Online Extra: Whirlpool's Future Won't Fade

The appliance giant's CEO, Jeff Fettig, has a favorite word: innovation. His company has used it to set earnings records and build a cutting-edge brand

These days, Jeff Fettig is getting the glory. Since mid-2004, Fettig has been chairman and chief executive of Whirlpool (WHR ), which as the world's No. 1 maker of big-ticket appliances, has set records for sales and earnings. The housing boom in the U.S. certainly has helped. But the real numbers booster, says Fettig, is innovation. Thanks to new products, Whirlpool not only has logged outsized growth in demand; it has been able to command higher and higher prices (see BW Online, 4/27/06, "Whirlpool: Fabulous by Design").

In 2005, the Benton Harbor (Mich.)-based company attributed $760 million of sales to new products, up from $217 million a year earlier. Raising the bar, Fettig now expects innovation revenues of $1.2 billion in 2006. And even that goal may not be all that hard to surpass. With 568 projects in some stage of development today, Whirlpool calculates that new appliances in its pipeline will generate $3 billion in annual sales when they're rolled out over the next few years (see BW Online, 3/6/06, "How Whirlpool Defines Innovation ")."

In 1999, then-chairman and CEO David R. Whitwam concluded that innovation was the only way for the appliance maker to rise above its peers. While Whitwam set the course, Fettig deserves credit for leading the way. After all, as Whirlpool's new president and chief operating officer at the time, Whitwam was urging everyone everywhere in the company to think of themselves as innovators (see BW Online, 2/7/02, "Whirlpool Taps Its Inner Entrepreneur ").

Fettig, 49, is a career man at Whirlpool. He was hired as an operations associate in 1981 after earning his MBA from Indiana University. Sitting at a conference table in his executive suite, Fettig recently spoke with BusinessWeek Senior Correspondent Michael Arndt about Whirlpool's innovation strategy. An edited transcript of the conversation follows:

How did you decide on innovation?

This goes back to a critical assessment we did of ourselves and the industry in the late 1990s. Any consumer walking into any appliance showroom anywhere in the world would see this: a sea of white. You don't see anything really different, even if you haven't been in the market for 10 years. You can't differentiate brands. You can't see the value proposition without having someone explain it to you. Thus, it's called the white goods business.

Without innovation and differentiation, the fundamental basis for competition was just price. There's nothing wrong with that. But our view was for us to truly execute a differentiated, value-creating strategy, we needed to do something dramatically different. From day 1, we took the approach that innovation was not the privilege of a few; it was a right of the masses. The only way innovation would work is if everybody was in, so to speak.

So is it working?

We're seeing evidence of what we call a "want in." In other words, consumers see something that is so different or innovative that they want to buy it as opposed to: they have to buy it. Because of that, we're dramatically changing the lifecycle of products. For example, if you looked four or five years ago, the average life of a washing machine was something like 13 years. With our Duet washers and dryers, which have been huge hits, we're surveying owners and finding out a lot of people are replacing their washing machine with the Duet after five, six, or seven years because they want it, not because their old machine broke or wore out. They just saw it, and they wanted it.

Another thing we're seeing is this is driving new revenue growth. I've told our investors that the incremental sales from innovation are now adding three points of growth to our annual growth rate. And it could be more. The other item -- and I don't think anything could be more clear than this -- is our average global selling price, or sales divided by number of units. From 1997 to 2002, our aggregated growth rate was a negative 3.4%. From 2002 through 2005, we've turned that from a minus 3.4% to plus 5%.

Could you highlight an example or two of when you had to adjust your strategy as you discovered things weren't working as you had planned?

Our first year, 1999, was all about learning. We knew what we needed to do; we just didn't know how to do it. We pulled 75 people out of their full-time jobs from vice-presidents to directors to secretaries to blue collars on the assembly line. We put them in three different innovation teams around the world. And for the first year, their job was to start innovating. I would say we had success with that. There's incredible power in putting together diverse people to come up with great business ideas. We learned tons.

But when we got to the end of that, we really started hitting a roadblock. This was the Internet bubble era. And most people wanted to go completely outside of our box; they wanted to start an Internet company. We had our first breakthrough. We said this is great, we don't want to overcontrol this, but we need to bound it. So we made this very simple fundamental decision: You could work on anything you want, but it has to be within the scope of our brands. It brought a boundary to our people.

I'd say we had the next breakthrough, in late 2002 and going into 2003. We were still treating innovation as something separate. It needed to be something we do every day. How do you do that? Basically, you decide where you want to go, set a goal, and hold people accountable. That's when we introduced innovation revenue and pipeline targets, and linked them to executive compensation. That was probably the big breakthrough that allowed us to scale this up.

What do you need to do now to improve your strategy?

I think we have a healthy approach. There's always faster, better, cheaper. Another dimension is that although we are doing this around the world, we think we can more rapidly leverage innovation from one part of the world to another part of the world. We've got 60,000 people worldwide. We estimate that on any given day we've got 1,500 working on innovation. There are probably 5,000 in any given year. That's a lot of people, but we've still got a long way to go. We may never get to 60,000. But we could get to 10,000 or maybe 15,000. We've got a lot of bandwidth.

What has the new strategy done to Whirlpool's corporate culture?

People think they have more freedom to contribute than ever before. This is fun. This is exciting. Our retail partners value this a lot. Young people talk about us like we're a high-tech company. No, we're not, we're a high-innovation company. Which is different from how people thought of us before, as an old, traditional company. People at Whirlpool don't believe they're in an old, traditional company. They believe they have the right and the obligation to create a future.

    Before it's here, it's on the Bloomberg Terminal.