Harvard business publishing Essay

In mid-September of 2010, Emily Harris, fault president of readerreshing heritage raspberry guilds issue constituent, was weighing exteriorise final ca implements for the familys upcoming capital budgeting meetings in October. Two proposals stood out found on their potential to strengthen the variants innovative mathematical mathematical product lines and drive future gain. However, due to constraints on fiscal and omnibusial resources, Harris knew it was possible that the theaters capital budgeting delegacy would decline to approve both(prenominal) pop outs. She in like manner knew that wise inheritances licensing and retail incisions would promote compelling projects of their own. Consequently, Harris had to be prepargond to recommend oneness of her projects over the other.The doll Indus moveRevenues in the U.S. toy and game manufacturing totaled $42 jillion in 2008 and were projected to increase by 4.6% per twelvemonth to $52.5 meg by 2013. The mart was divided into two liberal segments video games (48%) and traditional toys and games (52%). The second segment was further divided into babe/preschool toys (14.5%), madams (14.1%), outdoor & sports toys (12.3%), and other toys & games (59.1%) including arts and crafts, plush toys, action figures, vehicles, and youth electronics. The U.S. market for toys and games was dominated by large global enterprises that enjoyed economies of scale in design, toil, and distribution. Revenues were exceedingly seasonal the largest selling season in the United States coincided with the winter holiday period. Within the toy and game segment, U.S. retail sales of fowls totaled $3.1 billion in 2008 and were projected to grow by 3% per year to $3.6 billion by 2013.The hoot category include large, soft, and mini dolls, as fountainhead as doll raiment and other accessories. The phenomenon of age compression the magnetic dip of younger children to acquire dolls that had tradition onlyy been desi gned for older girlsreduced growth in the baby-doll sub-segment. Competition among doll producers was vigorous, as a small tour of large producers targeted similar demographics and marketed their dolls through the same media. Lasting franchise pry for a branded line of dolls was rare the enormous conquest of Barbie dolls was an unequivocal exception. More recently and on a much smaller ________________________________________________________________________________________________________________ HBS professor Timothy Luehrman and HBS MBA Heide Abelli prepared this case solely as a posterior for class discussion and not as an endorsement, a source of un required data, or an illustration of effective or ineffective management. This case, though based on real events, is fictionalized, and any resemblance to actual persons or entities is coincidental. in that location are occasional abduces to actual companies in the narration.Copyright 2010 Harvard melodic phrase domestica te Publishing. To order copies or request permission to reproduce materials, call 1-800-545-7685, publish Harvard Business Publishing, Boston, MA 02163, or go to http//www.hbsp.harvard.edu. No part of this government issue may be reproduced, stored in a retrieval governing body, used in a spreadsheet, or transmitted in any form or by any meanselectronic, mechanical, photocopying, recording, or other thanwithout the permission of Harvard Business Publishing. Harvard Business Publishing is an affiliate of Harvard Business School.Purchased for use on the manuscript Business Valuation, at lofty College London. Taught by crowd together Sefton, from 21-Aug-2013 to 31-Dec-2013. dedicate ref F211857. Usage permitted only indoors these parameters other give infothecasecentre.orgeducational material supplied by The guinea pig center fieldCopyright encoded A76HM-JUJ9K-PJMN9IOrder summon F211857New heritage Doll order capital Budgeting4212 New inheritance Doll Company Capital Bu dgetingscale, New hereditary pattern in any case had created a durable franchise for its line of heirloom dolls. But the usuality of most doll lines waned afterward a few eld.New hereditary pattern DollsBy 2009, New heritage had grown to 450 employees and gene vagabondd approximately $245 one thousand thousand of revenue1 and $27 one thousand thousand of operating sugar from three members fruit, retailing, and licensing. The production sectionalization, discussed further to a lower stray, designed and produced dolls and doll accessories. The retailing division offered a unique intergenerational experience for grandmothers, mothers, and daughters, centered upon the character histories and storylines of the federations dolls and delivered through an online website (42%), a mail-order paper catalog (33%), and a network of retail stores (25%). In fiscal 2009, the retailing division generated roughly $190 million of revenue and $4.8 million of operating profit.The licensing division was started in 1998, and represented the corporations newest and most moneymaking division. It sought to extend the New heritage brand and capitalize on proud levels of node loyalty by selectively licensing the associations doll characters and themes to a variety of media that r apieceed the sign of the zodiacs target demographic of toddler to pre-teen girls. In fiscal year 2009 the licensing division generated $24.5 million of revenue and $14.5 million in operating profit.New heritages Production DivisionProduction was New heritages largest division as measured by total assets, and slowly its most asset-intensive. Approximately 75% of the divisions sales were do to the companys retailing division, with the remaining 25% comprising private commemorate goods manufactured for other firms. Table 1 summarizes the divisions discordant sources of revenue and operating income. Table 1Production Division dataRevenue ($ millions)Operating Income ($ millions)New inheri tances dolls and accessories were offered under distinct brands with different price points, targeting girls between the ages of 3 and 12 years. The companys baby dolls were universally priced from $15$30, and were offered to younger girls in earlier stages of ontogeny. These dolls typically came with a birth certificate and a short personal history. Dolls in the higher-end of this category in corporeald technology that produced a limited amount of delivery and motion. For the 1 The division revenue figures include approximately $95 million of internal sales within divisions which are eliminated when considering consolidated revenue for the company.BRIEFCASES HARVARD chore createPurchased for use on the disseminated multiple sclerosis 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 infothecasecentre.orgeducational material supplied by The Case CentreCopyright encoded A76HM-JUJ9K-PJMN9IOrder reference F211857The New Heritage Doll Company was founded in 1985 by Ingrid Beckwith, a retired psychologist specializing in child development and the grandmother of two young girls. Dr. Beckwith believed the dolls produced by the major toy companies did piffling to develop girls imagination or foster a positive self- ambit, so she created a line of dolls with unique storylines and whole slightly themes. Dr. Beckwiths dolls struck a chord among mothers and grandmothers who also rejected the dated, clichd images portrayed by the popular dolls of the day.New Heritage Doll Company Capital Budgeting 4212New Heritage outsourced much of its production to a select number of contract manufacturers in Asia. To ensure product quality and safety, the company maintained a fulltime supply to oversee material sourcing, production, and quality control on site at each of its manufacturing partners. Manufacturing activities that required prec ise tolerances or proprietary processes, a colossal with all the creative chemical elements (design and product prototyping, for example), were handled in-house at the companys headquarters facilities in Sacramento, California.Educational material supplied by The Case CentreCopyright encoded A76HM-JUJ9K-PJMN9IOrder reference F211857Capital Budgeting at New HeritageNew Heritages capital budgeting process retained some of the informality that characterized the companys early years as an innovative startup. As the company grew, deliberate steps were taken to decentralize some of the project grace process and increase spending authority at the division level. However, large and/or strategic spending proposals were review articleed at the corporate level by a capital budgeting committee consisting of the CEO, CFO, COO, the controller, and the division presidents. The committee examined projects for consistency with New Heritages business strategy and sought to balance the ask and prio rities of each division against practical financial and organizational constraints. The committee also sought to understand project interdependencies and the potential for a given enthronement to strengthen the whole company, not solely the division proposing it.New Heritages capital budget was set by the board of directors in consultation with top officers, who in unblock sought input from each of the divisions. The capital and operating budgets were linked historically, the capital budget comprised approximately 15% of the companys EBITDA. The committee had limited discretion to expand or contract the budget, according to its view of the quality of the investing opportunities, competitive dynamics, and general industry conditions. Before being considered by the committee, projects were described, analyzed, and summarized in self-contained proposal documents prepared by each division. These contained business descriptions, at least atomic number 23 years of operating and exch ange work gauges, spending requirements by asset category, personnel requirements, calculations of standard investment metrics, and identification of key project risks and milestones. monetary AnalysesFinancial analysis began with operating forecasts developed with oversight from New Heritage operating managers. Revenue projections were derived from forecasts of future prices and volumes. Fixed and variable costs were estimated separately, by expense category. Forecasts of working capital requirements were likewise vetted by line managers, who paying particular attention to a projects requirements for various types of instrument. Forecasts for frozen assets and related depreciation charges were developed in cooperation with analysts reporting to the controller.HARVARD BUSINESS create BRIEFCASESPurchased 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 infothecasecentre.org$75$150 price range, New Heritage produced a line of heirloom-quality dolls and accessories. These were designed to appeal to older girls and to convey 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 celebrities, each associated with a charitable cause andembracing more contemporary fashion trends. These dolls targeted girls in the so-called tween age range of 812 years, and also were priced from $75$150. Like the heirloom dolls, celebrity dolls also came with more elaborate stories and accessories.4212 New Heritage Doll Company Capital BudgetingNew Heritage assigned discount rate pass judgment to projects according to a subjective opinion of each projects risk. High-, medium-, and low-risk categories for each division were associated with a corres ponding discount rate set by the capital budgeting committee in consultation with the corporate treasurer. Assessments of each projects risk were made at the division level, but subject to review by the capital committee. Factors considered in the assessment of a projects risk included, for example, whether it required new consumer credence or new technology, high levels of resolved costs and hence high breakeven production volumes, the sensitivity of price or volume to macroeconomic recession, the anticipate degree of price competition, and so forth. In 2010, 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.Projects that created protect indefinitely, given continuing investment, were treated as going concerns with a interminable life. That is, NPV calculations included a terminal value computed as the value of a perpetuity growing at a constant rate. However, to preserve a n element of conservatism, the capital committee generally insisted on relatively low unending growth rates lower than New Heritages historical growth and lower than near-term growth forecasts for a given division.Investment Opportunities in the Production Division Emily Harris was focused on two of the production divisions most attractive current proposals. The first involved expanding the prospered Match My Doll dress tilt to include matching allseason clothing for tween girls and their favorite dolls. The second involved a new initiative, the inclination Your let Doll line, which employed web-based doll-design bundle to let userscustomize a dolls features to the customers specifications.Match My Doll enclothe Line ExpansionThe Match My Doll Clothing line originally consisted of a few sets of matching doll and child clothing and accessories for warm weather. It quickly became successful after the daughters of a few celebrities were spotted and photographed wearing items from the line, and girls magazines included some of the line in whats hot to wear partitionings. accustomed recent publicity, Marcy McAdams, the brand manager responsible for the line, believed the timing was perfect to expand. Specifically, McAdams proposed to create an All Seasons Collection of apparel and gear covering all foursome seasons of the year.She expected the new offerings to be at least as profitable as the living line, since its current popularity would make it possible to maintain gift 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 back up reduce, or at least not exacerbate, the seasonality in New Heritages sales and earnings.BRIEFCASES HARVARD BUSINESS PUBLISHINGPurchased for use on the MSc Business Valuation, at Imperial College London. Taught by James Sefton, from 21-Aug-2013 to 31-De c-2013. Order ref F211857. Usage permitted only within these parameters otherwise contact infothecasecentre.orgEducational material supplied by The Case CentreCopyright encoded A76HM-JUJ9K-PJMN9IOrder reference F211857Operating projections for a given project were used to develop cash escape forecasts that would underpin calculations of net present value (NPV), internal rates of return (IRR), payback period, and other investment metrics. Cash flow forecasts were mean to capture the incremental effect of a proposed project on the firms cash flow for each year within the forecast period. That is, each projects cash flow forecasts excluded non-cash items, such as depreciation charges, and nonincremental items such as sunk costs (i.e., costs that would be incurred regardless 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 rise understood by division staff.New Heritage Doll Company Capital Budgeting 4212To exploit the current popularity of the original Match My Doll Clothing line, especially given the fickle nature of childrens fashion trends, McAdams believed the fortune had to be exploited without delay. Her investment proposal contained relatively large outlays for R&D, market look, and merchandise to maximize 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 OutlaysThe R&D and marketing expenditures would be deductible for tax purposes at New Heritages 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 introduce 1, were based on the modified accelerated cost recovery system (MACRS ) allowed by the IRS. Working capital requirements, shown in Table 2 for 2010 and in express 1 for subsequent years were based largely on recent historical experience with the original Match My Doll Clothing line. Finally, given the proven success of Match My Doll Clothing, Harris believed the project entailed suss out riskthat is, about the same degree of risk as the production divisions existing business as a whole.Design Your Own DollThis initiative targeted existing New Heritage customers, many an(prenominal) of whom owned several of the companys heirloom dolls. The companys research showed that, when asked what features (e.g., appearance, ethnicity, life story, etc.) New Heritage should give to future dolls, loyal customers responses had a high correlation with their own personal data. That is, girls wanted dolls like themselves. get along research suggested that many loyal customers would purchase yet another doll if they could customize the dolls features to create a one- of-a-kind addition to a girls or familys existing collection of dolls. It also promised to increase the girls pride in and identification with the doll, both because of their shared features and because of the girls participation in creating the doll. This in turn further cemented customer loyalty.The customization process would begin with a new section of New Heritages website, where proprietary design software product enabled the customer to select physical attributes of the doll such as haircloth color, hair length & style, skin 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 with user-selected accessories. The customer could zoom in or out on the image and rotate it to see different aspects. The softwaremade it easy to try out different combinations of features and accessories before making a purchase.Elizabeth Holtz, brand manager for heirloom dolls, was very exci ted about the project. She observed, A girls alliance with her favorite doll is often partly mommy and partly great(p) sister. Either way, having your doll look more like you is very powerful. And in that locations excitement in the experience exploring the website, naming the doll-to-be, selecting her first tractor trailereven the anticipation of waiting for the new doll to arrive. I really think this is big. Holtz also believed that the dolls could command a premium price. Customers will course expect to pay more for a HARVARD BUSINESS PUBLISHING BRIEFCASESPurchased 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 infothecasecentre.orgInitial Expenditures ($ thousands)4212 New Heritage Doll Company Capital Budgetingcustom doll, she said. Market research with focus groups revealed significant enthusiasm for the product c oncept and supported the notion of premium prices.The web-based software tools and order doorway system required New Heritage to make significant modifications to its existing technology infrastructure, expand its webhosting capacity, and modify the terms 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. Initialoutlays, some of which occurred in 2010 and some in 2011As with Match My Doll Clothing, the required R&D and marketing costs would be tax deductible. Manufacturing equipment had to be consistent by the end of 2010 to be ready for production at the germ of 2012. While New Heritage had the option to pay for custom equipment in quarterly installments, the firmcould get a substantial discount by paying for the equipment up f ront, in 2010. Figures in Table 3 and render 2 reflect the discounted cost of the equipment. To support the forecasted level of sales, substantial investment in working capital (primarily work in process inventory of partially manufactured dolls) would be required beginning in 2011. And comfort 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 revert to patterns familiar from the production divisions traditional lines of dolls.To complete development work, Holtz planned to use some of the companys existing IT staff. The majority of the work would take place during calendar 2011. The number of people 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 corporate resources and were almost certainly gettable to work on the project.Table 4 Design Your Own Doll Development Personnel, ($ 000s) activity Development Personnel CostsWeb Application DevelopersDatabase ManagerSystems Integration SpecialistTotal CostBRIEFCASES HARVARD BUSINESS PUBLISHINGPurchased 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 infothecasecentre.orgHowever, even a limited degree of customization increase 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.New Heritage Doll Company Capital Budgeting 4212Finally, Holtz needed to give Harris her assessment of the projects riskiness. On the one hand, Design Your Own Doll had a relatively long payback period, introduced som e 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 shell customers. On the other hand, the project had a relatively modest fixed cost ratio, and it played to the companys key strengthcreating a unique experience for its consumers.Educational material supplied by The Case CentreCopyright encoded A76HM-JUJ9K-PJMN9IOrder reference F211857Emily 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 mightiness have about the proposals the business case, the financial projections, the operating details, or anything else. Harris expected that she would indeed have some reexamination questions as she worked through her financial analyses.She also knew that her final r ecommendation might disappoint some executives within the division, who would scrutinize it closely. It had to be well-supported.