A.O. Smith Corporation Internal Analysis Frameworks' Analysis

Analysis of the General Environment (PESTLE Framework)

Segments

Elements

Political

U.S. tariff wars with China

Brexit challenges being borne by both the European Union as well as Britain

Free trade agreements

A.O. Smith Corp has significant holdings in China due to the nature of its supply and distribution channels, and these relationships have come under some duress due to the tariff war (A.O. Smith, 2019).

Consumer demand for durable goods in the UK and EU have fallen as consumers there express concern regarding the weakening Euro and Pound, as well as other consumer anxieties arising out of Brexit talks (Amadeo, 2019).

The US has weakened free trade agreements currently with Mexico and Canada, and there is dearth of future deals with Asian or other Latin American countries ever since the current U.S. Administration existed the Trans Pacific Partnership (McBride & Chatzky, 2019). This has curtailed the market for US manufactured durable goods.

Economic

Staffing shortages

Unaffordable housing in major markets

Drop in GDP, consumer spending, exports, and business investing

Increase in Employment Cost Index

There is a lack of skilled workers in manufacturing, which cannot be easily solved and is a long-term concern of all major U.S. manufacturers currently, who are looking into public private partnerships, in-house training programs, apprenticeships, and automation as potential solutions (Amadeo, 2019).

Housing costs are up 12% since 2006, with continuing inventory shortages in major in-demand markets (Amadeo, 2019).

According to the Federal Open Market Committee’s meeting minutes recorded in June 2019, “U.S. GDP growth will slow to 2.1% in 2019 from 3% in 2018. It will be 2% in 2020 and 1.8% in 2021” (Amadeo, 2019)

Employment Cost Index will increase in 2019 from 4.1 to 4.4 percent (Amadeo, 2019).

Sociocultural

Social media consumption

Workplace Inequality

Consumers are changing how they interact with brands online, meaning that manufacturers with omnichannel sales online are succeeding better than those who depend on more traditional models of reaching the consumer (Amadeo, 2019).

While A.O. Smith Corporation does enjoy a large percentage of workplace satisfaction, workplace gender and pay inequality is a major issue currently in the U.S. 

Technological

AI-Enabled Analytics

IoT devices

 Consumer data collected via AI interaction (using chatbots, or other interactive elements online) is being used by companies to fine-tune available data on consumer behavior (Amadeo, 2019).

Internet of Things (IoT) devices and goods are becoming increasingly popular, where consumers are able to track energy consumption as well as customize usage of their appliances via their cell phone or other mobile device.

Legal

 Privacy laws and data collection

 Laws regarding data collection and the improved management of customer privacy are ascendant at this time, especially given the rise of cyber attacks.

Environmental

 Increasing concerns about climate change

 Consumers today are becoming more involved in acting on their concerns regarding climate change, and are more likely that before to consider energy efficient options even at a higher price point.

Analysis of the Industry Environment (Porter's Five Forces Framework)

Force

Description of Factors

Threat of New Entrants

 Low risk of new entrants, given market volatility affecting key materials like aluminum and steel, tariff wars between US and China, and glut of existing manufacturers that are A.O. Smith competitors international as well as in North America, there is a lack of a threat of new entrants.

Bargaining Power of Suppliers

 A majority of A.O. Smith Corp’s suppliers involved in the company’s international production cycles, especially in China, have been directly affected by the tariff war between the U.S. and China. Despite this barrier, suppliers do have a significant amount of bargaining power as there is no monopoly and multiple options for A.O Smith in every category.

Bargaining Power of Buyers

 There has been a recent uptick in demand for durable goods within U.S. Markets. Increase in Capital Goods was most recently recorded at 1.9% year over year, with an increase in Shipments recorded most recently at 3.4% year over year. This is a reversal from May 2019 and is seen as a positive indicator. A.O. Smith lost market share to its competitors according to most recent data released by CSI Markets. Buyers for A.O. Smith have high bargaining power due to the diversity of producers of durable goods who compete with A.O. Smith in the same categories (Emmer, 2019).

Threat of Substitute Products

 At this time, as A.O. Smith is a manufacturer of durable goods, there is a low risk of substitute products until significant innovation regarding durable goods such as heating and cooling devices, and water management or treatment takes place. A.O Smith is positioning itself as an innovator as it recently built the Lloyd R. Smith Corporate Technology Center near its global headquarters in Milwaukee. This center comprises of a 42,700-square-foot research and development lab, serving as the company’s innovation hub (aosmith.com, 2018). Additionally, A.O. Smith acquired Water-Right, Inc., a Wisconsin-based water treatment company and all its subsidiaries in early 2019, ostensibly to increase its water treatment production capacity.

Rivalry among competing firms

A.O Smith’s primary competitor in China is Haier Appliances. Additional competitors include Midea in the electric water heater and water treatment markets and Rinnai and Noritz in the gas tankless and solar water heater markets (csimarkets.com, 2019). There are several other private and state-owned competitors in China. In India, A.O Smith competes in the water heater market with Bajaj and MTS-Racold and Eureka Forbes and Kent in the water treatment market. In the U.S., A.O. Smith’s major competitors are Honeywell International Inc, Whirlpool Corp., Ingersoll-Rand Plc, Emerson Electric, Dover Corp. and Franklin Electric Co Inc. A.O. Smith’s quarterly earnings decreased -8.15% in Q2 of 2019 while its competitors rose 4.35 % during the same time period (csimarkets.com).

Analysis of the Firm's Competitors

Competitors

Future Objectives

Current Strategy

Assumptions

Capabilities

Predicted Competitor Future Response

Haier

 Further building upon the “Win-win Model” of “Individual-Goal Combination”, Haier aims to continue flattening its organization to allow its frontline employees to lead in product and services innovation based on user data. Employees online are considered “interface persons” and will be developed by Haier as independent enterprising ventures (Haier.net, 2015).

Currently, Haier is in its “Networking Strategy” phase, which it entered into in 2013. Haier’s products and services and the processes surrounding them are completely driven by the personalized needs of the end user. Human value is put first, whether that is the value of the consumer or that of the individual employee (Haier.net, 2015). 

 That Haier will retain its market share, and will continue to innovate ways in which to customize its products to meet the demands of its users. Haier will recover from any fallout of the tariff war more easily than A.O. Smith, given the size of Haier’s holdings and their diversification of brands.

 Strong distribution network including brick-and-motor stores, R&D, human capital, international partnerships, and adequate placement at large retailers as well as hypermarkets.

Lower production costs than those experienced by A.O. Smith.

In-house supply chains.

 Haier will not be affected by changes made at A.O. Smith given the market share and diversification that it already has access to.

Honeywell

 Covering a wide array of industries, from defense & aerospace to home safety and water quality, Honeywell aims to continue to build upon its brand name and presence in local emerging markets.

 An industry giant, Honeywell has had the capacity to develop exclusive distribution relationships, and gain users for its diverse portfolio of products by leveraging existing relationships across an array of industries.

 Honeywell will continue to expand its b2b and b2c capabilities internationally. Likely that the tariff war has had no effect on its pricing strategies.

Honeywell while sensitive to price fluctuations in raw materials is still able to absorb and manage its costs via long term supply agreements, push and pull price strategy, and hedging activities.

  Honeywell will not be affected by changes made at A.O. Smith given the market share and diversification that it already has access to.