Tycos organizational structure

1
Tycos organizational structure

• Multidivisional structure with HQ as corporate
  banker
• Six distinct divisions with potential for little
  synergy (except in the case of fire protection
  and flow control)
• Using corporate cash resources to manage growth
• Centralized financial decisions
• Presidents responsible for division strategy
• Allows divisions to focus on business strategy,
  while HQ provides support (more flexible,
  efficient), decentralized strategic decisions
• Familiarity and interaction of corporate with
  divisions strategic responsibility and control
  (freedom from operating responsibility)
• Allows better monitoring and accountability of
  each division
• Fostered growth through multiple acquisitions in
  each division

2
Organizational structure

• Lean corporate HQ (avoided bureaucracy associated
  with this structure)
• Managing trade off between centralization and
  decentralization
• Financial controls with strategic freedom
• Financial controls emphasize short term profits
  (emphasis on EPS)
• Competition between divisions for resources
• Does not allow tracking performance by country
  markets (significant worldwide presence)

3
Control systems

• Very centralized financial controls (minimal cap.
  expenditures require corporate approval -
  100,000 and up)
• Excess cash goes to corporate account, may not go
  back to generating division
• Profit centers increase accountability
• Budgets (behavior controls) with earnings targets
  on a divisional basis (flow down to profit
  centers)
• Poor performers (at plateau 1 for many years)
  typically lose their jobs
• Not a balanced scorecard approach emphasize
  financial goals (EPS, earnings growth)

4
Reward structures

• Low base salaries with large bonuses (based on
  operating performance, growth from previous year)
• Lack of transparency in bonuses flexibility
  (encourages misuse)
• Extensive use of stock compensation plans
  (emphasize short term emphasis)

5
Acquisitions

• Unrelated diversification to counter
  cyclicality and increase growth
• Consolidating position as leader in each group
  through acquisitions managing the external
  environment
• Value added From HQ in market-based and
  performance oriented compensation, strategic
  planning and budgetary process and rational
  evaluation of potential targets
• Synergies Unrelated divisions (except for two),
  synergies through share resources are likely to
  be limited, may end up creating costly
  bureaucracy and integrating mechanisms

6
Tyco

• Kozlowski and Swartz charged with looting 170m
  from the company and obtaining 430m through
  stock sales
• Where was the BOD?
• Forgave executive loans, tax evasion (through
  Bermuda location), questionable accounting (high
  operating margins, mediocre measures of
  efficiency)
• Focus on Pricewaterhouse Coopers Tycos
  auditors
• Overpaying for acquisitions (spent 63bn)
• Challenge for Breen - 26bn in debt, Selling non
  strategic units (like plastics) will yield only
  fraction of payments for acquiring them in the
  bull market, implications for share
  capitalization (loan covenants)