Case Analysis: United Beverages, Inc. United Beverages’ CEO is debating with his department heads on the course of action the company is going to take in the future. Their flagship product, GangBuster, has been highly successful for the past 5 years. However, they have been thinking of entering the market for Energy Drinks for kids. Paul Diaz also comes up with a revolutionary idea of the dual-drink, having two separate flavored drinks in a bottle and being able to mix both flavors. Due to the limited resources of United Beverages, they have two weeks to decide whether to expand their portfolio or not? 1.
What United Beverages should look take into account when deciding which product(s) to develop? Potential Costs: 1. How much does it cost to develop? 2. How long does it take to develop? 3. How much resource do we need to allocate for the development? 4. Do we have enough resources to develop it? How will this development affect the development other products? 5. Can we create a contingency in developing more than one of these products? Potential Benefits: 1. How large is the (existing/potential) market for this product? 2. How much revenue is expected from it? 3. How long is the potential life of this product? . What are the growth potentials of this product? 5. How long will take for competitors to imitate/ pioneer a similar product? PROSCONS GangBuster Expansion ProgramMaintains revenue streamLimits Budget of R&D for other projects ($300,000 needed to maintain current sales) There is still potential growth for GangBusters Expansion is mandatory to not lose market share Strengthen barriers of entry to the Interactive Beverage IndustryIt has been 5 years since the development of GangBusters, growth will eventually plateau Open to selling foreign markets and development of new flavors
PROSCONS Kid-Energy Drink ProjectPotential revenues range from $500,000 to $1,000,000Cannibalization of the GangBusters Market (children ages 9-14) There is a market for Kid-Energy drinksPlenty of competition in the market Positive feedback of 80% from survey respondents Fast acceptance rate PROSCONS
Dual-Drink ProjectRevolutionary idea opens a whole new dimension in the Interactive beverage industryThere is no existing data on “dual-drinks” Potential revenues will be (4-5) times more than the existing GangBusterMarket for this product is not defined Existing experience in manufacturing sports bottles and plastic mugsSlow acceptance rate Only 25% responded with a positive feedback, while 50% remain “unsure” High development costs of new dual-chamber bottles It will require HEAVY product marketing 2.
Development time as a function of Cumulative Monthly Investment Exhibit 1 Exhibit 2 R&D/NDP has to cover the minimum $100,000 expansion program of GangBuster in order for it not to lose to much market shares. It also has the option to fund the development of the two other products with its excess funds. At times, in might not be feasible for the company to develop a the products as fast as they want neither is developing both products at the same time. 3. Assumptions: 1. Monthly revenues for 2003 to 2004 will be the same as 2002 unless stated otherwise. . The Components of the Financial Statement of 2003-2004 will follow the historical ratios of 2002 compared to Monthly Net Revenues. (Cost of Revenue 67%, Gross Margin 33%, SG&A 12%, R&D/NPD 8%, Total Operating Costs 20%, Operating Income 13%). 3. Development(s) and/or expansions will start on January 2003 (the 1st Month) 4. Benefits (if any) for the Kids-Energy and Dual-Drink Project will start the month after the development. (e. g. 6 months development, incremental revenues will come on the 7th month) 5.
If all or a portion of the 8% R&D/NPD remain unused, it will be spent on the GangBuster Expansion Program 6. $100,000 (minimum requirement) – $299,000 spent on Expansion will produce the worse-case result, $300,000 or more spent on Expansion will produce the best-case result. This is needed to keep the competitiveness of the GangBuster product in the market. 7. In the Kid-Energy Drink Project, we are assured of at least $500,000 incremental revenue after development. In the Dual-Drink Project, incremental revenue could be negligible. Worst-Case **Yellow – Development of Dual-Drink. Blue – Development of Kid-Energy Drink ***Corresponding monthly costs of developments in the graphs above 123456789101112 Net Revenue4,1144,1044,1104,1014,1024,1024,1144,1054,1084,1104,1144,109 Additional Revenue-247-246-247-246-246-246-247-246-246-247-247-247 Total3,8673,8583,8633,8553,8563,8563,8673,8593,8623,8633,8673,862 Cost of Revenue2,5912,5852,5882,5832,5832,5832,5912,5852,5872,5882,5912,588 Gross Margin1,2761,2731,2751,2721,2721,2721,2761,2731,2741,2751,2761,275 Operex S G A464463464463463463464463463464464463
RND/NPD309309309308308308309309309309309309 Total Operex773772773771771771773772772773773772 Operating Income503502502501501501503502502502503502 131415161718192021222324 Net Revenue4,1144,1044,1104,1014,1024,1024,1144,1054,1084,1104,1144,109 Additional Revenue-247-246-247-246-246-246-247-246-246-247-247-247 Total3,8673,8583,8633,8553,8563,8563,8673,8593,8623,8633,8673,862 Cost of Revenue2,5912,5852,5882,5832,5832,5832,5912,5852,5872,5882,5912,588 Gross Margin1,2761,2731,2751,2721,2721,2721,2761,2731,2741,2751,2761,275 Operex
S G A464463464463463463464463463464464463 RND/NPD309309309308308308309309309309309309 Total Operex773772773771771771773772772773773772 Operating Income503502502501501501503502502502503502 Total12,047 The development of the dual-drink project had taken 12 months resulting in complete failure. No additional efforts were made to try producing the kid-energy drink. Total operating income for worst-case is $12. 047 million. Minimal spending on the expansion program of GangBuster for a year, the product will lose significant market share.
Best Case & Recommended Case ***Yellow – Development of Dual-Drink. Blue – Development of Kid-Energy Drink 123456789101112 Net Revenue4,1144,1044,1104,1014,1024,1024,1144,1054,1084,1104,1144,109 Additional Revenue-247-246-247-2467547547537547547537535,000 Total3,8673,8583,8633,8554,8564,8564,8674,8594,8624,8634,8679,109 Cost of Revenue2,5912,5852,5882,5833,2533,2533,2613,2553,2573,2583,2616,103 Gross Margin1,2761,2731,2751,2721,6021,6021,6061,6031,6041,6051,6063,006 Operex