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Case 17
THE U.S. MAJOR HOME APPLIANCE INDUSTRY (1996):
DOMESTIC VERSUS GLOBAL STRATEGIES
I. CASE ABSTRACT:
This industry note summarizes the strategic issues facing the major
home appliance industry in the United States and elsewhere. It was
written for use in a business policy/strategic management course with a
segment on industry analysis and competitive strategy. The industry in
1996 was in the process of becoming a truly global rather than simply a
multi-domestic industry. The note details issues in product and
process design (R&D), manufacturing and purchasing, marketing and
distribution channels, as well as environmental issues and government
regulation. Market share, shipment volume, life expectancy, and
saturation level are provided for each appliance.
The note also provides brief sketches and operating results of the key
competitors which controlled over 98 percent of the U.S. industry:
Whirlpool, General Electric, A.B. Electrolux, Maytag, and Raytheon.
Whirlpool and AB Electrolux, the market share leaders in both North
America and Europe, were poised for significant gains in the rest of
the world. GE was also very active in Latin America and Asia.
Maytag's acquisition of Hoover's world-wide appliance business had not
been successful, causing Maytag to sell its European business to Candy
(Italy). Meanwhile, Bosch-Siemens (Germany) was expanding from its
second-place position in Europe into the Americas. As the major home
appliance industry became increasingly global, the future was in doubt
for those firms, such as Maytag and Raytheon, that were following a
purely domestic strategy.
Decision Date: 1996
II. CASE ISSUES AND SUBJECTS
Major Home Appliances Multi-domestic vs. Global
Industry
U.S. Industrial
Competitiveness
World Trade
Competitive Strategy
Industry Analysis Strategic Alliances
European Union (EU)
Societal and Task Environment
Impact of Government
Regulation
International Strategy Mergers and Acquisitions
A.B. Electrolux Group Whirlpool Corporation
General Electric Company Maytag Corporation
Raytheon Company Competitive Advantage
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This teaching note was prepared by J. David Hunger of Iowa State
University as a basis for class discussion. All rights reserved to the
author. Copyright 1997 by J. David Hunger.
Copyright 1999 by Thomas L. Wheelen and J. David Hunger. Reprinted by
our permission only for the 7th Editions of (1) Strategic Management and
Business Policy and (2) Cases in Strategic Management.
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III. STEPS COVERED IN STRATEGIC DECISION-MAKING PROCESS
(see Figure 1.5 on pages 20 and 21)
Strategy Formulation
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O = Emphasized in Case X = Covered in Case

IV. CASE OBJECTIVES
This case is appropriate for courses in strategic management and
international business at the undergraduate, graduate, and executive
levels. Besides offering sufficient material to conduct an industry
analysis, the case provides opportunities to focus on economies of
scale and its strategic use in an international context to form
global strategies. This comprehensive industry note is meant to go
with cases Maytag Corporation (1996): Back to Basics (Case 18)
Whirlpool's Quest for Global Leadership (Case 19) and Whirlpool: The
First Venture Into India (Case 20). Used as part of this set,
Whirlpool can illustrate a company successfully following a
globalization strategy, in contrast to Maytag's failed attempt to do
the same. The specific objectives to be achieved in this case are:
1. To acquaint the student with an industry often ignored in business
schools but one which has successfully beaten off Japanese rivals.
2. To illustrate the importance of continual product and process
design improvements in acquiring and maintaining competitive
advantage.
3. To show an industry in the midst of a significant change from a
fragmented domestic industry to a global industry dominated by a
few multinational corporations.
4. To provide a vehicle to illustrate Michael Porter's concept of
industry analysis in terms of forces driving industry competition.
5. To establish a solid foundation of knowledge about the
appliance industry in order to set the stage for a subsequent case
on a particular appliance manufacturer, such as Maytag or
Whirlpool.
V. SUGGESTED CLASSROOM APPROACHES TO THE CASE
This industry note is third in a series of industry notes on the major
home appliance industry written by David Hunger. The first note was
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"The Major Home Appliance Industry in 1990: From U.S. to Global" -
first appearing in Annual Advances in Business Cases 1990, edited by
Roy A. Cook and published in the 4th edition of Strategic Management
and Business Policy by Wheelen and Hunger. This note is a descendent
of the "Note on the Major Home Appliance Industry in 1984 (Condensed)"
by Christensen, Andrews, Bower, Hamermesh, and Porter in Business
Policy, 6th edition (Irwin, 1987). The second industry note was "The
U.S. Major Home Appliance Industry in 1993: From Domestic to Global,"
appearing in the Fall 1993 issue of the Case Research Journal and in
the 5th edition of Strategic Management and Business Policy by Wheelen
and Hunger.
This last industry note in the series can be used alone or with the
companion cases of Maytag and Whirlpool. It could also be used as a
take-home exam on industry analysis. Its most likely use is as a
stimulus to open class discussion of the forces driving competitive
intensity in an industry. Use the first class day to discuss the
development of the major home appliance industry and how U.S.
manufacturers were successfully able to repel Japanese competition.
Then move to a discussion of possible critical success factors in the
developing global appliance industry. Discuss the likelihood of only 4
or 5 giant multinational corporations surviving to dominate the world
home appliance industry within ten to twenty years. Push the class to
predict the likely fate of each of the five key competitors in the U.S.
The second day of class could then be used to discuss another related
industry such as automobiles or an appliance company case like Maytag
followed by a third day with Whirlpool.
VI. DISCUSSION QUESTIONS
1. What factors have helped to create the modern U.S. major home
appliance industry? Were these factors changing in 1996?
A key factor encouraging the growth of the U.S. major home
appliance industry was the early provision of electricity and
natural gas by the federal government and aggressive utilities.
This was not discussed in the note, but it should be developed in
order to understand how this industry develops in other countries,
in particular the less developed countries. Without the
availability of dependable energy sources, appliances would be of
questionable value. A strong economic infrastructure composed of
electric and gas utilities, supermarkets, paved roads, and consumer
goods manufacturers is needed for a society to value sophisticated
appliances. A less developed country is likely to have less of
this infrastructure. Its people have less need of a refrigerator
because they shop daily at a nearby market. Washing machines and
dishwashers need a dependable source of hot and cold water. Who
needs a dryer if sunshine and clothes line are more readily
available than electricity?
Another key factor encouraging the growth of the industry in the
United States was a large and relatively homogeneous domestic
market. Nationwide standards and similar preferences across regions
enabled appliance manufacturers to exploit economies of scale to
keep prices low. A high degree of competitive rivalry forced every
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manufacturer to provide greater value to the customer at low cost
if it wished to keep up its sales. The consolidation of the U.S.
industry plus the trend toward large-scale dedicated plants meant
that fewer companies came to control the market. Since World War
II, the industry has shifted from a fragmented one composed of
hundreds of producers to an oligopoly composed of five dominant
firms.
By the 1990s, the U.S. appliance industry had reached maturity.
Demand for most large home appliances was of the replacement
variety. Saturation rates of most appliances were close to 70%.
Since the U.S. market was no longer growing and most significant
brands had been acquired by the big five -- Whirlpool, General
Electric, Electrolux, Maytag, and Raytheon -- appliance
manufacturers had to turn to international markets if they were to
continue to grow. Unfortunately, foreign markets preferred smaller
appliances than did the U.S. market and except for Western Europe,
Australia, and Japan, they were generally not developed
sufficiently to have widespread stable market demand. This was
rapidly changing, however, as countries in Eastern Europe, Asia,
and Latin America moved to a free market economy.
2. How important is the manufacturing function in this industry? Why
hasn't marketing been as important in this industry as it has been
in automobiles? Why hasn't product R&D been as important in this
industry as it has been in the computer industry?
Although manufacturing, industrial engineering, and purchasing are
not usually discussed in much detail in business policy/strategic
management cases, they appeared to be key to the successful
implementation of competitive strategy in the major home appliance
industry world-wide. The key success factors for a company in this
industry were price and reliability. Given that in the U.S. most
major appliances were sold through Sears or to housing contractors,
marketing by the manufacturer had traditionally been of less
importance to sales than were other factors. In 1996, many builders
included built-in stoves, refrigerators, and ovens. The housing
decision thus overwhelmed consideration of appliances. Cost and
brand image were key when selling to major retail outlets and to
builders. Brand image was determined either by long-term product
dependability, such as in the case of Maytag and Amana, or by the
overall reputation of the manufacturer, such as General Electric
enjoyed. Even though many appliance manufacturers had added
consumer-oriented features such as automatic ice dispensers to
their products, consumers tended to view most of the features as
nice but not necessary. People tended to view their houses and
automobiles as extensions of themselves. They could make a social
statement with a new car or house. In contrast, major appliances
were merely a part of a house and generated little buying
enthusiasm until they broke down (a rare event when the average
major appliance had a life expectancy of 10 years or more).
Process R&D had traditionally been more important than product R&D
in this industry. The basic technology underlying these appliances
had not changed significantly since WWII. Consequently, the keys
to competitive advantage have been economies of scale and constant
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process improvements to reduce costs and to improve product
dependability and overall quality.
3. Describe the current state of the major home appliance industry in
the United States as of 1996. Which companies appeared to be in
the strongest position and which appeared to be in the weakest
position? Why?
The major home appliance industry in the United States as of 1996
had reached a level of maturity. The five large corporations --
Whirlpool, General Electric, A. B. Electrolux (Frigidaire), Maytag,
and Raytheon -- dominated the industry. The trend in manufacturing
appeared to be to dedicate plants to a particular product line in
order to reap the cost benefits of economies of scale and increased
quality and dependability through more automation. Strong price
competition meant that unless companies had large enough sales to
justify building a large efficient plant, they were forced to buy
appliances from other manufacturers to market under their own brand
name in order to offer a full line of appliances to their
distributors.
With the U.S. market becoming primarily a replacement market, U.S.
appliance manufacturers looked to foreign markets as their growth
opportunity. The key success factor now seemed to be a significant
international position. As of 1996, all but Maytag and Raytheon
had either purchased, been acquired by, or formed a strategic
alliance with a strong European appliance company. Whirlpool
purchased the major home appliance business of Philips; General
Electric joined GEC of the UK in a joint venture called General
Domestic Appliances; and Electrolux had purchased White
Consolidated Industries (renamed Frigidaire). The emerging global
nature of the industry meant that Whirlpool and A.B. Electrolux
were in the best internationally competitive position. General
Electric was reasonably well positioned, but it was stronger in the
United Kingdom than in continental Europe. GEs widely known
corporate policy that every business unit must be either first or
second in its market raised some problems for the major appliance
business unit. GE may be second in the U.S. market, but it was a
distant third internationally. Given that GE's manufacturing
facilities at its 40-year old Appliance Park were in need of major
re-investment, management may soon have to decide if such
investment is worth staying in the industry. Maytag's difficulties
with its European Hoover unit had put the company in a difficult
position. Although its management realized that the industry was
becoming global, it had been unable to establish a successful
European presence and had been forced to retreat to its domestic
market. Both Maytag and Raytheon seemed to be staking their future
on the mature U.S./Canadian market. Neither had any significant
operations in Latin American and were vulnerable to low-cost
Mexican imports (thanks to NAFTA). To be globally competitive,
Raytheon needed to expand its appliance operations through joint
ventures or acquisitions or else consider selling its appliance
division. Nevertheless, the bleak outlook for defense-related
business meant that Raytheon might have to depend on its major
appliance business more than it had in the past. A European or
Asian strategic alliance seemed a strong possibility if Raytheon
were to continue in appliances.
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4. Discuss this industry using Michael Porter's forces that drive the
level of competitive intensity, e.g. threat of new entrants,
bargaining power of buyers and suppliers, threat of substitute
products, and relative power of other stakeholders. Which of these
forces were increasing the level of competitive intensity and which
were acting to reduce it? Which ones were most important to
monitor in the future?
Students should be able to directly apply Porter's forces to the
U.S. major home appliance industry. The threat of new entrants in
the United States was surprisingly high in 1996. One threat was
Bosch-Siemens, expanding from its new dishwasher plant into other
high-end appliances. Another threat was that of a strong foreign
competitor acquiring or entering into a joint venture with an
existing U.S. appliance manufacturer, such as Raytheon's Appliance
Group. A third was Mexican appliance firms using NAFTA to enter
the U.S./Canadian market. The bargaining power of buyers was
already strong in 1996 and seemed to be getting stronger as Sears
Roebuck and national chains of appliance dealers, like Circuit
City, were coming to dominate the retail business. The bargaining
power of suppliers appeared to be shrinking as appliance
manufacturers integrated backwards or insisted on just-in-time
delivery. Suppliers were increasingly being forced to choose
between becoming a captive company or a marginal supplier. The
trend toward closer ties between a few suppliers and an appliance
manufacturer suggested the existence of de facto vertical
integration through some of the characteristics of the network
organization. The threat of substitute products appeared to be
very small in 1996. Appliance producers were seriously looking for
new technologies and designs to incorporate in their products.
Although some developments had occurred recently to keep food fresh
without refrigeration (such as irradiation), most food in the home
still needed to be kept cool or frozen to avoid spoiling. The
level of rivalry among existing firms in the industry had always
been high in the United States and seemed to be getting higher, but
now on a global rather than just a domestic level. The industry
had already consolidated into an oligopoly in the United States and
appeared to be following the same process worldwide. Following Ed
Freeman's stakeholder view of strategic management, a sixth force
could be added to the five forces described by Porter. The
relative power of other stakeholders, such as unions, national
governments, special interest groups, and local communities could
also be considered in terms of their effect on the ultimate profit
potential in the major home appliance industry. The CFC/efficiency
issue facing refrigerator/freezer manufacturers was a real problem
given the conflicting nature of evolving governmental regulations.
Environmental issues were becoming very important worldwide in the
1990s, and attempts to deal with pollution issues were bound to
increase cost pressures on an industry already suffering from low
profit margins. The likely internationalization of standards did
propose, however, to make life easier for appliance companies and
provide impetus for the globalization of the industry.
5. Why did the Japanese come to dominate the U.S. microwave oven
market but no other appliance market? Was this a one-time only
incident, or does it reflect a serious weakness on the part of U.S.
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major appliance producers?
U.S. major home appliance manufacturers were justifiably proud in
1996 of their ability to withstand Japanese competition much better
than had the U.S. automobile and consumer electronics industries.
The high level of price competition in the United States resulted
in both a heavy emphasis on cost reduction and a consolidation of
the industry. The five surviving U.S. appliance manufacturers were
strong firms with battle-toughened management committed to product
dependability, low costs, and a full line of products for marketing
efficiency. Japanese appliance firms could find no undefended
niche, other than in microwave ovens, from which to launch a
competitive attack. Japanese strengths in other industries came
from their powerful process R&D and manufacturing expertise, which
enabled them to utilize basic technological advances developed
elsewhere to manufacture low-cost, high-quality products. The same
was true of the Korean firms, such as Samsung. The U.S. appliance
industry, however, was also process R&D, manufacturing-oriented and
was already making what some might say were the highest quality and
lowest cost appliances in the world. As a result, the Japanese
manufacturers had no discernible competitive advantage over their
U.S. competitors except in microwave technology. A new technology
would be needed for the Japanese to gain some advantage. Fuzzy
logic had the potential, but it was picked up by the key
competitors before it could become a distinctive competency.
Another possibility might be the use of sound waves to clean
clothes. Nevertheless, it is very likely that Japanese and Korean
firms will be more attracted to the fast-growing Asian major home
appliance market than to the less-attractive, more mature North
American and European markets.
6. What factors are likely to transform the major home appliance
industry in the future?
In the short run (next 5 years), the unification of Europe will be
one of two major factors. Agreements on standards and a common
currency throughout Western Europe are, resulting in a consolidation
of the industry much as the U.S. industry consolidated after World
War II. Expect A.B. Electrolux, Whirlpool, General Domestic
Appliances (GE/GEC), Bosch-Siemens, Miele, Group Brandt, Liebherr,
Temfa, Candy, and Merloni to either acquire or form alliances with
the smaller European appliance manufacturers (especially in Central
and Eastern Europe). Expect more cooperation among the EU nations
and the EFTA-European Free Trade Association nations (Sweden,
Norway, Austria, and Switzerland), and with Eastern European
nations. The key to success in Europe will be the ability to
utilize economies of scale to manufacture high-quality, low-cost
home appliances tailored to cultural preferences. A second factor
will be the impact of NAFTA on competition in North America.
Following the success of pioneering maquilladora operations, low-
cost manufacturing in Mexico is likely to be a key to remaining
competitive in North America. GE's joint venture with MABE is
already undercutting Magic Chef with Mexican-made, low-cost gas
ranges. In the short run, Mexico is important primarily as a
supplier of low-cost labor.
In the intermediate term (5 - 10 years), major appliance
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manufacturers will likely focus on the developing markets in Latin
America. Given Mexico's fast-paced economic development, marketing
opportunities there will assume greater importance than its current
low-cost position in labor. The possible extension of NAFTA into
Chile may eventually lead to a unified American market similar to
the European Union. Appliance makers will need to increase their
presence in Latin American to prepare for this possible development.
Expect continued mergers, acquisitions, and joint ventures as
domestic appliance makers join with U.S. and European appliance
firms to exploit the expanding South American market. Continuing
improvements in communications and logistics will act to de-
emphasize national cultural differences. Major home appliances will
become more standardized as low-priced, high-quality appliances made
globally replace unique but high-priced locally made products.
For the long run (10 - 20 years), the future of the major home
appliance industry must be in Asia, especially in China and India.
Increasing economic development throughout Asia will likely
translate into the biggest home appliance market yet. A truly
global industry is not possible until the same players are competing
in all areas of the world. Unless U.S. and European companies begin
to form alliances with Asian appliance companies, Asia may fall to
Hitachi, Mitsubishi, Samsung, and Matsushita by default.
VII. CASE AUTHOR'S TEACHING NOTE by J. David Hunger*
Parts of the Case Author's Teaching Note was presented above in
Sections I - VI.
Overall Issues
____________________
*Reprinted by permission of the case author.
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This industry note summarizes the strategic issues facing the major
home appliance industry in the United States and elsewhere. The
industry in 1996 - both in the United States and in Europe - was in
the process of becoming a truly global rather than simply a multi-
domestic industry. Contrasted with the U.S. automobile and consumer
electronics industries, U.S. major appliance manufacturers had been
able successfully to ward off Japanese competition (except in
microwave ovens) and were actually on the offensive internationally.
For "white goods" -- refrigerators, freezers, washing machines,
dryers, ranges, microwave ovens, and dishwashers -- over 84% of
those sold in the United States were made domestically. More
appliances had been made and sold in the United States in 1994 than
in any preceding year. Although shipments were down slightly in
1995, most industry analysts predicted that 1996 shipments should be
fairly stable.
The U.S. major home appliance industry was, nevertheless, facing
some significant threats as well as opportunities as it moved
through the last decade of the twentieth century. The
Canadian/United States market had reached maturity. Future unit
sales were expected to grow only one to two percent annually on
average for the foreseeable future. Operating margins had been
dropping as appliance manufacturers were forced to keep prices low
to be competitive even though costs kept increasing. In Western
Europe, however, a market already 25% larger than the mature North
American appliance market, unit sales were expected to grow around
2% - 3% annually. This figure was expected to increase significantly
once Eastern European countries opened their economies to free
trade.
Appliance markets in Asia and Latin America were expected to grow at
a rate of 5% - 6% annually. The unification of the European Union,
the signing of NAFTA, and global growth opportunities were providing
the impetus for a series of mergers, acquisitions, and joint
ventures by major home appliance manufacturers. The industry was
under pressure from governments around the world to make
environmentally safe products plus significantly improve appliance
energy efficiency.
Now that A.B. Electrolux (Sweden), market leader in Europe, has
completed its move into North America through its acquisition of
White Consolidated (now Frigidaire), and Whirlpool has integrated
the worldwide major appliance business of Philips (Netherlands) into
its market-leading North American business, these two corporations
seemed poised to dominant the coming global industry. Both General
Electric and Maytag had also tried to establish strong positions in
both Europe and North America. General Electric (U.S.) had formed a
joint venture with the British GEC to create General Domestic
Appliances, but the venture had not yet obtained significant market
share on the European continent. Maytag's acquisition of Hoover's
worldwide appliance business had not been successful, causing Maytag
to sell its European business to Candy (Italy). Meanwhile, Bosch-
Siemens (Germany) was expanding from second place in Europe to the
Americas.
How soon would this major home appliance industry become a truly
global phenomenon? All the major players were turning their
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attention to the developing economies of Latin America (especially
Mexico, Brazil, and Argentina) and Asia (especially China and
India). Other than microwave ovens, Japanese and Korean appliance
manufacturers had a very small presence in Europe and the Americas.
They intended to grow with the developing Asian market and were in
no mood to lose this wide-open opportunity to European and American
firms. Matsushita (Japan) had the largest market share in Asia, but
its total was less than 10% outside Japan. Which of the principal
competitors would achieve competitive advantage and which would be
forced to drop out in this increasingly competitive industry? As the
industry became more global, would competitors such as Maytag and
Raytheon remain viable by following a domestic-only strategy? Have
AB Electrolux and Whirlpool overextended themselves by
overemphasizing international expansion? Given the importance of
cultural preferences regarding washing machines and stoves, would
major home appliances ever become truly global like automobiles,
televisions, and soft drinks?
VIII. STUDENT PAPER (Strategic Audit inappropriate)
An analysis of the U.S. major home appliance industry requires
analysis of a dual set of markets. The five main U.S. manufacturers
not only dominate the U.S. market but also play key roles in the
developing global market. Only after evaluating the external
environment and the strategic factors of competition in both
markets, as separate yet interdependent entities can we make
accurate assumptions about industry trends.
A. DESCRIPTION OF HOME APPLIANCE (WHITE GOODS) INDUSTRY
The U.S. home appliance industry is dominated by five
manufacturers that control 98 percent of the market: Whirlpool
with 35%, General Electric with 29%, Maytag with 14%, A.B.
Electrolux (parent of Frigidaire) with 13%, and Raytheon with 6%.
Stable sales and saturation levels of white goods in the United
States during the past ten years indicate maturation, providing
few opportunities for growth. Consequently, these manufacturers
must look to emerging and growing global markets for growth.
Typically, developing a global presence requires looking first to
the triad of developed areas of the world, North America, Western
Europe, and Japan. The U.S. market is stable with a 1-2%
predicted sales growth compared to the European market with 2-3%.
In the past few years, a series of acquisitions and joint
ventures has resulted in three companies (Electrolux, Whirlpool,
and Bosch-Siemens) having about half the European market. Thirty
manufacturers share the remaining half. The fragmented Asian
market, currently dominated by Japanese and Korean manufacturers,
was beginning to be important. By 1996, the largest U.S. and
European appliance makers (except Maytag and Raytheon) had
utilized acquisitions and/or joint ventures to gain a greater
global presence, particularly in North America and Europe. They
were now extending their reach into Latin America and Asia.
B. SOCIETAL FACTORS IN THE ENVIRONMENT (See Exhibit 1)
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Current economic trends include an increase in two-income
families (in both North America and Western Europe), an upcoming
period of a strong economy in North America and abroad, and
developing economies in much of Asia and Latin America that may
soon support significant white goods markets. Technology and
sophisticated electronics have improved manufacturing processes
and product design. The effects are seen in increased production
efficiency, improved product quality, greater variety of
features, "smarter" appliances, and increased energy efficiency.
Political-legal forces include relaxed international trade
restrictions, more governmental regulation and special interest
group pressure for stricter environmental and energy-usage
standards, and trade association encouragement for world-wide
appliance standards. The ongoing economic integration of the
European Union enables products with at least 60 percent local
content to avoid tariffs. Regional South American trade
agreements and the North American Free Trade Agreement promise
lower tariffs and increased American trade. Political changes in
Eastern Europe are opening markets. The sociocultural phenomena
of the aging "baby-boomers" throughout the developed world means
a bulge in the population with increased spending power.
The societal environment parameters must be evaluated in the
context of the industry environment. Although interrelated, the
mature North American home appliance market differs greatly from
the fragmented markets of other regions of the world. It is best
to analyze the competitive forces as components of two separate
industries.
C. COMPETITIVE INDUSTRY (TASK) ANALYSIS-NORTH AMERICA
1. THREAT OF NEW ENTRANTS
The U.S. white goods industry contains many of the following
barriers to entry - most of which have kept the threat of new
entrants low and some which may be raising the threat.
Economies of Scale . The consolidation of firms in the U.S.
white goods market has led to fewer but larger plants. The
trend of dedicated manufacturing facilities continues, with
each product category requiring specialized equipment.
Consequently, economies of scale encompassing suppliers,
manufacturing processes, and distribution channels, are
significant barriers to entry.
Product Differentiation . Brand identification in the
United States creates a significant barrier. Most
appliances sold in the United States are well-known brands
since only five different manufacturers account for 98
percent of the market. Consequently barriers to entry are
created by the large advertising and promotional budgets
required to overcome brand recognition and loyalty in the
U.S. market. There may be room at the top of the growing
high-quality category, however, for an established European
firm like Bosch-Siemens.
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Capital Requirements . New competitors to the large,
established manufacturers would require very large amounts
of capital. This is a significant deterrent to market
entry.
Switching Costs . Home appliances in general have a high
switching cost. Since white goods are relatively expensive
and have a long life, consumers are hesitant to try a new
brand, thus discouraging new entries into the market.
Access to Distribution Channels . The U.S. trend of
retailing white goods through "power retailers" and
regional appliance chains precludes easy access to new
products since these dealers carry only a few full lines of
appliances; dealers who carry well-known national brands
have a shrinking share of the market. The contract sales
segment, the other major distribution channel, also usually
chooses well known appliance brands. Due to the emphasis
on brand names and volume purchasing, a new company would
find distribution a barrier.
Cost Disadvantages Independent of Size . Due to the well-
established nature of the U.S. home appliance industry, the
advantages of experience curve, suppliers, and location
would not be available to a new competitor. These hurdles
may be insurmountable unless an incoming company has
adequate resources. Bosch-Siemens may be the exception.
Government Policy . NAFTA has acted to significantly change
the competitive landscape. Because the treaty protects
Mexican appliance makers from U.S. competition, they are
able to enter the U.S. and Canadian markets with low-cost
appliances. As Mexico becomes less socialistic, it is
allowing U.S. firms to either acquire Mexican firms or to
form joint ventures with them. European firms seeking
entry into the U.S./Canadian market may wish to use Mexico
as an entry point.
2. RIVALRY AMONG EXISTING FIRMS
Competitors . Since there are few competitors and several
are of roughly the same size, the U.S. market is highly
competitive. In this mature market, innovations are
matched quickly by the competition. High-technology
features used to create product differentiation are short-
lived due to careful monitoring and quick response by
competitors.
Industry Growth . Competition is also promoted by the
limited growth available in the U.S. white goods market.
Product or Services . In some ways, home appliances are
like commodities. Since most lines have a broad range of
features, there is decreased product differentiation. High
switching costs discourage customers from jumping form one
brand to another and prevent a resulting increase in
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Case 17
U.S. Major Home Appliance Industry (1996)
competition.
Fixed Costs and Capacity . High fixed costs and the large
incremental costs of adding capacity encourage both price-
cutting and competition to recoup costs.
Exit Barriers . The difficulty of leaving this industry
encourages competition. The specialization required for
each type of appliance manufacturing plant discourages exit
from the industry due to the limited marketability of the
plant facility.
3. THREAT OF SUBSTITUTE PRODUCTS OR SERVICES
Substitute products exist on a limited basis. A clothesline
can be used for a dryer, a microwave for a range, a coin
laundry for a home washer, or a refrigerator-freezer for a
deep freezer. Due to the limited nature of substitutions,
this does not contribute much to the level of industry
competition.
4. BARGAINING POWER OF BUYERS
Buyers have increasingly strong bargaining power due to the
trends in distribution. The policy of national "power
retailers" to purchase only a few full lines of major
appliances gives them clout to get the lowest wholesale
prices. Contract sales also demand lower prices.
5. BARGAINING POWER OF SUPPLIERS
Purchasing trends include fewer suppliers and a closer, more
interactive supplier-manufacturer relationship. These
bargaining power factors are offset by the suppliers probable
reliance on the manufacturer's business.
6. RELATIVE POWER OF OTHER STAKEHOLDERS
The need to comply with government regulations and industry
standards can increase both competition and cooperation. For
example, research and development departments compete to meet
environmental requirements such as the decreased use of CFCs
and stringent energy standards. However, the appliance
industry is cooperating on creating international standards
for quality and safety, which should decrease entry barriers.
Analysis of the competitive nature of the North American
market reveals this to be a highly competitive industry based
on a limited number of competitors, minimal growth potential,
high fixed costs, large increments of capacity, high exit
barriers, and increasing bargaining power of the buyers.
Strong competition decreases the profit potential of the
industry as a whole and becomes a threat in the external task
environment.
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Case 17
U.S. Major Home Appliance Industry (1996)
D. COMPETITIVE INDUSTRY (TASK) ANALYSIS-GLOBAL FRAGMENTED MARKETS
1. THREAT OF NEW ENTRANTS
In fragmented industries, such as in South America, Asia, and
Europe (if Eastern Europe is included), the entry barriers are
low, increasing competition. Typical barriers, being somewhat
related to firm size, are limited. Relaxed trade barriers in
the European Union and other parts of the world have lowered
one of the primary barriers to entry. The Asian market is
still young enough to allow for new brand entries in addition
to entrance by acquisition of existing firms. The main threat
to new entries is high product differentiation due to national
preferences.
2. RIVALRY AMONG EXISTING FIRMS
In the fragmented markets of Europe, South America, and Asia,
numerous appliance manufacturers and industry growth potential
prevent intense rivalry. This is offset somewhat by the
presence of exit barriers.
3. THREAT OF SUBSTITUTE PRODUCTS
As in the North American market, substitute products are
limited as countries develop economically. Substitute
products (such as washing clothes in a nearby stream) are most
likely in the less-developed areas.
4. BARGAINING POWER OF BUYERS AND SUPPLIERS
In fragmented markets, the power among the buyers, suppliers,
and manufacturers seems to be fairly evenly distributed
because there are few advantages of size. The European market
has begun to experience consolidation of manufacturers, giving
those firms a bargaining advantage over suppliers.
5. RELATIVE POWER OF OTHER STAKEHOLDERS
Even though European trade barriers are being relaxed,
government continues to influence this market through local
regulations, local content requirements, and environmental
regulations. Environmental and energy requirements are
extremely important, however.
As is characteristic of fragmented industries, Western Europe
and developed Asia have both a large number of competitors and
weak bargaining positions of buyers and sellers. Even though
these forces combine for a low level of competitive intensity,
it really only takes one strong factor to prevent industry
consolidation. The high product differentiation related to
regional boundaries works to maintain fragmentation in these
primary global markets. The European market, in response to
the decreased trade barriers in the EU, has seen consolidation
occur with the potential for competitive intensity increasing.
The same may be true of Latin America within the next ten
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Case 17
U.S. Major Home Appliance Industry (1996)
years. Asia has too much growth potential for consolidation
to be an issue for at least 10 more years.
6. INDUSTRY TRENDS
Rapid globalization is the overriding trend in the major home
appliance industry. This necessitates looking at the market
as a composite of national markets, one of which is the U.S.
market.
7. GENERAL TRENDS
Overall profit growth. A projected robust economy, an
increased proportion of consumers in the middle-age group,
and an increase in two-income families all indicate
increased spending power worldwide.
Continued technological changes in production to promote
higher efficiency and improved product quality. These are
required to maintain a competitive position.
Increased technological sophistication of features. This
trend should continue due to the ready supply of and demand
for technological improvements.
Increase in high-tech, high-end product demand. This
demand is driven by increased spending power in developed
countries.
Use of high-technology features filtering down to lower-end
models. Innovations frequently move from a high-end
product to a mass market as the technology comes down in
price.
Improved energy efficiency. R&D departments are responding
to market and government pressures.
More environmentally friendly products. Regulations have
forced the decreased use of substances such as CFCs.
International standards of quality and safety requirements.
This has fueled the consolidation of fragmented markets.
8. MARKET TRENDS FOR THE U.S.
Strong sales. U.S. sales should be high based on
indications of a strong global economy. Overall sales
growth will remain stable near 1-2% because of market
saturation.
Increased emphasis on high-end products. The increased
market segment of two-income families and middle-aged
consumers creates growth potential for high-feature
appliances.
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Case 17
U.S. Major Home Appliance Industry (1996)
Need for strong product lines to compete for distribution
channels and buyers. Due to competition and economies of
scale, the trend for retailers to carry a few full lines of
appliances will increase buyer power.
Increased interdependence of suppliers and manufacturers.
This results from the need for specialization and
efficiency.
In conclusion, there is opportunity for profits in the major
home appliance industry if the needs of the individual markets
are considered. A strong showing in the U.S. market will
depend on remaining competitive in both process and product
technology in order to be both efficient and desirable.
Growth in markets abroad will rely on understanding the needs
of the individual markets and the timing of entry.
Consolidation of the industry is more advanced in Europe than
in Latin America and Asia due to political-legal changes and
lowered trade barriers. Efforts to control portions of this
market need to be immediate. Further investigation into the
nature of the markets of the developed Asian countries and the
markets of developing nations should shape long-range
expansion plans.
IX. EFAS, IFAS and SFAS E XHIBITS - Were inappropriate for this Industry
Note.
X. FINANCIAL ANALYSIS - Was inappropriate for this Industry Note.
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Case 17
U.S. Major Home Appliance Industry (1996)
EXHIBIT 1
SOCIETAL ENVIRONMENTAL FACTORS OF THE
MAJOR HOME APPLIANCE INDUSTRY
ECONOMIC TECHNOLOGIC POLITICAL-LEGAL SOCIO-CULTURAL
Increase+ spen+ing power
+ue to increase in #,income
families -./S/ & a0roa+1
Pro+uct 2evelopments3
,Increase+ energy efficiency
,Increase+ sop4istication of
electronics -fu55y logic &
smart appliances1
,6i+esprea+ availa0ility of
increase+ features in
./S/7Cana+ian mar8et/
Increase+ governmental
regulation on environmental
an+ energy usage issues
2emograp4ics , Increase+
mi++le,age+ mar8et -!ging of
9Ba0y Boomers91 favoring
4ig4,en+ pro+ucts in
+evelope+ parts of worl+
./S/ 4ousing starts pre+icte+
to 0e goo+
Process +evelopments3
,Fewer components
,Improve+ relia0ility
,Ro0otics
,Computer lin8s to suppliers
Re+uce+ :ra+e Barriers3
,Economic integration of
European .nion
,;ort4 !merican Free :ra+e
!greement
,2eveloping countries -<atin
!merica= Pacific Rim1
;ational cultural preferences
favor appliances t4at are
tailore+ to local con+itions
Pre+ictions of ro0ust
economy in ;ort4 !merica
an+ a0roa+
European visual pro+uct
+esign tren+ 0ecoming
in+ustry,wi+e
pening of Eastern European
an+ !sian mar8ets
2esire for >uality low cost
la0or saving pro+ucts
increasing worl+,wi+e
!sia an+ S/ !merica
moving towar+ free,mar8et
economies/
Emerging worl+ stan+ar+s for
appliance in+ustry
Parts of !sia= !frica= an+
Sout4 !merica remain
insignificant mar8ets at
present 0ecause of
un+evelope+ economies an+
inconsistent availa0ility of
power sources