Troika Potato Chips

1
St Petersburg, Russia
Case Description
This two part case provides students with the opportu-
nity to evaluate the attractiveness and of
entering the potato chip business in St. PE'tershurg.
Russia, based on the information and analysis present-
ed in a business plan document, and then a
savvy Western investor's perception and of
that business.
Case (A) presents the business plan itself, along with a
background note on Russian culture.
Case (B) presents an assessment of this plan by a
aging director of a British-owned, Moscow-based ven-
ture capital fund who is reviewing it to decirle if he
wants to invest in this start-up venture to produce pota-
to chips for the St. Petersburg market and surrounding
region.
Given the different tone of the second case, which
largely summarizes the view and opinion of a
Westerner in Russia, Case (B) endeavors to
the "wisdom of experience" of an experienced Western
investment professional who outlines his rules of thumb
for dealing with Russian entrepreneurs seeking invP.st-
ment, and offers specific recommendations for forE>ign
investors who are endeavoring to work with
entrepreneurs.
Project Summary
The proposed project envisions the establishment of a
new enterprise that will produce high-quality, competi-
tively priced potato chips in the town of not
far from St. Petersburg. The initiators formed a
separnte legal entity ''Troika" for the
purpose of renli7.ing thP. project. The will
be c;olrlunrler the "Troika"
The Russian initiators hope to tin outside eqtrity
investor the invP'itPrl to special-
ized, high-quality, imported equipment that
will enable them to produce and package world-clnss
potnto chins to be c;old through both whoiP.salers and
retailers in the region. The finanrial rE'Quirements for
thP. of the ahnve project nre: nn equity
investmPnt of $RO':J.fi00 for the purchase of imported
produrtion enuinmP.nt. and a c;hort-term credit of
$nfi.OOO for cnpital.
The stage has been completed. and practi-
cally nil key asner.ts have hPen worked out by the ini-
'tiators. The Pnterpric;e has a production site
(building land) <1 spedali;,:ed potato
fadlity. With thP pmchac;e and of processing
equipment. nnd a compiPte of the prorluc-
tion sitP, production can bPqin. A prPiiminnry agree-
ment to pt arrhnc;e enuiomP.nt hils been rPnC'hPd with a
Outrh firm mnc;idPrPd <1 lendinq prorlurer of food pro-
cesc;ing eqtaioment.
Tbe Focus of this Case
In performing their students should focus more
on thP qut'llitativP, than q11antitative issues of
the cac;P. . In pntP.ntinl projects in Ruc;,c;ia and
othPr dP.velnning the quality of mnnngement
takec; prPrP.rlenre over finnnrinl projertionc; the most
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TEACHING NOTES
important factor. Because the instability of the Russian
market makes long-term planning virtually impossible,
most Russian entrepreneurs regard the business plan as
a formality in attracting foreign capital rather than an
actual blueprint for running their business. Therefore,
the student, as a potential investor, should concentrate
on those sections of the business plan which give some
indication of management's style and degree of profes-
sionalism. These sections deal with marketing research,
risk assessment, and project planning.
Position in Course
This case could be used as a teaching tool in courses on
managing in developing countries, entrepreneurship or
venture capital investing.
This case should:
1. Give an appreciation for the cultural aspects of
doing business in Russia.
2. Provide experience analyzing an actual business
plan and making an investment decision.
3.111ustrate the specific challenges facing investors in
developing countries.
Questions for Discussion
1. Discuss some of the positive attributes of this
project.
2. Discuss some of the negative attributes of
this project.
3. Based on the business plan, what can be said
about the initiators?
4. What additional information would you
request from the initiators?
5. Should the investment be made 7
Salient Points
Indications of insufficient preparation on the part of
the initiators:
Further information revealed that the potatoes
supplied by Komarovo were inappropriate for
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potato chips. Suitable potatoes are not grown in
the vicinity and would have to be supplied by an
outside producer, leaving Komarovo uninterested
in involvement in the project since it would no
longer have a steady buyer for its potatoes. Costs of
purchasing potatoes outside the region and trans-
porting them to the processing plant were not
accounted for, and they would certainly increase
the cost of production. Furthermore, potatoes suit-
able for potato chips do not hold up well in trans
port.
Students will not know this from reading the case.
However, as potential investors, they should
reque-;t an expert opinion about the viability of
using the supplied potatoes for producing chips.
The partners are not willing to make a significant
equity investment into the enterprise. This is an
indication that they may not have a sufficiently
serious attitude toward the project.
It may also indicate that they have no cash, which is
not negative in itself. However, the contributed
assets are overvalued and highly illiquid.
Assets offered by the partners are overvalued and
illiquid.
The assigned values seem arbitrary since there were
no licensed appraisers in Russia at the time the case
was written. Furthermore, real estate is a highly
illiquid and problematic asset.
Certain legal questions are not sufficiently
addressed. Presently, one cannot have 100% own-
ership claim on a piece of Russian real estate. Also,
the land on which the building is situated is still
considered state property. Real estate laws in Russia
are rarely defined and very confusing. Therefore,
these sorts of questions have to be examined very
carefully.
Students may not know the intricacies of Russian real
estate laws, but they should be able to identify this as a
salient yet vague point, since real estate forms the bulk
of the initiators' contribution to the project. Initiators
should have anticipated this ambiguity and provided
some additional information regarding legal issues.
Evidence of Inexperience in General
Management
Sales are projected to be $1 million/year, while
advertising expenditures are estimated to be
S 15,000/year. It is unlikely that this amount will be
enough to realize brand recognition and sales of
that enormity.
Sensitivity analysis should have been performed
and provided to the investors.
Troika projects to capture 5% of the local market
selling 300 tons of chips per year. This puts the total
market at 6,000 tons per year, which is obviously an
exaggeration (1 kg of chips per person). Further-
more, the marketing research indicates that only
about 60% of the population consumes potato
chips on a regular basis.
The business plan does not indicate how the prod-
uct will be sold. We only know that one of the
partners has access to a local distribution network.
It seems that the initiators have very little experi-
ence in wholesale on such a scale.
Evidence of lnexperience in Financial
Management
Cash flows are not discounted.
If some students attempt to do an NPV analysis, discuss
how they would choose a discount rate and adjust for
inflation.
The proposed exit strategy indicates that the initia-
tors do not take into account that the investor will
require a minimum 30% annual return on his
money, which seems fair considering all the specif-
ic risks of the project and the general risks of invest-
ing in Russia.
TROIKA POTATO CHIPS
The initiators estimate the annual return on investment
to be roughly 24%, which is the ratio of the average
annual dividend to total investment.
General Comments about Business in
Russia
The project or enterprise is only as good as its man-
agement team. Laws and cash flows change quick-
ly and unexpectedly in Russia, though management
does not. A good manager is someone who has
operated a successful (profit-making) business
through the recent economic transition; someone
who can react quickly to changes; someone who
understands the system but is also outside of it;
someone whose livelihood depends on the business
he is managing.
Organized crime groups perform two important
functions for business in Russia. First, they provide
the business with protection against other criminal
structures. Second, they enforce contracts, especial-
ly the repayment of credit. It makes no difference
whether the credit is obtained by an individual or a
corporate entity with limited liability; the individ-
ual who signed the promissory note is personally
responsible for repayment. The individual risks all
personal property and ultimately his life if repay-
ment is not made. In Russia, bankruptcy offers no
protection from creditors.
NOTES
1. This case was written by Gene Gutenberg of Cornell
University. It is intended as a basis for class discussion rather
than to illustrate either effective or ineffective handling of an
administrative situation.
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