Hans Stråberg took the reins of Electrolux in 2002, just in time to face the daunting challenge of a rapidly polarizing appliance market. Low-cost Asian players, such as Haier,¹ were applying pressure at the low end of the market, while premium competitors like Bosch, Sub-Zero, and Viking were continuing to grow at the expense of middle-of-the-road brands.² The result wasn’t a crisis for Electrolux but rather a slow erosion in performance, with EBITDA (earnings before interest, taxes, depreciation, and amortization) margins dropping steadily from 9 percent in 2002 to around 8 percent in 2005.³

The company’s response has extended far beyond cost cutting. To be sure, Stråberg has guided Electrolux through a major restructuring that includes importing more parts from Asia and shifting assembly operations from about 20 sites in Western Europe and the United States to lower-cost countries such as Hungary, Mexico, Poland, Russia, and Thailand. At the same time, he has pushed the company to sharpen its value proposition at both the high and low ends of the market by taking a fresh look at what consumers really want and by creating new products that are specifically aimed at the purchasing patterns and lifestyles of more fine-grained customer segments.

In this interview, Stråberg describes both the nature of market polarization in the appliance sector and the high-wire act Electrolux is now performing. By rethinking customer wants and needs, refocusing the brand portfolio,⁴ sorting out the challenges inherent in selling high- and low-end products in the same channel, and launching innovation efforts that have won public plaudits,⁵ Electrolux has started to compete more effectively across the entire market. Yet even as sales, operating income, margins, and the company’s stock price rise, Stråberg is well aware that achieving continued success means hitting a target that’s moving in at least two directions at once.

The Quarterly: What do you mean when you talk about market polarization?

Hans Stråberg: Polarization is something that has been going on for quite some time. In major appliances, over the past 15 or 20 years, people have doubled the amount they spend on their homes. As part of that, they are spending more on their kitchens. You can cook food on a campfire, but people nevertheless spend $2,000 on an induction range. This general trend coincided with globalization, which opened up the possibility of new, lower-cost manufacturers in emerging economies coming onstream. These parallel developments drove apart two segments of the market—call them the premium end and the value end.

Other industries have experienced similar developments. We know that when the shift comes, it comes quite fast. In floor care products like vacuum cleaners, where the market polarized earlier, the whole process—starting with the rapid growth of premium players like Dyson—took five to seven years. The first signs of entry by low-cost competitors occurred in the late ’90s, and the big change happened very fast, maybe within the first two or three years. It’s important to be prepared for the rapid change and not engage in wishful thinking.

The Quarterly: When you moved from the floor care and small domestic-appliance division into the CEO’s role, what actions did you take with respect to polarization?

Hans Stråberg: First, I needed to see how our industry was changing, so I traveled the world and inspected a wide range of products from new manufacturers, mostly Asian companies. The products hadn’t hit Western markets, but I knew it was only a matter of time. In my mind, the middle market—the stomping grounds of Electrolux—was on the verge of disappearing. Then I started shipping some of my finds to the homes of my top managers. When I got back, we rolled up our sleeves in a series of workshops designed to shed light on the strategies of new competitors, such as LG and Samsung. In one of these meetings, top managers assumed the role of LG executives strategizing how to beat incumbents and then reflected on what it meant for Electrolux.

The Quarterly: How does market polarization force you to rethink your customers and their needs?

Hans Stråberg: When you segment the market you’re not talking about the “typical” consumer but the consumer combined with a particular buying situation. Take the example of a built-in induction range. It’s a must for somebody with a lot of specific wants: you like it, it’s an interest you have, and therefore you’re prepared to spend money on it to feel good and satisfy those wants. At the other end, cooking is a more basic necessity. You’re looking for the best offer at the best possible cost. It’s not a product that you want to show off; it’s mainly a product that you want to use.

Given the differences in what consumers value, we have abandoned the traditional industry segmentation based on price and a “good-better-best” hierarchy. Now our segmentation has as many as 20 product positions that relate directly to the lifestyle and purchasing patterns of different consumers. Steam ovens, for example, are now successfully marketed to health-oriented consumers. Compact dishwashers, which we had initially developed for smaller kitchens, are now marketed to a broader consumer segment interested in washing dishes more often.

The Quarterly: How did you decide to play at both ends of the market simultaneously, and what challenges has that created?

Hans Stråberg: At first, I thought we needed to decide whether to compete with commodity-like offerings or to deliver higher-value products. But after some deep soul-searching, we decided we could still make money in both ends if we separated our business models for the two ends of the market. Dividing the sales force is one example of what I mean when I talk about different business models. At one end you’re selling freestanding countertop refrigerators, which just fill a basic need; you’re driving for orders and you want high volumes at certain price points. The cost, the quality, and the delivery time are all very important. At the other end you’re working with consumers and retailers who are buying a kitchen solution to fit their specific needs. The same sales force usually can’t handle both of those roles. And even if the same person can handle both, you have to focus to avoid compromising how well you serve the retailer.

The challenge, of course, is if you’re dealing with one retail customer that’s selling to both segments in its stores. If you have one competitor that goes in and only focuses on sending full truckloads into a retailer’s system and offers a very short warranty, if any, then you have to be able to do the same. Simultaneously, you have to satisfy consumers in the premium segment. So you have to separate the business, and that’s the difficult part. I don’t have a general patent for that.

The Quarterly: Is it possible for a company that feels stuck in the middle to escape without doing some successful innovating?

Hans Stråberg: It is not possible. I think you can build awareness. It’s quite expensive, but you can advertise yourself to get awareness. But if you don’t get differentiation it’s very difficult to win people over just because your products are known. What makes innovation particularly challenging is that the functional improvements that set products apart in the 1970s and 1980s, such as RPMs⁶ for washing machines and watt usage for vacuum cleaners, are no longer effective differentiators.

But differentiation can take many forms. Consider complementary services. In the United States, we launched a water filtration subscription program for side-by-side refrigerators. Strong consumer support can also be a differentiator. There are very high demands on consumer support in the premium segment compared with the lower end. So we are supporting premium products with special help or consumer support contact points: more personalized service if consumers have a problem or questions, a separate number they can call to reach a given distribution channel, and so on.

The Quarterly: What is the role of the brand in dealing with polarization?

Hans Stråberg: In both ends of the market, brand credibility and trust are very important because customers entrust our products with expensive loads of clothes or have a lot at stake when cooking dinner for people. You want to show that you’re very good at cooking, and therefore you can’t be let down by the product. But there is a big difference in what consumers can afford to spend on high- and low-end brands, and marketing methods differ accordingly. In the value segment, the focus is usually more on in-store displays at the point of purchase or on cooperative advertising with retailers, while in the premium segment you can afford to use other means, such as mass-media and targeted Internet campaigns, that allow more time to explain the innovation to premium consumers. Of course, the specifics are highly dependent on what category you’re in.

The Quarterly: Given these differences, why did you abandon Electrolux’s multibrand strategy, and how is the transition going?

Hans Stråberg: We committed ourselves to a master global brand, complemented by some well-defined subbrands, after looking outside our industry. We saw how even in the industries hardest hit by low-cost imports, such as TVs, a large majority of consumers would deliberately pay a premium for distinct global brands, such as Sony and Philips. And so far, sales of the Electrolux brand account for about half of total group sales—an impressive progression from only 10 percent in 2000. As important, the creation of one global brand has instilled a sense of one global corporate culture, which has already had an extremely positive effect on the organization.

The Quarterly: What advice would you give to a company that is stuck in the middle on how to jump-start innovation?

Hans Stråberg: Start with consumers and understand what their latent needs are and what problems they experience. That doesn’t mean you go and ask them, “What are your latent needs?” or “What problems do you experience?” Then you will not get the answers. You need to observe and find out by different means and then put the puzzle together yourself to discover what people really want to have. Henry Ford is supposed to have said, “If I had asked people what they wanted, I would have made faster horses” or something like that. You have to figure out what people really want, although they can’t express it.

There is a whole series of techniques and approaches for doing that: videotaping consumers and asking them the right kind of questions; observing consumers; reading between the lines of what they are really saying; observing them for what they are doing, not what they’re saying; and so on. The people doing this work should be organized in cross-functional teams—product developers who are actually coming up with the ideas, sales and marketing people, and support personnel who can help collect and organize data. This approach has helped us almost double the number of new-product launches in the past three years.