Prompt: To complete the first step of this final project, you will submit a statement that identifies the New Heritage Doll Company’s mission, vision, and values as presented in the case study. How might these two projects align with the company’s stated goals? In your statement, summarize the two capital investment options and consider the legal, ethical, and/or professional standards that may be relevant. To begin, you need to do the following:
II. Background B. Additionally, summarize the two capital investment options. Specifically, explain all legal, ethical, or professional standards that apply to both, using specific examples to illustrate. Background: Legal, Ethical, or Professional Standards Summarizes the two capital investment options fully, including an explanation of all legal, ethical, or professional standards that apply, using specific examples
New Heritage Doll Company: Capital Budgeting ________________________________________________________________________________________________________________ HBS Professor Timothy Luehrman and HBS MBA Heide Abelli prepared this case solely as a basis for class discussion and not as an endorsement, a source of primary 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. There are occasional references to actual companies in the narration. Copyright © 2010 President and Fellows of Harvard College. To order copies or request permission to reproduce materials, call 1-800-545-7685, write Harvard Business Publishing, Boston, MA 02163, or go to http://www.hbsp.harvard.edu. This publication may not be digitized, photocopied, or otherwise reproduced, posted, or transmitted, without the permission of Harvard Business School. T I M O T H Y L U E H R M A N H E I D E A B E L L I New Heritage Doll Company: Capital Budgeting In mid-September of 2010, Emily Harris, vice president of New Heritage Doll Company’s production division, was weighing project proposals for the company’s upcoming capital budgeting meetings in October. Two proposals stood out based on their potential to strengthen the division’s innovative product lines and drive future growth. However, due to constraints on financial and managerial resources, Harris knew it was possible that the firm’s capital budgeting committee would decline to approve both projects. She also knew that New Heritage’s licensing and retail divisions would promote compelling projects of their own. Consequently, Harris had to be prepared to recommend one of her projects over the other. The Doll Industry Revenues in the U.S. toy and game industry totaled $42 billion in 2008 and were projected to increase by 4.6% per year to $52.5 billion by 2013. The market was divided into two broad segments: video games (48%) and traditional toys and games (52%). The second segment was further divided into infant/preschool toys (14.5%), dolls (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, production, and distribution. Revenues were highly 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 dolls totaled $3.1 billion in 2008 and were projected to grow by 3% per year to $3.6 billion by 2013. The doll category included large, soft, and mini dolls, as well as doll clothing and other accessories. The phenomenon of “age compression”— the tendency of younger children to acquire dolls that had traditionally been designed for older girls—reduced growth in the “baby-doll” sub-segment. Competition among doll producers was vigorous, as a small number of large producers targeted similar demographics and marketed their dolls through the same media. Lasting franchise value for a branded line of dolls was rare; the enormous success of Barbie® dolls was an obvious exception. More recently and on a much smaller scale, New Heritage also had created a durable franchise for its line of heirloom dolls. But the popularity of most doll lines waned after a few years. 4212 S E P T E M B E R 1 5 , 2 0 1 0 This document is authorized for use only in FIN 620 by Pamela Queen at Morgan State University from January 2013 to July 2013. 4212 | New Heritage Doll Company: Capital Budgeting 2 BRIEFCASES | HARVARD BUSINESS SCHOOL New Heritage Dolls The 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 little to develop girls’ imagination or foster a positive self-image, so she created a line of dolls with unique storylines and wholesome themes. Dr. Beckwith’s dolls struck a chord among mothers and grandmothers who also rejected the dated, clichéd images portrayed by the popular dolls of the day. By 2009, New Heritage had grown to 450 employees and generated approximately $245 million of revenue1 and $27 million of operating profit from three divisions: production, retailing, and licensing. The production division, discussed further below, 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 company’s 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 company’s newest and most profitable division. It sought to extend the New Heritage brand and capitalize on high levels of customer loyalty by selectively licensing the company’s doll characters and themes to a variety of media that reached the firm’s target demographic of toddler to pre-teen girls. In fiscal year 2009 the licensing division generated $24.5 million of revenue and $14.5 million in operating profit. New Heritage’s Production Division Production was New Heritage’s largest division as measured by total assets, and easily its most asset-intensive. Approximately 75% of the division’s sales were made to the company’s retailing division, with the remaining 25% comprising private label goods manufactured for other firms. Table 1 summarizes the division’s various sources of revenue and operating income. Table 1 New Heritage Private Label Total Production Division Data: Dolls Accessories Dolls Accessories Revenue ($ millions) 80 14 26 5 $125 Operating Income ($ millions) 4.4 0.5 2.3 0.3 $ 7.5 New Heritage’s dolls and accessories were offered under distinct brands with different price points, targeting girls between the ages of 3 and 12 years. The company’s baby dolls were generally priced from $15–$30, and were offered to younger girls in earlier stages of development. These dolls typically came with a “birth certificate” and a short personal history. Dolls in the higher-end of this category incorporated technology that produced a limited amount of speech and motion. For the $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 and embracing more contemporary fashion 1 The division revenue figures include approximately $95 million of internal sales within divisions which are eliminated when considering consolidated revenue for the company. This document is authorized for use only in FIN 620 by Pamela Queen at Morgan State University from January 2013 to July 2013. New Heritage Doll Company: Capital Budgeting | 4212 HARVARD BUSINESS SCHOOL | BRIEFCASES 3 trends. These dolls targeted girls in the so-called “tween” age range of 8–12 years, and also were priced from $75–$150. Like the heirloom dolls, celebrity dolls also came with more elaborate stories and accessories. New 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 staff to oversee material sourcing, production, and quality control on site at each of its manufacturing partners. Manufacturing activities that required precise tolerances or proprietary processes, along with all the creative elements (design and product prototyping, for example), were handled in-house at the company’s headquarters facilities in Sacramento, California. Capital Budgeting at New Heritage New Heritage’s capital budgeting process retained some of the informality that characterized the company’s early years as an innovative startup. As the company grew, deliberate steps were taken to decentralize some of the project approval process and increase spending authority at the division level. However, large and/or strategic spending proposals were reviewed 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 Heritage’s business strategy and sought to balance the needs and priorities of each division against practical financial and organizational constraints. The committee also sought to understand project interdependencies and the potential for a given investment to strengthen the whole company, not solely the division proposing it. New Heritage’s capital budget was set by the board of directors in consultation with top officers, who in turn sought input from each of the divisions. The capital and operating budgets were linked; historically, the capital budget comprised approximately 15% of the company’s EBITDA. The committee had limited discretion to expand or contract the budget, according to its view of the quality of the investment 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 five years of operating and cash flow forecasts, spending requirements by asset category, personnel requirements, calculations of standard investment metrics, and identification of key project risks and milestones. Financial Analyses Financial analysis began with operating forecasts developed with oversight from New Heritage operating managers. Revenue projections were derived from forecasts of future prices and volumes.