Case Study 1: Electrolux

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

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

taking into account its world share of sales. After this acquisition. Because of these expansionist policies of Electrolux’s managers over the years. its expanding strategy and the decisions that were made by its managers over the years. Electrolux managed to self-supply itself with aluminium. 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. 2. a very important player in the world’s market. when the firm managed to expand by creating its very own plants of production of vacuum cleaners. Tappan. 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. copper. Its main product was vacuum cleaners until the 1960s. critics wonder whether Electrolux will be able to reach its profit targets further on. the leadership in the world’s market was challenged by Whirlpool. an acquisition that was highly debated between economic analysts. because of the size and the total diversified profile of this company. Arthur Martin. a company that has merged with the appliances section of Phillips. Because of the need of taking over the global market. Sweden’s biggest metal producer and fabricator. Besides becoming a raw materials supplier. However. Electrolux started acquiring smaller companies such as Facit. IDENTIFICATION OF THE PROBLEM Electrolux was found in the situation of facing the problem it had created on its own. Husqvarna. 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. The next decade of its expansion. In the 1980s. Therma. companies which were producing other types of electrical appliances and thus. ELECTROLUX - SUMMARY OF THE CASE STUDY The study of the Electrolux Company is very interesting. Electrolux shifted from horizontal expansion to the vertical one by acquiring Granges. it also faced 3 . the Electrolux president Anders Scharp realised that the high degree of industry concentration will no longer allow for growth through acquiring household appliances. However. Electrolux invested in them in order to enlarge its portfolio of clients. plastics and other materials necessary to produce the marketed appliances. Even so.1. Electrolux succeeded in taking over a company which was also a target for competitive companies. Since sales have been increasing much more rapidly than profits and standardisation is hard to be put in practice.

Most of the times. which can be a very effective arm against competition. can bring high expenditures and the risky operation was finally recognized even by Electrolux. the slightest fact that a few of their products were of the same line as those of Electrolux. and the customers on other markets related themselves more to other brands then Electrolux. First. not responding to the main headquarters’ strategies. 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. it was a luxury it could afford for himself. Acquiring firms locally known in different parts of the World was a good choice as far as economies of scale were concerned. 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. Then there were the negative effects. which shows the results of a too extended acquisition – Electrolux dealt to sell the motorcycle product line. Instead of fighting harder in order sell the chain-saw product line. but had to cope with the chain-saw product line. 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. Although the profile of the firm was different. This didn’t happen as it was still an early stage for that. 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. costs would increase and competition also. 4 . and it didn’t take into consideration the branding aspects. Electrolux started to acquire different competitors on the chain saw market in order to develop this market as well.unexpected negative aspects. Also. but not as far as costs were. Electrolux also seemed to make other mistakes as buying just because it saw competition doing the same thing (an automatic response to Beijerinvest’s acquisition was buying Granges) and buying producers which developed not only its chain of products but also others very different from its own. made Electrolux have no second thoughts concerning their decision. The Swedish market was too small but didn’t create high spending. caused by the firm’s decision to take over the global market. on the long run. but as costs increased it became a burden. it bought companies just for small insignificant parts of their production. The biggest mistake it has done was not taking into consideration that along with the internationalization. which is very subjective by definition. To standardize such a product. through the standardization of their kitchen chain. The causes were: the Husqvarna case. 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). As a conclusion. The main negative effects on the company were the costly operations Electrolux had to deal with. I would state Electrolux’s issue as lacking maturity and responsibility: it didn’t look further.

On total. and overestimating their own power. the effects were high costs. Further on. 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. 5 . although Electrolux had liquidities from selling all the unrelated companies a few years before. This should lead to the pay off for the $175 million which Electrolux used to buy Granges. 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. When they had to deal with Whirlpool the effects were tremendous. in order to use in a proper way the marketing budget which could mean increasing the brand awareness. Should Electrolux have taken over Granges? Electrolux had minimized raw material costs by taking over Granges and integrating its aluminium. 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. it could easily continue its international horizontal expansion by acquiring more international firms and trying as before to increase the sales for those firms. 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. in terms of costs. and thus concentrating over the companies that had similar product lines. 3. Another objective on the marketing agenda should have been to invest in customer satisfaction. but proportionate with costs. each decade brought about a daring option.Another cause for the negative situation in which they found themselves was not taking seriously the power of their competitors. alternative solutions will be discussed and one solution for Electrolux problem will be chosen in the end. while the costs exceed the benefits. seeing only the sky as a limit. could had been acquiring a smaller international company or trying to obtain convenient contracts with local companies for the raw materials. time consuming projects which didn’t pay off and the 1990 period in which the company was in a critical situation. SOLUTION 1 – ADVANTAGES AND DISADVANTAGES A good solution to this problem would be the limitation of all these acquires. By this. if Electrolux wouldn’t had taken over Granges. ALTERNATIVE SOLUTIONS FOR SOLVING THE INTERNATIONALISATION PROBLEM The strategy of Electrolux evolved significantly over time. 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. They began extending themselves firstly at horizontal level and then at vertical one. By the other hand. copper and plastics into the appliance production. If at the very beginning Electrolux was a small company trying hard to build its own facilities for selling vacuum cleaners in Sweden.

Among the disadvantages we find the hardness of cost levelling while trying to keep the same quality everywhere. The advantages of this policy would be the creation of stronger ties among Electrolux’s 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.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. niches which would be taken over by competitive companies. As it was mentioned before. Moreover. since consumer awareness means higher profits and thus a higher profitability for the company. Electrolux could maximize its sales by offering to its customers the best products. 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. 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. An alternative solution to their problem would be to reconsider their acquisition process. Creating a super-product has it advantages and disadvantages. 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. A team of experts in marketing techniques should be hired first phase. in order for Electrolux to better know its customers. Moreover. some market niches will be lost. If the company is oriented into making a large amount of products. Among the advantages that product standardisation implies we can state the fact that it boosts up the company’s image. Moreover. which they thought to be the answer to their higher profits despite the higher costs incurred. 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. They seemed very confident on their brand awareness. Even so. while paying more attention to marketing and advertising costs and campaigns. care has to be taken when standardizing products – some products do need a certain degree of adaptation. increased customer awareness and a smaller product portfolio will bring about increased revenues and 6 . They didn’t follow a technique friendly to standardization. SOLUTION 3 – ADVANTAGES AND DISADVANTAGES Electrolux chose diversification in their product acquisition. A product known at a global level by consumers all over the world could only be beneficial. These would include surveys and research made at a deeper level. 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. monthly watching their evolution.

Whirpool. As the president of Electrolux mentioned. Into the home appliances product line Electrolux should also integrate washing machines and cooking and kitchen equipment. 4. From my perspective the best choice with Granges will be to sell it. 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. 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. 7 . Since a cartel would be illegal and the competition and antitrust laws will make illegal future take-overs. The first solution to be discussed is that concerning future acquisitions. Together with these. A COST-BENEFIT ANALYSIS In the previous chapter various alternative solutions for solving the Electrolux’s 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.profitability. but the company is interested in the rate of return and not in the volume of sales. 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. SELECTING THE OPTIMAL SOLUTION. 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. Thus. the two commercial cleaning service firms should be sold in order to reach specialisation and to divide the products into two main product lines. On the other hand. the company has to find other ways of developing itseld. It is true that some market niches will be lost and that the volume of sales would decrease. Since it had developed. 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. In which regards the take-overs that should be reversed. 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. the disadvantages of this first solution are small comparable with the disadvantages. Electrolux’s management should choose to found another brand (Electrosaw) in order to characterise better the chain saw division and to increase customer awareness. Electrolux can profitably sell it in the same time raising money for specialisation on the two product lines that have been left. 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. This specialisation will definitely lead to higher profits through a high volume of sales and lack of useless spending. In which regards the chain saw division. the vertical integration with Granges is by far too much for Electrolux.

but since the solution is not the only one to be applied. 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. This fits like a glove with the future perspectives for household appliances business.The second alternative that Electrolux may pursue is to standardise all its products while keeping all the existent product lines. 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. Since various models exist there is no need for price policies standardisation but at group level and not generally. 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. anticipation and speculation are two key elements for Electrolux. Scale economies can be reached if the entire world is divided into consumer groups. As it was previously shown. differentiated marketing campaigns have to be pursued in each customer groups. Thus. 5. 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. 8 . the choice to be implemented is not a unique solution but a mixture of the three alternatives that were provided. the resources needed are by far less costly than the present situation. increased costs can be financed by the sales of the other product lines that the company will give up at. campaigns aimed at creating brand awareness and at increasing sales. 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”. 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. It is true that these campaigns will imply higher costs. In other words. 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. 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. Further on. 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. However. 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.

As it was previously shown they definitely pay back and bring about very high returns. These savings will be complemented by profit increases and costs decreases and thus will lead to an outstanding benefit. 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. they are brought to a minimum by the very fact of choosing a mixture between alternative solutions. 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. 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. 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. all the disadvantages of absolute product standardisation are brought to a minimum. 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 . 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. Thus. This would cost approximately 200 million Euros (including advertising costs) and it will definitely pay back in less than one year. Moreover. DIMINISHING THE DISADVANTAGES OF THE CHOSEN SOLUTION In which regards the disadvantages of the chosen solution. Suppose the company is going to acquire a raw materials supplier at 30 million Euros. From selling the cleaning services in US and France and Granges approximately 500 million Euros will be created in cash. 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 small scale supplier will be enough in order to supply all the necessary raw materials while being cheap enough for the company.In this respect.

- 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 10 .

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