Prepared By:

---Jay Modi

---Michael Wuest

---Lakshmi Dampanaboina

---Sri Mydhili

---Integrated Case---

Decision Making

Decision: Marginal Benefit > Marginal Cost

Strategy : Low Risk and Maximizing Profits

Profit = Total Revenues-Costs -Tax

How to calculate ROE( Measure of Profitability in Economics )

• Dividend Growth Model

• Capital Asset Pricing Model :A model that describes the relationship between risk and expected return and that is used in the pricing of risky securities.

A cash flow stream with a limited number (n) of periodic payments (C), receivable at times 1 through n, is an annuity. Future payments are discounted by the periodic rate of interest (i). The present value of this annuity is determined with this formula

Discount

Cost of Capital

• Opportunity costs are the costs of capital (COC)

• COC = (S/S+B) Rs +(B/S+B) Rb (1-T)

Where, T- Corporate Tax, S-Stock, B-Loan

Rs – return on stock

Rb –return on loan

A corporate tax rate in Europe is approx. 30%

COC for the Case

• S+B = 20 Million Euro• Rs = 9.5 (kellogs)+1.5 (Finance)• Stock( S) =6M Loan( B)=14M• Rb = 0.75 Corporate Tax = 30 percent• COC = 6.975 percent• COC =1.395 M to pay off shareholders

Industry Attractiveness

Threat of Substitutes

Competitive Rivalry within an

Industry

Bargaining Power of Customers

Bargaining Power of Suppliers

Threat of New Entrants

Threat of New Entrants

StrongLow cost to

enter

Bargaining Power of Suppliers

Strong1 supplier of:•Raw material•Packaging material

Bargaining Power of

Customers

Strong3 buyers

Grocery Stores – 48%

Hypermarkets – 23%

Independent grocers – 28%

High

High

High

High

Threat of Substitute Products

Strong-low switching

costs-differentiation is

low-fruits/yogurts other breakfast

food

High

High

High

High

Competitive Rivalry within an Industry

StrongStruggle for market

leadershipMany competitors

Competition

• Company X

• Company Y

• Company Z

Company X

• Cost Leadership

• Produce small and large boxes

• Four products

• Grocery chains– Advertised early and stopped

• Target Market: Everyone

Company Y

• Differentiation

• Independent Grocers– High prices and High advertising $

• Grocery Stores – Advertised early and stopped

• Target Market: Advertising sensitive consumers

Company Z

• Cost Leadership & Differentiation

• Grocery Stores

• Large and small boxes

• Four products

• Dropped prices 4th quarter

THEORIES TO CRAFT A MARKETING AND POSITIONING

STRATEGY

Market segments and target market strategy

• Create brand value by offering high quality products

• Competitive pricing of products

• Health conscious consumers

• Research target markets

• Market leadership in niche market

Product position for maximum competitive advantage

• Mass market appeal to health conscious consumers

• Focus on independent grocers and grocery chain– 76% of market

• High quality perception of product

• Market dominance – leader approach

Advertising & promotion strategies

• Lots of money available for advertising– Niche market

• Be competitive in market with pricing

• Focus on brand value

STRENGTHS

•Capital

•Committed Team

•Strong business plan

• Advance forecasting

WEAKNESS

• New to Market

•Limited supplier

• Lack of market reputation

• Heavy debt

OPPORTUNITIES

• Targeting ‘niche’ market

THREATS

• Existing competition

• Changing market

• Response time

SWOTAnalysis

Product mix

What constraint stops us from increasing our capacity ?

Material flow in one-to-one sequence

Material flow should be one-to-many

Following the solution can increase the capacity from 25k to 30k per day

Focus on utilizing the available resources to maximum extent

New problem

THEORY OF CONSTRAINTS

Product mix

Which products offer the highest contribution margin per unit of the constraint ?

Decision rule

Label Units

Strawberry 8,000

Nuts 10,000

Raisin 7,000

TOTAL 25,000

Contribution margin per unit of product

Product/Activity Selling price (€) Variable cost (€) C.M (€)

Strawberry 4.65 1.87 2.78

Nuts 4.39 1.66 2.73

Raisins 4.19 1.5 2.69

Blueberry 4.46 1.72 2.74

Original 4.14 1.46 2.68

Mixed Fruit 4.18 1.49 2.69

StrawberryCompanies Product Mix Prices (€)

Large Box Small Box Large Box Small Box

Company x n/a 0.15 wheat0.20 Oat

0.15 Straw

n/a 4.893.693.89

Company Y n/a n/a n/a n/a

Company Z 0.30 wheat0.50 Oat

0.20 Straw

n/a 6.106.106.10

n/a

Missouri S & T cereal n/a 0.35 wheat0.35 Oat

0.30 Straw

n/a 4.654.654.65

Major competitor is Company X

NutsCompanies Product Mix Prices (€)

Large Box Small Box Large Box Small Box

Company x 0.30 wheat0.45 Oat0.25 nut

n/a 5.395.495.59

n/a

Company Y n/a 0.175 wheat0.175 Oat0.15 nut

n/a 7.503.814.08

Company Z 0.25 wheat0.40 Oat0.35 nut

n/a 5.825.825.82

n/a

Missouri S & T cereal 0.40 wheat0.25 Oat0.35 nut

0.20 wheat0.125 Oat0.175 nut

4.394.394.39

2.202.202.20

Major competitor is Company Z

Raisin

Companies Product Mix Prices (€)

Large Box Small Box Large Box Small Box

Company x 0.30 wheat0.45 Oat

0.25 raisin

n/a 5.896.195.39

n/a

Company Y n/a 0.175 wheat0.175 Oat0.15 raisin

n/a 7.503.814.08

Company Z n/a 0.15 wheat0.20 Oat

0.15 raisin

n/a 4.004.004.00

Missouri S & T cereal 0.40 wheat0.35 Oat

0.25 raisin

0.20 wheat0.175 Oat

0.125 raisin

4.194.194.19

2.102.102.10

Major competitor is Company X & Z

STRATEGIES

BUSINESS STRATEGY

CORPORATE STRATEGY

Product Differentiation

Quality Assurance

Competitive Price

Gaining Market Share

Creating Monopoly Market

Cost Leadership

Bill Of Materials

Strawberry cereal

OWheat (35%) Oats (35%) Strawberry (30%)

Bill Of Materials

Raisins Cereal

OWheat (40%) Oats (35%) Raisin(25%)

Bill Of Materials

Nuts Cereal

OWheat (40%) Oats (25%) Nuts (35%)