Cooper Industries Corporate Strategy

Corporate Strategy of Cooper

Acquisitions with manufacturing focus

Decentralized operations and central control over corporate policy

Acquire companies with stable earnings or earnings countercyclical

Value Added Manufacturing - Focus on products that served basic needs and that were manufactured with mature production technologies

Acquisition candidates possess its own strongest assets

Retain original brand names

Focused on companies manufacturing in US Market

What Next? Cooper Industries Case Study on Diversification

Slide 1: Good day to all! This presentation is entitled "What's Next?" and is a case study on the diversifications strategy of Cooper Industries, a diversified industrial corporation in the U.S.

Slide 2: The strategic challenge for Cooper Industries is whether it can buy two companies, or only one, or none at all, given the problems associated with the acquisition.

The solution arrived at after a thorough strategic analysis of Cooper's internal capabilities using the VRIO framework and its external opportunities using the S-C-P framework is that Cooper can buy both companies, sustain its growth strategy, enhance shareholder value, and develop an international diversification strategy..

Slide 3: Cooper's growth depends on wise diversification, buying companies that are inefficiently managed but with valuable brand names in industry sectors that are counter-cyclical to its traditional business of compression and drilling for energy.

With its experience and strength in Cooperization - the ability to transform poorly managed companies into highly efficient, profitable, and competitive businesses - it has been able to digest the companies that it buys and make them blend with what they have.

Slide 4: Cooper's growth strategy is through diversification and acquisition. After a business crisis in the late 1950s allowed an outsider to buy shares in the company, Cooper CEO Miller saw that the company needed to manufacture products that would not be affected by the business cycle in the same way and at the same time.

Cooper decided to buy companies instead of building them up from scratch because of high entry barriers in the manufacturing business, intense competition from business rivals, a limited number of suppliers (Cooper acquired some suppliers out of necessity), a growing base of customers, and the increasing number of product substitutes.

The 5-forces analysis shows increased business competition in the industry sectors where Cooper competes, giving the company the opportunity to benefit from economies of scope and scale by consolidating manufacturing and sales, marketing, and distribution channels. By cutting down overhead and fixed costs, closing down inefficient factories, and laying off workers, Cooper can generate more profit while growing its sales. Cooper can grow because it is good at turning crisis into opportunity.

Slide 5: This is a summary of the Five Forces Analysis on Cooper Industries.

Slide 6: Diversification at Cooper is not always about buying companies. It also means knowing when to abandon an industry to dominant and well-run competitors. Cooper lost to Dresser Industries and Carrier Industries, two large companies that are very profitable and highly efficient. It also decided not to compete with Black & Decker in the electric power tools industry sector.

[S-6] But it had opportunities that it could exploit in the hand tools industry, where there are many small companies that are cheap and very inefficient. It also identified a company, Gardner-Denver, which was large but inefficient. Cooper bought that company too. It bought Crouse-Hinds, a large and efficient company, when the opportunity came up because Crouse-Hinds was the object of a hostile takeover attempt. Cooper was able to buy these companies because of its image as a high value-added, competitive, and quality manufacturing company.

At Cooper, growth by acquisition includes not only knowing which companies to buy, but which ones to sell or close down. Companies that do not meet financial and operating targets are either sold or closed down.

Slide 7: Cooper has very important strengths that are valuable, rare, and difficult to imitate.

It also has a structure that allows management to exercise close control over its diversified operations, but at the same time allows managers and workers to act on their own most of the time.

The structure is a balanced M-Form structure where Business Units are accountable for performance according to well-defined metrics.

Its managers are highly competent and well-rewarded using appropriate compensation systems like profit-sharing and performance-linked bonuses for all workers.

Its MD&P system allows top management to align its 21 profit centers in 3 business segments regularly to find value in making operations more efficient, cutting costs, and increasing sales.

The result is a diversified business that is successful in sustaining its competitive advantage of making its operations more efficient and profitable. Its good performance is shown in the price of its stock outperforming industry benchmarks like the S&P 500 (Exhibit 6) from 1974 to 1989.

Slide 8: Cooper generates value by following a set of characteristics that are RARE and DIFFICULT TO IMITATE.

It has clear cash flow targets that allow it to buy companies with healthy cash flow so that it could pay off debts used to buy the company.

Cash flow is generated by buying companies that meet Strategic Guidelines for Acquisitions: they look for companies with large and stable customer bases, high-quality products, and valuable brand names. By keeping or growing sales figures, Cooper can generate higher profits by cutting costs.

Cooper is also flexible with its organization. It changes its structure after each acquisition to find the best combination of people running the different business units and profit centers. It also combines decentralized operational management with centralized policy-making. The structure is unique because it is NOT a holding company structure but an OPERATING structure.

[S8] Top Management and the Board are involved in ALL policy decisions