Pan Europa Foods

Analysis

Robbi Palacios Wendell Salcedo

Subject: Project Management Regis Program Submitted to: Rene D. Aguila

Question 1 a. Strategically, what must Pan-Europa do to keep from becoming the victim of a hostile takeover? Answer: Pan Europa should not decrease the dividends of the shareholders to not devalue the stock price of the company. Instead should just decrease capital spending as what they board of directors have decided. In short, they should adopt strategies that should increase stock price not push it down to discourage buyout. b. What rows categories in Exhibit 2 will thus become critically important in 1993? What should Pan-Europa do now that they have won the price war? Answer: As suggested by their bank they should reduce their debt due to the high debt to equity ratio incurred during the price wars and use their competitive market reach to attain this. c. Who should lead the way for Pan-Europa? Answer: Humboldt and Morin should be leading the charge on this strategy since these folks are the ones initiating the innovative changes in the company.

Question 2: a. Using NPV, conduct a straight nancial analysis of the investment alternatives and rank the projects. Which NPV of the three should be used? Due to the duration of the project it would be wise to use the Annuity instead since it corrects discrepancies project durations unlike the NPV. Using this analysis the preferred project would be 11, the Strategic Acquisition. Then following in order would be: Eastward Expansion Snack Foods Southward Expansion Inventory Control System Artificial Sweeteners New Plant Expanded Plant Automation and Conveyor System Expand Truck Fleet Effluent Treatment Program (which has no NPV)

While the Effluent Treatment Program has no formal NPV it can be considered an investment of 4M now to save a cost of 10M in 4 years.

Question 3 a. What aspects of the projects might invalidate the ranking you just derived? There are many aspects that could invalidate the simple NPV analysis of the projects. They include Risk Political considerations Regulatory issues including health, safety and environmental Incompatibility with corporate strategy Resource availability

b. How should we correct for each investments time value of money, unequal lifetimes, riskiness, and size? Different analysis techniques and different assumptions can be used to correct for the various factors that affect each project differently. For example: The time value of money reliable measures are discounting methods such as NPV or IRR. Unequal lifetimes of the projects are solved using Equivalent Annuities. Risk can be dealt with by increasing the hurdle rate. Different project sizes can be can be measured by multiplying the NPV by the ratio of the size of the projects or by using a profitability ratio.

Question 4 Reconsider the projects in terms of: a. Are any must do projects of the nonnumeric type? The Effluent project is a must do project. The Automation and Conveyor Systems might be a must do since it is a health hazzard to employees. These impose both safety and environmental issues. b. What elements of the projects might imply greater or lesser riskiness? Answer: Projects that involve small technology changes like expanding the truck fleet would have low risk. Increasing levels of technological sophistication such as automation or introducing artificial sweeteners into products would also increase implementation risks. Another risk area for any producer in a capitalist environment is attempting to increase markets with new products in new areas. The prospective customers may simply choose to not buy the product. Other elements of risk include project size, complexity and length of the period of return. c. Might there be any synergies or conicts between the projects? Answer:There are real synergies between the plant expansion/additions, automation, truck upgrade and the geographic expansion projects. d. Do any of the projects have nonquantitative bene ts or costs that should be considered in an evaluation? Answer: Projects that have nonquantitative costs and benefits would include: Projects that impact the companys regulator compliance such as effluent treatment (environment) and warehouse automation (safety). Several of the projects could impact the companys image. For example, the snack food rollout could be positive because of its wholesome connotations while

the acquisition of the schnapps brand could be negative. The effluent project could be positive by showing the companys willingness to act on environment al concerns early. Similarly the automation project could be cast a positive step towards increased safety. The plant expansion project may be positive or negative depending on whether the community reacts to new jobs or factory encroachment. Question 5 Considering all the above, what screens/factors might you suggest to narrow down the set of most desirable projects? 1) I would recommend four screens be applied using the following factors: Does the project incurr a high cost? Exceeds Tolerable Cost Value Is the project a Mandatory? Options Yes/No Does the project meet minimum IRR? Options Ok/Not Ok Does the project meet maximum payback period? Options Ok/Not Ok Does the project incur high risk? Options Ok/Not Ok Does the project meet the current corporate strategy? Options Ok/Not Ok What criteria would you use to evaluate the projects on these various factors? 2) Using these screens and criteria the following projects would be eliminated outright: Truck Fleet (1) because it does not meet the minimum IRR and exceeds the maximum payback period dictated by company policy. New Plant (2), Plant Expansion (3), Artificial Sweetener (4) and Plant Automation (5) all because they exceed the maximum payback period dictated by company policy. Strategic Acquisition (11) and Artificial Sweetener (4) would both be eliminated due to excessive risk.

Strategic Acquisition (11) would also be eliminated because it does not match the current strategy Strategic Acquisition(11) eliminated due to high cost.

Question 6: Divide the projects into the four Project Pro le Process categories of incremental, platform, breakthrough, and R&D. Draw an aggregate project plan and array the projects on the chart.

10

2 1 11

No 1 2 3 4

Project Name Expland Truck Fleet New Plant Expanded Plant Artificial Sweetner

Cost 22 30 10 15

Aggregate Platform - major departures Platform - major departures Derivative - incremental R&D long

5 6 7 8 9 10 11

Automation and Conveyor Effluent Treatment Eastward Expansion Southward Expansion Snack Foods Inventory Control Strategic Acquisition

14 4 20 20 18 15 40

Derivative incremental (completed quickly) Derivative incremental (completed quickly) Platform - major departures Platform - major departures Platform - major departures Breakthrough Platform

Derivative Add ons or minor enhancements to existing systems. Clearly bounded and require few development resources. Completed quickly. Platform - Cros between derivative and breakthrough. More technology change than derivative but not completely new,untried systems like breakthrough. Fundmanetal improvements over range of performance dimensions(Speed, functionality, reliability, etc) rather than just one or two. Designed for future expansion. Breakthrough Projects Signficant changes to both technology and business processes. Establish new core systems that fundamentalyy from previous. Large degree of change in many functional areas. Require large resources allocation and heavy management involvement. R&D Proejcts Takes the longes time to finish.

Question 7: Based on all the above, which projects should the management committee recommend to the Board of Directors? The following projects should be recommended based on table below. 1. 2. 3. 4. 5. Effluent Treatment Eastward Expansion Southward Expansion Snack Foods Inventory Control
Cos t 22 30 10 15 14 4 20 20 18 15 40 Mandator y No No No No No Yes No No No No No Paybac k Not Ok Not Ok Not Ok Not Ok Not Ok n/a Ok Ok Ok Ok Ok Strateg y Ok Ok Ok Ok Ok n/a Ok Ok Ok Ok Not Ok 77 4 20 20 18 15 Investmen t

No 1 2 3 4 5 6 7 8 9 10 11

Project Name Expland Truck Fleet New Plant Expanded Plant Artificial Sweetner Automation and Conveyor Effluent Treatment Eastward Expansion Southward Expansion Snack Foods Inventory Control Strategic Acquisition Total Cost

Classification Efficiency and Expansion Market Extension Market Extension New Product Category Efficiency Environmental New Market New Market New Product Category Efficiency New Product Category

IRR Not Ok 7.8% Ok - 11.3% Ok - 11.2% Ok - 17.3% Ok - 8.7% n/a Ok - 21.4% Ok - 18.8% Ok - 20.5% Ok - 16.2% Ok -28.7%

Risk Ok Ok Ok Not Ok Ok n/a Ok Ok Ok Ok Not Ok