FEBRUARY 27, 2006

GLOBAL BUSINESS

Electrolux Cleans Up

Boosting R&D and getting all units on the same page delivers a rebound

You will never meet Catherine, Anna, Maria, or Monica. But the future success of Sweden's Electrolux depends on what these four women think. Catherine, for instance, a type A career woman who is a perfectionist at home, loves the idea of simply sliding her laundry basket into a washing machine, instead of having to lift the clothes from the basket and into the washer. That product idea has been moved on to the fast track for consideration.

So just who are Catherine and the other women? Well, they don't actually exist. They are composites based on in-depth interviews with some 160,000 consumers from around the globe. To divine (learn, understand, figure out) the needs of these mythical customers, 53 Electrolux employees, including designers, engineers, and marketers hailing from various divisions, gathered in Stockholm at the end of November for a weeklong brainstorming session. The Catherine team began by ripping photographs out of a pile of magazines and sticking them onto poster boards. Next to a picture of a woman wearing a sharply tailored suit, they scribbled some of Catherine's attributes: driven, busy, and a bit overwhelmed.

With the help of these characters, Electrolux designers and engineers are searching for the insights they'll need to dream up the next batch of hot products. It's a new way of doing things for Electrolux, but then again, a lot is new at the company. When Chief Executive Hans Straberg took the helm in 2002, the world's No. 2 maker of home appliances after Whirlpool Corp. faced spiraling costs while its middle-market products were gradually losing out to cheaper goods from Asia and Eastern Europe. Competition in the U.S., where Electrolux gets 40% of its sales, was ferocious. The company's stock was treading water.

Straberg had no choice but to do something radical. He began shuttering plants in Western Europe and the U.S. and shifting work to lower-cost locales in Asia and Eastern Europe. He also is spinning off the outdoor products division. But this is no ordinary corporate makeover. Straberg is also breaking down barriers between departments and forcing his designers, engineers, and marketers to work together to come up with new products. To speed the transition, he has recruited executives from companies with strong track records in innovation, including Procter & Gamble and PepsiCo.

At the Stockholm brainstorming session, for example, the group leader, Kim Scott, is a recent P&G defector. She urges everyone "to think of yourselves as Catherine." The room buzzes with discussion. Ideas are refined, sketches drawn up. The group settles on three concepts: Breeze, a clothes steamer that also removes stains; an Ironing Center, similar to a pants press but for shirts; and Ease, the washing machine that holds a laundry basket inside its drum.

Half the group races off to the machine shop to turn out a prototype for Breeze, while the rest stay upstairs to bang out a marketing plan. Over the next hour, designer Lennart Johansson

carves and sandpapers a block of peach-colored polyurethane until a contraption that resembles a cross between an electric screwdriver and a handheld vacuum begins to emerge. The designers in the group want the Breeze to be smaller, but engineer Giuseppe Frucco points out that would leave too little space for a charging station for the 1,500 watt unit.

For company veterans like Frucco, who works at Electrolux' fabric care research and development center in Porcia, Italy, this dynamic groupthink is a refreshing change: "We never used to create new products together," he says. "The designers would come up with something and then tell us to build it." The new way saves time and money by avoiding the technical glitches that crop up as a new design moves from the drafting table to the factory floor.

To support the innovation drive, Straberg has bumped up spending on R&D from 0.8% of sales to 1.2% and is aiming for 2% eventually. What he's gunning for are products that consumers will gladly pay a premium for: Gadgets with drop-dead good looks and clever features that ordinary people can understand without having to pore through a thick users' manual. "Consumers are prepared to pay for good design and good performance," he says.

Electrolux isn't the only appliance maker on an innovation kick. In 1999, Whirlpool Corp. launched a program that allows all of its 68,000 employees to contribute design ideas, yielding a flood of new products.

EYE-CATCHING DESIGN But few have pulled off the range of hot new offerings that Electrolux has. One clear hit is a cordless stick and hand vacuum, called Pronto in the U.S. Available in an array of metallic hues with a rounded, ergonomic design, this is the Cinderella of vacuums. Too attractive to be locked up in the broom closet, it calls out to be displayed in your kitchen. In Europe, it now commands 50% of the market for stick vacs, a coup for a product with fewer than two years on the market. The Pronto is cleaning up in the U.S., too. Stacy Silk, a buyer at retail chain Best Buy Co., says it is one of her hottest sellers, even though it retails for around $100, double the price of comparable models. "The biggest thing is the aesthetics," Silk says. "That gets people to walk over and look."

Straberg, who spent decades running Electrolux operations in the U.S., is crafting these new products even while moving away from many traditional tools of customer research. The company relies less heavily on focus groups, and now prefers to interview people in their homes where they can be videotaped pushing a vacuum or shoving laundry into the washer. "Consumers think they know what they want, but they often have trouble articulating it," says Henrik Otto, senior vice-president for global design, whom Straberg lured away from carmaker Volvo. "But when we watch them, we can ask, 'why do you do that?' We can change the product and solve their problems."

The new approach is starting to yield results. After dropping for two straight years, annual sales rose 8%, to $16.5 billion, in 2005. Operating income jumped 42% in the fourth quarter, compared with the year before, though it rose by less than 2%, to $881 million, for the year as a whole. Johan Hjertonsson, director of the consumer innovation program, says product launches have almost doubled in quantity. And the number of launches that result in outsized unit sales is now running at 50% of all introductions, from around 25% previously. The stock? Up a third in the last year. Catherine would be pleased.

By Ariane Sains and Stanley Reed, with Michael Arndt in Chicago

Questions to be discussed in class next week:

1. What type of research does Electrolux prefer? Why? Why does it not use other types of marketing research? What does it learn from this type of research?

2. Pick one of the new products they envision for “Catherine” (Breeze, Ironing Center, or Ease) Describe the 3 layers of your product.

3. List the activities that Electrolux followed in the New Product Development process.

4. Which category of adopters should they aim the product to? Describe demographically and psychographically what this chosen category would “look” like.

5. Describe the activities you would recommend to Electrolux to move the new product through the six stages of adoption.

6. What type of new product is this product?

Vocabulary – Find the definition for the following words:

1. fast track2. insights3. took the helm4. treading water5. radical6. shuttering7. spinning off8. corporate makeover9. track records

10. defector1. prototype2. bang out3. contraption4. groupthink5. glitches6. gunning for7. pay a premium8. coup9. product launches