Rayovac Corporation's diversification strategy and divesture plan analysis

Rayovac Corporation

Welcome to the new and improved Spectrum Brands ®. The organization has embarked on a cost reducing strategy that will enable our business to focus on our primary businesses whilst removing the non-core businesses. Divesture will not facilitate a cost to our firm. We seek to obtain profits by selling off assets and by reducing liabilities outstanding. The liabilities such as pensions can be bought at a value below maturity and therefore removed from the balance sheet as a future long-term liability obligation.

The feasibility of divesture, as well as debt restructuring is not novel. However, many businesses choose not to 'cut the fat' so to speak and remain marginally profitable due to the dragging business lines. We seek to sell off these marginal performers and perhaps invest into a new line of business. A new line that will continue to see growth in a booming industry such as automotive or baby supplies will enhance the revenue stream to generate the revenue consistent with double digit growth.

The risks of such a plan are limited to the external threats and the internal limitations of each environment, respectively. The industry will seek to re-establish their respective position within the market place when confronted with the new strategy. We expect the divesture to save millions in costs and provide cash to reduce the long-term debt. The metrics will be sales growth of our businesses kept and we will track the industries of our divesture and determine if the industry is continuing on a downward spiral. However, what matters is our growth in revenue as a function of the strategy implemented. We expect a $50,000mm return by 2015, estimated from divesture profits, the savings in debt financing, and the generation of profits from our businesses.

Introduction

The Rayovac Corporation was an example of the old school economy, brick-and-mortar based, undiversified, and highly susceptible to losing market share to new and more innovative competition in the market place. The revenue model was based on its manufacture and distribution channels of the Rayovac brand of battery. Strategic Management and positioning of the firm forced the diversification of the firm hence facilitating the resources to acquire businesses in an array of businesses.

Rayovac was able to survive the declining stream of revenue by recognizing the need to diversify its business holdings and product offerings. A function of the external environment, the internal environment must adjust and identify the parameters of the market and facilitate the business operations to utilize resources and obtain a greater percentage of the outstanding market. The Rayovac Corporation was subsequently renamed to Spectrum Brands to acknowledge its new path and diversification of goods.

Analysis of the case

Michael Porter's Five Force Model identifies the market dynamics that can segment the market activity and identify opportunities and weaknesses in context. Ostensibly, this is an analysis of what Porter refers to as the 'microenvironment'. The microenvironment enables a company to serve its customers most appropriately by enabling the organization to best utilize its resources to directly affect the transition of its products into the market place.

Porter's Five Force Model provides an assessment of the five most centric components to the future of an organization. These include the following:

Entry of competitors

Threat of Substitutes

Bargaining power of buyers

Bargaining of power of suppliers

Strengths

The major strength of the company is in its diversification. The company stock price became a function of its diversification. Spectrum's engagement in the pet care, men's grooming, consumer battery, lawn and garden, pest control, and portable lighting products, has facilitated a hedged portfolio of holdings that enable the growth if its revenue and profits by investing into areas that are ostensibly disposable income purchasing choices for the consumer.

Spectrum is now globally positioned in markets on six of seven continents. Specifically, the company sees its greatest advantages in the U.S. And Canadian markets, yet has exposure to Mexico, Central America, South America, and the Caribbean.

The Remington acquisition is a critical component to grow the company stock price as men's grooming is an inelastic market where Remington brand products are prime to increase market share.

The distribution channel for its pet supplies is a major advantage when speaking to the cost for the shelving space and the location of the shelves to which the products are aligned.

Pet & Lawn Care comprise the co-primary growth markets for the company going forward.

The fiscal operations of the company are rather strong. Reinvesting the retained earnings into the firm via paying down long-term debt and investing into R&D enables the company to grow its operations and increase the sales revenue.

Weaknesses

The operations have not entered into Asia as a function of the company strategic planning operations. The goods are sold in Asia however the company does not maintain an active global operation that focuses on Asia in a manner similar to that of the Americas.

The company's expenditures on R&D have yielded a decreasing marginal return from 2002 to 2006 as a function of net sales. The marketing strategy has not effectively created the inelastic demand curve sufficient to identify these new products as innovative to the extent of being superior to the current product offerings available from rival competitors.

The inability for the company to achieve an increasing marginal return on its R&D investment from 2002 to 2006 resulted in a lost opportunity to declare a dividend in the amount of the R&D expenditure increase above that of 2001.

Opportunities

The Asian market is perhaps the largest market, collectively speaking, in the world. This market is not consisting only of China, but also of south and south eastern Asia including Vietnam, Cambodia, the Philippines and Indonesia.

The Aquatics market is a growing market in the pet care industry. Sales at such establishments including Pet Smart are seeing a growing percentage of sales occurring from aquatic products such as fish tanks, filters, and tank pumps.

The pet care market in aggregate offers an incredible opportunity to increase sales and revenue. Pet care is a function of domestication of non-human species. As pets are domesticated throughout the world, as Americans are relocating throughout the world, the increase in the domestication of animals will yield new domesticated pets that will require a pet care market.

The Pet Care market in maintaining the adult species of many of these animals, including panthers is an investment path the company may choose to specialize in. A number of exotic species are introduced into foreign lands each year due to the owners desire to own an exotic pet. The adult care of these pets is important to the maintenance of the human population and the environment in general.

The global market for the electric personal care products is an area to which the company's product mix can obtain a considerable amount of market share from the competitors. In many ways Vidal Sassoon is a forgotten brand and is often overlooked on store shelves. Marketing of these products will increase revenue over advertising expenses.

The propensity for families to go camping or to even live outdoors given the harsh economic conditions throughout the world has ignited the flashlight and lantern market. From 2003-2006, this market remained stagnant and thus non-conducive to real economic growth for the firm. This market is expected to grow and the company is strategically positioned to benefit from this growth.

Threats

The primary competitors represent the main threats. Additionally, the macro economic conditions to which the company engages on a global basis remain a competitive global threat.

The cost of supplies within the supply chain will either increase the cost to the consumer, whom may choose to then purchase a lower costing competing product, perhaps with different ingredients that are lower in cost than that of the subsidiary Spectrum Brand.

Additionally, the firm can bear the cost increase or the producer which is the supply chain. This goes back to the five force model of bargaining power of the supplier. The supply chain participants may have to bear the producer cost increase in raw materials such that competing supply chain companies selling the raw materials will readily enter into the market.

The threat from competing product lines such as Scotts Miracle Grow in the lawn and care market remains pervasive. The brand recognition of a Scotts Miracle Grow presents a problem when considering the lack of advertising for the products of the Spectrum Brands owned companies that compete against Scotts and its Miracle Grow product.

The inability for the R&D to further penetrate the market and increase sales as a function of R&D expenditure remains an internal threat. The lack of dividend payment and the declining marginal return on R&D investment remains a threat to shareholders and stakeholders alike.

Strategy Recommendation

Spectrum Brands as a wholly owned and diversified company has invested into markets within a variety of industries. The best strategy for now is to divest the businesses in non-growth markets and within industries that are seeing a decline in sales growth and revenue. R&D expenditures as a function of retained earnings have shown a negative return when invested into the markets that have not shown an increase in growth via sales.

The reduction of the number in acquisitions outside of the core competency compels the organization to reduce the outstanding debt as a function of these dead wood acquisitions. The higher costs in commodities have pushed battery prices beyond the marginal benefit/marginal cost curve that is profitable for the firm to produce at. Additionally, the volume required to generate a profit now appears to be above the MC/MC = 0, which makes the business net negative in profit.

Additionally, given the lower growth forecasts in a few of the business lines, the idea of restructuring the debt makes great sense. The debt obligations for the short-term include a number of term loans in varying currencies as well as revolving credit and capitalized lease obligations. The amounts of all debts aggregate to over 2.270mm through 2015. The rate of interest is of particular importance as a loan for 26 is pegged @ 10.3% with two large outstanding loan amounts totaling almost 1mm at 8.55%.

The stock price will be a bargain considering the debt elimination from the balance sheet and therefore will likely be recommended as a buy given the debt restructuring, the divesture of non-core operating businesses, and the revenue growth from the stable brands in the growing markets. Increases in commodities costs also seek to undermine profitability and therefore futures hedging which is a function of the currency hedge should continue.

Largely, the profits generated (16.1mm approx.) from the overseas markets were from the sales as a function of the currency value of the Euro to the U.S. Dollar. Yet when commodity costs increase, the firm relies more on these overseas sales to drive profits which can cause an artificial increase in sales revenue due to the overheated nature of the overseas economy. Hedging by engaging the futures market and locking in current prices in case of a supply crunch yielding a supply constraint does occur.