Page 292 - DMGT545_INTERNATIONAL_BUSINESS

Unit 15: Global Strategic Management and Business Ethics

in the minds of consumers they increase the price that can be charged for the firms product. notes
For example, in the 1980s the French Company Perrier did a wonderful job of US consumers that
slightly carbonated bottled water was worth US $ 1.50 per bottle rather than price closer to US $
0.50 that it cost to physically collect, bottle and distribute the water. Perrier’s marketing function
increased the perception of value (V) that consumer’s ascribed to the product. Marketing and
sales can also create value by discovering consumer needs and communicating back to the R&D
function of the Company which can design products to match those needs.
The role of service activity is to provide after sales services and support. This can create a
perception of superior value (V) in the minds of consumers by solving customer problems and
supporting customers after they have purchased the product. This is an extremely valuable
capability in an industry where down time is very expensive. For example Caterpillar the US
based manufacturer of heavy earth moving equipment can get spare parts to any point in the
world within 24 hours thereby minimizing the amount of downtime its customer’s have to suffer
if their Caterpillar equipment malfunctions.

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Caselet Global cost structure analysis
n 1986, Whirlpool Corporation was considering expanding into Europe by acquiring
Philips’ Major Domestic Appliance Division. From the framework of customers, costs,
Icompetitors, and government, there were several pros and cons to this proposed
strategy.
Pros
l Internal components of the appliances could be the same, offering economies of
scale.

l The cost to customize the outer structure of the appliances was relatively low.
l The appliance industry was mature with low growth. The acquisition would offer an
avenue to continue growing.

cons
l Fragmented distribution network in Europe.
l Different consumer needs and preferences. For example, in Europe refrigerators tend
to be smaller than in the U.S., have only one outside door, and have standard sizes
so they can be built into the kitchen cabinet. In Japan, refrigerators tend to have
several doors in order to keep different compartments at different temperatures and
to isolate odors. Also, because houses are smaller in Japan, consumers desire quieter
appliances.

l Whirlpool already was the dominant player in a fragmented industry.
Since Philip’s had a relatively small market share in the European appliance market, one
must analyze the cost structure to determine if the acquisition would offer Whirlpool a
competitive advantage. With the acquisition, Whirlpool would be able to cut costs on raw
materials, depreciation and maintenance, R&D, and general and administrative costs. These
costs represented 53% of Whirlpool’s cost structure. Compared to most other industries,
this percentage of costs that could benefit from economies of scale is quite large. It would be
reasonable to expect a 10% reduction in these costs, an amount that would decrease overall
cost by 5.3%, doubling profits. Such potential justifies the risk of increasing the complexity
of the organization. Because of the different preferences of consumers in different markets,
Contd...

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