Case 31: First Greyhound, then Greyhound Dial, then Dial, now

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Case 31: First Greyhound, then Greyhound Dial, then Dial, now what? Merle Henning 1. What were the critical incidents in Greyhound's growth and development over time? Founded in 1914 as a transportation company for miners in Minnesota, Greyhound's success came very fast and the company started to expand its routes. In 1930, the name Greyhound Corporation was adopted and by 1960, Greyhound had achieved its goal of a nationwide bus transportation system. After some years, Greyhound found out that the transportation business brought in a lot of money, which could be used for new businesses. Thus, in 1962, Greyhound's board of directors decided to diversify into operations outside of the bus transportation industry, which meant the establishment of a huge company. By the end of 1963, Greyhound had acquired two other companies and was now divided in three major operating industries: bus transportation, bus manufacturing and financial services.

When Gerry Trautman was appointed CEO in 1966, he wasted no time in accelerating Greyhound's new strategy for expansion and growth.

Until 1970, he had acquired 30 different companies, among them several bus lines, a cruise line and a company specialized in furniture transportation. However, the most important fact is, that Greyhound formed a new operating division, services.

Not all the companies that Trautman acquired were successful and he divested it as quickly as he had acquired it. According to Trautman, the company's mission is "diversification within diversification". This means that the operating groups are so diversified, so that each of them is recession-proof and all are enhancing the financial strength of the company.

The next big incident was in 1970, when Greyhound acquired Armor&Co, another large conglomerate that had many diverse business interests in food, consumer products and pharmaceuticals, which Trautman sold in 1977. What remained after the divestitures were Armor's food operations and Armor's Dial division, from which would emerge Greyhound's Dial consumer products operating division.

Fir the next years, Trautman continued to increase the company's size and by 1978, Greyhound's holding company consisted of five operating divisions: Transportation, bus manufacturing, food and consumer products, financial, and services/food service. All of them continued to acquire more operations in order to pursue Trautman's "diversification within diversification". Some of the acquisitions were failures but Trautman believed that the risk of a failure should be run as long as the company is healthy.

The next big acquisition was in 1978, when he acquired Verex, the largest private insurer of residential mortgages in the US in order to strengthen the operations of Greyhound's financial operating division.

The next critical incident was in 1980, when Armor started to have huge problems and Trautman wanted to retire. In 1981, John Teets was appointed CEO, whose challenge was to manage Greyhound's diverse businesses so that he would be able to achieve at least 15 % return on equity. Since Armor still caused a lot of losses, Teets decided to divest Armour. In preparation for the sale, he separated Armour Food Company from Armour Dial. In December 1983, the food company was sold, which meant that Teets chopped of nearly half of Greyhound's business. During the 80s, the bus lines operation caused huge problems and in 1987, Teets decided to sell the Greyhound Bus lines, which brought in $ 290 million of cash but also meant the loss of its core industry, bus transportation. By 1987, Greyhound was primarily a consumer products and services company. Another important incident took place in 1985, when Teets decided to acquire Purex Industries, a large producer of household products. Teets hoped that he could boost profits in Greyhound's consumer products operating division by using the Dial sales force and marketing expertise to sell Purex products. It worked! In September 1990, another consumer products acquisition was announced: Breck hair care products. In 1991, the company's name was changed to the Dial Corporation. Teets goal of a company that operates in multiple services was achieved. Everything seemed to run well until 1990, when Dial's transportation manufacturing unit begun to perform poorly and Teets decided to spin it off. After this incident it seemed that if Dial made strides in one business, problems in another one wiped of the effects of the improvement. Finally, Teets decided to split the company in two different companies (Dial Corp. and Viad Corp.). The division was scheduled in 1996 but hasn't been accomplished yet.

2. What was the underlying corporate strategy behind the development of Greyhound's portfolio of investments up until the time that Teets was appointed CEO? Was Trautman correct to pursue this strategy? What were advantages and pitfalls? Basically, the underlying corporate strategy was diversification. By operating in as many businesses as possible, Trautman hoped to make the highest profit in each niche the company operates in. He was convinced that a huge diversification would have a positive impact on the company's financial strength and would make it more resistant to a recession. Even though some acquisitions were failures, Trautman thought, acquisitions are always worse the risk as long as the company as a whole is better off. Losses in one business could be backed up by profits in other businesses. Furthermore, some businesses are more likely to be effected by a recession than others. Those, which are not effected, can help to make the company more resistant to economic downturns. The strategy of diversification also consists of sharing knowledge, which Trautman expected to strengthen the company's position.

I think, it is difficult to answer the question if Teets was right or not. To me, he had no other choice than pursuing the strategy, because the company had already expanded too much which made a change in strategy very difficult. However, I would say, that Teets was wrong to pursue the same strategy, because the struggle of Armour was a sign for it to be wrong. The diversification was too widespread, which means that some businesses, Greyhound operates in, are not linked in any way, which makes it very difficult to manage. Bus manufacturing and soap, for instance, require completely different strategies and different expertise. Certainly, diversification has its advantages. Knowledge can be shared and the company can use different managerial expertise in order to improve the company's performance. Furthermore, some production lines can be used or several products and even a distribution system, which serves all the businesses, can be established and costs can be divided.

On the other hand, diversification is very risky. Some businesses are more likely to be effected by a recession than others, which might have a negative impact on the whole company. Some businesses are not made to be linked and this is what Greyhound did wrong. It is very risky to combine food with bus manufacturing, because they have only a few things in common concerning their strategies and their likelihood to be effected by a recession. While pursuing a diversification strategy, it is important to stick to one core industry out of which more businesses may develop. Greyhound lost its core industry and struggled to find a new and profitable one.

3. What environment factors affected Greyhound's businesses? Could anything have been done to control for environment factors? In what ways did they distort the picture of Greyhound's performance? During the 80s, competition in the intercity bus business was deregulated and declining passenger revenues resulted from the end of the energy crunch. Greyhound found itself paying wages and benefits that were from 30 to 50 % higher than those paid by its competitors. Furthermore, Trailways, its major competitor, having negotiated significant wage concessions from the Amalgamated Transit Union, had immediately passed the savings on to customers in the form of lower fares.. This was an offensive attack against Greyhound, which was supposed to take away market share from them. Even though Greyhound reacted, they lost millions of dollars. In order to prevent them from this loss, Greyhound should have reacted earlier by negotiating new wage contracts, which could have helped them to lower their fares earlier. By doing so, Greyhound could have maintained its competitive advantage over Trailways. Furthermore, after the intercity bus business was regulated, Greyhound should have made more efforts to lower its costs in order to sustain its competitive edge. Greyhound wasn't flexible enough and thus lost its competitive edge. By doing more research and by developing a program for saving costs, Greyhound could have prevented it from these high losses.

Apart from that, Greyhound has bad luck and was affected by recessions, which had high losses as a consequence. Certainly, they couldn't have prevented the recession, but they could have done market research, which would have helped them to realize the danger of a recession earlier.

4.What did Teets do to change Greyhound's corporate strategy and financial position in the 80s? Analyze the rationale behind this strategy? Was it working? Teets wanted to give the company a completely new structure. His conviction was that some businesses just fit better into Greyhound' s plans than others. Besides selling Greyhound Bus Lines in 1987, Teets also sold Greyhound Capital Corporation (GCC). GCC had become an underperformer in the face of lowered interest rates and changes in the tax laws that disallowed investment tax credits. In 1987, teets tried to sell Verex, because it caused high losses. Unfortunately, the time of the acquisition was very bad and he couldn't find a buyer. Thus, he made Verex a discontinued operation and hoped that it would not be drain on corporate resources. With the sale of Greyhound Buslines, GCC and Armour and with the discontinuation of Verex, Teets announced that he was near the end of his mammoth task of restructuring Greyhound. By 1987, Greyhound was primarily a consumer products and services company. Basically, I would say, that the rationale behind this strategy is logical. Teets wanted to give the company a new structure in order to get more control over all the businesses and he wanted to combine those businesses that fit together and can be managed together. He changed the whole core business from bus transportation to consumer products and services because he hoped that these businesses are more recession resistant and bring more profits. Teets found out that Greyhound's food and restaurant services contributed the highest profits and thus, tries to strengthen them. This is logical and a rational conclusion. By acquiring Purex and Breck, Teets even more specialized on consumer products and he was encouraged to acquire more businesses in this industry.

5. How has Teets's strategy worked in the 90s? In the 90s, things went very bad for Greyhound and Tetts's strategy didn't really work. Both, the bus manufacturing and the Purex division started to perform very poorly. Furthermore, all the other divisions started to suffer and had to withdraw from the cruise-ship niche. According to analysts, Greyhound wasn't more than a hodgepodge of different businesses that had nothing in common, were not recession proof and did not even have a secure niche.

6. Do you think that Dial should be split into two companies or that its assets should be divested? I think, the company should be split off into 2 companies, because I believe, that being one company, the two different division rather destroy each other than help them. Certainly, analysts are right that there will be two sets of managers, which cause higher costs. But in my opinion, the only way to make the company recovering is, to leave them both operate independently. By splitting up the company, each one could focus more on its own business and could focus on the managerial expertise that is necessary to improve the company's performance.

Divesting the assets is also a good possibility, because a bidder could then merge a particular Dial business into its own operations and thus reduce manufacturing, distribution or marketing costs. The drawback of it is, that the company would fall apart in a way and I'm not sure that this will be helpful for a Better performance.

Basically, it doesn't really matter, what will happen, because to me, it seems as if Greyhound became a playground for analysts, the CEO Teets and the shareholders. It is very difficult to rescue a company, that has suffered from so many changes.

At least, a split off could be the start of a new era for the company and might have a positive impact on the company. Things nearly cannot get worse.



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