Q1. What is Cooper’s corporate strategy
Cooper Industries’ main corporate strategy is broad diversification through M&A. Cooper Industries acquired firms in order to lessen its dependence on cyclical natural gas industry and to exhibit stable earnings. Cooper Industries acquired firms that had stable earning, a broad customer base and proven manufacturing operations using well-known technologies. Cooper Industries had a good corporate level strategy of diversification. Copper Industries acquired both related and non-related businesses. As a result, Cooper Industries could exhibit stable earnings.
Reasons for Cooper’s diversification
Threats of its original industry :
Low growth level
Unstable market(cyclic)
Technology Issues
Expensive labor and high costs.
Cooper’s strengths :
skilled labor and high technology that could be used in other businesses
Financially abundant.
In order to refrain from possible threats and maximize its strengths, Cooper chose to diversify its business both in size and scope.
By diversification, Cooper could achieve:
Update of processes and equipment
Retain of Brand power
Retain of skilled labor and consolidated plants
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Retain of cheap labor and capital(by moving to Southern area) Overall, Cooper’s corporate level strategy can be regarded as good because it adds value in various ways. Cooper could gain market power and economies of scope by related diversification
By related diversification and vertical integration, Cooper could reduce costs of primary goods and support activities below competitive level. Cooper could also develop and exploit economies of scope by:
Combining duplicate product lines to one division.
Rationalizing manufacturing facilities to close underutilized plants. Consolidating sales and marketing programs to help develop a unified market identity.
Combining sales members from other companies to promote efficiency.
Q2. How does it create value?
Cooper also created value by:
Acquiring firms that exhibit stable earnings and counter-cyclical to those Cooper Industries had. (e.g. Invested in the electrical business in late 70’s) Acquiring firms with high quality products and firms that were market leaders. Focusing on products that served basic needs and were manufactured by proven technologies so that Cooper gained consistent earnings from stable markets with predictable growth. Transferring proven practices around the company rather than using outside consultants. Experience and judgment of senior management staffs.
Cooper Industries’ key resources
Structural behaviors
Experienced management executives.
“Cash flow is king” thinking – enforcing attention to working capital. Bottom-up strategic plans
Centralized activities among divisions.
Skilled labor and capital
Cooper had skilled labor and capital with low costs.
Acquisition-related aspects
Cooper had strict guidelines for acquiring firms
Cooper conducted systematic supervision over acquired firms. Cooper’s structure
Chief Executive Officer Cizik, three Senior Vice Presidents who manage Administration, Finance and Manufacturing services, and three Executive Vice
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Presidents who manage each division : Electrical & Electronic, Commercial & Industrial and Compression & Drilling. Central control over corporate policy but delegated day-to-day operating decisions to each operating unit. Senior management is composed of former operators so that it knew what were good decisions to make. Cooper maintained a strong union-avoidance policy.
Cooper’s incentives
Executives were paid salaries based on the Hay system. Their bonuses were 20~40% of base salaries. Division managers had a bonus determined by Corporate Administration and EVP’s discretion. Key managers were granted stock options.
When Cooper acquired a firm, administration adjusted pay scales to the same as other Cooper divisions. Cooper also adopted its standard benefits for medical insurance and pensions for new acquisitions.
Cooper’s evaluation
Evaluation was based on Management Development & Planning(MD&P) MD&P evaluated organizational effectiveness and individual strengths and weaknesses by focusing on the performance of key managers. Employees were reviewed by their supervisors.
Each EVP conducted annual reviews of all managers in the division. MD&P uncovered existing or potential management gaps and identified people worthy of promotion. It also distinguished candidates for interdivisional transfers, which is a key resource for Cooper Industry.
Q3. Should Cooper acquire Champion Spark Plugs? Why or Why not?
Cooper should acquire Champion Spark Plugs
Champion was doing automotive industry, which was profitable business and related to Cooper’s businesses. Champion had a strategic fit with Cooper’s long term plans such as diversification. Champion Spark Plugs fits well with Cooper’s acquisition guidelines for Diversification. Stable earnings and earning patterns that are countercyclical to those Cooper had.(Slight decrease in sales, however, occurred annually) Although Champion suffered from declines in sales, Champion was recognized worldwide and was a market leader in the spark plug market. Champion had an internationally recognized brand name.
Overall, Champion was suffering from declining demands in spark plug market at the time of the takeover battle. Champion was trying to penetrate the automotive tool business in spite of its poor technology level. So, in order for both Champion and Cooper to make more profits, Cooper should acquire Champion. Champion and Cooper can both satisfy each other’s needs. While Champion can use Cooper’s experience and skilled labor to penetrate the automotive tool business, Cooper can use Champion’s world-widely recognized brand name to explore overseas markets.
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