Merloni Group

Merloni Group was founded by Aristide Merloni, a former mayor of

Fabriano, in 1930. In 1950s entered his three sons, Franco,
Vittorio, and Antonio, who were also involved in public life. In
1970s, successful product diversification strategy led to a shift
from Functional Organizational Structure to Product Division
Organization Structure. The company had four divisions viz. ELDO
(for appliances), ISA (for sanitary products), CASA (for furniture),
and Progetti (for technology in abroad). Each division had profit
centers

as

manufacturing

and

marketing

operations

and

functional services as personnel, administration, planning and

control. Initially the companys basic strategy was to be at lowcost position and sell by volume. Bur later it moved into middleprice segment. So it had to upgrade the quality in order to move
out of the price competitive segment.

In 1970s, the company decided to expand abroad. In late 70s

European sales and marketing organization was established. Also
the company, at the same time, tried to expand outside Europe,
especially in Middle East and Iraq. The overseas business was
managed by the overseas division. European markets were
controlled by country subsidiaries which were fitted into existing
product division structure. Each country manager reported to the
European manager of the respected product division. This

structure was complex as the country managers had to report to

multiple bosses. To reduce the complexity, responsibilities were
defined for the divisional country managers, and all decisions with
respect to transfer price, policies, quantities, quality were taken at
their level.
This structure did not work as planned. Its French subsidiary,
Ariston France (AF), despite of showing increasing sales, was in
deep losses. The subsidiary managers presented many reasons
for the losses, to which the headquarter managers refuted, and
also vice versa, thus causing tensions between them. Some of the
reasons were- unpredictability of transfer prices, inadequate
administration and information system, low product support, and
under-capitalization. Because of having low quality products and
low volumes, the division could not cover its fixed costs, which
could have been prevented through economies of scale. After all
this, the headquarter tightened its control by questioning the
strategies, modifying reporting systems and linking country level
sales manager more closely and directly to headquarter based
product division. Moreover, the headquarters decided that AF
should achieve 10% increase in profitability by increasing prices
and cutting fixed cost. But this was not possible at the moment
according to Sergi as the threshold at which economies of scale
could be realized was not achieved yet.

The strategy that Merloni should follow is to segment its market

into low price and high price segments. It is already catering to
the low price segment. By introducing a new product line in high
price segment, it can increase the margins to cover the fixed
costs, which will further give AF some time to achieve the
threshold for achieving economies of scale. Also when it will enter
into the high price segment, it has to improve its product quality,
which will require initial cost. But eventually this will lead to a
strong brand equity in the minds of the customers. According to
the case, AF has been in existence for only one year, which is a
very less time to judge a company. So it must be given some
more time, but at the same time the parent management should
not sit idle. They should continuously work out to build
distribution strength and improve sales and service support. This
operational efficiency could be achieved through improving the
infrastructure like warehouses and transportation. Rather than
tightening the control over the administration, a proper IT
infrastructure should be erected, which would improve the
communication

and

coordination

between

the

divisions.

Tightening the control may produce the counter-productive

results. The organizational structure can also be changed to
Product-Team

Structure

to

basically

reduce

the

design,

manufacturing, marketing and coordination costs and also to

speeding up the innovation and responsiveness, as in this
structure, the authority rests with the team, removing the multilayer hierarchical structure.