CHALLENGING TIMES IN THE APPLIANCE INDUSTRY
by Andria Constantinou
COMPANY BACKGROUND:
AB Electrolux was founded in 1910 by Axel Wenner-Gren. The original idea was that every home should own a vacuum cleaner and this made Electrolux to bring forth its first vacuum cleaner. Electrolux products were always based upon what customers needed most and by 1925, Electrolux product mix included refrigerators, later it brought forth washing machine in 1951 and afterwards produced dishwashers. Its tactic to become global was achieved by the acquisition of over 300 companies in the last 90 years not only in Europe but in North America in 2004 as well, having over 50 000 employees in over 50 countries. For the past ten years Electrolux’s president and CEO is Hans Straberg.
The company’s products range from consumer durables for kitchen, laundry and floor-care as well as professional products including floor-service equipment, industrial kitchen and laundry equipment. Its yearly sales level up to more than 40 million products in over 150 different markets.
The company’s mission is to produce quality products satisfying both the environment and their customers, products that customers are willing to pay a higher amount for. Their strategic intention is to become the first worlds’s household appliance manufacturer and excel Whirlpool which currently is first, leaving Electrolux at the second place. One of the main goals of the company is also sustainability and more specifically issues such as climate change, sound business practices, responsible sourcing and restructuring.
IMPORTANCE OF STAKEHOLDER MANAGEMENT FOR ELECTROLUX:
Stakeholders, government and overall society’s expectations can influence strategic reasoning. According to a fundamental heuristic, stakeholder theory, types of stakeholders can be identified by their influential power, their legitimate relationship with the firm as well as their urgency of their claim on the company (Mitchell et al, 1997). According to Jones (1980), a company has some kind of “obligation to constituent groups in society”. The main stakeholders of Electrolux include consumers, customers, employees, suppliers, shareholders, governing bodies as well as the government.
Internal stakeholders can be assumed to be employees and governing bodies . They assumed to have most influence upon strategy especially members of the governance structure (Appendix 1), their decisions and effect is shown in terms of profitability for the firm, therefore they deemed to be core for the company capability of being successful. Governing bodies are responsible for Electrolux’s success. Customers and consumers are seemed to be connected stakeholders. They are influential in the decisions of the company since their demands and needs are put first in Electrolux’s product development, design, production and marketing. Electrolux is driven by consumer preferences and this is expressed in company’s slogan “Thinking of you”. Shareholders are also assumed to be connected stakeholders providing finance for the company and are rewarded with dividends. Shareholders were not that much satisfied from the performance of the decreasing stock price during 2008 and 2009 due to the recession (Appendix 2).
Government is an external stakeholder for Electrolux. It imposes taxation on the company, can affect the company through regulation and expect the company to act ethically and legally. In addition, government also published some programs for appliance companies to help increase the demand and promote sustainable products. In terms of legislation, governments are making strong efforts for companies to go “green”, as for example the American Recovery and Reinvestment Act in 2009 that earned US$27.2 billion for investing in renewable energy research.
In the case of Electrolux, Stakeholder mapping can be used for identifying what stakeholders expect from the company and their influential power in strategy’s terms as in Appendix 3.
According to the stakeholder mapping (Appendix 3) the most influential stakeholders are governing bodies including CEO and president (Hans Straberg) that deemed to have the most power and their expectations are needed to be primarily considered.
As every stakeholder has different interests and power in the company, it is assumed that financial managers of Electrolux will be faced with agency problem. According to Johnson et al (2008, p.135) principal agent theory states that managers will not always fulfill stakeholders’ expectations however there are many ways to overcome this when putting forward strategic planning through alignment of interests and incentives. This can be achieved by appointing strategic management to managers but approval for decisions and plans can be the role of the governing bodies to be made. Additionally, governing bodies of the company can work with managers the process of business strategy. Another key factor for alignment of managers and stakeholders interests is the construction of a mission and vision statements.
STRATEGIC ANALYSIS OF AB ELECTROLUX:
Conducting the strategic analysis of AB Electrolux, it is assumed that it must be analyzed in both business level and corporate level since the company’s strategy path is towards becoming the leader in household appliance industry while competing with the first leader in the industry Whirlpool Corporation and other dominating companies such as GE Appliances and LG Electronics.
It is obvious that Electrolux managed to be globally successful focussed on sustainability matters and consumer needs without compromising on a low cost product variety, instead it has been focussing on producing quality in its products and managed to enter into a premium market of household appliances. The strongest sector of profitability and sales for 2009 was consumer durables in Europe and North America as Appendix 4 presents. Consumer durables are the most successful department with revenue amounting to 93% of overall revenue for 2009, leaving professional products revenue only 7%. Another consequence of the global recession was the fall in the share price of Electrolux.
SWOT ANALYSIS FOR ELECTROLUX:
In determining whether Electrolux strategy is sustainable, one useful tool is SWOT Analysis. This analysis is useful to analyze the environment of the company and its strategic capability that affect business strategy planning.
STRENGTHS:
- The company is focussed on sustainability issues (e.g. “green range” products). It relocated 60% of manufacturing to Mexico and China which are low cost countries. Additionally, it has strong sustainability initiatives. It managed to gain energy savings of up to $100 million a year.
- Electrolux managed to produce efficient products with low energy and environmentally friendly (e.g. AEG-Electrolux Super-Eco washing machine, Lagoon and Inspiro oven).
- Electrolux managed to increase its operating profit margin with firstly achieving low suppliers and production costs.
- Electrolux achieved a more “comprehensive thinking” when expansion, based not only on low prices but make evaluations of labour and transportation costs, access to new suppliers and the extend of growing markets. The company’s strategy also contains locating to medium or high cost companies due to taking advantage of the technology evolution of those countries (e.g. Europe).
- In terms of marketing, the company managed to keep its high prices through global recession in 2009 both in Europe and America. Also, the company’s marketing is strong including door to door sales and product development process (Appendix 5).
WEAKNESSES:
- Financial results showed an operating profit margin of 4.82% far lower than industry’s of 8.42%. Although Electrolux made some effort increasing its operating margin (having a target of 6%) still is very low due to the fact that inventory is stuck in warehouses. Furthermore, its profit margin can be punctuated if consumers rely more on lower cost products (e.g. vacuum cleaners).
- The company has low capacity use up to only 60% whereas it also suffers from adequate overhead costs and costs of sales.
- Some of the sub-brands of vacuum cleaners that the company holds in its group are more “famous” than premium brands. One example is Frigidaire brand in North America.
- Door to door sales can be an adverse reputation for a brand image company such as Electrolux taking part in a premium market of household appliances.
- Electrolux business strategic units fall behind in terms of innovation, value and core competences. In addition, refrigerator sales are at very low levels comparable to competitors.
OPPORTUNITIES:
- Electrolux already meet some criteria of low energy use and sustainability whereas governments in the near future will impose regulation.
- Post-recession, credit markets (e.g house buying) will be opened again. Consumers will make a shift from repairing towards purchasing new household appliances.
- Middle class growth in Asia is an opportunity for labour.
- As demand for silent appliances has increased, this forms an opportunity for the organization to increase its development process for silent vacuum cleaners.
- Resource allocation is also an opportunity since in can utilize technological advancements to meet sustainability standards.
THREATS:
- Social threats for Electrolux can be the consumer demands for products easy to use and energy efficiency.
- Internet can also be a threat for the organization since consumers choose by price and can shift easily to a competitor.
- As the organization sells in different markets, these markets change from time to time imposing risk to the company.
FIVE FORCES FRAMEWORK:
Porter’s five forces framework can be used for evaluating household appliance industry.
- Threat of entry: Obstacles of entering the industry is the main content of this force. According to Johnson et al (2008, p.61) barriers include experience, companies must able to gain advantage of distribution channels, price war or high costs of entering, government action as well as differentiation. In the case of Electrolux, there are few barriers of entry such as experience (up to 90 years), leading to “high investment requirements” and high costs for entering such a market. Government legislation as for example the American Recovery and Reinvestment Act in 2009 is a barrier of entry too. Differentiation cannot be assumed as a barrier since from the information available GE Appliances also produce high quality products that Electrolux does not include in its product range. Overall, threat of entry is low.
- Threat of substitutes: Consumers in household appliance industry will shift to lower cost substitutes but in the case of Electrolux they will not find better quality appliances. Whirlpool Corporation may charge a medium cost but the quality it offers is medium too. LG Electronics produces appliances at a low cost, information on quality is unavailable. Consumers also demand energy efficient products and silent ones which Electrolux is in place to satisfy them. Therefore, threat of substitute is low for the organization.
- The power of buyers: Sometimes customers with negotiation skills can drive sellers’ to accept and therefore affect their profit negatively. In the case of Electrolux there is not available information about concentrated customers with power. Household appliance customers can choose one supplier than another mostly because of price can affect negatively Electrolux since the company does not offer the lowest cost. However, the power of customers is deemed to be low. In addition, there is no evidence in the case study for “backward vertical integration” (Johnson et al, 2008).
4. The power of suppliers: Suppliers of Electrolux include providers of raw materials (e.g. steel, plastic etc) and equipment for the production of the appliances. There is no evidence available about concentrated suppliers but it can be assumed that as Electrolux has suppliers globally, then supplier power is low. In terms of switching cost from a supplier to another, because it is expensive for Electrolux which is a global organization to switch from one country’s supplier to another’s then suppliers in this situation have a high power. Due to the fact that Electrolux can reach consumers online through the Internet without the use of intermediaries, through forward vertical integration, it is assumed that the supplier power is high. Therefore, the bargaining power of suppliers is strong.
5. Competitive rivalry: Whirlpool Corporation, GE Appliances and LG Electronics are the main rivals for Electrolux. LG Electronics is not a big threat since the size of the company is smaller than Electrolux with fewer employees although its products have lower cost than Electrolux and take advantage of resource allocation but further information is not available on quality of its products, growth rate, or fixed costs. Therefore from LG Electronics there is not any competitor balance with Electrolux, thus no strong competitive rivalry. GE Appliances can be a threat in a very low level for Electrolux since it manufactures high quality products and most of the products are the same except that GE Appliances produces an induction cook top which is very desirable from consumers. Growth rates and fixed costs are not available to be considered in this evaluation. Therefore, competitive rivalry from GE Appliances is assumed to be low to moderate. A high powered competitive rivalry for Electrolux is Whirlpool. Whirlpool Corporation has a market capitalization of half the whole appliance industry, it is bigger in size than Electrolux since it acquired Maytag in 2006 and has approximately 17 000 more employees. Although its growth rate is quite low (8.8%) for the industry’s average of over 29%. Comparing fixed costs cannot be achieved due to misleading information. Product mix of both companies is the same but quality differs as Electrolux offers high quality with high cost and Whirlpool medium quality with medium cost. As a result, competitive rivalry is strong.
Electrolux is challenged and affected mostly by competition in the industry. It is needed to divide the industry into smaller groups. It is very important to distinguish between the three rivals and Electrolux as according to Johnson et al (2008, p.73), the five forces can have a different effect on each organization. This is because each organization has different strategies to follow and different perspectives that when two or more companies with the same “strategic characteristics” and “following similar strategies” they are said to be strategic groups. It would be helpful to determine which rivals are most threatening for Electrolux. A strategic group map is deemed to be a useful tool to determine the stance that each organization has to competition. In identifying differences between companies in household appliance industry factors should be taken in mind such as ownership by bigger companies, market capitalization, markets they are involved, revenues, product variety etc. Appendix 6 presents strategic group map for the appliance industry.
Critical success factors for Electrolux are the specific features in its products that consumers value and therefore have a result for the organization to surpass rivals. In household appliance industry, consumers have many demands and Electrolux must be able to satisfy them by producing:
- energy-efficient and sustainable products
- aesthetics of products instead of practicability
- easy to use products
- silent vacuum cleaners
Capabilities of Electrolux should be assessed in terms of their alignment with consumer demands. Electrolux needs to adopt competitive capabilities help positioned in a differentiation than that of competitors. Johnson et al (2008, p. 102-106) stressed out that in order for an organization to have competitive advantage it needs to fulfill four criteria: appreciated capabilities from customers, rarity of strategic capabilities, capabilities that are inimitable.
THE VALUE CHAIN AND THE VALUE NETWORK:
It is important to determine how strong is Electrolux in managing activities both primary and supporting for creating its high quality appliances. Appendix 7 shows the value chain for Electrolux.
In business level strategy, Michael Porter’s three generic strategies (cost leadership, differentiation and focus) can be used to help Electrolux to become the leader in the appliance industry. Utilizing the Bowman’s strategic clock (Appendix 8) we can identify the position of Electrolux group in the appliance market. Although there is not enough evidence that products of Electrolux have the highest quality, however it has been given that it has entered the premium market category of household appliances and its products are worth for consumers paying a higher price. With the misleading information it is assumed that Electrolux is in a position of “focussed differentiation”. However this position in the market make some issues come front especially for Electrolux since it is making international expansion plans. Electrolux needs to clear its position whether when focussing on competition if it is aiming to focus on specific markets (e.g. low cost Asia) or on a quality global brand. According to Johnson et al (2008, p.231) further issues in Electrolux position in the market include possible argument with stakeholders as well as a possible market change that is followed by differences in segments may take place making competition even more complicated.
In terms of competitive stage, Electrolux is seemed to be proactive and has the advantage of first-mover. This is because the company’s core competence is to be focussed on customer needs and recognize fast the changing tastes of consumers. For example, the company managed to produce silence vacuum cleaner (Ultra Silencer) from surveying and assembling consumers that needed more silent appliances. This is a dominant strategy of Electrolux, a strategy that exceeds competitors.
CONCLUSION AND RECOMMENDATIONS:
In order to remain successful, Electrolux strategy needs to be sustainable. Overall, its current strategy of satisfying customer needs through sustainability in its products gained a part in the company’s operations. The strategy meets customers’ expectations, compared to competitors. From a customer viewpoint, Electrolux products may be of a higher cost but fulfill sustainability and quality criteria. In the short-term, Electrolux is deemed to continue being successful but longer-term considerations need to be thought.
A key weakness that need to be considered is the company’s low operating margin of 4.8% which needs to be increased. The company is aware and already put forward efforts increasing it and it needs to continue those efforts to achieve industry’s compatible of 8.42%. One start could be a more effective control of operating and overhead costs.
As there is a positive relationship between the cost of raw materials and economic growth, Electrolux should take advantage of this opportunity to determine when economic growth comes. In other words, when raw material cost increases means that economy is growing. In terms of changing markets, Electrolux needs to be more flexible to reduce the risks and easily adapt to these changes.
According to Wernerfelt’s (1984) resource based view of competitive advantage, Electrolux should start from resources, define its core capabilities, then competitive advantage to achieve its strategy. In addition, Electrolux should also consider improvement of its marketing department to maintain an excellent brand image.
Game theory according to Johnson et al (2008, p.241) is “concerned with the interrelationships between the competitive moves of a set of competitors” and can play a very significant role in Electrolux strategic planning. The authors explain that when using game theory, companies should “enter competitors’ mind” as well as “reason backwards”. Using game theory, the company could consider expansion of its product variety with entirely new features and aesthetics to be a “first-mover” while at the same time being focus on its successful products and also might consider improving them since it has many opportunities that can take advantage of such as technological evolution.
OPTION OF STRATEGIC CHANGE FOR ELECTROLUX
In the case where a large global organization such as Electrolux wants to adopt a strategic change, a new organizational formation is going to be created. According to Bartlett and Ghashal (1995), changes will take place in both external and internal environment of the company. A major strategic change according to the authors must not be based on “capital or scale” but on “knowledge and expertise, in other words, based on Electrolux managers’ viewpoint. According to the managerial theory of a company, strategic change must be focussed on the “key actors” in the organization.
When considering a major strategic change it is important to utilize an all-inclusive organizational learning as Crossan and Berdrow(2003) discussed due to the fact that many challenges appear. The authors explained that there is tension “between exploration and exploitation”, for example in the case when Electrolux adopts new core competencies when at the same time exploits old ones. The two authors also explained that there are four processes in a strategy change presented in Appendix 8 which are ‘intuiting,interpreting,integrating,institutionalizing”.
In order for Electrolux to manage strategic renewal, it must firstly obtain to cope with its culture and be flexible to adapt to the changes for its successful future. One useful tool for analyzing Electrolux cultural content is paradigm. Johnson (1992) defined paradigm as being a “deeper level of basic assumptions and beliefs that are showed by organization members, that operate unconsciously and define in a basic ‘taken for granted’ fashion an organization’s view of itself and its environment. paradigm diagram is presented in Appendix 9.
Paradigm for Electrolux is the 90 years of experience and skills in the manufacturing industry of appliances and the customer viewpoint of its quality products. Power structures include the CEO and president as well as chief executives and organizational structures include the chain of its different departments from Human Resources to Marketing department. Control systems include control of operating margin, overhead costs as well as cost of sales. Rituals and routines for Electrolux is the continuing focus on product development in terms of sustainability and improvement to satisfy customers. Stories can be assumed to include the adverse effects of the second World War and the 2008-2009 recession. Imposing symbols on Electrolux can considered to be slogans such as “Thinking of you”.
Johnson (1992) also stated that companies, as Electrolux are “political entities” where interests of stakeholders can be trade-off mostly due to the uncertainty managers are faced when considering a major strategic change. This leads to the problem in actions taken my managers in times of strategic change. Managers of Electrolux needs to consider “logical incrementalism” which means that they need to make evaluations of plans in a strategic change with commitment.
It is possible for the organization to face some issues and problems while renewing its strategies. These issues include strategic drift ,change refusal and managing strategic change. Renewal of strategy is not that easy because managers of Electrolux may be uncertain of consequences (e.g. threat that may lose their vocation in the case of failure) therefore stuck in traditional strategies. Due to the fact that managers of the company may use familiar planning methodologies which do not consider “socio-cultural and symbolic processes” (Johnson, 1992). Traditional strategy analysis includes only strengths, weaknesses and threats which pretermit current practices. Furthermore, current strategic analysis tools do not include deep insights.
Strategic drift may become harmful for Electrolux in the case it takes place. According to Johnson et al (2008, p.179) it is “the tendency for strategies to develop incrementally on the basis of historical and cultural influences but fail to keep pace with a changing environment”. Strategy may not keep up with the changing environment of household appliance industry.
Due to the fact that Electrolux has been very successful for the last 90 years of its managerial experience there is a high possibility that its core capabilities will not change, therefore the company could instead adopt core rigidities. In such a situation, managers take for granted the old success of their organization. This is one of the reasons that strategic drift may happen for Electrolux. Additionally, strategic drift may happen due to the lost of relationships with the company’s suppliers and customers which will affect Electrolux product development processes.
Overall, strategic drift is quite risky. Electrolux can lose its market share or face a decline in its share price. There are other periods of downturn following strategic drift and specifically the period of flux which is a period whereas strategic change may happen but not as requested and the period of transformational change of death in the case of the worst downturn whereas the company may be acquired by another one or stop its operations permanently.
However, there are many ways which Electrolux managers can utilize, to prevent their organization from suffering. Firstly, they need to create an appropriate environment for change. It is needed to bring forth to the organization new people,outsiders, for example new chief executives that will bring the change. They also need to use the paradigm, provide signals and symbols internally to Electrolux. Last but not least, they need to manage efficiently strategy renewal.
Change for Electrolux must start from its organizational structure since is the key driver for change. According to Contingency theory, “there is no single organizational structure that is highly effective for all organizations. It sees the structure that is optimal as varying according to certain factors such as organizational strategy or size.” (Donaldson).
Firstly, the managers of Electrolux should consider the type of change according to the strategy. In that case, they should consider change as revolutionary as they perceive to have a major strategic change with a change in culture to make Electrolux more adaptive and flexible in the new environment. Secondly, that kind of change also needs good management.
Good management of revolutionary change according to Johnson et al (2008, p.544) could be achieved by CEO and president Hans Straberg who can impose a clear strategic direction and be the ideal model of change. In addition, Electrolux should use both economics and symbols for this turnaround situation as for example, greater market research, management members renewal, capital and financial reconstructions or even relocate some of its departments (e.g. marketing) to more efficient locations. Furthermore, in order to stop managers from refusing change and renewal of the company’s strategy, they should use different types of management change. For example, education about change and specific training using “intervention style to involve people in aspects of change where they have specific expertise” (Johnson et al, 2008).
The current culture of Electrolux should be used as a core element in the strategy renewal. This process includes determining aspects of culture and expand it instead of making an incremental renewal of the whole culture. This can be achieved by conducting a forcefield analysis which is presented in Appendix 10 and defines the problems that need to be solved and determines the forces that want change and the ones that do not in accordance with the existing culture of Electrolux. As a result, Electrolux could prevent those negative effects and issues such as a strategic drift and a downturn when adopting a major strategic change and achieve this change effectively.
