Business Case Study Interpretation: Tyco
1. What are the goals and objectives of Tyco? How well has the company performed? Show your analysis and interpretation.
Tyco was a holding company of the highest caliber (at the time of this case’s publishing), with a simple plan that was painstakingly engrained into the corporate culture. Everything about the company screamed Wall Street success, despite that one CII report to the contrary, and this success could be credited to the stubborn adherence to meeting 15% growth rates and various financial performance ratios.
2. What are the nature and characteristics of businesses/industries that they are in? What is the business selection strategy? What businesses are they entering or exiting? Are they related or unrelated?
Again, it must be stated that Tyco is the epitome of a holding company. This can be said with certainty since each division has a president who “functions as a CEO.” Whether it is fire protection or packaging materials, Tyco entered businesses that were unglamorous but provided an opportunity for profitability and growth. Before the creation of the medical products line, most businesses fit neatly into one of four areas. Since then, it seems like the company was more inclined to find any opportunity to grow, as long as it fit within the financials of the holding company.
And did they ever acquire businesses! Early on, in the days of Mr. Gaziano, Tyco earned a reputation as a corporate raider. Later on, under Fort and Koslowski, things operated under more diligent control. [Although I feel the specialty products division seems too unrelated to manage and should have been divested.] But one area where Tyco seemed to fail was the way it limited its buying power between businesses through an utter lack of communication. Divisions needed the same raw materials despite being unrelated, but didn’t take advantage of the volume discounts on steel, for instance, that could have been negotiated.
3. What are the unique resources they have developed to create a competitive advantage? Are they general or specific?
The corporation seems to have created a few highly important resources in order to survive and succeed as a holding company. More than anything else, Tyco’s strong financial savvy in managing unrelated businesses is a general skill that few have ever mastered. [As the case points out, very few experts take a position on the side of conglomerates, thereby making what Tyco has done all the more remarkable.]
Other areas where it has excelled are more specific, and all of these relate to the different businesses they company has entered. Tyco is now skilled in the areas of fire protection production, disposable medical product marketing, etc.
4. How does the corporate office contribute or create value for its business units?
Tyco seemed to succeed in spite of two major flaws in management’s style: the use of fear-based directives and a complete lack of attention to cost-saving synergies. Looking at the use of fear first, the example on page nine proves Tyco’s reliance on numbers led to middle management fear under Dennis Koslowski. While it may have been effective, it probably led to a lot of dissension among the ranks despite the generous bonuses that were given out.
Brad McGee’s comment on page two of the case really typifies how little synergy there was between divisions. Perhaps this was necessary given the holding company structure, but I think some middle ground could have been achieved. In certain circumstances this could have been seen as a positive, like in the case when the company was looking for the best deal in the marketplace, instead of being forced to buy something internally. But by and large, it feels like more could have been done.
On the positive side, Tyco corporate did an excellent job of making sure the numbers were always top-of-mind. In addition, the company intelligently added hedged acquisitions and creations (like the servicing example) to continually keep the Wall Street numbers moving forward.
5. What kinds of structure and systems has Tyco set up to manage its business units? How well do they work?
As stated earlier, Tyco prided itself on a holding company structure that really tried to make each division an entrepreneurial power unto itself. Everything centered on each division president’s ability to hit a few preplanned budget goals. Lowballing expectations was also ferreted out in order to force these managers to perform at the very best levels.
The initial iteration of this clean-up effort started with John Fort. By reducing long-term debt from 119% to 8% of shareholder’s equity, Mr. Fort was able to make all future year financial figures shine. He gave his manager’s freedom to meet targets, but was very controller heavy; in essence perpetuating this attention to the financials.
There was one drawback to this style though. In my mind, this Wall Street-heavy strategy makes all planning year-by-year. Thus, long-term corporate health might be sacrificed in the effort to make each year’s goals. Moreover, this strategy was in stark contrast to the bonus structure set up at Tyco, adding further to the minds of those who ran the business from day-to-day.
6. Has the company created and sustained its corporate competitive advantage? Explain the sources of sustainability for Tyco.
We all know the hot water Mr. Koslowski got the company into a few years ago with his lavish spending at a company party. With that information aside, the skill Tyco has built at acquisition and holding company management seems to be tried and true. Also, the industries in which it trades seem to be under the company’s control. In these senses, Tyco can thrive for years to come thanks to competitive advantages.
However, there is one area where Tyco could easily falter. Namely, the very reliance on financial performance that has made Tyco a success for decades could be its downfall. First of all, the company has never been as entrepreneurial as management wanted us to believe since there are “no guarantees that the divisions generating the cash would later be able to spend it.” Also, budgeting was done from top-down, which seemed to put Wall Street above all else. While this ensures that no one ‘dog’ division will consistently hurt the company, it also appears to force Tyco management to hang onto projects and companies that might be better sold off completely. In other words, Tyco seems to manage in a financially prudent manner, but seems averse to disposing of problems entirely.