MBA 2019-2021 University Business School, Panjab University Mrinal Chandra (13)
Strategic Management – MBA (7101)
Submitted to: JRF Ms. Ankita Bhardwaj
Questions:
1. What are Electrolux’s reasons for direct investment?
a. Sweden being a small nation has a proportionately small
population. Therefore, it lacks the requisite demand necessary to
allow Electrolux to expand its operations purely for domestic
markets.
b. Domestic markets cannot be relied upon to implement economies
of scale.
c. Additional sales to aid the acquisition of more and more product
lines in order to complement existing in-house products for the
long run i.e. filling the gaps in its own product lines through
acquisitions.
d. Even if foreign sales did not materialise, it would help to set up
foreign production as international operations can reduce labour,
compliance and production costs.
e. It would also help to spread out admin, R&D costs to avoid too
much burden.
f. Occasionally, the acquisition of unintended product lines (chain
saws, Husqvarna), due to the purchase of supplementary product
lines in addition to those which were target led to reconciliation
and expansion into new territories, often leading to establishment
of new categories. This happened only when extraneous or
unfamiliar product lines could not be disposed of.
2. How has Electrolux’s strategy changed over time? How has this affected
its direct investment activities?
a. Earlier, Electrolux engaged in horizontal expansion i.e. grew by
acquiring a similar company in their industry at the same point of
the supply chain which is evident by its purchase of firms whose
product lines differed from its own, thereby, filling the gaps in its
catalogues.
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MBA 2019-2021 University Business School, Panjab University Mrinal Chandra (13)
b. As time passed, they moved on to vertical expansion (Granges) i.e.
expanded by acquiring another company that operates before or
after them in the supply chain. Granges was involved in metal
fabrication/production and was acquired to be integrated with
Electrolux’s production of appliances.
c. In the beginning (1960s), the company Electrolux aimed at
increasing market share through acquisitions; it was done to revive
the company and extend its product portfolio which until then,
consisted of and depended entirely on vacuum cleaners.
d. Later, it started expanding vertically, in a bid to outsource less and
develop competency in those segments of the supply chain
preceding the stage where its expertise existed already.
e. The direct investment activities promptly reduced due to change in
the expansion strategy.
f. The borrowing to buy Granges, combined with the worldwide
economic downturn and the impact of rising interest rates on
swollen inventories, pushed Electrolux into a sobering three-year
decline in profits as a percentage of sales.
g. Asset sales and restructuring paid off in a sharp rebound that began
in 1983.
3. What do you see as the main advantages and possible problems of
expanding internationally primarily through acquisitions as opposed to
building one’s own facilities?
a. Advantages:
i. Speed: It provides immediate stimulus as there are no lead
times to be tolerated as is the case with the development of
in-house strategies.
ii. Increase in market share is immediate.
iii. Existing entry barriers can be overcome as the entity being
acquired can help navigate through compliance and
statutory requirements.
iv. Financial gains can be realized by stripping the assets of the
acquired firm which already has a low share value.
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MBA 2019-2021 University Business School, Panjab University Mrinal Chandra (13)
v. Resources or core competencies which conventionally take
years to develop can be a strong motive to engage in
acquisitions
b. Disadvantages:
i. The new technology and work culture can lead to integration
issues due to differences in processes and personnel
mindset.
ii. Too much focus on external purchase can deter internal R&D.
iii. Sometimes, the investment may not pay off or be too
difficult to ensure the seamless realization of financial gains
as in the case of hostile takeovers. Here a premium paid for
acquisitions may not translate into expected profits.
iv. Unintended addition of unrelated, diverse product lines
produces additional burden of the disposal of extraneous or
unwanted business units.
v. The objectives of the acquirer may not be in synergy with
those of the acquired entity.
vi. The business unit obtained may be poorly matched with the
existing units resulting in more and more challenges and
decline in productivity.
vii. Brand damage might be an outcome in case the brand is
extended in a bid to strengthen the credibility of unrelated
products and conflicting functionalities.
