HBS case: Investment Analysis and Lockheed Tri Star

9-291-031 HBS : Investment Analysis and Lockheed Tri Star

•         Pre-production costs estimated at $900 million incurred between 1967 and 1971.

•         Total of 210 planes delivered from 1972-1977

•         Revenues of $16 million per unit, 25% of revenue received 2 years in advance of delivery.

•         Production costs of $14 million (at 210 units could decline to $12.5 million at 300) from 1971-1976.

•         Discount rate of 10% per year.

•         210 planes (1972-1977)

•         Planes per year = 210/6=35

•         Production Costs (1971-1976)

•         35($14M)=$490M per year

•         Don’t forget the preproduction costs of $900M

•         Revenues (1970-1977)

•         Total Revenues 35($16M)=$560M per year

•         Deposits=0.25($560M)=$140M (2 yrs in advance)

•         Net Revenues=$560-$140=$420M on delivery

Year	1967	1968	1969	1970	1971	1972	1973	1974	1975	1976	1977
Pre Prod.	-100	-200	-200	-200	-200
Costs					-490	-490	-490	-490	-490	-490
Dep.				140	140	140	140	140	140
Revs.						420	420	420	420	420	420
Total Cash Flow	-100	-200	-200	-60	-550	70	70	70	70	-70	420

 

NPV = - $584

 

Due to learning curve average unit cost reduces as production increases

 

Units Sold	Average Unit Cost	Accounting Profit	NPV
323	$12.25	$311	-195
400	$12.00	$700	-$12
400	$11.75	$800	$42
500	$11.00	$1,600	$441

 

In 1970 all investments are sunk cost and should not be included in calculating NPV so now considering caseflow = zero for year 1967,68 and 69 again calculate NPV and we get $ 18 million , so we have touched breakeven considering 67,68 and 69 investment as sunk cost.

 n      Accounting breakeven approximately 275 planes

n      $16M - $12.5M = $3.5M per plane

n      $3.5M´275 = $962M profit versus $960M in actual development costs known in 1970

n      This more realistic breakeven level announced subsequent to the guarantees being granted.

n      NPV breakeven approximately 400 planes

n      Total free world market demand for wide-body aircraft approximately 325 planes

n      Optimistic estimate: total demand 775 and 40% of that is 310

n      Lockheed share price

n      $64 Jan 1967 drops to $11 Jan 1971

n      ($64-$11)(11.3 Million shares)=-$599 Million

n      Compare to -$584 Million NPV

 

Here we can again see that NPV of a project has direct impact on shareprices equal to the amount of NPV.

The Web's Favorite Airline - EasyJet Case Summary

The case pertains to the growth and sustenance of easyJet airlines, a low-cost carrier operating in the European skies. EasyJet’s concentration has so far been on low-cost airline services to the masses, and although it faces competition from other low-cost carriers as well as major carriers, it has been able to successfully sustain its business and turn around an initial loss into profits of £2,318,938 [exhibit 2].

EasyJets’s value proposition has been to offer a cheap, punctual, safe, no-frills method of travel to people who generally paid out of their own pockets. This has been possible thanks to an efficiency-driven operational model, high brand awareness and a sustained focus on satisfaction of customer expectations, often exceeding them. The emphasis has been on “value for money” and affordable quality travel with an added emphasis on customer satisfaction. Being a low-cost carrier, customer expectation were minimal and thus brand new planes with the best of pilots and punctual flights was clearly successful in delighting the customer, as evidenced by the high number of repeat fliers. A lot of emphasis was given to customer satisfaction offering better customer flexibility and punctuality.

EasyJet’s competitive advantage has been derived from a policy to cut down on costs and hence frills in every aspect of short distance travel. EasyJet has been modelled after a very successful South-West airlines and it also managed to enjoy first-mover advantage in the European aviation industry as a low-cost carrier. However the trick to being successful for easyJet has been the manner in which it has adapted its model to the specifics of the European market. No in-flight food was offered; booking was mainly internet-based thus bypassing travel agents and their attached commissions. easyJet flew from London’s Luton airport and not the more popular and expensive Gatwick. Operating at capacity using high-density passenger seating with higher turnaround times, easyJet could fly more hours with fewer planes [11.5 hours], and thus high aircraft utilization facilitating a volume based model with thinner margins. easyJet also used a variable “yield management” based pricing strategy that made the most of increased demand for certain flights and translated into higher prices for those. To help keep costs down, easyJet also out-sources most aspects of running an airline; however this has some added disadvantages, ground handlers often didn’t not place the same emphasis on customer satisfaction.

It is not the low-cost nature of its operation that drives the sustainability of easyJet’s competitive advantages. On the contrary, easyJet’s competitive advantage is largely sustainable due to its rapid speed of expansion and its bid to quickly attain the benefits of operating at the optimal scale for greater profitability. Instead of taking its larger competitors head-on in a “red ocean”, easyJet created its own “blue ocean” within the European aviation industry. easyJet’s owner Stelios has a policy of “not spreading (his operations)too thin” thus allowing for easyJet to avoid head-on competition with similarly modelled competitors such as Ryan air, operating on largely different routes using different airports [exhibit 9]. However, with the emergence of several competitors in a similar bracket, easyJet’s cost advantage stands to be tested. They were the first enter an uncontested market space. Now they have significant brand value creating a high exogenous entry barrier. Copying them will now involve huge costs and organizational changes. Therefore, on account of high brand value, they enjoy a competitive sustainable advantage

Newell Company: The Rubbermaid Opportunity

 Case summary : Newell Company: The Rubbermaid Opportunity

In October 1998, Newell Company was considering a merger with Rubbermaid Incorporated to form a new company, Newell Rubbermaid Incorporated. The agreement would be through a tax-free exchange of shares valued at $5.8 billion. Newell had revenues of $3.7 billion in 1998 across three major product groupings: Hardware and Home Furnishings, Office Products, and Housewares. Rubbermaid is a renowned manufacturer of a wide range of plastic products ranging from children's toys through housewares.Once the transaction is completed, Newell will begin he process of assimilating Rubbermaid's operations through a process called "Newellization." The companies expect that the merger will create synergy through the leveraging of Newell Rubbermaid brands. By 2000, these efforts are expected to produce increases over anticipated 1998 results of $300 to $350 million in operating income for the combined company.

Reading the case analysis, there are many issues that I feel are concerning this merger and I feel that Newell should not process with this merger. First of all, this is a tough and alarming challenge to Newell's capacity to integrate and strengthen acquisitions. How would Newell bring Rubbermaid into the newellization process since they have completely different products? Another question that comes to mind is how does Newell coordinate all its divisions and what changes will it have to make to create synergy with Rubbermaid? Does the newellization process fit for Rubbermaid? Lastly, are the risks acceptable for Newell to merge with Rubbermaid? Newell needs a very well thought out business plan and has to answer these questionsbefore they proceed.

There are advantages and disadvantages in this merger. I will start with theadvantages. If this merger goes through, it will be a quantum step in Newell's growth. The merger will be uniting two companies that are leaders in their industries. Through the merger, Newell will gain the international presence that Rubbermaid has. Both companies can create synergy within their divisions and Newell can expand their product line internationally. There are certain products in Rubbermaid's product line that Newell does not have. Another advantage the merger will create is increased operating income. Some disadvantages of the deal are that Newell would be exposed to a tough challenge to the company's capacity to combine its acquisitions. One big disadvantage is the risk that is involved in the deal for Newell. Newell is a very respectable company, and a company whose customers are very satisfied. They are very successful with their acquisitions due to their exemplary newellization process. Rubbermaid currently has many problems with their company such as bad customer relations, their operations are not lean, increases competition has taken away market share, and their financial targets seem unrealistic. Newell needs to understand these problems and realize what they will have to deal with if they join with Rubbermaid. Doing my research I have come up with many more disadvantages than advantages toward this merger and that is why I feel that these companies should not merge.

In today's business world, companies change hands all the time through mergers and acquisitions. Most of the time, the security propositions of new ventures are disregarded.Company A may have the most secure network, but when they couple this network with Company B, you're exposing your company to a whole new set of risks. The first step is that Newell needs to assess the business risk. Reputation loss is an issue, which Newell will be affected by. Rubbermaid has bad customer relations because it has angered its most important retail buyers with the heavy-handed way it has passed its rising costs. They have given their competitors a lot of shelf space.

A big question mark comes to my mind is when I think about how Newell will bring Rubbermaid into the Newellization process. Newellization is described as a "well established profit improvement and productivity enhancement process that is applied to integrate newly acquired product lines." The newellization process includes the centralization of key administrative functions including data processing, accounting, and EDI, and inauguration of Newell's rigorous, multi-measure, divisional operating control system. Reading the case analysis, Rubbermaid is extremely incompetent in these areas. Their operations are one of their biggest problems. According to the case, "although it excels in creativity, product quality, and merchandising, Rubbermaid is showing itself to be a laggard in more mundane areas such as modernizing machinery, eliminating unnecessary jobs, and making deliveries on time."

Looking at Rubbermaid and analyzing their problems, they have totally the opposite qualities of companies that Newell has acquired in the past. Newell's acquired companies were mature businesses with unrealized profit potential. Rubbermaid has had a mature business for quite a long time and I do not see any room for unrealized profit potential. They have a very big international presence and Newell will end up hurting themselves once they have to deal with Rubbermaid and their incompetence. I do not feel that the newellization process fits Rubbermaid because these are two companies that have been around for a while, and it is not like Rubbermaid is a start-up or a fairly recent company that can be changed around quickly and all of the sudden have lean operations, which newellization has proved it can do with previous acquisitions. Newell should stick to their business principle and do what they have done in the past, which is to acquire small to medium sized companies and integrate them into the newellization process and create an enormous amount of synergy. I always believe that one should do something that they know best or have experience in and not pursue a totally different market in which that have no experience in. In this case, Newell does not have any experience with acquiring a company that is worth billions. A merger example that recently occurred which has turned into a blunder is the AOL Time Warner merger. These were two totally different companies in different industries that thought they could merge and be a giant in the Internet and Media/Entertainment industry. The outcome of this merger is that the CEO's of both companies are being laughed at in the business world. AOL Time Warner stock price is in the dump and the company is in real trouble. Newell can avoid all this by again looking at their previous acquisitions and seeing what type of companies they acquired, which were companies with unrealized profit potential and who had the ability to create synergy in a short amount of time with Newell's existing divisions.

In conclusion, the deal is attractive for Newell but is not worth the risk that is involved. The key to merger and acquisitions is to not jump on your first instinct and just merge or acquire a company that's price looks cheap. You have to determine what the company will look like in the future. Lack of foresight will cause a huge problem. Rising raw material costs along with Rubbermaid's operational problems will impair the whole newellization process. Rubbermaid has very sour relationships with their clients and Newell will have an extremely difficult time fixing those relationships. If the two companies merge, only investors or individuals who follow business news will know that these two companies are one. The average customer will still know of Rubbermaid as Rubbermaid. I feel that Rubbermaid brings a lot of heavy baggage to the table and will hurt the smooth and exemplary business that Newell has attained.

Priceline.com: Name your own price

HBS case summary : Priceline.com: Name your own price (9-500-070) 

The reading by Allyn Young focuses on two aspects of division of labour: growth of indirect or roundabout methods of production and division of labour among industries (as opposed to within a firm or industry). The author also points out that the size of the market (capacity to absorb output of goods) remains the single most important factor in determining an industry’s competitiveness, but this, in turn, is determined by the volume of production in the industry. The reading further highlights that division of labour among industries can be a source of increasing returns and thus actively promotes the idea of intermediation as a way of increasing returns.

Case Overview:

The case gives insight into the growth of Priceline.com and highlights its effectiveness as an intermediary, focusing on the unique model created by it where the customer can seek to be served at a particular price, and not be dependent on the published rates(fares) of the service providers (here airlines, hotels etc). The case highlights how strategic division of labour (in the context of this case – intermediation) can actually benefit both the producer and the customer, and create more value by tapping new markets / expanding the existing market.

By allowing customers to bid a price for air tickets, Priceline essentially tapped a new market for those customers who were willing to forego convenience and brand image in favour of price (eg. budget minded leisure travellers).  At the same time it allowed the airlines to effectively sell out those tickets which would otherwise remain empty, without diluting their brand or foregoing the business customers.

1.       Allies: Priceline actively pursued an alliance with the major airlines and hotels, including a stake sale to the airlines to rope them into the program. Thus it ensured greater inclination on the airlines’ behalf to provide incentives to its customers. It also collaborated with its indirect competitors such as Travelocity and Cheaptickets, to ensure a potential win-win alliance for all of them. Finally, by providing customers to actively participate in the sale of goods (read tickets etc), it also was able to forge an alliance with them, which led to a substantial increase in its sales, in the second year itself.

2.       Sources of Profit: Following can be identified as the (potential) source of profits for PriceLine:

a.       Substantial customer base giving it more bargaining power with airlines, hotles etc

b.      Brand image, consciously cultivated through advertising spends

c.       Building economies of scale and then capitalizing on it through diversification (expanding value chain)

d.      Potentially untapped market, Blue Ocean Strategy

3.       Why is it diversifying: Priceline is primarily targeting the value oriented customers, who will be willing to forego certain other parameters of service for a better price. Also, in some ways, its key customer is the leisure traveler. Thus,

a.       diversification into car rentals, hotels and travel packages gives it a chance to capture an increasing share of the customer’s wallet

b.      diversification into home financing, groceries, long distance telephone calls etc gives it a chance to capture other segments with similar buyer characteristics viz. price sensitivity and flexibility requirement

c.       encashing upon its brand image and customer base

Based on Young’s article, we can understand the importance of Priceline as an intermediary and a market maker. Priceline plays a key role in establishing a link between price sensitive but otherwise flexible customers and airlines (and other segments too). Thus, in the airline segment for example, it helps convert a latent demand for seats at a lower price into actual demand thereby increasing the market (capacity to absorb the product) and at the same time builds a market for the vacant airline seats (volume production). Further, it helps the airline industry achieve increasing returns through this intermediation (division of labour).