lines. Together with these, the vertical integration with Granges is by far too much for Electrolux. They have 2 main alternatives: either sell Granges and acquire a smaller raw materials provider in order to have self sufficiency either list Granges on the stock exchange in order to share ownership and to raise capital. From my perspective the best choice with Granges will be to sell it. Since it had developed, Electrolux can profitably sell it in the same time raising money for specialisation on the two product lines that have been left. Thus the first alternative solution will not only be adopted but also extended Electrolux will limit the take-overs and reverse those that had diversifying effects over the field of activity of the company. 7

The second alternative that Electrolux may pursue is to standardise all its products while keeping all the existent product lines. As it was previously shown, keeping all the product lines means lack of specialisation and customer will no longer be aware of the brand power when faced with such a large variety of choices. However, despite being as radical as it was initially parts of this alternative can be adopted by Electrolux in order to improve efficiency through cost optimisation. Scale economies can be reached if the entire world is divided into consumer groups. These consumer groups will be created according to similar characteristics and needs such that each product line will comprise fewer models that are standardised at group level. The standardised production can take place in different subsidiaries of Electrolux for different models and thus both economies of scale and consumer satisfaction are reached without standardising at world level. Since various models exist there is no need for price policies standardisation but at group level and not generally. Concerning marketing campaigns Electrolux must improve and invest in order to avoid the mistakes of the past such as the Nothing sucks like an Electrolux translated slogan for vacuum cleaners. A first movement will be to create two different brands: Electrolux for home appliances and Electrosaw for chain saws in order to differentiate the products offered in the minds of consumers while still offering the perspective of the same company. Further on, differentiated marketing campaigns have to be pursued in each customer groups, campaigns aimed at creating brand awareness and at increasing sales. It is true that these campaigns will imply higher costs, but since the solution is not the only one to be applied, increased costs can be financed by the sales of the other product lines that the company will give up at. Thus, the choice to be implemented is not a unique solution but a mixture of the three alternatives that were provided. Maybe the future global competitive situation in household appliances is in favour of several giant companies that will dominate the international market and will be aiming at creating monopolistic submarkets for themselves. In the Sustainability Report for 2003 the president of Electrolux states that The Electrolux strategy is to create sustainable solutions by pursuing business opportunities created as a result of changes in legislation and consumer preferences. In other words, anticipation and speculation are two key elements for Electrolux. This fits like a glove with the future perspectives for household appliances business, as creating giant companies require acquisitions of smaller companies (Electrolux already did this) and lots of premonitions about how the newly created market will shape.

5.
RESOURCES

IMPLEMENTING

THE OPTIMAL SOLUTION

NEEDED FOR IMPLEMENTING THE OPTIMAL SOLUTION

The main problem of Electrolux until now has been the inefficient use of the resources and the lack of specialisation in terms of product portfolio. Since the optimal solution aims at solving these basic problems, the resources needed are by far less costly than the present situation. 8

In this respect, the resources needed for putting the solution in practice are mainly human resources specialists have to be employed and a strong marketing department has to be created. From selling the cleaning services in US and France and Granges approximately 500 million Euros will be created in cash. Suppose the company is going to acquire a raw materials supplier at 30 million Euros. This small scale supplier will be enough in order to supply all the necessary raw materials while being cheap enough for the company. The rest of 470 million Euros will represent a surplus part of it can be used for rebranding the chain saw product division and hiring marketing specialists in order to lead aggressive marketing campaigns. This would cost approximately 200 million Euros (including advertising costs) and it will definitely pay back in less than one year. Thus, by applying the solution presented in the previous chapter the company will not only improve its current situation but also make savings to as much as 270 million Euros. These savings will be complemented by profit increases and costs decreases and thus will lead to an outstanding benefit. DIMINISHING
THE DISADVANTAGES OF THE CHOSEN SOLUTION

In which regards the disadvantages of the chosen solution, they are brought to a minimum by the very fact of choosing a mixture between alternative solutions. Decreased sales volume and the loss of market niches do no longer represent a problem since the increased profitability of the remaining market segments outweighs the costs of loosing sales volume and product lines. Moreover, product standardisation is not applied at the product line level but at customer group level there is no individual product of a certain type for all customers but there are fewer variants of products for specific groups of customers. Thus, all the disadvantages of absolute product standardisation are brought to a minimum. Finally the high costs implied by the extensive marketing campaign no longer represent a problem since they are financed through the sales of certain product divisions. As it was previously shown they definitely pay back and bring about very high returns. IMPLEMENTATION
STEPS

We will conclude the report written for solving the problem of Electrolux by mentioning the steps that have to be pursued in the implementation process: Selling the cleaning services companies from US and France Acquiring a small raw materials supplier that would enable Electrolux to be self-sufficient Selling Granges Employing more marketing people Rebranding the two remaining product lines: Electrolux and Electrosaw Dividing consumers in groups according to their needs and wants Diminishing the number of variants in each product line after a thorough study of consumer preferences 9

Standardising products at consumer group level Standardising marketing campaigns at consumer group level, while differentiating them at cultural level Releasing the new company image on the market using extensive marketing campaigns

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