26363232 Case Study the US Major Home Appliance Industry Domestic vs Global Strategies

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: II.

1996

CASE ISSUES AND SUBJECTS Major Home Appliances U.S. Industrial Competitiveness Industry Analysis European Union (EU) Societal and Task Environment International Strategy A.B. Electrolux Group General Electric Company Raytheon Company

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Multi-domestic vs. Global Industry World Trade Competitive Strategy Strategic Alliances Impact of Government Regulation Mergers and Acquisitions Whirlpool Corporation Maytag Corporation Competitive Advantage

Case 17 U.S. Major Home Appliance Industry (1996) 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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Case 17 U.S. Major Home Appliance Industry (1996)

Strategic Posture

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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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Case 17 U.S. Major Home Appliance Industry (1996) "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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Case 17 U.S. Major Home Appliance Industry (1996) 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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Case 17 U.S. Major Home Appliance Industry (1996) 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. GE’s 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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Case 17 U.S. Major Home Appliance Industry (1996)

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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Case 17 U.S. Major Home Appliance Industry (1996) 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, lowcost 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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Case 17 U.S. Major Home Appliance Industry (1996) 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 deemphasize 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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Case 17 U.S. Major Home Appliance Industry (1996) 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 multidomestic 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, BoschSiemens (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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Case 17 U.S. Major Home Appliance Industry (1996) 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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Case 17 U.S. Major Home Appliance Industry (1996)

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.

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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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Case 17 U.S. Major Home Appliance Industry (1996) •

Capital Requirements. New competitors to the large, established manufacturers would require very large amounts of capital. This is a significant deterrent to market entry.

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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.

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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.

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Cost Disadvantages Independent of Size. Due to the wellestablished 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.

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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 shortlived due to careful monitoring and quick response by competitors.

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Industry Growth. Competition is also promoted by the limited growth available in the U.S. white goods market.

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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 pricecutting and competition to recoup costs.

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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 supplier’s 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.

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Continued technological changes in production to promote higher efficiency and improved product quality. These are required to maintain a competitive position.

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Increased technological sophistication of features. This trend should continue due to the ready supply of and demand for technological improvements.

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Increase in high-tech, high-end product demand. This demand is driven by increased spending power in developed countries.

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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.

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Improved energy efficiency. R&D departments are responding to market and government pressures.

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More environmentally friendly products. Regulations have forced the decreased use of substances such as CFCs.

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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.

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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 EXHIBITS - 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

Increased spending power due to increase in 2-income families (U.S. & abroad)

Product Developments: -Increased energy efficiency -Increased sophistication of electronics (fuzzy logic & smart appliances) -Widespread availability of increased features in U.S./Canadian market.

Increased governmental regulation on environmental and energy usage issues

Demographics - Increased middle-aged market (Aging of "Baby Boomers") favoring high-end products in developed parts of world

U.S. housing starts predicted to be good

Process developments: -Fewer components -Improved reliability -Robotics -Computer links to suppliers

Reduced Trade Barriers: -Economic integration of European Union -North American Free Trade Agreement -Developing countries (Latin America, Pacific Rim)

National cultural preferences favor appliances that are tailored to local conditions

Predictions of robust economy in North America and abroad

European visual product design trend becoming industry-wide

Opening of Eastern European and Asian markets

Desire for quality low cost labor saving products increasing world-wide

Asia and S. America moving toward free-market economies.

Emerging world standards for appliance industry

Parts of Asia, Africa, and South America remain insignificant markets at present because of undeveloped economies and inconsistent availability of power sources

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