Indesit Case study- on global issues

FINAL REPORT

CASE STUDY: Indesit Company: Does Global Matter?

Prepared By:

Ayush Agrawal (630058475)

&

Al Muhalab Al Busaidi (630058003)

CASE STUDY: Indesit Company: Does Global Matter?

BEMM 116 PRINCIPLES OF INTERNATIONAL

BUSINESS

9th December 2013

BEMM 116 PRINCIPLES OF INTERNATIONAL BUSINESS CASE STUDY: The Indesit Company: Does Global Matters?

1

Report By: Ayush Agrawal (630058475) & Al Muhalab Al Busaidi (630058003)

As the company founder ‘Vittorio Merloni’ believed that working in a restricted location may possibly halt the newest management thinking and technology, inspiration must be engaged from other vicinities. Glimpsing to the company’s retrospect, most significant growth was witnessed after the acquisitions outside their fringe between 1987- 2002, this gave them new exposures. Further Indesit was the foremost mover after the fall of Berlin Wall to explore the market where immense clientele were present and that has awarded them their present status, continuing the same footsteps established by the founder, Indesit must explore global markets.

Indesit imports numerous essential components from other nations, consequently augmenting the costs because of duties and inward transports. Going global would significantly increase company’s production due to reduced labour cost as company can reorganise operations to authorize proficiency in the management. The world no more is monopolised by certain manufacturers, competition is ubiquitous. Indesit comprehends that they cannot enjoy the sourcing advantages from Enrico vita due to emulating competitors who utilize economical Chinese sources. Hence constant innovation is the need of the hour which certainly cannot be achieved by restricting in a certain region, advantages from the global knowledge has to be taken to stand apart from the competition.

Growth for a corporation necessitates new markets. To become a global player developing its market outside Europe is a stipulation. Also entrance of large MNCs in the European market, made the competition more intense for Indesit, especially when it was still discovering its way to enter German, Scandinavian and Turkish markets.

Getting global embraces a lot of risk factors, this may lead to the failure of entire organisation. Also, the gigantic international retailers kept back colossal pressure on prices and new entrants. Additionally liability of outsider ship which is due to lack of knowledge, systems and authenticity in the local context; tough transnational appeal has to be maintained by establishing global sharing network. Employing people from the host country could enable Indesit to trounce liabilities of foreignness. The factors an organisation should consider before engaging itself in FDI are discussed as under:

A Resource Based View

Throughout its history, the organization inherited a set of values including an advanced approach to labour relations and a solid commitment to modern low cost production and geographical expansions with a total of eight international acquisitions in its long history. E.g.: Stinol in Russia and GDA in the UK. (Figure A Case Study)

Indesit’s primary operational strengths is logistics, as reflected in the balance sheet where inventories account for only 11% of sales. Moreover, the sourcing organization has a wide vendor network, composed of 280 members. The organization announced that by 2008 around 60% of its labour hours will be in low labour cost countries. Hence, the use of Chinese sources was enabling a further reduction in cost, creating a potential competitive advantage. However, the organization is losing ground on price index. The company invests only 3% in advertising and promotion. Moreover, this budget was distributed among seven brands which is a clear indication of weak brand management.


2


The case study may mislead us to believe that one of Indesits’ most tangible resources is its financial ability. This is shown in its continuous strategy of acquisitions as mentioned earlier. However, upon calculating the gearing ratio, it is revealed that the company is mostly financed by debt with a percentage of 54%. This is very risky, especially when the organization stumbles upon tough international and local competition and when sales take a slope. Moreover, the talented team of executives who were able to run the company effectively in 2007 can be identified as an important human resource but it’s not possible to measure the exact impact of their managerial practices in a period of two months.

The below framework will distinguish between the resources which add value and the ones which do not support the exploitation of external opportunities.

As shown in the table above, Indesits’ financial capabilities do not support its global expansion. Sales, distribution and the operational capabilities create value. However, these resources can be matched and copied by competitors. The organizational culture can be identified as a major source of sustained competitive advantage, the commitment towards geographic expansion gave it a first mover advantage allowing it to enjoy commercial success in many continents. I.e. First mover in Europe in 1991. (Figure A Case Study) Human resources are also potentially a source of competitive advantage and it should be utilized in Indesits’ approach to become global. A major concern which needs to be addressed is the marketing skills and the brands’ overall image. Competitors such as Bosch are able to capture value better with their brands, as they receive 40% more than Indesit with same quality.

After identifying its capabilities and evaluating each resource. Indesits can benchmark itself with the industry’s’ average. The application then should be to whether outsource or offshore.

Assuming the debt financing is through bank loans, the senior management should take a stand to focus completely on paying off its debt; this can be achieved by closing down more of their factories abroad as well as continuing to outsource and save costs. Upon resolving all financial and management issues, Indesit should focus on brand management and allocating the proper budget for advertisement and promotion. Figure G in the case study indicates that competitors like Samsung spend around €115 M across many products under the same name brand name (Figure G Case Study). Indesit should perhaps follow the lead of its competitors.

Criterion Finance Human Resources

Operation Sales & Distribution

Marketing Organizational Culture

Value Creating?

No Yes Yes Yes No Yes

Rare? No Yes No No No Yes

Imitability (Difficult)?

No Yes No No No Yes

Organization Yes Yes Yes Yes No Yes

Competitive Implication

Disadvantage Sustained Advantage

Parity Parity Dis- advantage

Sustained Advantage

Table 1 VRIO Framework for Indesit


3


An Institution Based View

The company ought to focus on Institutional based differences to tussle against its competitors. Differences in formal institutions include type of economy, legal and political system, these are required to be noticed for the efficient operating of the company. Empathizing the economic conditions would enable Indesit to relocate their products after tailoring them for local conditions. Also learning about economy would make them understand the policies targeted to enhance FDI such as investments, incentives, import barriers etc. Political and legal system engrosses a huge risk that involves corruption, expropriation, prejudicial acts against foreign companies.

Similarly, difference in the Informal institutions must be perceived by the company. It encompasses effects of culture (norms and values) which has evolved over time. Before entering into a new market, risk pertaining to the customs must be evaluated for maintaining good business relationships. Cultural differences may evolve due to not understanding the employment practices, human rights, regulations, customer relationships, etc in the host country.

The management must conduct research through assessments by market analysts or individually through internet “The doing Business Project” which is associated with World Bank and has database for around 189 economies. Additionally Indesit can negotiate terms of compensation with India and China for legal alternatives.

Trading Internationally & Investing Abroad

Indesit can enjoy benefits of economic gains due to free trade because current customers stipulates for better quality but at the same time desires to shell out less, especially in developing nations. Indesit delivers good quality products with comparatively less prices than its competitors. (Case Study) Going global would give them comparative advantage of a location. Resources are tied up in European market and going out would offer increased market size, economical transport facilities, inexpensive land rates, hence less investment. However absolute advantages in production are also present because labour wages and material costs are more efficient in Asian countries. Hence trade across borders would be a win-win situation for Indesit. Starting with an assessment of attractiveness of global markets. The international market apart from Europe, accounts for approximately 67.8% of the total market. Moreover, as opposed to mature markets, where manufactures depended on brand name to earn higher profits margins, the global market is driven by price and product quality which is one of Indesits’ strengths thus, reducing the threat of incompetence in global marketing and brand management. In addition, the five year estimated market growth for Europe fades in comparison to Asian markets growth percentages. The table below illustrates the level of variances. (Exhibit 6a case study)


4


Country Market Growth Comments

China 24% 2005-2006

India 27% 2005-2006

CIS and Eastern Europe 5% Five-Years Estimation

Continental Europe 2% Five-Years Estimation

Turkey 6% Five-Years Estimation

UK 1.5% Five-Years Estimation

Table 2 Comparison of market growth between countries

In China, the economy is witnessing a steady level of GDP growth. The growth rate improved by a astounding 2% between 2001 and 2006.(Exhibit 6b case study) In consequence, the Chinese economy is ranked 4th in the world. The labour cost per hour is €1 in comparison to Italy at €20 and CIS at €3. (Figure E Case Study). Therefore, Indesit’ decision to have 60% of its labour hours in developing countries is reasonable.

The OLI paradigm below will set an example and aid in the decision of whether Indesit should engage itself in FDI or continue doing business abroad through imports, exports, outsourcing and other means.

Figure I OLI Paradigm: Example of Chinese Market

Only if the three advantages exist, it would be reasonable then for Indesit to enter the global market.

Further determining the type of FDI that Indesit should adopt. As pointed out, Indesit announced that it will start sourcing labour hours; therefore it’s already engaged in upstream vertical FDI as shown in the figure below.

O-Advantages

• Logistics systems

• Manegerial skills (Tacit Knowlege)

• Organizational Culture

• Brand reputation

L-Advantages

• Asian Market Size

• Growing Economy

• Cheaper Labor

• Increasing Income of Consumers(Exhibit 6c Case Study)

• Government incentives

I-Advantages

• Brand Repositioning

• Tariffs

• Resource mobility


5


Figure II Indesit Engaged in Upstream Vertical FDI at present

The management should replicate the whole value chain and establish a Horizontal FDI. They should activate R&D in China and India; 2007 studies was a good start. (Case Study)

Figure III Proposed Horizontal FDI


6


Entering Foreign Markets

Indesit must plan a strategy to conduct their business in another country. They need to identify adequate location, entry mode, timings, marketing, human resources and logistics efficiently. Indesit does a lot of investment in manufacturing, innovation and systems, but seeks for market and efficiency. The Asian countries, being potentially viable can offer strong market demand for Indesit products, as they are cost effective, hence company can differentiate their product offering with low cost position.

Currently, Indesit is using the method of captive off shoring in the assembly level of their value chain, it set up plants in low-labour-cost countries and closed down factories in areas such as France, UK and Italy. However, the components used in assembly are supplied through offshore outsourcing from local suppliers. The Figure below illustrates the current FDI application by Indesit.

Location of Activity

Entr

y M

od

e

Home Abroad

Internal Domestic In-House

Captive Off shoring

Assembly (Manufacturing)

External Domestic Outsourcing

Offshore Outsourcing

Components (Sourcing) i.e.; 13 Local Suppliers.(Figure E Case Study)

Figure IV Current FDI (China)

Indesit is known for setting competitive prices, the price of Ariston front-load washer an Indesit brand in China is at $1,025 which is more than twice as high as its competitors Haier at $410 and Samsung at $400 (Exhibit 6b Case Study). This indicates they assemble the product in China and sends it to Europe and then export the final product back to the Asian market. Where it’s sold by local retailers’ .This process includes a high level of transaction cost, which includes searching for buyers along with the managerial effort of managing contracts. The search costs can increase due to the distance between Europe and China along with the confusion of exchange rates, taxes and transportation charges. The brand is also subjected to the threat of opportunism which can justify the high price tag on Indesit products. This can be resolved by establishing retail outlets in China.

The competitors of Indesit had already entered the Asian markets hence the company can take late mover advantages. Venturing through WOS (Wholly Owned Subsidiary) incurs high investments, complete ownership risk but the company can penetrate the market fast without adding any additional production facility and supply chain network. But Indesit’s poor finances will not allow WOS. In addition, an issue arises when the government obligations in the emerging economies does not permit WOS .Hence management of the company has to enter through JVs (Joint ventures). This can reduce the risk but coordination difficulty would increase.


7


Figure V Proposed Entry Mode to Asian Markets

To enter the Indian market, the RBV, the IBV and the transaction costs needs to be taken into full consideration to overcome the liability of outsider ship. Indesit needs to realize its resources and capabilities and decide why should they enter the global market? The answer is because they want to minimize costs by seeking the strategic goal of efficiency. After assessing the economic, political and cultural conditions, this can be achieved through the low-labour cost in India. However, this is only possible when Indesit resolves it’s financial and brand complications in Europe making resulting in a late entry which answers the question of when to enter. The entry mode will be through a joint venture because it’s the only method approved by the formal institution in the host country.

A Global strategy

Indesit can take advantages of economies of scale by decreasing the unit cost with subsequent increase in volume of production due to greater market demand in Asian countries. To aim the global key accounts, manufacturing should be at key locations close to the buyers with suppliers feeding the global demand which is processed centrally.

Why? Market Seeking, Efficiency Seeking , Competition , Geographic Expansion

Where? India: Low-Labor Cost, increased disposable income, increased demand in rural market, concentration in urban areas (Exhibit 2 Case Study).

When? Late Entry , after resolving Financial and brand issues in Europe

How? FDI , Joint Venture

Table 3 Basic decision model E.g. For Entering the Indian Market


8


The global market has perfect competition, because of various reasons; first the competition level due to large number of established players, Second Free entrance of large number of producers without much barriers and Last normal profits due to bulk business. Indesit should launch its products at prices comparatively less to the prices its rivals are quoting to remain away from the price war. The lower price must be critically analysed against the tolerable finances, as Indesit is not financially sound and not even holds a technological edge over its rivals. In other words, company should adopt “Blue Ocean Strategy”, to avoid direct confrontation with rival companies, and subsequently establishing consumer attention. However, this might arise dynamic competition by the competitors to counter attack for their enduring benefits. Therefore, Managers should analyse the probable reaction on counter attack by the rivals, before venturing they should understand the domestic and international competition in the target market.

Organising Structure

As suggested earlier, Indesit should implement horizontal FDI. The transnational strategy is cost efficient (adequate for cost driven market like Asia), locally responsive and at the same time engages global learning. Although this is complex and difficult to implement, based on the market scenario, it is the most adequate form of organisation. With this, the company can attain knowledge jointly due to communities of practice (CoP) which they can share worldwide.

Chart 1 Proposed strategy in Asian Markets


9


Conclusion The senior management must comprehend that saturation in the European market could hinder their long term growth; hence they ought to expand globally. But as mentioned earlier the company is financially incapable, hence they should fortify their finances and brand reputation before going global. Prior to enter a new market, the management should restructure their budget to take the risk. The company should stabilize their production capacity so that the existing market is not damaged. As recommended in the essay, management should recognize the formal and informal aspects of the host nations and then decide where, why, when and how they should invest. The must also analyze competition and develop their global strategies accordingly.


10
