Cooper Industries Essay

Cooper Industries’ is truly in the business of value-added manufacturing. From its criteria used to select acquisitions to its organizational structure, Cooper Industries is constantly trying to uncover opportunities to acquire and divest companies in the pursuit of increasing economies of scope and profitability.

Acquisition Guidelines for Diversification

Cooper has specific, detailed guidelines for its diversification approach. It will only acquire firms that will fit easily into their mold: seeking acquisitions that exhibit stable earnings or countercyclical earning patterns, acquiring products that serve basic and essential needs that are derived from proven technology, and acquiring manufacturing companies that are both high quality and market leaders.

These acquisitions guidelines
also exist when looking to acquire companies that would complement their existing product lines. Anytime a company comes aboard it must be able to enhance Cooper’s distribution strategy, strengthen a business unit’s market position, serve a broad customer base, and must broaden its existing product lines.

Adding Value to Cooper Industries

Cooper Industries does not only add value to its products by these detailed guidelines for diversification, but also by its organization structure and management controls.
Since Cooper Industries is a large, well diversified firm, it can take advantage of various economies of scope. Transfer pricing is one such economy of scope where the company can accomplish corporate objectives. With transfer pricing, Cooper Industries can spread out costs over a wider area and allow products and technology to be used throughout the company.

Cooper Industries also does a good job with its internal capital allocation. In compliance with its acquisition guidelines, Cooper Industries not only seeks companies that can add value to its strategy implementation but will also fund such projects. Cooper Industries will fund efforts that strengthen its core competencies and capabilities, sometimes creating new ones. The other advantage Cooper Industries exploits with its internal capital allocation is the success and willingness to divest and downsize a company or acquisition to fit the company mold.

Recommendations for Cooper
Industries

In regards to Champion Spark plugs, we believe that Cooper Industries should go ahead with the acquisition. Even though it was not the most profitable company in the past year, it does meet the criteria and guidelines set forth by Cooper Industries. It may also be able to use its core competencies, strategic use of internal capital, and transfer pricing to create a more profitable company and product line. Also, its effective use of the M-organization structure has created close ties between units and its execution has greatly contributed to the success of the company.

However, Cooper Industries should consider making a few strategic improvements to its future corporate strategy. One such improvement is to consider zero-based budgeting, forcing the company to prioritize its acquisitions and use of capital, as well as making adjustments to the compensation plans. Company goals and managerial attitudes could be more aligned if Cooper Industries implemented a divisional, performance based compensation plan in combination with stock options. Finally, Cooper Industries should diversify by pursuing a centralized hub structure as it expands its international strategy. This will allow the company to exploit and retain its economies of scope and core competencies in its corporate headquarters; yet allow Cooper Industries’ decisions to be implemented by local managers worldwide.