Driving Forces of the Third Strategic Change

In this chapter, the influential external and internal factors behind the change will be presented and analyzed. However, according to A. Edholm (personal communication 2004-12-16) there is not much shift in strategy, but shift on focus during this period.

After reviewing data related to the third change, the author found that several factors i.e.

management fashion, culture, structure did not explicitly affect the change process. In other words, these factors are extended from the second change during 90s. Therefore, only factors have explicit impact on the transition from second to third strategic change will be presented and analyzed in this part.

5.3.1 Environment

Electrolux had started to focus on brand, design and product development before Hans Stråberg succeeded Michael Treschow as president and CEO in 2002. In December 1998, a new brand policy was finalized that involves focusing resources in a smaller number of large and well-defined brands. These brands will be positioned consistently in all markets where they are used and the corporate brand Electrolux would be used as an endorsement for all product brands. Michael Treschow, the president of Electrolux in 1998, indicates that improving internal efficiency creates room for investments in e.g.

product development. Design is also becoming more important for making products more attractive and more user-friendly, and for giving consumers greater freedom of choice (Electrolux Annual Report 1998). Therefore, there is not much shift in strategy from the third to fourth stage, but shift on focus during this period (A. Edholm, personal communication 2004-12-16). Several environmental factors which may influence the shift from focus on core business to brand, design and product development are as follows:

Most Electrolux product areas feature continued globalization and increasing competition. A. Edholm (personal communication 2004-12-16) points out that one of the major factors drives Electrolux to focus on brand, design and product development is globalization. Globalization resulted in the (1) overcapacity in the industry and (2) imports can be done cheaper than prior to globalization. Product imports are not as expensive as it used to be and thus impact Electrolux business. The overcapacity in the manufacturing of the industry had grown and fiercely increased price competition in all markets, which consequently resulted in lower prices for end consumers. This situation, for example, is serious in China. He also indicates that in the beginning Electrolux grew rapidly in China, and now they have come to the point where they are facing tough competition and falling prices. They are facing a lot of small competitors and there is

no consolidation in the industry to talk of in China. In 2002, the income for appliances in China had substantial decline where losses increased due to downward pressure on prices, a less favorable product mix and higher marketing costs. The operation in India in 2002 also reported lower income than that in 2001 (Electrolux Annual Report 2002).

Therefore, the Group has to develop innovative products with good design and strong brand in order to create added value, that is, to get the customers to pay more for the product. Referring to Gurt (2001) the product development was very important since one of the possibilities to improve the profitability was to offer products with high specification, better performing appliances that customers should be willing to pay higher prices for.

Besides the greater globalization and fierce price competition from producers in low-cost countries, the buying habit of consumer is another factor behind the change.

Traditionally, consumers do not change or purchase new household appliances frequently. However, consumers are willing to pay more for new products that correspond better to their needs and desires-both functionally and esthetically. For example, a recent market survey, done in UK based on 642 interviews, showed that the average price consumers were willing to pay for a washing machine with comparable performance varied by GBP 350-477 between six different brands (see Figure 5.4).

Thus, building strong brands that consumers can trust is essential. In addition to the change of consumers’ buying habit, the increasing awareness of energy conservation also made the Group to put a lot of efforts to develop energy saving appliances i.e.

compressors and deep freezers with record low energy consumption.

Figure 5.4 A survey of consumers’ buying habit (Source: Electrolux Annual Report

2002)

Major findings of this section

Using the PESTLE model to analyze the Electrolux change from focusing strategy to brand, design and product development, we found environmental i.e. globalization and socio-cultural factors i.e. buying habits of consumers strongly influence the change process. In addition, analyzing the change in terms of the Five Forces Model, the threat of new entrants i.e. manufacturers from China and Eastern Europe increased due to the low entry barriers resulted from globalization. The increasing new entrants increase the threat of industry rivalry and result in fierce price competition, which in turn, lower the bargaining power of Electrolux to the buyers. Therefore, it is understandable why Electrolux initiates the focus brand, design and product development strategy in order to possess stronger bargaining power than that of its competitors.

5.3.2 Leadership

In 1997, Michael Treschow became the president and CEO of and he also initiated an extensive restructuring program in order to increased efficiency and reduced costs. The aim of the restructuring program was to reach the Group’s long-term financial goal of an operating margin of 6.5-7% and a return on equity of at least 15%. The Group met these targets in 2000 (see Figure 5.5 right; Source:

Electrolux Annual Report 2000). For the full year 2000, operating margin was 6.5% and return on equity was 18.5%, exclusive of items affecting comparability. This was the highest margin for the Group on an annual basis since 1985 (Electrolux

Annual Report 2000). Mr. Treschow was quietly successful at cutting costs and selling businesses to focus on core businesses: consumer durables and professional products.

In 2002, Hans Stråberg, who was head of the floor-care division, succeeded Michael Treschow as the president and CEO of the Group. As the head of floor-care division, Mr. Stråberg closed inefficient factories, concentrating production where returns were best. He also modernized manufacturing techniques, putting more emphasis on final assembly than on vertical integration. Electrolux’s vacuum-cleaner factory at Västervik in southern Sweden is a good example of transition towards rebranding and a model of flexibility. Its production lines can be reconfigured in a matter of minutes to reflect

demand for particular branded models. Therefore, Mr. Stråberg wanted to repeat throughout the company his main achievements in the floor-care division (The Economist, 2002). His ways-of-thinking can be seen from the following statements:

In April 2002, Mr. Stråberg said “The Group’s performance has improved substantially over the past few years, mainly through cost cutting and restructuring. There is still room for reducing costs and improving the performance of our operations. But at the same time, we must intensify out efforts in product development and brand building, based on better insight into consumer needs. I am convinced that this is the way to achieve sustainable profitability and growth. And I am confident that we will succeed in doing so (Electrolux Annual Report 2002).” He also points out “the firm understands that better brand management is its best defense against the commoditization of its products by low-cost Asian manufacturers. Our aim is to become a reliable and trusted partner with our customers and retailers; that means we need a few strong brands. We cannot support too many (The Economist, 2002).” However, Mr. Stråberg acknowledges that rationalizing the brands can be dangerous if done too quickly, so the rebranding will be more evolution than revolution. Electrolux brand only accounted for 20% of Group sales until 2002. During 2002 all Group consumer operations began implementing plans for brand transition. The Group plans the Electrolux brand to account for about two-thirds of Group sales by 2007. This will be achieved by double-branding - linking Electrolux to the Group’s strong local brands. It will also involve phasing out a number of local brands. Double-branding was initiated in 2002 in several countries, such as Denmark, UK, and the US.

As describe above, the ways-of-thinking of the leader, Hans Stråberg, have critical impacts on the Group’s strategic direction towards brand, design and product development. Hans Stråberg initiated the double-branding strategy, set up global product council in order to better coordinate efforts in product development since he thought by intensifying efforts in product development and brand building is the way to achieve sustainable profitability and growth. Besides, it is presumptive that his former working experiences i.e. the head of floor-care division also affect his ways-of-thinking, which in turn strengthen his determination to commence the new strategy.

Hans Stråberg could be characterized as concept attainer, planner and pattern recognizer in terms of the mind of the strategist since he formulated the vision (i.e.

Electrolux should be perceived as the leader in the minds of consumers) and plan what the company should do (i.e. product development and brand building) and search for emerging pattern to distinguish (i.e. strong brands enable higher margins and greater

profitability for the Group and retailer partner). Besides, the author found Hans Stråberg represents strategic leadership (Rowe, 2001) since his strategy direction emphasizes not only short-term financial stability but also long-term wealth and he also strives to enhance the long-term viability of the Group.

Major findings of this section

The ways-of-thinking of the leader, Hans Stråberg, have critical impacts on the Group’s strategic direction towards brand, design and product development. He also could be characterized as concept attainer, planner and pattern recognizer in terms of the mind of the strategist; moreover, he represents strategic leadership (Rowe, 2001) since his strategy direction emphasizes long-term wealth and strives to enhance the long-term viability of the Group.

5.3.3 Resources and Capabilities

Numerous acquisitions have given Electrolux many brands, particularly in Household Appliances and Professional Appliances. These brands are of course substantial assets, but they also create complexity in operations. In addition, some brands have unclear or even contradictory positions in the market (Electrolux Annual Report 2002). As of 2002, the plethora of brands is a problem. In Europe it owns Zanussi and AEG, in America Frigidare and numerous local brands i.e. Tornado vacuum cleaners in France. Electrolux must maintain many complicated manufacturing operations to support them. Moreover, unlike competitors such as General Electric or Maytag in America and Bosch-Siemens in Europe, Electrolux is spreading its efforts across the entire consumer-goods market;

marketing products in the discount, middle-market and premium segments (see Figure 5.6).

That strategy arguably damages its brand-appeal to consumers. Mr. Stråberg decided to tackle Electrolux’s sprawling portfolio of brands, more than 50 of them in all due to the plethora of the Group’s brand resources. Therefore, overabundance of resources could be characterized as one of the driving forces behind the change.

Figure 5.6 From cut-price to cutting-edge; Source: The Economist, Vol. 363, Issue 267, pp. 54

Approaches were taken in order to building Electrolux as a global brand. First, the Group aligned all marketing communications activities within a single agency across Europe, North America and most of Asia in the beginning of 2003 in order to enable more consistent communication of the Electrolux brand across product categories and regions.

Second, all media advertising in Europe was assigned to one agency. In doing so, the Group can focus its advertising resources on the Electrolux brand to increase its impact among consumers. With fewer products platforms and brands to support, the Group will be able to spend more on new products even at the current overall level of spending. Also, with more consolidated activities the Group will obtain a better yield on the money they spend.

With respect to product development, the Group set up global product councils in order to better coordinate efforts in product development. These will enhance standardization of designs and components and further increase our strength in purchasing. Global product councils are common for the whole world. Apart from the product councils, the Group has six design centers in the world one of them is in Shanghai. The design centers are working very tightly together following global design trends. We can leverage these resources and capabilities regardless where we are - in China, Japan, United States or

Sweden (A. Edholm, personal communication 2004-09-23).

Major findings of this section

Reviewing what Electrolux have done based on its focus on brand, design, product development strategy, the author found that Electrolux controlled resources and capabilities such brand, design, product development and tried to make them valuable, rare, imperfectly imitable and non-substitutable by combining and leveraging them in different ways in order to create synergies and establish its competitive advantage. Both the overabundance of brand resources before change and the synergies created afterwards can be treated as important driving forces behind change from focus on core business to brand, design and product development.

5.4 Capacity for change