CONFIDENTIAL,Developing a Winning Strategy for the Microwave Oven Business in China,LG Electronics Tianjin Appliances Co., Ltd,Final progress review,April 9,2001,This report is solely for the use of client personnel. No part of it may be circulated, quoted, or reproduced for distribution outside the client organization without prior written approval from McKinsey it is not a complete record of the discussion.,010326SH_120703_085v5i,THE JOINT LG/McKINSEY TEAM HAS COMPLETED THE PROJECT WITHIN 5 WEEKS,Modules,Key activities,Market Demand/Forecast,Forecast potential market by segment through refining market segmentation, understanding key growth drivers, and modeling market growth,LGE performance assessment,Conduct internal data collection within LGE Develop sound understanding of value proposition based on available market research including branding and consumer survey,Strategic development opportunities,Analyze different product mix options Gather information on branding and marketing Conduct channel diagnosis Analyze value chain costs,Competitor,Develop competitive assessment for microwave oven competitors Conduct interviews with distributors, retailers, government agencies, competitors to collect competitor information,Consumer,Conduct consumer survey via external research house in 6 specified cities and 1 rural area to understand consumer purchasing behavior,End products,Market demand forecast by areas and product type,Current organizations strengths and weaknesses Current processes and incentive systems strengths and weaknesses LGE aspirations for future growth,High level recommendation on product mix Brand positioning status and recommendations Channel mix diagnosis and high level channel prioritization Detailed breakdown comparison on costs, COGS in particular,Analysis on overall competitive environment Detailed information on competitor performance including sales, branding, pricing, channel mix and incentives Key competitors COGS analysis Strengths and weaknesses of each competitor group and the implications,Detailed analysis on consumer purchasing pattern,1,010326SH_120703_085v5i,TODAYs DISCUSSION,The Microwave oven market in China will continue its strong growth and should reach 7.5 million units in 2003. Primary regions will be Central China, followed by South and Southwest China. Other regions should develop as income grows. Computer grill and mechanical grill should further increase their share as prices decline. Four customer segments are found from market research: Premium buyers, basic brand buyers, rational technophile, and generic buyers. All segments, except premium buyers, are highly price-sensitive, thus skewing market demand towards low-end products. At the same time, reliable performance, ease of use, and good after-service are important across segments. The competition in China is already intense and will continue to increase, as Galanz and Midea have huge ambitions in the market. In addition, the severe overcapacity (about 45%) will continue to force prices downwards thus threatening profitability for all but the lowest cost players. LG has built a successful platform for growth, becoming #2 in China, although far behind Galanz, by focusing on premium products and in the Beijing area. Faced with the issue of further growth and improving profitability, LG now needs to choose between a high growth strategy, with the objective of becoming the leading player and to reach breakeven in 2005, or to remain a premium niche player for the foreseeable future. To achieve the aspiration of becoming a profitable #1 Player in China, LG needs to launch 5 strategic initiatives: (1) launch a three step regional expansion, first from Beijing to Wuhan, (2) introduce entry products to cover all price points while continuing to introduce high end products to create margins, (3) improve channel coverage by increasing the distributor network and the sales force resources, (4) increase significantly advertising spending while optimizing media mix, (5) reduce aggressively cost by leveraging economies of scale.,2,010326SH_120703_085v5i,TODAYs DISCUSSION,The Microwave oven market in China will continue its strong growth and should reach 7.5 million units in 2003. Primary regions will be central China, followed by South and Southwest China. Other regions should develop as income grows. Computer grill and mechanical grill should further increase their share as prices decline. Four customer segments are found from market research: Premium buyers, basic brand buyers, rational technophile, and generic buyers. All segments, except premium buyers, are highly price-sensitive, thus skewing market demand towards low-end products. At the same time, reliable performance, ease of use, and good after-service are important across segments. The competition in China is already intense and will continue to increase, as Galanz and Midea have huge ambitions in the market. In addition, the severe overcapacity (about 45%) will co