TTI: Tooling up for Asia
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S UST 1015-046 KRISTIAAN HELSEN JEROEN VAN DEN BERG ARMAND GHIEUW TTI: Tooling up for Asia The way we differentiate ourselves from competitors is by developing breakthrough products that outperform our competition and that is why we are winning. […] We believe we will be the global leader in cordless [power tools] for years and decades to come. Joe Galli, CEO TTI1 On 19 August 2015, Techtronic Industries (TTI), a leading manufacturer of tools, outdoor products and vacuum cleaners, announced record revenues and profits for the first half of 2015. According to Joe Galli, the company CEO, TTI’s success could be attributed to the continuous roll-outs of innovative products; investments in productivity and automation; and highly targeted geographic expansion.2. Even though TTI’s star had been shining brightly its executives would not rest. They were always looking for methods to sustain the company’s growth in the global market. They predicted that in the next 10 years, Asia could become an important market for TTI. 3 Given the large number of possible entry markets, the company wanted to rank the Asian countries by level of market attractiveness. For those markets that seemed to offer the most attractive opportunity a range of other issues had to be addressed. What would the most suitable market entry strategy? A one size fits all approach was probably not workable. 1 Joe Galli, interview by Shery Ahn, Earnings Edge, Bloomberg, 20 August 2015. 2 Ibid. 3 Joe Galli, interview by author, Hong Kong, 11 August 2015. Jeroen van den Berg and Armand Ghieuw prepared this case under the supervision of Professor Kristiaan Helsen solely as a basis for class discussion. Cases are written in the past tense; this is not meant to imply that all practices organizations, people, places or facts mentioned in the case no longer occur, exist or apply. Cases are for educational use only and are not intended to serve as endorsements, sources of primary data, or illustration of effective or ineffective handling of a business situation. To order copies or request permission to reproduce materials write [email protected] or visit www.bm.ust.hk/cbcs. © 2015 by the Hong Kong University of Science and Technology. This publication may not be digitized, photocopied or otherwise reproduced, posted, or transmitted without the permission of the Hong Kong University of Science and Technology. Last edited:2 October 2015 HKUST Business School Thompson Center for Business Case Studies Techtronic Industries "The vision of the chairman was: If I want to be able to control my destiny I need brands. As an OEM (original equipment manufacturer), you are at the mercy of your customers’ strategy competing on price against all the other manufacturers." Stephan Pudwill, President of Strategic Planning, TTI4 Horst Julius Pudwill, the Chairman of TTI, co-founded the company with Roy Chung in Hong Kong back in 1985. H. Pudwill, who was an engineer turned entrepreneur, first came to Hong Kong from Germany in the mid-1970s as an executive with Volkswagen. 5 TTI began operating in a small industrial building as an original equipment manufacturer (OEM) supplier to companies like Sears, Hoover and Dirt Devil vacuum cleaners. The first manufacturing plant was based in Dongguan, China in the Pearl River delta just across the Hong Kong-Shenzhen border. To have better control of the company’s destiny, they were determined to go beyond operating as an OEM and decided to build their own house of brands. TTI was listed on the Hong Kong stock exchange in 1990. In 1999, the company acquired its first brand, VAX, a leading vacuum cleaner brand in the United Kingdom. It subsequently purchased a number of popular power and hand tool brands including Milwaukee, AEG, Ryobi, Homelite, Stiletto and HART. Other acquisitions included Hoover and Oreck floor care brands which were already household vacuum cleaner brands in the US consumer and commercial markets. [see Exhibit 1 - timeline]. By 2015, TTI had evolved into one of the largest companies of its kind with an annual turnover of USD4.7 billion in 2014 [see Exhibit 2 - TTI global footprint] and [Exhibit 3 – TTI financial statements]. Floor Care TTI's turnover could be roughly split up in two business lines: power equipment and floor care. Floor care included TTI's industrial and commercial vacuum cleaner products and their accessories. The brands TTI owned in floor care were the leading brands in their segments. Oreck was a professional brand serving the commercial market. Hoover and Vax were premium brands that were known for their upright vacuum cleaners, and Dirt Devil was a general consumer brand selling a range of cleaning solutions including hand held and upright vacuum cleaners [see Exhibit 4 - floor care] Power Equipment Power equipment, which included hand tools, power tools and lawn and garden tools, was TTI''s largest business segment. The segment generated roughly 75% of total revenues or USD3.6 billion [See Exhibit 5 - sales by segment]. Within the segment, power tools generated the bulk of the revenues, whereas TTI’s total hand tools sales were less than USD100m. Fiscal year 2014 was a banner year and there was growth in all business segments and geographic regions. North America grew by almost 9%, Europe by 11.3% and the rest of the world by 26.4%. [See Exhibit 6 6 - sales by region]. 4Denise Tsang, New products key to Techtronic’s future, says founder’s son, http://www.scmp.com/print/business/companies/article/1502386/new-products-key-techtronics-future-says-founders- son, accessed 8 July 2015. 5 http://www.forbes.com/profile/horst-julius-pudwill/, accessed 26 August 2015. 6 Euromonitor International , “Power Tools: Category Overview,” February 2015. 2 UST 1015-046 TTI: Tooling up for Asia HKUST Business School Thompson Center for Business Case Studies As a designer, manufacturer and marketer, TTI had a clear strategy for its power equipment segment and was focused on end-consumers, professional and industrial users in the home improvement, infrastructure and construction industries. It always looked to add to its brand portfolio. It also considered brand extensions that fulfilled new market niches and/or advanced its technological edge in the marketplace. Geographic expansion was also part of TTI’s long-term strategy to build its business outside the North American and European markets, the company’s traditional strongholds. The introduction of innovative new products remained the centerpiece of its business model. New products account for approximately one-third of our revenue annually. We keep investing in our brands. It is critical to keep on the forefront of technology. Stephan Pudwill, President of Strategic Planning, TTI7 TTI's strategy for long term success was centered on four pillars: powerful brands, innovative products, exceptional people and operational excellence. In 2009, the company combined its scattered China production plants and engineering centers into one big factory campus in Dongguan, China [See Exhibit 7- TTI Manufacturing & Innovation Center ] and [Exhibit 8 – TTI consolidated efficiency]. This move boosted productivity by 25% by putting design, production and engineering facilities under the same roof8.While rising costs and the appreciation of the Chinese yuan were driving some manufacturers out of China, TTI had so far defied the odds by automating its production wherever possible to achieve greater cost efficiencies and by focusing its revenues on traditional markets like North America and Europe. In addition to the China facility, TTI has a diversified manufacturing strategy with facilities in the US, Germany and the Czech Republic according to Stephan Pudwill9, TTI's president of strategic planning.10 In 2014, TTI spent US$118mln on research and development. A significant amount was spent on expanding the lithium cordless platform across all product segments, and enhancing the performance of battery and motor technologies. Effort was also devoted to developing completely new products or enhancing the safety and productivity of existing ones. We do R&D and product development in the US and in Europe, but we do the back end work in Asia. They [the US and European teams] can come up with the ideas in the markets and the teams in Asia can then work on the implementation of those designs together with the US, European and ROW teams. Stephan Pudwill, President of Strategic Planning, TTI11 To bring new products to the marketplace faster and to reduce product development lead- times, R&D activities were shared between its US and European offices and its China Dongguan Innovation Center. Typically the local teams identified the needs of the end-users they served. 7 Stephan Pudwill, interview by author, Hong Kong, 28 July 2015. 8 Anita Lam, Innovation spares Techtronic delta pain, http://www.scmp.com/print/business/companies/article/1278233/innovation-spares-techtronic-delta-pain, accessed 8 July 2015. 9 Stephan Horst Pudwill had been with TTI since 2004. Prior to joining TTI Stephan Pudwill held managerial positions at Daimler Chrysler AG. He was the son of Horst Julius Pudwill. 10 Stephan Pudwill, interview by author, Hong Kong, 28 July 2015. 11 Ibid. 3 UST 1015-046 TTI: Tooling up for Asia HKUST Business School Thompson Center for Business Case Studies The product development itself was a joint effort of the local R&D and the China R&D teams [see Exhibit 9 – TTI product development]. Examples of product innovation included the development of a power tool for an application that up till that point could only be done with hand tools; or the addition of a finger guard on a tape measure that eliminated the chance of the user’s fingers getting hurt when the tape retracted, thereby improving the user experience. S. Pudwill estimated that while 80% of products were global, 20% of products were market specific.