Massey Ferguson Business Strategy

1. PRODUCT MARKET STRATEGY AND FINANCIAL STRATEGY 1971-1976
1.1 Product market strategy
Massey’s product market strategy through 1976 was worldwide growth. During the 1960s and 1970s, the company pursued an ambitious program of acquisition and business expansion. This strategy worked out well until 1976 with certain success. Massey’s markets spread out through all over the world, especially outside North America and Western Europe where it succeeded in dealing with the local authorities and penetrating with good remuneration.
The production facilities were located in developed countries like Canada, France, England and Australia. Especially, diesel engines were produced intensively in United Kingdom. However, Massey focused its sales strength

Firstly, financing by too much debt offerings and short term credit lines would increase the risks of company’s business expansion. Indeed, having constantly lower financial leverage than Massey, its competitors, Harvester and Deere, developed and sold their products primarily in North America with guaranteed high economic and political stability, and had certain competitive position there. This also means that in case of recession, Massey would be in a much less favorable situation. Moreover, farm tractors and machinery business belongs to cyclical industry which is vulnerable to the change of the economic environment, so the highly risky strategy of expansion – a hope to gain high return – with geographic misalignment of production sites and sales markets even made the company dependent much on local interest rates and currency fluctuation. Change in interest rates would affect purchasing power in general, at the same time costs of production could not be covered properly, and currency fluctuation implied a burden of carrying higher costs of goods sold and inventories, which had been high in nature. In other words, higher costs of goods sold negatively affected the competitiveness of products and directly impacted profitability. The company would be more vulnerable in case of market

The recession led to a sharp fall in demand for farm machinery. (Baldwin, Mason, & Hughes, 1982, p. 3)
Interest rates doubled the impacts on Massey’s performance. First, the cost of short term debt was escalated dramatically due to the exponential soar of interest expense. Its short term debt/capital ratio in 1980 was 58%, five times increased from 12% in 1976, and tripled that of the two competitors in the same year. At that time, its total debt, as a result, accounted for up to 81% of capital. Also, debt-to-equity ratio was 4.22, doubled that of 1979, while three and six time larger than Harvester (1.15) and Deere (0.67) respectively. (Exhibit 3)
Second, higher interest rates, which partially led to a market crash in demand, along with stronger British pound and German mark exacerbated Massey’s situation. Cost of goods sold increased made the exports too costly, thus reduced margins and damaged the company’s product competitiveness. Other than that, many of the current emerging markets were violated due to political instability, and the developed markets in North America and Europe were depressed, shrinking the sales harshly. Specifically, its profit as percentage of sales (-7%), return-on-equity ratio (-64%) and interest coverage ratio (-0.46) were very much negative in 1980 (Baldwin, Mason, & Hughes,