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Haier’s Case

Executive Summary The strategic problem of Haier is inconsistency between its target – to become a leading U. S. appliance brand with not typical “made in China” reputation, and its actions that have developed perception of Haier as a brand of comparable or acceptable quality at low price: the U. S. arket entry through a niche in a price-driven category by offering products with specific features, pricing its differentiated product in high-end segment lower than competitors do, communicating its products mostly to retailers, not consumers, which has led to low brand awareness among end-users in large standard refrigerator segment. Haier may resolve this problem by (1) improving and strengthening its current competitive position in a niche market (for current situation see Exhibit 3), (2) challenging share leaders in large standard refrigerator market, or (3) entering a niche of deluxe refrigerators.

We recommend that Haier pursues offensive strategy – improves ; strengthens its competitive position in a niche market of compact refrigerators – that will result in gross profit of $19 million and marketing ROI of 40% by reaching market share of 35% by 2010, and in gross profit of $35 million and marketing ROI of 53% at market share level of 40% by 2015 (see Exhibit 4). Analytical Summary of the Haier’s Strategic Situation Category As of 2007 Haier, China’s strongest domestic brand in home appliance business, enjoys 1. 1 relative market share in a niche segment of compact refrigerators within the U. S. refrigerator market (see Exhibit 1). It also holds second position in the free-standing freezer segment with the market share of 12%, which is again a niche market. Haier has won its position due to two major advantages: low cost production (which in return offers higher margins than local manufacturers can have – see Exhibit 2), product differentiation ; innovation. Its offer to the U. S. compact refrigerator market is superior; it is really good value for money.

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At the same time Haier pursues the U. S. standard refrigerator market, however its sales are rather small so far due to two market constraints. First, standard refrigerator market is mainly a price-driven business and therefore it puts a lot of pressure on manufacturer’s prices and margins – here Haier cannot enjoy higher margins than its competitors do even if it produces refrigerators in the U. S. and does not pay huge shipping cost of $85 per unit when producing in China (see Exhibit 2).

Second, category sales depend a lot on retailers who purchase, place and then sell refrigerators, and they want inventory support, promotional support and lower prices. Furthermore, large national retail chains such as Wal-Mart and Target are not service-oriented and thus cannot educate and assist consumers in buying refrigerators. However this point is very critical for successful sales of many products in this category. Competition The U. S. refrigerator market is strongly competitive in low-end and high-end refrigerator segments.

The main advantages of competitive brands are established reputation, brand image and awareness (GE, Whirlpool), strong relations with distributors (Sears, leading retailer of home appliances, accounted for 20% of Whirlpool white goods production), focused operations (Sub-Zero pioneered and further expanded deluxe category of refrigerators). The only way for Haier to compete in low-end segment is to offer product of comparable quality at lower price and in high-end segment – to offer highly differentiated and unique product at the price comparable to competitors’ one.

Company Haier has established positive reputation among retailers as a company that is highly responsive to customers’ demands and offers a broad variety of product. To be regarded by retailers as a reliable ; responsive brand is a very important point in this industry: if retailers do not want to work with a company, there is no big business, no high profitability. We can say that Haier is considered as a niche-winning company. It does not have established brand image and high awareness yet, so it can hardly compete in such a large segment as standard refrigerator one.

It is mainly perceived as the company offering good quality for low cost. However in standard refrigerator market there is another issue that matters not less than product quality. It is service quality. As an overseas company, Haier experiences occasional service part shortages and shipment problems. This makes successful sales (higher market penetration with gaining more new consumers and retaining existing ones) in standard refrigerator segment much harder. Customer

The available customers in Haier’s product category are various customer-specific retail outlets (for compacts), big national retail chains (Wal-Mart, Target – for compacts and low-end of standard refrigerator market), major home appliance retailers (Sears, Best Buy, Lowe’s, Home Depot – for different products, however mostly for full-size refrigerators) and independent dealers (for compacts, apartment size and low-end refrigerators) and on-line retailers (for compacts and economy brands of refrigerator market).

However Haier is working mainly through large retail chains such as Wal-Mart. In order to sustain in the market and retain leader’s position, the company should broaden its customers’ portfolio and widen its distribution channels, since its currently winning product is also sold through diverse outlets – office equipment dealers, hotel supply channels and high end specialty stores – which usually do not require as low prices as large retail chains do. Consumer There are three major and important-to-know trends in the U.

S. refrigerator market in terms of consumers: 1. share and size of single-unit homes have increased and continue increasing which means increase in demand for apartment-size and compact refrigerators; 2. 25% of newly built homes have home offices, which indicates again a potential demand for compact models of refrigerators; 3. market of deluxe refrigerators is growing, as more homeowners with over $100,000 incomes are replacing their old refrigerators with new, highly differentiated and richly-featured models.

This shows a shift in consumers’ preferences – now they are seeking not only high quality product and service, but also style and differentiation. Haier’s consumers are either buyers that are price-concerned or those who are looking for products with specific features, e. g. wine storage cabinets. In fact, the company can benefit from the first two trends listed above, if it correctly targets and reaches its consumer – communicates and sells its product through appropriate channels. Culture

The company has an advantage of superior operations management system – Overall, Everyone, Control, Clear – where the performance of each employee is measured and sought to be improved day by day. This system has increased company’s value tremendously. Haier has been very aggressive in its domestic market as well as in foreign markets such as the U. S. A quick success in the U. S. compact refrigerator market has fostered high expectations of the company in other segments. However Haier’s competitive position is not strong enough to gain leadership in the U. S. tandard refrigerator market (see Exhibit 3). Strategic Alternatives The strategic problem of Haier is inconsistency between its target – to become a leading U. S. appliance brand with not typical “made in China” quality – and its actions: the U. S. market entry through a niche market in a price-driven category by offering products with specific features, pricing its differentiated product in high-end segment lower than competitors do and communicating its products mostly to retailers and not consumers (which results in low brand awareness among end-users in large standard refrigerator market).

Strategic alternatives for Haier to resolve its problem are: 1. improve and strengthen its current competitive position in a niche market; 2. challenge share leaders in large standard refrigerator market; 3. enter a niche of deluxe refrigerators. Assessment of Strategic Alternatives 1. Haier should pursue offensive strategy and improve its competitive position in a niche market of compact refrigerators in which it holds leader share. By assessing overall market attractiveness and current Haier’s position (see Exhibit 3) this strategy seems to be the most feasible one.

As the company is enjoying leader market share of 21% in this market, it is easier to deeper penetrate into the market through diversification of distribution channels and improvement of marketing efforts. Quantitative assessment (see Exhibit 4) also shows that this alternative is more attractive and profitable than the second one. 2. If Haier chooses this strategic alternative as a solution to existing strategic problem, it should invest to grow which is actually possible when either market is very attractive or company’s competitive position is very strong.

In case of relatively mature U. S. refrigerator market where competition and price rivalry are extremely intense, Haier may challenge share leader in larger segments only under condition if its competitive position is strong. To pursue the aggressive strategy of going to large standard refrigerator market, Haier will have to significantly increase its marketing expenses in order to compete with other brands that invest considerable amounts in marketing (in 2007 Whirlpool has spent $170 million only for consumer media).

Furthermore, as big three manufacturers have moved their factories to Mexico, Haier will not be able to compete with current market leaders in production costs. Thus, it should also revise its factory expansion plans in the U. S. 3. Haier may enter another niche which is deluxe segment. There are not enough data to quantify this alternative, however qualitatively it is obvious that Haier’s brand is too weak to compete with Sub-Zero or Viking. This market entry will require a lot of investment in R ; D as well as in marketing. Moreover, these investments will not guarantee Haier’s success in this category.

Recommendation We recommend that Haier pursues offensive strategy – improves ; strengthens its competitive position in a niche market of compact refrigerators – that will result in gross profit of $19 million and marketing ROI of 40% by reaching market share of 35% in 3 years, and in gross profit of $35 million and marketing ROI of 53% at market share level of 40% in 8 years (assuming average annual segment growth over 2000-2007, slight increase in selling price and relative increase in marketing expenses). Exhibit 1. Relative Market Shares of Haier and its Competitors. Standard Refrigerators in 2006|

Company| Actual market share, %| Relative market share, %| GE| 29| 1. 16| Electrolux| 25| 0. 86| Whirlpool| 25| 0. 86| Maytag| 10| 0. 34| Haier| 3| 0. 10| Others| 8| 0. 28| | | | Compact Refrigerators in 2006| Company| Actual market share, %| Relative market share, %| Haier| 21| 1. 31| GE| 16| 0. 76| Sanyo| 7| 0. 33| Danby| 3| 0. 14| Avanti| 2| 0. 10| Others| 51| 2. 43| Exhibit 2. Refrigerator Production Economics. Build refrigerator cost structures| Type| Low-end 18. 2 cu. ft. unit| Low-end 1. 8 cu. ft. unit| Factory locations| U. S. Union| U. S. Non-Union| Mexico| China| U. S. Union| U. S.

Non-Union| Mexico| China| Labor productivity| 100| 100| 40| 70| 100| 100| 40| 60| Payroll: full cost/hour| 25| 17| 3. 5| 1. 5| 25| 17| 3. 5| 1. 5| Materials ; components| 100| 100| 100| 85| 100| 100| 100| 85| Depreciation ; facilities cost| 100| 85| 75| 60| 100| 85| 75| 60| Freight ; warehouse cost| 25| 28| 30| 35| 8| 9| 10| 11| Additional import shipping cost| 0| 0| 7| 85| 0| 0| 1| 9| | | | | | | | | | Price/cost structure per unit| | | | | | | | | Retail selling price| 425| 425| 425| 425| 115| 115| 115| 115| Net manufacturer’s price| 300| 300| 300| 300| 82| 82| 82| 82| | | | | | | | | |

Cost of goods sold| | | | | | | | | Payroll| 70| 47. 6| 24. 5| 6| 25| 17| 8. 75| 2. 505| Materials ; components| 180| 180| 180| 153| 47| 47| 47| 39. 95| Depreciation ; facilities| 25| 21. 25| 18. 75| 15| 10| 8. 5| 7. 5| 6| Freight ; warehouse including| | | | | | | | | Ocean shipping| 25| 28| 37| 120| 8| 9| 11| 20| Total costs of goods sold| 300| 276. 85| 260. 25| 294| 90| 81. 5| 74. 25| 68. 46| Gross profit| 0| 23. 15| 39. 75| 6| -8| 0. 5| 7. 75| 13. 55| Exhibit 3. Marketing Attractiveness vs. Haier’s Competitive Position. Market Attractiveness|

Very unattractive| Unattractive| Somewhat unattractive| Somewhat attractive| Attractive| Very attractive| 0| 20| 40| 60| 80| 100| Market forces factor importance: 30%| | Relative importance| | Attractiveness rating| | Attractiveness score| Market size| 35%| | 80| | 28| Growth rate| 35%| | 90| | 31. 5| Buyer power| 30%| | 20| | 6| | 100%| | | | 65. 5| | | | | | | Competitive environment factor importance: 35%| | Relative importance| | Attractiveness rating| | Attractiveness score| Price rivalry| 45%| | 20| | 9| Ease of competitor entry| 25%| | 80| | 20| Number of competitors| 30%| | 30| | 9| | 100%| | | | 38| | | | | | Market access factor importance: 35%| | Relative importance| | Attractiveness rating| | Attractiveness score| Customer familiarity| 35%| | 50| | 17. 5| Channel access| 35%| | 30| | 10. 5| Sales/service requirements| 30%| | 50| | 15| | 100%| | |  | 43| | | | | Market attractiveness index| 48| Exhibit 3. Marketing Attractiveness vs. Haier’s Competitive Position – Continued. Competitive position| Considerably behind| Clearly behind| Somewhat behind| Somewhat ahead| Clearly ahead| Considerably ahead| 0| 20| 40| 60| 80| 100| Differentiation advantage factor importance: 40%| | | | | | | Relative importance| | Attractiveness rating| | Attractiveness score| Product quality| 40%| | 80| | 32| Service quality| 30%| | 40| | 12| Brand image| 30%| | 50| | 15| | 100%| | | | 59| | | | | | | Cost advantage factor importance: 40%| | Relative importance| | Attractiveness rating| | Attractiveness score| Cost of goods sold| 70%| | 30| | 21| Marketing and sales expenses| 20%| | 50| | 10| Overhead expenses| 10%| | 30| | 3| | 100%| | | | 34| | | | | | | Marketing advantage factor importance: 20%| | Relative importance| | Attractiveness rating| | Attractiveness score| Market share| 35%| | 60| | 21|

Brand awareness| 30%| | 30| | 9| Distribution| 35%| | 50| | 17. 5| | 100%| | |  | 47. 5| | | | | Competitive position index| 46. 225| Exhibit 4. Quantitative Assessment of Strategic Alternatives 1 and 2. | Compacts| Standard| | 2006| 2010| 2015| 2006| 2010| 2015| Market demand, units| 2,700,000. 00 | 3,726,000. 00 | 5,514,480. 00 | 11,100,000. 00 | 11,921,400. 000 | 13,030,090. 200 | Market share, %| 0. 21 | 0. 35| 0. 4| 0. 03| 0. 1| 0. 2| Volume sold, units| 567,000. 00 | 1,304,100. 00 | 2,205,792. 00 | 333,000. 0 | 1,192,140. 00 | 2,606,018. 04 | Price per unit, $| 115. 00 | 123. 05 | 135. 36 | 425. 00 | 467. 50 | 537. 63 | Sales revenues, $| 65,205,000. 00 | 160,469,505. 00 | 298,564,976. 16 | 141,525,000. 00 | 557,325,450. 00 | 1,401,060,448. 76 | Gross profit, $| 7,682,850. 00 | 18,907,493. 85 | 35,178,742. 84 | 7,708,950. 00* | 30,357,845. 10 | 76,316,586. 80 | Gross profit margin, %| 0. 12 | 0. 12 | 0. 2 | 0. 05 | 0. 05 | 0. 05 | Marketing sales ; expenses, $| 7,500,000. 00 | 13,500,000. 00 | 22,950,000. 00 | 7,500,000. 00 | 37,500,000. 00 | 112,500,000. 00 | Marketing sales ; expenses, %| 0. 12 | 0. 08 | 0. 08 | 0. 05 | 0. 07 | 0. 08 | Net marketing contribution, $| 182,850. 00 | 5,407,493. 85 | 12,228,742. 84 | 208,950. 00 | (7,142,154. 90)| (36,183,413. 0)| Marketing ROS, %| 0. 00 | 0. 03 | 0. 04 | 0. 00 | (0. 01)| (0. 03)| Marketing ROI, %| 0. 02 | 0. 40 | 0. 53 | 0. 03 | (0. 19)| (0. 32)| *Gross profits for standard refrigerator production are calculated based on the assumption that production will take place in South Carolina and cost structures for U. S. Non-Union factories will hold true (see Exhibit 2).

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