Chart 4
The home appliance industry as a whole is predominantly viewed as being oversupplied, and the major players in the industry are not working their facilities to full capacity, resulting in the ability to meet increased demand relatively easily. This phenomenon of over-capacity therefore also adds to the strong competitive nature of the industry when it comes to pricing, as the supply always seems to be able to adequately keep apace with any increase in demand, both in the short and the longer term. As can be seen from Exhibit 2 in the case, the 1994 European market for home appliances was 45 million units, whereas the 1994 production is cited as being 51,5 million units, resulting in an over supply situation of 6.5 million units that are to be absorbed by the marketplace.
All of the factors detailed above have led to a deterioration in the profits being achieved by Merloni, however these factors do not occur uniformly across all product types, and more significantly, there are numerous differences in the levels of performance by Merloni’s various international subsidiaries, and these are detailed in the following section.
- How do you account for the different levels of performance by the international subsidiaries?
Despite the formation of the single European market in 1992 as a result of the Single European Act, there still exist vast differences in culture, taste, economics, and technical requirements amongst the member countries of the European Union. The market for home appliances remains fragmented, with major national producers retaining a stronghold over their own specific domestic markets, while at the same time, many of these larger players faced significant challenges on the international scene.
As regards Merloni, the company remained largely successful at retaining its market share in its home country of Italy, through their continued efforts of cost controlling and quality improvements. Merloni’s domestic market share grew from 21.4% in 1990 to 25.2% in 1994, holding out an 80 bases point spread over Electrolux in 1994. Merloni has effectively highlighted its strategy to more fully engage in market segments that provide for higher profitability, by further developing product lines with increased margins, for example by expanding the Scholtes brand. Brand development and market knowledge are essential elements in being able to achieve this strategy.
The international subsidiaries have been operating at different levels of performance due to the different approaches adopted by senior management at Merloni as to their original genesis, ongoing development and strategic plans for the future. For instance, ELDO France was established in 1974 to introduce the Ariston product line to France. The company was successful in building brand and quality awareness for Ariston, and successfully integrated the Scholtes acquisition in 1989 and the subsequent Indesit product line. The three lines were all managed separately, which appears to have been an appropriate strategy, in order to maintain product differentiation and support different price points for the various products. Overall however, Merloni ELDO still only captured 10% of the overall home appliance market by 1995, although this is up an impressive 2% from the 1994 figure of 8%. With an overall market of 8.1 million units in France (1994 figure from Exhibit 2 – 18% of total market of 45 million units), and the production level at just under 6.2 million units (12% of total production market of 51.5 million units), it would appear that with continued efforts at improving the distribution network, targeting the Electrical Retailers and Independents who make up 65% of the distribution channel for the French market (Table A, p.6), and ramping up the production side for the French market, Merloni has the opportunity to continue to increase their market share in France.
The experience of Merloni in the UK was considerably different than that of either Italy or France. Merloni faced a highly concentrated distribution network, with three retail stores, and electric utility company retail stores (such as South Western Electricity Board, or SWEB) controlling 70% of the market. This resulted in Merloni facing considerable difficulties in introducing new brands to this heavily controlled and protected environment. The company’s two product lines Indesit and Ariston were cannibalizing one another’s sales, as they were competing in the same low price market segment. Merloni responded with a major reorganization of process, cutting 20% in overhead costs and reinvested these savings into promoting the Ariston brand more heavily, aiming the product at the middle market, and pricing it accordingly (i.e. higher). The Indesit brand was then able to be aggressively marketed as the ‘economically sound alternative’ appealing to the particularly price/cost conscious consumer. Indesit’s market share for this cheaper market segment of products under ₤300 double from 20% to 40% of this market segment. These factors promoted Merloni ELDO to the position of third largest provider of white goods in the UK, with a market share of 8.5% in 1994. Reported sales for 1994 for the UK were ₤111million, which represents an average per unit sale of ₤185 per unit, on 600,000 units, which seems to indicate that Merloni’s strategy of brand separation and product differentiation was largely successful, with a significant contribution coming from the lower priced Indesit product line. Indeed, the 1995 sales by volume figures tabulated on page 11 of the case show Indesit products accounting for 56% Merloni’s volume of sales for that year, although it is noted that overall market share declined by 1%, from 5.8% in 1994 to 4.8% in 1995. This decline is attributed to the struggle being faced by traditional high street retailers and the closure of the electricity utility company stores, along with fierce competition from Zanussi and Hotpoint in the lower priced market segment, and the pulling of Indesit from Curry’s stores, one of the Big Three appliance retailers. Merloni indicated that it has slated ₤20million for product development and productivity in 1995, which represents a significant 18% of the total sales revenue earned in 1994.
As can be seen, the various international subsidiaries have faced very different business, marketing and competitive environments, and have responded to these in different ways. The international expansion approaches adopted, either from acquisition of existing companies, or from insertion of an existing product line into a market have resulted in different levels of performance being achieved. What must be noted is that “performance level” must be carefully defined, because while top management may consider a particular marketing strategy to have been highly successful by gaining an increase on overall market share by number of units sold, this may in fact have been at the expense of a reduction in market share by sales revenue either from price reductions, or a shift in product focus to selling more products at lower margin levels.
- What is your assessment of the matrix that the consultants have provided for the company? Does it present the right solution? Why yes/why not?
“The New Brand Multibrand Organization” that the Boston Consulting Group recommended handles the complexity of Merloni’s multinational/multiproduct management structure quite comprehensively, leaving just a few logistical questions. It was created to effectively manage and coordinate countries and factories across their three brands: Indesit (a pan-European brand, able to take a dominant piece of the branded part of the mass/commodity market), Ariston (a higher margin brand able to use leading features and design to capture a significant position against the national champions), and Scholtes (a premium French brand in the high end of the built-in market). To breakdown the matrix, three areas will be analyzed: the key assumptions that had to be made to create the matrix, the positives of the new organizational chart, and finally what gaps are left even after the matrix is implemented.
For the Boston Consulting Group to create a realistic and workable multibrand organization, they had to trust that Merloni executives, several retained consultants (BCG, BPCS, RSO, SSA, and Computer Vision), and top-quality information processing systems would be able to generate and calculate accurate data (sales and profitability) and share that information as seamlessly as possible. Another assumption that the matrix depends on is the product positioning that ELDO management has determined for Indesit, Ariston, and Scholtes. If, for some reason, the pricing/product positioning doesn’t hold true to initial projections, then the matrix may falter – more on this in a moment. Perhaps the biggest assumption of all has to do with supply chain management: the matrix makes one very large assumption that after the consolidation of factories and brands, all of the distribution channels will remain intact and that their exports to over a dozen countries from their Italy, France, and Portugal factories will continue to suffice.
Before reviewing some of some of the assumptions and questions further, let’s take a look at some of the aspects of the matrix that work well. First, the decision to distinctly divide and segment the three brands and build on their current perceived strength was inherently a good idea and then gave Merloni the best chance to increase profitability with limited resources. Evidence of this can be seen in the plan for Ariston France. Ariston built a reputation as a good-value, reliable product, which resulted in steady growth and a firming price point. When Indesit was acquired, a separate organization was developed in 1992, followed by a separate group being established in 1994 for Scholtes. The results were impressive and are outlined in the chart below:
Another aspect of the new matrix strategy that would have an immediate impact was the Fall Budget Crunch with its new guidelines indicating the levels of contribution margin (earnings at the factories) and gross margin (earning in the countries). Each country manager came with his proposed budget for two days of intensive discussion. This new approach was reflective of the new brand management organization and brought to the table the varying country manager’s perspectives, which would need to mesh with the homogenous view of senior management – ultimately leading to a synchronized strategy that would fuel the matrix.
With growth looking strong, and the new multibrand matrix approach in full effect, there are still gaps in the system to be addressed. To develop the three brand positioning appropriately, significant advertising dollars will be required: for Scholtes to compete with DeDietrich in spontaneous and assisted recall (Scholtes 5% and 54%, DeDietrich 10% and 73%); for Ariston in order to improve its image and recognition; and Indesit to change its image as a low-end Italian product – currently, there is no proposed solution as to where the resources would be generated. Also, with the newly integrated matrix, the organization had to further develop its ability to serve the distribution, the retailers, and the final consumers. Other questions still remained about the differences in the level of budgetary discretion the two brand managers had versus their direct orders. For example, the new ideas developed by the seven member staff could not be implemented without the brand manager’s approval, and their approval often was aligned with corporate strategy rather than their staff – this ultimately leads to delays in implementation and a backup in time sensitive information feeding the matrix. A final “hole” in the matrix has to do with extenuating circumstances that are outside the realm of the new organization: i.e. the unification of Europe. The matrix strategy has worked well so far with the three designated brands, but when new markets open up or are created, there must be some sort of flexibility to cope with such massive changes. So far, it seems that more questions, rather than solutions, are created.
- What action steps do you recommend?
Based on the analysis in the previous question, here are four proposed action steps to expand the scope of the matrix:
1. Incorporate another level into the organization chart for “Supply Chain Management”. It is critical that Merloni is able to maintain a stable distribution chain as it continues to grow and plan for expansion into China. Acquiring products/companies has the pleasant side effect of acquiring pre-made supply chains and relationships with retailers, but those relationships and distribution channels need to be managed and cared for or else they could vanish. Another box on the matrix chart under R&D and Operations should be solely devoted to this endeavor.
2. Assign advertising dollars as a percent of projected sales for each brand. This would still be a presented proposal to the senior management at the Fall Budget Meetings, but would take a more logical approach and have more facts and figures to determine who gets what. As it currently stands, brand managers present their cases, but it still ends up being a mystery as to what brand will garner what type of advertising support. If real projections are made and founded, and it is pre-determined that a brand will get 5% of their projected sales for the next sales period, then it is easier to figure out what type of campaigns can be put in place. For example, if Ariston has 235,000 in unit sales and is growing at 24%, they will be at approximately 291,400 unit sales in 1995; if each unit costs $200 and 5% was the budget promised, they would get an advertising budget of $2,914,000. Each brand would be based on this type of proposal and instead of being a separate box in the matrix, advertising would be a joined box with each brand.
3. Give more power to the Brand Manager’s direct reports to implement brand strategy decisions. While the decisions would have to be within the budget, there should be a set amount that could be passed through and put into action without waiting for senior management to sign off. This could even be pre-determined at the beginning of the quarter/year, where a certain category is determined to be of the most importance and when critical action needs to be taken, it can be within limits (to be agreed upon by senior management, brand management, and staff). This gives a rather large and complex organization the ability to make the quick, nimble decision that smaller, more flexible companies can make in more local settings. That leads to the next and final proposed action step…
4. Build flexibility into the matrix. Prepare for instances like the European Union and have an “expandable matrix” that is malleable to uncontrollable forces. For instance, there is now the question of how to produce another 2,000,000 units and should there be another brand. Not that it is always easy to predict what will take place, but production capacity should be somewhat predictable and based on the matrix it should be already be determined where the production should come from…hence, the existence of the matrix. If capacity has been reached, then there should be a predetermined “new” brand ready to take flight, or a new market, complete with factory and locale ready to be researched. Basically, now that The New Brand Multibrand Organization exists, it is time to expand the process and constantly be molding and shaping the matrix to fit the current situation – in fact, this can be another box on the matrix!
- What have you learned from this case about building capability for international expansion?
That it can be done, and done well. After the several cases we have discussed in this course, as well as previous cases from previous courses, Merloni Elettrodomestici is the first one that seems to have discovered a method that is efficient and profitable. This may be due to the fact that they haven’t yet overstepped their boundaries and acquired too many products/companies and taken on organizations that are beyond their expertise. The interesting aspect of this case is the fact that Merloni was growing (acquiring new products), and at the same time cutting back (consolidating factories and workforce), while making the appropriate changes to product line and positioning for the future. While Merloni has been successful, it is important to note that they did not achieve their current status without any challenges: they still face dilemmas in the United Kingdom and have yet to conquer the U.K. market – challenges still exist for even the most successful international expansion. For the U.K. case, it may have been beneficial to wait until they fully understood the market, and then entered quickly and confidently.
The strategy an organization chooses to adopt when attempting to build capability for international expansion is clearly the most significant element in determining the success, or otherwise, of the organization’s expansion plans. The decision to enter a country without first establishing business partners, or acquiring an existing operation, must be made extremely carefully, after considerable analyses of all the potential risks and downfalls involved. While this form of international expansion certainly has the highest levels of risk attached to it, it often also is the strategy that will reap the greatest returns for the organization, particularly where a gap in the existing international market can be identified and exploited.
All in all, the main takeaways for building international expansion from the perspective of Merloni seem to be: stay within the realm of expertise, maintain the existing supply chain and retail relationships, trim the unnecessary workforce and integrate top management, have a clear depiction of where your products should fit in the marketplace and communicate that vision throughout the organization, and always focus the efforts to satisfy the end consumer.
REFERENCES
Merloni Elettrodomestici spa: Building for Profit, March 2000. Bower, J.L., McKern, B., and Naman, J.L., Harvard Business School, Cambridge, Massachusetts.
International Dimensions of Marketing, 2000. Russow, L.C. and Terpstra, V., South-Western College Publishing.
