Whirlpool: Redefining Innovation
If you look at our history, innovation had been the responsibility of a couple of groups, engineering and marketing. Now, you have thousands of people involved. It's speeded things along. It's changed the focus of innovation to trying to deeply understand the customer and a belief that we could actually build customer loyalty in the appliance industry. The way we'll know it's successful is if it changes every job at Whirlpool.1 - Nancy Snyder, Vice-president Leadership and Strategic Competency Development, Whirlpool Jeff M. Fettig succeeded David R. Whitwam, as Chairman and Chief Executive Officer of Whirlpool Corporation in 2004. The year 2005 had proved to be a year of exceptional achievements for the world’s number one home appliance brand company2. Whirlpool had achieved record net earnings of $422 million3 on record sales revenues of $14.3 billion4 (Annexure I), which had in turn, propelled the company’s share price to an all-time high of $92.645 by April 2006 (AnnexureII). Fettig attributed much of Whirlpool's performance to the new products and features introduced by the company over the past four years. The innovations were a result of the ‘innovation system’ established by Whitwam in 1999 to counter the company’s almost stagnant performance over the past decade, in everything from stock price to profit margin to market share. The company’s failure to introduce exciting products or product features had reduced Whirlpool’s machines to mere commodities and prices for its most important products were falling each year. Following the implemetation of the innovation drive, revenues from products that fitted the company's definition of ‘innovative’ increased from $10 million in 2001 to $800 million in 2005, i.e., 5 percent of the company's record total revenue of $14.3 billion6. In 2005 alone, Whirlpool had launched more than twice as many new products in half the time, as compared to the same time when the innovation process was launched six years earlier7. Realizing that customer loyalty was essential for its success, the company was making concerted efforts to determine the attributes of its products and services that appealed to its consumers and focussed its innovation on those touchpoints. As Fettig explained, “Our strategy is to enrich the value of our products and brands. Customer loyalty is an important element of this approach, and Whirlpool innovation enables our people to create the products and services that delight our customers and grow shareholder value.”8 With a record number of new product launches in the global marketplace in 2005, and with a strong pipeline, the company was looking forward to an accelerated pace of product introductions

1 2

“How Whirlpool Defines Innovation”, BusinessWeek, www.businessweek.com, March 06, 2006 www.whirlpoolcorp.com 3 Whirlpool Corporation, Annual Report 2005. http://media.corporateir.net/media_files/irol/97/97140/WHR_AR05/WHR_2005AR.pdf#search=%22whirlpool%20annual%20report%202005%22 4 Ibid. 5 Michael Arndt, “Creativity Overflowing”, Businessweek, www.businessweek.com, May 08, 2006 6 Op.cit., “Whirlpool Annual Report 2005” 7 ibid 8 ibid

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in 2006 as well and the years to come. Within six years, Whirlpool’s ‘innovation system’ had proved to be a success. The case looks at the making of this successful innovation strategy.

The Home Appliance Industry in the US
Electrical appliances which helped to accomplish household functions such as cooking or cleaning were generally referred to as major home appliances. Washers, dryers, refrigerators, freezers, cooking ranges, microwave ovens, etc., were common examples of home appliances, also called ‘white goods’, due to the standard white color of these goods that existed till recent years (1990s). The early twentieth century saw the beginnings of the home appliance industry. It was between the years 1906 and 1915 that the initial models of electric washing machines, household refrigerators and temperature-controlled stoves made their way into the US. Though market innovation slowed down during the Great Depression and the World War II, it picked pace from the late 1940s onwards and continued through the early 1950s. It was during this period that Whirlpool introduced its first top-loading automatic washer, Raytheon its microwave cooking oven, and Maytag its first washer with an automatic agitator and its first electric clothes dryer. 9 For two decades after World War II, demand for white goods continued to rise due to the increase in disposable incomes and a rise in the number of working women. The growth of the industry was slow during the 1960s. Innovation in appliances had slowed and product innovations had become incremental. The industry grew at a modest pace through the 1970s and 1980s. The 1990s saw unit sales of white goods growing at an average rate of 2-4 percent annually in the US, even as prices of unimproved goods fell at about 2-3% per annum 10. At the same time, with technological improvements, new products made their way into the market; Eureka introduced a prototype robot vacuum cleaner in 199911. Also, most major appliances were designed to fit into smaller spaces. A trend of consolidation which had begun in the appliance industry during the 1980s continued through the 1990s too. Companies purchased one another in their attempt to fill out product lines. For example: Maytag acquired Jenn-Air and MagicChef, Whirlpool bought KitchenAid and GE acquired Roper. By 2001, three major companies had come to dominate the US appliance industry scene – Whirlpool, General Electric, and Maytag. (Exhibit I) Exhibit I Performance of Appliance Manufacturers Company Whirlpool GE Maytag
Sales ($ million) 1986 Sales ($ million) 2001 Operating Profit ($ million) 1986 Operating Profit ($ million) 2001

4,009 4,107 1,724

10,343 5,806 4,324

307 462 219

751 643 299

Source: Company financial statements
9

Jan W. Rivkin, Dorothy Leonard, Gary Hamel, “Change at Whirlpool Corporation (A)”, 2005, Harvard Business School Publishing. www.ecch.com
10 11

ibid

Jonathan C. Roche, U. Srinivasa Rangan and Stephen A. Allen, “U. S. Major Home Appliances Industry in 2002”, Babson College, 2003. www.ecch.com

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Source: “U. S. Major Home Appliances Industry in 2002”, Babson College, 2003. www.ecch.com

Whirlpool: The Numero Uno Player
The history of Whirlpool could be traced back to the year 1911, when Louis Frederick and Emory Upton founded a company called the Upton Machine Company, in rural Michigan 12 (Annexure III). A manufacturer of electric, motor-driven wringer washers, Upton’s business started expanding in 1916, when Sears Roebuck and Company13 began selling its machines under the brand name ‘Allen’. In 1929, Upton merged with the 1900 Washer Company, New York, and became the Nineteen Hundred Corporation. In 1950, the Nineteen Hundred Corporation renamed itself as Whirlpool Corporation. From the 1950s (till the 1970s), Whirlpool’s success continued to depend on the success of Sears, as Sears accounted for more than 50% of the company’s business. However, the period saw Whirlpool try to move out of Sears’ shadow and develop an identity of its own. Through a number of mergers, the company expanded its product line to include refrigerator, air-conditioner and cooking-range businesses. The move helped Whirlpool to face the growing competition from GE14, by then an aggressive player in the US home appliance market. In 1986, Whirlpool’s brandbuilding efforts received a boost with the acquisition of KitchenAid15, a producer of dishwashers, mixers, etc. By the mid-1980s Whirlpool had become the second largest producer of home appliances in the US16. In 1987, David Whitwam, who had joined Whirlpool in 1968, became its CEO and drew a global penetration strategy for Whirlpool, thereby moving away from the company’s earlier dependence on the US market alone. They entered the European market by acquiring Philips’ 17 home appliance business. By 1991 whirlpool had established itself as the largest white goods maker in the US and the second largest in the world, through a series of acquisitions and partnerships. During the 1990s the company continued its global expansion strategy by entering Brazil, Romania, Bulgaria and Asian markets. In 2006, Whirlpool acquired rival Maytag Corporation, the third largest home appliance maker in the US, thus making itself the world’s number one appliance maker. The company had sales in more than 170 countries around the world18.

12

Whirlpool Corporation website (www.whirlpoolcorp.com)

13

Sears, Roebuck and Company was a mid-range chain of international department stores, founded by Richard Sears and Alvah Roebuck. Sears merged with Kmart in early 2005, creating the Sears Holdings Corporation. 14 The General Electric Company, or GE was an enormous multinational conglomerate headquartered in Fairfield, Connecticut. The company described itself as composed of a number of primary business units or "businesses." Each "business" was itself a vast enterprise, many of which would, even as a standalone company, rank in the Fortune 500.
15

KitchenAid was a home appliance brand most well known for its stand mixers. The company was started in 1919 by The Hobart Corporation to give restaurants a countertop alternative to their industrial sized mixers. 16 Op. cit., “Change at Whirlpool Corporation (A)” 17 Koninklijke Philips Electronics N.V. (Royal Philips Electronics N.V.), usually known as Philips, was one of the largest electronics companies in the world. In 2004, its sales were € 30.3 billion (US$38.7 billion) and it employed 159,709 people in more than 60 countries. Philips had a number of divisions: Philips Consumer Electronics, Philips Semiconductors, Philips Lighting, Philips Medical Systems and Philips Domestic Appliances and Personal Care 18 “Whirlpool taps its inner Entrepreneur”, Businessweek, February 07, 2002. www.businessweek.com.

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The ‘Innovative’ Innovation Drive: Trials and Tribulations
“Innovation at Whirlpool is not a temporary project or separate corporate department. It is a capability that permeates all areas of the company…within our people, our products and our services.” - Whirlpool Annual Report 200519 After Whitwam took over as the CEO of Whirlpool in 1987, the company had achieved large economies of scale by cutting costs by millions of dollars20. However, he was not satisfied with the achievements of the company, which had more or less stagnated since the previous decade, inspite of maintaining the top position in the appliance industry. Throughout the history of the company, it had a reputation of being a manufacturer of high quality products with efficiency in operating plants and distribution channels. Yet, the prices of its products had been falling at an average rate of 3.4 percent21 each year, through the 1990s. It was in 1999, when arch rival, Maytag Limited22 launched a revolutionary hit product, the front loading Neptune Washing Machine, that Whitwam realized that the problem ailing Whirlpool, in the highly competitive industry was its inability to churn out exciting products that could command premium prices. As Whitwam admitted, "I go into an appliance store. Now, I have pretty good eyes. I stand 40 feet away from a line of washers, and I can't pick ours out. They all look alike. They all have decent quality. They all have the same price point. It's a sea of white."23 Thus, he decided to reinvent the company’s corporate strategy by incorporating innovation as an integral part of its corporate culture. In the same year, Whitwam appointed Nancy T. Snyder, an organizational behaviourist employed with the company since 1986, as Director of Strategic Process, directly reporting to him, to implement his ‘innovation program’. Nancy studied many companies like Proctor and Gamble24, 3M25 and Cemex26 among others that had transformed themselves into innovative organizations. Since she and Whitwam felt that none of the models would suit Whirlpool well, they decided to seek the help of outside consultants. In November 1999, they engaged the services of Strategos, a small California-based Consultancy firm for a year, to help transform Whirlpool into an innovation-based business27. The innovation drive was kick-started simultaneously in Whirlpool plants in North America, Europe and Latin America. The company sent out a broad call throughout the organization,
19 20

www.whirlpoolcorp.com Op.cit,“Creativity Overflowing”. 21 ibid 22 Maytag Corporation was a $4.7 billion home and commercial appliance company, headquartered in Newton, Iowa in 1893-2006. 23 Ibid. 24 Procter & Gamble Co. was a global corporation based in Cincinnati, Ohio that manufactured a wide range of consumer goods. The company had annual revenue of $55.4 billion and employed 106,000 employees.
25

3M Company, Minnesota Mining and Manufacturing Company until 2002, was an American corporation with a worldwide presence that produces over 55,000 products, including adhesives, abrasives, laminates, passive fire protection, electronic circuits and displays, and pharmaceuticals.
26

Cemex SA de CV was the world's third largest manufacturer of cement[1] and the world's leading supplier of ready-mix concrete. Founded in Mexico in 1906, the company wais based in Monterrey and had operations extending around the world, including production facilities in 20 countries in North America, the Caribbean, South America, Europe, Asia, and Africa. 27 Jan W. Rivkin, Dorothy Leonard, Gary Hamel, “Change at Whirlpool Corporation (B)”, 2006, Harvard Business School Publishing. www.ecch.com

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inviting all its 61,000 employees to come out with ideas for innovative products. Snyder, with the help of the regional heads, selected a regional general manager for each region. They in turn picked 25 people working under them, relieved them of their regular duties and sent them on about a year’s training to learn innovation skills from Strategos. Each of these teams, called “ITeams”, constituted members representing different categories like new, experienced, from different levels, various functional divisions, etc. From each region, senior leaders were selected to serve as members of an “I-Board”. The I-Boards were entrusted with the job of supporting the respective I-Teams and supervising the innovation effort by setting goals and allocating resources. Every region was asked to set aside $1 million to $3 million from its existing budget as a seed fund for innovation. Anyone, including non I-Team members, was allowed to apply for funding from the seed fund, if they had an innovative idea. Whitwam also created a CEO fund as a backup fund, for cases where individuals who were denied funds from the regional seed funds could seek funds. The company defined an innovation as a creative idea focused on a customer touch point that28: • Created unique and compelling solutions valued by customers; • Created sustainable competitive advantage; • Created extraordinary value for its shareholders; and • Came from everywhere and anyone Inspite of all these efforts, the outcome by the end of 2000 was discouraging as most of the ideas generated proved to be useless, impractical and hence failed to draw on Whirlpool’s strengths. Thus, the program proved ineffective.

Taste of Success
Whitwam and Snyder continued with their plans for innovation with a new strategy – instead of a democratized innovation program, they set in place a more traditional and centralized model of product development. In 2001, with the aim of getting the rest of the global employees involved, Snyder set up a “Knowledge Management” intranet site that offered a do-it-yourself innovation course. All employees were invited to post their ideas on the site; they were also encouraged to get ideas from outsiders. The company also organized Innovation fairs to tap new ideas and reward good ones. According to company sources, the response to the intranet was overwhelming, with the site recording upto 300,000 hits per month in 2000 and 200129. However, the middle-level managers were unhappy with the happenings. They complained that workers were ignoring their core activities and spending time doing secondary jobs. They also felt that upper level managers did not care for the innovation initiative as their performance was not tied to innovation metrics. To bring better control, in 2002, Whitwam made the top management responsible for evaluating and funding all new proposals at monthly innovation board meetings. Projects with high possibility of success were assigned to the design, market research and manufacturing
28 29

Gale Cutler, “Innovation Mentoring at Whirlpool”, Nov-Dec 2003, Industrial Research Institute, Inc. Op. cit, “Creativity Overflowing”.

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departments. Whitwam also set pipeline targets. Executives who failed to reach these targets were to lose 30% of their annual bonus. In order to distil good ideas and ensure that they reached the I-Boards, a two step graphing tool called the I-Box was designed. The first step was to ensure that the product answered consumer needs/desires; the second step was to make sure that the product commanded above-average returns. Both the checks were conducted through market research, i.e., involved quizzing the consumers. The ideas generated were graded by the innovation consultants on a scale of 1 to 10. Finally, only ideas that scored 6.5 points or above were selected. The new innovation strategy proved to be a success. Whirlpool’s innovators not only came up with new ideas but also revived products that had failed earlier. (Exhibit II) For example, the company introduced a product called Personal Valet, an appliance that steamed out wrinkles and odors from dry clothes. Though the product was appreciated by consumers it had to be withdrawn in 2004 as people considered it too high priced. However, in 2005, the device was rolled out as a Fabric Freshner, priced at $199 in Mexico.

Exhibit II Whirlpool – Customer Driven Innovation

Source: http://media.corporate-ir.net/media_files/IROL/97/97140/2004AR/whr2004ar.pdf

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Some of the innovative ideas that had been converted to products launched by Whirlpool since 2001 were its single drawer dishwasher, hygienic refrigerator, built-in cooking range, etc. (Annexure IV).

Looking Ahead
Since the implementation of Whirlpool’s innovation program, its revenue from its innovative products had shot up from $10 million in 2001 to $800 million in 2005. The average price of its appliances had risen by 5 percent annually for 3 consecutive years since 2003, while the price of its shares had almost doubled over the past 5 years 30. The company boasted of a team of 24 Iconsultants, 580 I-mentors and 568 innovation projects in development, of which 195 were being scaled-up for commercial launch. In 2006, Whirlpool hosted delegations from reputed companies like Hewlett-Packard, P&G and Nokia, keen on benchmarking their innovation projects against Whirlpools. Speaking of the company’s persistence and success with innovation, Jan W. Rivkin, a Harvard Business School professor said, "You have to give the management team credit. A lot of other companies would have shut this down. One of the remarkable things here is they've found ways to adapt and keep this rolling."31 On the company’s learning through the experience, Snyder said, “We had a learning journey on how you describe innovation. An idea had to meet three criteria to be innovative: It had to create a competitive advantage. It had to be unique and differentiating. And it had to create shareholder value..... … We worked with those definitions for three years, and then we realized they weren't quite right. It's hard for any one thing to create a competitive advantage by itself and be sustainable. You have to stay ahead of the competition. If you have a cadence of innovations that keeps a product fresh and always improving -- a migration path -- that makes it sustainable. So now we say if we're going to put any money in an innovation project, it has to sit on a migration path, it has to be something that the customer really wants, and it's got to return an above-average profit”32.

30 31

Op. cit., “Creativity Overflowing” ibid. 32 Op.cit., “How Whirlpool Defines Innovation”

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Annexure I Whirlpool – Revenue

Source: Whirlpool Corporation, Annual Report 2005

Annexure II Whirlpool – Revenue from Innovation and Rise in Stock Prices

Source: http://www.businessweek.com/magazine/content/06_19/b3983064.htm:

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Annexure III Whirlpool Corporation: Timeline 1911 - The Upton brothers, Louis, Frederick and Emory Upton, created the Upton Machine Company in 1911 to produce electric, motor-driven wringer washers. Mid 1920s - The Upton Machine Co. became the exclusive supplier for Sears electric and gasoline powered washing machines. 1929 - Upton Machine merged with the ‘Nineteen Hundred Washer Company’ of Binghamton, New York. In a decade, the company led in the production of washing machinesin the country. 1942 - The Nineteen Hundred Corporation joined hundreds of other American companies by converting all of its facilities to wartime production. 1948 - The company marketed its first Whirlpool brand automatic washer, thus establishing dual distribution — one line of products for Sears, another for Nineteen Hundred’s other customers. Early 1950s - The company's business expanded vigorously. Officially known as the Whirlpool Corporation, the company added automatic dryers, refrigerators, ranges and air conditioners to its product line. 1951- Whirlpool Corporation established its philanthropic arm, the Whirlpool Foundation. 1956 – Introduction of the “Whirlpool Miracle Kitchen.” 1957- The company established the Appliance Buyers’ Credit Corporation (later to be known as Whirlpool Financial Corp.) to extend credit to families interested in the latest appliances. 1969 - The company introduced a residential trash compactor, the first new-to-market appliance in 30 years. 1986 - Purchased the KitchenAid division of the Hobart Corporation 1987- Whirlpool Corporation and Sundaram-Clayton of India formed TVS Whirlpool Limited to make compact washers for the Indian market 1988 - Whirlpool Corporation and Vitro, S.A. form Vitromatic S.A. de C.V., a joint venture to produce and market appliances for the Mexican and other export markets. 1989 - Acquired the Roper brand name 1990s - Whirlpool Corporation Continued its Global Expansion 2000s - Building Customer Loyalty Worldwide through innovations
Source: Compiled from the Whirlpool Corporation website (www.whirlpoolcorp.com)

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Annexure IV - Whirlpool’s Innovation Pipeline

Source: Whirlpool Corporation, Annual Report 2005

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References 1. “How Whirlpool Defines Innovation”, BusinessWeek, www.businessweek.com, March 2. 3.
4. 5. 06, 2006 Whirlpool Corporation, Annual Report 2005. www.whirlpoolcorp.com Michael Arndt, “Creativity Overflowing”, Businessweek, www.businessweek.com, May 08, 2006 Jan W. Rivkin, Dorothy Leonard, Gary Hamel, “Change at Whirlpool Corporation (A)”, 2005, Harvard Business School Publishing. www.ecch.com Jan W. Rivkin, Dorothy Leonard, Gary Hamel, “Change at Whirlpool Corporation (B)”, 2006, Harvard Business School Publishing. www.ecch.com Jonathan C. Roche, U. Srinivasa Rangan and Stephen A. Allen, “U. S. Major Home Appliances Industry in 2002”, Babson College, 2003. www.ecch.com “Whirlpool taps its inner Entrepreneur”, businessweek, February 07, 2002. www.businessweek.com. Gale Cutler, “Innovation Mentoring at Whirlpool”, Nov-Dec 2003, Industrial Research Institute, Inc. Supratim Majumdar, “Whirlpool – Maytag Merger”, IBS Research Centre, Kolkata, ICFAI Business School, 2006. www.ecch.com

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