Herman Miller, Inc.: The Reinvention and Renewal of an Iconic Manufacturer of Office Furniture Essay
Herman Miller, Inc.: The Reinvention and Renewal of an Iconic Manufacturer of Office Furniture
Herman Miller, Inc. is primarily concentrated in the business and institutional market. Herman Miller is one of the leading players in the US office furniture industry with a 12% market share. Over the last several years, the entire industry has experienced significant declines in sales due to poor macroeconomic conditions. However, Herman Miller has managed to outperform most of its competitors in terms of profitability, illustrated through strong operating margins and return on sales. Herman Miller has a strong reputation for high quality, innovative products, strong customer service, high customization, and reliability. This strong brand equity enables the company to leverage its brand strength across different market segments, leading to extended customer reach I have analyzed the company and the industry, and have chosen the best strategy to expand customer reach, and increase sales revenue. My analysis chosen will consist of a three-year implementation plan that will bolster sales revenue and expand the company’s customer base. Herman Miller Inc. internal environment brings to light the following strengths and weaknesses, threats, and opportunities.
The $1.3 billion manufacturer of office furniture is known for its distinctive innovation skills and management methods. The following list of strengths elaborates on the company’s distinguishing capabilities.
Innovative products and processes – Herman Miller has led the industry with many ground-breaking developments, such as the first open-plan modular office system, the first seating configuration scientifically based on ergonomic principles, and cradle-to-cradle environmentally friendly product construction. Organizational culture and value system – The company’s culture is built on an empowered workforce and human resource practices that acknowledge the special talents and potential of all individuals, utilize committee-oriented collaboration to generate improvement ideas, encourage risk-taking, and exemplify shared sacrifice. Herman Miller’s codified values serve to unite employees, build productive relationships, and advocate employee-driven community contributions.
Its “Business as Unusual” philosophy expands performance beyond the confines of measurable capabilities. Human resource and compensation policies – The company’s HR practices, such as promoting from within, emphasizing education and training, providing generous pay, benefit, and retirement packages, linking universal profit-sharing and bonus plans to corporate performance and values, and promoting employee stock ownership effectively keep employee retention above 98% and develop a high-value, knowledge-based workforce. High-profile and research-driven product design – Herman Miller’s long-held, inventive design capabilities have produced revolutionary, winning furniture designs recognized by the art community, Time magazine decade and century awards, industrial designers, and international groups.
The company’s financial management practices are relatively conservative during normal economic times. Typically ahead of the industry in terms of profitability, stock market value, and leverage ratios, Herman Miller is currently experiencing serious financial pressure resulting from the recent domestic recession. Despite actions to sell 3 million stock shares, reduce dividends per share by 70%, and eliminate all capital expenditures, the company’s debt-to-equity ratio remains high. At 3.81, the debt-to-equity ratio indicates a substantial level of debt being used to finance growth and is higher than levels typically observed even in capital intensive industries (which can be above 2.0). Cash is down 30% in the past year (from $193 million to $135 million), and inventories are up 55% (from $37 million to $58 million). Deeper analysis of the company’s income statement reveals additional areas of financial concern.
Consolidated Statements of Operations
(In millions, except per share data)
Cost of sales
Selling, general, and administrative
Design and research
Total operating expenses
Other Expenses (Income):
Interest and other investment income
Net other expenses
Earnings before income taxes and minority interest
Income tax expense
Minority interest, net of income tax
Earnings per share – basic
Earnings per share – diluted
This comparison of income statement items over the past five years reveals that Herman Miller’s overall performance peaked in 2008. Since then, income has fallen 19% in each of the last two years, cost of sales has ticked upward by 2 points, and SGA expense has gone up by 4 points. Earnings as a percentage of sales have fallen substantially. In 2008, operating margin was 12.3% of sales, but it is now just 4.1%. Net profit margin has fallen from 7.6% of sales to 2.1%. Even though sales fell by less than industry predictions (of 26.5%), these financial results (especially the company’s profitability ratios) are cause for immediate concern. And it leads to speculation of whether the company’s strategy can be effective in turning around Herman Miller’s performance or in sustaining its long-term viability.
The industry has been hit hard by our unstable economy. This current recession is having deep ramifications on the psyche and spending behavior of consumers. Even the most successful firms and individuals have become conservative in their purchasing decisions, opting for practicality over luxury and high-end products. It is difficult to estimate if and when consumer spending that will resume stimulating new product demand. The office furniture industry is mature and volatile. Mature industries are tormented with low growth rates, which generate greater competitive intensity and drive market prices down, at the same time that consumers are demanding better services and product attributes. The most innovative threat is telecommuting, which allows workers to carry out their job responsibilities in non-office settings, has reduced demand for high-end office equipment.
The company can attempt to increase market share by gaining business from struggling competitors. A market for home office furniture may be emerging as the telecommuting trend increases the amount of work being conducted in at-home settings. The need for ergonomic furniture to reduce fatigue and injuries is increasing, as workers spend more hours at the computer than ever before.
Described as a continuous strategy of reinvention and renewal, Herman Miller’s is a differentiation strategy based on product innovation. It depends on contributions made by individual employees; the company’s original design philosophy; an organizational structure based on work teams, caucuses, and councils; and exceptional HR policies The company continues to invest in research and development, even when survival from economic conditions is uncertain. (The income statement analysis above records a .3 percentage of sales increase in R&D in each of the past two years.)
Operationally, the company uses cross-functional product development teams to facilitate internal innovation, integrate activities across departments, increase the speed of new product development, enhance the commercialization of new products, and provide strategic flexibility. Herman Miller uses lean manufacturing techniques to gain efficiencies, cost savings, lower inventories, higher inventory turnover, greater on-time shipments, higher quality, and better safety performance. It engages in supply partnerships, outsourcing component production with strategic suppliers to limit fixed production costs, increase profitability, and enable the company to retain control over production processes that have the greatest potential to yield competitive advantages. And Herman Miller uses green marketing and cooperative advertising initiatives to attract customers.
In the past, the company has employed acquisition strategies to fuel growth and to bolster its resource pool. It has also restructured operations to reduce costs, launched new product lines and reintroduced classic designs to grow sales, expanded its retail network to grow small business sales, developed design tools to attract medium-sized business customers, and made technology investments for linkages throughout the supply chain. Under the leadership of Volkema (who became CEO in 1995), Herman Miller’s sales have doubled.
In 2003, Herman Miller’s strategy enabled the company to recover from the collapse of the dotcom bubble and the events of September 11, 2001. At the time, sales fell 34% and profits dropped 139%. But, even with sales continuing to fall, the company restored profitability by adopting a new social contract with the workforce, again restructuring, and placing unquestionable emphasis on the customer. Shared sacrifice is credited with the company’s quick turnaround. The approach reinforced cultural elements and sustained the company’s valuable organizational culture, at a time when it could have been at a grave risk. Through 2008, Herman Miller’s profits rose to all-time highs. .
Short-term to medium-term prospects for high-end design items are weak, and the company should proceed with extensive research and development investments with caution. The company needs a medium-end, practical design line for the home office market that meets the ergonomic needs of the telecommuting workforce. Herman Miller does maintain the strategic resources to introduce a promising new product line that can serve this growing market segment. Conditions suggest the need for increased focus on market segmentation (a more focused differentiation strategy), keeping in mind that product innovation can create a fast-growing market segment where one did not previously exist. Herman Miller Inc. should always be looking for ways to diversify to reduce variability in profitability by generating earnings from different markets or industry pools. Seeking markets with growth potential for long-term viability can protect the company from cyclical dips in its primary industry or market.
The company needs to secure a better return on its international business investments and to take immediate action to restore stronger levels of profitability. Some of the strategic options available to Herman Miller are outlined:
Consider the high costs and complexities of managing wholly owned subsidiaries. Aggressively seek entry into growing markets, especially emerging markets like China, India, and Brazil. Strategic alliances offer entry into new markets where knowledge and understanding of competitive conditions is weak. Evaluate the need for greater responsiveness to local preferences or the need to increase local marketing capabilities. Conduct market research to determine if a global or transnational strategy is more suitable for markets being pursued.
Herman Miller has followed product development and market development strategies with clear emphasis on differentiating its product. It operates in the upper end office furniture market in over 100 countries, although only 10% of its profits were from non-North American countries. The efforts of its Accessories Team could be classified as related diversification.
Herman Miller values have played a profound role in shaping the company’s strategy and its strategy execution. This has occurred primarily through policies that create a work climate conducive to good strategy execution. The case has numerous examples of this work climate. One such example is Paul Murray’s recounting the story of the work who told him to “get your safety glasses back on.” This illustrates how many different policies produced an empowered employee. These empowered employees are the source of a sustainable competitive advantage for Herman Miller. Herman Miller’s core values are:
Curiosity & Exploration – these values are undergirded by encouraging risk and practicing forgiveness.
Engagement – this value is about “ownership” of the company, its problems, and the responsibility to step forward with solutions. People who care are engaged in their company and community.
Performance – it’s everyone’s job at Herman Miller. High performance at all levels is necessary to enrich the lives of employees, delight customers, and create shareholder value.
Inclusiveness – in order to succeed Herman Miller must value the whole person. This value emanated from DePree’s belief that all workers have “special talent and potential.”
Design – this relates to “how” the company solves problems. Satisficing is not good enough at Herman Miller.
Foundations – the company values its past without being ruled by it.
A Better World – by pursuing sustainability and environmental wisdom Herman Miller creates a better world to live and work in.
Perks at Herman Miller are wonderful their employees. These benefits help Herman Miller attract a talented workforce, but it has also helped the firm retain those talents as well. Additionally, the tuition reimbursement helped build the employee’s capabilities. The concierge and on-site services allowed employees to focus on work without unneeded distractions.
These perks include
Health insurance, vision care & prescription plans;
Flexible spending accounts;
Short-term & long-term disability insurance;
Life insurance & accidental death insurance;
Long-term care insurance;
Gym memberships; and
Employee assistance programs.
100% tuition reimbursement;
Concierge services (e.g. dry cleaning, greeting cards & take-home meals); and On-site services (e.g. massage therapy, banking, and personal trainers). The culture at Herman Miller is characterized by respect, autonomy, and accountability. The firm respects the talents and interests of its employees related to work and the community. This is evident by allowing employees 16-hours of paid leave to do community service and by giving employees a voice in corporate giving through the Employee Gift Committee. Autonomy is exhibited through the numerous cross-functional teams used to develop and improve the product lines and the organization structure. Accountability is evident because most forms of compensation are largely contingent on corporate performance. Throughout the years Herman Miller Inc., has created a strong culture supportive of the strategy it has been executing.
The value foundation for this culture was clear with management and employees conducting themselves consistently with these values on a daily basis. As the recession dragged on it was fair to wonder whether Herman Miller could maintain its unbiased approach that engendered loyalty and commitment among its employees. The company’s cost saving decision to suspend 401(k) contributions was one area that may need to be revisited to avoid eroding elements of the organization’s culture. Herman Miller Inc. should consider expanding its global operations to increase its revenues. The company should always continue to reinvent itself through the dedicated cross-functional teams that have served it so well. As part of my analysis of Herman Miller, I have analyzed the five forces that affect the office furniture industry. The five forces include competitive rivalry, threat of new entrants, threat of substitutes, bargaining power of suppliers and bargaining power of buyers.
Herman Miller operates in a highly competitive market. In the US, the company competes with Steelcase, HNI Corporation, Kimball International, and Knoll. Many of these competitors offer similar products and have greater resources. This high level of competition in a saturated market increases pricing pressures. Efforts to combat competition, such as price reduction, increased advertising expenses, and discount offerings, could have an eventual impact on the company’s profitability in the future. With all of these factors, the overall Competitive Rivalry can be rated as High.
Threat of New Entrants
Herman Miller specializes in the design and manufacture of high-end office furniture. The company has established itself as a premium manufacturer of these products. With research and development costs being over $20 million a year, most companies are not capable of entering into this high end market. With the future of the industry currently looking to be on the downside due to prolonged effects of the recession, most potential new entrants will be driven away from investing into the office furniture industry. Also, Herman Miller’s high-end product line would be difficult for competitors to imitate due to high research and development costs, and moderately high capital expenditures needed to start up. These factors would determine a Low Threat of Entry.
Threat of Substitutes
There are a number of available substitute products in the office furniture industry. Customers can easily switch to another product because of price, service, or several other factors. These factors determine the Threat of Substitutes to be high.
Bargaining Power of Suppliers
The items used in healthcare furnishings are standard throughout the industry. Suppliers are plentiful and manufactures can easily switch suppliers. Bargaining Power of Buyers Customers of office furniture have a number of companies to choose from, and an even larger variation of products to choose from. Buyers can choose between a large range of prices and quality to suit their needs pertaining to office furniture. This would drive the Bargaining Power of Buyers to be high.
Key Success Factors
After performing an industry analysis, I have found areas where Herman Miller
can increase their sales revenue. The key success factors include:
•Very low customer switching costs
•Many available substitutes for office furniture
•Increasing input costs
Herman Miller has a leading market position bolstered by strong brand equity. Its strong brand equity has enabled the company to leverage its brand across multiple lines of business, extending customer reach. Herman Miller is the third largest player in the office furniture industry and has 12% market share. The company has received number one rankings in five of nine attributes surveyed by “Fortune.” These include innovation, people management, use of corporate assets, social responsibility, and quality of products and services. Herman Miller’s brands are acknowledged for their sheer design and quality. Herman Miller has a wide and diverse distribution channel covering multiple target markets. The company’s distribution channels consist of independent contract furniture dealers and licensees, independent retailers, owned contract furniture dealers, and direct customer sales.
Overall, the company has 260 dealer locations in North America and 751 dealer locations nationwide. Strong and diverse distribution networks allow Herman Miller to consistently strengthen its market position through wider customer reach. It also allows the company to address multiple customer segments and protects them from any significant fall in demand for any specific customer group. Herman Miller has a strong orientation toward Research and Development for user-friendly and innovative designs. Its strong Research and Development orientation enables the launching of new products and improving existing product lines. The company utilizes both internal and independent resources to understand and anticipate customer needs and problems and to launch innovative solutions. One of Herman Miller’s new healthcare products, Compass, launched in 2010 won the gold award in the healthcare furniture industry.
Herman Miller is extremely dependent on the United States office furniture industry. Nearly 51% of the company’s revenues come from the U.S. office and government institutions. With the office furniture industry so cyclical and seasonal, the economic downturn has deeply impacted this industry. Office vacancy rates are high, non-residential construction has slowed, and many companies are holding on to cash, instead of expanding. Profits have declined on average 56.5% from year to year due to reliance on single businesses. This puts the company’s performance at risk in harsh economic downturns.
Herman Miller is currently focusing on emerging markets to capitalize on the growth opportunities in these markets. Acquisitions in the recent past have helped diversify Herman Miller’s product portfolio and expanded its product/market focus. The acquisition of the healthcare manufacturers, Brandrud Furniture and Nemschoff, marks Herman Miller’s efforts to diversify into other business segments. This acquisition has created a larger dealer network and a major growth opportunity. The combined companies now have full range capabilities of product applications from administrative offices to clinical labs. The healthcare segment is strong and has significant drivers such as the expected growth in aging population from 12% to 20% by 2030. Global demand for healthcare is expected to rise along with the United States.
Also, with the rising popularity of online retail for a direct-to-consumer e-commerce store, Herman Miller can capitalize on their ability to sale directly to the customer through their website. Herman Miller’s online retailing enhances its customer reach and provides additional avenues for growth in revenues. The direct-to-customer store website creates brand awareness for the company’s products as well as informs customers about Herman Miller designers, behind the scenes inspiration, and allows customers to explore the concepts behind its innovative products.
Value Chain and Competitive Advantage
Supply Chain Management – Agreement with suppliers to deliver parts to Herman Miller production facilities in a just-in-time process. Also, the company outsources component parts to suppliers in order to reduce the fix production cost Operations – Maintain efficiencies and minimizing the inventory cost by purchased direct materials and parts as need to meet demand. Distribution – Herman Miller has manufacturing operations located in different countries, and it produces the products and delivers to the local independent dealerships. Sales and Marketing- All productions are made of recyclable materials and renewable energy. For the builders who used its production will earn points of Leadership in Energy and Environmental Design certification. (Green Market)Service – provide explanations and description for the products, and customers support.|
Product R&D, Technology and Systems Development – Herman Miller focus on improving and innovating new productions, even during the recession, the company still invested in R&D. (Thrive Collection Products) Human Resources Management – the company have a strong HR Management team and it offers various benefits to it employee.|
Competitive Advantage – Herman Miller continuously investing in R&D and innovating in new products to satisfy the need of its customers earned the customer brand loyalty. In addition, the company willingness to contribute in the green world and environmental friendly strategy gained a good reputation in the market. As the company new product lines meet the increasing demand of ergonomic health products in the working environment, the new innovation product will become a competitive advantage over its rivals. The company, while remaining innovative and front running, has experienced many trials and tribulations, including the Great Depression, the dot-com bubble burst, and a recession that has hurt most companies, not just furniture companies.
However, through all the turmoil, the company as remained profitable and with the guidance and direction of current president and CEO Brian Walker, have established themselves in markets in all seven continents, as well as added focus to not just the business market, but the residential market as well. New threats have emerged, however, that have caused the company to refocus and look for other avenues to insure a business that has been profitable for almost one hundred years remains profitable for hopefully one hundred more and beyond. In my recommendations for Herman Miller, I believe the company should stay on task and continue forth as they have throughout their history; remain innovative, strive for perfection, and remain employee friendly.
However, if tariff legislation comes into effect, they will have to drop benefit programs, commit layoffs, and possibly commit to simpler central focus. They would possibly have to cut down on R&D spending, as well as not take as many risks as far the inventions of new products. Therefore, I believe they should have this scenario implemented in their risk management plan, but should continue to develop international assets as well as build on domestic residential affairs while producing the best office furniture possible as long as current legislation allows it.
University/College: University of Arkansas System
Type of paper: Thesis/Dissertation Chapter
Date: 5 April 2016
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