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Luna Product Launch

Zachary Klein
Mason Schaller
William Finnerty
Akash Miriyala
Robert Glasgow
Wei Zheng

Table of Contents
Executive Summary........ 1-5

Management Analysis...................... Z1-Z28

Management Appendix.... Z29-Z30

Marketing Analysis........ M1-M21

Marketing Appendix.. M22-M27

Operations Analysis...... P1-P18

Operations Appendix........ P19-P27

Financial Analysis........ F1-F11

Executive Summary
Our consulting team faces an intricate task in creating a comprehensive business analysis
for Moon Springs Beverage Company as to the potential launch of their latest product,
the enhanced coconut water drink, Luna2. This project is a complex one, with decisions in
each strategic business facet that rely heavily upon one another. In our assessment, we
concentrated on framing the implications of our determinations regarding the obstacles
that the product faces both in the short-term and the long-term. Luna2 may be a shortterm project, but the actions Moon Springs takes now will have extensive, broad, longterm impacts on the future of the entire company. Luna2 will be a turning point in the
course of Moon Springs history: we strongly believe the recommendations we have
compiled will position the company well to increase its influence in the soft drink
industry with a highly recognizable brand, to dial in their internal business processes, and
to ultimately achieve outstanding bottom-line results.

In this highly competitive soft-drink market, there is little margin for error in the
execution of Luna2. If Moon Springs wishes to yield maximum utility from the project,
then implementing flawless organizational strategies is of paramount importance. Making
sure the project is run successfully starts with the people involved, ranging from the
manufacturing workforce to top-level management. Thus, one of our foremost concerns
in managing the human capital situation for the Luna2 launch is the drop in productivity
levels in certain bottling facilities. Further, massive increases in hires are necessary to
keep up with Luna2s projected demand in the first year. It is imperative for Moon
Springs to enact quick, comprehensive solutions to solve its human resources dilemmas.

People represent the most valuable asset that Moon Springs has, and the extent to which
they efficiently organize this asset may determine whether Luna2 flourishes or flops.

Luna2 has potential to do very well as a premium product in the coconut water market,
but this potential can only be realized if the correct steps are taken to market the
beverage. Luna2 is a leader in healthy additives and quality, so choosing an acceptable
price point will be crucial in forming customer perception of the brand and stimulating
early sales. Additionally, it competes in a market that is highly consolidated and
characterized by its relatively low barriers to entry. In order for the brand to receive
traction and increase customer retention, Luna2 will need to enact a highly effective
integrated marketing communications strategy that resonates with its target market
segments, while delivering on the drinks value proposition. Moon Springs has already
established strong relationships with a familiar customer base and trustworthy marketing
channel; the company will need to get creative in order to ensure the brands success over

Thus far, operations systems have been one of Moon Springs strongest assets. The firm
possesses nationally recognized supply chain, distribution management, and production
processes rivaling those of the Big 2. With new equipment and different capabilities
being presented to Moon Springs with the Luna2 launch, their final decisions will
determine how well they are able to compete with, or preferably, outperform competitors
in the future. Luna2 will require different operations than Moon Springs is accustomed to

and thus, the company must be willing and able to change certain processes and
capacities so that the new product launch will be a successful one.

By drastically adjusting Moon Springs human capital structure for the duration of Luna2,
Moon Springs will be better equipped to handle the increase in demand they expect for
the companys other product lines in the future. These changes are not only an investment
in the companys future, but also its people. Honing in on the most effective hiring
processes and performance management strategies can allow Moon Springs to establish a
galvanized labor force with low turnover and high productivity. Additionally, hiring the
right employees can establish an even stronger company culture, creating high demand
for jobs at Moon Springs as the company expands. These measures will be very
important as more firms enter the soft drink industry and threaten Moon Springs market
share: the company must be able to compete on its internal business processes if it wishes
to gain larger shares of the market and increase its net worth.

There are widespread sentiments amongst industry executives that the coconut water
market may be short-lived. Small, but consistent growth rates for the overall market have
been generally accepted, however, there is a lot of uncertainty about the future of the
market after six years, with the potential for a new product to emerge and diminish sales
of coconut water. This is essential knowledge for Moon Springs to consider when making
long-term marketing commitments to Luna2 as well as when deciding how it will market
its existing product lines if this market is to drop off. It is essential that Moon Springs

leverages Luna2 in the six years following its launch to build brand equity for all of the
companys soft drink offerings. Even if the consumer need for coconut water is shortlived, Moon Springs can experience long-term returns from the project via a marketing
standpoint by learning how to better reach their target segments with their marketing
efforts, and by building strong relationships with their channels and consumers.

Moon Springs needs to maintain operational procedures and make necessary adjustments
to stay ahead of technological innovations and rapidly advancing processes. Moon
Springs must not, however, allow themselves to become complacent in their operational
diligence. If this were to happen, Moon Springs would inevitably experience obsolete
processes and consequently lose revenue and crucial market share in a highly competitive

Moon Springs past financial reports have shown small but consistent growth across all
of its current investments. This trend speaks to the quality of Moon Springs current
management team. With their guidance, Moon Springs has been able to keep company
risk down while continuing to make sound financial decisions. Moon Springs growing
brand value has generated revenues to allow management to make a decision on which
project to invest in next. Luna2 is a project with upside potential but large initial costs.
The financial evaluation will be key to understanding not only the ideal projections for
the new product, but also if the project may fall short of expectations. In order to make
accurate calculations, we will need to pull from our revenue data of previous projects.

Our finance team will need to take careful consideration regarding which possible factors
may or may not be required in completing an accurate analysis of Moon Springs
investments. The success of Luna2 may hinge on the number of years the project lasts.
Further, whether or not the project is worth going through with will depend on the NPV
and IRR calculations at which we arrive.

After diligent analysis of the Moon Springs business functions, we have compiled a
detailed report of recommendations and strategies for the launch of Luna2 that follows.
These recommendations are just that; our deductions have led to opinions on Moon
Springs best course of action, but they are not firm requirements that represent the only
way the company can succeed. No matter what decisions Moon Springs makes, the
companys executives must keep in mind that their short-term actions will have extensive
long-term implications. Luna2 may forever change the scope of Moon Springs company
trajectory, thus detailed and comprehensive analysis of our report is important to ensure
that the most informed conclusions are made.

Mission and Objectives

The mission of Moon Springs Beverage Company is to provide our customers with a
wide range of high quality soft drinks that cannot be matched. We are committed to
delivering the healthiest and highest quality beverage options available on the market, to
strengthening our ties to communities through building strong relationships with local
retailers, and to following ethical business practices that raise the societal well-being of
the markets that our products reach. From our employees to our customers, Moon Springs
is always on your side.

Balanced Scorecard
Setting specific, measurable, actionable, relevant and time-bound goals in the short term
for the Luna2 project will be essential in measuring its success. Further, the decisions and
benchmarks we make for this project will help us decide where Moon Springs should
look to improve its business strategies in the future. A balanced scorecard will help link
the strategic functions of the entire company, and its contents will serve as clear
guidelines that ensure Moon Springs employees know how to perform their jobs in the
most productive way possible. This is especially important given the relatively low
productivity levels in the New York and Arkansas plants; this balanced scorecard is just
the start to getting employees at those locations back on track. Our balanced scorecard,
which discusses the financial performance, customer experience, learning and growth,
and internal business processes, as presented in Exhibit 1.


Staffing Forecast
In order to complete our staffing forecast for the upcoming year without the addition of
Luna2, we need to first identify our employees current capabilities. Given the data
provided, we decide the most accurate way to account for the capabilities of was to
calculate the amount of revenue each individual worker is responsible for. By dividing
our total annual revenue from the most recent year by the number of employees in our
current workforce, we find each employee is accountable for, on average, about $267,000
of annual revenue.

Next, we need to find a projected yearly growth rate we can use to estimate revenue for
the coming year. With this projected revenue, we can divide by the rate calculated above
in order to reach the required number of workers for the coming year. In order to provide
comprehensive projections, we decide to calculate worst, base, and best-case growth
scenarios using all historical Moon Springs project revenue data that was provided to the
finance team. It is important to note these case scenarios are based off revenue, meaning
the highest revenue is the best case. We note this in case of any confusion for the bestcase scenario because the most amount of new hires and largest gaps need to be
reconciled. We calculate the base revenue growth rate by averaging yearly growth rates
of total revenues from all projects over the last five years: this rate is .99%. As for the
best and worst-case growth rates, we choose the highest and lowest year-over-year
growth rates among the five years of data: the best and worst-case growth rates are 4.82%
and -2.45% respectively. We then use the turnover rate to find the amount of employees

we will lose in the following year. We find the company will be losing 26 employees in
the following year. We then use our recruiting and selection information and find 21
employees would be accepting jobs in the following year, thus our total employees lost
would only account to be five employees. By using all of this information we are able to
calculate the labor forecast chart shown below.


Current FTEs



FTEs Required



Staffing Forecast for Luna2

Using the capacity levels calculated by our operations team, we find three levels of
capacity a high, low, and most likely estimate of our production abilities for the first
year of the Luna2 launch. We calculate our revenue by multiplying our $1.20/unit
measure from the operations team by our various capacity levels. Given revenue options
for various sections from our consulting team, we chose the $1.20 level because it is the
most conservative estimate. This may seem like a low estimate, but we determine it
would be wise to stay on the safe side with our calculations.
Possible Levels
High Capacity
Average Capacity
Low Capacity



Workers Needed


Now, let us take a consolidated look at Moon Springs best, base, and worst-case labor
requirement scenario for all projects as well as with the addition of Luna2.





Total FTEs





As you can see, Moon Springs will need to increase its workforce by a very large amount
in the coming year regardless of the growth in the company or our capacity levels. This is
expected due to the very lofty demand projections of 24.5 million units of Luna2 in the
coming year. A concern that arises with the reconciliation of these labor force gaps is
high hiring and firing costs in the short-term for this 6-year project launch in a market
that shows signs of falling off in the near future. One might argue that the project should
not be pursued because these large changes in labor are too costly for a short-term project
and may hurt the companys bottom line. However, we are apt to disagree. The long-term
goal of the Luna2 project is to generate excitement about all Moon Springs product lines
and increase sales revenue for the entire company. To put it another way, Luna2 aims to
bridge the gap between slowing revenues that Moon Springs has been experiencing
recently and the high sales the company believes it can achieve down the road. Assuming
this plan works, Moon Springs will definitely need increased production capabilities for
its other product lines after the Luna2 project runs its course.


Decision on Second Shift Strategy for Luna2

When looking at the information for adding a second shift, the data gives a fairly simple
answer. We are able to calculate Moon Springs overall demand for this past year by
dividing our yearly project revenues over the $1.20/unit. By doing so we are able to find
the demand for the company this past year was ~35 million units. Also, from our
operations information we find the most likely capacity would be 34 million units for the
Luna2 launch alone. This past year we had 161 FTEs and in the following year we have
156 FTEs available. This results in a small decrease in the amount of units produced,
but by an insignificant margin. Assuming the company will be able to produce the same
demand as this past year for their other projects they would need to produce a demand of
~69 million units, which is nearly double the past years demand level. To produce this
level of demand, we would have two options of either having double the amount of
employees or paying the employees eight hours of overtime. Although the company has
not shown hiring levels of this magnitude in the past, it also has not had a demand as high
as it will for Luna2 in the coming year: Moon Springs will need to increase its hiring
efforts drastically in order to ensure keeping up with demand in the short-term and to be
well-suited for higher demand in the long-term. When calculating the costs it is ~$3
million cheaper to have two shifts, as opposed to paying overtime hours. These large
changes in demand will be occurring from the production of Luna2 will greatly affect the
company, as they have to gain a large amount of employees quickly, which may be
difficult to complete. Although this is true, we would recommend having two shifts with
~156 FTEs to fulfill the future demand levels.


From a qualitative stance, it may take some time to hire ~156 new FTEs, especially
considering our recruitment data shows that this year we would only be hiring 21 FTEs.
Since this may be an issue, we look into other possible solutions for producing this high
level of demand in the short-term. We recommend Moon Springs start with paying some
employees to work overtime and hiring temporary employees for low-skill jobs, which
are both quick solutions to the problem that can be easily reversed. These measures buy
Moon Springs time to find the new workers that they need. The temps and overtime hours
should be gradually decreased as their work is replaced with external hires.

Job Description System Design

The various members of key management personnel include: plant managers, regional
managers, plant controllers, product development managers, and brand managers. When
determining job descriptions for each position we analyze the use of all five methods and
focus on the pros and cons of each method. To ensure job descriptions are clear and
vivid, we would recommend using multiple methods. The three methods we feel are most
valuable are Job Performance, Critical Incident, and Interviews.

Job Performance is an important method to use because it explains the day-to-day work
within the position, as well as the various demands of the jobs. It is simple to understand
the concepts of each position and the use of these concepts in the job description would
allow for the immediate understanding of the position itself. The issues created when
using job performance is it may be difficult to determine daily functions when a job

requires a lot of training, or is a complex position. For all the positions listed, it is
possible to list these day-to-day functions, as they would be generally repetitive, unlike C
level employees. We will discuss this in depth in later sections.

Critical Incidents involves the understanding of critical decisions that employees make
and provides a great amount of insight into these positions. This method shows the
various contributions and coaching an employee makes as well as how they are able to
affect others. This method can take a great amount of time to gather information and also
these incidents may not occur very often. When looking at Moon Springs organizational
chart it shows that all of these positions are in charge of specific areas, thus it will be
simple to find examples in which they are affecting others through various contributions,
as well as the dynamics of the job.

The last method we would incorporate into our job descriptions is interviews for both the
workers themselves, and their supervisors. This method allows for information that may
not be observed to be discussed, as well as the desired performance of the position itself.
This not only looks at what the current person holding the position actually does, but also
what the supervisor may desire within the position. Interviews can be ineffective if they
are run poorly. If a worker is suspicious about those interviewing them, or if the wrong
questions are asked, it can strongly affect the overall benefits of the interview itself.
When creating job descriptions its not only important to discuss what the current


position does, but also what the supervisor feels is required for this position. Interviews
are a great way to gain this extra piece of information and are very important.

The five management positions can be divided into three different sections. The first
section includes the Plant Manager and is mainly focused on the production of the
product. The second section includes the Product Development Manager, Brand
Manager, and Regional Managers. This section is focused on the development of the
product itself, as well as the distribution of the products. The final section consists of the
Plant Controllers, which focuses on the human resources and finances of the company.

When developing the job description for the Plant Manager it is important to use the three
methods listed above to fully incorporate all of the areas of the position. We would first
look at the daily job duties of the Plant Manager. These duties consist of checking on the
workers to make sure they are completing the tasks necessary to keep the production
process moving smoothly. Another daily task is using the information of the quality
workers to determine that no defects are occurring. After analyzing the day-to-day
functions and placing them into the job description we would look at the critical
incidents. These are functions of the job that dont occur daily. For example, if an
unexpected issue occurs with the equipment, the plant manager may have to work with
the maintenance workers, or call an outside company to help. These issues that are not
daily, but do happen occasionally, would be recorded for future data.

Once this

information is gathered over time, a description of critical incidents would be placed


within the job description. The last step of the job description would be interviewing the
plant manager as well as the COO. Moon Springs will be able to find information on
occurrences that may occur for the manager, but not very often. Also, by interviewing
the COO, Moon Springs will be able to figure out the desired performance rather than

For example, the COO may state he wishes the plant manager check with

individual employees every day, when in reality the plant manager checks with them
every week. This would then be placed in the job description as well so desired changes
could either be made with new hiring, as well as when evaluating an employee.

We will follow the same system when creating the job description for the Product
Development Manager, Brand Manager, and Regional Manager. We first look at the job
performance for each position. The functions that can be discussed in the job description
will include evaluating the sales forecast for a specific product, developing a new
marketing strategy for a product, and assessing sales opportunities. These are then placed
in the respective job description. After going through job performance we then repeat the
same system as before and move onto our critical incidents. For example, a critical
incident can include a distribution worker sending the product to the wrong location.
This will be an issue that may arise, but not very often. After this is placed in the job
description, Moon Springs moves onto conducting interviews for each position as well as
the CMO. When conducting interviews with the managers, Moon Springs will learn
about mental work, which is difficult to learn about any other way. This mental work can
include questions about leadership or the way in which theyd handle a specific situation.
We also can interview the supervisor, or CMO, to help determine any desired


All of the results from the job performance, critical incidents, and

interviews would then be placed within the job description, fully incorporating all aspects
of these three positions.

The next position that Moon Springs will create a job description for is the Plant
Controllers. The plant controllers are mainly in charge of the HR and the accounting for
the company.

Their job performance consists of submitting financial transactions,

creating forecasts, and analyzing daily production meetings. Moon Springs will then
look at the critical incidents such as solving issues with internal controls. We then
recommend interviewing the Plant Controllers and the CFO. Asking the plant controllers
questions about the management and development of staff will provide information
otherwise difficult to find. We recommend creating the job description based off these

The specific system we have put in place involves first looking at the job performance of
a position, then looking at the critical incidents that occur within that position, and finally
utilizing interview questions to gain a further understanding of position tasks. This
system allows Moon Springs to gain a strong job description for each position within the


Performance Management System Design

There are five different ways to evaluate performance: the Comparative approach,
Attribute approach, Behavioral approach, Results approach, and Quality approach. In
tandem, we use five criteria to evaluate performance management systems: strategic
congruence, validity, reliability, acceptability, and specificity. These criteria help
determine whether the chosen performance management system is using relevant,
accurate, and specific measures relevant to the company goals.

The comparative approach involves comparing an individuals performance to others.

The individual, in this case, a plant manager, is ranked against others or even scored in a
comparison with others in the workgroup. While this approach is easy to implement, it
lacks specificity. If an employee wonders why they are ranked below others, there is
really no reason except the person doing the evaluating objectively thinks one is better
than the other. We reject this approach as it fails to link evaluation of performance to the
goals of the company.

The attribute approach is concerned with whether or not an individual carries traits
needed for a job. Using a rating scale, the individual is scored from one to five for each
trait being assessed. While this is a popular approach, the traits being assed are quite
general, for example: knowledge, communication, creativity, etc. In addition, many traits
may not be specific to company goals. For this reason, we reject this approach, as we
seek a method to evaluate which is relevant to Moon Springs goals.

The quality approach focuses on product quality and proper employee practices. This
approach is driven by what the customer demands of a product. The quality approach
works hand in hand with innovation and improving experiences for everyone. It assesses
the individual based on the quality of his or her performance within the system. We also
choose to reject this approach, as many Moon Springs employees do not have high
contact with customers.

The behavioral approach can use multiple methods to assess whether the employee
exhibits certain wanted behaviors. In its simplest form, the behavioral approach says how
things get done, is just as important as the results. The Behaviorally Anchored Rating
Scale (BARS) specifically defines dimensions associated with different levels of
performance and then considers what the employee would do in certain situations
(Exhibit Z2). Keep in mind the possibility of rater error; results are skewed due to bias
from the evaluator. To mitigate this risk it is important to train raters on the use of the
evaluation methods. If done correctly, behavioral methods can have high reliability. Since
those who will use the system generally develop the behavioral measures, the
acceptability of using the behavioral approach is high. This approach allows behaviors to
be linked with corporate strategy and allows for specific feedback to the employee. Its
only weakness is the constant monitoring and updating of the behaviors and measures


We believe the behavioral approach will work well with Moon Springs. With plant
managers at four different plants, the behaviors and measures used can be repeated across
all locations. Thus, it is easy to set up BARS and repeat its use across plant managers.
However, we can improve upon our methods by pairing the behavioral approach with the
results approach. In the results approach, managers and employees set goals together, and
performance is based upon how results compare to the goals previously set. More
importantly the results approach includes the Productivity Measurement and Evaluation
System (ProMES), a system designed to motivate employees to improve productivity. In
this system, managers and employees set goals together, but develop weights based on
the priorities of the objectives they discuss. Since goals are set and performance is
assessed relative to them, the results approach can strongly link performance to company
goals and strategy. However, assessing employee results may have contaminants; for
example, their results may be influenced by factors outside of their control. In all, our
team believes a combination of the results approach and behavioral approach allows the
best evaluation of the performance of plant managers at Moon Springs. The behavioral
approach allows assessments based on ideal behaviors set by company executives
grounded in the vision of the firm. This specificity allows for additional constructive
feedback as model behaviors are already laid out. On the other hand, the results approach
allows a focus on productivity, which is a critical aspect, especially concerning plant
managers and their staff. We believe this combination provides a well-rounded evaluation
of the manager.


Plant managers have specific goals regarding their groups effectiveness, which have
effects on the organizations performance because managers direct and manage all plant
operations. The results approach focuses on managing the objective measurable result of
a job or work group, this pairs nicely considering the scope of the plant managers dayto-day activities. Regarding the job responsibilities of plant managers, they need to
provide leadership for the successful day-to-day operation of the facility, and
communicate with research and development as well as product management personnel
to develop new product strategies. Therefore, it is critical plant managers have certain
attributes such as leadership skills and communication skills for the success of the
company. While this may sound like a time to apply the attribute approach, we have
decided against it. The attribute approach is more of a check to see if the manager holds
certain traits like leadership or communication but does not evaluate all relevant aspects
of the job. However, the behavioral approach can transform these traits into action items,
and comparing the behaviors of manager to these action items can give us a clear picture
of how the manager utilizes skills, not just if they have the skills.

Another method in the behavioral approach is the use of competency models.

Competencies are the set of characteristics needed to qualify a person to perform a job. In
order to be effective, these competencies must be up to date, drive performance, be valid,
and be relevant. We can use competency models to design performance appraisals for
plant managers, which can then be evaluated by subordinates and co-workers who work
with the manager on a daily basis.


One problem with subordinate evaluations for behavior-based performance system is they
give subordinates power over their managers, which can put the manager in a difficult
situation. This can lead to managers emphasizing employee satisfaction over productivity
because of the appraisal process from subordinates. Another disadvantage of using coworker or peer ratings is the potential for bias ratings as a result of friendships. Thus, we
see possible contamination in a behavioral approach. However, the results-based
performance system removes this bias as much of the results approach relies on objective
quantifiable indicators of performance. We choose a combination of the two approaches
because the behavioral approach provides tangible behavioral evidence of performance
while the results approach mitigates the bias and provides feedback based on real results
compared to goals set.

Incentive Program Design

We obtained data from a consulting firm previously hired by Moon Springs that
generated a report on the productivity of the four existing workforces. The report shows
the Indiana and Nevada plants have a productivity level at 90%, while the New York and
Arkansas plants have productivity levels at 75%. There is a need for an incentive
program to boost the productivity level in New York and Arkansas to that of Indiana and
Nevada or higher, but also to continue improving the productivity in these already highly
productive locations.


Our suggestion would be to implement a Merrick Plan that would push employees to try
to produce the highest level of productivity, so they will be able to gain the highest
potential salary. We are able to determine the amount of units an employee should be
able to produce on average by using past year production per employee levels and
determining the amount of units each employee produces, on average, per hour. We
calculate the average production unit per employee is ~9.6 units per hour. Our Merrick
plan states that if an employee produces between 9 and 10 units per hour they will receive
their current hourly rate. If they are able to produce 10 units or more per hour they will
be paid 120% of their hourly rate. The counterpoint is if employees produce 8 units or
less per hour they get paid 80% of their average hourly rate.

We would recommend implementing the program in New York and Arkansas to start, as
a trial period. The company should expect increases in the productivity rates of these two
locations, but they are going to receive backlash from workers in the other two locations.
The company will expect a reaction from the other two locations because once workers
hear of incentives workers will find it unfair. If this occurs, we would recommend Moon
Springs implement this Merrick Plan across all locations. Although Indiana and Nevada
already have a high productivity rate, there is always room for improvement.

We recommend Moon Springs also offer group-based plans throughout their locations.
Gain-sharing plans allow for easy development of performance measures. We feel the
most efficient way to utilize a gain-sharing plan is through a Scanlon Plan. Through the

use of worker productivity committees, Moon Springs will be able to evaluate employee
and management suggestions for ways to improve productivity and cut costs.

In order to find out the amount of benefits associated with the reduced costs, the first step
is to compute the historical ratio. This ratio compares the monthly sales and output with
the labor costs for the past five years. The next step is to use the existing ratio (historical
ratio base rate) to project labor costs for the coming period, and beginning the employee
productivity initiative. If the actual labor costs are lower than projected labor costs
without changing the level of the plants productivity, the saved costs are used as a bonus
fund which is split between emergency management reserve (gains withheld from
distribution in case of future emergencies) and the compensation for the production
workers. In this case, 25% of the bonus fund is banked into the management reserve. The
rest of the funds are used for the compensations. After 80% of the compensations are
distributed to the labor employees, the company will take the last 20% of gains.
After calculations we anticipate cuts of $85,000 per month in labor costs in the New York
and Arkansas plants. As a result, 25% of $85,000 ($21,250) goes to bank reimbursement
for the firm. Of the remaining $63,750, 80% goes to compensation for labor employees
($51,000). The company will take the rest ($12,750).


Actual saving from monthly labor cost: $85,000

Bank Reimbursement: 25%*$85,000=$21,250
Compensation: 75%*$85,000= $63,750
Employees Compensation: $63,750*80%= $51,000
Companys Compensation: $63,750*20%= $12,750
For each employee in Arkansas Plant: $51,000/34= $1,500
For each employee in New York Plant: $51,000/37=$1,378.38

The figure above shows the employees compensation for the New York and Arkansas
plants is $51,000 each. The current number of employees in Arkansas and New York are
34 and 37 respectively. Each employee will get an equal cut of this fund; each employee
in Arkansas receives $1,500, while each employee in New York receives $1,378.38.

Recruitment and Selection

One of the key success features of a company is hiring and maintaining quality workers
because workers make or break a company. With a potentially large number of hirings
looming as a result of the Luna2 product decision, it will be key to have an effective
recruitment process in place. The key to a successful company starts with its ability to

hire and retain the right people. A well-documented framework known as the ASA model
breaks out a three-step process (attraction, selection, and attrition) needed to maintain
quality employees. By setting a standard recruitment process, Moon Springs is more
likely to attract similar employees, thus leading to a higher sense of group and company

By standardizing the selection process, we will be better at identifying quality employees.

It is also necessary to standardize the hiring criteria to reach this goal. One such example
of a standard hiring criterion could be to list all the skills necessary to be successful in a
job. As a result, there will be less worker cliques and judgment because employees are
similar in their abilities. We will discuss later and in greater detail which selection criteria
and evaluation to conduct. The final step of the ASA model is natural attrition; an idea
that employees who do not fit the culture will naturally leave the company. In other
words, this framework implies bad employees will leave instead of the organization
needing to fire them.

Lets move on to Moon Springs current employee recruitment systems across all
location. Upon evaluating the data present in Exhibit Z3, we can begin to make some
conclusions. It makes sense Indiana and Nevada are the more efficient locations because
they are willing to pay a higher recruitment cost. These higher costs also lead to a higher
selection ratio because of the pre-screening process of hiring from select sources.
Although Nevada has the highest ratio of 33%, there are only three data points so it is

hard to conclusively say this is the best option. Indiana is the next best option and at
8.75%. Their internal company costs are reduced because they are spending less time
reviewing applicant data. These cost savings greatly outweigh the roughly thousand
dollars to use this recruitment method. If we consider each employee brings in about
$266 thousand in revenue, it should be an easy decision to spend substantially to recruit
employees that fit our company mold because their long run return will outweigh the onetime cost. In other words, the successes of search firms in Nevada and trade school hires
in Indiana have generate revenues well beyond the costs to recruit them. Evaluating only
on a ROI basis, Arkansas or New York would be ideal because of the low costs to hire.
Although Arkansas cost per hire of only $129 looks attractive, the employees are only
75% efficient versus 90% with higher cost recruitment option such as the ones used in
Indiana and Nevada. Also, taking a look at voluntary resignations over the past 12
months for each plant, the Arkansas plant has the highest turnover rate and number of
voluntary resignations. In at least one way, this high turnover can be considered a good
thing because it demonstrates the natural attrition pattern that should happen as a result of
employees not fitting the company culture. This is why it is important to hire employees
who fit the culture so they will be more productive for the company.

Overall, when a company has a large number of resumes, company resources are pulled
away from daily work to evaluate resumes. It is important not to waste the time of these
managers as they provide benefits to the company as well. Arkansas spends a lot of time
and money reviewing hundreds of resumes and conducting interviews. These costs are
not part of our model, but they would raise the cost per hire amount significantly. In

conclusion, Indiana is performing the best in terms of recruitment and selection. This is
because the extra 15% productivity generates greater revenues than the cost difference of
lower cost per higher totals.

Selection System Standardization

Now that we have covered where the company has been, we can evaluate how Moon
Springs should conduct themselves in the future. We aim to standardize recruitment
selection systems across our four plants. By doing this, we can decide on selection
criterion and evaluation methods by comparing the cost for validity of each possible
recruitment method, as shown in Exhibit Z5. A standardized selection process leads to
consistent hiring and leads to a more efficient hiring process across the four plants.
Our first step in the process is to identify target recruitment sources. After finding
potential hires, it is key to gather basic information in order to support the hiring decision
process. Our ideal source of talent would be from trade schools, because of the dollar
value of each employee hiring. Other sources of recruitment for Moon Springs include
search firms, employee referrals, and direct applicants. Although search firms are
expensive, the revenues employees will produce outweigh the search firm costs.
Unfortunately, direct applicants generally require a lot of time on the part of the hiring
managers and lead to fewer hires, thus we would advise Moon Springs to consider other
recruitment sources first.


After gathering basic information and initially screening employment sources, potential
employees are invited for interviews. Our suggestions for selection tools rely on the
utility value of validity and its cost. Based on our cost versus validity analysis, the costs
would advise Moon Springs to use an unstructured interview. Because production line
employees do not require as much evaluation to determine if they are capable of
performing the job, unstructured interviews would allow for lower costs. In other words,
although validity is less than half as accurate for unstructured interviews its costs are
almost six times cheaper (identified in Exhibit Z4). Hiring managers should have a
general outline of question types focusing on historical situations. The best predictor of
someones future actions is their past actions. Thus, managers should ask questions about
how the interviewee reacted to something in their past. Specifically, certain questions
may focus on how someone acted in a leadership role in the past.

With an understanding of the candidates experience and behavior, those who successfully
interview will move on to taking employee tests. The firm should pose a personality test,
reference check, and educational background check. A personality test would test for
construct validity, or in other words, if the interviewees behavior would fit what is
necessary to perform the tasks assigned. For example, this test would try to determine if
the candidate would be an easy colleague to work with on the production lines. Because
work on a production line is mostly hands on, it is not necessary to use a mental aptitude
test. Lastly, a reference check should always be done as the opinions of past co-workers
and bosses about the candidate could be helpful in our decision. This method attempts to
identify if the candidates job behavior is in line with the firms expectations, also known

as criterion-related validity. This evaluation method can be biased so it is important to get

multiple inputs but usually this method only turns up important negatives about someone.
Based on our return on investment approach to hiring, we have minimal content validity
checks to make sure the employee can actually perform on the production floor.

Again, a standardized selection system will drive recruitment across all four plants
consistently. We feel the elements chosen are the most effective considering the cost and
scope of our recruitment. Proper selection of recruitment sources and collection of basic
information allow hiring managers to select the best candidates to move forward with
interviews. Our choice to use structured interviews allows a well-rounded understanding
of the candidates behaviors. Coupled with the appropriate employment test, we have a
comprehensive picture of the potential candidate and can make a hiring decision based on
need and fit. After a decision is made, we can notify the employees we offered a position
to and proceed to the next steps of bringing in a new employee.

Organization Culture Design

Organizational culture describes the collectively shared values and norms of its members.
In other words, its the personality of the organization. As Moon Springs creates a new
identity, a mission culture best supports its aspirations for the future. The beverage
market is a relatively stable one, so this compels firms like Moon Springs to maintain
consistency. As a beverage company, Moon Springs focuses on providing a memorable


experience to the customer, rather than a focus on low cost, the firm focuses on
differentiation with innovative beverages.

The key to a mission culture is a focus on striving to achieve a larger vision, and
achieving company goals. Considering the Moon Springs mission statement, the
company aims to deliver high quality products, build strong relationships with customers,
and follow ethical practices. This drive for success will come from our employees strict
moral codes as well as creative ways to innovate the company.

We have identified some shared values for Moon Springs that can help shape the new
corporate identity by instilling cultural changes:

Give Sustainably, Take Responsibly - In every deliberation we must consider the

future impact of our decisions. We work with suppliers to improve environmental
performance, extending responsibility up the product chain and down the supply
chain. We are individually accountable and collectively responsible.

Act with Integrity - We conduct all matters of business with integrity. We firmly
believe honesty, truthfulness, and sincerity cultivate the healthiest relationships
and connections with customers and society. The time and effort put into every
product is true to our mission of delivering a premium product in an ethical


Commitment to Innovation and Excellence - We persistently seek improved

methods of providing our premium beverages. We see excellence as a
professional journey of continuous improvement and learning.

Produce Safe, High quality and Nutritious Products - To uphold our reputation for
admirable quality achieved for a quarter century, we set high standards. Our goal
is to produce and sell the finest beverage products with all-natural and nutritional

Support Team Member Happiness and Excellence - Our success is dependent

upon the collective energy and intelligence of all of our team members. We strive
to create a friendly and exciting work environment where people aspire to work
and build long-term careers. We appreciate employee effort and reward results.

Strong cultures emerge when the companys core values are widely shared among the
firms employees and when norms have been internalized. Every organization has a set of
beliefs, or norms, that guide day-to-day interactions and processes. We identify certain
norms that are consistent with our new identity below:

Quality over Quantity - Moon Springs products fill the high-quality end of the
soft drink market and command a premium price. Favoring quality over quantity
will increase the companys reputation and product loyalty.

Ethical Conduct - Individuals or groups make decisions within an organization,

but these decisions are influenced by previous norms or by managers. The
decision to behave ethically is a moral one; employees must decide what they feel


is the right course of action. The goal is for our culture to instill a quality moral
compass leading to better judgment from employees.

Sense of Appreciation Hard work is recognized and rewarded at Moon Springs.

Managers must focus on developing a learning organization, where the firm
expects people make mistakes but those mistakes offer learning opportunities.
When offering feedback, we always present positives at length before offering

Organizational change must be managed properly in order for successful changes to take
place. Employees may not welcome sudden changes, as they fear possible negative
aspects of changes will affect their jobs. In order to mitigate this fear, we recommend a
three stage Model for Planned Change.

The first stage, unfreezing, begins the change process by creating motivation. Leaders
may create a sense of urgency, compare against competitors, and justify the need for
change. This push is required by leaders at the firm because there will be forces against
change in an organization. Employees may have well-learned skills, and may be
complacent in light of changes ahead. Others may fear possible personal losses because
of changes in their role. In the case of Moon Springs, leaders must convey their goal to
increase market share through Luna2, and even further down the line use momentum from
Luna2 to hold position until the next project. With a mission culture, Moon Springs
employees adopt views structured by the company and its mission statement. Thus,
motivating employees should be done through an enthusiasm for the new premium

coconut water beverage launch and the possible positive effects of the company that may
result. This requires a deep understanding of the structure of the company, specifically
how the parts all work together, and the types of interactions between employees. It is
key for management making the change to understand these issues so they can identify
rifts in the company and bridge the gap before it becomes too great. In different terms,
people may cling to past success, or are just not flexible. This is why it is key to
communicate changes and to guide employees that may have issues with change.

The second stage, changing, entails the installation of new models and norms, as
employees learn the new firm views. It is important for Moon Springs to stay attentive in
this stage of change as some employees are not ready for change. Constant monitoring of
the changes and feedback from employees is crucial to executing the entire change. Tools
that may help in the change process can be tangible rewards such as monetary incentives
or intangible rewards such as positive recognition of an employee from executives. As
mentioned earlier, implementing a pay for performance plan such as a three tier Merrick
structure would encourage employees to work harder for higher pay. We believe the
addition of a Scanlon pay plan would also help employees see the value in the new
company identity as it also increases employee pay. These two tangible rewards will
encourage employees to accept the new company culture. Also, it is difficult to overhaul
a company with change in a short period of time. This is why its important for the firm
to generate short-term wins in its journey of organizational change. One such suggestion
could be rewarding employees who are starting to embody the new company values.


Small rewards can uphold motivation in times of change; soon enough, many short-term
wins will lead to the final change first envisioned.

In the last stage, refreezing, the organizational changes are embodied in the company.
At this point, the goal is to sustain changes. In order to do so, the firm must continue to
focus on the training of employees in the new values and norms at the company. Moon
Springs new mission statement is the core form of what we want new employees to look
like. This way, the changes made are not temporary but rather instill a new culture at
Moon Springs.


Management Appendix (Z)

Financial Performance

Revenue growth impacts

bottom line, thus leading to
greater shareholder

Double revenue in the

next year through the
launch of Luna2 project.

Exhibit Z1: Balanced Scorecard

Maintain stable risk
levels across the firm
through the launch of
Luna2 project.

Keep cost of capital down,

so that Moon Springs may
continue to invest in
profitable ventures in the

Customer Experience
Increase customer
retention rate by
offering an alternative
to other Moon
Springs products.
Reach market share of
5% in coconut water
market with Luna2.

Internal Business Processes

More options allow
customers to stick to
the Moon Springs



Increasing market
share allows
customers to feel
stronger relationship
with the company.



Continue to uphold
strengths in supply chain
management and

National awards lead to

recognition and superior
perceived brand value.

Maximize profit by using

capacity levels that can
handle unseen demand.

We will always be able to

supply a customer with
our product.

Learning and Growth

Reduce employee turnover
rate by 3% for all four plants
by creating an incentive
program and improving
employee engagement.
Standardize hiring procedures
to increase worker efficiency
across all plants, to 90%

Decreased turnover leads to
lower training costs, and
higher employee efficiency
as a result of experience.
Standard hiring procedures
allow for more consistent
recruitment, leading to
improved talent acquisition.


Exhibit Z2: BARS Example

Exhibit Z3: Yield Ratios and Efficiency for Recruitment Sources

Exhibit Z4: Testing Costs

Exhibit Z5: Validity of Testing Options


Assessing the Market: Overview and Analysis of the Current Competitive Situation
Over the past five years, Moon Springs Luna enhanced coconut water drink has been quickly
establishing a foothold in the second tier of the coconut water market. From 2008-2013, Lunas
relative market share (market share relative to that of the products largest competitor) went from
15.38% to 74.29%, representing a growth of roughly 80%. The new product penetrated the
existing second tier market well, increasing in relative market share by 52.6% from 2008 to
2009, and 36.9% from 2009-2010. Growth has slowed recently, with an average increase in
relative market share of just 1.6% in the last two years, which is an understandable trend for a
newly launched product. At the end of 2013, Luna had the lowest revenue market share amongst
second tier coconut water beverages. However, this drink showed the largest growth in overall
revenue market share over this five year period, exceeding the growth of the other newly
introduced beverage in this market (Naturo) by 5.5%. At year-end in 2013, Luna held a revenue
market share within the second tier of 21.67%.

Compared to the competition, Luna has shown some promising growth. As stated above, Luna
has had the largest percent increase in revenue over the past five years. Naturo, the drink that
was launched at the same time as Luna in 2008, was able to penetrate the market much better
early on, leading to their 116.67% relative market share amongst the second tier in 2013. It is
readily apparent that Naturo was able to gain more traction in the market. We spent a large
portion of our analysis on Exhibit 2, which outlines Lunas price and attributes as well as those
of the two competitors CMO Tommy Ming has focused most closely on: Naturo and Vibe. Luna
clearly represents a premium product within their market, evidenced by their comparatively high


price point. By analyzing the difference in respective product attributes and target segments
between Luna and Naturo, we are able to conclude that Naturo achieved better sales over this
five-year period by appealing to a broader market segment with their product namely athletes
and college students. This will be an essential distinction as we move forward in differentiating
the perception of Luna2 and positioning Moon Springs newest product to succeed in the market
given the customer segments that we hope to target.

Fortunately, we believe Luna2 is well suited for a broader customer base than was achieved with
Luna. This new drink variation will be able to capture this segment by offering a premium
beverage with all of the energy benefits of the original Luna drink, and adding healthier
ingredients and natural flavors. So far, Luna has been competing on the advantage of quality and
healthiness, however it does not seem as though the customer has been as receptive to the
brands efforts to differentiate itself, as evidenced by the higher sales of its competitors. The
additions to Luna2 will allow the brand to compete on quality more effectively. The advantage of
Luna2 over Naturo and Vibe in this market can be visualized through the use of the perceptual
map we have constructed. For the coconut water market, we determined the most important
beverage attributes to our target consumer are price and health benefits. Price is easy to graph on
the perceptual map, and our map clearly shows that Luna2 is a premium product compared to its
second tier market competitors on the basis of reference pricing. In order to chart health benefits,
we assigned each drink a health score from one to three based off their respective attributes.
Luna2 has the lowest sugar content and the best added ingredients (additional calcium and
antioxidants) and has an assigned score of three for both of these categories. The drink has the
second highest potassium content, and thus has a rating of two. We use the same process with

Naturo and Vibe and sum the individual attribute scores for the respective drinks, and use this as
the X criteria for our perceptual map. Additionally, the relative size of each respective bubble
represents the revenue market share each brand holds. These results can be viewed in Exhibit

With the launch of Luna2, the hope is that the Moon Springs Brand can further penetrate the
coconut water market and gain some market share from its largest competitor, Naturo, as well as
the market share of its other second tier competitors that have stagnated or declined in terms of
revenue market share growth recently. With effective consumer relationship management, Luna2
will allow Moon Springs to acquire new customers while at the same time strengthening their
relationships with existing ones. In doing this, the company will be able to capture more
customer lifetime value from their markets.

The value proposition for Luna2 is similar to that of Luna, but with added health benefits. This
new beverage provides all of the energy benefits of the original Luna premium coconut water
beverage with increased health benefits from additional calcium and antioxidants. The
competitive advantage of Luna2 over its competitors is that it offers the highest quality coconut
water on the market, justifying its more-for-more value proposition.


Segmenting the Market and Targeting Consumers

With Luna, Moon Springs Beverage Company pursued a segment of the existing coconut water
market that desired a trendier, premium product image. More specifically, Luna targeted working
professionals over the age of 23; this demographic was already a strong purchaser of Moon
Springs products. Based on the information available in the case, we are given a fairly specific
idea of the segments that seem appropriate for Moon Springs to target with their Luna2 enhanced
coconut water beverage. To start, Moon Springs should widen the target age demographic to
include college students. In Moon Springs earlier targeting practices with Luna, they
specifically targeted working professionals aged 23 and older. This may have caused the
company to pigeonhole themselves with regard to Luna, making it seem like a niche product.
Further, we believe that part of the reason that Naturo has received better market traction than
Luna from their respective launches is Naturos heightened focus on the 18-22 year old

Additionally, Moon Springs would be well advised to also pursue athletes, as Naturo has. One
of coconut waters paramount benefits to the consumer is hydration, a characteristic necessary
for athletes. By not marketing towards this large consumer base, potential customers who live an
active lifestyle will seek out alternatives to Luna and Luna2.

It is important to note that college students tend to have some of the same needs as working
professionals in that they both are often looking for energy beverages to help them in doing
mental work for long hours. Marketing strategies that create need recognition for both of these

segments will be important. In past years, when they did not target college students, Moon
Springs aged their product, making customers perceive it as a drink for older people and adults.
In their marketing efforts going forward for Luna and Luna2, Moon Springs needs to focus on
making their beverages appeal to a younger demographic without losing sales from the 23+ year
olds they have already had success with. From this, we can determine that our target segments
moving forward will focus on, but are not limited to, athletes, students, and working
professionals, aged 18 years and older, who are seeking a healthy, high quality coconut water
drink with natural ingredients, and low sugar content. These psychographic segments will help
guide us in the rest of the IMC strategy.

By stretching their Luna brand up vertically with the introduction of Luna2, Moon Springs will
be able to reinforce the perception of their coconut water offerings as the premium options in
their market. Further, Moon Springs is able to more effectively leverage their marketing
communications; the idea that the Luna2 brand is will be reinforced to customers through other
IMC efforts, as they have already attached a premium connotation to this brand1. With this
determination, it is important to position the Luna2 brand as accurately as possible to ensure
Moon Springs correctly and efficiently engages its target segments with consistent IMC
strategies. Our consultation advises that a positioning statement for Luna2 should be similar to
the following: Moon Springs Luna2 enhanced coconut water beverage is the healthiest and
highest quality coconut water on the market, featuring the best ingredients available and ensuring
a consistent experience that will always leave customers satisfied.

Davis, John A. "Stretching a Brand Vertically." Competitive Success: How Branding Adds Value. West
Sussex: John Wiley & Sons, 2010. 76-79.

Setting the Best Price for Luna2

In order to set a price that will be an accurate predictor of future sales, and more importantly,
generate the most revenue for Luna2 while maintaining its image as a premium product, we need
to run a regression analysis on the data provided in Exhibit 3. First, we determine the three
factors that could possibly affect overall units sold in each test market: number of households,
IMC, and price. Our reasoning behind choosing these factors is rather simple; obviously one
would expect sales to be higher in a market with a higher population, and we would hope that the
companys IMC efforts would also increase sales somewhat based on the amount of IMC they
deployed in the market. The most difficult part was determining how price would affect the
bottom-line sales in each of these markets.

We decided to run four regressions on the four segments of test market data that we gathered. So,
a separate regression was run for the split of the cities that had a price and IMC CPM of $2.69
and 50 respectively, $2.69 and 200, $2.87 and 50, and $2.87 and 200. We graphed our data based
off of the number of households for the city split (X), and the units sold for the corresponding
test market (Y). With this, we are observing how population influences units sold because we felt
that population would be the largest determining factor in units sold per test market. Further, we
calculated the r-squared (coefficient of determination) for each set of data to determine the
tightness of regression. Simply put, the r-squared calculation gives us a percentage of the amount
of variation from the mean of the data points in Y can be explained by their corresponding Xvalue. The results of our regression can be found in the marketing Exhibit M2.


Our regression shows us that the $2.69 price under both IMC levels has the clear advantage in
terms of unit sales when compared to the $2.87 price at the same IMC. However, the $2.87
seems to be the more reliable predictor of sales, with 90% of the variation explained for the
$2.87/50 level and 62% for the $2.87/200 level. This r-squared value for each $2.87 pricing
strategy is 5% higher than the corresponding $2.69 level. Further, there is a difference of 18% in
r-squared values between the different IMC spending strategies under the same price. To explain
why the difference in these numbers, well have to do some mathematical reasoning.

As we explained earlier, the r-squared calculation determines the percent of variation in Y, which
is explained in the variation of the corresponding X-values. Thus, one minus r-squared will give
the percentage of variation that is not explained by the two variables graphed: this percentage is
described as a measure of noise. We also mentioned earlier there are three potential factors that
could influence sales (number of households, price, and IMC level), and we are already
accounting for one of those factors (number of households) in the regression graph. From this,
we can deduct that price and IMC levels make up the noise in our variation between Y-values
and corresponding X-values.

Let us first explain the 5% difference in r-squared between prices $2.69 and $2.87 when IMC
level is the same. By analyzing the difference in r-squared under the same IMC conditions, we
are able to isolate the amount of variation in units sold that can be allocated for the different
price levels. In essence, this difference is saying in the test markets, customers are willing to
purchase 5% more erratically than one would predict given the regression at a price of $2.69

versus $2.89. The same holds true when isolating price and examining IMC levels. One would
expect increased marketing communications in a test market to increase sales in that market, and
this creates more noise in our regression that is not accounted for solely by the difference in
number of households.

Another statistical consideration that should be noted from our regression is the presence of
outliers. In all models of our regression, the Portland, Oregon test market performed particularly
well. Demographic analysis of this region may allow Moon Springs to get a clearer picture of
the customers that are most receptive to Luna2. Also, the company may want to consider
geographic pricing differences to obtain more revenue if they find more outliers like this persist
in other markets.

It is essential to choose the correct pricing strategy in order to deliver maximum sales for Luna2.
When choosing between market-skimming pricing and penetration pricing as a new product
pricing strategy for Luna2, the choice is clearly skimming. We chose skimming because Luna2
represents a premium product with a high quality performance and image. A premium price at its
launch will reinforce this and Moon Springs will be able to capture large margins. Thus, to
generate initial sales of Luna2, we recommend that the beverage be priced high relative to its
competitors. More specifically, we believe that the price should be higher than the $2.69 test
price, but a bit lower than the $2.87 point. We believe this because the higher price will allow for
a better predictor of sales moving forward, which is very important in a coconut water market
that has been characterized as uncertain. However, it is clear from the data in Exhibit M3 the

lower price produces more units sold over the course of testing. A price at or near $2.80 would
provide for favorable results for the company. At this price point, the company will be able to
generate high initial sales from customers who are willing to pay a premium price for a premium
product. This high price will also generate market interest and hype, leaving our target segments
to wonder why Luna2 is priced so much higher than other available option, leading to purchases
as they wish to find out what level of additional utility they can get for this price. Then, by
gradually moving the price down over time and settling at $2.69, Moon Springs will be able to
obtain the maximum amount that each customer segment is willing to pay as the product
matures, moving along from the early adopters through the late majority. They still retain the
customers that were already willing to pay a premium, but over time, capture more customers
that were not willing to pay such generous prices for a soft drink.

Most Effectively Marketing Luna2

SWOT Analysis of Luna2
Before we make any recommendations for Luna2s marketing plan moving forward, we found it
important to create an analysis of the strengths, weaknesses, threats and opportunities (SWOT)
for Moon Springs to consider with this new product launch. While the outlook for this product
does seem positive, some market factors that may shift in the near future will require some level
of monitoring by Moon Springs to ensure the companys success in the years after launch. The
list below outlines our considerations, which should allow the company to anticipate any
developments that may impact their decisions and strategies down the road:


o Luna brand is already perceived by the target market segments as high
quality, evidenced by the success of the brand in the years following its
o Luna2 will represent the healthiest and highest quality coconut water on
the market
o Award winning distribution channels:

Moon Springs already has its own bottling plants and distribution
fleet that is fast and highly reliable

Strong relationships with retailers and wholesalers have already

been established

Moon Springs has a strong corporate image that resonates with its

o Coconut water market is highly consolidated and growth projections for
the next five to six years are highly scrutinized
o Moon Springs currently does not come close to meeting the labor
requirements to keep up with projected demand for Luna2. Hiring and
firing costs of acquiring a large enough workforce for this short-term
project will be large
o The Big 2 firms have a high level of brand insistence amongst their
customers, so Moon Springs will not be able to improve their market share
by capturing the customers of these firms


o Annual demand growth for Luna2 over the next six year is projected at
6%, with growth in the overall market projected at 9%
o Advertising efforts can have a large net influence on gaining more market
share due to the companys current standing as one of the smallest in the
coconut water market
o This short-term project helps stimulate what were previously stagnate
sales amongst other Moon Springs products, building brand equity and
bridging the gap between the companys recent slow period and the plans
they have for the future

o With a more-for-more value proposition in a market with low barriers to
entry, Luna2 may be vulnerable to new products that claim the same
quality levels at a lower price
o There is much speculation about the future of the coconut water market.
Demand projections are unusually high in the short time, so management
must be careful not to allocate too much focus on the future of this brand
if signs are indicating coconut water to be a fad

Macro Analysis of Effective Marketing: Setting Goals, Objectives, and Strategies

When determining an integrated marketing strategy for Moon Springs Luna2 launch, we first had
to assess which promotion mix strategy would be most effective for this premium product in the
competitive coconut water market. A very interesting piece of information provided to us comes

in the The Soft Drink Industry portion; it reads, In the U.S., soft drink products are not simple
commodities but rather they are lifestyle products in that an image and an experience are being
sold to the consumer To gain even a foothold in this market, a firm must establish some
manner of brand identity and brand appeal amongst consumers. With this information in hand,
it is clear that a pull promotion mix strategy in which Moon Springs directs its marketing efforts
directly at consumers would be most effective in creating a strong brand identity for Luna2 and
increasing sales over time.

The most important marketing communications that will drive up initial sales of Luna2 are
advertising, public relations, and digital media. We will go into more detail about leveraging the
companys digital media efforts later on, but for now we will focus on how Moon Springs should
best use macro-level marketing strategies to reach a broader target segment than they have
previously for Luna.

The effectiveness of Moon Springs advertising strategy for Luna2 may be the biggest
determinant in whether or not the product will gain traction in the market early on and increase
the brands market share of coconut water. We would expect advertising, if done well, to be
more effective for Luna2 than it might be for other competing brands because of its current
revenue market share, which is very low. Further, advertising will represent the largest portion of
the companys marketing budget, so getting the message across the first time will be very
important so the company does not go over budget and dip into its profit margins. At this point,
in the relatively mature and consolidated coconut water market, the consumer has some general

knowledge as to the benefits of coconut water, so it would be ideal to utilize persuasive

advertising objectives. More specifically, the goals of the advertising strategy will be to enhance
the brand image and reinforce quality perceptions associated with the Luna product line, build
brand preference for current Moon Springs and Luna consumers, and to convince customers to
promote the product to their peers. Depending on how competitors react to the launch of Luna2,
Moon Springs may want to start developing a preemptive comparative advertising strategy to be
deployed in the future. One potential issue with the Luna2 more-for-more value proposition is the
barriers to entry for the coconut water market are relatively low, thus, a competitor may also
choose to stretch their brand vertically, and promising comparable quality levels at a lower price
than Luna2. Moon Springs must be ready to defend Luna2 as the highest quality enhanced
coconut water on the market. Also, this advertising strategy can be used to steal sales from other
functional beverages like sports drinks and energy drinks by informing the consumer the
advantages of coconut water over these products.

Public relations should be emphasized in the time leading up to and following the launch of
Luna2 to ensure a high level of product publicity and to raise consumer awareness and interest.
Moon Springs digital media accounts should be pushing news and events related to coconut
waters many benefits. Due to its affordability, PR can provide a cost effective way to create a
period of increased consumer curiosity about coconut water for those who are not already
purchasers of the product. This PR strategy should be timed well to coincide with the launch of
Luna2; as potential customers become more and more interested in including coconut water in
their lifestyle, they will be reached by the advertising efforts of the newest, highest quality


coconut water on the market in Luna2. By using public relations in this manner, Moon Springs
can attract new customers more quickly after the product launch.

Finally, the integrated marketing efforts and launch of Luna2 need to be timed well to coincide
with increased customer demand for the product so Moon Springs can quickly infiltrate the
market with sales. From our judgment, we have determined the best time to launch Luna2 would
be in April. As temperatures start to rise and summer approaches, consumers will be looking for
refreshing and healthy soft drink options to quench their thirst and keep trim for bathing suit
season. At this time, Luna2 will have the most utility and value to consumers compared to any
other point during the calendar year. Thus, a spring launch with increased marketing frequency
leading up to the products launch and carrying through the summer months will help Luna2 grab
a larger revenue share in the coconut water market.

Successful Strategy Implementation: Reaching Target Market Segments

Before we get into more specific targeting strategies for our marketing efforts, let us review what
we have determined so far:

With Luna2, we have advised that the target market be expanded to include customers
aged 18-22, college students and athletes, and the trendy, upscale working professionals
at which Luna was targeted

Luna2 possesses a more-for-more value proposition with a unique selling proposition that
highlights its quality and health benefits over competitors


It would be most beneficial for Moon Springs to use a pull promotion mix strategy with a
focus on advertising, public relations, and direct communications with digital media

These factors will serve to guide the implementation of specific marketing strategies moving
forwards. The key to Luna2s IMC will be demonstrating how the product can demonstrate value
for the consumers in their target segments, resulting in value being captured by the company
from those consumers.

First and foremost, the advertising plan needs to effectively engage our target market segments.
Achieving this starts with a great message strategy. For Luna2, the general messages we will be
communicating to potential customers are the quality and health benefits of the product. The
advertisements should contain a straightforward message that reinforces the products value
proposition and unique selling position that we have outlined.

As far as creative concepts go, the big idea that makes the advertisement and product stick in the
consumers mind will ultimately be up to whatever branding agency or in-house marketing team
Moon Springs chooses. Be that as it may, we have a few specific considerations that should be
noted when deciding on how to execute this message. A creative message that features a lifestyle
format would do particularly well to meet the needs of communicating Luna2s value to its target
segments, especially because soft drinks are lifestyle products and we have implemented
psychographic segmentation. The consumer can more easily visualize how Luna2 can fit into
their everyday lives if they are able to see an example. Further, a celebrity endorsement may
provide for a more memorable message while also attesting to the quality of the beverage. When

considering which celebrities to use in Luna2 advertising, one must keep the target segments in
mind. Professional athletes, famous business people, and intellectuals would all be great
candidates to use in a differentiated marketing strategy for the product by addressing the target
segments more succinctly. Regardless of the specifics as to how the Moon Springs team
ultimately decides to advertise, we would like to stress that the advertising appeal must highlight
the desirableness and benefits of Luna2, be believable to the target audience, and demonstrate its
distinct advantage over other coconut water drinks. Also, all advertising efforts should have
consistent semiotic components that easily allow consumers to associate Luna2 with healthiness
and quality. The same way Luna2 separates itself from competitors on the basis of quality, the
products advertisements should have high quality artistic aesthetic that sets them apart from the
marketing efforts of the competition.

Public relations will be crucial if Moon Springs hopes to attain a high level of traction for Luna2.
The goal of the public relations strategy should be to generate public awareness about the launch
of Moon Springs most recent product, as well as educating consumers as to the health benefits
of coconut water and Luna2s additives. According to focus group studies provided to our
consulting team by Qualitative LLC2, a recurring trend of minimal knowledge and lack of
awareness was present amongst the test subjects2. They said things like, antioxidants are
flagged on some food I eat but I do not know what that really means, and, Ive heard the word
antioxidant but I dont know why I should buy a product with that. Continuing, test subjects
cited that a reason why they do not choose to drink coconut water is due to a lack of awareness.

Qualitative LLC held a series of focus groups in November 2014, involving various populations ages
20-39 represented within an urban population. Through the focus groups, Qualitative gathered
information to help management determine interest in a new product.

With a well-organized and far-reaching PR strategy, these questions can be answered, these
problems can be solved, and Luna2 can acquire more customers, once these customers realize
what kind of value Luna2 adds to their lives. To do this, wed recommend emphasizing the use of
digital media social media accounts and the company website as an extremely cost effective
way to get specific information about the health traits of the product to the consumer base. Blog
posts and news articles that touch on the benefits of coconut water or other health trends related
to calcium and antioxidants should be circulated frequently on Luna2s Facebook and Twitter
pages. For the Luna2 website, blurbs and testimonials that speak to how healthy the drink is
should receive prominent focus. Market assessments have indicated that high transparency with
regard to ingredients and health effects is very important to consumers. Moreover, in the pre and
early stages of launch, branding elements and informational resources for the customer should be
very prominent. To assist in the design of Luna2s website, we have provided the following web
layout as a general guideline to follow. The key to the brands site will be to align with the image
we have painted for the brand so far, so a high quality design with natural colors is necessary.
Our web design outline can be seen in Exhibit M3 below.

As for the drinks digital media strategy, we think that it would be wise to incorporate elements
of the previous marketing communications strategies in order to reinforce a consistent message
to the consumer. The key to using digital media as a marketing strategy is to create a two-way
conversation with individual consumers in the target market. With the advent of social media,
marketing strategies have shifted from trying to reach as many people as possible with
broadcasting, to having more meaningful, specific interactions in narrowcasting. Unfortunately,
many companies products use digital media to talk at their customers, as opposed to with them.

The latter is much more beneficial for consumers, the companys brand identity, and the
companys bottom line. The biggest challenge in starting this conversation is producing highly
actionable content to which the consumer is willing and able to respond back. With Luna2, the
solution to this problem can be found in using celebrity endorsements once again. Highly likable
individuals with a large online following are able to generate massive responses from their fans
and potential Moon Springs customers with their posts on Twitter, Facebook and Vine. Moon
Springs should find celebrities with images that align well with the brand to start an online
campaign in which they explain why they enjoy drinking Luna2. These efforts can be assisted by
a hash tag that encapsulates the brand, and Moon Springs on your side motto is a perfect fit.
In order to better grasp this concept, let us provide an example. Moon Springs could sponsor an
athlete with an online portfolio of followers that represents Luna2s target segments (trendy, upscale, 18+ years old, athletes, college students, and working professionals). A professional golfer
like Rickie Fowler, the 25 year old, world ranked American with over 800,000 Twitter followers,
might do well for these purposes. During a major tournament with high publicity and online
buzz, Fowler would send sponsored tweets explaining how Luna2 is #OnYourSide when he
drinks it before or during a big performance, and also urge his followers to tweet about how it
helps them. Now, this is of course a hypothetical situation, but the merit of the idea remains, this
is a relatively cost effective way to quickly and selectively reach Luna2s target segments.

Consumer perception of the Luna2 is also heavily dependent on the products design and
packaging. With an eye-catching design that sets itself apart from the other products on the
shelves, consumers will instantly associate Luna2 with quality. Although Moon Springs has
consulted a Chicago company to design Luna2, we took the liberty of drafting up our own design

as a reference, which can be seen in Exhibit M4. By using a flashy design with a modern
typeface and natural colors, we believe the exterior is representative of whats on the interior.
Other consideration for product capabilities that Moon Springs may want to introduce is varying
flavors for Luna2. Focus group results have shown that customers either like the coconut flavor
but would like some sort of variation, or they do not like the coconut as a stand-alone flavor and
would like some sort of fruit flavor to go with it. By appealing to these requests, wed hope that
Moon Springs can appeal to even more customers with Luna2.

Luna2s Value Delivery Network

One of Moon Springs biggest strengths is its highly efficient and reliable distribution network
that rivals the Big 2 firms in the coconut water market. In the past, having their own bottling
plants and distribution fleet has allowed the company to deliver its products reliably, while also
creating brand value through public relations with its exceptionally clean and well-branded
trucks. With Luna, Moon Springs opted to implement a selective distribution strategy where the
use of intermediaries was somewhat limited. This seemed to bode well for the brand: Moon
Springs was able to establish strong connections with its brokers and retailers through a multichannel distribution network. Now that Luna is a mature product, Moon Springs should start a
more intensive distribution strategy in order to prevent decline in sales as the product saturates
the market. Good relationship with retailers and brokers will be very important for Luna2 as it
may be difficult to convince some smaller, locally owned businesses to carry a product that is
priced as high as Luna2. It may also make sense for Luna2 to add another intermediary in a
merchant wholesaler because of the extremely high demand projections we have analyzed for


this project. By selling to larger merchant wholesalers, Moon Springs can save some room in its
warehouse, lower holding costs, and save on transportation costs by working with wholesalers
that are more spread out than the Moon Springs facilities. A pitfall to adding more intermediaries
in Luna2s VDN is that it can sometimes create tensions between different retailers or
distributors. In order to have a supply chain that runs as smoothly as possible, Moon Springs
must clearly describe the requirements and responsibilities of each channel member.

When considering whether Moon Springs should implement direct sales to the consumer via the
Luna2 website, our consulting team believed that this strategy would not align with the
companies integrated marketing communications strategy. This comes back to the drinks
perception as a premium product; it would be best to focus on pushing Luna2 to high-end and
local retailers that we have already worked with, at a higher price point. By doing this, Moon
Springs is better served to increase brand equity. Additionally, the website should not be used for
large distribution to wholesalers and retailers. As stated earlier, Luna2 is best served with a
selective distribution network, and if we allow any wholesaler to buy this product we will lose
the advantage of this strategy because any retailer can decide to carry the product. We believe it
would be best not to complicate a process that has worked so well for Moon Springs: the
company should stick to its traditional intermediaries and avoid muddling the network with a


Moon Springs should be able to use the short-term product launch of Luna2 to establish effective
long-term personal selling relationships. The purpose of Luna2 is to bridge the gap between
Moon Springs current trend of slow sales, and how they hope to expand to the future. Looking
to the future, they will need strong personal selling techniques and relationships that are built up
with experience. The only way to improve the companys personal selling relationships is with
time, so Moon Springs needs to start focusing on doing this now so they can be well equipped
with a wider range of strong relationships with retailers as they continue to expand. The same
can be said for the companys integrated marketing communications strategies for Luna2: it is
vital for Moon Springs to gain experience in segmenting, targeting, differentiating, and
positioning it brands and to build profitable relationships over time.


Marketing Appendix (M)

Exhibit M1: Perceptual Map



Health Benefits

Potassium Sugar









Exhibit M2: Price Regression Analysis

$2.69 Price, 50 IMC
Units Sold




Linear (Series1)


20,000 40,000 60,000 80,000 100,000

Number of Households

$2.69 Price, 200 IMC

Units Sold




Linear (Series1)


20,000 40,000 60,000 80,000 100,000

Number of Households


$2.87 Price, 50 IMC

Units Sold




Linear (Series1)


20,000 40,000 60,000 80,000 100,000

Number of Households

$2.87 Price, 200 IMC

Units Sold




Linear (Series1)


20,000 40,000 60,000 80,000 100,000

Number of Households

R^2 Calculations









Exhibit M3: Website Outline



Exhibit M4: Can Design


Moon Springs Operations

In the past, Moon Springs has had strong operations, winning national awards for supply chain
and distribution management, which have allowed it to produce and distribute its products with
as much ease and efficiency as the Big 2. Moon Springs strengths in the past have been its
supply chain management and going forward we would like to see that it remains a strength of
the company as it rolls out the new Luna2 product. In order for this to happen we must analyze
the schedules associated with the new project, equipment decisions, supplier advantages and
disadvantages, capacity planning requirements, and the assortment of methods used to bring all
of these together into a controlled and reliable process.

Project Management Schedule

Exhibit P1 shows the network diagram, which we created based off the initial project schedule
provided to us by Moon Springs. It shows the length of the project to be 22 weeks, before any
crashing of the project occurs. The diagram allows us to find the critical path of the project, thus
finding the critical activities. In order for Luna2 to be released in time for the peak sales season
the project must be completed in 19 weeks or fewer. As discussed later, we recommend Moon
Springs use a late start and late finish schedule. For this reason we also recommend the project
be crashed to 18 weeks to allow for extra time on the chance one or more of the activities takes
longer than expected.


In order for the project schedule to have a duration of 18 weeks, we must crash the critical path
of the project which involves activities B,C,D,E,F,I,J,O,P (Exhibit P2). After reducing the
duration of activities F and E by a total of 4 weeks, the project length is reduced to 18 weeks and
the costs total $11,000. By crashing the project one more week to reduce the duration from 19
weeks to 18 weeks the cost incurred would be $3,000. We believe having an extra week to allow
for variance is worth the additional cost. Our reasoning is the opportunity cost of missing out on
a portion of the peak sales season and losing potential demand is far greater than the $3,000 cost
to move the completion of the project forward to 18 weeks. While there is only a one-week
difference in the timing of the project, we feel the extra week can allow for minor changes and
improvements in the systems to better help Luna2 have a successful launch.

Looking more in depth at the activities, we realized there are two that require a major capital
outlay. Due to these major capital outlays, we recommend Moon Springs use a late start and late
finish schedule to delay the major spending as much as possible. The reasoning is two-fold; one
being Moon Springs is able to avoid having extensive capital tied up throughout the project, and
secondly, from a shareholders perspective, they would rather see immediate returns after such
an extensive capital investment.

By using the late start and late finish schedule, the activities

with major capital outlay are finished just a few weeks before the project is complete, so there is
a relatively short time period after the major capital investment and the time in which the project
starts generating revenues.


Despite delaying the start of certain activities, the project will still take no longer than the
expected time it would take if Moon Springs uses an early start and early finish schedule. The
duration, after crashing, will be 18 weeks regardless (Exhibit P5). We simply believe the late
start and late finish schedule provides more benefits than using an early start and early finish

Equipment Decision
The decision tree in Exhibit P6 displays the three possible scenarios presented to Moon Springs:
purchase the equipment, add modifications in-house, or hire and engineering firm to add the
modifications. Option A represents the purchasing of the equipment with an expected cost of
$575,000. Option B represents Moon Springs modifying the equipment in-house, which has an
expected value cost of $620,000. The last option, Option C, represents modifying the equipment
using an outside company, which would net an expected cost of $574,750.

After analyzing these three possible equipment decisions for Moon Springs, we find the lowest
expected cost is Option C, modifying the equipment using an outside firm. Although this would
provide the lowest cost for Moon Springs, we would recommend purchasing the equipment for
the additional $250. Purchasing new equipment provides the company with benefits such as
having the ability to produce a higher capacity, as well as being able to quickly change the size
from one drink to another. Since this is the main issue on the current equipment, we feel these
additional benefits definitely outweigh the small additional cost of $250. With this decision
made, we look to the future and longevity of Moon Springs; the equipment purchased will

greatly improve Moon Springs processes and increase productivity through the operating years
of Luna2 and after.

In addition, the flexibility provided by purchasing the equipment allows for easier change in the
future. Our marketing research shows in six years the coconut market is expected to drastically
decrease and a new product will start taking over. Due to this change in the market, it is very
likely that Moon Springs will be altering its products in order to be competitive in future

Evaluating Suppliers
When looking at order policies from the three different suppliers, our main focus is on finding
the reorder points, economic order quantities, holding costs, setup costs, and purchasing costs
associated for each of the next six years (Exhibit P7). The setup or ordering costs vary from one
supplier to the next, as did the holding costs. Though, in order to determine the annual holding
cost per unit, we use the cost of capital of 14.1%, given by our finance team. After completing
these calculations, we find the total costs for all six years for each supplier. At a glance, this
information shows BioOpt would be our cheapest supplier, followed by So-Natural, with the
most expensive being Organic Arc. Based on this first look at the holding costs, setup costs, and
purchasing costs, we recommend BioOpt be the supplier of proprietary antioxidant compounds
for Moon Springs, as they are least expensive by roughly $2 million as compared to the next
lowest cost. Even though this decision seems straightforward at first, we have to delve deeper
into the data to verify these results.

We find our reorder points using the first year demand of 24.5 million units and growing at a rate
of 8%, converting the demand into kilograms to be consistent with the units in each individual
can of Luna2, and then finding the daily demand assuming a 360-day year. In finding the
standard deviation to use in the ROP formula, we use the daily coefficient of variation. We must
also take into account the coconut water market is 2.5 times the coefficient of the soda market,
which we are given. After using the reorder point formula we were able to compare our reorder
point with our previously calculated EOQ. For Organic Arc and BioOpt we find the reorder
points are greater than the EOQ for all six years, and for So-Natural the reorder points are less
than the EOQ for all six years. To gain a better understanding of how to deal with this situation
of ROP being greater than EOQ, we compare the demand during lead-time to the EOQs of
BioOpt and Organic Arc. If that demand were less than the EOQ, we would have no issues of
stocking out as long as we place the first order somewhere above the reorder point. This first
order would be a non-optimal EOQ, but would allow us to order the optimal quantity in the

After this comparison, it is clear the demand during lead-time for BioOpt is still greater than the
EOQ. Keeping in mind the fact that BioOpt has the lowest overall costs, we want to determine
an order policy to deal with this dilemma to ensure its new costs are not too high. To solve for
our initial inventory, we need to place an order so it will be received at time point zero, 21 days
before the start of production of Luna2. This order will be at the optimal reorder point of close to
1685 kilograms. At this level it will ensure we do not stock out before receiving the next


shipment. Our next order would then be placed at time point zero, the start of production. This
order would be for the optimal quantity. Due to long lead times and high demand for our
product, the ROP and EOQ concepts are slightly more challenging to grasp as time moves on
because ROP is greater than EOQ as we have stated. As a result, our inventory would never be
over the reorder point so we need to find a relevant ROP that will allow us to order the EOQ and
eliminate stock outs. We can accomplish this by subtracting EOQ from the ROP to get a new
ROP that our inventory levels will actually hit. When inventory falls below this ROP, we will
place an order of EOQ. This allows us to conclusively say when to place our next order. Based
on our model for BioOpt, year one, we would place an order roughly every fifteen days. After
the initial launch inventory falls, we receive orders every fifteen days as a result of our revised
ordering schedule. Precisely, the new ROP would be the point where inventory falls to 665
kilograms at any point in the first year. More concisely, an order will be placed for the next
shipment before the previous shipment arrives, thus ensuring that no stock outs occur.
Evaluating future years requires the same calculations but would result in a growing
manufactured ROP value for each year.

In evaluating the extra cost for BioOpts order policy, we realize the extra cost is simply the
difference in the initial reorder point of 1685 kilograms and the EOQ. This is the only additional
cost in the order policy and would not increase costs enough for us to choose another supplier
from a cost standpoint.


By calculating our lead-time cost in general, we find that the greater the lead-time, the greater the
costs. Since BioOpt has the greatest lead-time, we determine how much it will affect overall
costs. We find the cost associated with lead-time to be insignificant. Due to the price differential
of approximately $2 million with So-Natural and $4 million with Organic Arc, we would still
recommend using BioOpt from a purely economic perspective.

Supplier Quality
Taking a closer look at the samples of proprietary antioxidant compounds provided by Organic
Arc, BioOpt, and So-Natural when their individual processes were in control, as well as the
samples taken by Ms. Ryan, we are able to compare the overall quality of the suppliers
processes. By using the data provided by the three suppliers from the in-control samples, we are
able to construct a series of control charts using the limits from the in-control samples and the
raw data from the samples Ms. Ryan obtained. By using the limits and average found in the incontrol sample, we are able to judge how well the processes functions, how much variation is
present, and what kind of variation the results are attributed to, in comparison to the other
samples. Within these samples, we are looking for changes in the process mean. This will give us
a better understanding of how the processes are working and how consistent they are in
supplying the proprietary antioxidant compound.


Organic Arc
Of the three samples obtained from Organic Arc, they are all in control as shown in the control
charts for the process mean. This data shows to be a reliable measure and thus Organic Arc is a
strong choice in the quality decision.

BioOpts samples are in control for the most part. However, one sample did give us an indication
there is some special cause variation in the process (Exhibit P8). The erratic behavior displayed
in this control chart alerts us to the fact that there is definitely special cause variation in this
sample. With that being said, however, BioOpt is not ruled out of the equation because other
samples display signs of being in control.

The processes for So-Natural are clearly of lower quality than BioOpt and Organic Arc. Two of
the four samples display clear signs of special cause variation (Exhibit P9 A, B). The first chart
displays signs of being out of control because of the eight consecutive points above the line near
the end of the chart. This gives us a strong indication there are signs of special cause variation in
the process.


The second chart for So-Natural is out of control; it shows a point above the Upper Control
Limit. Based on our assumption that the in-control data provided by So-Natural was obtained
when their processes were in- control, and thus using those control limits to plot the other data
obtained by Mr. Ryan, it is safe to say that this point above the line indicates special cause
variation. As seen in the control charts and compared to the processes of BioOpt and Organic
Arc, it is apparent that So-Natural has the processes most out of control and lowest quality.

By looking at the changes in the process mean among the three potential suppliers, Organic Arc
has the best quality in relation to the others. Of the samples we obtained we found them all to be
in control with no outside variation. So-Natural is clearly the lowest quality supplier with half the
samples showing special cause variation. BioOpt then falls in between the other two suppliers as
far as quality is concerned as only one of the samples collected is seen as being out of control.

Final Supplier Decision

After analyzing both the ordering policies and quality of supply for each supplier, we believe
BioOpt would be the ideal choice to provide the proprietary antioxidant compound for Moon
Springs. It is clear BioOpt has the lowest total annual cost for the six years combined. Their sixyear total cost is $13,604,375 as compared to Organic Arcs total cost over six years being
$18,101,717 and So-Naturals being $15,778,877. The next lowest cost of So-Natural is still
around $2.15 million more than the total cost of using BioOpt. The difference in total cost at the
end of the six years has a sizeable impact on this decision seeing as the project NPV found by the
finance team was roughly $7 million. Even though this value is in present value terms, the

difference of $2.15 million at the end of six years is enough to say BioOpt is clearly the best
choice from a cost standpoint.

The quality aspect also has a large impact on this decision because Moon Springs provides high
quality products and the Luna brand is considered a premium product in the coconut water
market. From our analysis of supplier quality, we find BioOpt and Organic Arc have much better
quality processes than So-Natural. Based on the process mean, BioOpt, as mentioned earlier, has
one control chart that we interpret as being out of control. However, the other sample sets are in
control and BioOpt is a close second behind Organic Arc in quality of the process mean. That
being said, we still believe BioOpt is the best choice because of the total cost associated with the

This decision is not based entirely on the costs associated with the suppliers and ignoring quality
altogether. Simply stated, the costs associated with the higher quality are not worth choosing
Organic Arc as the supplier because the large difference in cost will cut into our NPV. By
lowering our NPV, this project becomes far less enticing. When evaluating this from a financial
standpoint, these costs are too great compared with the benefits they provide in quality.
Therefore, we are confident in recommending BioOpt as the best choice among the three


Capacity Planning
In order to make the new Luna2 product, we suggest Moon Springs buy new equipment for
$575,000 to allow for an increase in capacity and allow for different sized cans to be produced
using the same equipment. Based on this decision, and the assumption that for every unit sold it
brings in $1.20 in profit, we can estimate several possible capacities. From there we determine a
capacity that will increase expected net profits over the first six years of the product life.

The demand forecast used to estimate our capacity requirements is 24.5 million unit sales in the
first year, which we find from the marketing sales forecast. We assume these demands are
growing at a rate of 8% per year as seen in the equation of D(T)=1.08 X D(T-1) + Error. Given
the information the low sales forecast is 85% of the expected and the high sales forecast 125% of
the expected, we use the expected value formula to find the expected value of demand growing
at 8% over six years.

With this expected demand for years 1 through 6 we find the absolute lowest and highest demand
possible by taking into account the Error at the end of the sales growth equation with a standard
deviation of 2,000 and a mean of 0. Theoretically, with a mean of 0, the standard deviation will
cancel out in the long run, but for our purposes we assume there will still be variance in demand
in the form of uncertainty. Thus, we take into account the standard deviation in our calculations
of the low and high forecasts. In solving for the standard deviation we use a 95% confidence
level and therefore find the z-score associated with that level and multiply that z-score by the


standard deviation of 2,000 to find the number added and subtracted from the absolute high and
low forecasts.

In finding the absolute lowest possible demand we use the forecast of 85% of the most likely
demand and subtract the standard deviation of the multiplied z-score each year for six years. To
find the absolute highest demand we use the forecast of 125% of the most likely and then add the
standard deviation of the multiplied z-score. We realize that these two numbers are the absolute
lowest and highest possible demand forecasts, but it gives us an indication of the boundaries for
the capacity levels.

We then create a production plan that compares the three capacities we chose with every demand
level. The three capacities we use are a low capacity of 29 million, an average capacity of 34
million, and a high capacity of 46 million (Exhibit P10). The low, most likely, and high demand
level we calculated for each year is divided over these capacities to determine the percent of
capacity that is used by the level of demand. In doing so, we are able to find the utilization rate
of our capacity. We then average the utilization rates of each years capacity, for all three
demand levels, to find an overall capacity utilization rate. Our findings show that although the
highest level of capacity is able to reduce opportunity costs and produce all levels of demand, it
is unreasonable because the utilization rate is only 69.1%. The reason we do not want to have
such a low utilization rate is because we would be paying for the cost of capital associated with
the equipment to produce this capacity, as well as the increased warehouse space needed to
produce this much. We also find the low level of capacity has a high utilization rate, but is

unable to produce a large amount of the most likely demand for each year and would result in a
great amount of opportunity cost in the form of losing demand.

Despite not having specific fixed costs for increasing capacity to accommodate any demand
experienced, we realize there are inevitably going be fixed costs associated with increasing
capacity such as equipment modifications, increased warehouse space, etc. These costs cannot be
directly correlated into the cost of increased capacity, but we assume they will be present. As a
result of these costs, it is not feasible to create a capacity to satisfy demands at all levels.
Furthermore, larger capacities lead to lowered utilization rates, which affect the workforce and
labor costs associated with making the products.

According to the workforce planning for Moon Springs, its workers are required to work at least
40 hours per week at each of the four facilities around the nation. By working all 40 hours, we
are assuming the workers are able to produce up to 100% capacity. In this scenario we would pay
them for 100% of their productivity. But when capacity is increased and utilization rate is
decreased, we begin to pay workers for productivity levels below what we would pay them for
100% utilization, thus creating hidden costs in the form of unproductive time from the workers.

It is unreasonable, and not economically feasible, to expect workers to produce 100% of

capacity. This is why we would like a 91.5% utilization rate (capacity of 34 million); we do not


want a rate that is too low so we can avoid paying workers 100% wage costs for work well under
that rate.

We are able to maximize expected net profits by using a capacity level that minimizes the
potential loss of opportunity costs and has a high capacity utilization rate so that most of the
demand can be produced. We are then able to calculate our net profits for each year by
multiplying our demand produced by the profit of $1.20. We then added that to a multiplication
of our demand produced times $0.0115. Our marketing department found for every $1.00
generated by Luna2, it generates an extra $0.0115 of side effects, which we will include in our
net profit for each unit. We also subtract the potential profit of any demand that we lose because
of restrictions in capacity. We do this by calculating the difference in the demand from the
capacity and multiplying it by $1.20. The net profit we find over six years using this capacity of
34 million was ~$218 million. The average net profit per year would then be close to $36 million
as seen in Exhibit P11.

The reason for choosing a capacity level of 34 million is based on the opportunity cost of
missing out on lost revenues as well as maximizing the net profit. For Moon Springs, any
demand not covered by capacity is lost. This is why we would like the demand, on average, to
take up roughly 91.5% of capacity, or a 91.5% utilization rate. This capacity will allow us to
cover demand as well as allow a buffer to ensure that we have the capability to plan for
downtime in the event some machines need to be repaired or adjusted. The reason the capacity
level of 34 million shows roughly $33 million in opportunity costs of lost demand is primarily

due to the possibility of the absolute highest demand forecast. This being the absolute highest
demand, we do not fully expect to achieve those levels and therefore the opportunity cost of lost
demand will fall substantially as we start experiencing true demand.

Quality Function Deployment

For the introduction of Luna2 it is extremely important to have a high quality product for the
customers, as well as a high level of quality throughout the production process. To utilize
quality function deployment, it is important for the involvement of all areas of the company to be
in unison, as they all have an effect on the overall process; from the raw materials used to
produce the product to the end goods being sold to the customer. Quality function deployment
can be viewed as a four-stage process, consisting of product planning, assembly deployment,
process planning, and quality control. These four steps are specifically associated with the
production of Luna2 before it ever reaches the hands of the final consumers.

Before analyzing these four steps, it is important Moon Springs identify the customers needs
and gain customer feedback on which needs they find to be of most importance. The main
customer needs for Luna2 are the health benefits, innovation in the bottle design, and increase in
flavor options. The results of the Moon Springs focus group study show these areas are
extremely important to the customer and need to be utilized. More importantly, the company
needs to ensure every product sold to consumers is exactly the same. When customers know
they are receiving, a consistent and high quality product, they are more likely to purchase the
product in the future.

After discovering the needs of the customers, the company should move into the first stage of
QFD, which is product planning. This step will allow Moon Springs to finish the development
of the product. During this step we can compare the various competitive products with Luna2
and discuss specific technical characteristics of the products. Moon Springs would use the
process of industrial design to manufacture Luna2, keeping the customers needs in mind. To
implement this decision, we would use information gained from our marketing department to
make sure that customer wants, such as the design of the can, and the amount of health benefits
provided in each drink, are specified as a part of the operational process of our product.

The next step would be the assembly or part deployment process. During this stage it is
important to understand and determine which equipment to use once full-scale production of
Luna2 occurs. Previously in our report, we discussed an equipment decision we made based off
the change in the containers for the new product. The purchase of new equipment will allow for
a higher capacity to fulfill the demand once full-scale production begins, but also allows for easy
change to drink size in the future. This ease-of-scale is valuable as it allows Moon Springs to
initially produce the product at a specific drink size, but also gives them the ability to produce
their product in multiple sizes.

A main goal of Moon Springs should be to have a higher level of productivity within the
facilities. When discussing this increase in productivity with our management department, they
discussed how additional capacity can be created as a result of implementing an extra shift.


Having double the shifts will enhance our productivity assuming these shifts help identify
defects and malfunctioning equipment, thus allowing for continuous, unhindered production.

The next stage is process planning, which consists of determining the process flow as well as
creating the requirements for the equipment.

It would be very valuable to implement a

concurrent engineering process so all steps needed to create the product are being done
simultaneously, rather than one after another. By simultaneously completing the activities in a
process it allows for a reduction in the amount of time it takes for the entire process to be

With a product such as Luna2, we would recommend Moon Springs use this

approach so they can quicken the process and in turn produce more revenue.

The final stage is quality control, which will allow Moon Springs to establish a plan to monitor
and control the entire process from start to finish. Since Moon Springs already has maintenance
crews checking the equipment to make sure it is correctly calibrated, runs smoothly, has reduced
variability, etc., they have already taken a strong step into the direction of a good quality control
process. One technique we would recommend using is acceptance sampling for the new product.
Although inspection doesnt generally increase quality, using a form of inspection such as
acceptance sampling is valuable as it provides insight into how well the process is performing.
This involves testing the quality level of one random sample of Luna2 to determine if the entire
batch is of acceptable standards or if it needs to be rejected. This will reduce the costs of quality
control, as Moon Springs does not need to test each individual product.

We would also

recommend using statistical process control, which is a method to monitor production through

the use of statistical data. By combining the results of the acceptance sampling in the statistical
process control we can use the information gathered to gain an understanding of any quality
issues occurring throughout the process. It would also be important to compare data across the
four locations where manufacturing takes place. By using these methods based on statistical
methods, it will allow Moon Springs to reduce any issues or defects that may occur.

All of these methods will allow for Moon Springs to improve its process and quality, and thus
provide the premium products it is known for and develop long-term, loyal consumers that
ensure its longevity and health in the future.


Operations Appendix (P)

Exhibit P1: Initial Project Management Schedule



Exhibit P2: Crashed Project Schedule

AFIJOP- 9 8 7
BCDEFIJOP- 22 21 20 19 18


Exhibit P3: Pre-Crash LS/LF

Exhibit P4: Pre-Crash ES/EF


Exhibit P5: Crashed LS/LF

Exhibit P6: Equipment Decision Tree


Purchase Equipment
Modify Equipment
Modify Equipment with an
outside engineering firm


Exhibit P7: ROP, EOQ, TAC

Reorder Point (Kg)

Organic Arc



Year 1




Year 2




Year 3




Year 4




Year 5




Year 6




Economic Order Quantity (Kg)

Organic Arc



Year 1




Year 2




Year 3




Year 4




Year 5




Year 6



































































































Exhibit P8 : BioOpt Out of Control Chart

Product samples in kgs









Number of samples

Exhibit P9 A: So-Natural Out of Control Chart #1

Product samples in kgs




Number of samples


Exhibit P9 B: So Natural Out of Control Chart #2

Product samples in kgs






Number of Samples

Exhibit P10: Capacity Planning

Exhibit P11: Net Profits


Net Profit
Year 1


Year 2


Year 3


Year 4


Year 5


Year 6





Financial Evaluation of the Luna2

In order to consider the launch of Luna2 we need to first evaluate the companys current
standing. Based on the companys previous revenues, it has shown small growth in its current
projects and contributes about $43 million per year. Looking further, it is key to our analysis to
identify the risk associated with our new project. After risk analysis we can identify the yearly
cash flows and understand the net costs of assets necessary for the project. The analysis in this
report will help to identify the profitability of Luna2.

To understand the value of the Luna2 launch, we first must identify how risky the company is.
By comparing the returns of our firm versus the market, we calculate Moon Springs levered beta
to be ~1.7. Because we only want to evaluate Moon Springs, it is necessary to strip out the
average risk present in the company as a result of debt. By taking into account the D/E and tax
percentages, we can apply the leverage formula. After crunching the numbers, our results show
Moon Springs unlevered beta is ~1.5.

Company analysts believe the Luna2 project will have a risk of equal blend between projects P
and Q, so it is necessary to identify individual project risks. This analysis begins by identifying
how much each project contributes to the company. Next, we determine how volatile each
project is relative to the market to determine a revenues to returns ratio (Project Beta tab reg.
coef.). We can then take a weighted average of these coefficients to determine how reactive the
whole company is. This allows us to convert a company beta into a revenue amount. Setting this

number as a base line allows us to convert project revenues into a beta relative to the companys
beta. We can then determine how volatile individual project revenues are relative to the company
(project beta tab risk scaler). These values can be multiplied by the unlevered beta to give us an
individual project beta. Based on this analysis, Luna2 is estimated to have a beta of ~1.5.

With the project beat identified, the next task is identifying the risk free rate. Given current
Treasury securities, we identify a 73 day T-Bill has a return of ~2.22%. We adjust this rate up
because a one-year T-Bill will have more price risk than a 73 day T-Bill. Our estimate projects
the risk free rate to be roughly 2.3%. The historical equity premium is currently estimated at
6.85% and we can calculate our cost of capital, ~12.5%. However, the money we need to invest
in Luna2 will be tied up and relatively illiquid for the next few years. We have concluded that an
additional 1.75% liquidity premium should be added on to our cost of capital as a result of this
illiquid investment bringing our total cost of capital up to ~14.2% (Project Beta tab Cost of
Capital table).

Now we can move on to laying out the cash flows of the Luna2 project. Our first step is to
identify the future tax rate. Based on historical tax rates, we can run a regression (Cash Flows tab
Tax Assumptions table) to determine the future tax rate of ~30% and use that tax rate over the
project life. While we cannot perfectly determine a future tax rate, our method allows for a
rough, but close estimation of the tax rate.


After identifying the tax rate, we can place the operating cash flows on a timeline and identify
the yearly revenues we expect to receive as a result of launching Luna2. After considering
revenues, expenses, positive side effects, and other expenses presented on the cash flows
worksheet, we can identify our expected yearly revenues. To counterbalance the incoming cash
flows we must consider how much it will cost to launch this project. Using financial estimates,
we identify non-depreciable assets to be ~$25 million and the net salvage value of borrowed and
exploratory assets to be ~$10 million.

To complete our ICF calculation, we must consider the effective cost of depreciable assets for
this project. Depreciable expenditures for this project total $31.8 million. Using the respective
recovery periods, our deprecation expenses total ~$31 million leading to a tax savings of ~$10
million. The market sales values of the depreciable assets at the end of the project allow us to
calculate net salvage values, which total ~$7 million at the end of year six. Given the analysis
above, the effective costs of our assets total ~$19 million.

Crunching the ICF numbers, our total costs to launch this project are ~$45 million. Through our
calculations, we can conclude the Internal Rate of Return is ~19% and this project will generate
~$7 million in positive cash flows for the company. We would advise Moon Springs to move
forward with this project because of the positive cash flows generated beyond what the market
has to offer.


Based on a six-year projection, the finance team would advise Moon Springs to pursue this
opportunity. However, it is necessary to consider the chance that the project is not profitable for
the entire six years. With shorter recovery periods, fewer assets are sold above book values, thus
leading to a greater tax shield and lower effective cost. As the project duration decreases, ICF
values are lower due to the changes in effective cost.

Evaluating the operating cash flows over shorter durations is a more straightforward process.
With each year lost in sales, our payback totals fall. An each year decrease in project life reduces
the present value of operating cash flows by roughly $6 million. Upon evaluating a five year
project structure, the company generates returns relatively in line with the market and would
only generate about a half million dollars. Looking at a year shorter, Moon Springs could lose
roughly five million dollars relative to the market and risk they are taking. In other words, Moon
Springs is taking on unnecessary additional risk for the returns being generated. If the project
lasts only three years, Moon Springs actually loses about a million dollars on the Luna2

To conclude our analysis, we reiterate our recommendation for Moon Springs to launch the
Luna2 product. The positive NPV and IRR > project cost of capital over a six year life makes this
a sound investment opportunity. However, Moon Springs should be wary that launch costs for
this project are equal to roughly one years revenue. But, expectations for the new project would
double company revenues. It is crucial Moon Springs considers the downside of this project as a
result of a shorter project life. To be fair, our model does include a few estimates, but the big

picture cash flows remain relatively the same. As a result, it is imperative that Moon Springs is
almost certain of their project length estimates, as less than a five year project life would lead us
to advise against this project. Overall, based on our current model and information present at the
time, we would advise Moon Springs to go through with launching of Luna2.


TO: Mr. Robert Wadkins

FROM: Financial Consulting Team
DATE: December 11, 2014
SUBJECT: Financial Perspective Calculations
Mr. Wadkins, upon reviewing your napkin calculations, we would like to walk through some
differences in the numbers to try and help close the gaps. The key to understanding finance is
knowing how to follow the money. This not only includes the cash spent but it also includes the
theoretical cash flows that come back into the company as a result of taxes. The overarching
theme of taxes is when we have a cost, it decreases our revenues and the difference in taxes we
no longer have to pay can then be considered a net cash inflow that helps net income. Another
key to our modeling is to understand that we only care about what decisions we can make going
forward, not what we have already done in the past. This is because whether we decide to pursue
the project or not we have already incurred these costs. If we decide not to pursue the project, we
can sell these assets and that value is what we should consider as the cost to use these assets
going forward.

In order to understand how much money it will cost the company to launch the new project, there
are a few adjustments we will need to make in order to bring them in line with financial
perspectives. We agree that $22 million has already been spent. However, for financial purposes,
and this specific project, we only need to take into account what we can now receive for these
assets if we choose not to pursue this project. More specifically, the company can only get
roughly $7 million and $4 million in return for R&D expenses and equipment purchases
respectively. This money is what we consider to be the cost of using these assets because we are
foregoing the value if we do not sell the assets. Because we cannot get any money back for the

advertising expense regardless of whether or not we pursue the project, we do not consider it as a
cost towards this specific project going forward. Again, this cost hurts the company, but because
we cannot opt out of this cost in the project going forward, it should not be considered. Thus, the
$22 million initially estimated, is closer to only $11 million as a result of these considerations.

Evaluating the money we still need to spend going forward, roughly half of the expenses hit the
accounting books immediately. These expenses lower our net income, so we pay less in taxes
and we can net these savings against costs. This allows us to cut the $25 million in asset
expenses down to roughly $17 million. As for the five asset classes costing ~$32 million, they
will also, in theory, decrease. This is because every year the depreciation of $31 million will
allow us to pay ~$10 million less in taxes. At the end of this project we can also sell the assets
we use for the project. However, money in the future is not as valuable as it is today. The gain on
asset sales as well as tax savings will need to be discounted to determine their value today. By
applying these adjustments, the cost to purchase these assets today is only $19 million. Totaling
these adjustments, our model gives us a cost today of $47 million.
We agree that net revenues are just over $20 million but because of taxes, we again have to
subtract the tax expense and these net revenues fall to ~$15M per year. Depreciation expenses
have already been accounted for when we calculate the cost of the five assets and reduce total
costs from $32 million to $19 million. Interest expense requires the tax adjustment as presented
previously, thus lowering interest expense from $500,000 to only $340,000.
Using our marketing department estimates, we can assume for every dollar we generate in
revenues from Luna2 it will boost company after tax profits by 1.15 cents, thus leading to an

additional ~$720,000 per year. Our final adjustment for yearly revenues is a negative effect as a
result of needing key upper management personnel to direct and monitor Luna2. The company
estimates profits after tax will fall by $300,000 for the first two years and $150,000 the two years

With all the data converted to a financial perspective, we can now calculate how profitable Luna2
will be. Using these evaluations of $47 million in costs to launch Luna2, and an estimated profit
of $15 million per year, this project would begin to produce positive returns as early as the
beginning of year four. Below is a visual representation of the calculations we previously
discussed. However, there is one other key aspect of financial modeling necessary to understand.
$15 million in the future is not as valuable as it is today. In other words, the $90 million dollars it
looks like this project expects to produce needs to be adjusted to todays value of money. By
discounting that future money back to a dollar amount in today's terms, we would have profits of
$54 million and a cost of $47 million to launch the project, giving us a positive return of roughly
$7 million in terms of todays dollars.

We hope this analysis helps you to see how we have evaluated this project. We believe from the
analysis above, we will begin to see a payback shortly after three years.


Does Finance Create Value for Society?

In our opinion, value creation goes well beyond the numbers in a financial model. Often times,
companies make a decision based on widely accepted methods that help determine if a project
makes money. Many believe only focusing on profits leads companies to take value away from
society for their own gain. This evaluation is just one of the arguments for why business people
are perceived to be greedy. However, it is necessary to evaluate this argument through a lens
other than just the consumer.

This issue is one that draws upon the ethical fortitude of business people. There are some
companies that genuinely care while others are out to profit by any means necessary.
Unfortunately, the actions of few taint the positive qualities of many. Many feel they make
ethical decisions, but they actually act on their own self-interest. This is common in humans, and
most would agree they satisfy their basic needs before helping others. However, some believe
firms have adopted a different perception of basic needs. The development of a better ethical
compass can lead to fewer misguided decisions.

Projects that create positive NPVs for a company obviously create value for them as well, but
more evaluation from the customer side is necessary. When a company sells a product, the
margin they charge is equal to the value they receive. If a customers perceived value of the
product is greater than the price value is created for them as well. The counter argument is
companies take too much of the value and there is destruction of societal value because


companies are stealing it from customers. To understand this counter argument, lets evaluate
the company side of value creation.
Positive projects not only create value for the initial firm but they also create value for
wholesalers and retailers. In more granular terms, intermediary companies place markups on
products and take a percentage of the value created. Finance decisions can also prevent
unnecessary losses because if future flows are less than costs, the project is rejected. By not
approving a venture, financial teams can help prevent a firm from taking on bad projects and
destroying value.

For this debate, let us use the oil industry as an example to break down value. Many would agree
the oil industry has minimal consideration for society. This agreement comes from a one sided
evaluation focusing on negative externalities. On the other hand, oil left in the ground creates
minimal value outside of decreasing CO2 emissions. By taking oil out of the ground, value is
destroyed and many stop their analysis to argue oil companies destroy the earth and make profits.
If the analysis continues, oil becomes gas and allows billions of people to travel quickly and thus
more value can be created. In summary, some value destroyed can lead to a value creation
greater than the amount destroyed.

In conclusion, there is value created from sound company investments that make a profit. The
value created is dispersed to both companies and customers. This shared value provides the
company with a reason to do business and consumers to come back. The value present in
financial modeling only accounts for the value a company receives while the value consumers

place on a product beyond its price is also value created for society. In our opinion, companies
create value for society and any value destroyed is made up for by the value created from both
companies and society.