Emerging markets were an obvious growth potential for Electrolux. The company estimated that demand for household appliances in Asia, Eastern Europe and Latin America could grow at 20 percent annually. Thus it was advantage for it to get into these markets to increase sales.
Companies may seek out foreign markets to take advantages of business cycle – recession and expansion – differences between countries.
Sales grow more slowly in a country that is in a recession and grow more rapidly in one that is expanding economically.
Electrolux experienced slower growth in Western Europe and the United States in 1990 but this slow growth could have been compensated by higher growth in Asia, Eastern Europe and Latin America. Thus the company could avoid the full impact of price fluctuations or shortages in any one country.
Many companies, while expanding foreign markets, want to counter advantages competitors might gain there.
Electrolux and General Electric and Whirlpool were competing in the U.S. market, whereas Bosh – Siemens was the main competitors in Germany.
Electrolux knew that these companies announced similar plans to expand the same markets. It might fear that these competitors would generate profits from the emerging markets if left alone to serve them. Then they may use those profits in various ways, such as additional advertising or development of improved products.
Electrolux wanted to enter these markets before competitors to prevent them from gaining advantages.
- Finally the most obvious factor appears from the PLC theory.
If the product becomes standardized and the demand is mature the next step the company should do is moving to emerging markets of developing countries.
Longer production runs become possible for foreign plants, which in turn reduce per unit cost for the producers output. The lower per unit cost creates demand in emerging markets. Electrolux was incentive to begin moving plants to developing countries in which unskilled, inexpensive labour is very efficient for standardised products.
Q2. What do you think Electrolux acquired Lehel in Hungary, but opted for green field investment in many other Eastern European countries?
Electrolux had to make important decisions as it relates to the type of entry mode used for different countries. Electrolux decided to enter Hungary through acquisition while choosing green field venture for other parts of Eastern Europe. The method chosen depends on the certain circumstances. Careful evaluations of the situations in the different countries are necessary. Both alternatives should be carefully considered because both have advantages and disadvantages-
The reason for acquisition (buying an existing company) in Hungary are
- Lehel was a well established enterprise.
From the case we learnt that Lehel was Hungary’s largest manufacturer of household appliances. Lehel would have already had a large portion of the market share and already well known in that region. Electrolux would be purchasing all its assets – intangible and tangible.
- Get rid of the major or biggest competitor
Electrolux would no longer have to compete against the largest manufacture. If Electrolux did not acquire Lehel then upon entering hungry by building from start (Greenfield) they would have to win over customers from Lehel which would have been very risky.
- Lehel was government owned(public company)
During the 90’s Hungary might have been in the process of privatizing state owned companies which gave Electrolux the opportunity to buy it.
- The fastest way for Electrolux to establish its presence within that region.
Electrolux competitors were making plans to enter the region, so timing was important. Lehel could have been acquired by anyone of the other companies within the oligopoly. If it was acquired by any other company then Electrolux would have faced stiff competition.
Acquisitions are risky and not always the best method of establishing a presence in the country. Electrolux might have chosen green field method in the rest of Eastern Europe because
- There might not have been any company there the Electrolux desired to acquire.
This can be so because they imported most of the appliances or that the existing companies (if there were any) were small and not much of the competition, or could have even had a lot of liabilities to be taken over by the Electrolux.
- Electrolux might have wanted their own company culture to be prevalent. By building they are able to use their specification and ideas to suit their exact needs.
- Acquisition is harder to finance. Electrolux might have only chosen green field method in the other countries because green field is easier to finance as compared to acquisition.
- Combination of low factor cost. The cost of the factors of production could have been cheaper.
Q3 The Company has generally preferred FDI to exports as a mode of entry into foreign market. Why do you think this the case?
The reasons why Electrolux had preferred FDI to exports as a mode of entry into foreign markets can be divided into two parts;
First, Electrolux has possessed three advantages to choose FDI as an entry mode into foreign markets. As the world’s largest manufacture of household appliances, it has ownership advantages of specific assets, international experiences, the ability to develop differentiated products and the internalization advantages of integrating transactions within the company. Moreover, in the case of Electrolux, the location advantages of market existed in the countries where Electrolux tried to enter. The emerging market in Asia, Eastern Europe and Latin American has considerable market potential and the labor resource and raw material are comparatively cheap.
Second, there some disadvantages of choosing exports as a mode of entry in this case:
- There are some import barriers such as governmental regulation of foreign ownership and tariff which made direct exporting from Electrolux’s Western European and North American plants uneconomical.
- The cost and feasibility of transferring Household appliances should be taken into consideration. It will be not convenient to transfer the product, such as refrigerators, washing machine from one country to another and the transportation cost will be high.
- Electrolux’s main global competitors, such as General Electric, Whirlpool and Bosch-Siemens had announced the similar FDI plans. In order to negate competitor’s advantages in the market, Electrolux chose FDI as a strategic behaviour.
To sum up, in order to skirt import barriers, reduce the transportation cost and keep ahead in the competition, Electrolux chose FDI as a mode of entry into foreign market.
Q4.What theory, or theories, best explain Electrolux’s FDI decisions during 1990s; (a) the market imperfections approach, (b) the strategic behaviour approach, (c) the product life-cycle approach, or (d) the location-specific advantages approach?
First, these four approaches are presented.
Market Imperfection
This predicts that FDI will be preferred when there are impediments as follows;
Governments are main source of impediments to the free flow of the products between countries. So tariffs and quotas can be placed by governments.
- Impediments to the sales of know-how
Licensing is likely to be attractive because of royalty fee, and this is the main mechanism by selling know-how. However it does not always work well for selling know-how. There are three reasons. 1. The possibility to give away to its know-how to the competitors. 2. It is difficult for a firm to manage its operations in a foreign country. 3. A firm’s know-how may be difficult to codify
Strategic Behaviour
This explains first mover advantages in terms of oligopoly, and multipoint competition. Multipoint competition is that the rivals make a similar behaviour to ensure that a rival does not gain a dominant position in one market and then use its profit to other market to get competitive position. However, this does not explain why the first mover choose FDI, rather than to export or license.
In the Electrolux case, its expansion into Eastern Europe, Asia and Latin America is similar behaviour as the competitors such as General Electric, Whirlpool, Bosch-Siemans. Therefore, this approach explains Electrolux FDI behaviour by multipoint competition.
Product Life Cycle
When the local demand grows large enough to support the local production, a firm invests in the low cost locations such as developing countries to avoid price competition and cost pressure in home country. However, this does not explain the reason why a firm choose FDI at such times, rather than continuing to export or licensing.
Location Specific Advantages
The advantages result from that resources or assets such as oil, mineral and labour located in a particular country, are combined with the firm’s unique assets such as marketing and technological know-how.
This approach explains that the reason why Electrolux builds some plants in China. Because China has a plentiful low-cost labour and is good place to produce household appliances not only for Chinese market, but also for Southeast Asian countries to export.
Therefore, both strategic behaviour approach and location-specific advantages approach explain Electrolux’s FDI decisions during 1990s.
Conclusion
Many companies reach a point where the only way to increase sales is to start operations in developing countries, where there are existing markets. Electrolux seen the whole world as its market and choose the right time to enter, when the countries of eastern Europe liberalized its foreign investment regulations to make it easier for foreign companies to enter the market. Companies that want to expand should keep a keen eye on developing countries and the benefits it can gain from them and choose the appropriate time to enter as to capture the markets before their competitors.
