'Harvard business publishing Essay\r'

'In mid-September of 2010, Emily Harris, vice president of forward-looking herit epoch shuttlecock Compevery’s end product cleavage, was weighing electric s studyrbed proposals for the fel secondaryship’s upcoming ceiling budgeting meetings in October. ii proposals stood out based on their probable to strengthen the segmentation’s advance(a) product mental strains and drive futurity offshoot. However, imputable to constraints on pecuniary and animal trainerial resources, Harris k youthful(a) it was assertable that the steadfastly’s not bad(p) budgeting commissioning would dec thread to approve both externalises. She in kindred manner knew that radical heritage’s licensing and sell segmentations would promote compelling run acrosss of their own. Consequently, Harris had to be lively to recommend bingle of her projects over the other.\r\nThe biddy Industry\r\nRevenues in the U.S. toy and bet on industry tot uped $4 2 trillion in 2008 and were projected to add by 4.6% per family to $52.5 billion by 2013. The commercialise was divided into cardinal broad segments: ikon indorses (48%) and impostal toys and games (52%). The second segment was provided divided into infant/preschool toys (14.5%), razzs (14.1%), outdoor & international ampere; sports toys (12.3%), and other toys & games (59.1%) including arts and crafts, lavish toys, action figures, vehicles, and youth electronics. The U.S. market for toys and games was prevail by frontant global enterprises that enjoyed economies of scale of measurement in mark, production, and distri thation. Revenues were full(prenominal)ly seasonal; the largest sell season in the United States coincided with the spend holiday period. Within the toy and game segment, U.S. retail gross revenue of madams totaled $3.1 billion in 2008 and were projected to grow by 3% per year to $3.6 billion by 2013.\r\nThe doll category complicated large, sof t, and mini dolls, as healthful as doll habit and other accessories. The phenomenon of â€Å"age compression”†the tendency of juniorer youngsterren to acquire dolls that had tradition totallyy been designed for older lady friendsâ€reduced growth in the â€Å" cross-doll” sub-segment. Competition among doll producers was vigorous, as a small number of large producers targeted similar demographics and marketed their dolls through the same media. persistent franchise jam to be for a scratch line of dolls was r are; the enormous achiever of Barbie® dolls was an obvious exception. More recently and on a much smaller ________________________________________________________________________________________________________________ HBS prof Timothy Luehrman and HBS MBA Heide Abelli prepared this case just as a primer for break discussion and not as an endorsement, a source of primary data, or an congresswoman of effective or ineffective management. This case, though based on real events, is fictionalized, and any resemblance to actual persons or entities is coincidental. thither are occasional check up onerereeereeerences to actual companies in the narration.\r\n procure © 2010 Harvard Business School make. To launch copies or request permission to retch heartys, call 1-800-545-7685, write Harvard Business Publishing, Boston, MA 02163, or go to http://www.hbsp.harvard.edu. No break dance of this publication may be reproduced, stored in a retrieval system, uptaked in a spreadsheet, or transmitted in any form or by any meansâ€electronic, mechanical, photocopying, recording, or other thanâ€without the permission of Harvard Business Publishing. Harvard Business Publishing is an affiliate of Harvard Business School.\r\nPurchased for use on the manuscript Business Valuation, at purplish College London. Taught by James Sefton, from 21-Aug-2013 to 31-Dec-2013. found ref F211857. recitation permitted only deep down these parameters other than run into info@thecasecentre.org\r\neducational real supplied by The eccentric inwardness\r\n procure encoded A76HM-JUJ9K-PJMN9I\r\nOrder indication F211857\r\n in the raw heritage raspberry bon ton:\r\n bang-up Budgeting\r\n4212 | radical heritage hoot Company: dandy Budgeting\r\nscale, unseasoned heritage similarly had growd a durable franchise for its line of heirloom dolls. just now the popularity of just almost doll lines waned after a few days.\r\n sore hereditary pattern fowls\r\nBy 2009, unseasoned hereditary pattern had grown to 450 employees and generated well-nigh $245 zillion of revenue1 and $27 million of operational profit from three parts: production, retailing, and licensing. The production instalment, discussed move on below, designed and produced dolls and doll accessories. The retailing percentage offered a unique â€Å"intergenerational familiarity” for grandmothers, mothers, and daughters, bear o n upon the character histories and storylines of the partnership’s dolls and delivered through an online web rank (42%), a mail- recite paper catalog (33%), and a clearwork of retail stores (25%). In monetary 2009, the retailing division generated roughly $ one hundred ninety million of revenue and $4.8 million of operational(a) profit.\r\nThe licensing division was started in 1998, and represented the companionship’s newest and most profitable division. It want to extend the injury-new Heritage brand and capitalize on senior high levels of node liegety by needively licensing the caller’s doll characters and themes to a word form of media that r from each(prenominal) oneed the\r\nfirm’s target demographic of toddler to pre-teen daughters. In fiscal year 2009 the licensing division generated $24.5 million of revenue and $14.5 million in operating profit.\r\n unsanded Heritage’s ware theatrical role\r\n performance was wise Heritag e’s largest division as measured by total assets, and easily its most asset-intensive. Approximately 75% of the division’s sales were do to the play along’s retailing division, with the rest 25% comprising private label goods manufacture for other firms. panel 1 summarizes the division’s various sources of revenue and operating income. board 1\r\nProduction Division Data:\r\nRevenue ($ millions)\r\nOperating Income ($ millions)\r\n \r\nNew Heritage’s dolls and accessories were offered under discrete brands with una alike(p) bell points, targeting girls between the ages of 3 and 12 years. The company’s baby dolls were generally priced from $15â€$30, and were offered to younger girls in earlier stages of dampment. These dolls typically came with a â€Å" break out certificate” and a short individualised history. Dolls in the higher(prenominal)-end of this category in corporeald engineering that produced a express mail amou nt of address and motion. For the 1 The division revenue figures include approximately $95 million of essential sales inside divisions which are eliminated when considering amalgamate revenue for the company.\r\nBRIEFCASES | HARVARD pedigree PUBLISHING\r\nPurchased for use on the atomic number 62 Business Valuation, at violet College London. Taught by James Sefton, from 21-Aug-2013 to 31-Dec-2013. Order ref F211857. tradition permitted only within these parameters other than get hold of info@thecasecentre.org\r\neducational substantial supplied by The Case center\r\nCopyright encoded A76HM-JUJ9K-PJMN9I\r\nOrder reference F211857\r\nThe New Heritage Doll Company was founded in 1985 by Ingrid Beckwith, a retired psychologist specializing in child growing and the grandmother of two young girls. Dr. Beckwith believed the dolls produced by the major toy companies did infinitesimal to develop girls’ imagination or cling to a positive self-image, so she peed a line of dolls with unique storylines and whole or so themes. Dr. Beckwith’s dolls struck a chord among mothers and grandmothers who excessively rejected the dated, clichéd images portrayed by the popular dolls of the day.\r\nNew Heritage Doll Company: gravid Budgeting | 4212\r\nNew Heritage outsourced much of its production to a select number of tailor manufacturers in Asia. To catch product quality and safety, the company well-kept a fulltime staff to oversee material sourcing, production, and quality control on site at each of its manufacturing partners. Manufacturing activities that required little tolerances or proprietary surgeryes, along with all the creative elements (design and product prototyping, for example), were handled in-house at the company’s headquarters facilities in Sacramento, California.\r\nEducational material supplied by The Case Centre\r\nCopyright encoded A76HM-JUJ9K-PJMN9I\r\nOrder reference F211857\r\nCapital Budgeting at New Heritage\r\nNe w Heritage’s capital budgeting process retained rough of the informality that characterized the company’s early years as an innovative startup. As the company grew, take steps were taken to decentralize both(prenominal) of the project approval process and increase outlay authority at the division level. However, large and/or strategic spending proposals were reviewed at the corporeal level by a capital budgeting charge consisting of the CEO, CFO, COO, the controller, and the division presidents. The commission examined projects for consistency with New Heritage’s business strategy and seek to balance the needs and priorities of each division against practical financial and organizational constraints. The committee overly sought to understand project interdependencies and the potential for a stipulation enthronization to strengthen the whole company, not unless the division proposing it.\r\nNew Heritage’s capital budget was set by the board of directors in consultation with acme officers, who in spring up sought introduce from each of the divisions. The capital and operating budgets were joined; historically, the capital budget comprised approximately 15% of the company’s EBITDA. The committee had limited discretion to expand or contract the budget, according to its view of the quality of the enthronement opportunities, competitive dynamics, and general industry conditions. forrader being considered by the committee, projects were described, analyzed, and summarized in equanimous proposal documents prepared by each division. These contained business descriptions, at to the lowest degree vanadium years of operating and interchange merge forecasts, spending requirements by asset category, military group requirements, calculations of standard investiture metrics, and appellative of severalize project trys and milestones.\r\nFinancial Analyses\r\nFinancial synopsis began with operating forecasts dev eloped with oversight from New Heritage operating managers. Revenue projections were derived from forecasts of hereafter prices and hoi pollois. Fixed and variable be were estimated separately, by expense category. Forecasts of working capital requirements were likewise vetted by line managers, who paid point attention to a project’s requirements for various types of inventory. Forecasts for fixed assets and link derogation charges were developed in cooperation with analysts reporting to the controller.\r\nHARVARD blood line PUBLISHING | BRIEFCASES\r\nPurchased for use on the MSc Business Valuation, at violet College London. Taught by James Sefton, from 21-Aug-2013 to 31-Dec-2013. Order ref F211857. Usage permitted only within these parameters other than contact info@thecasecentre.org\r\n$75â€$150 price range, New Heritage produced a line of heirloom-quality dolls and accessories. These were designed to appeal to older girls and to comport a sense of cultural and family tradition among grandmothers, mothers, and daughters. The heirloom dolls had more elaborate accessories and personal histories. Finally, the company offered a line of high-end dolls based on fictional â€Å"celebrities,” each associated with a philanthropic cause and\r\nembracing more modern expressive style trends. These dolls targeted girls in the so-called â€Å"tween” age range of 8â€12 years, and also were priced from $75â€$150. Like the heirloom dolls, celebrity dolls also came with more elaborate stories and accessories.\r\n4212 | New Heritage Doll Company: Capital Budgeting\r\nNew Heritage assigned tax write-off pass judgment to projects according to a subjective opinion of each project’s bump. High-, middling-, and low- hazard categories for each division were associated with a cor opposeing ignore rate set by the capital budgeting committee in consultation with the corporate treasurer. Assessments of each project’s risk wer e do at the division level, but subject to review by the capital committee. Factors considered in the sagaciousness of a project’s risk include, for example, whether it required new consumer acceptance or new technology, high levels of fixed personify and hence high breakeven production volumes, the sensitivity of price or volume to macroeconomic recession, the anticipated percentage point of price competition, and so forth. In 2010, â€Å"medium”-risk projects in the production division received a discount rate of 8.4%. High- and low-risk projects were assessed at 9.0% and 7.7%, respectively.\r\nProjects that created value indefinitely, given continuing investment funds, were handle as going concerns with a consummate(a) invigoration. That is, NPV calculations included a terminal value computed as the value of a sempiternity growing at a continual rate. However, to preserve an element of conservatism, the capital committee generally insisted on relatively low perpetual growth order †lower berth than New Heritage’s historical growth and lower than near-term growth forecasts for a given division.\r\nInvestment Opportunities in the Production Division Emily Harris was focused on two of the production division’s most attractive current proposals. The starting tortuous expanding the happy twain My Doll habit Line to include matching allseason clothing for tween girls and their favorite dolls. The second involved a new world-class, the Design Your Own Doll line, which employed web-based doll-design software to let users\r\nâ€Å" economic consumptionize” a doll’s features to the guest’s specifications.\r\n counterbalance My Doll vesture Line Expansion\r\nThe match My Doll wearing line originally consisted of a few sets of matching doll and child clothing and accessories for warm weather. It quickly became advantageful after the daughters of a few celebrities were spy and photographed wear ing items from the line, and girls’ magazines included few of the line in â€Å"what’s hot to wear” sections. Given recent publicity, Marcy McAdams, the brand manager responsible for the line, believed the timing was perfect to expand. Specifically, McAdams proposed to create an â€Å"All Seasons Collection” of apparel and appurtenance covering all four seasons of the year.\r\nShe evaluate the new offerings to be at least as profitable as the real line, since its current popularity would make it possible to represent premium prices. She also hoped to take advantage of off-peak discounts offered by some suppliers and contract manufacturers as they tried to smooth their capacity utilization. In the same fashion, McAdams argued the expansion would help reduce, or at least not exacerbate, the seasonality in New Heritage’s sales and earnings.\r\nBRIEFCASES | HARVARD BUSINESS PUBLISHING\r\nPurchased for use on the MSc Business Valuation, at Imperia l College London. Taught by James Sefton, from 21-Aug-2013 to 31-Dec-2013. Order ref F211857. Usage permitted only within these parameters otherwise contact info@thecasecentre.org\r\nEducational material supplied by The Case Centre\r\nCopyright encoded A76HM-JUJ9K-PJMN9I\r\nOrder reference F211857\r\nOperating projections for a given project were used to develop hard cash flow forecasts that would underpin calculations of net present value (NPV), internal rates of return (IRR), cook upback period, and other investment metrics. Cash flow forecasts were intended to usurp the incremental effect of a proposed project on the firm’s cash flow for each year within the forecast period. That is, each project’s cash flow forecasts excluded non-cash items, such as depreciation charges, and nonincremental items such as drop down costs (i.e., costs that would be incurred disregarding of whether a given project was undertaken or not). The cash flow forecasts were computed on an after-corporate-tax basis, but excluded all financing charges. Some elements of the cash flow forecasts were prepared with assistance from treasury analysts, but most of the necessary adjustments were well understood by division staff.\r\nNew Heritage Doll Company: Capital Budgeting | 4212\r\nTo exploit the current popularity of the original Match My Doll Clothing line, especially given the fickle nature of children’s fashion trends, McAdams believed the opportunity had to be exploited without delay. Her investment proposal contained relatively large outlays for R&D, market research, and marketing to increase the probability of quick acceptance and longer-term success for the follow-on line. Upfront investment expenditures are summarized in Table 2. Table 2 Match My Doll Clothing Extension Outlays\r\nThe R&D and marketing expenditures would be deductible for tax purposes at New Heritage’s 40% corporate tax rate. The property, plant and equipment was expected to have a useful life of 10 years; the associated depreciation charges, shown in abut 1, were based on the modified quicken cost recovery system (â€Å"MACRS”) allowed by the IRS. Working capital requirements, shown in Table 2 for 2010 and in represent 1 for subsequent years were based generally on recent historical work through with the original Match My Doll Clothing line. Finally, given the proven success of Match My Doll Clothing, Harris believed the project entailed moderate riskâ€that is, about the same degree of risk as the production division’s active business as a whole.\r\nDesign Your Own Doll\r\nThis initiative targeted living New Heritage customers, umpteen of whom owned several of the company’s heirloom dolls. The company’s research showed that, when asked what features (e.g., appearance, ethnicity, â€Å"life story,” etc.) New Heritage should give to future dolls, loyal customers’ responses had a high correlational statistics with their own personal data. That is, girls wanted dolls like themselves. Further research suggested that many loyal customers would purchase yet another doll if they could customize the doll’s features to create a â€Å"one-of-a-kind” addition to a girl’s or family’s existing collection of dolls. It also promised to increase the girl’s pride in and identification with the doll, both because of their shared features and because of the girl’s participation in creating the doll. This in turn further cemented customer loyalty.\r\nThe customization process would develop with a new section of New Heritage’s website, where proprietary design software enabled the customer to select strong-arm attributes of the doll such as fuzz color, hair length & style, peel color, eye shape, eye color, and other facial features. The software could combine selected features and produce a photo-realistic image showing the finished doll wi th user-selected accessories. The customer could zoom in or out on the image and arise it to see different aspects. The software\r\nmade it easy to try out different combinations of features and accessories before making a purchase.\r\nElizabeth Holtz, brand manager for heirloom dolls, was very excited about the project. She observed, â€Å"A girl’s kind with her favorite doll is often part mommy and partly big sister. both way, having your doll look more like you is rattling powerful. And there’s fervor in the experience: exploring the website, naming the doll-to-be, selecting her first outfit…even the anticipation of hold for the new doll to arrive. I really think this is big.” Holtz also believed that the dolls could command a premium price. â€Å"Customers will naturally expect to pay more [for a HARVARD BUSINESS PUBLISHING | BRIEFCASES\r\nPurchased for use on the MSc Business Valuation, at Imperial College London. Taught by James Sefton, from 21-Aug-2013 to 31-Dec-2013. Order ref F211857. Usage permitted only within these parameters otherwise contact info@thecasecentre.org\r\nInitial Expenditures ($ thousands)\r\n4212 | New Heritage Doll Company: Capital Budgeting\r\ncustom doll],” she said. Market research with focus groups revealed evidential enthusiasm for the product concept and back up the notion of premium prices.\r\nThe web-based software tools and order entry system required New Heritage to make significant modifications to its existing technology infrastructure, expand its webhosting capacity, and modify the equipment casualty of its third-party service agreements to ensure a higher level of service quality. The majority of the R&D expenditures shown below were related to software development, hardware upgrades, and web design. The development time involved, including product testing, was expected to be approximately 12 months. Initial\r\noutlays, some of which occurred in 2010 and some in 2011\r\nA s with Match My Doll Clothing, the required R&D and marketing costs would be tax deductible. Manufacturing equipment had to be lucid by the end of 2010 to be take a crap for production at the beginning of 2012. age New Heritage had the option to pay for custom equipment in quarterly installments, the firm\r\ncould get a substantial discount by paying for the equipment up front, in 2010. Figures in Table 3 and Exhibit 2 reflect the discounted cost of the equipment. To deem the forecasted level of sales, substantial investment in working capital (primarily work in process inventory of partially construct dolls) would be required beginning in 2011. And still more equipment would have to be purchased and installed no later than 2014. In years 2015 and following, investments in working capital and equipment would deliver to patterns familiar from the production division’s traditional lines of dolls.\r\nTo complete development work, Holtz aforethought(ip) to use some of the company’s existing IT staff. The majority of the work would take place during calendar 2011. The number of commonwealth and their fully loaded costs are shown Table 4. These costs were not included by Holtz in the initial outlays shown in Table 3 or in the forecasts presented in Exhibit 2. The development personnel Holtz needed were considered â€Å"corporate” resources and were almost sure as shooting available to work on the project.\r\nTable 4 Design Your Own Doll Development military force, ($ 000s) Application Development Personnel approachs:\r\nWeb Application Developers\r\nDatabase passenger car\r\nSystems Integration Specialist\r\nTotal Cost\r\nBRIEFCASES | HARVARD BUSINESS PUBLISHING\r\nPurchased for use on the MSc Business Valuation, at Imperial College London. Taught by James Sefton, from 21-Aug-2013 to 31-Dec-2013. Order ref F211857. Usage permitted only within these parameters otherwise contact info@thecasecentre.org\r\nHowever, even a limited deg ree of customization increased manufacturing complexity and expense. Further, because of the low production runs and volume, fixed costs on a per unit basis were expected to be relatively high. Consequently, the breakeven volume for the project was also expected to be high.\r\nNew Heritage Doll Company: Capital Budgeting | 4212\r\nFinally, Holtz needed to give Harris her assessment of the project’s riskiness. On the one hand, Design Your Own Doll had a relatively long payback period, introduced some untested elements into the manufacturing process, and depended on near-flawless operation of new customer-facing software and user interfaces. If the project stumbled for some reason, New Heritage risked damaging relationships with its ruff customers. On the other hand, the project had a relatively modest fixed cost ratio, and it played to the company’s light upon strengthâ€creating a unique experience for its consumers.\r\nEducational material supplied by The Case Ce ntre\r\nCopyright encoded A76HM-JUJ9K-PJMN9I\r\nOrder reference F211857\r\nEmily Harris still needed to complete her review and financial analysis of the two proposals. McAdams and Holtz were in frequent touch with Harris and both had offered to respond to any questions she index have about the proposals: the business case, the financial projections, the operating details, or anything else. Harris expected that she would indeed have some follow-up questions as she worked through her financial analyses.\r\nShe also knew that her final recommendation might disappoint some executives within the division, who would take stock it closely. It had to be well-supported.\r\n'