Strategic Management of Cooper Industries - Case Study Example

Cooper Industries Introduction Cooper Industries is a renowned name in the manufacturing of electrical and industrial products. With operations in three business segments including energy, industrial, drilling and electronic, Cooper Industries is a diversification giant. It also operated in the hand tool products and light fittings which took the market by storm and established a clear monopoly of Cooper Industries. Currently the company is in a fix to digest the acquisition of Champion Spark plugs and Cameron Iron Works. While both the acquisitions will offer operational efficiency and diversification advantages, yet financial repercussions are there which are delaying the acquisition decision. Background Cooper Industries had always been aggressive in its diversification strategies as a means to add value to its manufacturing. While the period from 1967- 1970 was marked by the acquisition of related industries, Cooper industries grew from diversification by acquiring unrelated industries in the year 1980. Cooper Industries considered situations of crisis as opportunities and thus followed three basic principles while deciding upon acquisitions: The target company should be a market leader. The target company should be stable and has a good market for its offerings. The acquisition should make Cooper Industries a market leader in the respective industry (Cooper 1995). In its diversification regime, Cooper Industries had suffered both profits and losses. For instance, the acquisitions of hand tools, Gardner-Denver and Crouse-Hinds supplied diversification revenues while Dresser and Carrier and Black and Decker resulted in loss conditions. Thus, deciding upon the acquisition of Cameron Iron Works and Champion Spark Plugs is a dicey situation for it where it has to analyze its strengths, weakness and other factors which can provide efficiency without raising the debt burden. Analysis Over a period of thirty years, Cooper Industries acquired almost 60 manufacturing companies to add on to its manufacturing expertise. This not only made it independent of the external environment pressures, but also provided diversified revenue base where sale of one segment compensated for another during tough times. Its organizational strategy was also aligned to the business strategy where every single acquisition was first closely analyzed and then acquired. Its MD&P (Management Development & Planning) division constantly worked on acquisitions to eliminate poor performing or redundant product lines and integrates the acquired business into its own. In these efforts, even relocation of acquired companies plants or reorganizing the staff made all the acquired companies its profit centers. In order to gain a better understanding of its internal and external environment, the SWOT analysis puts light (Figure 1). Strengths Cooper Industries had clear acquisition strategies where it closely examined each target company before actual take over. Establishment of MD&P division aligned the business strategy with the organizational strategy and avoided cultural or operational gaps. Value was added in every acquisition by making it compatible to its own operations and squeezing the unwanted products or operations. Weaknesses In its acquisition drive, Cooper Industries did not pay attention to its rising debt ratio and thus, while adding value, it also increased its debt burden. Opportunities Oil and gas industry present good opportunities to rise. More acquisitions can be done to strengthen its business segments. Acquisition of Champion Spark Plugs can help gain entry into foreign markets. Threats Debt to capitalization ratio is supposed to achieve 60% mark after the acquisition of Champion and Cameron. While Champion suffers from liabilities and small diversification opportunities, Cameron’s acquisitions is exposed to anti-trust and growth concerns. Figure 1: SWOT Analysis of Cooper Industries How Cooper creates Value One of the prime analyzing factors in Cooper Industries is the way it adds or creates value in each of its acquisitions. Often it is found that companies acquired other companies but their organizational and operational practices remain distant from each other. Cooper industries emphasizes on integrating the strengths and competencies of acquired companies into its own which is actually the cornerstone of an acquisition success. With every acquisition, Cooper gets involved in dynamic structural changes of its organizational policies, plant relocations and staff reorganization. Strategic planning is exercised from bottom to top and competent managers are executives of acquired companies are made the heads of different functions of integrated business or segment. The best part is that it acquires those companies and maneuvers them in a way which cannot be imitated by rivals. More and succinct insights into its value addition drive can be understood by the VRIO (Value, Rarity, Imitability and Organization) aspects of its resources and capabilities which can help determine the competitive potential of Cooper Industries (Figure 2).   Value Rarity Imitability Organization Competitive implications Manufacturing expertise Yes Yes Yes Yes Competitive advantage Diversified revenue base Yes Yes No Yes Temporary competitive advantage Leading market position Yes Yes Yes Yes Sustained competitive advantage Figure 2: VRIO Framework of Cooper Industries Recommendation Before coming to the recommendations part, it is essential to know the plus and minuses of acquisitions of Cameron and Champion which go as follows: Champion- plus point is its brand name and access to overseas markets while minus point is its mismanaged and money-losing business practices. Cameron Iron Works- it can turn out to be a potential rival if not acquired and is also available at cheap prices due to industry fluctuations. Recommendations Cooper Industries is presented with a few options and respective advantages and disadvantages of each option is given which will help in the final selection of implementation plan. Option 1 Acquisition of Champion Spark plugs will help augment its electrical segment sales and also gain entry to foreign markets due to the recognized brand name of Champion in the Europe and Asian territories. Champion however is abused of its old and outdated production techniques which will delay the adjustment process. Option 2 Acquisition of Cameron which is a potential competitor and its acquisition can help Cooper Industries evolve as a market leader. Cameron products (valves, petroleum and gas) are more in demand than that of Champions and ‘Cooperization’ process will make the necessary adjustments to make it a profit centre. Option 3 Another option is to acquire both the companies regardless of financial concerns and its value addition philosophy and MD&P department will take needed steps to make things favorable. Implementation Analyzing the pros and cons of each option, the last option seems doable which is to acquire both the companies. Though some financial issues are involved yet its previous successes and efficient handling of over 60 acquisitions provide that expertise needed to fare well in this situation too. Action plan Now when acquisition of both Cameron and Champion seems viable and doable, the following steps compose its action plan: Meeting the Chief Executive Officers of both the companies and make suitable offers. Cameron purchase should not present anti-trust issues. Identifying liabilities of both the companies which are supposed for closure. Adding value to Champion’s acquisition by closing its losing businesses and cutting costs. Cameron’s acquisition should be followed by an immediate reduction of its sales force and integrating the research and development functions of both the companies and grow simultaneously. Conclusion Thus, amidst financial uproar and long term feasibility concerns, history of Cooper Industries favors the acquisition of both the companies. The advantages are more than the anticipated losses and Cooper’s better managed abilities and divisions are capable to handle the risks arising from these acquisitions. Identifying profit opportunities to offset the risks or losses lie at the heart of success of these acquisitions. Moreover, Cooper had divested its loss incurring businesses in appropriate time and after turning them into profit centers. Thus, only financial concern does not seem to be a serious issue serving as a hindrance in the acquisition philosophy of Cooper Industries. Reference Stuart T 1995. Cooper Industries’ Corporate Strategy. Harvard School Press. Read More