Case Study of Massey Fergusion
Question 1
Assess the product market strategy and financial strategy Massey pursued through 1976. Compare Massey’s strategy with those of its leading competitors.
Massey’s market strategy
-Sales of durable (long-lived) products
-In contrast to the competitors, focus on markets outside North America, emerging markets in particular.
-Success in dealing with governments and public institutions in developing countries
-But manufacturing in developed countries (in particular Canada and the U.K.)
Massey’s financial strategy
-Financing growth by debt
In 1976:
a) Massey’s D/(Total capital) = 47%, Deere’s D/(Total capital) = 31.3%
b) Massey’s coverage = 2.10, Deere’s coverage = 6.15
-Massey’s lenders: large, disorganized group (150 lenders from many countries)
-Hence, Massey pursued risky product-market strategy + aggressive financial policy
Massey Leading Competitors
i) Deere
-Deere saw the opportunity and decided to use it
-Deere financed its expansion with debt, mostly short-term. By 1980 debt ratio was 40%, with 21% short-term debt.
-Deere’s response to high leverage: issue equity. It reduced Deere’s stock price but brought down leverage to 33%
Question 2
What went wrong after 1976? How did Massey and its competitor respond?
What went wrong after 1976?
-Rise in interest rates. Double impact:
a) Demand for machines fell as customers needed to finance purchases by borrowing
b) Cost of short-term debt for Massey rose
-Credit and monetary restrictions in Argentina and Brazil (11.2% of sales)
-Weather
-Soviet grain embargo –reduction in demand for Massey’s products
-Appreciation of British pound: costs of production in the UK increased
-Political changes in Third World countries
-Failure to strengthen positions in the North American market (partly due to depressed demand, partly due to customers’ and dealers’
Assess the product market strategy and financial strategy Massey pursued through 1976. Compare Massey’s strategy with those of its leading competitors.
Massey’s market strategy
-Sales of durable (long-lived) products
-In contrast to the competitors, focus on markets outside North America, emerging markets in particular.
-Success in dealing with governments and public institutions in developing countries
-But manufacturing in developed countries (in particular Canada and the U.K.)
Massey’s financial strategy
-Financing growth by debt
In 1976:
a) Massey’s D/(Total capital) = 47%, Deere’s D/(Total capital) = 31.3%
b) Massey’s coverage = 2.10, Deere’s coverage = 6.15
-Massey’s lenders: large, disorganized group (150 lenders from many countries)
-Hence, Massey pursued risky product-market strategy + aggressive financial policy
Massey Leading Competitors
i) Deere
-Deere saw the opportunity and decided to use it
-Deere financed its expansion with debt, mostly short-term. By 1980 debt ratio was 40%, with 21% short-term debt.
-Deere’s response to high leverage: issue equity. It reduced Deere’s stock price but brought down leverage to 33%
Question 2
What went wrong after 1976? How did Massey and its competitor respond?
What went wrong after 1976?
-Rise in interest rates. Double impact:
a) Demand for machines fell as customers needed to finance purchases by borrowing
b) Cost of short-term debt for Massey rose
-Credit and monetary restrictions in Argentina and Brazil (11.2% of sales)
-Weather
-Soviet grain embargo –reduction in demand for Massey’s products
-Appreciation of British pound: costs of production in the UK increased
-Political changes in Third World countries
-Failure to strengthen positions in the North American market (partly due to depressed demand, partly due to customers’ and dealers’