Cervus Case

Introduction

MABE is widely known as one of the most renowned household appliance manufacturers in the world.  The company was founded in 1946 by the Mabardi and Berrando families, with its headquarters based out of Mexico.  The company started off as a kitchen cabinets producer but soon made the transition into household appliances.  MABE’s product line includes gas and electric stoves, refrigerators, and freezer units which it began exporting to Central American/Caribbean Companies.  MABE’s early success in Central America and the Caribbean earned it the attention of some of the appliance industry’s biggest players and, in 1987, MABE formed a joint venture with General Electric to supply the United States market with gas stoves.  MABE continued to expand and soon found itself dominating the household appliance market in almost all the Latin American countries in addition to starting operations in Canada.  With MABE now possessing a presence in virtually the entire western hemisphere, the question arose: Where do we go next?  MABE’s management team identified the “BRIC” countries as being top prospects in their search for expansion.  Brazil, Russia, India, and China make up the BRIC group and all are considered the next booming markets of the world.  In 2008 MABE chose to enter the Russian through a Joint Venture with the Spanish company Fagor.  The Russian market is unlike any MABE has competed in before and offers unique problems the company must tackle.  Today we will analyze MABE’s decision to enter the Russian market and whether the company should continue to develop it or move on.  To better understand MABE and its competitive environment start by conducting both an internal and external analysis of the company and its industry.  We will then examine MABE’s financials to determine if the company is financially healthy.  After obtaining a better understanding of the company and its operation, we will frame the Russian problem, conduct analysis, and finally come to a recommendation as to how the company should proceed.

Company Analysis

MABE’s basic corporate level strategy is to serve the global household appliance market with products such as gas/electric stoves, refrigerators, and freezer units.  The company tends to offer middle-high end products that differentiate themselves by having superior quality when compared to their competitors.  MABE relies on mostly joint ventures and acquisitions to grow its business.  Their deals with companies including General Electric, Easy, Durex, Dako, and Patrick have allowed them to expand into different countries without the intense capital and time investment incurred with greenfield expansion.

Conducting a 5 forces analysis can help us better understand the competitive environment MABE operates in.  The current rivalry within the household appliance industry is very intense.  There are less than 10 major players all competing globally for a share of the household appliance market.  With a global focus, companies virtually eat up each other’s profits as more migrate towards potential opportunity.  An example from the case is that the double profit margins forecasted for the Russian market disappeared as more firms entered the country.  Manufacturing these durable goods is also very capital intensive considering the manufacturing operations required to create any kind of economy of scale.  This means that exiting the market will be difficult for competitors and unused capacity is likely.  Buyers typically have moderate power in this industry as there are virtually no switching costs, but products are differentiated.  The suppliers to the household appliance industry will typically have low power.  Many of the inputs are manufactured in countries such as China to take advantage of low costs.  This manufacturing most likely takes place under contract protected terms favorable to the appliance company considering the shear size of these companies.  The size of appliance manufacturers also would imply that they make up a large portion of the component manufacturer’s business, further enhancing their power.  Also, while the inputs would be important to the appliance manufacturers, the suppliers pose almost no threat of forward integration due to patent protections.  Threat of new entrants is low due to the presence of high capital barriers, established economies of scale and R&D, and existing patents.  Threat of substitute products is high considering the options available at the hands of consumers and the low switching costs.  With all this considered, an existing competitor in this industry would find it attractive pending they are well established.