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CASE 20 WHIRLPOOL: THE FIRST VENTURE INTO INDIA

I. CASE ABSTRACT Management at Whirlpool concluded that if the company were to be a major player in the developing global major home appliance industry, it needed a presence in Asia to compete with the Japanese and Korean manufacturers. Industry projections suggested that Asia would surpass North American and Europe and represent 40% of world demand for home appliances by 2004. In 1987, Whirlpool managers thought that rising incomes and aspirations among India's middle class would generate substantial demand for home appliances over the next few decades. That same year, Whirlpool met and signed a joint venture agreement with India's TVS group, for the purpose of manufacturing automatic washing machines and eventually other appliances. TVS had begun as a bus service and diversified into auto component manufacturing and other auto-related businesses. Its most recent (and least successful) diversification into computer components was also its first into non-automotive consumer goods. TVS then joined with Whirlpool in forming TWL because it also wanted to take advantage of future growth in consumer products in India. Under the terms of the joint venture agreement, TVS provided day-today operational management, with Whirlpool providing the technical expertise in automatic washing machines. Unfortunately, TVS knew nothing of either making or marketing major home appliances, and Whirlpool ignored the fact that the Indian market had no interest at the time in automatic washing machines! People purchased either manual washers or semi-automatic twin-tub washers. Fully automatic machines were affordable only to a tiny segment of the population. TVS' and Whirlpool's investment of time and money into the development of their first washer meant that the venture had to sell 5,000 high-priced units per month to reach break-even. TWL was established as an assembly operation, dependent on components that were 80-90% externally sourced. TVS' lack of experience with appropriate suppliers, plus the marginal ability of suppliers to deliver quality parts on time, caused huge problems in production. TVS also had few connections with appliance retail distribution outlets. Dealers were not interested in buying products from single-product firms like TWL when they could deal with companies making a full range of consumer durables, like Videocom. Even after two years of operations, only 2,000 to 2,500 units were coming off TWL's assembly line. By 1993, TWL's equity was reduced to zero, cash flow was weak, and losses were accumulating. Whirlpool purchased TVS' stock in the joint venture and implemented a turnaround strategy under the new name of Whirlpool Washers Manufacturing Limited (WWML).

__________________________________ Copyright 1999 by Thomas L. Wheelen and J. David Hunger. Reprinted by our permission only for the 7th Editions of Strategic Management and Business Policy and Cases in Strategic Management. 20-1

Case 20 Whirlpool: The First Venture Into India Whirlpool initiated its Worldwide Excellence Program in the Pondicherry plant to raise the level of quality and reduce costs. It worked to develop better relations with its suppliers. Whirlpool replaced TVS managers with its own from the United States but still had to deal with the TVS corporate culture in the workplace. The reorganized venture reduced its losses and became profitable. Whirlpool's market share rose from 12.9% in 1994 to 17% by the end of 1995. WWML finally made a book profit in 1995 but still had to pay off its accumulated losses of US$50 million. Increasing competition and price wars were making the targeted 1996 market share of 20.6% difficult to achieve. Also in 1995, Whirlpool purchased a 51% interest in Delhi-based Kelvinator of India (KOI), one of India's leading refrigerator makers. Even though KOI had 30% market share in India, its refrigerators were outdated and the company was unprofitable. Whirlpool began construction of a US$119 million plant to produce state-of-the-art refrigerators. This was on top of its investment, totaling US$120 million, in the TVS joint venture and in Kelvinator. The company was also considering entering the Indian air conditioning market as well as the fast-growing, Chinese major home appliance market. In the meantime, Whirlpool's erratic corporate earnings translated into a decline in its per share stock price from $56 in 1993 to $51 in 1996. Whirlpool's plan to become a global appliance manufacturer appeared to be in difficulty. Decision Date: June 1996 Note: II. Whirlpool Corporation. 1995 Sales: 1995 Net Income: $8,347,000,000* $209,000,000*

Figures for WWML not available.

CASE ISSUES AND SUBJECTS Major Home Appliance Industry Environmental Scanning Industry Analysis India International Growth Strategies Joint Ventures Strategic Alliances Turnaround Strategy Strategy Formulation

Core Competencies Core Deficiencies Distinctive Competencies SWOT Analysis Competitive Strategy Corporate Culture Evaluation and Control Vertical Integration vs. Outsourcing

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Case 20 Whirlpool: The First Venture Into India I. III. STEPS COVERED IN STRATEGIC DECISION-MAKING PROCESS (See Figure 1.5 on pages 20 and 21) Strategy Formulation Pe rfo rm an ce Str at egi c Po stu re Co rp or at e Go ve rn an ce Ex ter nal Fa cto rs Int er nal Fa cto rs Str at egi c Fa cto rs Rev iew Mis sion & Obj ecti ves S tr at e gi c A lt e r n at iv e s 6 X Strategy Implementation Evaluation & Control

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1B X

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O = Emphasized in Case IV. CASE OBJECTIVES 1.

X = Covered in Case

To provide an example of a large successful company entering an international market via a joint venture. Students should be able to identify a number of mistakes that were made. To illustrate how an industry, major home appliances, can be mature in one part of the world (North America), approaching maturity in another part of the world (Europe), and just beginning its growth curve in another part of the world (Asia). Only rarely is any industry at the same stage of development around the world - the automobile and tire industries are now global and mature. To show that a company's core (or even distinctive) competencies may not be transferable to another industry (appliances in TVS' case) or to another part of the world (India in Whirlpool's case). Both companies were extremely successful in their own spheres of action but together proved incompetent in a joint venture requiring new competencies and resources. Both firms' weaknesses became core deficiencies in this situation. To illustrate how a large company like Whirlpool can learn from its mistakes. Once it realized that its partner was not offering anything to the joint venture, it moved to take over control and to transfer to the Indian operation those things in which it was extremely competent.

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Case 20 Whirlpool: The First Venture Into India 5. To show Neither getting its own the importance of appropriate environmental scanning. Whirlpool nor TVS really understood what they were into. Each assumed that the other would make up for deficiencies.

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Case 20 Whirlpool: The First Venture Into India V. SUGGESTED CLASSROOM APPROACHES TO THE CASE 1. This is a fairly difficult case for the typical student. Students have a difficult time deciding what to analyze. It is imperative that the instructor define the appropriate unit of analysis for students. It could be (a) Whirlpool Corporation (the multinational corporation based in the United States, (b) TWL (the Indian joint venture of Whirlpool and TVS), (c) WWML (the Indian venture after Whirlpool bought TVS' interest in TWL ), or (d) Whirlpool's operations in India (WWML plus KOI). Without this clarification up front, expect confusion in written papers or oral presentations. We have noted, for example, that student written papers and strategic audits of this case tend to intermix information from all four of these units of analysis. For example, the corporate governance section tends to include information about Whirlpool Corporation's board of directors and top management. The environmental scanning section for societal focuses only on India, but the industry analysis discusses the global (not the Indian) major home appliance industry. One could argue that all three possibilities are reasonable units of analysis, but mixing them together makes such a paper confusing and very difficult to grade. This clarification is not important if the instructor wishes to use this case in open class discussion. The instructor is then free to discuss each of these units of analysis in sequence. First discuss Whirlpool's decision to enter India from the point of view of the U.S. based corporation. Then discuss its joint venture with TVS. Then move to a discussion of Whirlpool's Indian operations now that it has control of both the joint venture (WWML) and Kelvinator of India (KOI). The discussion could then end up with a discussion of Whirlpool's Asian strategy with special emphasis on entering China. This case should be placed in that part of the course where international or business unit issues are being discussed. It seems most appropriate to use it when discussing international entry strategies - probably in the second half of the course after the standard corporate and competitive strategies have been discussed. This case can be used either alone or with the other cases in Industry Five: Major Home Appliances. These cases are The U.S. Major Home Appliance Industry (Case 17), Maytag (Case 18), and Whirlpool (Case 19). This case is especially effective after the first three cases have been discussed. Case 17 sets the stage by describing how the industry is moving from national to global. Case 18 shows Maytag's mistake in purchasing Hoover to enter Europe. Case 19 illustrates how Whirlpool became a dominant player in the U.S. and Europe in major home appliances. Case 20 shows how even an international success like Whirlpool can still make mistakes when entering a new part of the world.

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Case 20 Whirlpool: The First Venture Into India 4. This is a good case for a written paper dealing with international strategic issues. Whirlpool wanted desperately to be a player in Asia but seemed to have little clue about how to achieve it without spending huge amounts of money. Did the company learn any lessons from India in terms of deciding how it was going to enter China? This can also be a good case for a student presentation, especially if it is tied to the Whirlpool Corporation case (Case 19). Case 19 suggests that Whirlpool was a real pioneer in the concept of the "world washer." Case 20 illustrates the world washer seemed to be a failure in practice. (It was discontinued in India according to the case.) Was Whirlpool premature in its entry into Asia? Or was the decision sound but the strategy bad? Was the strategy sound and the execution bad? Did it make sense to buy Kelvinator of India, especially when Whirlpool was going to build a new refrigerator plant? SUGGESTION FOR DAILY CLASS PARTICIPATION: We have often found it difficult to get quality daily participation from undergraduate students. We suggest the following: a. Have the class members prepare individually or as a team (1) EFAS, IFAS, and SFAS Tables or (2) just a SFAS Table for the assigned case. *We have 1 or 2 individual students of a team bring their EFAS, IFAS, and SFAS or just their SFAS on a transparency. We have found in a 75-minute class that SFAS alone as a transparency works most effectively. b. We compare the student's work with that of the team or individual students making a presentation to the class. *We also discuss how the WEIGHTS and RATINGS were developed and the Total Weighted Score for the case under discussion. c. We ask each student at the beginning of the class to write down his/her Total Weighted Score for the case under discussion and to hand it in. *You can use the results to call on students whose scores seem to be out of line with the case. **It allows for a discussion of the Total Weighted Score as his/her overall evaluation of how the management of the company is managing the company's internal and external environment. ***We ask the students whether they would buy stock in this company. The Total Weighted Score then seems to have real meaning.

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Case 20 Whirlpool: The First Venture Into India VI. DISCUSSION QUESTIONS 1. What are the strengths and weaknesses of Whirlpool's venture in India? 2. What are the opportunities and threats facing Whirlpool's venture in India? 3. What are the strategic factors of Whirlpool's venture in India? 4a. Does Whirlpool Corporation have any core competencies? 'yes,' what are they? If

4b. Does Whirlpool's venture in India have any core competencies? If 'yes,' what are they? If not, why not? 5a. Does Whirlpool Corporation have a distinctive competency? 'yes,' what is it? If

5b. Does Whirlpool's venture in India have a distinctive competency? If 'yes,' what is it? If not, why not? 6. 7. 8. 9. 10. 11. 12. 13. What did Whirlpool do wrong in entering India? What did Whirlpool do right in entering India? What did TVS do wrong in joining with Whirlpool to make major home appliances in India? What did TVS do right in joining with Whirlpool to make major home appliances in India? What are the pros and cons of Kelvinator of India (KOI)? Whirlpool's purchase of

What did Whirlpool learn (or what should it have learned) from its Indian experience? What should Whirlpool do with its Indian operations? Should Whirlpool enter China? should it enter China? If not, why not? If so, how

VII. VIII.

CASE AUTHORS' TEACHING NOTE

None was available

STUDENT STRATEGIC AUDIT - (Modified to describe Whirlpool's total Indian operations) I. CURRENT SITUATION A. Current Performance WWML finally made operating profit in 1995 after years of losses totaling $US50 million. KOI was loosing money when Whirlpool bought it in 1995. 20-7

Case 20 Whirlpool: The First Venture Into India B. Strategic Posture: Implied, but not clearly stated in the case for Indian operations. 1. Mission: Provide major home appliances to the Indian subcontinent and provide a beachhead for subsequent expansion into the rest of Asia. 2. Objectives: To dominate the Indian washing machine and refrigerator markets in terms of market share. To earn a substantial return on investment for Whirlpool Corporation. To eventually expand into other major home appliances such as air conditioners. 3. Strategies: Horizontal growth corporate strategy into Asia First unsuccessfully tried joint venture as entry strategy into India. . . Followed by turnaround strategy at WWML and now at KOI. Now using entry strategies of acquisition and green field development. (Comment: Although these entry strategies are more expensive than joint ventures, they may be cheaper than the turnaround at WWML.) 4. Policies: Introduce Whirlpool Corporation's management practices into Indian projects. II. CORPORATE GOVERNANCE A. Board of Directors: Whirlpool controls WWML and KOI through its control of each company's board of directors. No information regarding rest of board membership. B. Top Management: Through its control of the boards of directors, Whirlpool is replacing the top management of WWML and KOI with its own people. (Comment: Since the past management was responsible for past poor performance, this makes sense.) III. EXTERNAL ENVIRONMENT A. Societal Opportunities: Ability to work more closely with suppliers to reduce supplier bargaining power and increase quality of parts High growth potential of Asian market Only 7% of Asian's households own refrigerator; only 2% own washing machine Rapid economic growth of 6-8% annually is spurring per capita income levels Indian major home appliance market is on the verge of a boom growth period 20-8 (EFAS - see Exhibit 1)

Case 20 Whirlpool: The First Venture Into India Recent easing of restrictions on foreign ownership and investment in India makes expansion attractive Threats Heavy start-up costs in Asia. Increasing competition in Asia, especially India Poor infrastructure to support making, selling, and using appliances in India. Questionable water purity and availability of electricity. Politicians perhaps less tolerant of foreign firms in future. B. Task Environment: Major Home Appliance Industry in India Rivalry among competitors is rapidly increasing; price wars are based on short-term promotions and purchase incentives. Threat of new entrants is high. Other major players from Japan, Korea, United States, and Europe are planning to soon enter either India or China or both. Must build entry barriers quickly or face greater competitive intensity. Threat of substitute products is high. Until infrastructure is built, many people in less developed parts of India substitute daily shopping for refrigerators, creeks for washers, sun for dryers, and fires for stoves. Bargaining power of suppliers is high for those few firms that can make quality components. Bargaining power of distributors is high for those appliance firms that only make one or two products. Relative power of other stakeholders appears low. Government is allowing foreign companies to acquire local firms and to build green field plants. It is doubtful that unions are a problem. Religious norms and values could negatively affect the importation of some U.S. management practices. C. Summary of Internal Factors - See EFAS Exhibit IV. INTERNAL ENVIRONMENT (IFAS - see Exhibit 2)

A. Corporate Structure: WWML and KOI now under sub-regional headquarters of Whirlpool South Asia in Delhi, which is under the regional umbrella of Singapore regional headquarters. (Comment: This structure better connects the Indian operations with Whirlpool's global operations and gives Whirlpool greater control over its Indian ventures. Not yet known whether it is a strength or weakness.)

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Case 20 Whirlpool: The First Venture Into India B. Corporate Culture: Culture clash at both WWML and KOI as Whirlpool introduces elements of its own culture into these unsuccessful operations. Although the worst is over at WWML, it may be just beginning at KOI, a more established company with a deeper culture. Conflict likely at KOI. (Weakness) C. Resources: WWML and KOI 1. Marketing: Strengths Good market share exists for both WWML and KOI. KOI brand is well respected throughout India. KOI has established distribution outlets. Weaknesses Whirlpool brand is not well known. WWML is still weak in distribution in northern India. 2. Finance: Strengths Whirlpool's Indian operations have access to corporations funds. WWML is making an operating profit and should pay down losses. Weaknesses KOI is losing money; may take years to turn it around Decline in Whirlpool stock makes it increasingly difficult for headquarters in United States to invest more in India, especially given interest in entering China. 3. Research and Development: Strengths Reasonably good product R&D competence at corporate level Excellent process R&D competence at corporate level Weaknesses Corporation still learning how to transfer its technology appropriately to India R&D not connected to needs of Indian market. 4. Operations and Logistics: Strengths Turnaround at WWML shows that operations is a strength of Whirlpool, which is being transferred appropriately. Output at WWML doubled to 64,000 units in 1994 and is rising to 120,000 units in 1995 with only modest increase in workforce.

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Case 20 Whirlpool: The First Venture Into India Weaknesses KOI's inability to earn profit as market leader in refrigerator sales suggests inefficient manufacturing and distribution. Poor distribution for WWML is being rectified. Relationships with suppliers are improving. 5. Human Resource Management: Strengths Streamlined hierarchies of management at WWML with cross-functional work teams WES used to clarify job responsibilities Sales force placed on incentive system Weaknesses KOI must still be dealt with. poor. 6. Information Systems: Strengths Seem to be introducing information system to track progress Weaknesses Likely that IS at KOI needs a lot of work before it can be integrated into the rest of the Indian operations V. ANALYSIS OF STRATEGIC FACTORS A. Situational Analysis B. Review of Mission and Objectives: Current mission and objectives still seem appropriate given Whirlpool's interest in being a global player in the major home appliance industry. Becoming a key player in Asia is important to Whirlpool. VI. STRATEGIC ALTERNATIVES AND RECOMMENDED STRATEGY A. Strategic Alternatives (for operations in India) (SFAS - see Exhibit 3) HRM likely to be fairly

1. Retrenchment: Cut back on investments in India in order to put more emphasis on China. Sell off KOI's operations and form a joint venture with KOI's buyer for the new refrigerator plant in Pune Pros: Stops cash flow into India so cash can be used elsewhere. Eliminates a costly turnaround of KOI. Forming a joint venture for the new refrigerator plant keeps Whirlpool in the refrigerator business. 20-11

Case 20 Whirlpool: The First Venture Into India WWML has been turned around and should be able to grow using its own cash flow. Cons: Lack of multiple appliance products may make it increasingly difficult to sell washing machines to India's distributors. Lack of significant growth could cause investor pressure to completely pull out of India. Investment is just starting to pay off. Retrenchment makes it difficult to make and market appliances in nearby countries. It sends a bad signal to appliance industry that Whirlpool is not a serious global competitor. Will make it difficult to successfully enter and grow other parts of Asia, such as China. 2. Stability: Keep all current operations, but add no new ones (kill air conditioner idea). WWML grows using internal cash flow. Implement turnaround at KOI and use new plant to make refrigerators. Pros: Allows time to turn KOI around and to solidify WWML's turnaround. Keeps additional investment in India in check until KOI is turned around and new refrigerator operation begins to pay for itself. Allows Whirlpool to turn its full attention to entering China. Cons: Lack of growth at a time when the appliance market is undergoing rapid growth will make it difficult to achieve Whirlpool's goal of dominating the major home appliance market in India. It may hurt relations with distributors who may soon demand a full line of appliances from any one supplier (similar to situation in United States) and thus cut into sales growth. Stability allows competitors opportunity to move ahead and take away markets that could have been Whirlpool's. 3. Growth: Push ahead with expansion of WWML and KOI. Use joint ventures to move into other major home appliances such as air conditioners, stoves, and microwaves. Expand WWML to add clothes dryers. Pros: Growth enables Whirlpool's India operations to grow with the market, with a good chance of dominating while others are focusing on China. WWML's new profitable position may enable it to grow out of its own cash flow.

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Case 20 Whirlpool: The First Venture Into India KOI may be easier to turn around given Whirlpool's success with its joint venture with TVS. Expansion now will enable Whirlpool to move into related appliances and gain bargaining power with its suppliers and distributors, thus boosting sales and cutting costs at a time when competition is increasing. Cons: Growth is likely to be very costly. Will seriously cut into Whirlpool's funds to enter China. KOI may be very expensive to turn around - similar to Maytag's problems with turning around its Hoover UK operations. Whirlpool seems unable to successfully adapt its technology to less developed nations. Question whether Indian market is interested in the new refrigerator. China is hot now and should be emphasized over India. B. Recommended Strategy Recommend Stability Strategy: Keep all current operations but add no new ones (kill air conditioner idea). WWML grows using internal cash flow. Implement turnaround at KOI and use new plant to make refrigerators. This choice allows the parent corporation sufficient time to consider and implement a good entry strategy for China. For the time being, washers and refrigerators are the key appliances for India and contiguous countries. Import other appliances or purchase them from competitors in order to have a full line for distributors. Continue emphasizing quality and cost reduction for competitive advantage. Develop policies to support this emphasis. VII. IMPLEMENTATION A. Programs: Introduce WES system at KOI. Use same programs as were successful at the WWML venture. Use the Kelvinator brand and distribution system to market the new Whirlpool refrigerator. Convert KOI's management system and culture to Whirlpool's. Use Kelvinator distributors to sell Whirlpool brand washing machines and vice versa. B. Budgets: Both WWML and KOI become separate responsibility centers. WWML's budget comes out of its own cash flow. KOI's budget is supplemented by a separate turnaround budget for the next two years.

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Case 20 Whirlpool: The First Venture Into India C. Procedures: Transfer the procedures that work best from WWML to KOI and vice versa. Introduce Whirlpool's tried and true procedures if no local procedure is effective. VIII. EVALUATION AND CONTROL A. Upgrade the information system at KOI and at WWML where necessary. B. Integrate the information systems of all Indian operations so can deal with suppliers and distributors as one company, not two. C. Implement effective performance evaluation system at all operations. D. Evaluate KOI and WWML as investment centers responsible for achieving ROI figures

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Case 20 Whirlpool: The First Venture Into India IX. EFAS, IFAS, and SFAS EXHIBITS

Exhibit 1 EFAS (External Factor Analysis Summary)


Key External Factors Opportunities: Forming closer relationship with suppliers Expanding sales throughout India Make air conditioners Make other appliances Import other appliances Market to nearby countries Threats: Seasonal sales fluctuations Weak infrastructure to support appliances Increasing competition Politicians' tolerance of foreign firms TOTAL SCORE Weight .15 .15 .05 .10 .05 .05 .05 .10 .20 .10 1.00 Rating 5 5 3 3 4 3 3 4 4 4 Weighted Score .75 .75 .15 .30 .20 .15 .15 .40 .80 .40 4.05 Comments Doing this now KOI helps Have technology Expansion possible Expensive Could do soon Must live with it Getting better KOI helps So far, so good

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Case 20 Whirlpool: The First Venture Into India

IX.

IFAS, EFAS, and SFAS EXHIBITS

Exhibit 2 IFAS (Internal Factor Analysis Summary)


Key Internal Factors Strengths: New management & system Kelvinator brand New manufacturing facilities Parent company's technology expertise Market share Weaknesses: Inadequate distribution Larger capital investment: more needed KOI's inefficient operation: losses Lacks simpler technologies Ignorance of Indian market TOTAL SCORE Weight .10 .05 .10 .10 .15 .10 .05 .15 .05 .15 1.00 Rating 4 4 4 5 4 3 2 3 2 3 Weighted Score .40 .20 .40 .50 .60 .30 .10 .45 .10 .45 3.50 Comments Needed at KOI Well known 2 /3 brand new Excellent Good & growing Improving More money needed Not yet dealt with Has to license Getting better

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Case 20 Whirlpool: The First Venture Into India

IX.

SFAS, EFAS, and IFAS EXHIBITS

Exhibit 3 SFAS (Strategic Factor Analysis Summary)

Key Strategic Factors Forming closer relationship with suppliers (O) Expanding sales in India (O) Make other appliances (O) Weak infrastructure to support appliances (T) Increasing competition (T) New management & system (S) Kelvinator brand (S) Market share (S) Inadequate distribution (W) KOI's inefficient operation (W) Knowledge of Indian market (W) TOTAL SCORES

Weight .05 .10 .10 .05 .15 .10 .05 .10 .10 .10 .10 1.00

Rating 4 4 2 3 4 4 3 4 3 2 2

Weighted Score .20 .40 .20 .15 .60 .40 .15 .40 .30 .20 .20 3.20

Duration S I L X X X X X X X X X X X X X X X X X X X X X X X X

Comments Getting better Key to success Investment high Getting better Getting tougher Key to profits Short-term value Key to success Getting better Must fix now! Must improve!

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Financial Ratio Analysis Was inappropriate for this case.

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