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    107 views16 pages

    Danaka Case

    Uploaded by

    Vijita Jain
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    © All Rights Reserved
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    of 16
    KELSWU GDSEVSS MARK JEFFERY AND ROBERT COOPER Danaka Corporation: Growth Portfolio Management ir i ived at his office at his Jerry Sanders, chief operating officer for Danaka Corporation, arriv pn regular time of 6:30 a.m. He had a full day scheduled and was eager to get a head enidineae a ‘onslaught of daily meetings began. Lying in a neat stack in front of him were Danaka’s quarte1 internal reports from each of the four business units (BUs) (see Exhibit 1). ‘The reports confirmed that for the second quarter in a row Danaka had failed to meet its growth targets and earnings had fallen short of market expectations. Market reaction had been swift, and Danaka’s stock price had taken a major hit, falling 6 percent from the week before. Sanders called an emergency meeting with his management team for that afternoon to prepare for an upcoming three-day offsite executive management meeting. Over the last four years, Danaka had undergone a major restructuring and realignment of its BUs, eventually consolidating into four major BUs: performance materials, agriculture, health 2° Solutions, and emerging solutions. Despite previous analyses, Sanders questioned whether the projects proposed for each BU were supported by enough resources and met ihe wie eal Objectives of the corporation. Danaka Corporation’s History and Current Directives Sie its inception in 1932, Danaka had steadily grown to become a chemicals conglomerate With 2005 annual revenues exceeding $14.5 billion. With 35,000 employees and Operations spread across three continents, the company had evolved into a major chemical company and pharmaceuticals provider with a global reach that impacted countless lives. Largely driven by its innovative technologies and products, Danaka had achieved top-line revenue growth for 2000-2005 with the exception of the last two quarters. Continued fone ns ' operational efficiency had allowed it to realize increasing operating profits. Exhibit 2 shows the annual sales and pretax operating income for the four BUs in 2003-2005. Danaka attributed ‘C2007 by the Kellogg School of Management, Northwestern University. This case was prepared by Debashi Sengupa 707 Wr SOO Rae Soe e haa soe es ae a ae ( ‘ a Glas dacusin. Caesar 0 intended 1 serve eadarvmens, soso ot ee ieee ‘ Ian ett o atstve manage To rt copie ot oun ponent sa aan r (er 617-783-7600 casi the United Sit or Canada) or eal cesar No pe fis plone he Saas jn retrieval system, used ina spreadsheet, or transmitted in 3 by any means—clecvonic: mechankay 4 eee ong acinar wid! pero of te Kegs Schoo of Managers protoconying or 4 DANAKA CORPORATION ; to market over the years. innovative products it had brought shieve research and lar pride in the frm’s ability fo te its i vation level directives that it growth, operating large part of its success to the many Executive management took particular pri J pommeonny (R&D) productivity by efficiently pushing new product pipeline. Looking to the future, management had laid out three grmerao er envisioned would drive overall corporate and BU goals and strategy- is income growth, and commitment to employee benefits and dividend payments. Top-Line Growth Executive management determined that a target of 10 percent annual top-line revenue growth over the next five years was reasonable considering Danaka’s stellar results over the last five years. Moreover, with the improving economic climate, management fully expected sales in Danaka'’s agriculture and health care solutions BUs to pick up. However, several senior managers had voiced concerns that this growth target could adversely impact BUs and projects that did not meet the growth goal but were stellar performers by other financial metrics. Operating Income Growth Danaka’s obligations to its employees and retirees were compli i programs in many countries in which it operated, which were tees, &Y Tetitement-related Impact on the company’s earings and cash flows. Where pene to change or discontinue is pension, medica dental and fe mene Danaka had the right corporate-level goal was to honor its commitments nad ran pu . ands om which pensions had been historically paid. In addition Dan contbutions to trust 1 eee in nd eter shes ha ens a ). Historical data suggested a 13 percent cash mart Te : in Exhibit cash requirements, in was sufficient to satisfy future minimum Danaka Corporation Business Units | ‘As described above, Danaka had recently restructured into four BI concise summary of the BUs. "ur BUs. See Exhibie 4 for a Performance Materials Danaka was the number two global player in the high-performance polymer ind rimarily on the breadth of its polymer-based materials portfolio, including pat Eustomers to develop components for mechanical and electrical systems, 2° 2°! lustry. It reli lymers used be 1 8s resins and —— Sahat RIC ee : KELLOOG Schoot oF Manaon f ext 4 "RSet: KEL300 segment included films for packaging and industrial applications. The key markets sere Ue ee his wl’ automotive original equipment manufacturing and associated after-marl pe bctiinnvatio’ electronics, packaging, and construction industries. While opportunities for toe ie were limited, within the automotive segment new uses for high-performance poly: explored, albeit at a very slow pace. Major projects within the polymers BU were aligned by product lines. The top five product lines, which contributed to more than 90 percent of segment sales, were Sinclair™ nylon resins, Tyler™ acetal resins, Wiren™ polyester films, Yorkton™ laminate interlayers, and Zortox Aluoroelastomers. Exhibit 5 provides segment sales and pretax operating incomes for the Performance materials segment and revenue breakdowns for the top five products in this BU. Global demand for polymers was rising steadily, but market expansion was hampered by pana acity and significant price pressure, particularly from China. In addition, higher oil and natural gas-related raw material costs were adversely affecting operating incomes, OUTLOOK improve the quantity, quality, and safety of the lobal fo i that available global arable land was beceiag ee ares Pad Song ronan increases “would have to be achieved primarily through improvement in crop yield. productivity rather than through an increase in Planted acreage. Banking on this tend, ee had channeled significant R&D resources toward developing a strong product pe he f branded seeds, insecticides, fungicides, and herbicides, Exhibit 6 Provides segment Slot? are dac acting incomes for the agriculture segment and revenue tresketsse for the top five Danaka also had initiated research into gene-shufflin, technology to improve fia, specifically along the lines of herbicide and insect resistance ‘The coenpang’¢ mt Products were designed to capture market share in the global agriculture prodvction industry and extend existing business, particularly in the grain and specialty crop sectors, forestry, and Hesetation management. The agriculture segment continued to be a strong cash generarcr he Danaka and largely drove the organization’s ability to meet enterprise-wide minimum 13 percent cash margin requirements. OUTLOOK Danaka was positioned to benefit from several industry trends that were expected to stically increase demand within the agriculture industry. A combined effect of evolving U.S. al policies, primarily a significant increase in farm subsidies, and globalization of the 1d commodity |. The value of worl Itiple of ing up new markels nN Bs cted to grow as & el Lat; record levels in 2005, and was exposes income. Lastly sed to increase for commodity gains and iy to continue to realize dot ulture projects were in the agriculture market was _— ‘global caeersst higher yields were diving demand fom ivestck and industrial sectors was expected hes seas Bezause fee markt fos ths sgment was expected 0 digit growth in 2006. Reflecting these growth prospees en Pipeline to receive funding and to have resources assign Health Care Solutions ic in ‘ider of technology and ’s health lutions goal was to become a leading provi Peition nek rare oath te important niche markets globally. It had benefited from Erxemover advantage in several of these niche subsegments omplete solutions. Specialy, Dangka wat reuling Mel rack Paris and grovth in media and ‘surgical Products, dental and orthodontic products, health information ‘systems, anc general hospital care. Exhibit 7 provides segment sales and Pretax operating incomes for the health care solutions segment and revenue breakdowns for the top four products thee drove revenue growth. In the medical and Surgical area, Danaka primarily provided medical tapes, dressings, suinebedic casting materials, and stethoscopes. Within the demos and orthodontics segment, ability to innovate was paramount to continued succere art Danaka’s extensive capability had won it industry accolades. In 2000 health care solutions had launched a new Product line of Proprietary resin cement for dental applications that Promised significant improvement over Gzisting produets in the market. Danaka had continaee invest resources into improving the versatility of the Product line, and the resin cement was now broadly regarded as the best Product available to dental Professionals. Lastly, in the health information systems and general hospital care segments, Danaka had developed data classification and management software and Provided related consulting services, OUTLOOK Jn addition to the existing Danaka medical product Subsegments, infection prevention was singrBing a8 a booming segment. The company had limites offerings in this segment, primarily surgical drapes, masks and preps, and sterilization equipment as complementary products to ite medical and surgical line, The inc Previously, indicated sustained high growth and Profitability for Danaka. Management wanted to Emerging Solutions The nanotechnology industry in the United States had Nanotech Initiative, announced in 2000.' Leveraging its been kickstarted with the National ‘ew relationships in the dental and ‘ ic tie iillyemnounced by President Clinton in 2000, povided mult-agency framework to enere US asi cnn tad co pose Ce a atonal scr ‘Further information can be found at http://www.nano.gov. ns KELLOGG SCHOOL OF MANAGEMENT. 3 15 KEL300 tential in this sket, Danaka technologies that held long-term pot ite dental Seep ati citen NanoTexh a startup with promising nanocom Pe ology mers technology ‘American NanoTech was initially li bia Danae » martes Danas ject withis Ith care solutions BU. However, to tap into a wrap tahed the emerging slatons BU in 2003 to focus on nanotechnology. In aa ae in nanocomposite restoratives, significant R&D budget was allocated to Pei erage nanotechnology in diverse applications such as thin-film NiCad batteries, fuel cells, rensren sun blocks, and composite lightweight conductors. A particularly aire peace development by the emerging solutions BU was nanotech-based paint that block ce ll Phone signals. Danaka envisioned use of this product primarily in hospitals and educatior institutions. Exhibit 8 provides segment sales and pretax operating incomes for the emerging solutions segment and revenue breakdowns for the top two products that drove revenue growth. OUTLOOK Qne of the questions Sanders most wanted hi - ost wanted his management te not each BU 4,f08ls were synchronized with Danakerc corporate goals. an wanted, Nbsther or were directed spre gees regarding how resources were being deplay end @ Punposefi appropriately to meet 5.008 that were part of the market-dri Pevate and BU goals. Two hi, innovation port horizon neoNth (MDG) a ects against 9 high-leve, Usually dri in twelve mont! on defending or extending existing businese designs tl other or re These longer-term projects (three to five or more‘yc Tote i av ng do a aaa tr ee ( ( ‘ ‘ 6 « « & on on oo on Om DANAKA CORPORATION ‘alization was expected in less than 2 projects were the heart of major new growth, and commercialization wé three years 7 ifferent drivii metrics All projects were driven by stage gate processes but had very be ra Se sctrt Horizon | projects were driven by eamings and eash growth; Horizon 3 projects Wer they were fe stn stg cliy-canvering erica! assumptions to knowledgebecatse they. were deemed substantial; and Horizon 2 initiatives were at a point where a specific busin to be scaled around metrics of revenue and market share growth. Once the map of existing and future projects was created, business managers could assess {ether resources were being allocated appropriately against a specific business’s mission. A business whose main goal was cash generation should have few Horizon 3 projects. A major wth business should have a healthy mix of Horizon 2 and 3 initiatives. Each business also had Tccstermine how much of its disposable costs should be allocated to Horizon 3 projects. See Exhibit 10 for a top-level designation of the three horizons as they applied to each BU. Initiative Portfolio Maps * Lagging Projects were Horizon 1 initiatives that were fu i i inded onl for manufacturing companies and people for servo" businesses) neers yaa How oe eacnste overall financial performance, Lagging id not gencrare ot flow beyond the minimum required. I did not generate cash customers. These projects contibuted cash fox: 4 ihe buying power of limited growth potential. They mainly existes protcet the eum Tequited but had * Share Growth projects were Horizon 1 or 2 initan the n © Horia iti design. They represented solid, albeit relatively lim e's, "Mat extended d, growth 7 * Accelerated Growth projects were usually Horizon 2 ee a “zon 2 projects that : concepts that were originally Horizon 3 proj iects; at scaled busin i projects as well. TSS ome that they could bs Horizoaes current business resulting portfolio analyses shown in Exhibit 13 give the ei. < Thao four major portfolio categories plus thls sso allocations “Y°eAtions by ty 4 acts Resource to Win new global market provided Dana with stnitcany hay, The the second quarter in Bes fare that for the tow Dana and jas well awe ‘hed failea to mee) ort, Sanders w: Indiana University BUS M522 Fall 2014 KEL300 DANAKA CORPORATION targets and, as a result, the stock price was falling. He knew he had to change the direction of this ship fast, or Danaka would run aground. NORT) UM OMESTERN . & Indiana University BUS Moz Fan

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