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Tyco International - Corporate Malfeasance

Essay by   •  April 4, 2011  •  Case Study  •  2,448 Words (10 Pages)  •  2,921 Views

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Case Summary

Tyco began in 1960 when it was founded by Arthur Rosenberg and started as an investment holding firm. In 1973 Joseph Gaziano took over for Rosenberg as CEO and pursued many hostile acquisitions. He was successful and was able to grow the company to a net worth of $140 million before he passed away in 1982. The CEO who took his place was John Fort who came in with the basic strategy of maximizing shareholder wealth through dramatically cutting costs. When John Fort left his position in 1992, Tyco was comprised of Fire Protection, Electronics, and Packaging departments. Dennis Kowalski was able to work his way to the top of Tyco and take the CEO position in 1992. Kowalski began as an aggressive CEO looking to acquire businesses that were in synergy with Tyco. He succeeded with this by diversifying the company with 1,000 acquisitions by 2002. Throughout the peak of his reign at Tyco the stock price soared from only $5.00 in 1992 to $62.00 in 2001. Although, what investors did not know and should have legally known, was that Kowalski and Swartz had so much influence over the board of directors that they were able to hide substantial amounts of money which they gave to executives throughout the company. In the end, Kowalski stepped down as CEO in June of 2002 when it became evident that he was stealing money from the company. He and Swartz (CFO) were convicted of grand larceny, conspiracy, and fraud and were sentenced to 8-25 year prison sentences in June of 2005. This could have been prevented if the corporate governance structure was not so overpowered by these two individuals.

Situational Analysis

Industry Attractiveness Analysis

Tyco now has many different main industries that it does business in. Although, there is not enough space to cover all of them so I will use two of the most important industries. They are fire protection, and electronics industries. It is very important to use the five forces of competition model when looking at the attractiveness of both of these industries. The five forces of competition model includes the threat of new entrants, bargaining power of suppliers, bargaining power of buyers, rivalries among firms, and the threat of substitute products.

The fire protection industry seems to have a mediocre barrier to entry for new firms entering the industry. This industry is a mature one where firms have already established themselves in the market place and therefore it would be hard for new entrants to be profitable. Although, there is a chance that a new entrant will have a core competency in their product in the form of a unique fire protection technology that is hard for other firms to imitate. Since the demand for fire protection equipment is relatively stable and there are many firms in the industry, the bargaining power of suppliers is relatively low. The bargaining power of buyers is mediocre because firms produce many differentiated and unique fire protection devices. These customers could also go and switch to a substitute product and not incur much more of a cost. Therefore, the threat of substitute products is high in the fire protection industry. The fire protection industry is very competitive and companies strive to differentiate themselves from competitors. Therefore, this industry has an intense rivalry among competitors. Overall, Tyco should still compete in this industry because of the constant demand and the potential to have a product go above and beyond expectations.

The electronics industry is very competitive, in which firms must concentrate on constantly making their products better. Once a firm is established in this industry, like Tyco, there is no significant threat that new entrants pose. This is because a new entrant would get a very big competitive response right away from other innovative mature firms in the industry and not be able to gain a significant market share. Suppliers in this industry have a high degree of bargaining power because this industry is dominated by only a few very large firms. The bargaining power of buyers in this industry is very low because companies are constantly producing highly innovative and unique products. The threat of substitute products in the electronics industry is high because there are always at least three competitors that produce the same types of products (televisions, video games). So, if a customer wanted to purchase another video game for his x-box he could very easily buy one without thinking about who made the game. Tyco should stay in this industry since they already have their foot in the door and are doing well.

External Environment Analysis

It is also essential to understand the trends of the external environment and how they might affect Tyco. These trends have different implications for the fire protection and electronic industries Tyco competes in. First off, demographically the people in our world are getting older due to the aging of the baby boomers. This is a negative signal for the electronics industry because the majority of buyers of electronics are relatively young. The fire protection industry is not affected so much because fire protection is a necessity now. When looking at the economic segment, we are climbing out of a recession and interest rates are low. Therefore Tyco is able to borrow capital at lower rates than before. Also, the political/legal segment may affect the electronic and fire protection industries in a number of different ways. Some laws may affect changes in interest rates and would give Tyco a higher or lower cost of capital. Also, there may be politics or groups of people that lobby against them and portray a negative image of Tyco to shareholders. In effect, this would reduce the stock price. Another factor of the external environment that must be considered is the sociocultural segment which deals with the attitudes and the culture people Tyco might do business with. If Tyco were to expand into other countries it would need to consider their culture because certain products may not be marketable to them. One of the most important segments for Tyco to consider is the technology segment which is evolving rapidly today. Tyco must consider what other companies are inventing in both industries so they can better their own products to compete. I feel that there is turbulence in the economic and political/legal segments at the moment that may hinder Tyco's efforts in both industries. Consequently, Tyco must proceed with caution into the fire protection and electronic industries to earn an above average profit.

Internal Environment Analysis

When looking at the internal environment of Tyco you should consider

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