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Ethan Allen is a well-known furniture company. In recent years it has established its position as the number one furniture-maker in the United States. This claim is supported by figures detailing the fact that Ethan Allen’s gross revenue in fiscal year 2007 reached the 1 billion dollar mark. Following a distant second was Bassett Furniture Industries with a mere $328 million in total revenue. Thus, without a doubt Ethan Allen is the top furniture maker in America. However, 70 years after its debut in the US, Ethan Allen is faced with problems common in the furniture making industry. There are two major issues that threatened to ruin the good fortune of furniture makers in the US. The first one is the housing crisis that led to foreclosures and lackluster growth rate in the housing market. The second major force is the impact of globalization. Ethan Allen responded by radically altering the core business strategy. But it may not be enough to deal with the twin impact of a feeble US economy and a Chinese exporting juggernaut.
Impact of a Weak US Economy
The financial crisis that hit the first decade of the 21st century can be traced back to a lending fiasco. It was already too late in the game when bankers, investors, and U.S. citizens found out that the housing sector was not as robust as many thought it would be. As a result, banks went bankrupt and houses that were valued in millions of dollars can no longer be bought or sold because of the significant loss of value.
From the vantage point of furniture-makers the housing crisis, followed by a depressed economy, created a perfect storm of problems that threatened to eradicate the once lucrative industry. In fact, a number of established names in the furniture-making industry threatened to file bankruptcy. The gloomy forecast in the financial sector meant that there are many people who are going to lose their jobs. A depressed economy also means that there are only a few people that can afford to buy homes.
Homes that are left to rot because there are no buyers and sellers created a chain-reaction of events that eventually affected furniture-makers. A housing crisis simply means that newly-wed couples may opt to stay in their cramped apartments. It can also mean that wealthier couples who are supposed to buy a second home may have decided to postpone that decision until the economy is more predictable. The point can as well be that people are no longer interested in buying a house for their family. As a consequence there is a significant reduction in the demand for products coming from companies like Ethan Allen.
Impact of Globalization
Globalization has many facets but in the case of the furniture-making industry, it can be simplified into cheap exports and cheap manufacturing capability. Companies can relocate their manufacturing facilities in places where they can find cheap labor. Thus, instead of paying native-born Americans thousands of dollars in wages, an organization can save a great deal of money if they establish factories outside the United States. Therefore, they can pay foreign workers a fraction of the cost, resulting in a significant decrease in production expenses. The outcome is cheaper products.
Another major facet of globalization is the existence of countries that can offer cheap labor courtesy of their burgeoning population. The best examples are China and India. These countries are favorite destination of business outsourcing because they can provide cheap resources for Western companies. One of the most popular demonstrations of this strategy is the relocation of manufacturing facilities from the US mainland to China, India, Thailand and even south of the US border into Mexico. The case study seems to indicate the fact that furniture-makers in the United States already approved of this strategy and this includes Ethan Allen. There is high probability that the company relocated their factories in Asia because 24 design centers are already located in that region (Negatu, 2011, p. 6).
It is impossible to talk about globalization without mentioning the role of China in the global economy. In the furniture making industry China plays a dual role as exporter of goods and as a consumer of quality products. Ethan Allen’s strategy must carefully consider the impact of the Chinese economy in relation to the United States. For example, Ethan Allen will be hard-pressed to compete against cheap products from China. At the same time, competitors that decided to relocate their manufacturing facilities outside the United States can create another problem for Ethan Allen.
Furniture-Making and Interior Design
Before going to the recommendations on possible strategies that can be adopted by Ethan Allen, it is important to point out that the company has completed a major diversification of its core business and created a dual focus – one in furniture manufacturing and the other in interior design. The firm is not just a furniture manufacturer and it is now known as Ethan Allen Interiors (Negatu, 2011, p.4). Ethan Allen also specializes in interior design guidance (Negatu, 2011, p.4). It may be a clever upgrade of their business model, but the company has to prove that it can deliver high quality work.
There is nothing wrong with the idea of diversification and offer a service to augment the sale of furniture. After all, interior design is related to the furniture manufacturing business. On the other hand, Ethan Allen only manufactures furniture and there are other things that go into interior design aside from arranging furniture. Thus, it can complicate the business model of Ethan Allen and turn the firm into something that may frustrate customers.
One problematic issue is the realization that Ethan Allen cannot provide everything that the customer needs. Thus, at some point, Ethan Allen interior design consultants will have to endorse products from their competitors. At the same time there may be pressure to suggest the use of Ethan Allen products even if it is not appropriate for a particular house, office, or work space. In other words, the interior design aspect of the business may create a conflict of interests.
The case study also highlighted the fact that Ethan Allen has 24 design centers in Asia. It must be clarified if these design centers are actually manufacturing facilities or factories. It is important to move manufacturing facilities outside the United States. It is the only way to challenge the cheap exports from China and other Asian countries. Ethan Allen must continue to offer high-quality products but it cannot afford to sell it at high prices. The only way to solve this dilemma is to move manufacturing capabilities outside the US mainland.
Although it is cheaper to move factories to China, Thailand or Vietnam, one of the major considerations in a furniture making business is the need for saw mills and access to quality wood. Thus, Ethan Allen must consider transferring facilities to Mexico. In this way the company can still use saw mills within the United States and deliver wood products from there to Mexico. It requires a shorter time to transport raw materials from American woodlands rather than to ship raw materials to Asia. At the same time, the continuous use of US woodlands as source of materials ensures that Ethan Allen maintains a sustainable farming procedure. In other words the company can maintain a strategy that replaces wood products harvested from these woodlands. The same thing cannot be expected if the wood products are taken from forests in Asia and other regions outside the United States.
Ethan Allen must terminate the experiment regarding interior design. There is a possibility of a conflict of interests if consultants hired by Ethan Allen insist on using Ethan Allen products rather than use items from their competitors. But more importantly Ethan Allen has no proven track record with regards to interior design. The company must go back to its roots which is the ability to manufacture high-quality furniture. The main goal is to offer high-quality products that are affordable. There is no other way to achieve this other than to transfer a majority of Ethan Allen factories from the United States to Asia or Mexico. For the sake of sustainability it is interesting to develop a strategy that involves US woodlands as a source of raw materials and then the establishment of factories in Mexico. In this scenario Ethan Allen can deliver raw materials quickly to the factories that are located just across the US border. At the same time it is easier to manage the supply chain if the factories are nearby as opposed to having them in Asia.