Monday, November 26, 2007
Thermo Electron- Question #1- Beth Ellis
Historically speaking, Thermo Electron used their unusual diversification strategy very well to create value for the company and its shareholders. The approach used from 1983-1997 was to create products to be spun out by subsidiary companies in which Thermo holds a majority of equity stake in. Thermo produced 23 of these spinouts between these years, and grew its sales to over $6.3 billion a year. Thermo’s diversification strategy was different in that it gave the subsidiaries a huge amount of freedom as day-to-day operations and stock contract options were generally handled by the subsidiary (Hill, 2008). This created value for the company during the time as they didn’t have to do as much work with each of the subsidiary companies, allowing the companies to take care of a majority of things for themselves. This created value for the shareholders as during this time period the compound return to shareholders averaged 28% a year (Hill, 2008). Historically, this approach worked well for Thermo Electron.
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Thermo Electron Question #2- Steve Moore
There are several drawbacks to this strategy and many of which have hindered the Thermo Electron Company. The CEO of a company has the option to multiply his subsadaries or not. Thermo Electron took that approach and they went a bit to far as their subsadaries has given rise to a structure that has become a complete mess. This can result in low share prices with the use of a company structure that is too complicated to handle. Having all of these subsadaries to handle, the company is required to produce a large amount of annual reports and quarterly earning statements. "In addition, bad performance by one subsidary can cast a shadow over the whole oompany and adversely affect both revenues and share price" (Hill, 2008). The last drawback of this companies strategy is the long process of spinning out companies is that the management and engineering talent can spread to thin and the amount of ideas would begin to diminish.
Thermo Electron Question 3- Jason Grier
Yes, the problems do invalidate the strategy due to the fact that there was lack of performance and the financial results were not the greatest. There was also slow sales and some product recalls because some subsidiaries rushed products onto the market when they were not properly tested or engineered well enough.
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