Case Analysis- Troika Potato Chips

Case Analysis- Troika Potato Chips

Submitted to : Rupesh K. Shrestha

Group 1Chanda Kiran AdhikariMinakshi AgrawalNabin ChapagainBhavananda JhaAamir Maharjan

Case synopsisThe case is showing a scenario where John Mirren, MD of Moscow based British investment fund, is having trouble in deciding whether to accept or reject to invest in a potato chips manufacturing company. Troika Potato chips was established with joint effort of three different legal entities having expertise in three different areas i.e. raw material production, food processing and supply chain. The business plan presented by Troika was sophisticated and elaborate. John had quite an experience and knowledge about Russian business culture because of his background connections with Russia.IssueThe main issue of this case is to find out whether to invest or not in Troika potato chips.SWOT analysisThe SWOT analysis of Troika potato chips will help to list out and analyze the level of strength against weakness and also the level of opportunities against threats.Strength: Strong supply chain of Baikal. Komarov is largest potato producer in Russia. So, there will be smooth supply of raw material. Highly efficient machinery and equipment. Low priced and high quality product

Weakness: Lack of sufficient knowledge about potato chips business. Difficult to have external investor in the company. High cost involved because of use of modern machineries and also because of producing many flavors of potato chips.Opportunities: First mover advantage with market leadership opportunity because there was no local potato chips manufacturer meeting high quality and low cost as that of Troikas. Can compete with foreign brand in price whereas with local brand in quality. Mass production will help to satisfy the steadily growing demand of Potato chips and as there was not much choice available, producing potato chips in different flavors may attract more consumers.Threats: New players in market may appear while the existing foreign and local potato chips manufacturers may also start to adopt same strategy as of Troikas. A bad potato harvest may have negative impact on quantity, quality and price of potato supplies.Strategies regarding 4Ps The proposed project in this case is to establish a new enterprise that will produce high-quality; competitively-priced potato chips in the town of Komarov, not far from St. Petersburg. The company proposed to use several differentiation strategy low price, high quality, strong distribution channel. The company is aiming to sale in lower price than the chips imported from abroad, high quality in potatoes and packaging.As going through the case it is seen there is no clear market leader at present condition and also the market price elastic for the product in high demand again potato chips are neither a basic nor a luxury product, therefore demand in such market is determined by price and quality. Therefore the company if uses low price and high quality product will have a competitive advantage.Product: The company plans that the troika potato chips will be produced and packaged with equipment manufactured by a Dutch firm, Florigio Industry, which uses only natural, high-quality ingredients which could be promoted as differentiation strategy and also their principal raw ingredient is potatoes, not the regular processed potato concentrate as a result finished product will be more natural potato taste and smell. Therefore this will help them to manufacture a high quality product.Pricing: Also these chips will be cheaper than imported brands and of higher quality than domestic brands, so it is expected that they will be very popular. The company plans that the chips will be priced on average 35% cheaper than imports and 10-20% cheaper than domestic substitutes, making them affordable to a larger segment of population. Also since the wholesale price will be charged very low it will allow retail prices to be maintained at competitive levels. The low price will help the company to make the product reasonably priced to 20-30% of potential consumers, compared to the 10% potential buyers who can afford to buy them at current prices. According to a survey 90% of potential buyers of potato chips cease from buying due to their high price. The remaining 10% choose not to buy because of perceived low quality or for some other reason; therefore the company by using low price strategy and by providing high quality product will be able to reach these both potential customers.Promotion: Talking about their promotion strategy the company is focusing on quality and presentable packaging of chips guaranteeing freshness of the product and for this the chips will be packaged in multicolor polypropylene packages that prominently display the Troika brand name. In order attract Russian buyers; the company tactfully motivated local market by displaying information and logo on the package in Russian language. Multi-stage advertising campaign will be adopted to promote the product utilizing printed and electronic media. Therefore promotion strategy uses localization strategy which will provide them differentiation when compared other aboard companies.Place: The product is currently focusing Russia as its place of business. They are planning to use the strong network of Baikal in order to make effective supply chain. Therefore a proper planning on pricing strategy, a high quality product, and good packaging will enable Troika to successfully compete with local as well as foreign producers. Troika chips will differ from imports in price and from domestic in their quality and packaging. Therefore, at present the differentiation strategy used by the firm seems realistic and reasonable but in long term when more local mass-producers of potato chips will enter the market, the strategy could be altered because for now the company is fulfilling, the demand for the product will remain unsatisfied but with increased competition the scenario would be different.

Financial AnalysisDetails of the projectEquity investment$803,600

Short term credit$236,000

Time frame for realization of project10.5 years

Expected net profit at the end of 10.5 years$2,269,000

Total number of common stocks100 (each with nominal value of $200)

Actual market value of assets held$159,000

The initial distribution of common stock is in the ratio of 2:2:1 between Komarov, Baikal and Znamaya respectively. But after the entry of an outside investor the common share will be distributed as follow:Outside investor: up to 40%Baikal: 25-30%Komarov: 30%Znmaya: upto 5%According to the companys policy of profit distribution, investor will get the highest priority. The investors are the one to take highest risk in this business because they are not familiar with this business. Particularly talking about John Mirren, he is British national who has some knowledge about Russian business culture but still he does not know about potato chips business. The required capital expenditure to be made by investor is also very high ($8,036,000). Since the risk is very high, the return to the investor should also be of high priority.The exhibits shown in the case presents profitable projection of future business of Troika. The Income is high from the start of the project. But the control over the company is distributed in the ratio of 2:3 between the investor and initiators. This may be a problem for investor in coming future as there is less power and authority. Decision making policy seems more favorable to initiators as there is requirement of at least 50% of share for any minor decision whereas for major decision making 75% shares should be fulfilled in minimum. The decision making authority should be revised and be more based upon the risk taken by the shareholders. The investors are the highest risk takers so they must be provided with highest authority of decision making.The net income of the company seems very attractive even after adjusting with all the risk factors like inflation as mentioned in case and it looks like company has make elaborate plan regarding future income generations. Hence from the financial perspective the company seems safe to invest.How appropriate is their decision of prioritizing the investors (the ones involved with the equipment purchase and the renovation of production site) in the dividend distribution process?A troika potato chip is a new enterprise and it is distributing all profit as a dividend to investor in proportion to ownership stake. They give priority to investor in dividend distribution process who is involved with the equipment purchase and the renovation of production site because the main risk with investor is that they have no experience in potato chips production and they have to face difficulties in financing the funds. However, they are taking the risk of investing in this new enterprise rather than investing in mature firm. Thats why they have much more higher risk than other. So they deserve higher return and prior return than other investor. Thats why the decision of prioritizing to the investor who is involved in equipment purchase and renovation of production site in dividend distribution process is correct. The company has a very good plan of distribution all profit as a dividend to different investor according to the level of risk they have taken. Prioritizing investor in dividend distribution process gives confidence to investor to invest in this new potato chips production company. The investor has a confidence that they will receive prior return from their investment and they will take the risk to invest in this company which is good for the company in the initial phase to attract potential investor.Is the decision to give back all the profit as dividend wise?Yes, the strategy of distributing all their profits as dividend is wise because it is the major way to attract the investors into the project. In investing, there are precious few universal truths. One of them is that companies that consistently pay dividends are good investments. Dividends are a key part of what investment analysts call total investment return the money you ultimately make on your portfolio by different measures. Investing in expansion, including the purchase of other companies, the problem with this is that even great companies sometimes make regrettable decisions. For example, Microsoft bought Expedia, only to sell it at a loss. Dividends allow investors to get cash out of the market without selling stock and incurring nettlesome trading costs. As the project has the time frame of ten years, it is important that all the profits be distributed among the shareholders so that they have option of selling back their stock. From the view point of Jim Mirren as a prospective investor, it is better for him to get as much dividend as possible for his share in Troika Potato Chips. Should John invest in Troika potato chips?The proposed project envisioned the establishment of a new enterprise that will produce high-quality, competitively priced potato chips in the town of Komarovo. The initiators hoped to attract an outside equity investor and use the invested funds to purchase specialized, high-quality, imported processing equipment that would enable them to produce and package world class potato chips to be sold through both wholesalers and the retailers in the region. Troika was bringing in the processing equipment from Florigio industries which were a leading producer of food processing technology. Troika was basically focusing on the three strategies: A careful pricing strategy A high quality product Good packagingTroika was looking forward for the growth in their sales based on the expansion of the consumer base and not on the basis of the competition elimination. They were not going to face any competition for at least the initial 4-5 years which meant that they would be at least gaining a 5% of the market share by that time.The reasons why John should invest in Troika chips are stated as below:Adequate market research has been done by the promoters: The promoters of the business come from a background which involves food and produce and they know the demand of potato chips in that region. They have done a thorough analysis on how the potential customers are being deprived from consuming the chips because of its high price and because of which they have decided to price their product accordingly.Strategic share of ownership: The Company has distinguished ownership after the investments and before the investments. Before the investment, the promoters Baikal and Komarovo would be granted the major ownership of the company and after the investors are brought in they would have a major ownership in the company and then followed by the promoters. This in turn would attract the potential investors for Troika.No strong competitors in the market: There are very few wholesalers who are importing the chips, which limits the choices of the buyers and the local producers in the region dont bring out the quality chips and the freshness that is required for it to taste the same after a period of 6 months. The competition is presumed to grow after about 4-5 years and hence the company has devised its advertisement plan accordingly.Properly devised advertisement strategy: For the product to be known the advertisement strategy in the initial years has been designed in a much different manner than when competitors enter the market. The advertisement would be more aggressive once there is the competition in the market.High Product Quality: Since the processing equipment is brought in from the Netherlands, it is expected to reduce their production cost; they can charge a low price to their customers. Not only that, they are ensuring that they get the best quality potatoes for the processing purpose. Having done that, they are still setting aside a 5% chance of error in the processing of the potatoes which implies that they are not being over ambitious.Acting globally and Thinking Locally: They have planned to design the packaging at par with the chips that get imported from America and other foreign lands. Having said that, they are still using the Russian Language which means that they are thinking locally and catering to the sentiments of the Russians and the people in that region which will definitely put them on a winning side, because the consumers will get to eat the chips that have been produced in their country without compromising with the quality.Prioritizing investors while paying the dividend: The company has decided that the dividend will be given to the investors who have invested in the purchase of the processing equipment and the renovation of the production site which ensures/assures the investment is safeguarded and the company is putting them at first which is one of the major reason why John should invest in Troika.The cultural disparity used as an advantage: Despite the fact the culture John grew up in being different than that of Russia, the fact that he has studied about the history, literature and culture about the country cannot be ignored. Besides, he has been there for almost 5 years now and the experience has sure been inbuilt since he has invested in many of the projects, he is sure to be well acquainted with the Russian culture.Some of the Dark side of the project It is mentioned in case that due to break up of former Soviet Union, old inter regional ties has been ruptured. This also means that the political condition is not very favorable for any big business venture in Russia. In such scenario, it may be unrealistic to forecast 10 years of project. The situation may not be as favorable as mentioned in the income exhibits. The business plan has mentioned that they are Troika is planning to gain 5% of market share by producing 300 tons of chips a year. This means the total market for chips is 6000 tons per year. The total population of St. Petersburg in 1995 was 237,487. According to case, 60% of people consumes potato chips i.e. 142492 number of people. So this gives a rough calculation of 38 kg of potato chips consumption by a person in a year which is a bit unrealistic. And yet it is mentioned that people of age group 5- 18 are the major consumer. That means the consumption per year must be even higher per consumer. The projection seems unrealistic and over optimistic. Znmaya is responsible for the storage of potato chips but it is given least priority among the initiator in profit distribution. Since the projected production is very enormous, the storage facility must be very effective. But because of the least advantage to be gained, Znmaya may not be much bothered about the storage which may create problem in coming days. In the matter of investing, initiators are not the major contributor. Instead, investor is the one who is having major investment. This has raised suspicion regarding the seriousness of the initiators. Are they really into the business or are they just planning to attract investors money? The advertising and promotion is not given the required attention. Rather the focus is given on showing million dollar of sales revenue. It is not agreeable that advertising for $25000 per year will provide million dollar of revenue. All the projection of financial exhibits is shown in best case scenarios. The worst case scenario should also be shown to the investor for more realistic vision. The discounted NPV of the project can be shown so that investor should not bother in calculating NPV on his own. This will take time and investor may lose the interest in project. The organized crime in Russia will be a drawback because they will demand some portion of profit from the business. ConclusionJohn Mirren should invest in Troika Potato Chips as it seems financially sound company. The marketing strategy adopted by the company also shows positive future prospects of high profit. The company has quite elaborately identified the gap in market and hence is planning to fulfill the gap with mass production of potato chips. There may be definitely some problems in the future while dealing with Russians because of the difference in culture but John should use his experience in Russia and Russian culture to cope with those issues. The financial projection should be made clearer. For this John may ask the initiators to provide more realistic projections. His other investment options are also based in Russia. Hence, there is no escape from investing in Russian market. That is why he must be more cautious. He must try to understand the intention of the initiators. He must negotiate enough to make his bargaining power high and stable in future too which will make the initiators more serious in their job.