CASE STUDY

ORGANIZATIONAL CHANGE AT ROYAL DUTCH-SHELL

The Anglo-Dutch company Royal Dutch-Shell is the world's largest no

state-owned oil company with activities in more than 130 countries and
1997 revenues of $128 billion. From the 1950s until 1994, Shell operated
with a “matrix structure” invented for it by McKinsey, a management-
consulting firm that specializes in organizational design. Under this matrix
structure, the head of each operating company reported to two bosses. One
boss was responsible for the geographical region or country in which the
operating company was based, while the other was responsible for the
business activity that the operating company was engaged in (Shell’s
business activities included oil exploration and production, oil products,
chemicals, gas, and coal). Thus, for example, the head of the local Shell
chemical company in Australia reported both to the head of Shell Australia
and to the head of Shell's entire chemical division, who was based in
London. Both bosses had equal influence and status within the organization.

This matrix structure had two very visible consequences at Shell. First,
because each operating company had two bosses to satisfy, decision making
typically followed a pattern of consensus building, with differences of
perspective between country (or regional) heads on the one hand and the
heads of business divisions on the other being worked out through debate.
Although this process could be slow and cumbersome, it was seen as a good
thing in the oil industry where most big decisions are long-term ones that
involve substantial capital expenditures and where informed debate between
different viewpoints can clarify the pros and cons of issues, rather than
hinder decision making. Second because the decision-making process was
slow, it was reserved for only the most important decisions (such as major
new capital investments). The result was substantial decentralization by
default to the heads of the individual operating companies, who were largely
left alone to run their own operations. This decentralization helped Shell
respond to local differences in government regulations, competitive
conditions, and consumer tastes. Thus, for example, the head of Shell's
Australian chemical company was given the freedom to determine pricing
practices and marketing strategy in the Australian market. Only if Shell
wished to undertake a major capital investment, such as building a new
chemical plant, would the consensus-building decision making system be
invoked.
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As desirable as this matrix structure seemed to many, in 1995 Shell

announced a radical plan to dismantle it. The primary reason given by top
management for the shift was continuing slack demand for oil and weak oil
prices, which had put pressure on Shell's profit margins. Although Shell had
traditionally been among the most profitable oil companies in the world, in
the early 1990s its relative performance began to slip as other oil companies,
such as Exxon, adapted more rapidly to a world of low oil prices by sharply
cutting overhead costs and consolidating production in efficient facilities.
Consolidating production at these companies often involved serving the
world market from a smaller number of large-scale refining facilities and
shutting down smaller facilities. In contrast Shell still operated with a large
head office, which was required to effect coordination within Shell's matrix
structure, and substantial duplication of oil and chemical refining facilities
across operating companies, each of which typically developed the facilities
required to serve its own market.

In 1995, Shell’s senior management realized that lowering operating costs

required a sharp reduction in head office overhead and, where appropriate,
the elimination of unnecessary duplication of facilities across countries. To
achieve these goals, top executives decided to reorganize the company along
divisional lines. Shell now operates with five main global product divisions-
exploration and production, oil products, chemicals, gas, and coal. Each
operating company reports to whichever global division is the most relevant.
Thus, the head of the Australian chemical operation now reports directly to
the head of the global chemical division. The thinking is that this will
increase the power of the global chemical division and enable that division
to eliminate any unnecessary duplication of facilities across countries.
Eventually, production may be consolidated in larger facilities that serve an
entire region, rather than a single country, thereby enabling Shell to reap
greater scale economies.

The country (or regional) chiefs remain but their roles and responsibilities
are reduced. Now their primary responsibility is coordination between
operating companies within a country (or region) and relations with the
local government. There is a solid line of reporting and responsibility
between the heads of operating companies and the global divisions and only
a dotted line between the heads of operating companies and country chiefs.
Thus, for example, the ability of the head of Shell Australia to shape the
major capital investment decisions of Shell's Australian chemical operation
was substantially reduced as a result of these changes. Furthermore, the
simplified reporting system reduced the need for a large head office
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bureaucracy, and Shell trimmed the work force at its London head office by
1,170, driving down Shell’s cost structure.

2004 STRATEGY REVIEW

The Exploration and Production (EP) portfolio today generates significant

cash flow from core producing areas. Though the overall resource base
remains significant, proved reserve life is relatively low and it is essential to
convert existing resources into proved reserves and production. EP will
invest $10 billion a year (including exploration) in sustaining profitable core
areas, in growing integrated gas positions and large-scale oil projects, and in
maturing additional unconventional oil production. New investment and
business development will target areas with growth potential and exposure
to price upside.

Production in 2004 will be between 3.7 and 3.8 million barrels of oil
equivalent (boe) per day, and between 3.5 and 3.8 million boe per day in
2005 and 2006. Production is expected to grow to between 3.8 and
4.0 million boe per day by 2009.

Exploration will focus on ‘big cat’ wells (with prospects greater than 100
million boe Shell share), with spending levels approaching $1.5 billion per
year. Over 260,000 km2 of acreage has been acquired with the potential to
deliver some 30 big cat prospects. Looking forward, 15-20 big cat wells per
year are planned.

Shell Gas & Power is the world’s largest supplier of liquefied natural gas
(LNG) and the second largest natural gas producer, with leading positions in
the world’s key markets. There is a strong track record in the delivery of
LNG projects and expect to increase capacity by 14 per cent per year
between 2003 and 2008. Leading the development of the potentially major
Gas to Liquids industry is in process.The strategy is to draw on a global
portfolio, market access, attractive customer propositions and leading
technology to monetise and add value to Shell’s upstream reserves and to
capitalise on the future growth in global gas demand.

More profitable downstream

The downstream businesses provide significant cash and earnings for the
Group and hope that success to generate future growth. A key priority will be
the integration of the oil Products and Chemicals businesses into a simplified
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downstream business from 2005. Work will also continue to restructure the
portfolio and to divest underperforming assets. Improvements in operational
performance will be underpinned by simplifying and standardising business
processes in the new global structure.
Capital investment in the downstream will be targeted at markets where
strong growth in demand is expected. By 2010, about 40 per cent of Oil
Products assets and 35 per cent of Chemicals assets are expected to be in the
Asia Pacific/Middle East region.

RAISING THE PERFORMANCE BAR

Improved performance will underpin all of activities with the goal of

achieving top quartile performance in all our businesses. This will include a
particular emphasis on delivering projects on time, to specification and
within budget. That performance will also help to deliver competitive
returns with strong cash generation to fund growing dividends and
investment.

FINANCIAL FRAMEWORK

All this work will be carried out in the context of growing demand for
hydrocarbons around the world, accompanied by a structural shift to higher
oil prices. Increasing our capital investment to some $15 billion per year, of
which $11.5 billion will be spent in the upstream, while continuing to
manage our portfolio with divestments of $10-12 billion over the period
2004 to 2006 was a key point.
The company will continue to grow the dividend at least in line with local
inflation over time; invest in existing and new business growth; and
maintain a strong balance sheet. If additional cash is available, our strategy
will be to balance further high value capital investment opportunities with
returns to shareholders.
Shell Considers a New Structure 1
Industrial complex
Energy titan Royal Dutch/Shell Group operates under a complicated
structure that spans the Netherlands and Britain.

1
Wall Street Journal Europe, June, 2004
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740,000 shareholders 240,000 shareholders

Royal Dutch Petroleum Shell Transport & Trading Co.
Co. (Netherlands) (U.K.)
60% 40%

Royal Dutch/Shell Group of Cos.

Service Companies
Shell Petroleum NV Shell Petroleum Co.
Netherlands Advice and services U.K.

Operating companies

Exploration
Gas and Oil Other industry
and Chemicals
power products segments
production

This version would eliminate directors’ Special Shares; unified Board Is

Possible.

Many have called for deep changes at the Anglo-Dutch oil company after its
energy-reserve accounting scandal this year. Several executives said previously
that they had begun reviewing the company’s structures for possible changes.

Royal Dutch Petroleum Co. of the Netherlands and London-based Shell

Transport & Trading Co. jointly own Shell’s operating companies 60-40,
respectively. The company is run by a committee of managing directors, a
group of executives who owned the group’s top management body. The
committee answers to separate teams from each parent company.

The nearly century-old structure has already drawn complaints from

investors for being anachronistic and opaque.

The criticism intensified earlier this year after Shell disclosed it had greatly
overstated its reserves of oil and natural gas. Shell has since made minor
changes to its structure, including the naming of a no executive chairman to
its British parent.
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In a statement Thursday, Shell said a steering committee of board members

is considering a number of alternative structures, including a chief executive
who would report to a unified board. “Nothing is ruled out at this stage”, the
statement said.

Still, it is unclear whether Shell will act fast enough to satisfy shareholders.
Shell said it would disclose the results of its structural review in November
and consult shareholders further about possible choices. Shell said it expects
to be able to begin implementing changes after its annual general meeting in
2005. Shell also said it would propose abolishing “priority” shares at that
meeting. Priority shares are controlled by Royal Dutch directors and give
holders disproportionate power in picking new board members.

In meetings with big investors in recent weeks, Shell declined to discuss its
overhaul review in any detail, refusing even to name executives who were
part of a steering committee looking at options. That position prompted a
public rebuke by two influential us. investors. Eric Knight, managing
director of Knight Vinke Asset Management, a corporate-governance
activist fund, and Ted White, director of corporate governance at the
California Public Employees' Retirement System, chastised Shell for a lack
of transparency in a letter published Wednesday in the Financial Times.

The two called on Shell to disclose the names of members of the steering
committee and to detail the group’s scope. Shell said Thursday that the
group included Jeroen van der Veer, chairman of the committee of
managing directors, and four no executive board members.

Case Discussion Questions

1. What were the benefits of the matrix structure at Shell? What were the
drawbacks? Did the matrix structure fit the environment of the global
oil and chemical industries in the 1980s?
2. What shift occurred in Shell’s operating environment in the 1990s?
How did this shift affect the financial performance of the firm? What
does this suggest about the fit between strategy and architecture?
3. What kind of structure did Shell adopt in 1995? In what ways did the
architecture of Shell's organization after 1995, differ from that before
1995?
4. Comment on the fit between operating, environment, strategy, and
organizational architecture at Shell after the 1995 reorganization.
Did the change lead to enhanced fit?
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SC “Duo Business Impex” Ltd. was set up at the end of the year 1999,
according to art 39, Law 32/1990 republished, as well as to OUG 76/2001.
It has two founding members, equally sharing its social capital and the
rights and obligations arising from the administrative qualities.

The two associates decided to start the activity in the import-export field
because they both had prior experience in this domain. They also took into
consideration, from the very beginning, the possibility to extend their
activity in other fields as well, such that they insured a higher flexibility
from the legal point of view.

The Specific Activity of Duo Business Impex Ltd

CARACTERISTICS MANAGERIAL IMPLICATIONS

− it is not necessary to use its own
financing resources for
investments in the merchandise
fund
− it is not necessary that the working − it is the result of the general and unitary
capital is distinctly emphasized in administration of the company’s funds
the balance sheet without distinctly separating the
investment funds from the activity
financing funds
− no operation on stocks is held − the merchandises from suppliers are taken
over immediately at the moment the
respective lots are prepared for export *
− it is not necessary to have an − these are limited to the current needs such
acquisition department as: consumables, protocol, etc. The needs
of the company are quantified each week
or month, from case to case, and there is
usually taken into account the
quality/price equation.
− the goods and services export is − it is a recoverable expense from the state
added value tax – exempted budget
− the total turnover may be
approximated with the production
of the exercise or even with the
gross commercial margin
− the company depends, − imposes a very rigorous selection of the
considerably high, on the banks banks based on several criteria:
because all financial flows seriousness, rapidity, the level of charges,
generated by it are developed banking commissions, bureaucracy**
through the banking system.
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* In extraordinary circumstances, when the merchandise cannot be taken over based on

the established terms, being the fault of the external client (e.g. Last winter the roof
of a deposit crumbled because of the snow) the partner was required to either send
the counter-value of the goods or to pay the storage expenses. Since the situation
lasted more than 1 month, the first solution was more appropriate.

** Here it should be remembered the unpleasant experience of the company in relation

with the Turkish- Romanian Bank, where it initially had the accounts opened and
where only the fast intervention of the associates by the external clients made
possible the suspension of payments in course and the limitation of losses.

General Considerations on Small and Medium Enterprises (SME)

The development of market economy systems in our country can only be

accomplished throughout specific structural modifications, qualitative
changes in economic activities organization and management, stressing on
the private sector which is considered as in integrated part, indispensable to
any developed market economy country, and without which neither the
society nor the market economy can function.

A SME, as a form of a dynamic business life which includes all social and
economic forms of life, is at the same time one of the progress and
development influencing factors in all developed countries. The
development of SMEs in Romania is rendered more difficult because of the
following factors:
Incomplete and sometimes contradictory legislation;
Lack of a clear state system to support the SMEs as well as its
infrastructure;
The ever going inter-connections process for different property forms;
Lack or insufficiency of financial and material resources needed as a
real support in the setting up of a SME;
Weak coordination in personnel’s training and professional
qualification; as a rule, an activity may become more efficient through
one of these two opportunities:
o New technology and capital infusion;
o Training of human resources capital
ƒ During its life, any company will face the need to invest in new
technologies but it is more economic and efficient, with faster
results, to invest in personnel’s training and improvement of
professional qualifications throughout the introduction of
modern management approaches.
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Among many other factors that insured the economic success of developed
countries throughout the world, the SME played an important role.

He main functions of enterprising activity can be considered as it follows:

New or better quality goods or services production;
New marketing;
Finding and use of renewable energy and raw materials;
Innovating production methods application and reorganization;

Financial Analysis of Duo Business Impex Ltd

1. Turnover’s evolution of the company between 2001-2004 is the

following:

3000000

2500000
2.011.344
2000000
1.511.778
1500000
881.174 1.024.642
1000000

500000
2001 2002 2003 2004

Turnover's evolution in 000 lei

The turnover structure of the company is homogenous, the concentration

coefficient aiming to 1, because it only offered one type of services by now.

In accounting reports, the registrations were done at the level of commercial

margin, the value of the merchandises being recorded in the revenues and
expenses accounts.
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2. Turnover’s structure on years, comparing with the selling markets

is the following:

2001
Italy USA Belgium
668,329 thousand lei 179,225 thousand lei 33,620 thousand lei

In percentages, the situation is the following:

Turnover percentage on selling markets for the year 2001

4% 76%
20%

Italy USA Belgium

2002
Italy USA Belgium
801,004 thousand lei 110,032 thousand lei 113,606 thousand lei

In percentages, the average turnover in the year 2002 is the following:

Turnover percentage on selling

markets in the year 2002

11%
11% 78%

Italy USA Belgium

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2003
Italy USA Belgium
850,379 thousand lei 211,112 thousand lei 450,287 thousand lei

In percentages, the defalcation on markets is the following:

Turnover structure on selling markets in the year 2003

30%

56%

14%
Italy USA Belgium

2004
Italy USA Belgium
1.618.888 thousand lei 225,348 thousand lei 167,108 thousand lei

In percentages, the defalcation on markets is the following:

Turnover structure on selling markets in the year 2004

8%
11%

81%

Italy USA Belgium

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It can be seen that the dynamic of each market is not revealing a spectacular
development of any of them, but only a constant evolution:

Demerom's Market's evolution

100

80
60 Italy
USA
40
Belgium
20
0
2001 2002 2003 2004

After analyzing the evolutions until now, the associates came to the
conclusion that the strategy initially adopted, meaning to exploit at
maximum a single market, should be reviewed, taking into account the
implementation of services offered on other markets, too. Although efforts
have been done in this direction, as it can be seen from the above graphs, the
situation is not yet satisfying. It is very important to create equilibrium in
this regard because so, the impact that could be caused by the decreasing of
a market can considerably be minimized. The experience of a competition
company should be remembered, Tehnoforestexport, which hardly
recovered after the loss of Russian market, immediately after the year 1990,
being known that this market represented more than 50% from the total
furniture sales of this enterprise. This aspect is however common for several
other economic fields in the post-December period.

Although there are already 4 years from the moment of setting up of the
company, period characterized by both increases and decreases, I consider
that it is still on an increasing trend, being relatively far from its maturity
phase.
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3. The Net Result of the year, also in the 2001-2004 period, expressed in
thousand lei, is the following:

The net result of the year in 000 lei

200000 177426

150000 112332
84094 105779
100000

50000

0
2001 2002 2003 2004

The net result of the year

4. The premises of accounting information for the analysis

of indicators in the period 2001-2003

Indicator 2001 2002 2003

Sold Production 888174 964382 1317233

Acquisitions (61111) (71001) (92675)
Services (611903) (881542) (902554)
Other expenses (746) - (955)
Taxes (8647) (11839) (21772)
Added Value 205767 254885 299277
Salary expenses (71644) (102101) (158444)
Depreciation (8377) (8594) (8893)
Gross Profit 125746 144190 131940
Financial Revenues 47299 69277 85202
Financial Expenses (44937) (57171) (55332)
Extraordinary Revenues 42017 - -
Extraordinary Expenses (58000) - (18000)
Income tax (28031) (43964) (38031)
Net Profit 84094 112332 105779
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Return on Social Capital: ROSC = Net Profit/Social Capital

ROSC 2001 ROSC 2002 ROSC 2003

42.04 56.16 52.88

Using the same initial social capital, the company succeeded to increase its
net profit within the analyzed period of time.

Return on Owners’ Equity: ROE = Net Profit /Owners’ Equity

ROE 2001 ROE 2002 ROE 2003

1.58 1.01 54.97

Although the net profit of the company increased each year, it was needed
the increase of owners’ equity too, and this is why this indicator has
descending results.

Profit Margin: PM = Net Profit/ Added Value

PM 2001 PM 2002 PM 2003

0.40 0.44 0.35

Gross Surplus from Operations: EBE = Added Value –Salary Expenses

EBE 2001 EBE 2002 EBE 2003

134123 152784 140833

Total Gross Surplus:

EBG = EBE + Financial Revenues + Extraordinary Revenues –

Extraordinary expenses

EBG 2001 EBG 2002 EBG 2003

165439 222061 208035

Auto-financing Capacity: CAF = EBG – Financial Expenses. – Income tax

CAF 2001 CAF 2002 CAF 2003

92471 120296 114672
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The company improved every year its auto-financing capacity.

As a rule, company’s policy was to pay all its fiscal obligations in time, but
the owners did everything they could from the legal point of view to
minimize the amount of taxes owed to the state for the obtained profit.
(income tax)

The Commercial Analysis

Based on the economic opportunities, the associates decided the orientation

of company’s activity on export-import area and more specific, on furniture
and wood products exports on the following main markets: Italy, Belgium
and USA. At the moment the company tries to enter the Northern markets.
Until the year 2002 the exports have been realized by the company having
the quality of COMMISSIONARY EXPORTER by the Romanian
producers. From this year on, it gave up this system and orientation on the
net export of services, including:
Ö Finding of producers for foreign clients according to the requested
products (models, quantities, specific requirements).
Ö Consultancy service for the foreign partners.
Ö Supervising the contracts’ carrying on.
Ö Assuring of the qualitative control of merchandises before the delivery.
Ö Verification of documents that travel with the merchandise.

This change is more formal than it seems because no major changes have
been done but only in the form and circuit of documents. The most
significant aspect of this procedure is however the decreasing of risks such
as:

Ö As an exporter, the company was directly responsible in front of the

financial-banking institutions with the repatriation of foreign currency
at a specific date; the delays facilitated the penalties and a whole series
of justifying documents had to be presented;

Ö Non-payment risk caused by independent reasons form the company’s

activity (non-payment caused by reclamations on merchandises that had
latent defects).
Developing plan for each range of products / country
2005

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Developing plan for each range of products / country
2006
Developing plan for each range of products / country
2007

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The company continues to carry on a marketing activity on external markets

in order to support and promote the furniture exports, for the identification
of potential clients and new markets and, in general, of new opportunities.
The marketing activity continues also on the internal market for the
identification of most competitive producers and sellers of services and/or
collateral products with the export activity and at the same time for the
awareness of services offered by the company.

The Analysis of Suppliers and Sub-Contractors of the Company

It must be specified from the very beginning that this is the most difficult
thing to be done and creates the biggest problems for the company.
Theoretically, all furniture producers are or may become the suppliers of the
company at a specific moment in time.

Each foreign client comes with a scale of new models/products for the
producer and this is the reason why the quality of a product already
manufactured by a producer is a relative criterion that does not guarantee the
quality of a future production at the level desired by the client. A supplier
will be chosen according to his technical possibilities, seriousness and level
of prices.

The choice of a supplier is based on the following criteria:

Ö A producer with whom the company has already collaborated in the

past at a satisfying level will be chosen.
Ö The choice is done based on the recommendations of a person from the
same field who knows very well the producer.
Ö In case of more complicated products, the producer with the highest
level of technology will be chosen, even if it will be the first
collaboration with that supplier.
Ö Randomly, when the foreign client is the one who chooses certain
products from the presentation catalogue of a certain supplier. These
cases are however very rare and almost all the clients of the company,
no matter the market they come from, require exclusive products.
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The company acts in the following way in most of the cases, whishing the
best quality at the most competitive prices:

Ö Offer requests are sent to several potential suppliers, sometimes up to

10-15 offers at once.

Ö The received replies are analyzed, the main selection criteria in this
regard being the nearest prices to the offer request and the samples
manufacturing will then be ordered.

Ö After the manufacturing of the samples the optimum supplier will be

chosen according to the quality offered and his productive capacity.

This system allows that, in cases when the deliveries from the chosen
supplier will no longer be performed for several reasons, this will be
substituted with another one, already knowing his quality level and the
potential contracting conditions required.

Many of the known suppliers pass through difficult periods of time from the
financial point of view because of the economic situation characterized by
major changes. This is the reason why a great importance is shown to the
choice of producer since, once the contract concluded, the producer must
have the necessary resources for its execution. Most of the time the
producers are classified on risk categories from the point of view of the
capacity to carry on the contract.

10% 10%

30% 50%

Reliable Suppliers Medium Risky Suppliers

Highly Risky Suppliers Unknown Suppliers
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The economic environment can also cause the bankruptcy of some very well
known suppliers and at the same time the appearance of some other new
producers. For this reason specialty reviews should always be monitored
and the information gathered from several sources must be correlated.

The travels of the associates on site have many times the purpose to visually
verify the existence and endowment of different suppliers and also to update
the information.

At this moment, due to the current economic situation, the competition is

low comparing to the number of suppliers and their capacity: several of
them are not covered with orders at a satisfying level.

The negotiation power of the company depends most of the time on the
negotiation power of the client it represents: his financial position, the
requested model-style, number of orders and also the length in time of these
orders are key-elements.

Once the contracts have been signed, the periodical payments are made
sometimes once a week, to each supplier in order to assure the observance
of the established conditions by all parties.

At each inspection a Finding Statement will be drawn up in which there will

be mentioned the number of products found, the manufacturing stage and
the products’ quality.

By analyzing these Finding Statements and correlating them it may be

assessed whether the delivery terms will be observed or the length in time of
the delay. The situation will be communicated in writing to the foreign
partner and this one, as the beneficiary of the merchandizes will take
appropriate measures. From own experience it was noticed that these
periodical inspections have also a preventive role. Usually, the qualitative
curve of the production shows that after the observations and analyzes of the
first samples, the quality level is high following then a decreasing period of
2-3 months and it ends by stabilizing after the first deliveries.

Any complain received from the foreign partner, either qualitative or

quantitative, is accompanied by proving documents (for eg. The
Merchandizes Reception Statement, photos, and eventually statements of
independent third parties) and it must be presented within the legal terms
stated in the external contracts. Trade usages stipulate a 30 days term for
 International Business

furniture for the wording of quantitative and qualitative complains and a

90 days period for latent defects, the period being calculated from the
moment the goods have been received. Then it will be translated and handed
over to the producer who, in his turn, must present the official reply in
writing usually within 30 days.

Samples First First Series Series

deliveries deliveries

Quality curve from the launching into production of

samples until the series delivery

In cases when these complains cannot be solved by mail they will be settled
through direct negotiations between the parties involved.

Taking into consideration their importance in this field, the settlement of

complains are stipulated in several chapters in trade contracts.

E. Company’s Activity Adaptation to Clients’ Specific Needs

In order to help the foreign clients, through offering a better level of

consultancy, the company tried to create a data base containing:

Ö Massive and combined furniture producers, structured on products

ranges (eg. living-rooms, bedrooms, kitchens, small furniture,
upholstered furniture, gardening furniture, etc) and on wood essences
used. Observations regarding the technical endowments and flexibility
of managerial politics are specified for each producer.

Ö The road transporters selected and grouped according to the quality of

transport means, prices and preferential destinations.

Ö Producers of different materials used in the furniture industry: fabrics

and furniture materials; varnish, diluted solution, adhesives; extension
mechanisms; etc.
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The data base is permanently updated and adapted, containing a simple and
useful working instrument.

Not taking into consideration the specific of each market (for example the
Italians prefer the furniture with a very simple line, called “Arte Povera”,
manufactured from poplar or lime wood, with a great accent on the quality
of finishing workings, while the Belgians prefer the furniture from beech or
oak wood in classic style and the Americans commercialize huge quantities
of superposed beds which must integrate in some very strict norms) all
clients have the same requests: quality, observed delivery terms and
competitive prices.

If in the case of prices these are negotiated in the pre-contractual phase, for
the assurance of compliance with the desired level of quality there are in
each productive unit sample-witnesses approved and notified by the final
beneficiary for each manufactured product. For the observance of delivery
terms, these are not imposed by anyone, but they are communicated by the
producers who know or should know the best their internal possibilities. In
order to prevent unhappy surprises, in some cases the company takes into
consideration at least a few more days from the communication of delivery
terms.

Beside this, all contracts signed have stipulations regarding coercive and
punitive measures that- although seldom applied- have a preventive role.

However, from its own statistics, the majority of problems that appeared
during the carrying on of contracts are the subject of non-observance of the
imposed quality level:

Percentage of causes that generated problems in

the carrying on of the contracts

90
8 2 Reasons

Quality Delivery Terms Others

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In order to assure the fluency and optimization of productive cycle, a

division of a program was tried on several producers (usually 2-3) but this
idea did not work because there are always big differences concerning the
accuracy of finishing workings execution which are not accepted in a
homogenous program.

When the range of products does not raise problems and the contract
stipulates serious orders which exceed the production capacity, it will be
proposed to the supplier to extend his productive capacity and if he does not
have the necessary own resources, then a counter-party will be negotiated
with the foreign client in the following manner: machines and equipment for
merchandizes.

There have been done investments in efficient automobiles that allow the
rapid access in territory, with low fuel consume and comfortable because
the activity of the company includes the need of traveling together with the
clients and thus the realization of the established purpose should be assured
at the destination (merchandize control, negotiations, etc).

At the same time, in order to assure a fast and efficient communication, a

good administration of data basis and the identification of new
opportunities, a high-technology computer was also purchased.

Although English was imposed as the official language mainly used in trade
contracts, for a better approach toward the foreign client, the associates try
to communicate in client’s own language, and thus the two owners do a
considerable effort in learning new foreign languages and in improving the
already known ones.

The World Furniture Commerce (Circumstances Situation)

Furniture has a major weight in world commerce due to both its value and
volume. The main furniture producers, in descending order, are: USA,
Germany, Italy, England, France, Japan and Canada, countries which gather
around 60% of the world market. Other 20% are owed by the rest of
developed countries and only 20% from the world production is realized by
the developing countries. From this last category, 3 main countries are the
leaders: China, Mexico and Poland who develop in a sustaining rhythm,
with an export orientation.
Case Study

From the geographic point of view, the furniture production is divided as it

follows: 40% in West Europe, 6% in East Europe, including Russia, 24% in
Asia, 26% in North America and 4% in South America.

The main importing countries are: USA, Germany, France, England,

Canada and Japan and the main exporting countries are: Italy, Germany,
Canada, China, USA, France, Poland and Mexico.

European Furniture Market 2003

Almost all European countries registered negative trends during 2003.

Total European furniture production value should have decreased to 3.5%

during 2003 (76.8 billion Euros). This is the second consecutive decrease
(estimated at around 5% of the total volume).

This fact was determined by the slack demand in almost all European
countries and by the negative exports on the main traditional markets
outside EU.

EU Furniture production in billion Euros

82.2
90

81.5

79.5
78.2

76.8
75.7
73.5

80
71.6
70.1
69.2

68.9
67.8

67.8
65

70
59.6
54.3

60
48
44.1
41.9

50
40.4

40

30

20

10

0
19841985198619871988198919901991199219931994199519961997199819992000200120022003
Year (EST)
EST= estimates (EST )
Year
 International Business

During the first half of the year 2003, furniture exports in countries outside
EU began to diminish although the situation may differ from country to
country. Norway, Russia, Japan and, at a lower level, the new member states
continued to remain markets of interest. However, exports to the Unites
States (a quarter of total exports) continued their decrease (–15% as value
and –4% as volume).

Total export outside EU decreased by more than 4% in value, that amounts

to around 9 billion Euros.

Imports from Poland, China and Czech Republic increased by more than
10% while imports from other countries registered limited increases.
Imports from Poland increased by almost 13% as value (and volume) and
must have exceeded 2,700 billion Euros in 2003.

Imports from China exploded (+34% as value and +45% as volume). It must
have reached a 2 billion Euros level during 2003.

Furniture imports from outside EU countries. First half of the year 2003

Billion Euros

First First
First half
half % % half % Deviation
2002
2001 2003

POLAND 1,005.1 20.8 1,214.8 20.4 1,365.4 20.8 12.4

China 580.6 12.0 722.3 12.1 967.1 14.7 33.9
Czech Rep. 428.7 8.9 490.4 8.2 509.2 7.7 3.8
Indonesia 456.0 9.5 412.8 6.9 430.4 6.5 4.3
Slovenia 266.9 5.5 268.8 4.5 272.4 4.1 1.3
Romania 232.5 4.8 262.2 4.4 279.1 4.2 6.5
Others 2,628.2 54.5 2,588.7 43.4 2.751.2 41.8 6.3
Total
5,598.0 116.1 5,959.9 100.0 6,574.8 100.0 10.3
Euros

Total imports exceeded 13 billion Euros (+10% comparing to 2003).

The same as in the previous years, imports increase rate is positive while
exports trend is in a structural decline. This situation determined an
increasing deficit of commercial balance which exceeded in 2004 the
amount of 4 billion Euros.
Case Study

Furniture commerce of countries outside EU in billion Euros

13100
14000

11617
10842
10450
12000

9904

9829
9920

8950
8135
10000

7993
7499
7547
6854

6748
8000

6115
5842

5784
5185
4951

4927
5024

4872

4973

4276
6000

1071 3902
3935
3542
3157
2544

2708
2407

2316

4000

1927
2028

1907

1763
1839
1330

751
2000
Exports
0

-142

-530

-938
-2000

-1788

-4150
-4000

-6000
1989 1991 1993 1995 1997 1999 2001 2003
(EST)
Yea r s
Exports Im ports Balan ce

In 2003, furniture production industry value in Italy decreased by 4.1%

comparing to 2002, reaching 20.2 billion Euros. This situation was
influenced by an exports strong decline: they decreased by 5.1% at
10.7 billion Euros. At the same time, imports increased by 8.5% at around
1.7 billion Euros.

In Germany, furniture production industry value in the year 2003 decreased

by only 2.4% comparing to 2002. Upholstered furniture and mattresses
sector met increases (+2.3% & +5%), while kitchen and household furniture
production continued to decrease. Office furniture was still unfavorable
(–12.8%).

Exports decreased by 5.4% at around 4,990 billion Euros while imports

remained slacked at the same level as in 2002 (6,830 billion Euros).
 International Business

Furniture production in EU countries in billion Euros. Deviations: 03/02

20,2
25 5

19,8

3,0
'03 '03/02

2,5
20

1,5
1,3

1,2
1,0
0,0
-0,5
0

-1,0

-1,1
15

-2,4
8,6
8,5
8,0
-4,1
10
-5
-6,1

2,6
2,6
2,2
2,2
2,0
-7,5
5

1,3
1,2
0,8
0,5
0 -10

A
I

S
P
D

SF
ES

L
NL

R
UK

DK

IR
B+

G
I = Italy D = Germany F = France
ES = Spain UK = United Kingdom NL = Netherlands
DK = Denmark B + L = Belgium + Luxemburg
A = Austria S = Sweden P = Portugal
SF= Finland GR = Greece IRL = Ireland

In France, during the first 10 months of 2003, furniture production value

decreased by 6.1% comparing to the same period of the year 2002. Low
demand on both internal and external markets strongly affected all sub-
sectors except kitchen sector (+1.6%). Household furniture production
decreased by 6.7%, upholstered furniture by 4.4%, mattresses production by
4.8% and office market by 8.7%.

In United Kingdom, furniture production value increased by 1.1% for the

first half of the year 2003 comparing to the same period of the year 2002
(–1% expressed in Euros). This slow increase was influenced by the
individual consumption (Great Britain seems to avoid decline although the
consumption decreases), as well as by exports. The increase of imports was
mainly influenced by imports increase from Italy and other non-EU
countries.
Case Study

In Spain, furniture production value slightly increased by 1.3% at around

8,492 billion Euros. Furniture export slacked for the first 10 month of 2003
(comparing to the same period of the year 2002, at 1,242 billion Euros).
The main countries receiving its exports were France (29% from total
exports), followed by Portugal (15%) and Great Britain (7%). Imports
registered almost the same values as exports (+25%), reaching an almost
zero commercial balance for the first time; strong imports from China
(13 from total imports) partially explain this new situation.

In Netherlands, furniture producers, with more than 20 employees,

turnover decreased by 7.5% in 2003. Exports increased by 5.1% at around
737 billion Euros, Belgium and Germany being the most important partners
(29% of total exports, respectively 24%).

Imports also increased by 5.9% at around 1,700 billion Euros: 29% of

imports came from Germany followed by Belgium with 13%.

In Belgium, furniture industry turnover decreased by 1.2% during the first

half of 2003, comparing to the same period of the year 2002; this decrease
was influenced by both the difficult situation of household and office
furniture sectors and by the decline of its traditional markets. A better
situation was registered for the upholstered furniture (+1%), kitchen
furniture (+3%) as well as for mattresses furniture (+6.2%). During the same
period of time, exports decreased by 7.2% and imports by 2.6% while
internal market demand slacked.

Danish furniture producers exported goods of around 2.3 billion Euros in

2003. This represents a 1.2% increase comparing to 2002, conforming the
ability of this industry to maintain its influence over exporting markets, in
spite of foreign trade difficult situation. Positive results in 2003 were mainly
due to the increase trend of discounted furniture sold. Production sold to its
neighboring Scandinavian markets continued its stabilization trend noticed
in the past years while Swedish market registered a particular increase by
13%. The estimates show a production increase by 1.5% in 2003 that
amounts to around 2, 6 billion Euros.

Figures of 2003 show a continuous increase of furniture exports out of

Austria. For the first 6 months of 2003, furniture value exported only
 International Business

in EU countries amounted to around 574 billion Euros, increasing by 28%

comparing to the equivalent period of 2002. Germany and Italy remained
the main exporting countries. Exports increase may be explained by new
EU markets penetration as well as by the demand increase for Austrian
furniture in Ireland and Finland. More over, the Austrian market registered
impressive revenues of around 20% which indicate a good future evolution.
Most important exports were registered to Hungary (52 billion Euros) for
the first half of the year 2003, followed by Slovakia and Poland.

Imports slacked at around 730 billion Euros for the first half of the year
(imports from Germany amounted to 43%, while from Poland to 13%).

According to a study realized by the Austrian furniture industry during the

last trimester of the year 2003, most of the producers expected a
considerably improvement of the current situation for the year 2004.

In Sweden, furniture sales decreased by 3% during the first 8 months of the

year 2003. Both imports and exports faced decreases.

In Finland, production increased by 1.5% at around 1,150 billion Euros.

Exports have been maintained at the same levels as those of 2002
(275 billion Euros, with Sweden and Russia as main partners). Imports
registered 349 billion Euros (+1%), while Sweden and Estonia gathered haft
of total imports.

In Poland, furniture industry had a good evolution, mostly due to the

fact that Euros registered a 25% increase per zlot, which meant cheaper
exports in EU countries (representing three quarters form total production
and registered a12% increase). Production value increased by 12%
(3.3 billion Euros).

In Czech Republic, furniture production value reached 1.5 billion Euros

(+2.1% comparing to 2002). 73% of total production (1,100 billion Euros,
–1, 8% comparing to 2002) was exported mostly I Germany and Belgium.
Imports decreased by 4.8% at around 400 billion Euros (35% from
Germany, 30% from Russia and CEI states and 20% from Poland).
Case Study

In Romania, production value registered one of the most increasing rates

(+7.3% at around 895 billion Euros), due to strong exports mostly in
EU countries (699 billion Euros, meaning 7.1% increase). Imports
continued their boom registered also in the past year, amounting to a total of
125 billion Euros (+19%, mostly from Italy, Poland and Germany).

Furniture Production in the other European Countries in billion Euros

3500 3300 45
41,0 40
3000 '03 '03/02 35
30
2500 25
22,0 20
2000 15,0 15
12,0 12,0 11,310
1510 7,3 5
1500 2,1 1,1 0
895 -5
1000 755 695 -10
430 398 -15
500 290 275
139 -20
-25,0 -25
0 -30
PL CZ ROM SLV SK BG HU LT EST LV

PL = Poland CZ = Rep. Czech Republic ROM = Romania

SLV = Slovenia SK = Slovakia BG=Bulgaria HU = Hungary
LT = Lithuania EST = Estonia LV = Leetonia

Furniture industry in Slovakia registered one of the fastest increases in the

world for this type of industry for the last three years. In 2003 its production
increased by 43%, at around 695 billion Euros. This situation is explained
by increases of exports (661 billion Euros in 2003) mostly in Czech
Republic and in the EU countries. Imports also increased by 35.6% at
around 266 billion Euros, mostly coming from Poland.

In Bulgaria, furniture industry situation was quite positive. Production

value increased by 22.6% during 2003, amounting to 429.5 billion Euros.
Exports amounted to 128.5 billion Euros (+48%).
 International Business

In Hungary, furniture production value decreased by 25%, amounting

under 400 billion Euros. This was one of the worst years, especially after the
four years continuous increasing period. Imports were higher than exports
(216 billion Euros, comparing to 161 billion Euros).

In Lithuania, furniture industry should have registered a quite increased

rate (+15%). Exports increased by 17% for the first half of 2003, at around
142 billion Euros, while imports slacked at around 24 billion Euros.

Production value in Leetonia for furniture industry registered a 139 billion

Euros value, meaning 11.3% increase comparing to 2002. Exports
represented 80% of the total production (111 billion Euros) and were mainly
directed to Denmark, Germany and Great Britain. Imports registered an
amount of 36 billion Euros.

Romanian Place in The Furniture International Commerce

Wood processing and end products have been occupying a very important
place in Romanian national economy assembly. The producing capacity of
Romanian furniture factories is evaluated, at the current prices on the
international market, at around 1 milliard US$/year. At national level, the
Romanian furniture industry in the year 2000 realized 1.68% from the total
Romanian industrial production, 6.08% from export and 0.54% from imports.

Until the years 1980, Romania occupied the 6th place in Europe through the
furniture producers and the 12th place in what concerns the production
volume. At the end of the years 1980, the total furniture and wood export was
around 1 milliard US$, the production being at that time concentrated in 60 big
wood processing factories, that were practically situated all over the country.

After 1990, because of privatization programs, they were divided in several

furniture sections/factories focused on the realized production profile.
Because of that, but also because of moral and physical depreciation of used
equipment and technology, the furniture and wood products production
faced a significant decrease. Its straightening was felt after the 1998, once
the major factories privatization was over and new factories started to
appear on the market, endowed with the newest technology, suitable
dimensioned and therefore able to quickly adapt to the market demands.
The decrease in furniture production in the given period had as result both
the loss of traditional markets for Romanian furniture (ex CAER countries)
and the reduction in the internal market demand because of decreases in the
revenues of a significant part of Romanian population.
Case Study

Starting the year 2001, a slightly recover of Romanian furniture production

and export was noticed. The last mentioned one reached in the year 2002,
450 millions Euros, in 2002, 480 millions Euros, in 2003, 540 millions
Euros and in 2004, only 510 millions Euros.

Rom anian Furniture Export Evolution in the Last 3 Years,

expressed in Billion Euros

550 540
510
500 480
450
450

400
2001 2002 2003 2004

Romania only owes 1% of the world furniture commerce at the moment.

The year 2005 started unfavorably for Romanian producers who were
oriented on the external market (only 65% of total production), the reasons
being the decrease in the demand on the West traditional markets for
Romanian furniture (Germany, Italy, France, England, etc.) and the
exaggerated decrease of West Euros currency.

In these conditions, the Romanian producers are forced to look for new
outlets, to re-discover traditional markets (Russia, Ukraine, and other CSI
countries), which requires increased efforts taking into consideration the
external, extremely strong competition on these markets where all important
furniture producers/ exporters have entered.

Romanian industry and export have absolute developing perspectives for the
future, as the world economic situation improves, due its own raw material
capacity, qualified labor and the wish and ability of new managers/owners
to prove the possibilities and the availability to invest in this traditional
activity in Romania.
 International Business

The structure of Romanian furniture production for 2004

PRODUCTION VALUE
DENOMINATION PERCENT %
(BILLION LEI)
Bedrooms 1762 14.3
Youth furniture 138 1.1
Children furniture 103 0.8
Dining rooms 1499 12.1
Bookcases 863 7
Office furniture 354 2.9
Small furniture 3560 12.5
Kitchens 623 5
Corner benches 534 4.3
Commercial furniture 19 0.2
School furniture 78 0.6
Hotel furniture 0,17 -
Garden furniture 0.04 -
Simple chairs 761 6.1
Bentwood chairs 393 3.2
Colonial chairs 142 1.1
Folding chairs 42 0.3
Ergonomically chairs 375 3.1
Upholstery furniture 1476 11.9
Mattresses 109 0.9
Cloakroom furniture 28 0.2
Toys 2 -
Shelves 0.02 -
Living rooms 243 2
Hospital furniture 3 -
Other furniture 1287 10.4
Total production 14394 100

The Competition and the Place of “Duo Business” Company

in the Furniture Export

Until the year 1990, Romania exported furniture and wood products which
valued around 1100 millions US$, the export being concentrated in the
hands of 3 important Commerce Houses: SC TEHNOFORESTEXPORT,
SC ILEXIM – representing the local industry and ICECOOP – representing
the co-operations. Among them, SC TEHNOFORESTEXPORT realized
around 80% of total exports, SC ILEXIM – 14% and ICECOOP – 6 %.
Case Study

After 1990, once the state monopole on the production, internal commerce
and export was broken, hundreds of exporters appeared who could be
classified in 3 main categories:
ƒ ex- important monopolists (or what was left of them);
ƒ Direct producers/exporters;
ƒ Several exporting companies focused on clients or markets or furniture
categories.
The ex-monopolists disappeared both because of the interior factors (a lot of
specialists/ commercial people left the company and, together with some
clients started businesses of their own) and of external factors.

After that, TEHNOFOREST, ILEXIM and ICECOOP started the privatization

process and became joint-stocks companies but their weight in Romanian
furniture export decreased continuously, such that, in the end of the year
2002 the 3 of them realized around 8-10% of a total of 600 mil $ (some data
show that the total amount of export at the end of 2002 was of 610 mil. $,
while some others registered 560 mil. $).

The producers were unpleased by the representation and monitoring by the

ex-monopole companies and because of that, as soon as the opportunity
appeared, they launched on their own businesses and the external clients
preferred, of course, to work directly with them, because they were more
flexible and accessible from the point of view of assortments and prices.

Therefore, the important furniture producers took over in their hands the
export, realizing deliveries for the traditional clients but also for new ones.
This was possible thanks to the direct contacts established in time with
external clients and to the producers’ desire to be present on the external
markets, to be closer to the customer and therefore to know directly the
demands and the desires on the market.

The need to apply new technologies was also of a big importance; this was
mostly realized by the use of external “technical credits”, because the
Romanian credit market was not offering the possibility to acquire
advantageous products. On one hand, the possibility to acquire these credits
was a benefic thing because it helped the producers to renew their
equipments and technologies for the furniture processing and on the other
hand, it forced them that, on the entire period of crediting and
reimbursement to deliver with priority only what the creditors asked for and
most of the times for prices bellow the market.
 International Business

For the last years, the producers directly exported the furniture, realizing a
volume of around 50% form the total Romanian furniture export.

The rest of around 40% of the export belongs to some companies that
appeared after 1990 and which included the furniture export in their activity
domain.

According to the data obtained from the Ministry of Industry, 3000

economic agents having as object of activity the furniture
production/commercialization activate at the moment in Romania. A lot of
these companies are small and medium enterprises. Only 140 of the total
have more than 300 employees. The number of furniture producing
companies increased 1000 times between 1989 and 2001. The same sources
however identify among these around 100 active companies in the furniture
export domain, among which around 30 having a permanent export activity.

Furniture Export Allocation for the year 2003 (860,000 euro total)

DEMEROM
Other companies (0,86 billion
(240 billion euros)
euros) 0%
40% Furniture
producers
(300 billion
euros)
50%

Ex-monopole
Commerce
Houses before
1990:
Tehnoforest,
Ilexim, Icecoop
(60 billion euros)
10%

However, it should be admitted that “Duo Business”, having a total export

of around 1,000,000 Э, for the year 2003 only occupies 0.03 % from the
percentage allocated to “Other companies” and it is therefore negligible as
reported to the total volume of Romanian furniture export.
Case Study

Products Portfolio Analysis

This analysis objective is to describe the strategic position of each exported

product by the company in order to determine resource allocation. The
characterization of each product or group of products is done according to
the intrinsic attraction criteria of reference marketing segment to company’s
competition level for each of the above analyzed products.

We shall draw a multi-criteria grid for exported products or range of

products by Duo Business and we shall consider a scoring from 1 to 5 for
each criterion taken into consideration using at the same time percentage
coefficients. We shall then add the obtained percentages horizontally and a
score matrix will afterwards be constructed.

Attractiveness Market Increasing Gross Margin Clients Competition Total

Indicators Attractiveness Indicator Potential Concentration

Score/Percent Score/Percent Score/Percent Score/Percent Score/Percent

Europe <5% <5% 3 Strong

Bedrooms
3 / 0.2 1 / 0.05 2 / 0.15 3 / 0.05 1 / 0.05 1.15

Europe
<5% <5% 3 Strong
Living rooms + USA
2 / 0.05 2 / 0.1 3 / 0.05 1 / 0.05 1.3
4 / 0.2

Strong
Small Europe 5 – 10 % 5 – 10 % 5
2 / 0.05
furniture 3 / 0.2 2 / 0.1 4 / 0.2 4 / 0.15 2.3

Europe
Upholstered 5 – 10 % <5% 1 Strong
+ USA
furniture 3 / 0.2 1 / 0.2 1 / 0.05 2 / 0.1 1.85
4 / 0,2

USA > 10 % 15 – 25 % 1 Strong

Bunk beds
4 / 0,3 4 / 0.2 4 / 0.15 1 / 0.05 1 / 0.01 2.66
 International Business

Competitiveness Relative Market Share Price Construction Total

Indicator Difficulty

Score/Percent
Score/Percent Score/Percent

<1/3 benchmarking <,= than competition High

Bedrooms 2.3
2 / 0.2 3 / 0.5 1 / 0.4

<1/3 benchmarking <,= than competition High

Living rooms 2.5
2.5 / 0.2 3 / 0.5 1 / 0.5

<1/3 benchmarking <,= than competition Medium

Small furniture 4.3
3 / 0.2 3 / 0.9 2 / 0.5

<1/3 benchmarking <,= than competition Medium

Upholstered furniture 3.9
2.5 / 0.25 3 / 0.6 2.5 / 0.6

Overlapped children <1/3 benchmarking < than competition Low

4.5
beds 1 / 0.5 4 / 0.5 4 / 0.5

Obtained results interpretation will be done using a bi-dimensional system,

similar to BCG matrix, with the following values:

Overlapped
Living Small Upholstered
Bedrooms children
rooms furniture furniture
beds
Attractiveness 1.15 1.3 2.3 1.85 2.66

Competitiveness 2.3 2.5 4.3 3.9 4.5

It should be noticed that the attractiveness/competitiveness matrix has some

limitations, among which we can mention the followings:

Ö Relative measures because of the subjectivity risk in indicators chosen

and mostly in chosen evaluation criteria.

Ö The more criteria used and the more products or activities analyzed, the
more difficult the procedure.
Case Study

Products Portfolio Matrix

H 6
i
A g
t h
t 5
r M
a e
c d
t i 4
i u
v m
e
n S 3
e m
s a
s l
l 2

1
1 2 3 4 5 6
Small Medium High
Competitiveness

Legend

Bedrooms Small furniture Bunk Beds

Living rooms Upholstered furniture

However, this method offers an image quite clear on the developed

activities, products and their position on the market, allowing an overview
of results as well as a simple and expressive view.

It also determines society to think in market attractiveness terms and

competition ability which is essential for a foreign trade company; it
establishes both financial and human resource allocation priorities and, most
 International Business

important, it suggests differential development strategies for activities and

group of activities.

Analyzing the products portfolio in the attractiveness/competitiveness

matrix, it can be noticed that there is no “star” product with a higher market
share and extremely competitive that could offer important financial
liquidities for the company.

Most of portfolio products maintain relatively low to medium market shares,

having similar characteristics to problem-children in BCG matrix. Their
objective should be concentrated either towards support and intense
promotion or renouncement in terms of resource allocation.

Because of the present situation on the furniture market which has had a
decreasing trend during the last period, the fact that the forecast is not very
optimistic or, in the best case, of a reserved optimism, and because the
competition is really strong, the associates decided the launching of a new
product on the international furniture market: wrought iron as an activity
input in order to assure the development and improvement of company’s
financial results. The already existing activities will not be neglected and
new solutions will be sought in order to improve both exports and
traditional products market.

Why? Because we remain in a very well known furniture area and we also
come with a new product, whose market share is in a continuous increase.
Furniture market is subject to fashion and fashion brought this new slightly
dusty and romantic breath for wrought iron which can be used both outside
for garden furniture and inside as raw material for beds, bookshelves,
couches, tables, chairs, and so on.

Launching a New Range of Products on the International Furniture

Market: Wrought Iron Furniture

Market Selection And Auditorium Segmentation

European wood furniture market amounts to around 120 billion Euros

yearly, while wrought iron market hardly reaches 1% of this market, which
amounts to around 1, 2 billion Euros. However, for a small size company
and not only, holding a percent of this quota would represent an important
point in its activity development and financial result improvement.
Case Study

Most important consuming wrought iron furniture markets are the

followings:

Interior furniture Garden furniture Total

516 billion Euros

Italy 348 billion Euros (29 %) 168 billion Euros (14 %)
(43 %)

240 billion Euros

Germany 180 billion Euros (15 %) 60 billion Euros (5 %)
(20 %)

180 billion Euros

Netherlands 180 billion Euros (15 %) -
(15 %)

144 billion Euros

France 120 billion Euros (10 %) 24 billion Euros (2 %)
(12 %)

Other 120 billion Euros

countries (10 %)

European Wrought Furniture Consuming

Countries.
Percentage of Total Imported Furniture

Other countries

Netherlands

Italia
0 10 20 30 40 50

Wrought iron interior furniture

Wrought iron garden furniture

Auditorium segmentation requires consumers grouping according to

similar characteristics and needs, similar merchandise requirements, similar
buying reasons or similar acting ways. Some segments can bring
advantages; others can be fluctuant while others can bring disadvantages.
 International Business

Analysis of specific indicators offers a clearer image on interest markets:

Italy Germany France

Population (thousand inhabitants) 58 82 59
Yearly income/ person (Euro) 25,600 25,900 27,300
Total furniture market (billion Euros) 29.7 25.2 9.15
Forecasted yearly increase 4.1 % 2.4 % 6.1 %
Internal consumption 590 920 540
Furniture stores (in 2003) 20,000 15,000 11,000
Average surface (sq m) 500 sq m 650 sq m 1500 sq m

Our purpose focuses on choosing and managing of only those segments

that can bring revenues and benefits, with minimum allocated
resources.

This is the reason why the managers decided that Italy should be the target
market, considering the followings:
Ö It is a very well known market since most of company’s up to date
exports have been directed towards Italy;
Ö Buyers mentality is very well known and Italian language is accessible;
Ö There have already been offer requests registered in company’s data
base

Other potential markets will not be neglected but company’s efforts and
resources will mainly be allocated towards this market.

Market segmentation policies can be very different depending on the

merchandise and they must be combined in order to adapt to each business
conditions. They can be grouped in two major categories:

Ö Private buyers group, with sub-groups depending on the following:

o Geographical location (local, national, international)
o Demography (age, sex, social status, income, occupation, training
level, religion, race, nationality, etc.)
o Social position, way of living
Case Study

Ö Corporate buyers group

Both practice and products special features lead to the conclusion that the
best segment is the one of en-gross buyers group. They can launch
important orders from quantitative point of view which optimize and render
profitable both production and exports.
Small buyers do not present interest because in most cases the orders do not
even cover a full transport.
Potential Markets Attractiveness Analysis
Company’s export potential analysis is presented using a two variables
matrix, through the identification of key factors and their evaluation from
1 to 5, where 1 is the lowest level and 5 represents the maximum level.
The scores are expressed in percentages depending on the relative
importance of each factor assigned subjectively but still correlated with
indicators that characterize each of them. Percentage values are added for
each matrix dimension. We shall analyze export potential for the main
markets: Italy, Germany and France.

Percentage
Influence Factors Score Percentage
Value
I: 5 I: 0.3 I: 1.5
Market size G: 4 G: 0.2 G: 0.8
F: 4 F: 0.2 F: 0.8
I:4 I: 0.2 I: 0.8
Yearly increasing rate G: 4 G: 0.1 G: 0.4
F :3 F: 0.1 F: 0.3
I: 2 I: 0.15 I: 0.3
Competition intensity G: 2 G: 0.15 G: 0.3
F: 2 F: 0.15 F: 0.3
I: 3 I: 0.6 I: 1.8
Technical requirements G: 3 G: 0.5 G: 1.5
F: 3 F : 0.5 F: 1.5
I: 4 I: 0.5 I: 0.2
Inflation G: 4 G: 0.05 G: 0.2
F: 4 F: 0.05 F: 0.2
I: 4 I: 0.1 I: 0.4
Gross margin G: 4 G: 0.1 G: 0.4
F: 3 F: 0.08 F: 0.24
I: 4 I: 0.05 I: 0.2
Legislation G: 4 G: 0.05 G: 0.2
I: 4 F: 0.05 F: 0.2
Italy: 5.2
Total Germany: 3.8
France: 3.54
 International Business

Markets attractiveness analysis confirm company’s initial hypothesis

according to which Italy is the most attractive market for this new products
portfolio launching.

Company’s Export Potential Analysis

Company’s export potential analysis is expressed using the same matrix and
the same scoring system:
Percentage
Influence Factors Score Percentage
Value
Market share 1 0.15 0.15
Product’s quality 4 0.2 0.8
Selling network 3 0.1 0.3
Price competitiveness 4 0.2 0.8
Promotion 3 0.1 0.3
Unitary cost 4 0.1 0.4
Material resources 3 0.1 0.3
Total 3.05

Company’s position results being good due to products’ quality and price
competitiveness but an intense promotion action should be carried on in
order to present the offered product and to determine the buying decision
making of consumers.

Consumer’s Behavior

Furniture market is mainly influenced by specific cultural features of each

country, by population living standards and by fashion trends. Present
market is characterized by a continuous change and value reorientation. As
a rule, we can classify consumers’ preferences as it follows:
ƒ Germany: prefers a solid, voluminous, regular geometric forms, with
sober but economic lines, practice and good taste furniture;
ƒ France: prefers a more subtle, sophisticated, clear and antique-type
colors furniture;
ƒ Italy: Italians look for a supple, dark colored furniture. Even if the
preferred style is “arte povera”, characterized by very simple, minimum
lines of light essences furniture or a more valuable style of noble
essences such as cherry tree or nut tree, Italians prove a lot of
imagination in combining pieces of furniture.
Case Study

No matter the analyzed segment, the modern consumer expects a furniture

product to respond to his needs which requires esthetics, functionality,
comfort and competitive price for a good quality.

Once gathered all data for different market segments, their systematization
should be thought of in order to place them in an adequate order. First,
potential consumers’ needs, priorities and characteristics must be identified.
This information is structured taken into consideration the initial purposes.

Consumers’ needs are expressed through their wishes, targets and purposes.
Needs are the definition of their household and office consumption
requirements. Consumer’s advantages and priorities represent the result
towards which it reaches to satisfy his needs.

Consumer’s characteristics indicate his behavior, requirements and

expectations. We must be aware and understand consumer’s needs before
determining the potential auditorium and we shall take into account the
followings:
ƒ Who are the questionnaire subjects?
ƒ How do we ask questions?
ƒ Why are we asking questions?

The representatives of identified market segments are the subjects of

questionnaire and the bigger their number, the more representative it will be
for the given segment.

There are three tools defining what should be identified throughout a

questionnaire:
ƒ Critical links analysis
ƒ Critical interactions analysis
ƒ Consumers characteristics

Critical links analysis:

Critical links represent the points of real contacts with consumers and
determine the behavior towards them.
 International Business

The main issue is to determine what is really important for the consumer out
of the products the company can offer. Where the consumers consider
critical contact points they actually express their desires and expectations
that might be met by Duo Business.

Critical links graph in Duo Business’s case is presented bellow:

Figure 1

1. Merchandise quality

2. Specificity
Delivery
Distribution
Consumer

3. Suppliers

4. Complaints
Service
5. Price
Other problems

Why quality comes first? The buyer must be certain that the merchandise is
reliable and fully meets his demands, without causing future problems when
used. Duo Business’s advantage consists in the fact that a good quality
product improves buyers’ trust and finally leads to increased sales and
higher profits.

The second place is allocated to specificity, delivery and distribution since

they are very important for the company: the wider the products range, the
better the consumer’s needs met, therefore higher sales are expected.
Delivery is a critical issue because meeting the delivery terms is an essential
condition for contract obligations achievement.
Case Study

Merchandise suppliers are the 3rd element because, although up to a certain

point their and Duo Business’s interests are common, it is compulsory that
they also accomplish contractual obligations regarding orders, range of
products and delivery terms. These collaborations can be improved thorough
strengthening suppliers contacts and improvement of informational cycle.
The 4th point covers complaints solving, an adequate service as well as other
problems management. This point is strongly related to the 1st one –
merchandise quality – and is a strong condition for insuring buyer’s trust in
company’s seriousness and potential.
Price is the 5th because is an essential contractual element, it is negotiated
and agreed upon and it usually remains unchanged for a certain period of
time. It reflects both product’s quality and partners’ seriousness and
availability in finding a real equilibrium among the factors that characterize
the merchandise and its usage value. Practice has shown many times that
price not necessarily reflects merchandise’s real value and in this case, it
either cannot be produced by the supplier or bought by clients.
Critical interactions graph for Duo Business:
Figure 2

1. Specificity
Delivery
Distribution

2. Sales:
• exhibitions
SC Duo Business SRL • offers
• merchandise information

3. Payroll employees/collaborators

• Contracts
• Orders
44. General Manager • Invoices
• Delivery terms
 International Business

The first point includes deliveries, specificity and distribution and it is very
important for Duo Business because specificity meeting and in time delivery
for the required range of products satisfy both contract partners demands
and company’s needs thorough the increase of company’s cash flow. The
higher this ration, the better the company’s financial results.

The 2nd point, including sales, exhibitions, offers and merchandise

information also influence Duo Business results: the higher the sales, the
higher the demand and therefore the deliveries. Sales slack leads to
deliveries cease or delay and therefore at cash flow rotation slowing. This is
why sales must be continuously stimulated and supported using all
accessible means, including the attraction of new clients.

Payroll – 3rd point – is also a sensitive indicator, especially for a small

enterprise such as Duo Business. In case the company’s deliveries and
therefore its encashment decrease, employees’ income and as a
consequence, their interest also decrease.

The general manager – 4th point – must involve in all already mentioned
steps through an uninterrupted control of deliveries, encashment and
payrolls since the very moment of contract signing, always searching
stimulating and accomplishable opportunities.

Products portfolio expressed as services panoply

Selling services

Packaging

Base service

Quality Design

Guaranty Delivery and credit conditions

Selling Prognostic
Case Study
 International Business

The base service corresponds to the functional value of products range, in

this case the wrought iron furniture.

Secondary services are additional services if comparing to the base service

but they are also very important; they generate consumer’s satisfaction and
may become a choosing criteria for a certain brand instead of another.

Our company is extremely careful that its products are packaged according
to its clients requirements, accordingly marked, offer a 1 month guaranty
from the reception moment for perceptible defects and 1 year guaranty from
the reception moment for hidden defects or production vices.

It also offers commercial credits up to 60 days from the merchandise

clearance date.

Quantity Selling Prognostic Bunk beds

Wrought iron
20000 furniture
18000
16000 Small furniture
14000
12000 Upholstery
10000 furniture
8000 Living rooms
6000
4000
2000 Bedrooms
0
2004 2005 2006 2007

Value selling prognostic Bunk beds

3000000 Wrought iron

furniture
2500000
Small furniture
2000000
1500000 Upholstery
1000000 furniture
500000 Living rooms

0
Bedrooms
2004 2005 2006 2007
Case Study

Success Probability:

We can estimate success probability in launching of a new range of products

– wrought iron furniture – using an evaluation matrix built based on a
multi-criteria evaluation grid.

The horizontal dimension represents the attractiveness of this project for the
company and the index is determined through the multi-criteria matrix built
on relevant qualitative and quantitative elements for the enterprise.

The vertical dimension represents the technological and commercial success

probability.

The scores are between 1 and 5; 1 for the lower and 5 for the best
qualification.

Launching the wrought iron furniture on int’l market:

ATTRACTIVENESS
ESTIMATES SCORS OBTAINED
INDICATORS
In formation Ascending Slack Negative
1. Market trend 4
x
> 5 years 3-5 years 2-3 years 1-2 years
2. Product’s life 4
x
Germany Italy Belgium - Germany Italy Belgium
3. Level of potential
market > 500,000 >200,000 >200,000 - 5 3 3
(quantity/pieces)
1.000.000 233.000 214.000 -
Germany Italy Belgium - Germany Italy Belgium
4. Level of potential
market (value in > 50,000 >25,000 >25,000 - 5 3 3
thousand Euros)
130,000 30,290 27,820 -
Very well Well known Not well Not known Germany Italy Belgium
5. Consumer’s needs known known
x x x 1 4 2
6. Receptivity of Enthusiastic Positive Neutral Reticent
3
distribution channels x
Germany Italy Belgium Others Germany Italy Belgium
7. Market accessibility Difficult Easy Relatively Very 1 4 2
easy difficult
Germany Italy Belgium
Average score obtained
3.28 3.57 3.00
 International Business

COMPETITIVENESS SCORS
ESTIMATES
INDICATORS OBTAINED
1. Product’s Very high High Medium Low
attractiveness x
5
Very high High Medium Low
2. Competition
x
4
> 3 ani 1-3 ani < 1 an < 6 luni
3. Exclusivity duration
x
4
Relatively
Slightly lower Lower Bigger
4. Price equal 4
x
5. Client-seller Very high High Medium Low
compatibility x
3
Very high High Medium Low
6. Selling power
x
3
Very high High Medium Low
7. Quality level
x
3
Average score obtained 4

Success probability for wrought iron furniture launching – graphic

representation based on the above calculated indicators’ analysis:

Competitiveness
Rice bean of new launched Pearls
products

4 Wrought
iron furniture
3
Attractiveness
2 for the company
1

1 2 3 4 5

Lost causes Buds