Massey-Furguson, 1980 Answers Hbs Case Study

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1.Summary of Massey-Ferguson’s 1971-176 Goals, Strategy and Risk/Return profile

Goals/Strategy:
Focus on small tractors, combine harvesters and industrial machinery •Exploit markets outside North America and Western Europe •Dealing directly with governments and public institutions •Central production of diesel engines in UK

Risk/Return profile:
Empire Building; engaging in potential negative NPV investments •Expanding potentially unprofitable divisions (ambitious program of expanding operations) •Potentially pay too much for acquisitions (ambitious program of acquiring assets; e.g. purchasing Hanomag) •Make unnecessary capital expenditures (high debt-to-equity ratio) •Possible hire of unnecessary employees

Overconfidence; New opportunities are better off than they actually are •Free cash flow hypothesis
Continue to invest in projects that should be cancelled
Limited Diversification
Due to strength in negotiating deals with governments versus vulnerability to political distress in 70’s in Iran, Pakistan, Libya and Poland.

2.On which assumptions were goals, strategy and related risk/return policy based? •Exchange Rate stability (higher UK pound)
Stable cost of goods sold (Diesel Engines in UK)
Political stability in relation to countries in developing countries •Continued economic growth
Limited volatility in cash flows
Customer’s ability to make the principal payments
Stable or declining interest rates

3.How were the goals, strategies compared to those of the competition?
Massey-FergusonDeere & CoInt. Harvester
RegionsStrong outside North America and Europe Focus on North AmericaFocus on North America ProductionLack of alignment, e.g. diesel engine production only in UKConcentrated to North American marketConcentrated to North American market Farm and industrial machineryStrong in small tractors and combine harvesters on NA marketStrong in larger tractorsStrong in larger tractors

4.Would you agree that MF was trying to reduce risk by diversifying markets? Depends;
a.Yes, in a way that MF invested in developing countries with growing sales versus local US and Western European markets b.No, in a way that it had limited product differentiation and was not supplying e.g. at the home (US) market the products that customers (high horse power) wanted. Later corrected though.

5.Summary of what happened after 1976

Economics:
Increasing Interest rates
Declining demand

Strategy:
Returning attention to the North American Market
Introduction of new competitive (more horsepower) products in the North America and Western Europe. Finance:
Losses on continued operations
High debt-to-equity ratio as a consequence of ambitious program of acquiring assets and expanding operations HR:
Cost cutting and labour lay offs
Operations:
Elimination of unprofitable operations

6.Describe (using details from financial statements) MF’s financial strategy and changing financial position during 1977-1980. •High interest rates having a double negative effect
High costs due to high Debt level
Lower revenue due to higher cost of acquisition for customers •Indirect Costs of Financial Distress
Doubts about the future of the company eroded sales and weakened distribution network •Cost-cutting efforts made MF viable

7.Comparison of MF to its competitors regarding financial strategy and changing financial position (including graphs and comments)
Massey-Ferguson LtdIntern. HarvesterDeere & Company
Sales (see Figure 1)
IncreasingIncreasing until 1979Increasing steadily
Operating Profit, see Figure 2
Declining and losses in ‘78, ‘79, ‘80Increasing until 1980 when it falls sharplyIncreasing until 1980 when it falls slightly Debt to equity ratio, see Figure 3
High and increasing to very high levelsStable with small increase in 1980Stable with small increase in 1980

Generally, one can notice that Deere has a more...
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