Issues and Problem Analysis

To proceed with a case analysis, several issues and problems that Mabe has encountered
should be addressed. The first issue that can be addressed is Mabe’s joint venture (JV) in Russia
which has come with some headaches. One of which is intense competition and its early
presence as a new entrant. Cultural differences and the immediate nature of being an early
entrant character has plunged Mabe into an interesting and complex quagmire. Mabe has no
manufacturing facilities and only has presence in the nation’s major metropolitan areas.

Fagor’s relationship with Mabe regarding the Russian market entry is another cause for
concern. It should be noted that both firms do not compete in their key markets and regions. This
relationship is controversial and comes with its own considerations. How do these two firms
collaborate regarding decision-making, cultural integration, learning, scope, measure
performance, and plan? These are all factors that should have been confidently analyzed. For
instance, learning would have been predominantly Mabe learning from Fagor as the firm had
more experience in Russia in terms of cultural/societal integration. The two firms went so far as
to amalgamate production lines in the Russian market. Another display of the partnership was
Fagor’s adoption of the Action Learning method, which was obtained from Mabe which was
adapted from the General Electric (GE) alliance.

Another issue is the possibility of Mabe selecting a different market or region to enter
other than Russia. In the case, BRIC countries were considered for potential entry and Mabe had
entered Brazil and was reluctant to enter India and China due to there plethora of complexities.
Brazil was entered alongside Latin America and proved to be a fruitful endeavor. Russian was
selected predominantly on the fact that Fagor would support them and vice versa. An
underestimated parameter that wasn’t taken into purposeful consideration was Samsung’s
existing manufacturing presence in Europe. This should have been a clear signal to Mabe
regarding its competitors intentions and potential advantages.

Mabe’s JV with GE was positive for both parties and efforts toward international
expansion proved to be successful. The Overconfidence effect propagated by Mabe executives
may appear to be a downfall for the organization. Mabe’s Latin American expansion and Russian
expansion proved to be different in many aspects. The Latin American expansion resulted in
great success and this initiative was aided by miniscule language barriers, cultural/societal
similarities, and congruent time zones. The Russian augmentation was too rapid and was not
extensively considered. Substantial language and cultural barriers could prove to be catastrophic
for Mabe combined with the outcomes of the 2007-2008 financial crisis which directly impacted
consumer spending. Thus, with these issues Mabe must learn how to expand to foreign markets
without a “cookie cutter” approach and must learn this rapidly in order to succeed with a
competitive advantage.

Internal Analysis
Financial Analysis
Figures obtained from Exhibits 4 and 5, Mabe’s Balance Sheet and Income Statement
2006-2008 (in 1000s USD), IVEY PUBLISHING. MABE: Learning to be a Multinational. 2013.
 2006 2007 2008

Current Assets 1,465,662 1,707,399 1,687,304

Current Liabilities 1,010,313 1,337,046 1,693,630

Total Revenue 3,156,260 3,788,084 3,404,803

Net Income 81,487 126,688 11,430

Current Ratio (C.A./C.L.) 1.45 1.28 0.99

Gross Profit Margin (Gross Profit/Rev) 23% 22.6% 27%

As depicted in the table above, Mabe’s current ratio and Net Income has been on a
downward trend leading up to 2008, which could signal a solvency issue if it worsens. Since
Mabe’s revenues have remained fairly consistent, it appears that Mabe could be taking on a lot of
debt, which is apparent from their acquisitions of DAKO in 2003, Camco in 2005, and Atlas in
2008 which could all lead to increased debt burdens on Mabe depending on how they financed
these acquisitions.

The Gross Profit Margin and Net Income during these years indicates that Mabe has
continuously generated high revenues, with an increasing gross profit margin. These signs
indicate that Mabe is operating efficiently, however the large variance in Net Income each year
can signal financial troubles. One of the main reasons for the large drop in 2008 Net Income can
be attributed to the global financial crisis of 2008 which lowered currency values and consumer
spending, causing Mabe to experience a $101,400 exchange loss.

Overall, the financial statements indicate that Mabe experienced growth during 2006 and
2007, however the financial crisis of 2008 had a substantial impact on Mabe’s growth. It can be
assumed that Mabe can still remain as a world leader in the appliance market as the world
recovers from the financial crisis, and Mabe’s JV into Russia must be heavily considered to
determine whether they can succeed.

VRIO Anaylsis
Resource: Valuable? Rare? Inimitable? Organized to
Exploit?

Strategy of Yes - Allows Yes - “By early Yes - Costly Yes - Mabe is
acquisitions them to enter new 2003, more than a strategy that taking advantage of
and JVs with markets and third of all gas requires heavy expanding their
other brands lower costs and electric capital and brands through
ranges and investment risk acquisitions and
refrigerators sold JVs.
in the U.S. had
been
 manufactured in
Mabe plants.”

R&D skills Yes - Allows Yes - Very few No - Yes - Mabe is

and Mabe to use their competitors can Competitors always developing
knowledge own R&D skills use extensive could replace their R&D to take
rather than knowledge as it R&D with advantage of new
relying on GE has been acquired outsourcing, technologies and
and others over time through but this would new markets to
experience and be quite costly enter, allowing
would be so likely them to sustain
costly/difficult to difficult to competitive
duplicate imitate advantage

Organizationa Yes - New No - Many Yes - Yes - Mabe exploits

l Culture and engineers were multinational Organizational their culture using
Action paired with Mabe firms such as culture takes a action learning
Learning and GE Mabe have their long time to teams to determine
Teams executives to own effective develop from which markets to
develop action organizational within the enter and they
learning plans to culture that they organization, so continue to use
enter new can exploit to it would be these teams of
markets, allowing their advantage difficult for engineers and
Mabe to form another firm to executives to
good values and duplicate sustain their
behaviour of quickly competitive
employees advantage

All in all, it can be understood that Mabe can sustain a competitive advantage over their
competitors because of their ability to take advantage of their unique resources and capabilities
in ways that other competitors may not be able to do. These resources and capabilities can
continue to be developed and exploited as Mabe expands into Russia and other countries.

External Analysis
PESTEL
Political: The Russian government is enhancing attractiveness of foreign investment by
offering $10 billion fund. The election of the new president in 2012 was the big concern for foreign
investors. Investors are waiting until Russian President Vladimir Putin completely assumes power
before making further investment decisions. Tremendous disturbance over business activity from
the Russian government negatively impacts the investors decisions. A reversal of privatization
stemming from the 1990s is unlikely to exist in Russia. Before entering the Russian market,
investors have to consider the difficult and complex political environment and prepare adequate
countermeasures for avoiding political risk.

Economical: Russia belongs to Brazil, Russia, India, and China (BRIC) group of countries
which are predicted to be the largest industrialized countries size by 2050. The greatest disposable
income level of Russia among BRIC countries contributes to a steep rise in consumption. Since
the financial crisis of 2007-2008 severely endangered the economy of Russia and it took a long
time to recover, Russia experienced a huge loss of private capital and a significant decline in profit
margin during the crisis. However, this situation had improved and returned back to the peak at
the end of 2011. Overall, the gross domestic product of the BRIC countries continues to increase.

Social: Understanding socio-cultural factors are important for competing in a market.

Russia are having two critical issue of increasing death of population and decreasing quality of
education, leading to a drop of consumption and an upward trend of unskilled employees. There
are many reasons that cause the death such as cardiovascular diseases, fatal injuries, accidents and
suicides. The exam and test of elementary and high-school education are even easier than in Turkey
which given that is the lowest ratings for education among the OECD’s’s list of countries. In spite
of high education level of population in Russia, the quality of education is not in line with the
diploma. In addition to that, the culture is a big challenge for Mabe. Latin countries’ culture is
highly different with Russia. It is common that Russians don’t believe in private foreign firms
because of the communist culture. The generation of late twenties are pursuing European style as
they are money-oriented. As a result, the sale of product of Mabe are likely to drop.

Technological: To compete successfully in the appliance industry, advanced technology

is the key factor. Russia is sustainably developing its technology. Innovation programs have been
successfully implemented through Skolkovo, a centre for innovation, several techno parks and
economic zones in Russia lately. This is an important factor driving the competitiveness in the
appliance industry.

Environmental: In order to achieve success, product and operational energy and water
efficiency/consumption must be improved. Mabe appears to possess this competitive advantage
because it is providing products which are environmentally friendly combined with high energy
efficiency. More cost savings could even be passed on to consumers by providing peak energy
capacities by region on the actual product.

Legal: Russia provides a legal concern for potential entrants and investors due to poor legal
safeguards and enforcement regimes and the high incidents of corruption and bribery. Corrupt law
enforcement and judicial system result in weak capital market institutions and poor protection of
private property rights. These create a hostile business environment for foreign investors and new
entrants.

Porter’s Five Forces Analysis

Competitive Rivalry: Mabe is relatively competitive in Latin America and holds a crucial
market share in this region. In North America, healthy competition exists within the market from
Whirlpool Corporation (domestic) and foreign appliance firms operating in the continent.
However, the rivalry for Mabe is quite high in Russia. Cost advantage can’t be achieved in Russia
unless Mabe manufactures domestically. It’s apparent that it would not suffice to just have a local
office in Russia. Indesit (Italy), Bosch-Siemens (Germany), Samsung (South Korea), and LG
(South Korea) are three main local manufacturers which are big industry players (competitors) in
Russia.
 Threat of Substitutes: The threat of substitute of refrigerators is an upward trend in Russia
as the lifestyle of the late generation of twenties is changing. People prefer a healthier life and
consuming more fresh food and meat. This results in a drop on sale of refrigerators. Other products
don’t have a significant threat of substitute. Additionally, online food delivery is beginning to
present moderate competition to homemade cooking as ordering takeout food is on the rise.
Conclusively, the threat of substitute is moderate for the appliance industry.

Threat of New Entrants: The small number of companies considering investment in

Russia. Many difficulties and problems need to be overcome and solved if the company wants to
enter the Russian market. It requires a large amount of time to understand the diverse culture and
complex issue in Russia. It was very costly for Mabe since Mabe spent around 4 years to
completely understand the culture of Russia before it had a strong management team. Moreover,
people in Russia are more willing to be employed as a vice president in a small company than a
simple manager in a big company. This is because they think it is cooler show business card with
a VP job title. The poor quality of education is also the reason that the company is not easy to find
good employees. Besides, the decreasing population of Russians generates unattractiveness of the
market. Finally, the weak legal institution, high levels of bureaucracy and corruption makes
investors unwilling to enter the market.

Bargaining Power of Customers: The bargaining power of buyers is high in crowded

cities, such as: Moscow and Saint Petersburg. There are different companies providing products
with a wide range of features and a better price in the appliance industry. Hence, buyers have many
choices to pick the most favourite one in those crowded cities. It is medium in the other cities of
Russia. The country was also one of the 20 least densely populated countries in the world and had
only five cities with the critical mass of people and income necessary to draw in global brands.
Therefore, there aren’t products available in these cities as many as those crowded cities.

Bargaining Power of Suppliers: Bargaining power of suppliers is moderate with Mabe.

The organization is currently working with suppliers in GE’s network and a partnership with
Spain’s Fagor. Mabe already has established its own R&D department which could foreshadow
potential vertical integration. Thus, reliance on US technology and technical advice may prove to
be imperative in the short term or long term if Mabe decides to leave its JV with GE, time can only
tell. Fagor is also not offering very unique value for the organization. The objective to work with
Fagor is to reduce foreign risk and leverage its competitor’s capabilities. Nonetheless, Mabe has
obtained sufficient experience and deep knowledge about the complex country that it may opt to
leave its JV with Fagor. An additional source of competition for Mabe could source from a cost
advantage by producing on Russian soil.

Recommendation and Implementation

Alternatives
As a result of this case analysis, we have come up with three possible alternatives for
Mabe to follow. First, continue the JV with Fagor in Russia. They could open a domestic
manufacturing facility in a large city, creating jobs for the young and motivated citizens. As
Russia is a BRIC country and considered the last frontier, there is a lot of potential and room for
growth in their economy. Secondly, Mabe can exit the JV and find a new market to enter. The
Russian population is consistently decreasing and Mabe could focus their efforts on another
BRIC country. There is only one bank which makes it hard to obtain a loan. Also, there is a
considerable amount of political interference in business creating a corrupt atmosphere. Lastly,
they could conduct more market research before deciding either way. More time allows Mabe to
get an even better understanding of the Russian market and available job force. They can wait to
see if GDP increases significantly in the coming years, as it is expected to, and let that be the
final influence.

All three alternatives were evaluated based on the alignment with company vision and
mission, financial implications and the level of risk.

Criteria Continue JV Exit JV Wait

Aligns with Company 1 3 3

Vision and Mission

Financial Implications 2 2 2

Level of Risk (High) 2 2 1

Total Points: 5 7 6

Recommendation
Based on the evaluation of alternatives, we suggest that Mabe continues with the JV in
Russia with Fagor. There were significant revenues before the 2008 financial crisis and Mabe
was not responsible for the market crashing. Mabe and Fagor can expect to recover from their
losses in the future. Even though there is a high barrier of entry, obtaining work visas and
dealing with low trust of outsiders, the young and motivated workforce will be able to carry the
companies and support their missions.

Mabe already has a lot invested in the Russian market and to exit the JV would be a
waste of time, money and resources. Finding a new market to enter would be difficult because
each country has government regulations, cultural norms and appliance companies established.
To increase the likelihood of success on this JV, Mabe should implement a few small changes.

Short Term: Contact Fagor to establish how they will build appliances locally while
following all reasonable Russian business practices. It is important to respect the host countries
norms when expanding internationally. This increases employee motivation and satisfaction
while decreasing employee turnover. AS this is a JV, decisions will need to be made and agreed
upon with Fagor to minimize the chance of misunderstandings and miscommunications.
 Long Term: Mabe should prioritize the products that have been doing well in the
targeted market. They should reduce the production of products that are not as popular as others.
As Vladimir Putin was recently re-elected, Mabe should connect with his office for additional
support as he promotes foreign investments. They could get a bursary or promotion from the
nation’s leader which would generate interest and loyalty.

Contingency Plan
As this alternative is moderately risky, Mabe should consider a plan of action to take if
things do not go as planned. If the market does not improve and continues to worsen in 2012, Mabe
should abandon their JV in Russia by 2014. In the worst-case scenario, Mabe could then look for
another market to enter. They should focus on BRIC countries but if there are no viable options
available, they can expand their horizons.