Whirlpool Case Study
1995 – Whirlpool continued to strength its global leadership in major home appliance industry
Disappointing performance due to manufacturing inefficiencies and start up cost of new fridges in US, partly due to restructuring difficulties in Europe, as well as raw materials cost increases combined with minimal growth or even declining demand in North America and Europe
US APPLIANCE INDUSTRY
Home appliance classification:
Laundry
Washers and Dryers
Refrigeration
Refrigerators and Freezers
Cooking
Ranges and Oven
Others
Dishwashers, Disposals and Trash Compactors
Floor Care (Some Mfgs)
Floor polishers and vacuum cleaners
Manufacturing cost comprised about 65% to 75% of total operating cost while Labor – less than 10%
Component production = scale-sensitive i.e. doubling compressor out for fridges reduced unit cost by 10%-15%
Robotics introduction reduced scale economies while improving quality and performance consistency and enhancing flexibility
Industry Structure
1980s – 1990s: Appliance manufacturers realized they must offer complete line of appliances even if they did not manufacture all of them themselves which was the reason
Merger Activities:
Electrolux
White Consolidated
Whirlpool
KitchenAid and Roper (broadened WP presence at high end & low end of the market)
Maytag
Jenn-Air and Magic Chef
Inter-firm Sourcing:
Whirlpool made trash compactors for Frigidaire (Electrolux/White Consolidated)
GE made microwave oven for Caloric (Raytheon) and Jenn-Air and Magic Chef (Maytag)
By 1995: 5 major competitors controlled 98% of the core appliance market
Whirpool 35% " GE 29 3% " Maytag 14 4% " Electrolux 13 5% " Raythron 6 2%
Competition in US (1980s to 1990s)
Industry demand depended on:
State of economy, Disposable income level, Interest Rate, Housing Starts and Consumers' ability to defer purchases
Market Saturation level remained high and steady due to market maturation
Factors of competition
Lower cost, monitor margins, achieve economies of scale
Big 5 all renovating and enlarging facilities
Electrolux spent over 500 million to upgrade old plant for White Consolidated Industries
GE automated its Louisville plant which over 10 years halved the work force and raised output by 30%
Maytag built new facilities in the South for lower cost and non-union labor purposes
Others built twin plants on the Mexican border to profit from cheap labor
Factories / plants produced one product category only covering all price points
Quality became an important feature in this industry
Relation with suppliers changed as companies used fewer of them than in years past
Contracts set up over longer terms to improve quality and keep costs low with just-in-time deliveries
Demand for faster delivery which caused manufacturers to improve delivery systems
Innovation
Increase in government regulations:
Concern on the more stringent environmental standards in the European community would become a law in US
Possible ban on CFC in refrigerators by 1995
To reduce water consumption and noise level for washer and dishwasher
Advances in computer software:
New programs using fuzzy logic or neural networks
Technologies in cooking surfaces – ceramic glass units, solid elements, modular grill configurations
Self cleaning oven, automatic ice cube makers, self defrost fridges, pilotless gas ranges, and appliances that can be preset
Intense competition
Consumers concerned with how appliances look
White on white look which made the kitchen look larger
Outlook
US continued to look unattractive, growth rate est at 3% baed on 1994 demand of 46 million units At the prevailing saturation levels, demand was restricted mostly to replacement purchases (79%) with remainder going to new housing and household formation This creates the need for competitors to look elsewhere
GLOBALIZATION OF THE APPLIANCE INDUSTRY
Foreign Competition
1992 – 98% of dishwashers, washing machines, dryers, fridges, and ranges sold in US were made domestically
Big 4 each owned the market for each major appliance except for microwave ovens
Before 1986, Microwave import from Korea - Goldstar, Samsung and Japan – Sharp and Matsushita = 17% of total appliance sales
Europe
Prime attractiveness to US manufacturers because:
Western Europe moved towards a unified market of some 320 million consumers
Appliance demand expected to grow 5% annually
Political changes in Eastern Europe integrated these countries into the world trade system
Companies' operation style:
1970-80s European white goods industry experienced same consolidation as US:
Until mid 1980s – most companies either produce and sell in only one national market or export to a limited extent to many European markets from one country
By late 1980s – Electrolux Zanussi, Philips Bauknecht, Bosch-Siemens, Merloni-Indesit, Thompson, and AEG had controlled 70% of market (excluding ovens and air-con)
About European Markets:
Segmented with different consumer preferences pertaining to almost every type of appliance due to different lifestyle e.g. Americans prefer to stuff as many clothes into the washer while Europeans prefer smaller built-in models and eating habits e.g. French prefer to cook food at high temp while German prefer to cook at normal temp
Hard to establish pan-European models that would yield sustainable competitive advantage through manufacturing, procurement, and marketing efficiencies
Many of the national markets featured strong competitors
Distribution is different from US: basically 2 channels (retail trade and kitchen trade)
A.B. Electrolux, a strong player in the appliance industry managed to acquire more than 200 acquisitions in 40 countries spanning 5 businesses
A.B Electrolux also tried to establish a pan-European approach to the appliance market, followed by exploring trans-Atlantic opportunities. However they ran into trouble in 1993 during the recession and combined with market fragmentation, reduced their profits far below the targeted 5% margin
Germany: Bauknecht (Philips), Semens-Bosch and AEG-Telefunken
Britain: GEC's hotpoint
France: Thomson-Brandt
Italy: Merloni adopted low-cost labor strategy
In 1980s, no brand had more than 5% of the overall market, even though the top 10 producers generated 80% of the volume\
1989 - How the Americans closed up the gap relative to geographic scope of Electrolux:
Americans landed in Europe
GE joint venture with Britain's GE Corporation (GEC)
Maytag acquired Hoover Division through the purchase of Chicago Pacific
Whirlpool joint venture with N.V. Philips
In spite of concerns about differing consumer preferences in Europe, the largest U.S. appliance manufacturers established themselves before the 1992 EU Program became a reality. European Community rules required 60% local content to avoid tariffs, which combined with the fear of a "Fortress Europe" protected by Community-wide tariffs after 1992, excluded exports as a viable strategy
Within short period, further agreement followed: AEG with Electrolux in washer and dishwasher, Bosch-Siemens with Maytag, European Economic Interest Group combined with several manufacturers with France's Thompson-Brandt as the leader
Despite this trend, number of European manufacturers of home appliances was estimated to be about 100
Asia
World second largest home appliance market due to:
Rapid economic growth in the near future thanks to booming economies of the Pacific Rim countries
Expected growth rate at least 6% annually through the 1990s
Biggest promise on the world's most populous states: China and India
Though both are only approaching levels at which people could afford appliances
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Market dominated by 50 widely diversified Asian manufacturers, primarily from Japan, Korea and Taiwan
Preferences different from North America and Europe mainly due to lack of space hence owning a fridge represented a status symbol and created a demand for stylish colors and finishes
Technology wise: both direct-cool and forced-air models were common in Asia whereas in Europe more to direct-cool and North America more to forced-air version
Washers had to be portable mainly because of lack of space and no basement to keep washers permanently hooked up to water supply and drain – often moved to bathroom and kitchen for use
Due to delivery to apartments without elevators there is need for manual carrying up flights of stairs, thus lightweight designs on wheels coupled with handles for easy relocation is necessary
Washing habits were different as well due to the types of fabric used by different cultural and market groups.
Likewise for cooking, differences were noted on the two-burner, tabletop cooking unit used in contrast to ranges used in North America and Europe.
In air-conditioning, split-system units were the dominant version in Asia, Units installed high on the wall so that window space would not be blocked hence making remote control an important feature.
Latin America
The region that promises attracting growth once the markets emerge from decades of political instability, economic mismanagement and hyperinflation
1990 – above happened and coupled with efforts to lower tariffs which stimulated trade
1994 – white goods industry in comprised about 65 competitors
Whirlpool expected appliance shipments to expand faster than in North America and Europe
WHIRLPOOL CORPORATION
Company Background
1996: Headquartered in Benton Harbor, Michigan
One of the world's leading manufacturers and marketers of major home appliances
Company plants located in 12 countries
Distributes to over 140 countries under 28 brand names
Recognizes the world compassed 4 major regions:
North America (Canada, Mexico and US) : 46 million units sold annually
Europe (Western, Central and Eastern Europe, Africa and Middle East) : 50 million units sold annually
Asia : 56 million units sold annually
Latin (the Caribbean, Central and South America) : 17 million units
Mid 1980s, limited growth potential of its established markets motivated Whirlpool's top management "to remain focus on major home appliances but to expand into markets not already served by Whirlpool"
North America Appliance Group
Formed in 1989 from operations in US, Canada and Mexico
A streamlined organization with an unified strategy, originally around 4 brands
1992: Whirlpool reorganized NA operations behind a strategy to create a "dominant consumer franchise" (DCF). Such a strategy required a better understanding of consumer needs; improving product quality and keeping low costs was deemed necessary but not sufficient. Objective was to become more customer focused, which entailed a functional organization dealing with 4 core processes: product management, brand management, trade partner management and logistics.
New approach employed cross-functional teams within each function with product business teams at the center
To support its DCF strategy, Whirlpool announced a multitude of new products aim at 6 discrete appliance consumer segments i.e.
1. The traditionalist
2. The housework rebel (Whirlpool that helped consumer to manage homes better)
3. The achiever (KitchenAid brand appliances with style and substance)
4. The self-assured (Roper brand appliance which were value-priced and offered basic styling and features)
5. The proven conservative and
6. The homebound survivor
Jun 1993: Whirlpool was named winner in the 30 million Super Efficient Refrigerator Program (SERP) – where it eliminated CFCs completely by using a different refrigerant
1994: energy-efficient refrigerator with a CFC-free sealed system launched
1996: introduced a new clothes washer that use 1/3 of the water and energy of a conventional washer
1993 annual report: Since 1988, NAAG increased its regional market share by nearly 1/3 with help from Inglis, Ltd, the Canadian subsidiary and Vitromatic S.A., the Mexican affiliate
1994: Whirlpool had a major restructure, closing plants and reducing headcount in an effort to reduce costs.
1995: Montogomery Ward, the second largest home appliance retailer in the US, became a Whirlpool customer
Whirlpool's Globalization
Competitive advantage by leveraging a global presence in the various regional markets despite the differences in consumer habits and preferences
US appliance market constraints: limited growth opportunities, high concentration of domestic competitors and increasing foreign competition
US also represent only about 25% of the worldwide potential for major appliance sales
Most importantly, Whirlpool vision can no longer be limited to domestic borders as national borders no longer define market boundaries – marketplace for products and services is more global than ever before and growing more so every day
Consumer in major industrialized countries are living increasingly similar lifestyles and having similar expectations of what consumer products must do for them
As such, companies that operate on a broad global scale can leverage many of the strengths better than those who only serve an individual national market
Very likely, appliance manufacturing will always has to be done regionally.
Yet, the ability to leverage many of the strengths of a company on an international basis is possible only if that company operates globally
Whirlpool Trading Corporation (WTC)
Formed to consolidate existing international activities and explore new venture
1985: increased its equity interest in Inglis, from 48% to more than 50%
1986: Aspera S.r.l Torino, Italy was purchased from Fiat
Late 1950s: Whirlpool entered Brazil
1969: Whirlpool entered Canada
1980: Whirlpool globalization took shape when it added Mexico, India and Europe through a series of joint venture
Move in South America and Asia were motivated by expectation on climbing of disposable incomes in these continents would result in growing demand for appliance that would at least partially mirror the American consumer boom of 1950s and 1960s
Dec 1, 1987: David R. Whitwam assumed the position of President, CEO and Chairman of the Board of Whirlpool Corporation
Since then, he transformed a domestically oriented 4 b company into 8 b global force
Whirlpool communicated orientation:
Whirlpool in its chosen lines of business will grow with new opportunities and be the leader in an ever-changing global market. We will be driven by our commitment to continuous quality improvement and to exceeding customers' expectations. We will gain competition advantage through this, and by building on existing strengths and developing new competencies. We will be market driven, efficient and profitable.
Whirlpool Europe B.V
1988: Whirlpool joint venture with N.V Philips; second largest appliance manufacturer in Europe behind Electrolux
Deal was for a 53% interest in Philips' worldwide Major Domestic Appliance Division for $361 million in cash; new company = Whirlpool International B.V. (WIBV)
1991: Whirlpool bought over remaining interest from Philips and change name to Whirlpool Europe B.V (WEBV)
1994: WEBV with 13% market share, occupied 3rd position in Europe behind Electrolux (25%) and Bosch Siemens (15%)
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After formation of WIBV, Philips decentralized organization was phased out and WIBV split into customer focused business units. Brands positioned to fit the niches and conditions in Europe, an approach employed in the US
Bauknecht was aimed at the high end of the market, Philips/Whirlpool at the middle and Ignis at the lower end
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1995: Whirlpool terminated its successful brand-transfer effort and dropped the Philips brand name
Bauknecht and Philips/Whirlpool Appliance Groups received the decentralized sales and marketing functions, respectively which supported all of Whirlpool European brands
National sales consolidated into 3 sales regions to take advantage of the growing European cross-border trade
Marketing function included separate, brand-oriented components to strengthen brand identity and same time ensure internal coordination
Manufacturing and technology activities reorganized around product groups and development centers: Germany focus on laundry and dishwashing products / Italy on refrigeration and cooking
Key support functions (Consumer services, IT, logistics and planning) were maintained as separate, centrally managed entities
Distribution was reconfigured towards a pan-European approach – 10/28 finished goods warehouses were closed: idea is to put systems support in place so products could be delivered more accurately and timely
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WEBV assumed responsibility for the Middle East and Africa, which accounted for 100 million in sales, mainly in the form of kits in an attempt to boost local content and thru preempt the emergence of domestic-content rules
1994: another reorganization was started to streamline operations on a Pan-European basis in conjunction with similar efforts in North America in hope of achieving annual cost savings of about 150 million, starting in 1997
1992:WIBV started a 4 year effort to redesign its products (entire product line) to increase manufacturing efficiency, improve product quality and increase customer satisfaction
Whirlpool identified "value gap" in Europe – comparison of European industry's performance against best-in-class North American and Asian players shown that European producers delivered lower levels of customer satisfaction. Also European paid more for their appliances than their US counterparts. Today, the gap was closed by 15-20% for all appliances.
Global outlook was forged in the management team.
Managers rotated between Europe and US to foster global thinking.
Move paid off when in 1991 the VIP Crisp microwave oven, developed by a new "advanced global technology unit" in Norrkoping, Sweden was introduced and quickly became Europe's best-selling model. VIP Crisp had heated based plate that allows Italian to bake crisp pizza crusts and British to fry eggs. VIP Crisp was subsequently imported to the US
WEBV moves to establish itself in the emerging markets of Central and Eastern Europe which in 1991 represented about 11% of the world appliance market and promised attractive growth opportunities over the long term.
Bauknecht – set up distribution system in East Germany after opening of border
1992: WEBV developed distribution networks in the entire region and established a wholly-owned sales subsidiary in Hungary
1992: Whirlpool took 43.8 minority investments in Whirlpool/Tatramat as a joint venture in the Slovak Republic, which manufactured and sold automatic washers and marketed products assembled at other WEBV locations.
1993: Sales subsidiaries had been opened in Poland and the Czech Republic (strengthen position in Eastern Europe and Greece in Southern Europe).
1994: WEBV took controlling interest in this joint venture.
1995: Joint Venture with Russia
1996: Expansion into Romania and Bulgaria planned
Latin American Appliance Group
1958: company purchased equity interest in Mulitbras S.A. (Brazil), a major appliance manufacturer
Whirlpool strategy: taking full advantage of this large emerging market by optimally positioning its brands across the entire spectrum, based on in-depth consumer research in an attempt to cultivate "customers for life"
Brazilian market = half of all appliances sold in L/A in 1994 – Whirlpool held equity positions in 3 Brazilian companies:
Multibras which in 1994 merged 3 sister appliance makers into 1 organization and with annual sales of 800 m held market leader position.
Embraco, one of world's largest manufacturers of compressors and exported to 50 countries on four continents
Brasmotor S.A., which was a holding company with a majority interest in Multibras and a minority interest in Embraco
Whirlpool claimed to be second highest recognition brand after Cola-cola
1992: took over SAGAD, Philips' white goods operation in Argentina which except for Brazil and Argentina, this South America Sales Company was responsible for sales throughout the region
Whirlpool Latin American operations were part of the Whirlpool Overseas Corporation (WOC), formed in 1990 as a wholly-owned subsidiary to conduct marketing and industrial activities outside North America and Europe and included:
US Export Sales, Overseas Business Group acquired from Philips in the WIBV transaction, and 3 wholly-owned sales companies in HK, TH and Aus
Industrial activities included technology sale and transfer, kit and component sales, joint venture manufacturing and project management for affiliates
WOC key responsibilities also included feeding new technologies from Whirlpool bases in N/A and Europe to its other units; ensuring optimal brand positioning in each country and analyzing specific appliance design for their suitability to various markets
1993: Whirlpool decided that its global business interest would be better served by establishing two standalone business units, one for Latin America call LAAG and the other the Whirlpool Asian Appliance Group for Asian operations
Asian Appliance Group
exported home appliances to Asia over 30 years from US
Due to acquisition of Philips's appliance business, access was broadened to Asian markets
Whirlpool strategy: 5 Ps – Partnerships, Products, Processes, People, Pan-Asian approach.
Strategy in 3 phases: start-up, building and market leadership
Whirlpool market researched and decided to base its foray on the so called T-4 i.e. refrigerators, clothes washer, microwave ovens and air conditioners.
Refrigerator 1st appliance brought when income rose
Clothes washer came next
Air-conditioners important because of heat and humidity in much of this region
Microwave had become an essentially global appliance with its features and design
Focus on China and India (most populous countries)
Market entry supposed to occur through joint ventures followed by "Greenfield" plants
Planned to use pan-Asian platform, modified for specific areas to meet regional preferences
Only "Whirlpool" would be used since market was not considered mature enough to allow for a multibrand approach
1987: joint venture in India with Sundaram-Clayton, Ltd called TVS Whirlpool, Ltd which produced semi-automatic clothes washers, the so-called "World Washer" and twin-hub washers for Indian market
1993: Whirlpool Asian Appliance Group – regional headquarters established in Tokyo and later Singapore which also became home of a pan-Asian marketing, product development and technology center.
Asian market further sub-divided into 3, then 4 operating regions: Greater China, based in HK (Peoples Republic and HK), South Asia, based in Delhi (India Pakistan and surrounding markets), North Asia, based in Tokyo (Japan, Korea, Philippines and Taiwan) and Southeast Asia, based in Singapore (Aus and New Zealand)
1994: investment jumped to over 200 m
Jointed venture with Teco Electric & Machinery Co. Ltd to market and distribute home appliance in Taiwan as an insider
1995: acquired controlling interest in Kelvinator of India, Ltd, one of the largest manufacturers and marketers of refrigerators in India
Same time acquired controlling interest and d2d management of its existing India-based venture, TVS whirlpool, Ltd
China became the center of a series of joint ventures combines with plant expansions and upgrades. Moves marked important milestone as they completed the T-4 strategy in China
Long term strategy: creation of technology center in Singapore where new products would be designed for the Asian market and which could tap into Whirlpool's global expertise. As in Latin America, the Worldwide Excellence System was adapted to regional circumstances and provided a strong integrating mechanism.
To accelerate WES, Whirlpool assembled global product teams, offered foreign assignments within global organization to key personnel and hire aggressively within the region.
ORCHESTRATING THE STRATEGY GLOBALLY
Despite being a global force by 1995, Whirlpool's US exports were less than 10% of gross revenues. The company recognized the need to lay groundwork for utilizing effectively its experience worldwide in product technology and manufacturing processes and transferring it quickly to wherever needed and thereby leverage its global presence to gain sustainable competitive advantage. For that, a number of projects and organization functions and arrangement were put in place:
Global Business Units
2 products groups managed and organized on a global platform.
The Microwave Oven Business Unit: managed microwave oven production and development activities globally with manufacturing and product development facilities in Norrkoping, Sweden, and a second, low-cost source in development in Shunde, China. (Whirlpool claimed its top five microwave oven manufacturers
1995: Global Air Treatment Unit formed with a growth strategy that anticipated quadrupling of volume in the first half of 1996 relative to the same period in 1995
Whirlpool Financial Corporation (est. 1957) served manufacturers, retailers and consumers in the US, Canada and Europe. With assets exceeding 1.9b in 1995, provided inventory and consumer financing to support product sales from point of manufacture through the market channel to consumer
World Washer
To create a lightweight compact washer with few parts that could be produced in developing countries where manufacturing technology was not advanced and could be sold at a price that put it within reach of many more households than the designs marketed in the industrialized world
Goal: to develop a complete product, process and facility design package versatile enough to satisfy conditions and market requirements in various countries but with low initial investment requirements. Same time, to establish a beachhead especially against the Far Eastern rivals.
Common design was envisaged for India, Brazil and Mexico
It proved necessary to develop 3 slightly different variations instead of replicating the original version for all 3 markets
Reason constituted to factors such as material cost, labor and overhead costs differences
Goals were identical – minimizing facility investment and avoiding big finish systems and welding stations that required extensive machinery for materials cleanup and environmental safety
Brazil: plant designed as a creative convection cooling system to address high humidity
India: new facility built in Pondicherry, just 12 deg north of the equator
Worldwide Excellence System
WES was the company blueprint for quality, customers and continuous improvement worldwide
Combined ISO 9000, Deming approach in Asia, Baldrige system used in US
WES used a point system to measure success of implementing the program
WES has 7 categories
Whirlpool people and leadership categories described the involvement of people at all levels in moving the corporation to excellence
Fact-Based Management, Strategic Planning, and Quality of Process and Products outlined the major internal processes for achieving excellence. Measurement and Results explained the methods used to determine what customers expected and to assess how well they were being satisfied. The continuous monitoring of Customer Satisfaction was used for unending improvement of activities and processes
Technology Organization
Goal: to develop advanced innovative products and move them to market quickly and competitively
Early success: 1991 when VIP Crisp microwave oven was introduced and quickly became Europe's best-selling model
Global Procurement organization bought all materials and components needed for production facilities
Centers based in US, Italy and Singapore bought finished products, commodities sourced on a regional or global basis, and standardized parts and components
Most other parts and materials sourced from suppliers located near the production facilities where they were used
In developing countries: this implied educating and assisting local suppliers in attaining Whirlpool standards
Corporate Technology Development group developed product and process technology capabilities and provided technical services to Whirlpool businesses
Technology development activities were geographically dispersed in Europe, Asia and North America
Advanced Product Concepts unit looked beyond current product needs for appliance Whirlpool was making i.e. developing new product concepts through market research
Advanced Manufacturing Concepts team brought new manufacturing processes and identify and developed simulation tools and best practices to be used on a global basis
Strategic Assessment and Support identified and evaluated non-traditional new product opportunities in cooperation with other units of Whirlpool. It also established corporate policy regarding product safety and computer-aided design and manufacturing; addressed environmental and regulatory issues and intellectual property rights
RACE FOR GLOBAL DOMINANCE
Everyone was pursuing similar strategies in establishing global position of strength.
Electrolux - Expanded using pan-European and local brands as well as joint venture in China to manufacture water purifiers, compressors and vacuum cleaner plant. Same time acquired major holdings in production facilities for refrigerators and washing machines. In TH, IA, MA and SG – developed network through retailers and in Latin America, the company acquired a minority interest in Brazil's second largest white goods manufacturer, Refripar
Bosch-Siemens Hausgerate GmbH (BSHG) – alliance with Maytag to sell distinctively European designs, acquired major interest in Wuxi Little Swan Co., a leading manufacturer of laundry appliances. In Brazil, BSHG brought Continental 2001, a large appliance producer. In Eastern Europe, completed the construction of a washing machine factory in Lodz, Poland
GE – focus effort in India, China, SEA and South America. Same time strengthening alliances in Mexico and India, and developed a number of new products specifically for global markets
EPIOGUE
Fiscal year 1995: Whirlpool reported per share earnings of $2.80, up from a year earlier but still below the 1993 high. Mainly due to:
North America: product shipments had declined by 1.4% and operating profits had dropped by 16%
Europe: rising material costs, fierce competition, and a shift by consumers to cheaper brands and models reduced Whirlpool's shipment by 2% while industry grew by 1%
Latin America: volume was up thanks to robust growth in Brazil compare to Argentina where industry shipments plummeted by as much as 50% due to Mexican collapse
Asia: reported an operating loss due to continuing expansion while shipments increased by 193% and revenues by 83% respectively.
David Whitham said that the company was ahead of schedule in its restructuring effort in Europe and North America and he anticipated significant improvements in operating efficiency for 1996. Evidently Whirlpool felt good about its position in the industry, in spite of the lackluster short-term results
