Haier Porters Five Forces and BCG Analysis 2018
The home appliance and global electronics market is profitable but very competitive with sizeable major players such LG, Haier, Samsung, Whirlpool, Midea, all locked in a competitive battle producing a variety of goods like refrigerators, televisions, air conditioners, etc. Haier is the world’s largest producer of home appliances and consumer electronics with a global market share of over 10% in the home appliance market (Business Insider 2018).
1.1 Bargaining power of buyers
The ability of Haier’s consumers to drive down the prices of its household appliances and electronics depends on two factors; their price sensitivity and bargaining power (Grant 2010). Some of the main determining factors that determine consumer price sensitivity are brand differentiation, competition, and importance of the product being bought to the consumer. Bargaining power on the other hand is determined by factors such as cost and ease of switching to Haier’s rival competitors, as well as buyer information regarding prices of all appliance makers.
Hence when you put all these factors into consideration, one observes that Haier’s customers have substantial bargaining power due to a) high price sensitivity arising from ability to buy from Haier rivals’ offers and b) also because the cost of switching to Haier’s rival competitors is relatively low given the commoditization and availability of similar products like refrigerators, televisions, air conditioners, microwaves etc. from rival companies like Electrolux, Whirlpool offering at similar prices.
However, while buyer power is considerable, it is not exorbitantly high because it’s constrained by customer loyalty to the Haier brand arising from differentiation efforts as well as the importance of appliance and electronic products to consumers, which has enabled Haier maintain sales and induce more customers (Business Wire 2018).
1.2 Bargaining power of suppliers
Suppliers to Haier will be composed mainly of manufacturers that produce the key inputs that Haier uses to make its own home appliances and electronics. Because Haier manufactures a variety of goods like refrigerators, televisions, air conditioners and a host of numerous home appliances and consumer electronics with a global market share of over 10% in the home appliance market (Business Insider 2018), it has the economies of scale and capacity to drive down input prices from its suppliers who may be forced to lower their prices and bargaining power to keep supplying the Chinese company.
1.3 Threat of entry/barriers to entry
Whenever an industry starts to earn super profits or even above average profits, it will attract new entrants and firms looking to diversify and earn some of the high profits, creating more competition which lowers profits for all players. But the ease with which they can do this will be determined by barriers to entry, and more critically the height of those barriers which are normally created by the incumbent firms as deterrence to new firms (Grant 2010). In other words, the key to high or low threat of entry is whether Haier and other rival firms possess or have created barriers that can act as disadvantages to new entrants.
According to Grant (2010), the most common barriers across various industries are; high capital requirements, economies of scale, unit cost advantages, product differentiation (which creates brand loyalty and recognition), retaliation, access to distribution channels and government legislation. If one is to apply these conditions to Haier and the electronics and home appliance industry, the conclusion is Haier faces low threat of entry because any new entrant would require large capital investments and resources to establish a new electronics and home appliance company. It would also need time to accumulate enough economies of scale to be able to compete with existing companies who have attained unit cost advantages, access to global distribution channels as well as brand differentiation of Haier which means customers are more inclined to purchase from Haier and other established brands like LG, or Samsung due to loyalty (Business Wire 2018).
Haier also has the added advantage of favorable Chinese government legislation as detailed in the National Scientific and Technological Innovation Plan, which aims to help Chinese tech firms to become global powerhouse multinationals by providing supportive infrastructure to aid their global expansion ambitions (Yue 2016; Ho 2017). Few private business entrants elsewhere in the world have government backing that many Chinese firms enjoy. Nevertheless, as Grant (2010) notes, the effectiveness of barriers to entry also depend on the resources and capabilities that a potential new entrant possesses as Microsoft and Apple found out when their indomitable dominance of the web browser and operating system markets were easily challenged by the vast resources and capabilities of Google when it launched chrome browser and Android OS respectively.
1.4 Competition between rivals
According to Grant (2010), the intensity of competition between rivals is a consequence of a number of factors including levels of differentiation between firms or their products, cost conditions, exit barriers and firm concentration ratio. Most industries are dominated by anything from one firm (monopoly), two firms (duopoly), four firms (oligopoly) or an absence of one dominant player as seen in the UK clothing industry and its high level of fragmentation. Haier is among 4-5 dominant players in the electronics and home appliances market with competition coming from Whirlpool, LG, Siemens, Electrolux, and Samsung, many of whom manufacture similar products to Haier like televisions, washing machines, microwaves, refrigerators, etc. This has led to price wars, intense advertisements and product innovations (Buss 2018).
While Haier and many of its rivals have achieved considerable brand differentiation, many of the products they produce including refrigerators, air conditioners, televisions, washing machines, or microwaves are these days regarded as commodity products, meaning consumers may perceive little difference between rival offerings other than price. But critically for Haier, many consumer electronic goods and home appliances are commoditized because in a way that they have become just like daily purchases in a supermarket with little perceived value difference between rival products. For instance, most people would be hard pressed to differentiate between a Whirlpool, LG, Samsung or Haier refrigerator in a supermarket other than price.
Commoditization shifts competition away from value, differentiation, innovation towards price, where profitability is continually eroded by shorter product life cycles, and mass production by many brands all competition for scale (Wever et al 2008). This has led to the phenomenon of pile it high, sell it cheap box retailers such as Walmart or Costco who will stock all Haier products as well as rival offers with little price differentials between them. The result is a highly competitive industry driven by cost and volume production.
1.5 Competition from substitutes
Substitutes don’t necessarily mean the products of direct rivals but rather similar products whose performance can act as substitutes. For instance, cars are substitutes for trains while fans are substitutes for air conditioners. In Haier’s case, substitutes for home appliances and consumer electronic goods such as refrigerators, washing machines, air conditioners, or smartphones are few. For example, substitutes for Haier’s air conditioners may be fans used in offices for aeration but which are not as effective. In addition, Haier smartphones have few substitutes such as satellite phones, or land lines, considered old fashioned and incurring high operation costs. Also, satellite phones suffer more interference compared to smartphones (Ashish 2018).
2.0 Haier BCG Matrix Analysis 2018
The BCG matrix can be used to analyze the different products manufactured and marketed by Haier in terms of their market share, revenue and potential growth that will determine Haier’s investment patterns. Below is a BCG analysis of Haier electronics and home appliances;
2.1 Cash cows
The Haier refrigerator market has matured over the years having many competitors like LG, Whirlpool, Samsung, extra selling their own brands of refrigerators. Refrigerators have been operating as a cash cow for Haier selling in over 100 countries across the globe. Haier’s refrigerators have a 21.2% market share of the global refrigerator market with a revenue of 47.11 billion Yuan in 2017 (Statista 2018). The different Haier brands like GE appliances, Casarte, extra market its refrigerators in various regions enabling Haier to get significant amounts of revenue from its products. However, the refrigeration industry is mature therefore Haier needs to invest little effort to keep its sales high as the unit as its market share grew by 4.4% to 21.2% in 2017 (4-Traders.com 2018).
The deep Freezers unit is considered a star because it has the highest market share of 24.1% compared to other Haier products (4-Traders.com 2018) and given the increasing demand of deep freezers that is projected to have a market worth US $18,300.6 million by 2025, the freezer unit is more likely to increase its current market share and create a steady source of revenue for Haier. Even though Haier faces competition from other brands like Whirlpool, Midea, LG, the growing freezer market creates more opportunities to grasp a larger market share. Therefore, it is binding for Haier to invest heavily in freezers to attain an increased revenue (Globe News Wire 2018).
2.3 Question marks
Haier phones are categorized as question marks because they have an uncertain viewpoint on future development. Given the very competitive and fast-growing smartphone market led by tech-giants Apple and Samsung, Haier phones have failed to gain a significant market share in the low-end market due to intense competition. Even though Haier’s smartphones managed to obtain generous sales of 1.3 million worldwide, the brand has not gained popularity like refrigerators (Statista 2018). Therefore, given the growing smartphone market, Haier can invest heavily in smartphones to gain a significant market share (Gibbs 2017).
Haier’s Boilers and small house-hold appliances are considered dogs because they have not brought in any significant revenue for Haier since 2014 and seem to have a dubious view on future growth yet they continue to have huge investments (Statista 2017). Given their mature markets, sales of boilers have decreased due to market saturation. However, the global industrial boiler market is expected to grow by 4.58% between 2018 and 2023 due to increasing industrial manufacturing activities in developing and emerging markets hence Haier can invest in production of industrial boilers (Research and Markets 2018).
The above competition analysis and BCG matrix for Haier shows different challenges, market opportunities and threats that have affected Haier group. Haier has several growth opportunities such as investing in smart home solutions, smartphones, and industrial boilers due increased industrialization in emerging markets. However, Haier faces a major threat of competitors like Whirlpool, LG, Samsung, who manufacture similar products. In addition, Haier faces a threat of high buyer bargaining power thus a customer can easily switch products.
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Business Wire (2018) “Chinese Brand Haier Secures Extraordinary Customer Loyalty in France: Three Generations of a Family in Saint-Cyr, Paris use Haier refrigerators” Business Wire [Online] at https://www.businesswire.com/news/home/20180423005063/en/Chinese-Brand-Haier-Secures-Extraordinary-Customer-Loyalty [Accessed on 29th May 2018].
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