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SUNBEAM (1998) CASE REPORT

Example from Rex Mitchell=s class


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Table of Contents
Executie Su!!a"#$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$%$ &
'nte"nal Anal#sis $$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$%$ (
0urrent Mission, 4ong.Range 5b6ecti-es, $trategies and 7erformance .............................p. 8
3unctional Analsis .............................................................................................................p. %
Mar9eting.........................................................................................................................p. %
3inancial ..........................................................................................................................p. %
7roduction)5perations ....................................................................................................p. :
Technolog .....................................................................................................................p. :
5rgani;ational .................................................................................................................p. :
Anal#sis of t)e Exte"nal Eni"on!ent $$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$%$ *
"usiness)0ompetiti-e En-ironment (7orter<s : 3orces) ......................................................p. '
2eneral En-ironment ..........................................................................................................p. =
Economic ........................................................................................................................p. =
$ocial)0ultural ................................................................................................................p. =
7olitical)4egal .................................................................................................................p. =
Technological ..................................................................................................................p. =
'nte+"ation of Ma,o" St"ate+ic 'ssues $$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$%$ 9
Aailable Alte"natie St"ate+ies $$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$%$ 1-
0orporate 4e-el $trategies .................................................................................................p. ,+
0ompetiti-e $trateg ..........................................................................................................p. ,,
Reco!!en.ations an. '!%le!entation $$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$%$ 1(
0orporate 4e-el $trategies .................................................................................................p. ,%
0ompetiti-e $trateg ..........................................................................................................p. ,%
5ther $trategies...................................................................................................................p. ,%
A%%en.ices$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$%$ 1/
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E0ECUT'1E SUMMAR2
>n the !a9e of Al (unlap<s drastic restructuring, $unbeam appears do be doing ?uite !ell in earl
,&&= !ith re-enues on the rise, solid profits and a positi-e cash flo!. 1o!e-er, there are some critical
issues on the hori;on that $unbeam needs to address ?uic9l. >ronicall, the compan<s sa-ior, Al (unlap,
has put a rather audacious proposal of a triple ac?uisition on the table that !ill lea-e the compan highl
le-eraged and strapped for cash if completed. 4argel enabled b an inflated $unbeam stoc9 -alue that
could ?uic9l change, the ac?uisitions !ould also entail a drastic re-ersal of $unbeam=s successful current
corporate strateg of concentration.
Another related critical issue is that Al (unlap, a reno!ned turnaround expert, has decided to sta
on as $unbeam 0E5 to lead the compan @through a long period of gro!th,@ a responsibilit in !hich he
has little past experience. "esides the critical issues raised b Al (unlap<s latest mo-es, it is also important
to 9eep in mind that $unbeam<s core business is in a mature industr !ith limited gro!th so $unbeam
needs to exploit as man a-enues as possible to 9eep expanding in the future.
To secure a more stable future financial position for $unbeam, one 9e recommendation is to onl
ac?uire one of the three proposed ac?uisition targets, namel $ignature "rands #$A. This ac?uisition !ill
pro-ide distribution snergies, opportunities for international expansion and it is aligned !ith $unbeam<s
core strateg of concentration. Additionall, it is recommended that $unbeam gro!s further b forming a
strategic alliance !ith $un Microsstems to produce and mar9et @smart@ appliances. The issue of Al
(unlap lac9ing long.term management expertise is difficult to address, since he is so po!erful and
surrounded b a loal team, but it is recommended that the board loo9s for an alternate @dnamic industr
expert@ !ho could ?uic9l step in should (unlap pro-e to be unsuccessful in the unfamiliar @Aac9 /elch@
tpe role.
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'NTERNA3 ANA32S'S
CURRENT M'SS'ON4 3ON56RAN5E OB7ECT'1ES4 STRATE5'ES 8 PER9ORMANCE
/hen reno!ned turnaround specialist Albert (unlap stepped in as 0E5 of the struggling appliance
ma9er $unbeam in Aul ,&&B, his immediate strateg !as to aggressi-el cut the compan<s costs b
eliminating excessi-e staff, simplif the compan<s $C# sstem, di-est unprofitable di-isions and
consolidate head?uarters as !ell as production facilities. 1e also made the 1attiesburg, Mississippi plant
the central point of $unbeam<s operations, a decision solel based on its lo!er !age costs, !hich ma not
al!as be the most important factor in selecting a long.term facilit location. 1o!e-er, on the !hole, his
drastic restructuring strateg !as clearl !arrantedD and resulted in higher sales, significantl lo!er cost of
goods sold and operating profits along !ith a steadil climbing $unbeam stoc9 price in ,&&'. >n addition to
the do!nsi;ing, (unlap also emphasi;ed focusing on the core business, defined as @electronic appliances
and appliance.related business,@ and promptl sold a number of di-isions that !ere not closel related to
the ne! $unbeam<s main line of business.
/hen the organi;ation had been trimmed do!n to a desirable and efficient le-el, (unlap turned his
energies to reali;e his future -ision for $unbeam, !hich included aggressi-e gro!th and global expansion
of the core business b competing based on product differentiation !ith de-elopment of ne! product lines
mirroring gro!ing consumer preferences for no-el, timesa-ing con-enience appliances. A three.ear
business plan emploing these strategies boldl aimed to double sales to EF million !hile increasing
re-enues and operating margins b F+G per ear and increase R5E to F:G (@F+)F+)F:@).
5n a management and corporate go-ernance le-el, (unlap tends to surround himself !ith loal
executi-es from prior -entures, and in fact he ?uic9l replaced all $unbeam board members except one
ma6or shareholder (3ran9lin Resources !ith a 8:G sta9e). This strateg ma ma9e it easier for (unlap to
get consensus for his -ie!points, but it ma also stifle inno-ation, creati-it and fresh ideas. >t is ob-ious
that (unlap has had tremendous success in the pastD ho!e-er, since the business en-ironment is
continuousl changing, he should 9eep in mind that those experiences do not automaticall translate into
future triumphs. (unlap also prefers a highl in-ol-ed and -ested "oard of (irectors, accomplished b
re?uiring board members to in-est a large portion of their personal !ealth in $unbeam stoc9. This
re?uirement certainl creates incenti-es for the board members to carefull consider future strategic
decisions, !hich should ha-e a positi-e impact on the compan as a !hole. Another core belief of (unlap<s
is that @the most important person in the compan is the shareholder@ and that the ultimate measure of a
compan<s -alue is the share price of its stoc9s. Although there is much truth in the notion of a compan<s
responsibilities to its in-estors, being too focused on a compan<s stoc9 price ma sometimes di-ert
attention from other critical issues.
#p to this point, (unlap<s strategies appear to be reasonable considering the ob-ious inefficienc of
$unbeam<s performance prior to mid.,&&B and his extensi-e expertise in the arena of business re.
engineering. According to the securities mar9ets, his strategies had been highl successful, as e-idenced in
a $unbeam share price that ?uadrupled in 6ust ,= months after (unlap<s 0E5 appointment. >n late ,&&',
ho!e-er, in an uncharacteristic strateg re-ersal, (unlap decided that he !ould sta !ith $unbeam @to
build the compan bac9 up@ instead of exiting et another successful turnaround. As part of this ne!
strateg he started see9ing candidates for mergers and)or ac?uisitions that could add some snerg and
desirable ne! products to $unbeam and that (unlap could @rescue@ 6ust as he had rescued & companies in
the past. $unbeam<s intent to ac?uire three companies (0oleman, $ignature "rands and 3irst Alert)
simultaneousl, announced on March F, ,&&=, ma create histor on /all $treet if implemented, but in
light of $unbeam<s -er recent financial !oes, this seems li9e an o-er.confident mo-e on behalf of Al
(unlap that could entail large ris9s for $unbeam. Not onl is he -enturing out on unfamiliar grounds in his
attempt to @brea9 records@ and create rapid gro!th for $unbeam, this ne! strateg entails gro!ing b
ac?uiring firms !ith lines of business similar to those he had pre-iousl discarded at $unbeam for not being
related to the core business (such as outdoor furniture). Essentiall, this audacious ac?uisition proposal
represents a sudden ,=+ turn in strategD from do!nsi;ing !hile focusing on gro!ing the core business b
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product differentiation to di-ersifing through both concentric and conglomerate ac?uisitions. This ma be
a -iable strateg changeD ho!e-er, the financial and operational implications of ac?uiring three companies
at once !ould be profound, as discussed belo! in the 3unctional Analsis.
9UNCT'ONA3 ANA32S'S
Ma":etin+
$unbeam<s core mar9eting strength lies in ha-ing a strong distribution net!or9, !ith its products
being sold in a !ide -ariet of retail outlets, including large drug store chains, home suppl centers,
discount merchandisers as !ell as some high.end retailers (see Appendix F for a complete $/5T table).
This broad distribution approach not onl spreads the ris9 of being too reliant on certain retailersD it also
pro-ides a more extended selection of !here $unbeam products can be purchased, and !ill be helpful in
integrating $unbeam<s ne! product lines should the proposed ac?uisitions ta9e place. Ne-ertheless, /al.
Mart still accounts for nearl a fifth (,&G) of $unbeam<s re-enues in ,&&B, thus it is critical that $unbeam
maintains a good relationship !ith this important retailer. 5n the promotional side, $unbeam emplos
extensi-e mar9eting pac9age promotions through mass.retailers, catalogs, outlet stores, tele-ision
shopping and independent distributors. Another notable strength in the mar9eting arena is the 5ster brand<s
leading mar9et share in man 4atin American countries. This is sharpl contrasted to the almost
incomprehensible fact that $unbeam !as attempting to sell ,,+.-olt appliances in AsiaD a continent that
uses FF+.-olt electricit... 0learl, $unbeam has great potential to increase re-enues in the Asian region
!hile maintaining its leadership position in 4atin America both in terms of its current product lines as !ell
as an products ac?uired in the future.
As pointed out in the $/5T analsis, one bold strategic mo-e on $unbeam<s part !as to form a
mar9eting alliance !ith the American Medical Association. This endorsement agreement !as not onl
uni?ue since it !as the first time the AMA had agreed to support outside productsD it also held great
potential to significantl increase $unbeam<s brand exposure b being lin9ed !ith the trusted image of the
AMA on -arious mar9eting materials. 1o!e-er, the resulting public outcr o-er the ?uestionable ethics of
this alliance that led to a breach of the contract b the AMA, ma ha-e tarnished the image of $unbeam
along !ith that of the AMA. After all, the agreement caused a high.profile uphea-al !ithin the AMA that
!ould not ha-e occurred !ithout $unbeam<s participation. " refusing to release the AMA from the
agreement it had erroneousl entered into, $unbeam certainl couldn<t ha-e come across as a -er
charitable or sociall responsible organi;ation in the ees of the public.
9inancial
>n the !a9e of Albert (unlap<s drastic turnaround, $unbeam<s o-erall financial situation at the end
of ,&&' is ?uite sound, although it is important to 9eep in mind that the compan !as -er troubled
financiall !ith huge operating losses in ,&&B, 6ust one ear earlier. $unbeam is once again profitable !ith
net earnings near one.tenth of total sales (profit margin H &.%G) and an R5E -er close to (unlap<s target
of F:G at F+.:G. As illustrated in the ratio comparison table in Appendix ,, this le-el of profitabilit is
!ell ahead of other competitors in the saturated home appliance industr !hose profits margins tend to be
slim. >n terms of le-erage, $unbeam uses debt financing to a some!hat higher degree than its competitors,
but the compan is still safel belo! the ,.+ ratio @threshold@ !ith a .B8 debt to e?uit ratio in ,&&'.
$unbeam<s li?uidit is -er high, !ith recent current ratios ranging from F.8+ . 8.8F, surpassing the rest of
the industr in its abilit to meet short.term financial obligations. A loo9 at $unbeam<s acti-it ratios
re-eals a relati-el flat trend that is consistent !ith the industr comparison group.
The most important aspect of $unbeam<s financial situation, ho!e-er, is ho! the compan !ill be
affected b the proposed ac?uisitions of 0oleman 0ompan, $ignature "rands #$A and 3irst Alert. The
March F, ,&&= stoc9 price of E%:.B8 multiplied b the !eighted a-erage common shares outstanding of
=',:%F,+++ indicates that $unbeam<s total -alue approximates E% billion. 1o!e-er, due to the dramatic
fluctuations in $unbeam<s stoc9 price, the same calculation for 6ust a ear prior ields a -alue of circa E,.&
4
billion, less than half of the abo-e -alue. The ?uestion of !hether $unbeam is a EF billion or E% billion
compan !ill significantl impact its abilit to handle the financing of the proposed EF.: billion !orth of
ac?uisitions, of !hich one third (E=,, million) !ould be financed through stoc9s. Assuming additional
debts in excess of E, billion !ould finance another %FG of the proposed ac?uisitions. The remaining F:G
of the proposed purchase amount, approximatel E:== million, !ould be paid in cash. According to the
financial data pro-ided in the case, $unbeam onl had E:F.8 million in cash and cash e?ui-alents at the end
of ,&&', and it seemed unrealistic that the firm had accumulated an extra cash reser-e E:8B million in 6ust a
couple of months. 5-erall, from a financial standpoint, is does not seem !ise for $unbeam to assume such
a large amount of additional debt !hile completel depleting itself of cash in order to finance the
ac?uisition of three companies. Although the compan<s stoc9 price 9ept increasing after the ac?uisition
proposal !as announced, the mar9ets ma simpl be too focused on Al (unlap<s past successes, and !hen
the fragile realit of these ac?uisitions hit in-estors, the $unbeam stoc9 ma tumble do!n!ard rather
?uic9l.
P"o.uction;O%e"ations
A, (unlap made drastic operational changes to $unbeam !hile on his recent do!nsi;ing rampage,
including cutting :+G of emploees, closing ,= of FB factories, 8' of B, !arehouses and 8& of :8
facilities, and eliminating ='G of the compan<s products. /hile this restructuring appear to ha-e been
successful, e-idenced in higher re-enues, a soaring stoc9 price and health profits in ,&&', it is reall too
earl to declare $unbeam a !inner after 6ust one good ear until there is some e-idence of positi-e long.
term trends. As pointed out in the $/5T table, the s!eeping changes that included laing off B,+++
emploees ma ha-e caused unrest among remaining emploees that could hurt $unbeam in the long run.
This effect ma be augmented if (unlap uses similar restructuring approaches in each of the companies he
is proposing to ac?uire. Additionall, (unlap<s tendenc to locate manufacturing plants in lo!er !age
locations and)or countries ma not al!as result in optimal efficienc. >t is important to e-aluate facilit
locations on a number of factors, including experience of a-ailable !or9ers, access to transportation lin9s,
local unemploment rates, pre-alence of unions, etc.
Tec)nolo+#
5ne of $unbeam<s core competencies lies in its strong !arehousing and distribution capabilities,
largel enabled b electronic data interchange (E(>) communication and 6ust.intime in-entor (A>T)
sstems. $imilar to the distribution efficiencies mentioned in the Mar9eting section, there could potentiall
be some snergies gained b integrating the proposed ac?uisitions into $unbeam<s existing in-entor
management information sstem. 1o!e-er, this potential integration ma also raise a number of issues,
such as !hich compan<s technolog to use as !ell as the inherent complexities of combining se-eral
proprietar in-entor and distribution sstems into one.
O"+ani<ational
/ith the notorious @0hainsa! Al@ (unlap at its reigns, aided b his hand.pic9ed management team
and "oard of (irectors of faithful follo!ers, $unbeam is highl reliant on the ?ualit of his sub6ecti-e
6udgments. Although the fact that the board members ha-e high sta9es at ris9 b being hea-il in-ested in
compan stoc9 suggests that strategic mo-es !ill be carefull !eighed b the "oard, it does not appear to
be ?uestioning (unlap<s drastic proposal of a triple ac?uisition. Apparentl, the rapid accumulation of
shareholder !ealth gains that (unlop had generated had instilled a high le-el of trust in his fello! board
members. Another factor behind the obliging attitude of compan executi-e and board members ma be
that the are eing attracti-e lead positions at the companies that are ac?uisition candidates.
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ANA32S'S O9 T=E E0TERNA3 EN1'RONMENT
COMPET'T'1E EN1'RONMENT
The competiti-e structure of the home appliances industr can best be described as monopolistic
competition due to its man sellers and differentiated products. The industr is mature, !ith a relati-el
lo! o-erall gro!th rate, and the mar9et is saturated !ith products, forcing man plaers to cut prices,
consolidate or di-ersif through ac?uisitions.
Rial"# A!on+ Existin+ 9i"!s
#sing Michael 7orter<s 3i-e 3orces Model, internal ri-alr in the home appliances industr is the
principal threat to industr profits (see Appendix 8 for a detailed analsis). The most important factors
contributing to the fierce competition are the large number of plaers, slo!ing sales gro!th and lo!
consumer s!itching costs stemming from products being -ie!ed as similar to one another. To distinguish
themsel-es competiti-el, firms are forced to in-est in research and de-elopment to augment product -alue
b adding ne! features as !ell as continuousl in-ent no-el time.sa-ing and con-enience.related
appliances.
T)"eat of Substitutes
As pointed out in Appendix 8, there is a current trend in the home appliances mar9et to!ard
focusing on the more profitable segment of time.sa-ing small appliances. $ince most time.sa-ing
appliances such as electric 6uicers, dish!ashers, etc. are easil substitutable b manuall performing the
acti-it, the can be considered non.essential con-enience items that consumers !ill purchase less of in an
economic do!nturn. Therefore, the o-erall threat to industr profits from substitutes in this particular
segment is !o.e"ate to )i+)$
Ba"+ainin+ Po>e" of Bu#e"s
"uer bargaining po!er is normall lo! for an industr !ith man distributed, indi-idual consumer
purchases of its products. 1o!e-er, retailers could e?uall be considered buers of the products sold b
firms in the home appliances industr. $ince a hugel successful discount retailer such as /al.Mart ha-e a
large sa in !hich products to carr, it follo!s that the ha-e significant bargaining po!er.
0orrespondingl, smaller retailers ha-e less of a choice and thereb less bargaining po!er to bring to the
table. 5n the !hole, bargaining po!er of buers is a !o.e"ate threat to the home appliances industr
profitabilit.
T)"eat of Ne> Ent"ants
The home appliances industr is relati-el unattracti-e to ne! entrants due to its high penetration
and lo! le-el of profitabilit. >n addition, there are relati-el high barriers to entr in the form of restricted
access to distribution channels and capital re?uirements in-ol-ed in product design, manufacturing and
mar9eting. >n summar, the o-erall threat to industr profitabilit b potential ne! entrants is lo> (see
Appendix 8 for more detail).
Ba"+ainin+ Po>e" of Su%%lie"s
$ince industr firms tend to manufacture their o!n products, industr suppliers !ould be the
pro-iders of ra! materials. There is no indication of an difficulties in obtaining these ra! materialsD thus,
bargaining po!er of suppliers is estimated to be a lo! threat to industr profits.
5ENERA3 EN1'RONMENT
Econo!ic
/ith se-eral ears of a @bull@ stoc9 mar9et and financial prosperit resulting in si;eable
discretionar incomes for man #.$. consumers, the economic en-ironment has been largel fa-orable for
firms in the home appliances industr. 5n the flip side of the coin, man foreign economies ha-e in the
same time period struggled through financial do!nturns. This illustrates the importance of closel
obser-ing financial ccles to strategicall ta9e ad-antage of the -arious ups!ings as !ell as do!nturns b
increasing production in recessed economies and emphasi;e sales and mar9eting in prosperous mar9ets.
0onse?uentl, this en-ironmental force is -er important !hen it comes to the home appliances industr,
!hich relies, at least to a certain extent, on consumer discretionar income. >t is also important to note that
!ith international operations in multiple countries, $unbeam is -ulnerable to fluctuations in foreign and
domestic currenc exchange rates.
Social;Cultu"al
As mentioned in the detailed $/5T analsis in Appendix F, the time constraints facing most
families in the ,&&+s has led to increased demand, resulting in the !illingness to pa a premium, for time.
sa-ing small appliances. This presents an opportunit for one (or multiple) appliance manufacturer(s) to
de-ote some resources to!ard ne! product de-elopment for this niche, and for instance position
themsel-es as being the leading.edge inno-ator of con-enience items. >t is also important for industr firms
to consider both the trend to!ard more singlemember households as !ell as the aging of the general
population !hen designing and mar9eting ne! small appliances.
Political;3e+al
7olitical and legal forces do not pla a large role in strateg formulation in the home appliances
industr beond the @normal@ regulations and responsibilities of large, publicl held corporations.
1o!e-er, it is !orth mentioning here that !hile $unbeam<s manufacturing facilit in Iene;uela appear to
ser-e the 4atin.American region !ell, it does sub6ect the compan to the usual ris9s of conducting business
internationall, including changes in import tariffs, ?uotas or other imposed trade restrictions.
Tec)nolo+ical
0onsidering the changing consumer preferences and needs mentioned pre-iousl, there is most
li9el a certain urgenc in the industr to de-elop so.called @smart@ home appliances that emplo ad-anced
digital and -oice.recognition technologies. Although these products are a fe! ears a!a from mainstream
usage, in the long.term respect, technolog is certainl an important en-ironmental factor for this reason.
>n addition, technolog plas a crucial role for man industr firms through the efficiencies gained b E(>
and A>T !arehouse management sstems mentioned on page ' in the >nternal Analsis section of this
report.
'NTE5RAT'ON O9 MA7OR STRATE5'C 'SSUES
The preceding analsis of $unbeam<s internal and external en-ironment presents a large number of strategic
issues in terms of strengths, !ea9nesses, opportunities and threats (summari;ed in a $/5T table in
Appendix F). 5ut of these, the follo!ing three issues ha-e been identified as being critical to $unbeam<s
future abilit to sta competiti-e:
,. $unbeam<s 0E5 has proposed a triple ac?uisition that !ill lea-e the compan highl le-eraged and
strapped for cash
F. Albert (unlap lac9s experience in running a corporation efficientl in the long run
8. $unbeam<s core business is in a mature industr !ith slo! gro!th and a s?uee;e on profits
Su!!a"# of C"itical 'ssues
,. $unbeam<s 0E5 has proposed a triple ac?uisition that !ill lea-e the compan highl le-eraged and
strapped for cash
0iting the fact that $unbeam is @thro!ing off large sums of cash,@ and that the logical next step is
to ma9e a ma6or merger or ac?uisition that can @add e-en more -alue to the compan,@ 0E5 A, (unlap
has proposed a simultaneous ac?uisition of no less than three separate, publicl traded companies:
0oleman 0ompan, $ignature "rands and 3irst Alert. As discussed in the financial section of the >nternal
Analsis of this report, the additional debt $unbeam needs to incur as !ell as the large cash outla in-ol-ed
in the transaction !ill lea-e the compan in a -ulnerable financial condition. The compan<s -olatile stoc9
price could also 6ust as easil lose half its -alue and put $unbeam in a strenuous situation, scrambling to
sta afloat. >n addition to the financial issues, the practicalities in-ol-ed in integrating not t!o, but four
uni?ue organi;ations so ?uic9l after $unbeam under!ent a ma6or restructuring process !ill undoubtedl
put additional strain on $unbeam<s management as !ell as its emploees. Another characteristic of the
planned ac?uisition proposal is that it directl contradicts (unlap<s prior strateg of focusing on the core
business (electric appliances) and di-est unrelated di-isions. >n fact, as part of the ac?uisition, (unlap
!ould be buing business lines that he pre-iousl shut do!n at $unbeam, such as outdoor furniture.
F. Albert (unlap lac9s experience in running a corporation efficientl in the long run
(unlap has de-eloped a uni?ue area of expertise in do!nsi;ing sluggish companies to ma9e them
more efficient b carring out se-eral successful @rescue missions@ at a number of corporations o-er the
past couple of decades. 1o!e-er, he needs to 9eep in mind that these capabilities do not automaticall
translate into the abilit to successfull manage a compan o-er man ears along the lines of Aac9 /elch.
(unlap himself argues that his managerial stle is significantl different from that of /elch as !ell as "ill
2ates and that his area of specialt is in @mo-ing into troubled companies to sa-e them from ruin.@
Regardless of the future strategic paths chosen b $unbeam, the compan !ill clearl need an executi-e
tpe to match these strategies.
8. $unbeam<s core business is in a mature industr !ith slo! gro!th and a s?uee;e on profits
Although $unbeam !as able to post health profits in ,&&' !ith a margin of &.%G, most firms in
the home appliances industr are experiencing slo! re-enue gro!th and lo!, if an, profits. Therefore, it is
important that $unbeam not onl continues to operate highl efficientl, but also loo9s for areas of gro!th
through differentiation, di-ersification, globali;ation or ac?uisitions. Additionall, it is crucial to continue
de-eloping no-el products that suit the latest consumer needs and !ants, particularl !hen operating in
such a highl competiti-e industr.
A1A'3AB3E A3TERNAT'1E STRATE5'ES
CORPORATE 3E1E3 STRATE5'ES
5"o>t) St"ate+ies
5perating in a cutthroat, relati-el lo!.margin industr, $unbeam currentl has an o-erall
orientation to!ard gro!th)expansion of the compan<s acti-ities, !hich is also necessar to address 0ritical
>ssue J8 and remain competiti-e in the future. #p to this point, $unbeam<s strateg has been to pursue
gro!th b ta9ing mar9et share a!a from competing firms and -ia geographic expansion globall
(hori;ontal integration), and both methods ha-e !or9ed relati-el !ell since the compan<s recent
restructuring. 3uture strategic options $unbeam could emplo for achie-ing its aggressi-e gro!th ob6ecti-e
of F+G annual re-enue increases include (,) continue concentrating on the current industr and gro! b a)
capturing mar9et share from competitors, b) expanding through mergers or ac?uisitions in-ol-ing present
industr plaers, or c) integrate -erticall or hori;ontall. The second option (F) is !hether to gro!
outside of the current industr through a) concentric or b) conglomerate di-ersification.
$ome gro!th.related strategic alternati-es that are currentl under serious consideration b
$unbeam is !hether to gro! b ac?uiring one, se-eral or all of the follo!ing publicl held companies: ,)
0oleman 0ompan, a global leader in outdoor recreational and hard!are productsD F) $ignature "rands,
the North American coffee ma9er leader as !ell as the leader in consumer health products and 8) 3irst
Alert, the !orld!ide leader in residential safet e?uipment. 5ut of these three companies, onl $ignature
"rands is in the same core business as $unbeam (electrical appliances and appliance.related products),
through its consumer products di-ision, !hich constitutes =BG of re-enues. An ac?uisition of 6ust
$ignature "rands !ould be most closel aligned !ith Al (unlap<s apparentl successful strateg of
narro!ing $unbeam<s focus to one core product. Additionall, ta9ing o-er 6ust one firm, !ith similar
products nonetheless, !ould reduce man of the implementation problems attributable to three concurrent
mergers mentioned in 0ritical >ssue J,. Another crucial consideration factor is that a single ac?uisition
!ould lea-e $unbeam on much sounder financial grounds at a time !hen the true -alue of its stoc9 is being
?uestioned b analsts.
5n the other hand, ac?uisitions in-ol-ing 0oleman and)or 3irst Alert (!ith or !ithout $ignature
"rands) !ould result in $unbeam pursuing a concentric di-ersification strateg b expanding into product
lines that are not directl appliance.related. "oth 0oleman and 3irst Alert, ho!e-er, manufacture
consumer household products that tend to be sold in the same retail outlets as appliances, so $unbeam
could potentiall ta9e ad-antage of these commonalities and utili;e its excellent distribution sstem to
mar9et the products of the ac?uired companies as !ell.
There also appear to be snergies bet!een the existing product lines of $unbeam and those of some
of the ta9eo-er targets. 3or example, 0oleman<s camping and recreational products !ould fit nicel into
$unbeam<s 5utdoor 0oo9ing di-ision, $ignature "rands< Mr. 0offee product !ould be ideal for the
Appliances di-ision and its 1ealth 5 Meter brand !ould suit $unbeam<s 1ealth 0are categor !ell. 3irst
Alert<s products appear to be less related to $unbeam<s current product groupings, although the could still
be sold through the same distribution channels.
Regardless of !hether $unbeam gro!s -ia narro! or broad concentric ac?uisitions, it is clear that
$unbeam could benefit from distribution and mar9eting snergies, scale economies in production, as !ell
as economies of scope through either of these ac?uisitions. The ?uestion of !hich alternati-e to choose, if
an, reall comes do!n to a corporation<s financial ris9.tolerance (of !hich Al (unlap appears to possess
plent), as !ell as !hether the tentati-e purchase offers represent a fair mar9et -alue for each of the three
companies. /ith a price tag of EF:+ million on annual sales exceeding EF': million, $ignature "rands
appear to be more reasonabl priced than for example 0oleman, priced at EF billion !ith E,.,: billion
!orth of annual re-enues. >nterestingl, 0oleman has higher re-enues than $unbeam but its stoc9 is trading
!ell belo! that of $unbeam, !hich is a clear indicator than $unbeam<s stoc9 is o-erpriced.
Po"tfolio St"ate+ies
After (unlap had di-ested unprofitable di-isions such as outdoor furniture, gas logs, electric
blan9et production, decorati-e bedding and outdoor cloc9s and thermometers as part of his do!nsi;ing in
an effort to concentrate on the core business of electrical appliances, $unbeam<s business !as still spread
across a number of product categories or di-isions: Appliances, 1ealth 0are, 7ersonal 0are and 0omfort,
5utdoor 0oo9ing and A!a 3rom 1ome. 0urrentl, all products are mar9eted either under the $unbeam
or the 5ster brand name. 5ther than ac?uiring one or more of the abo-e.mentioned companies, $unbeam
also has the option to either narro! its portfolio b eliminating certain product lines or to broaden its
portfolio b de-eloping ne! products. Although the compan has a long tradition (since ,=&') of
producing animal clippers, it might be !orth considering di-esting its A!a from 1ome di-ision, !hich
generates onl :G of re-enues and, being directed to the professional and -eterinarian trade, is sold
through different channels than its four consumer oriented di-isions.
0onsidering the gro!ing demand for time.sa-ing appliances and other @smart@ de-ices for the
home, $unbeam could also pursue a line extension strateg consisting of products targeting @dual.career@
households strapped for time, utili;ing its familiar $unbeam or 5ster brands. ($unbeam could potentiall
de-elop an entirel ne! brand, but that !ould most li9el be too costl). The most feasible !a of
producing cutting.edge, @smart@ appliances !ould be to form an alliance !ith a high.tech compan that has
significant expertise in digital and !ebenabled technolog, such as $un Microsstems (!ho de-eloped the
Aa-a technolog) or $on. "eing one of the pioneering companies that puts its name on such leading.edge
products !ould pro-ide $unbeam !ith a ne!, potentiall -er lucrati-e, a-enue for gro!th, effecti-el
addressing 0ritical >ssue J8. >n addition, it might help form a more distinct image of the $unbeam brand in
the minds of consumers.
Pa"entin+ St"ate+#
5ut of $unbeam<s fi-e product di-isions, Appliances is not onl the largest at F&G of domestic
sales and doing !ell internationall, it is also a categor !ith a predicted gro!th rate of approximatel '.
=G o-er the next : ears. >t is important that $unbeam continues to in-est in this line of business so the
compan can capitali;e on the increased demand for small con-enience appliances. " manufacturing these
tpes of products, !hich tend to be more profitable than larger appliances, $unbeam can also alle-iate
0ritical >ssue J8 to an extent.
COMPET'T'1E STRATE52
$unbeam is currentl pursuing a broad differentiation strateg in all of its product lines, although it
is unclear !hat exactl separates $unbeam<s products from its competitors. According to A, (unlap, it is
important to @carefull examine ne! interests as lifestles change,@ thus $unbeam ma be attempting to
distinguish itself as a leading.edge plaer in the @con-enience@ segment of the home appliances industr
based on ha-ing inno-ati-e products. The !ide range of $unbeam<s retailers, from Mac<s and
"loomingdale<s on the high.end to /al.Mart and Cmart on the opposite side of the scale, indicates that its
products are positioned all across the board. The compan<s traditional core competencies appear to be in
the areas of efficient !arehousing and distribution, !hile a more recentl added competiti-e factor could
be considered the organi;ation<s o-erall @leanness,@ enabling it to respond more ?uic9l to customer needs.
The fact that $unbeam is neither hea-il in-ested in targeting a particular niche, nor solidl
differentiated from its competitors in the minds of consumers, suggests that a competiti-e strateg of
o-erall price leadership might be a -iable alternati-e for $unbeam to consider. /ith the recent cost.cuts,
consolidation and operations streamlining orchestrated b Al (unlap, it might 6ust be an efficient enough
producer to be able to compete on a price.basis. The fact that almost a fifth (,&G) of $unbeam<s products
are sold at /al.Mart illustrates its brands< appeal to cost.conscious shoppers.
Another possible competiti-e strateg option could be to stri-e to be a best.cost pro-ider. 3or the
same reasons as listed abo-e, $unbeam might be able to incorporate 9e product characteristics at a lo!er
cost than competitors. >n the !a9e of its recent high.profile compan restructuring, $unbeam could stress
its ne!found efficienc ad-antage to consumers and ad-ertise that $unbeam pro-ides products !ith the
best cost)-alue combination on the mar9et.
RECOMMEN?AT'ONS AN? 'MP3EMENTAT'ON
CORPORATE 3E1E3 STRATE5'ES
>t is recommended that $unbeam continue to pursue its o-erall goal of maintaining stead gro!th.
1o!e-er, as 0ritical >ssue J, spells out, $unbeam !ould ta9e on substantial financial ris9s b appro-ing
Al (unlap<s proposed ac?uisition of 0oleman 0ompan, $ignature "rands and 3irst Alert simultaneousl.
Ne-ertheless, some snergies in the form of distribution and other efficiencies achie-ed through an
ac?uisition could better position $unbeam for this future gro!th. To minimi;e the ris9s associated !ith
assuming the -er high le-el of financial le-erage needed to execute the triple ac?uisition, !hile still
achie-ing some gro!th through ac?uisitions, it is therefore recommended that $unbeam ac?uire onl
$ignature "rands #$A at this time and drop an immediate plans to purchase 0oleman 0ompan and 3irst
Alert.
This recommendation !ill address 0ritical >ssue J , and is based on the follo!ing factors related to
the implementation of the ac?uisition: ,) $ince most of the ac?uisition cost of $ignature "rands is in the
form of long.term debt, $unbeam onl has to shell out approximatel E8' million in cash, !hich it can
easil afford at this point in time. F) $ignature "rands< product lines !ill complement $unbeam<s current
product categories in the Appliances and 1ealth 0are di-isions. 8) $ince %+G of $ignature "rands< sales
are through /al.Mart K Cmart, it is alread sharing a large portion of $unbeam<s distribution channels,
!hich should simplif the integration of the t!o companies< respecti-e management information sstems.
%) The integration of one smaller compan into a larger organi;ation is usuall easier to achie-e than to
unite % different companies, some of !hich are of similar si;e (0oleman and $unbeam ha-e comparable
re-enues as !ell as number of emploees). :) The fact that $ignature "rands< product exclusi-el are sold
domesticall opens up the opportunit of gro!ing further b mar9eting Mr. 0offee and 1ealth 5 Meter
through $unbeam<s existing distribution channels abroad.
>n addition to completing the ac?uisition of $ignature "rands, $unbeam should continue pursuing a
stead rate of gro!th through its current strategies of hori;ontal integration globall and capturing mar9et
share from competitors through differentiation (discussed in the competiti-e strateg section).
>n terms of portfolio strateg, it is recommended that $unbeam 9eeps its current product
categories, since the are all profitable and related to $unbeam<s core business. To achie-e further gro!th,
thereb addressing 0ritical >ssue J8, it is also recommended to explore opportunities for forming a
strategic alliance !ith $un Microsstems to manufacture @smart,@ time.sa-ing appliances that !ill be in
high demand in the future b increasingl busier consumers. The strategic alliance !ill lessen $unbeam<s
re?uired in-estment to de-elop the ne! product line as !ell as mitigate some of the ris9 in-ol-ed. $ome
examples of the tpes of products produced b the 6oint -enture !ould be portable coffee mugs !ith
internet capabilities, mobile mini.refrigerators that can ad6usts the temperature according to the
en-ironment for long 6ournes in a car, and remote controls that heat up our home and turns on lights
before ou get home. 2i-en the coincidence of the t!o companies< similar names, the products should be
sold under a separate, et common, name, for example $mart$un or $unTech, to separate this cuttingedge
product line from $unbeam<s standard products. This -enture should gi-e e?ual attention to manufacturing
products using existing technolog and in-esting in the de-elopment of smart appliances applications for
the future.
Ce implementation issues to address are: (a) !here products should be manufactured (most li9el
at one of $unbeam<s existing plants), (b) !ho should design the products (i.e., should $un Microsstems
6ust suppl the technolog or should the also ha-e a sa in product designL), and (c) !here the should be
sold (most li9el -ia $unbeam<s distribution net!or9, but the >nternet might be an alternate -enue). >t !ill
also be important to include managers !ho ha-e both pac9aged goods and technolog industr experience
to head up the pro6ect team.
COMPET'T'1E STRATE52
/hile $unbeam has se-eral options to select from !hen formulating a competiti-e strateg for the
future, it is recommended that the compan adhere to its currentl successful broad differentiation strateg.
The compan should aim to differentiate itself as a customerresponsi-e home appliance plaer that ?uic9l
adapts to lifestle changes and ne! consumer needs. A broad differentiation strateg is not onl firml
aligned !ith the recommended gro!th strategies of industr ac?uisition, a strategic alliance producing a
line of products closel related in that it to $unbeam<s core business and continued globali;ationD it !ill also
best address 0ritical >ssue J8 allo!s for a higher profit margin than a price competition or best cost
pro-ider strateg.
$ome recommended implementation strategies to aid $unbeam in better defining its differentiation
points include redesigning pac9aging, in-esting in some brand building ad-ertising and emphasi;e its @lean
and responsi-e@ compan culture to customers as !ell as suppliers and distributors.
OT=ER STRATE5'ES
Most of the strategies proposed to address 0ritical >ssues J, and J8 !ill also appl to 0ritical >ssue
JF in the sense that the !ill pro-ide Al (unlap !ith a strategic direction !ith !hich to embar9 on his ne!
career as @long.term 0E5@ of $unbeam. 1o!e-er, it is recommended that $unbeam<s "oard of (irectors
ha-e a contingenc plan in place to ?uic9l replace (unlap should he pro-e unsuccessful in leading
$unbeam in the long run. E-en a loal assembl of board members and fello! executi-es !ill ha-e no
choice but to substitute the turnaround specialist (unlap !ith a dnamic industr expert, !ho !ill most
li9el be a superior choice for leading the compan gi-en the abo-e recommended concentration strategies
emphasi;ing hori;ontal integration.
A%%en.ix 1 6 9inancial Ratios Co!%a"ison Table
Sunbeam
,&&'
>ndustr
,&&'
Sunbeam
,&&B
>ndustr
,&&B
Sunbea
m ,&&:
>ndustr
,&&:
Sunbeam
,&&%
>ndustr
,&&%
P"ofitabilit#@
Net 7rofit
Margin
&.%G FG (F8.FG) F.:G :.+G 8.BG ,+.FG F.FG
R5E F+.:G :.%G (:'.=G) &.BG =.%G ,8.'G ,&.8G ,+.'G
3ee"a+e@
(ebt to e?uit +.B8 +.%, +.=& +.8' +.%= +.%F +.%& +.%%
3iAui.it#@
0urrent Ratio 8.8F ,.8: F.8+ ,.+: 8.,' ,.+: F.B8 ,.++
Actiit#@
Asset
Turno-er
,.+% +.&= +.&F ,.+F +.== +.&: +.&% ,.+&
Note: >ndustr a-erages !ere computed using financial figures from /hirlpool and "lac9 K (ec9er
obtained online from $tandard K 7oor<s $toc9 Reports.
A%%en.ix & 6 SBOT Table
St"en+t)s
M $unbeam products are mar9eted to a !ide -ariet of retailers
M $trong !arehousing and distribution capabilities including E(> and A>T sstems
M 5ster brand name is mar9et leader in se-eral 4atin.American countries
M $unbeam and 5ster brands both hold high mar9et shares
M Endorsement agreement negotiated !ith the American Medical Association
M 5rgani;ation is leaner and more efficient due to restructuring
M Re-enues, profitabilit, and R5e are up after cost.cuts
Bea:nesses
M $unbeam is highl reliant in 6udgments made b po!erful and autocratic 0E5, Al (unlap
M (unlap made ,=+.degree turn in strateg from do!nsi;ing and focusing on core business to proposing
concentric as !ell as unrelated ac?uisitions
M (unlap lac9s experience in managing a corporation in the long run
M 4aoffs and other drastic changes ma lead to emploee resentment and lo!er loalt to compan
M Negati-e publicit surrounding alliance !ith the AMA
M $toc9 price ma be o-er.-alued, lea-ing a false impression of the true -alue of the compan
M 1igh dependenc on large accounts !ith /al.Mart and Cmart
O%%o"tunities
M $!itch to FF+.-olt electrical products should increase sales in Asia region
M 1igher consumer demand for small, time.sa-ing appliances
M American appliance products ha-e increased appeal in the global mar9et
M Emergence of A smart appliance@ technologies
T)"eats
M 7roposed ac?uisitions !ould lea-e $unbeam highl le-eraged and strapped for cash
M The home appliance industr is a mature industr facing price pressures and a s?uee;e on profits
M Economic slo!do!n in "ra;il could dampen $outh American mar9et
M Asian financial crisis lo!ers demand in Asian region
A%%en.ix ( 6 Po"te"Cs /69o"ce Anal#sis ?etail
Internal Rivalry
>nternal ri-alr in the home appliance industr is )i+) due to the follo!ing conditions:
$ >ndustr gro!th rate is relati-el slo! at a pro6ected '.:G per ear (based on the follo!ing
estimated future sales figures pro-ided on page 8 of the case): ,&&':E'F.%&: billion,
,&&=:E''.&,: billion, F+++.F++F: E&&.&B+ billion
$ There is a large number of competitors 6oc9eing for mar9et share
$ 0ustomer s!itching costs are essentiall non.existent
$ 7roducts are -ie!ed as relati-el standardi;ed, and competitors rel on added @bells and
!histles@ to the products to differentiate themsel-es
Threat of Substitutes
$ince an increasing portion of industr products are geared to!ard consumers !ho are loo9ing for
con-enient, time.sa-ing items, industr firms !ould be relati-el -ulnerable in an economic recession.
"ecause these tpes of products aren<t necessities b an means, price sensiti-it is high and consumers !ill
s!itch to less expensi-e substitutes if their discretionar incomes decrease. $ome example of substitutes
!ould be to !ash dishes b hand instead of using a dish!asher, cut a bagel !ith a regular 9nife instead of a
bagel cutter, bu pre.ground coffee instead of buing a coffee grinder and s?uee;e oranges b hand to
ma9e 6uice instead of purchasing an electric 6uicer. 5-erall, the threat to industr profits from substitutes is
!o.e"ate to )i+)$
Bargaining Power of Buyers
"uer bargaining po!er is normall lo! for an industr !ith man distributed, indi-idual consumer
purchases of its products. 1o!e-er, retailers could e?uall be considered buers of the products sold b
firms in the home appliances industr. $ince a hugel successful discount retailer such as /al.Mart ha-e a
large sa in !hich products to carr, it follo!s that the ha-e significant bargaining po!er.
0orrespondingl, smaller retailers ha-e less of a choice and thereb less bargaining po!er to bring to the
table. Additionall, shifts in consumer preferences can largel impact industr firms, thus buers (if defined
as consumers) could collecti-el be considered po!erful. 5n the !hole, bargaining po!er of buers is a
!o.e"ate threat to the home appliances industr profitabilit.
Threat of New Entrants
The home appliances industr is relati-el unattracti-e to ne! entrants due to its high penetration and lo!
le-el of profitabilit. >n addition, there are relati-el high barriers to entr in the form of restricted access
to distribution channels and capital re?uirements in-ol-ed in product design, manufacturing and mar9eting.
>n summar, the o-erall threat to industr profitabilit b potential ne! entrants is lo!, for the follo!ing
reasons:
$ 4o! profit margins
$ 0ustomer s!itching costs are -er lo!
$ Existing firms ha-e mar9eting ad-antages through alread established brand names and
differentiated products
$ The li9elihood of an industr shoc9 or discontinuit is lo!
Bargaining Power of Suppliers
$ince industr firms tend to manufacture their o!n products, industr suppliers !ould be the pro-iders of
ra! materials. There is no indication of an difficulties in obtaining these ra! materialsD thus, bargaining
po!er of suppliers is estimated to be a lo> threat to industr profits.
Po"te"Cs / 9o"ce Anal#sis Su!!a"# Mo.el
Potential Ent"ants
(#nattracti-e industr)
5-erall Assessment:
4o! threat to industr
profitabilit.
'n.ust"# Co!%etito"s
"lac9 K (ec9er
Su%%lie"s Matag Bu#e"s
(Ra! materials) /hirlpool (0onsumers or retailers)
2eneral Electric
5-erall Assessment: Admiral 5-erall Assessment:
"argaining po!er of Magic 0hef "argaining po!er of
suppliers is a lo! threat Electrolux buers is a moderate
threat to industr profitabilit threat to industr profitabilit
5-erall Assessment:
>nternal ri-alr is a high
threat to industr profitabilit
Substitutes
/ashing dishes b hand,
buing pre.ground coffee
beans, s?uee;ing 6uice manuall
5-erall Assessment
The threat of substitutes is a
moderate to high threat to
industr profits.

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