case study

Maytag: A Sales Promotion Debacle in England and the Allure of Outsourcing

T he atmosphere at the annual meeting in the little Iowa town of Newton had turned contentious. As Leonard Hadley faced increasingly angry questions from disgruntled shareholders, the thought crossed his mind: “I don't deserve this!” After all, he had only been CEO of Maytag Corporation for a few months, and this was his first chairing of an annual meeting. But the earnings of the company had been declining every year since 1988, and in 1992, Maytag had had a $315.4 million loss. No wonder the stockholders in the packed Newton High School auditorium were bitter and critical of their management. But there was more. Just the month before, the company had a public embarrassment and costly atonement resulting from a monumental blunder in the promotional planning of its United Kingdom subsidiary. Hadley doggedly saw the meeting to its close, and limply concluded: “Hopefully, both sales and earnings will improve this year.”1

THE FIASCO

In August 1992, Hoover Limited, Maytag's British subsidiary, launched this travel promotion: Anyone in the United Kingdom buying more than 100 UK pounds worth of Hoover products (about $150 in American dollars) before the end of January 1993 would get two free round-trip tickets to selected European destinations. For 250 UK pounds worth of Hoover products, they would get two free round-trip tickets to New York or Orlando.

A buying frenzy resulted. Consumers quickly figured out that the value of the tickets easily exceeded the cost of the appliances necessary to be eligible for them. By the tens of thousands, Britains rushed out to buy just enough Hoover products to qualify. Appliance stores were emptied of vacuum cleaners. The Hoover factory in Cambuslang, Scotland that had been making vacuum cleaners only three days a week was suddenly placed on a 24-hour, seven-days-a-week production schedule—an overtime bonanza for the workers. What a resounding success for a promotion! Hoover managers, however, were unhappy.

Hoover never ever expected more than 50,000 people to respond. And of those responding, it expected far less would go through all the steps necessary to qualify for the free trip and really take it. But more than 200,000 not only responded but also qualified for the free tickets. This response overwhelmed the company. The volume of paperwork created such a bottleneck that by the middle of April only 6,000 people had flown. Thousands of others either never got their tickets, were not able to get the dates requested, or waited for months without hearing the results of their applications. Hoover established a special hotline to process customer complaints, and these were coming in at 2,000 calls a day. But the complaints quickly spread, and the ensuing publicity brought charges of fraud and demands for restitution. This raises the issue of loss leaders—how much should we use loss leaders as a promotional device?—discussed in the following Issue Box.

Maytag dispatched a task force to try to resolve the situation without jeopardizing customer relations any further. But it acknowledged that it's “not 100% clear” that all eligible buyers will receive their free flights.2 The ill-fated promotion was a staggering blow to Maytag financially. It took a $30 million charge in the first quarter of 1993 to cover unexpected additional costs linked to the promotion. Final costs were expected to exceed $50 million, which would be 10 percent of UK Hoover's total revenues. This for a subsidiary acquired only four years before that had yet to produce a profit.

ISSUE BOX

SHOULD WE USE LOSS LEADERS?

Leader pricing is a type of promotion with certain items advertised at a very low price—sometimes even below cost, in which case they are known as loss leaders—in order to attract more customers. The rationale for this is that such customers are likely to purchase other regular-price items as well, with the result that total sales and profits will be increased. If customers do not purchase enough other goods at regular prices to more than cover the losses incurred from the attractively priced bargains, then the loss leader promotion is ill advised. Some critics maintain that the whole idea of using loss leaders is absurd: The firm is just “buying sales” with no regard for profits.

While UK Hoover did not think of their promotion as a loss leader, in reality it was: They stood to lose money on every sale if the promotional offer was taken advantage of. Unfortunately for its effectiveness as a loss leader, the likelihood of customers purchasing other Hoover products at regular prices was remote, and the level of acceptance was not capped, so that losses were permitted to multiply. The conclusion has to be that this was an ill-conceived idea from the beginning. It violated these two conditions of loss leaders: They should stimulate sales of other products, and their losses should be limited.

Do you think loss leaders really are desirable under certain circumstances? Why or why not?

Adding to the costs were problems with the two travel agencies involved. The agencies were to obtain low-cost space-available tickets and would earn commissions selling “packages,” including hotels, rental cars, and insurance. If consumers bought a package, Hoover would get a cut. However, despite the overwhelming demand for tickets, most consumers declined to purchase the package, thus greatly reducing support money for the promotional venture. So, Hoover greatly underestimated the likely response and overestimated the amount it would earn from commission payments.

If these cost overruns added greatly to Maytag and Hoover's customer relations and public image, the expenditures would have seemed more palatable. But with all the problems, the best that could be expected would be to lessen the worst of the agitation and charges of deception. And this was proving impossible. The media, of course, salivated at the problems and were quick to sensationalize them:

One disgruntled customer, who took aggressive action on his own, received the widest press coverage, and even became a folk hero. Dave Dixon, claiming he was cheated out of a free vacation by Hoover, seized one of the company's repair vans in retaliation. Police were sympathetic: they took him home, and did not charge him, claiming it was a civil matter.3

Heads rolled also. Initially, Maytag fired three UK Hoover executives involved, including the president of Hoover Europe. Mr. Hadley, at the annual meeting, also indicated that others might lose their jobs before the cleanup was complete. He likened the promotion to “a bad accident … and you can't determine what was in the driver's mind.”4

The issue, receiving somewhat less publicity, was why corporate headquarters allowed executives of a subsidiary such wide latitude that they could saddle parent Maytag with tens of millions in unexpected costs. Did top corporate executives not have to approve ambitious plans? A company spokesman said that operating divisions were “primarily responsible” for planning promotional expenses. While the parent may review such outlays, “if they're within parameters, it goes through.”5 This raises the issue, discussed in the following Issue Box, of how loose a rein foreign subsidiaries should be allowed.

ISSUE BOX

HOW LOOSE A REIN FOR A FOREIGN SUBSIDIARY?

In a decentralized organization, top management delegates considerable decision-making authority to subordinates. Such decentralization—often called a “loose rein”—tends to be more prevalent with foreign subsidiaries, such as UK Hoover. Corporate management in the United States understandably feels less familiar with the foreign environment and more willing to let the native executives operate with less constraints than it might with a domestic subsidiary. In the Maytag/Hoover situation, decision-making authority by British executives was evidently extensive, and corporate Maytag exercised little operational control, being content to judge performance by ultimate results achieved. Major deviations from expected performance goals, or widespread traumatic happenings—all of which happened to UK Hoover—finally gained corporate management attention.

Major advantages of extensive decentralization or a loose rein are: (1) top management effectiveness can be improved because time and attention is freed for presumably more important matters; (2) subordinates are permitted more self-management, which should improve their competence and motivation; and (3) in foreign environments, native managers presumably better understand their unique problems and opportunities than corporate management, located thousands of miles away, possibly can. But the drawbacks are as we have seen: Parameters within which subordinate managers operate can be so wide that serious miscalculations may not be stopped in time. Because top management is ultimately responsible for all performance, including actions of subordinates, it faces greater risks with extensive decentralization and giving a free rein.

“Because the manager is ultimately accountable for whatever is delegated to subordinates, then a free rein reflects great confidence in subordinates.” Discuss.

BACKGROUND ON MAYTAG

Maytag was a century-old company. The original business, formed in 1893, manufactured feeder attachments for threshing machines. In 1907, the company moved to Newton, Iowa, a small town thirty miles east of Des Moines, the capital. Manufacturing emphasis turned to home laundry equipment and wringer-type washers.

A natural expansion of this emphasis occurred with the commercial laundromat business in the 1930s, when coin meters were attached to Maytag washers. Rapid growth of these coin-operated laundries took place in the United States during the late 1950s and early 1960s. The 1970s hurt laundromats with increased competition and soaring energy costs. In 1975 Maytag introduced new energy-efficient machines and “Home Style” stores that rejuvenated the business.

TABLE 12.1 Maytag Operating Results, 1974–1981 (in millions)

THE LONELY MAYTAG REPAIRMAN

For years Maytag reveled in a coup, with its washers and dryers enjoying a top-quality image, thanks to decades-long ads in which a repairman laments his loneliness because of Maytag's trouble-free products. (The actor who portrayed this repairman died in early 1997.) The result of this dependability and quality image was that Maytag could command a price premium: “Their machines cost the same to make, break down as much as ours—but they get $100 more because of the reputation,” grumbled a competitor.6

During the 1970s and into the 1980s, Maytag continued to capture 15 percent of the washing machine market and enjoyed profit margins about twice that of competitors. Table 12.1 shows operating results for the period 1974–1981. Whirlpool was the largest factor in the laundry-equipment market, with a 45 percent share, but this was largely because of sales to Sears under the Sears brand.

ACQUISITIONS

For many years until his retirement December 31, 1992, Daniel J. Krumm had influenced Maytag's destinies. He had been CEO for eighteen years and chairman since 1986, and his tenure with the company encompassed forty years. In that time, the home-appliance business encountered some drastic changes. The most ominous occurred in the late 1980s with the merger mania, in which the threat of takeovers by hostile raiders often motivated heretofore conservative executives to greatly increase corporate indebtedness, thereby decreasing the attractiveness of their firms. Daniel Krumm was one of these running-scared executives, as rumors persisted that the company was a takeover candidate.

TABLE 12.2 Maytag Operating Results, 1989–1992

Largely as a defensive move, Krumm pushed through a deal for a $1 billion buyout of Chicago Pacific Corporation (CPC), a maker of vacuum cleaners and other appliances with $1.4 billion in sales. As a result, Maytag was burdened with $500 million in new debt. Krumm defended the acquisition as giving Maytag a strong foothold in a growing overseas market. CPC was best known for the Hoover vacuums it sold in the United States and Europe. Indeed, so dominant was the Hoover brand in England that many people did not vacuum their carpets but “hoovered” them. CPC also made washers, dryers, and other appliances under the Hoover brand, selling them exclusively in Europe and Australia. In addition, it had six furniture companies, but Maytag sold these shortly after the acquisition.

Krumm had been instrumental in transforming Maytag, the number-four US appliance manufacturer—behind General Electric, Whirlpool, and Electrolux—from a niche laundry-equipment maker into a full-line manufacturer. He had led an earlier acquisition spree in which Maytag had expanded into microwave ovens, electric ranges, refrigerators, and freezers. Its brands now included Magic Chef, Jenn-Air, Norge, and Admiral. The last years of Krumm's reign, however, were not marked by great operating results. As shown in Table 12.2, revenues showed no gain in the 1989–1992 period, while income steadily declined.

TROUBLE

Although the rationale for internationalizing seemed inescapable, especially in view of a recent wave of joint ventures between US and European appliance makers, the Hoover acquisition was still troublesome. While it was a major brand in England and in Australia, Hoover had only a small presence in Europe. Yet this was where the bulk of the market was, with some 320 million potential appliance buyers.

The probabilities of the Hoover subsidiary being able to capture much of the European market were hardly promising. Whirlpool was strong, having ten plants there in contrast to Hoover's two. Furthermore, Maytag faced entrenched European competitors such as Sweden's Electrolux, the world's largest appliance maker; Germany's Bosch-Siemens; and Italy's Merloni Group. General Electric had also entered the market with joint ventures. The fierce loyalty of Europeans to domestic brands raised further questions as to the ability of Maytag's Hoover to penetrate the European market without massive promotional efforts, and maybe not even then.

TABLE 12.3 Operating Results of Maytag's Principal Business Components 1990–1992

Australia was something else. Hoover had a good competitive position there, and its refrigerator plant in Melbourne could easily be expanded to include Maytag's washers and dryers. Unfortunately, the small population of Australia limited the market to only about $250 million for major appliances.

Britain accounted for half of Hoover's European sales. But at the time of the acquisition its major appliance business was only marginally profitable. This was to change: after the acquisition it became downright unprofitable, as shown in Table 12.3 for the years 1990 through 1992, as it struggled to expand in a recession-plagued Europe. The results for 1993, of course, reflected the huge loss from the promotional debacle. Hardly an acquisition made in heaven.

Maytag's earlier acquisitions also soured. Its acquisitions of Magic Chef and Admiral were diversifications into lower-priced appliances, and these did not meet expectations. But they left Maytag's balance sheet and its cash flow weakened (see Table 12.4). Perhaps more serious, Maytag's reputation as the nation's premier appliance maker became tarnished. Meanwhile, General Electric and Whirlpool were attacking the top end of its product line. As a result, Maytag found itself in the No. 3 or 4 position in most of its brand lines.

TABLE 12.4 Long-Term Debt as a Percent of Capital From Maytag's Balance Sheets, 1986–1991

Year	Long-Term Debt/Capital
1986	7.2%
1987	23.3
1988	48.3
1989	46.8
1990	44.1
1991	42.7

Source: Company annual reports.

Commentary: The effect of acquisitions, in particular that of the Chicago Pacific Corporation, can be clearly seen in the buildup of long-term debt. In 1986, Maytag was virtually free of such commitments; two years later its long-term debt ratio had increased almost seven-fold.

ANALYSIS

FLAWED ACQUISITION DECISIONS

The long decline in profits after 1989 should have triggered strong concern and corrective action. Perhaps it did, but the action was ineffectual as the decline continued, culminating in a large deficit in 1992 and serious problems in 1993. As shown in Table 12.2 above, the acquisitions brought neither revenue gains nor profitability. One suspects that in the rush to fend off potential raiders in the late 1980s, the company bought businesses it might never have under more sober times, and that it paid too much for these businesses. Further, they cheapened the proud image of quality for Maytag.

WHO CAN WE BLAME IN THE UK PROMOTIONAL DEBACLE?

Corporate Maytag management was guilty of a common fault in their acquisitions: they gave newly acquired divisions a loose rein, letting them continue to operate independently with few constraints: “After all, these executives should be more knowledgeable about their operations than corporate headquarters would be.” Such confidence is sometimes misguided. In the UK promotion, Maytag management would seem as derelict as management in England. Planning guidelines or parameters were far too loose and undercontrolled. The idea of subsidiary management being able to burden the parent with $50 million of unexpected charges, and to have such a situation erupt with no warning, borders on the absurd.

Finally, the planning of the UK executives for this ill-conceived travel promotion defies all logic. They vastly underestimated the demand for the promotional offer and they greatly overestimated paybacks from travel agencies on the package deals. Yet it took no brilliant insight to realize that the value of the travel offer exceeded the price of the appliance—indeed, 200,000 customers rapidly arrived at this conclusion—that such a sweetheart of a deal would be irresistible to many, and that it could prove costly in the extreme to the company. A miscalculation, or complete naiveté on the part of executives and their staffs who should have known better?

HOW COULD THE PROMOTION HAVE AVOIDED THE PROBLEMS?

The great problem resulting from an offer too good could have been avoided, and this without scrapping the whole idea. A cost-benefit analysis would have provided at least a perspective on how much the company should spend to achieve certain benefits, such as increased sales, greater consumer interest, and favorable publicity. See the following Information Box for a more detailed discussion of the important planning tool of a cost-benefit analysis.

A cost-benefit analysis should certainly have alerted management to the possible consequences of various acceptance levels and to the significant risks of high acceptance. The company could have set limits on the number of eligibles: perhaps the first 1,000 or the first 5,000. Doing this would have held or capped the costs at reasonably defined levels and avoided the greater risks. Or the company could have made the offer less generous, perhaps by upping the requirements or lessening the premiums. These more moderate alternatives would still have made an attractive promotion, but not the major uncontrolled catastrophe that happened.

FINAL RESOLUTION OF THE PROMOTION MESS?

Maytag's invasion of Europe proved a costly failure. In summer 1995, Maytag gave up. It sold its European operations to an Italian appliance maker, recording a $135 million loss.

Even by the end of 1996, the Hoover mess was still not cleaned up. Hoover had spent $72 million flying some 220,000 people and had hoped to end the matter. But the fight continued four years later, with disgruntled customers who never flew taking Hoover to court. Even though Maytag had sold this troubled division, it still could not escape the emerging lawsuits.7

LATER DEVELOPMENTS

LEONARD HADLEY

In summer 1998, Leonard Hadley could look forward and backward with some satisfaction. He would retire the next summer when he turned 65, and he had already picked his successor. Since assuming the top position in Maytag in January 1993 and confronting the mess with the UK subsidiary during his first few months on the job, he had turned Maytag around completely.

INFORMATION BOX

COST-BENEFIT ANALYSIS

A cost-benefit analysis is a systematic comparison of the costs and benefits of a proposed action. Only if the benefits exceed the costs would we normally have a “go” decision. The usual way to make such an analysis is to assign dollar values to all costs and benefits, thus providing a common basis for comparison.

Cost-benefit analyses have been widely used by the Defense Department in evaluating alternative weapons systems. In recent years, such analyses have been sporadically applied to environmental regulation and even to workplace safety standards. As an example of the former, a cost-benefit analysis can be used to determine if it is socially worth spending X million dollars to meet a certain standard of clean air or water.

Many business decisions lend themselves to a cost-benefit analysis. It provides a systematic way of analyzing the inputs and the probable outputs of major alternatives. In the business setting some of the costs and benefits can be very quantitative; they often should be tempered by non-quantitative inputs to reach the broadest perspective. Schermerhorn suggests considering the following criteria in evaluating alternatives:8

Benefits: What are the “benefits” of using the alternatives to solve a performance deficiency or take advantage of an opportunity?

Costs: What are the costs of implementing the alternatives, including direct resource investments as well as any potentially negative side effects?

Timeliness: How fast will the benefits occur and a positive impact be achieved?

Acceptability: To what extent will the alternatives be accepted and supported by those who must work with them?

Ethical soundness: How well do the alternatives meet acceptable ethical criteria in the eyes of multiple stakeholders?

How would you go about calculating a cost-benefit analysis for Maytag Hoover's plan to offer the free airline tickets, under an assumption of 5,000 takers? 20,000 takers? 100,000 takers? 500,000 takers? What data would you need to perform the calculation? What assumptions would you have to make? How would you logically make these assumptions? (Hint: We know that the average cost per person of the promotion was $250 [$50,000,000/200,000 people].) What would be your conclusions for these various acceptance rates?

8 John R. Schermerhorn, Jr., Management, 6th ed. (New York: Wiley, 1999), p. 61.

He knew no one expected much change from him, an accountant who had joined Maytag right out of college. He was known as a loyal but unimaginative lieutenant of his boss, Daniel Krumm, who died of cancer shortly after naming Hadley his successor. After all, he reflected, no one thought that major change could come to an organization from someone who had spent his whole life there, who was a clone, so to speak, and an accountant to boot. Everyone thought that change makers had to come from outside. Well, he had shown them and given hope to all number-two executives who resented Wall Street's love affair with outsiders.

Within a few weeks of taking over, he'd fired a bunch of managers, especially those rascals in the UK who'd masterminded the great Hoover debacle. He determined to get rid of foreign operations, most of them newly acquired and unprofitable. He just did not see that appliances could be profitably made for every corner of the world, because of the variety of regional customs. Still, he knew that many disagreed with him about this, including some of the board members who thought globalization was the only way to go. Still, over the next eighteen months he had prevailed.

He chuckled to himself as he reminisced. He had also overturned the decades-long corporate mindset not to be first to market with new technology because they would “rather be right than be first.” His “Galaxy Initiative” of nine top-secret new products was a repudiation of this old mindset. One of them, the Neptune, a front-loading washer retailing at $1,100, certainly proved him right. Maytag had increased its production three times and raised its suggested retail price twice, and still it was selling like gangbusters. Perhaps the thing he was proudest of was getting Maytag products into Sears stores, the seller of one-third of all appliances in the United States. Sears's desire to have the Neptune was what swung the deal.

As an accountant, he probably should be focusing first on the numbers. Well, 1997 was certainly a banner year, with sales up 10.9 percent over the previous year, while profitability as measured by return on capital was 16.7 percent, both sales and profit gains leading the industry. And 1998 so far was proving to be even better, with sales jumping 31 percent and earnings 88 percent.

He remembered the remarks of Lester Crown, a Maytag director: “Len Hadley has—quietly, softly—done a spectacular job. Obviously, we just lacked the ability to evaluate him [in the beginning].”9

Leonard Hadley retired August 12, 1999. He knew he had surprised everyone in the organization by going outside Maytag for his successor. He chose Lloyd Ward, 50, Maytag's first black executive, a marketing expert from PepsiCo, and before that Procter & Gamble, who had joined Maytag in 1996 and was currently president and chief operating officer.

However, with extreme regret Hadley found that his choice of successor was flawed, or maybe Ward was just a victim of circumstances mostly beyond his control. After fifteen months, Ward left, citing differences with Maytag's directors amid sorry operating results. Hadley came out of retirement to be interim president and CEO. Some 3,400 Maytag workers, a quarter of Newton's population, roared when they heard the news. They had feared the company would be moved to either Chicago or Dallas, or that it would be sold to Sweden's Electrolux. Hadley assured them that such things would never happen as long as he was at the helm.10 Hadley retired again in June 2001 when Ralph F. Hake became his successor.

Hake came to Maytag from Fluor Corporation, an engineering and construction firm, where he had been executive vice president. Before that, he spent twelve years in various executive positions with Maytag's chief rival, appliance manufacturer Whirlpool.

Hake kept the headquarters in Newton, Iowa, but moved three plants to Reynosa, Mexico, intensifying fears that Maytag might export even more jobs to countries with cheap labor. He tried to allay such concerns: “I do not anticipate multiple plant shutdowns or restructuring here.” However, some analysts cautioned that consumers were becoming increasingly cost conscious—and less concerned with whether a product was made in the United States or abroad.

Hake also sought to move the company's product line beyond the traditional to more unusual products. He created a Strategic Initiatives Group with ten to twelve members to introduce a premium-priced line of mixers, blenders, toasters, and coffee makers under the brand name Jenn-Air Attrezzi. The hope was that such a focus on creative thinking would move the company out of its slump.11

THE ALLURE (AND NECESSITY?) OF OUTSOURCING

Even though Hake had moved some manufacturing jobs to cheaper labor overseas, still Maytag was slow to do this compared to its competitors, and by 2005, it was hurting, with its stock plummeting and its dividend slashed in half. While 12 percent of its products were made abroad, larger competitors such as Whirlpool and General Electric had huge cost advantages with more than half their production overseas. In recent years, Maytag also had to compete against nimble Asian newcomers, including South Korean LG Electronics, which had brought innovative appliances to the United States a few years earlier.

In 2005, with its sickly stock price, Maytag now became an attractive buyout. Ripplewood Holdings, an investment group, bid $14 a share for the company. This offer was bested by Whirlpool, which offered $21 a share in cash and stock to Maytag shareholders, and the deal was sealed. American jobs, and Newton, Iowa jobs in particular, were in jeopardy.12

THE END

On Thursday, October 25, 2007, the assembly lines in Newton, Iowa stopped and workers left the two million-square-foot factory for the last time. With the concomitant closing of the corporate headquarters, some 1,800 local workers now had to find other jobs. At its peak, Maytag had 4,000 workers in Newton, a town of 16,000 people thirty miles east of Des Moines. For most workers, it was a sad parting with a company that had provided for their families over generations. UAW Local 997 President Ted Johnson said this is part of a “widespread epidemic” of corporations cutting union jobs for lower-paying jobs that threaten the middle-class way of life. “It's just wrong,” he said.13

Invitation for Your Own Analysis and Conclusions

Could American jobs have been better saved in this competitive appliance industry?

WHAT WE CAN LEARN

Beware of Overpaying for an Acquisition

Hoping to diversify its product line and gain overseas business, Maytag paid $1 billion for Chicago Pacific in 1989. As it turned out, this was far too much, and the debt burden was an albatross. Hadley conceded as much: “In the long view, it was correct to invest in these businesses. But the timing of the deal, and the price of the deal, made the debt a heavy burden to carry.”14

Zeal to expand or the desire to reduce the attractiveness of a firm's balance sheet with heavy debt, and thus fend off potential raiders, does not excuse foolhardy management. The consequences of such bad decisions remain to haunt a company, and the ill-advised purchases often have to be eventually sold off at substantial losses. The analysis of potential acquisition candidates must be soberly and thoroughly done, and rosy projections questioned, even if this means the deal may be soured.

In Decision Planning, Consider a Worst-Case Scenario

There are those who preach the desirability of positive thinking, confidence, and optimism—whether in personal life, athletics, or business practices. But expecting and preparing for the worst has much to commend it, as a person or a firm is then better able to cope with adversity, avoid being overwhelmed, and is more likely to make prudent rather than rash decisions.

Apparently the avid acceptance of the promotional offer was a complete surprise; no one dreamed of such demand. Yet was it so unreasonable to think that a very attractive offer would meet wild acceptance?

In Using Loss Leaders, Put a Cap on Potential Losses

Loss leaders, as we noted earlier, are items promoted at such attractive prices that the firm loses money on every sale. The expectation, of course, is that the customer traffic generated by such attractive promotions will increase sales of regular profit items so that total profits will be increased.

The risks of uncontrolled or uncapped loss leader promotions are vividly shown in this case. For a retailer who uses loss leaders, the loss is ultimately capped as the inventory is sold off. With UK Hoover there was no cap. The solution is clear: Attractive loss leader promotions must be capped, such as at the first 100, the first 1,000, or for one week only. Otherwise, the promotion should be made less attractive.

Beware Giving Too Loose a Rein, thus Sacrificing Controls, Especially of Unproven Foreign Subsidiaries

Although decentralizing authority down to lower ranks is often desirable and results in better motivation and management development than centralization, it can be overdone. At the extreme, where divisional and subsidiary executives have almost unlimited decision-making authority and can run their operations as virtual dynasties, corporate management essentially abdicates its authority. Such looseness in an organization endangers cohesiveness; it tends to obscure common standards and objectives; and it can even dilute unified ethical practices.

Such extreme looseness of controls is not uncommon with acquisitions, especially foreign ones. It is easy to make the assumption that these executives were operating successfully before the acquisition and have more firsthand knowledge of the environment than the corporate executives.

Still, there should be limits on how much freedom these executives should be permitted—especially when their operations have not been notably successful. In Maytag's case, the UK subsidiary had lost money every year since it was acquired. Accordingly, one would expect prudent corporate management to have condoned less decentralization and insisted on tighter controls than it might have otherwise.

The Power of a Cost-Benefit Analysis

For major decisions, executives have much to gain from a cost-benefit analysis. It forces them to systematically tabulate and analyze the costs and benefits of particular courses of action. They may find that likely benefits are so uncertain as to not be worth the risk. If so, now is the time to realize this, rather than after substantial commitments have already been made.

Without doubt, regular use of cost-benefit analyses for major decisions improves executives’ batting averages for good decisions. Even though some numbers may have to be judgmental, especially as to probable benefits, the process of making this analysis forces a careful look at alternatives and most likely consequences. For more important decisions, input from diverse staff people and executives will bring greater power to the analysis.