The funeral services is a low-growth industry. A CFO of Service Corporation International, a funeral services company, must come up with a plan on how to maximize its earnings and, at the same time, the company's market value.
Benjamin C. Esty; Craig F. Schreiber
Harvard Business Review (296080-PDF-ENG)
March 18, 1996
Case questions answered:
- How did Service Corporation International make money with M&A in the death care industry up to 1980? Did this strategy create value?
- How did SCI’s M&A strategy change after 1980? Does this strategy create value?
- Is SCI’s current strategy sustainable? How do you know when growth adds value? Should SCI continue growing or stop? Why? How?
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Service Corporation International Case Answers
The Need For Strategic Redirection for Service Corporation International (SCI)
TO: Robert Waltrip, Chairman & CEO of Service Corporation International
PROBLEM: What strategies should Service Corporation International implement to continue growing earnings per share at 20% annually in the low-growth industry for the next 5 years?
HISTORY LESSONS:
Up to 1980
Up to 1980, SCI made money by acquiring other funeral homes and implementing their “cluster strategy,” which helped them decrease costs (higher utilization of overhead and lower variable cost with increased buying power) and increase revenues (offering a wider assortment, better merchandising, and incremental purchases).
By rolling up these funeral homes and improving margins, Service Corporation International was able to create value. The average independent home would get $75K in operating profit ($629K in revenues x 12%).
The average SCI home would generate $259K ($835K in revenues x 31%), which is 3.5 times more. The industry was also very fragmented (86% of US funeral homes are family-owned), and SCI paid a much lower cost for acquisitions than it does today.
During the 1980s
In the 1980s, SCI changed its strategy and began to integrate vertically. It did not create value as the cost outweighed incremental revenues, and the company suffered losses. It created slack in the business. In 1989, it had to stop vertical integration, writing off almost $100M.
The stock price for Service Corporation International continued to fall until 1990, when management decided to return to its roots by focusing on the funeral home and the cemetery business in metropolitan areas.
1990-1995
The current strategy is that of global expansion. With the recent acquisition of OFG/PFG, SCI now owns 2680 funeral homes and 320 cemeteries around the world.
The current strategy has been creating value for shareholders as the 1994 market price vs. book price of the stock is 1.96 higher ($27 share price in the market / ($1,196,622 shareholders’ equity/86,926 shares).
Looking at Exhibit 10, we can see that Service Corporation International has been outperforming the S&P 500 Index since 1990.
OPTIONS GOING FORWARD:
Before we consider options for SCI moving forward, it’s important to understand if the current strategy will be sustainable and whether we even need to consider strategic redirection.
One concern is the fact that SCI has been paying record prices for international companies (3.6x revenues vs. typical 2-2.4x in the USA).
The USA still has many smaller firms that Service Corporation International can purchase and pay less for them. Domestically, there is…
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