Whirlpool Corporation

1
Whirlpool Corporation

• Key issues
• Should Whirlpool expand globally through a joint
  venture with Philips?
• If yes, how should they proceed?

2
Whirlpool Corporation

• Whirlpools Background
• Founded in 1911 by Lou Upton as Upton Machine
  Company Established in St. Joseph, Michigan
• Established critical relationship with Sears
  Roebuck and Company in 1916, selling washing
  machines
• Lou Upton retired, and the companys named
  changed to Whirlpool Corporation in 1949

3
Whirlpool Corporation

• Whirlpool, 1950-1986
• Product lines expanded (refrigerators,
  dishwashers, ovens, laundry washers and dryers)
• National distribution of products
• Financial policies and cost control policies
  enacted
• New growth strategies emerged
• cost reductions
• domestic acquisitions (e.g., KitchenAid)
• global expansion (e.g., Brazil, Italy, and
  Canada)

4
Whirlpool Corporation

• Whirlpool, 1950-1986
• headquartered in Benton Harbor, Michigan
• Consolidation of the industry was a dominant
  trend in the 1970-1986 period when U.S. industry
  annual sales growth was around 2
• Five major manufacturers in 1986 accounted for
  93 of the U.S. market
• Whirlpool, General Electric, White Consolidated
  (Electrolux), Maytag, and Raytheon

5
Whirlpool Corporation

• Philips Background
• Gerard Philips founded the company in 1891,
  headquartered in Eindhoven, Netherlands.
• Expansive company
• subsidiaries covered 60 countries
• 380 plants in 40 counties
• 345,000 employees
• In the 1970s, Philips experienced financial
  troubles due to poor European market

6
Whirlpool Corporation

• Philips Background
• Throughout 1970s performance was low.
• 1982-1986, Chairman Wisse Dekker instilled
• Increased manufacturing rationalization
• Greater global coordination
• Increased collaboration with other firms

7
Whirlpool Corporation

• Philips Background
• 1986, Cor Van der Klugt becomes president
• Wanted to change strategic focus to core
  electronic business
• Needed cash flow to support rising new product
  development costs

8
Whirlpool Corporation

• Philips Background
• Major Domestic Appliances (MDA)
• Represented 7 of corporate sales
• Low profitability
• Division was not stand-alone
• Embedded in national organizations
• Covered a full product line
• Low to high end

9
Whirlpool Corporation

• Key Issues
• U.S. Market -- U.S. is a dominant player in the
  world market in 1986, with 26 of worldwide
  demand. However, there is a high demand
  saturation level. And, demand driven by
  replacement 75
• International markets are growth opportunities
• High cost pressures in the industry
• Need for local responsiveness in international
  markets

10
Whirlpool Corporation

• Key Questions
• Should Whirlpool expand globally at this time?
• Should Whirlpool purchase Philips Major Domestic
  Appliance Division (MDA)?

11
Whirlpool Corporation

• Analysis
• Five Forces Analysis of US, Asia and Europe
• Multi-domestic versus Global strategy
• Should they purchase?
• Should the focus be low cost or differentiation?

12
Whirlpool Corporation

• Five Forces in United States
• Barriers to entry Moderate
• High economies of scale capital requirements
• Brand-name equity
• Access to Distribution, e.g., Sears
• Consolidation has already occurred
• Although there is a high CR4 in the U.S., the low
  margins suggest that entry barriers were not
  enough to achieve sustainable competitive
  advantage
• Power of Substitutes Low
• e.g., laundry mats, dry cleaning

13
Whirlpool Corporation

• Five Forces in United States
• Power of Suppliers Low
• Raw materials are 30 of price
• Labor only 10 of price
• Firms have ability to backward integrate to make
  the components
• Power of Buyers High
• Power of distribution channels are high
• Sears is 25 of national sales 30 of
  Whirlpools sales
• Large contract customers account for 80 of that
  market
• Low switching cost for customers in retail market

14
Whirlpool Corporation

• Five Forces in United States
• RIVALRY High
• High price competition
• High non-price competition (e.g., quality,
  service, and support)
• Few major innovations likely
• High economies of scale and excess capacity
• Low industry sales growth
• Maytag and Whirlpool have low diversification
• Low costs strategy quickly imitated

15
Whirlpool Corporation

• Five Forces in Asia
• Barriers to entry High
• dominated by Japanese manufacturers Matsushita,
  Toshiba, Sharp, Sanyo, Mitsubishi
• Power of Substitutes Low
• Power of Suppliers Low
• Power of Buyers Moderate
• Rivalry Moderate

16
Whirlpool Corporation

• Five Forces in Europe
• Barriers to Entry Moderate
• GEC, Hoover and Thorn-EMI in UK
• Bosch-Siemens and AEG in Germany
• Thompson-Brandt in France
• Zanussi and Merloni in Italy
• Greenfield investment highly unlikely
• Acquisitions may be more attractive (but at what
  price?)
• Power of Substitutes Low
• Power of Suppliers Moderate

17
Whirlpool Corporation

• Five Forces in Europe
• Power of Buyers Moderate
• Distribution channels are diverse
• Britain Discount stores, electrical multiples
  utility company stores selling cooking appliances
• Germany mail order and electrical goods
  specialists, discounters, hypermarkets. High
  brand loyalty
• France specialists, discounters, hypermarkets.
  High store loyalty
• Italy specialists

18
Whirlpool Corporation

• Five Forces in Europe
• Rivalry Moderate
• High price competition
• Non-price competition (quality, service, support)
• Excess capacity BUT
• Differences in consumer tastes -- allows some
  product differentiation
• Industry growth rate is higher
• Saturation rate lower
• Standard of living is rising
• Opportunities for consolidation

19
Whirlpool Corporation

• Is this a global industry?
• Some reasons to say Yes
• Economies of scale in component manufacture and
  design MES 500,000 units
• 85 learning curve for components (p.6)
• leverage core competencies
• Electrolux is moving in a global direction
• European integration
• Convergence of national tastes are expected by
  some analysts

20
Whirlpool Corporation

• Is this a global industry?
• Some reasons to say No
• Differences in national taste will remain
• Differences in distribution channels in each
  nation
• High transportation costs

21
Whirlpool Corporation

• Should Whirlpool move forward with the Philips
  MDA deal?
• Reasons to say Yes
• European Union will drive channel convergence
• Cant let Electrolux operate here uncontested
• If Whirlpool does not buy Philips, would another
  firm be better positioned to compete further with
  Whirlpool?
• Whirlpool believes it can build a pan-European
  brand
• Philips is capital constrained (p.21) Whirlpool
  has low debt to equity (p.20)
• Philips MDA operates in France, Italy, United
  Kingdom and West Germany and has the 2 position
  in European market with 11.5 market share 85
  of sales spread over 16 countries full-line of
  appliances

22
Whirlpool Corporation

• Should Whirlpool move forward with the Philips
  MDA deal?
• Reasons to say No
• Different local product standards
• Increased cost of selling to European markets
• Substantial overcapacity
• High corporate tax rate on profits
• Philips experienced poor financial performance in
  the past and is not a leader in any market
• Requires substantial facilities upgrade

23
Whirlpool Corporation

• What are the gains from a joint venture with
  Philips MDA Division?
• Philips wants to transition out of this market
  segment Whirlpool needs brand recognition of
  Philips in Europe
• A joint venture provides Whirlpool with
  information and an option to buy (this
  strategic option may be valuable)

24
Whirlpool Corporation

• What are the gains from a joint venture with
  Philips MDA Division?
• Facilitates technology transfer
• Increased knowledge of local conditions
• Access to distribution
• Reduces costs of global expansion

25
Whirlpool Corporation

• If Whirlpool goes ahead with the Philips deal,
  should they use
• Cost leadership or product differentiation?

26
Whirlpool Corporation

• Cost leadership would be based upon
• Common components
• Rationalized manufacturing
• Common design
• Channel reorganization

27
Whirlpool Corporation

• Cost leadership would fit Whirlpools current
  strengths
• Whirlpool is experienced with cost reduction
• 20 fewer parts and 18 lower direct labor costs
  in 1985
• Most efficient U.S. manufacturer
• Would be effective if a global strategy with a
  standard product was accepted
• Would require less internationalization( which
  is not their current strength)

28
Whirlpool Corporation

• Differentiation could be based upon
• Philips has three major brands
• Bauknecht (high-end)
• Philips (medium)
• Ignis (low-end)
• Co-brand and then merge into Whirlpool?

29
Whirlpool Corporation

• What is Philips MDA Division Worth?
• Discounted Cash Flow Method
• NPV calculation

30
Whirlpool Corporation

• Discounted Cash Flow Method
• Assumptions
• 2.07 guilders per dollar
• 10-year valuation
• 5 growth rate in European Market
• 15 WACC tax rate 40
• 85 learning curve
• COGS assumed to be 75 of sales
• SGA assumed to be 15 of sales
• 500 million modernization
• Straight-line depreciation

31
Whirlpool Corporation

• Discounted Cash Flow Method
• Overall NPV 530 million
• Options Value 130 million
• Growth options
• Follow-on investments
• Price to offer 660 million

32
Whirlpool Corporation

• Whirlpool and Philips formed a joint venture in
  1989 and purchased 53 of Philips for 360
  million. In 1991 they acquired the company for
  600 million. Total price 960 million
• Whirlpool put in an additional 500 million into
  plants
• Note Maytag purchased Britains Hoover in 1989
  too for 320 million.

33
Whirlpool Corporation

• Why was the acquisition price so high?
• Asymmetric information by Whirlpool
• Synergies between Whirlpool and Philips that we
  have not accounted for
• Value of growth options are much higher than we
  projected
• Managerial hubris hypothesis
• Winners curse

34
Whirlpool Corporation

• Whirlpool entered with a cost leadership
  strategy.
• Centralized purchasing, design and manufacturing
• Reorganized sales forces by channel

35
Whirlpool Corporation

• The outcome in the short-run was that Whirlpool
  took the low end of the market (not what they had
  wanted).
• Fit and finish were problems for Whirlpool.
  Europeans keep washers in kitchen -- want
  something quiet.

36
Whirlpool Corporation

• They kept all three brands and shared parts
  across brands.
• Revenues were flat, high price competition
• After ten years, asset turnover in Europe is
  similar to U.S., but ROS in Europe was half the
  ROS in United States
• Maytag exited international operations in 1995,
  selling Hoover to Italian appliance firm booking
  a 135 million loss

37
Whirlpool Corporation

• Recommendations
• 1. Global strategy
• Joint ventures are a key to global strategy
• Whirlpool needs to achieve fully economies of
  scale in component production
• Whirlpool lacks expertise in international
  product design
• International companies can be more locally
  responsive

38
Whirlpool Corporation

• 2. Move to Transnational Structure
• Leverage components and procurement of materials
  worldwide
• Maintain local responsiveness necessary for
  European market

39
Update Market Share Comparison 1998

• 1998 market share in U.S. 1985 market share
• Whirlpool 35.7 32.2
• GE 28.5 23.0
• Maytag 17.0 14.3
• Electrolux (Frigidaire) 11.9 18.9
• Goodman (Amana) 4.7 NA

40
Update 2003

• Whirlpool as of Dec. 2003
• Manufactures products worldwide in13 countries
  sells them in more than 170 countries
• Worlds 2nd largest manufacturer of major home
  appliances (after Swedens AB Electrolux)
• 12.1 billion in worldwide sales in 2003
• Net income (mil) approximately 414.0
• Joint ventures in Mexico, India, Taiwan, and
  China

41
Update, November 2004

• Speed bumps
• Whirlpool said it faced higher material and
  logistics costs, as well as high oil prices and
  material shortages. To compensate, the company
  raised prices in many key markets around the
  world and accelerated the rate that new products
  are brought to market. However, the company said,
  the full effects of these actions won't be
  realized until 2005.

42
Financial Update
2004 2003 2002 2001
Annual Sales ( mil.) 13,220 12,176 11,016 10,343
Annual Net Income ( mil.) 406 414 (394) 21
43
2004 Sales

• Major home appliances 2004 net sales across
  markets

U.S. 59 Europe 26 Latin America
10 Asia 5 Source Standard Poor's
Corporate Descriptions, March 19, 2005
44
Whirlpool Corporation

• Additional Analysis for Whirlpool
• Value-chain analysis
• Primary Activities
• Inbound Logistics Quality Express Network
• Operations Minimize costs and maximize
  flexibility
• Outbound Logistics Quality Express Network
• Marketing and Sales develop Whirlpool brand and
  establish global distribution network
• Service Improvements in replacement parts

45
Whirlpool Corporation

• Additional Analysis for Whirlpool
• Value-chain analysis
• Support Activities
• Procurement Leverage purchase of key components
• Technological Development Develop product and
  process technologies, global application, and
  technical transfer
• Human Resource Management Draw needed skills
  from global associations
• Firm Infrastructure Move to transnational
  structure