Nowadays, we can see the huge disasters around the world that some of them are natural disasters such as earthquake, tsunami and so on and others are artificial ones for instance, financial crisis, energy crisis, revolution and so on.
- Reinvestment Rate Comparisons for projects at WACC and IRR
Of course, to implement this strategy, all food companies need to help of third party to standardize the value of food such as FDA, FSIS, Codex Alimentarius Commission and Food Standards Agency (UK).
To be continued ....
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When we are faced the problem or the case the following should be our reaction:
1) If the case or the problem is related to our life directly, we should assume that it is a case of another person and we are a consultant to solve her/his problem.
2) If the case is related to other people, we should consider that it is our problem directly and proceed to solve this case.
When we receive a case or problem, we should mush pit into the pool and only utilize from references and other people experiences focused on case. It means that we do not need read all of pages of book to analysis the case. At the first, we should consider that we are the leader of the world and we are able to solve each problem. Therefore, we do not need to be a skilled person on a special field such as finance, Economic, Physics, Mathematics or engineering and so on. I think that It is actual concept of MBA course.
In the case of Euroland Foods, we face to the constriction of capital spending (initial investment) equal Euro 120 million for 11 projects. How can we cope with this investment?
Which projects should be chosen?
My analysis is based on two categories as follows:
1) Quantitative Analysis (Internal Analysis)
I used from Capital Budgeting Techniques below cited:
-Sensitivity Analysis
I consider IRR as independent variable, NPV at minimum ROR and Equivalent Annuity as functions (just like Polynomials function in Math) for each 10 projects because project 6 (Effluent – water treatment at four plants) definitely should be done.
According to this analysis I found the location of abruptions and ranked projects by higher IRR.
- Profitability Index
It can be calculated by using of WACC (10.6%) and free cash flows.
It has been done by using of Conflicting Ranking concept and ranked by higher IRR and NPV
- Annualized Net Present Value (ANPV) Approach
It has been ranked in accordance with ANPV.
- Double Discounting Technique
According to this technique, FCF of all of projects have been discounted and changed to the least years of FCF. Then, all projects are ranked by IRR and NPV.
All above techniques have approved the projects as follows:
-Project 2. A new Plant (Dijon, France)
This project (2) will be compulsory, if we choose project (7)
-Project 7. Southward Market Expansions
-Project 11. Strategic Acquisition
-Project 6. Effluent – water treatment
But since there is not enough initial investment, we have to take a decision between two options as follows:
Option (1):
-Expanded Plant (Nuremberg, Germany)
-Eastward Expansion
- Strategic Acquisition
-Effluent – water treatment
Total initial investment = Euro 111 million
Total Rank = 108 Score
Option (2):
- Development and introduction of new artificially sweetened yogurt
- Networked, computer-based inventory- control system
- Strategic Acquisition
- Effluent – water treatment
Total initial investment = Euro 115.5 million
Total Rank = 118 Score
Therefore, option 2 has been approved
2) Qualitative Analysis (External Analysis)
It is included a PEST analysis in which the approach is a qualitative analysis as follows:
In this case, I eliminate project (11) even though financial indexes show us a better profit. The reason is to allocate huge initial investment to this project.
In fact, we can distribute total investment to the projects which have intangible benefits. On the other hand, by distribution of investment, we will run many projects instead of one project (11). In the result, the least profit is to decrease unemployment rate, customer satisfaction, environment sustainability, the development of technology and so on.
As a matter of fact, by using a Balance Scorecard framework, we can measure the performance of projects better than using from financial indexes alone.
Here are my choices:
Project1. Replacement and expansion of the truck fleet
-A 15 percent increase in cubic meters of goods hauled on each trip
-The new tractors would also be more fuel and maintenance – efficient
-The increase in the number of trucks would permit more flexible scheduling and more efficient routing and would cut delivery times (possibly inventories)
-To support geographical expansion over the long term
Project5. Plant automation and conveyer systems
-Systems reduce the chance of injury by employees (more than EUR 15000 per year cost saving)
-To be improved throughout speed
Project9. Development and introduction of new artificially sweetened yogurt
-Significant cost saving to food and leverage
-Growing demand for low-calorie products
-Protecting of present market share
-To prevent of brand suffering
Project10. Networked, computer-based inventory- control system
-Shorter delays in ordering and order processing
-Better control of inventory
-Reduction of spoilage
-Faster recognition of changes in demand at the customer level
Total initial investment is equal to EUR109.5 (million).
Now, let me leave financial case analysis and have a debate about a new strategy in food industry.
When you do a strategic analysis for so many big companies in the field of food industry, you will perceive that horizontal integration, market penetration, market development and product development will be the best strategies in action in accordance with QSPM in which all these strategies are led to cost leadership as a Generic strategy (Porter Five Generic).
Here, I am willing to find a new idea (strategy) as an implement strategy for product development.
When the people look at the package of food in store markets or shopping malls, they do not really care about food quality mentioned as energy per 100 gram or weight and so on.
Most people consider the brand, price and promotion. But if food companies present the actual value of food to the people, they will gain good competitive advantages.
When we look at the SWOT matrix especially S-T analysis, we can see that there is a big Treat in external analysis which is significant increase of crude oil price and energy price. On the other hand, so many food companies have the appropriate growth of revenues as Strength.
What can be a good strategy for these Treat and Strength?
I think it will be the nomination and definition of Value for food. In fact, if the analysis of energy on food packages is changed to the value, the people will definitely consider it as an approach to buy goods.
I mean that food companies should bear in mind quantitative factor just like to qualitative factor. What is quantitative factor? It is weight of pack.
Therefore, to obtain the value of a good, we have:
P: price
E: energy
W: weight
Now, we should define the value as a function of above variables.
Value = f (P, E, W)
Now, the question is: How can we find the rational relationship among value and variables?
The answer is: It depends on the type of food industry. Here, I have brought you some examples as follows:
In the case of Snacks and Biscuit, we have P/ E and E/W in which E/W is very important because customers usually care about the compaction and distribution of energy on the weight. It means that they will be able to store energy with increase of weight.
Therefore, one of the best formulations can be as follows:
Value = (W . E) / P
In contrast, the approach for Chocolate industry is difference, maybe the similar to below formula:
Value = E / (W . P)
Sometimes we have to find an index by drawing the diagram of P/ E and E / W.
Besides, it is possible that food companies consider Partial Fractions as follows:
V = f (E) and V = g (E)
f (E) / g (E) = P(E) + F1(E) + F2 (E) +…..Fk (E)
Where:
P (E): Polynomial
F1 (E) …..Fk (E): Partial fraction decomposition
Furthermore, some companies maybe consider below formula for value:
V = (P / E) / (P / E)I * (E / W) / ( E / W)I
Where:
(P / E)I and ( E / W)I are average whole of industry
To be continued ....
