ceoforum.com.au: In a mature industry, the temptation for a CEO is to focus strongly on cost control. How do you avoid getting too preoccupied with costs, at the expense of market development?
O'Neill: With great difficulty! A mature industry is not the same as a stable industry. The fact is, our industry has undergone some major changes, many which, of course, are not highly visible to the customer. Over time, these changes required us to take strong action to sustain our business.
A big change has been the shift in power from suppliers to retailers. In the late eighties you had far more retailers than you do today, people like Brash's and so on. Now the sector is much more concentrated. Retailers are also far more profit-conscious - retail success stories like Harvey Norman have created new benchmarks for retail profitability. As a consequence, they drive a much harder bargain with suppliers.
On the supplier side, you have seen the reverse. Over the same period, the number of suppliers has gone from three to eight or more. Competition is far more intense, and margins slimmer.
Another change is the reduction in tariffs. We had this uninterrupted period during the eighties in which there was no industry consolidation, very high tariff barriers and a stable exchange rate for importing components or raw materials. When tariffs virtually disappeared in the mid-nineties, the dollar was more volatile and there was more import competition. Many of the industry players simply didn't cope - their culture had developed in the eighties and simply couldn't be changed fast enough. As a result, we now have no locally owned manufacturer.
ceoforum.com.au: 'Just a cost cutter' can almost become a term of abuse for senior managers. How do you see the exercise of cost management?
O'Neill: Reducing costs also requires creativity - it's not just the easy stuff such as reducing marketing and head count. It's also true that in our own business, the devaluation of the Australian dollar over the last two years meant we had to reduce marketing costs last year. Yet there is limit to how far you can do this. As we have come into this year, nothing has changed, the Aussie dollar is still down and not at a level where we would want it. Yet we have made the decision that we have to invest in the brand. So, we are investing in it strongly this year, and looking at other areas of the business where we can manage costs.
Our supply-chain costs, for instance, is an area in which we have been working hard. We will save around 20% of annualised costs by improving our processes in this area. We have increased electronic management of information by linking the source forwarder and warehousing provider, so that the information automatically flows between the organisations without the need for human intervention.
ceoforum.com.au: Sometimes the savings for these type of IT implementations can be elusive. How confident are you that the numbers stack up here?
O'Neill: I think it is correct to assume 'sometimes the savings are elusive' and indeed the benefits are difficult to quantify in dollars. The reality is that a well implemented IT strategy that has been developed to improve the flow of information for the application of business processes from systems to systems will reduce your people costs, with the additional benefit of improved quality and therefore customer satisfaction.
You can quantify the savings in people very easily, but what is difficult, is to value the improved quality of the process and the increased satisfaction levels of your customers.
With our implementation of electronic management between the company and the logistics provider, we put in a tracking device to measure inefficiency, so what we measure here is incorrect deliveries, damaged deliveries and return rates. These items cost money and so it is through managing this area we are able to improve the quality, customer satisfaction and identify the dollar saving from the process.
ceoforum.com.au: Elite sport is often described as 'a game of inches' (or centimetres!) The same could be said of mature industries, where you get fixed on incremental improvements (e.g. a bit of market share here, some costs saved there). As a CEO, how do you get out of this mindset occasionally to think more broadly about where the business is going?
O'Neill: That also is not easy. There are, of course, a lot of day-to-day pressures to deliver, but somehow you have to find time. In the last 12 months, for instance, I have spent about 15-20% of my time investigating how e-commerce will affect our industry, and our position within it. That has not been a regular day a week, but it has been a sustained commitment. Getting this time is always a struggle, but you have to be creative.
ceoforum.com.au: One marketing commonplace about mature markets is that you often need multiple brands/sub-brands to extract full value from each customer segment. Is this something that you have found?
O'Neill: Not really. We think you can maintain one brand across a range of product categories and prices. With refrigerators, for instance, we have got the top of the range stainless steel, side by side refrigerator selling for $5,000-$6,000, we have also got the single or studio apartment type refrigerator we sell for $699. What we have done is tried to ensure the quality is in the lower cost ones, but, some of the more unique features may be included to tantalise the consumer, to introduce them to an experience with the company. So that person buying the $699 fridge can say, 'That was a good experience.' When they go out to spend say, $2,000, they say 'well I had a lot of good experience with that company, I'll buy from them again'.
We also find we get brand synergies between commercial and consumer products. With top load washers, for instance, we make both consumer and commercial products, which go into coin operated laundries. When we talk about 'commercial quality' it says something to the consumer about the capability of the company.
ceoforum.com.au: What have you found to be the best way of attracting new customers?
O'Neill: Probably the single biggest factor has been the use of extended warranties. These have been very effective in encouraging customers to switch brands to Whirlpool.
I think different groups of customers see it as either a cost or quality benefit. Some see that, over the five or ten years they expect to have the product, so if they have a problem they won't need to pay for it. So for this group the warranty is a cost benefit. There are other groups who say 'well, this manufacturer would not have offered this if they did not have a lot of confidence in their product, so it must be quality'. For this latter group, it becomes almost a guarantee of product quality.
ceoforum.com.au: What about product innovation? Many say companies win in mature markets by streamlining what they do around cost and process more than through product development. Are there any product innovations that you think have been decisive in gaining new customers?
O'Neill: Yes, I feel product innovation is important in gaining new customers, but so is product stewardship. Over the past decade I have seen a substantial shift in consumer expectations in seeking product innovation to justify upgrading of their current appliances. In laundry that has been very much the introduction of electronics and in microwave ovens, unique cooking features such as crisp grill. But then there is the product stewardship factor where consumers are now seeking brands that stand for something. In Whirlpool's case this was energy efficiency and the stewardship role that we play in driving the industry to be concerned about the environment.
ceoforum.com.au: Another piece of conventional wisdom about mature markets is that, as time goes by, you end up competing more and more on price. Do you think that price has greater importance in the consumer's purchasing decision now than it did when you entered the market in 1990?
O'Neill: Price is not in the consumer's mind when they go to purchase, it is put there by the sales person. What we are seeing are consumers who are prepared to pay a premium for a better featured product more often as they perceive this as adding to their quality of life. Consumers are busy today and don't have a lot of time to shop around and it is not until they need to replace or purchase a product that they become aware of the advertising taking place around them.
ceoforum.com.au: A typical defence against purely price-based competition in consumer goods is branding. What do you think worked best (and what didn't work) in building your brand?
O'Neill: When Whirlpool re-entered the Australian marketplace in 1990 after an absence of ten years of communicating with consumers, there was substantial equity still left in the slogan 'Guess Whose Mum's Got A Whirlpool'.
Up until 1997 we continued to use the slogan, although dropping the reference to 'Mum' for obvious reasons and placing a more modern face to the Whirlpool story. It was this strategy that worked best for us and at the same time worked against us. We were unable to bridge the gap in the consumer's mind between the Whirlpool of the seventies and how it would be a brand for the future, and so the image, whilst it gave people comfort about strength and reliability, it equally gave them messages of being'old-fashioned'.
Our biggest mistake in branding probably was allowing 'European' brands, to position themselves in the consumer's mind as 'quality'. In doing this they piggy-backed off other perceptions about 'European quality', such as relate to cars like BMW. The trouble with this is that the perception does not really discriminate - the Europeans also make some pretty awful cars as well.
Even the real estate industry has picked up on this - in searching for market differentiators, they are marketing houses with 'European appliances'! We are addressing this perception issue in our marketing today, but, with 20/20 hindsight, it is an issue on which we should have moved much faster on earlier. Once a company has captured the quality high ground in the customer's mind, it takes time and money to claw that back.
ceoforum.com.au: Another differentiator for mature companies can be the management team. Recently you brought in an external facilitator to closely work with you and your team. What were the objectives and outcomes of that exercise?
O'Neill: Having started the company from scratch in 1990, a considerable element of my style is in the business. Indeed, it was often referred to as 'Mike's business'. Therefore, people would all too often defer to me for a decision to be made.
The objective of bringing in the facilitator was to have the executive and management teams take greater ownership and accountability in preparation for my impending departure, although this was not known by the audience.
The outcome of this was a substantial shift in people taking that ownership, which enabled the announcement to take place in June of this year in the full knowledge that the executive team had ownership for the strategy moving forward.
ceoforum.com.au: In a mature industry, you often have the option of recruiting executives with substantial industry knowledge and experience. How important to you see industry experience being for your own role and that of other senior managers in your organisation?
O'Neill: I think it is vital. In my case, I knew what the industry dynamics were, I knew the people in it, and established relationships. I could then look at our go-to-market strategies and see how best that suited the practicalities of the industry.
Where we didn't have that background, things are harder. Our entry into building industry, for instance, has been a very, very slow process. We didn't have the key relationships, and we didn't fully understand the dynamics of that industry. We are now getting on top and in the past few months have been making some breakthroughs, but it has taken us quite a while.
We have used people outside the industry with success, particularly in functionally specialised areas like finance and HR. The one we have never achieved is when you attract somebody new into marketing. They can't deal with the change in dynamics, the difference between fast moving consumer goods in a supermarket versus an appliance retail store. With FMCG the whole marketing idea is about speed: get it on the shelf, get the consumer in with a six week advertising campaign, and then maybe within six months the product is dead. In our industry, its more of a slow burn. Perhaps it is six months to get it onto the retail floor, it is another six months to get it established, then you have a couple of years of sales. The dynamics are different.
Not all suppliers understand our industry's needs. In researching B2B, for instance, I've talked with an exhaustive list of suppliers. Many of them are simply selling technology, not really addressing problems, or even attempting to understand. The less impressive suppliers want to tell you how great their technology is, the smarter ones get you to educate them about the problems. Our industry is quite particular, and some suppliers struggle to understand it. It's not suited to everybody, so industry understanding can be decisive.
ceoforum.com.au: It is often said that the pressure on CEOs to deliver is greater than it was even five years ago. Is this something you have experienced, and, if so, what do you put this down to?
O'Neill: I think a lot of it comes down to the fact that, because of information technology, organisations, such as country operations for MNCs, are a lot more transparent than they used to be. Just as we know a lot more about our cost and profit drivers of our own business, so too, does our parent company know about our performance. Our financials are consolidated every month in Dublin. Our parent company can see what our payroll costs were, what our sales are, and how we measure up against the total global organisation. The information to do this is both much more detailed and more current than it was five years ago.
ceoforum.com.au: Do you think that investors are realistic in their expectations about mature industries? Did all the 'new economy, old economy' talk create pressures on CEOs of established companies?
O'Neill: The simple answers here are 'yes' and 'yes'. I feel the majority of investors are realistic about expectations in setting a benchmark for returns that they require on investments made in shareholdings. I sense though that the hype that experts put around new economy and old economy debate confused many investors and, in so doing, placed unreasonable pressures on CEOs to adopt technology and strategies that seemed more akin to the hype.
The banking industry is a great example to focus on in terms of struggling with the new and old economies. On the one hand our bankers are being told that they are to adopt new technology to take costs out of the business, and on the other the same people are decrying the loss of service. So the pressure is now to establish the balance that is required for a business to meet the mind and mood of the investor and consumer and for the CEO to be outspoken demonstrating leadership to both groups of constituents.
