Case Study Danaka - WS 2022

Professor Dr.
Thomas Hutzschenreuter
Chair of Strategic and International Management
Fall term 2022 - Strategies in MNEs
Portfolio Planning at Danaka Corporation:

New Investment Proposals
Adjusted case study of the Harvard Business School case study: Danaka Corporation: Growth
Portfolio Management, no. KEL300-PDF-ENG, 01/01/2007, Harvard Business School
Publishing, Boston.
Page 1
Professor Dr. Thomas Hutzschenreuter
Portfolio Planning at Danaka Corporation:

New Investment Proposals
January 14th, 2015, Jerry Sanders, chief operating officer of Danaka Corporation, arrives at
his office at his regular time of 6:30 a.m. He has a full day scheduled and is eager to get a
head start before the onslaught of daily meetings begins. Lying in a neat stack in front of him
are Danaka’s annual internal reports from each of the four divisions.
The reports confirm that for the second year in a row Danaka has failed to meet its growth
targets and earnings have fallen short of market expectations. Market reactions have been
swift, and Danaka’s stock price has taken a major hit, falling 6 percent from the week before.
Sanders calls an emergency meeting with his management team for that afternoon to prepare
for an upcoming three-day offsite executive management meeting. There are 40 investment
projects in the pipeline at the moment, which could help Danaka to change the direction of the
last two years. Sanders wants to decide, which investments should be made or not. It is
important that the investment is in line with the portfolio guidelines of the single division to
which the project belongs to.
Over the last few years, Danaka has undergone a major restructuring and realignment,
eventually consolidating into four major divisions: performance materials, agriculture, health
care solutions, and emerging solutions (see Exhibit 1).
As Sanders reads through the reports including the investment proposals, he takes special
note of information that addresses the following question that is foremost in his mind, a
question concerning the decision, if an investment project belongs to Danaka´s portfolio or
not: Does it fulfill the portfolio guidelines of its superordinate division?
Danaka Corporation’s History and Current Directives
Since its inception in 1932, Danaka has steadily grown to become a chemicals conglomerate
with 2014 annual revenues exceeding US $ 30.9 billion. With 35,000 employees and
operations spread across three continents, the company has evolved into a major chemical
company and pharmaceuticals provider with a global reach that impacts countless lives.
Largely driven by its innovative technologies and top-line revenue growth for the period of
2009 to 2012 – not including the last two years – continued focus on operational efficiency
has allowed realizing increasing operating profits. Danaka attributes a large part of its success
to the many innovative products it has brought to market over the years. Executive
management takes particular pride in the firm’s ability to achieve research and development
(R&D) productivity by efficiently pushing new products through its innovation pipeline. Looking
to the future, management has laid out three corporate-level directives that it envisioned
would drive overall corporate and division goals and strategy - top-line growth, operating
income growth, and commitment to employee benefits and dividend payments.
Page 2
Top-Line Growth
Executive management determines that a target of 10.0 percent annual top-line revenue
growth over the next three years is reasonable, considering Danaka’s stellar results over the
last three years. Moreover, with the improving economic climate, management fully expects
sales in Danaka’s agriculture and health care solutions divisions to pick up. However, several
senior managers have voiced concerns that this growth target could adversely impact
divisions and strategic business units (SBUs) that do not meet the growth goal but are stellar
performers by other financial metrics.
Operating Income Growth
Executive management sets a goal of 15.0 percent annual growth in pretax operating income
(PTOI) for the next three years. This measurement refers to the difference between a
company's operating revenues and its direct expenses (except taxes) tied to those revenues.
The PTOI excludes non-operating forms of revenue and non-recurring transactions such as
capital gains on assets and profits from unrelated investments in other companies. The
management has expressed confidence in Danaka’s ability to meet the 15.0 percent target.
This is a realistic goal, as the four divisions are relatively young and there is room for
improvement.
Meeting Obligations to Employees, Retirees, and Shareholders
Danaka’s obligations to its employees and retirees are complicated by retirement-related

programs in many countries in which it operates. Those are expected to have a long-term
impact on the company’s earnings and cash flows. Where permitted by law, Danaka has the
right to change or discontinue its pension, medical, dental, and life insurance plans. However,
its corporate-level goal is to fulfill its commitments and maintain its annual contributions to
trust funds from which pensions have been historically paid. In addition, Danaka pays out
dividends on its outstanding common and preferred shares. Historical data suggests a 13.0
percent cash margin (the ratio of the cash flow of a company´s operating activity and its
revenues) is sufficient to satisfy future minimum cash requirements.
Danaka Corporation Divisions and their Portfolio Planning Model
As described above, Danaka has recently restructured its divisions and has four divisions at
the moment. For Danaka´s sales by division and Danaka´s top four competitor´s sales in 2014
see Exhibit 2.
Performance Materials
Danaka is the number two global player in the high-performance polymer industry. It relies
primarily on the breadth of its polymer-based materials portfolio, including polymers used by
customers to develop components for mechanical and electrical systems, as well as resins
and films for packaging and industrial applications. The key markets served by the segment
include automotive original equipment manufacturing and associate after-market industries,
as well as electronics, packaging, and construction industries. While opportunities for product
innovation are limited, within the automotive segment new uses for high-performance
polymers are being explored, albeit at a very slow pace.
Page 3
Major projects within the polymers division are aligned by product lines. The top five product
lines, which contribute to more than 90 percent of segment sales, are SinclairTM nylon resins,
TylerTM acetal resins, WirenTM polyester films, YorktonTM laminate interlayers, and ZortexTM
fluoroelastomers. The market growth rate of this division is 3.0 percent. Global demand for
polymers had been rising steadily, but market expansion had been hampered by overcapacity
and significant price pressure, particularly from China.
Danaka´s performance materials goal is to meet the worldwide demand for more productive,
high-performance polymer materials, systems, and solutions through expertise in technology
and materials science. Management considers that especially the projects in the strategic
SBU “resins” are an important step in this direction and also offer the possibility to enlarge the
breadth of Danaka´s polymer-based materials portfolio, focusing on high-performance
polymers for the automotive segment.
OUTLOOK
The global market for polymers is expected to expand at a rate similar to that of global gross
domestic product (GDP). The world GDP growth in 2014 has been 3.5 percent. Historically
Danaka’s strong market standing in its key market segments has enabled it to realize similar
growth levels. The major concern going forward is that new producers in China are targeting
the heart of the performance materials business. At the moment, Danaka Corporation has 46
ongoing projects in the performance materials division. 26 of them will be completed in 2015.
Eight projects are in the pipeline. US $ 543.4 million is the proposed allocation for the new
projects.
Agriculture
The agriculture division leverages Danaka’s technology and industry knowledge to improve
the quantity, quality, and safety of the global food supply. Danaka has recognized that
available global arable land is becoming increasingly scarce. Therefore, production increases
would have to be achieved primarily through improvement in crop yields and productivity
rather than through an increase in planted acreage. Banking on this trend, Danaka has
channeled significant R&D resources towards developing a strong product portfolio of
branded seeds, insecticides, fungicides, and herbicides.
Danaka Corporation has particularly focused on building its line of hybrid and varietal seeds,
which had been intended to improve crop yields, insect protection, and herbicide tolerance.
Within this subsegment, hybrid seeds had driven market share growth in the corn and
soybean markets. Danaka also has initiated research into gene-shuffling technology to
improve seed traits, specifically along the lines of herbicide and insect resistance. The
company’s crop protection products had been designed to capture market share in the global
agriculture production industry and extend existing business, particularly in the grain and
specialty crop sectors, forestry, and vegetation management. Projects in the SBU “disease
control” have a high priority in the eyes of the management to strengthen Danaka´s crop
protection segment. The agriculture segment continues to be a strong cash generator for
Danaka and largely drives the organization’s ability to meet enterprise-wide minimum 13.0
percent cash margin requirements.
Page 4
OUTLOOK
Danaka is positioned to benefit from several industry trends that are expected to drastically
increase demand within the agriculture industry. The market growth rate is 3.6 percent. A
combined effect of evolving U.S. governmental policies, primarily a significant increase in farm
subsidies, and globalization of the agriculture market is opening up new markets globally. The
value of world commodity agricultural production had been at record levels in 2014, and is
expected to grow as a multiple of global GDP. In addition, higher yields are driving up
production and farm income. Lastly, demand from livestock and industrial sectors is expected
to increase for commodity grains and seeds. Due to these market factors, this segment is
expected to continue to realize high growth in 2015. 53 projects are currently carried out by
Danaka´s agriculture division. 18 of them will be finished in the end of 2015. At the moment,
twelve new projects are in the pipeline. US $ 625.4 million are proposed for them.
Health Care Solutions
Danaka’s health care solutions goal is to become a leading provider of technology and
services to help health care professionals improve quality of health care globally. The division
has benefited from first-mover advantages in several of these niche subsegments that
required complete system solutions. Specifically, Danaka had been realizing high profit
margins and growth in medical and surgical products, dental and orthodontic products, health
information systems, and general hospital care. The market growth rate is 3.8 percent.
In the medical and surgical area, Danaka primarily provides medical tapes, dressings,
orthopedic casting materials, and stethoscopes. Within the dental and orthodontics SBU,
ability to innovate had been paramount to continued success and Danaka’s extensive
capability has won the corporation´s industry accolades. In 2009 health care solutions
launched a new product line of proprietary resin cement for dental applications that promised
significant improvement over existing products in the market. Danaka has continued to invest
resources into improving the versatility of the product line, and the resin cement is now
broadly regarded as the best product available to dental professionals. Lastly, in the health
information systems and general hospital care segments, Danaka has developed data
classification and management software and provides related consulting services.
OUTLOOK
In addition to the existing medical product subsegment, infection prevention is emerging as a

booming segment. The company has limited offerings in this segment, primarily surgical
drapes, masks and preps, and sterilization equipment as complementary products to its
medical and surgical line. The increasing need for hospital services, and the trends discussed
previously, indicate sustained high growth and profitability for Danaka. The management
wants to focus on growth prospects in the “medical and surgical” SBU and ensures that the
innovation product pipeline is continually filled to take advantage of numerous opportunities.
Danaka Corporation has 32 ongoing projects at the moment. Three projects will be completed
in 2015 and nine projects are in the pipeline. US $ 752.4 million are proposed for the new
projects. Those projects of the SBU “medical and surgical” will strengthen the infection
prevention segment.
Page 5
Emerging Solutions
The nanotechnology industry in the United States has been kickstarted with the National
Nanotech Initiative, announced in 2000. Leveraging its new relationships in the dental and
orthodontics market, Danaka has sought new technologies that held long-term potential in this
market. The division´s goal still is to channel emerging nanotechnology expertise toward
developing innovative technologies. In 2004 Danaka acquired American NanoTech, a startup
with promising nanocomposite dental restorative technology. American NanoTech was initially
folded into Danaka as a nanotechnology project within the health care solutions division.
However, to tap into this burgeoning market, Danaka established the emerging solutions
division in 2008 to focus on nanotechnology. In addition to R&D in nanocomposite
restoratives, significant R&D budget has been allocated to research the use of
nanotechnology in diverse applications such as thin-film NiCad batteries, fuel cells,
transparent sun blocks, and composite lightweight conductors. A particularly innovative
product in development by the emerging solutions division has been nanotech-based paint
that blocked out cellular phone signals. Danaka envisions use of this product primarily in
hospitals and educational institutions.
OUTLOOK
Nanotechnology is expected to have an impact on nearly every industry. The U.S. National
Science Foundation has predicted that the global market for nanotechnologies would reach
US $ 1 trillion or more within ten years. The market growth rate of the emerging solutions
division is 4.0 percent. Danaka’s share of the pie is expected to be relatively small initially
while it builds up its nanotechnology expertise. However, the expectations are very high for
other nanotechnology-based products to gain acceptance in the market and drive long-term
explosive growth for the emerging solutions division. Three projects are currently carried out
by the division, whereas eleven projects are in the pipeline. US $ 691.7 million are proposed
for this division. The projects´ main focus of the SBU “nanopaint” is an innovative technology
which could bring high synergetic efforts to Danaka´s current portfolio. It could be invested in
different ways into a small plant, in which auxiliary material for the nanotech-based paint can
be extracted in an environmentally friendly way. Management wants to have at least three
new projects in this SBU.
Portfolio Planning Tool and Target Setting
Danaka uses the BCG matrix as portfolio planning tool with 0.7 as reference point for relative
market share. The categorization of the strategic business units is in general important for
three main functions: first, to serve as a resource allocation device; second, to manage the
overall portfolio in terms of cash and growth; and third, to provide management focus on the
appropriate key success factors for each stage in the lifecycle. In Danaka´s portfolio, all single
SBUs of one division are positioned in the same category. In principle, the position in the
portfolio determines a division´s access to capital. In evaluating an investment proposal much
attention is given to how the investment fits with the division´s position in the portfolio.
Page 6
Every category of the BCG matrix has its own guidelines. SBUs, which are positioned in the
“cash cow” category have already grown large in size and enjoy significant market share, but
compete in mature industries where there is less chance for further growth. These businesses
are managed primarily for cash. Their principal challenge is to defend their leading market
positions. Cash flow has a higher priority than return on assets (ROA). The targets are a
positive free cash flow (FCF) of at least US $ 5.0 million, a net present value (NPV) of at least
US $ 4.0 million and a ROA of at least 5.0 percent. The investment for a project should not
exceed US $ 100 million.
Business units positioned in the “star” category contain those products to which Danaka would
commit substantial funds in order to build “critical mass”. The criteria for involvement in the
“star” category include evidence of a large and/or growing market. Important for Danaka
Corporation is also the potential for innovations that would lead to future profits and a clear
link with the corporation´s core competencies. ROA is prioritized higher than cash flow and
has to be at least 10.9 percent in order to decide in favor of an investment. Further targets for
this category are a NPV of at least US $ 2.0 million, a FCF of at least US $ 2.5 million and an
investment not higher than US $ 130.0 million.
“Questions marks”, often products at the starting point of their lifecycle, are “development”
projects. As such, it would receive careful investment commensurate with Danaka´s belief in
its potential and fit with the company. At this stage, however, the level of commitment remains
tentative pending a clear demonstration of the product´s relation to the Danaka Corporation in
terms of its key success factors, profit potential, and growth rate. Corporate planning does
impose softer pre-set targets or milestones for this projects like a ROA of 2.0 percent, but in
order to move on into the “star” category, businesses have to meet those “star” criteria within
a predetermined period of time. The management has set a limit of US $ 60.0 million for total
investment. Furthermore, a maximum loss of US $ 20.0 million (negative NPV) is allowed.
Projects in the “poor dog” category have a low relative market share and a low market growth.
If these projects do not have a very high strategic relevance and/or high synergies to other
businesses, they should be divested.
New Investment Proposals – A Decision is necessary
The global market provides Danaka with significant challenges and opportunities. In the end
of 2014, 40 new investment proposals with different time horizons were created in the four
divisions (for detailed information see Exhibit 3). In total for all investments, a budget of US $
1,087.0 million is available. Typically in a planning process there are projects that clearly meet
all the portfolio guidelines and projects which clearly do not meet all of them. However, a
bunch of projects does not fully meet the guidelines, and therefore gives broad room for
discussion. Sanders is well aware that for the second year in a row Danaka has failed its
growth targets. With many new projects in the pipeline, it would be a good opportunity to
change the direction of this ship fast. Sanders knows, otherwise Danaka would run aground.
He decides to spend the rest of the morning with his team discussing the following questions:
Where in the BCG matrix is every single division located at the moment? Are the new projects
in line with the portfolio guidelines? Which of the new projects should be invested in and why?
Based on which criteria can decisions be found?
Page 7
Prof. Dr. Thomas Hutzschenreuter
Fall term 2022 – Strategies in MNEs
Exhibit 1 Danaka´s Divisions
Performance Materials Agriculture Health Care Solutions Emerging Solutions
Strategic Direction. Meet the Strategic Direction. Increase the Strategic Direction. Become leading Strategic Direction. Channel
worldwide demand for more quality, quantity, and safety of the providers of technology and services emerging nanotechnology expertise
productive, high-performance global food supply by leveraging to help health care professionals toward developing innovative
polymer materials, systems, and strengths in biology, chemistry, and improve quality of health care technologies
solutions through expertise in biotechnology complemented with globally
technology and materials science knowledge of the food value chain
Core Markets. Automotive, electrical Core Markets. Production agriculture, Core Markets. Medical and surgical, Core Markets. Dental and
and electronics, packaging, grain and specialty crop sector, dental and orthodontics, health orthodontics, utilities, fuel cells, skin
construction forestry, vegetation management information systems, hospital care care, paints
Major Products. Nylon resins, acetal Major Products. Hybrid corn seeds Major Products. Medical and surgical Major Products. Nanocomposite
resins, polyester films, laminate and soybean, insecticides, products, dental and orthodontics dental restoratives, nanopaints
interlayers, fluoroelastomers fungicides, herbicides products, health information systems
Strategic Business Units. Strategic Business Units. Strategic Business Units. Strategic Business Units.
Resins Hybrid corn Medical and surgical Nanocomposite dental restoratives
Polyester films Insect control Dental and orthodontics Nanopaints
Laminate interlayers Weed control Health information systems
Fluoroelastomers Disease control
Page 8
Prof. Dr. Thomas Hutzschenreuter
Exhibit 2 Danaka´s Business Sales compared to Danaka´s Top 4 Competitor´s Sales in 2014
Danaka´s Belfi SE´s Akomo AG´s Mentra KGaA’s Luminel AG’s

Sales 2014 Sales 2014 Sales 2014 Sales 2014 Sales 2014
Performance Materials US $ 16.7 bn US $ 6.5 bn US $ 18.6 bn US $ 1.6 bn US $ 5.1 bn
Agriculture US $ 3.4 bn US $ 5.2 bn US $ 8.4 bn ─ ─
Health Care Solutions US $ 9.2 bn ─ US $ 11.5 bn US $ 0.5 bn ─
Emerging Solutions US $ 1.6 bn US $ 15.5 bn ─ ─ US $ 2.1 bn
Note: Data based on annual reports of existing corporations.
Page 9
Chair of International Management
Exhibit 3 Danaka´s Projects in Pipeline
Project Name ROA FCF NPV Investment WACC Horizon

Performance Materials
Resins
Project 1.01 20.4% US $ 4.9 mill. US $ 17.5 mill. US $ 21.0 mill. 8.0% 10
Project 1.02 -2.1% US $ 1.3 mill. -US $ 12.3 mill. US $ 20.8 mill. 7.0% 9
Polyester films
Laminate interlayers
Fluoroelastomers
Agriculture
Hybrid corn
Project 2.01 6.1% US $ 4.1 mill. -US $ 6.8 mill. US $ 40.2 mill. 8.2% 14
Insect control
Weed control
Disease control
Health Care Solutions
Medical and surgical
Dental and orthodontics
Health information systems
Emerging Solutions
Nanocomposite dental restoratives
Nanopaints
WACC: Weighted average cost of capital
Page 10

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Professor Dr.

Portfolio Planning at Danaka Corporation:

Portfolio Planning at Danaka Corporation:

Danaka Corporation’s History and Current Directives

Operating Income Growth

Meeting Obligations to Employees, Retirees, and Shareholders

Danaka’s obligations to its employees and retirees are complicated by retirement-related

Danaka Corporation Divisions and their Portfolio Planning Model

Health Care Solutions

In addition to the existing medical product subsegment, infection prevention is emerging as a

Portfolio Planning Tool and Target Setting

New Investment Proposals – A Decision is necessary

Exhibit 1 Danaka´s Divisions

Performance Materials Agriculture Health Care Solutions Emerging Solutions

Danaka´s Belfi SE´s Akomo AG´s Mentra KGaA’s Luminel AG’s

Performance Materials US $ 16.7 bn US $ 6.5 bn US $ 18.6 bn US $ 1.6 bn US $ 5.1 bn

Agriculture US $ 3.4 bn US $ 5.2 bn US $ 8.4 bn ─ ─

Health Care Solutions US $ 9.2 bn ─ US $ 11.5 bn US $ 0.5 bn ─

Emerging Solutions US $ 1.6 bn US $ 15.5 bn ─ ─ US $ 2.1 bn

Note: Data based on annual reports of existing corporations.

Exhibit 3 Danaka´s Projects in Pipeline

Project Name ROA FCF NPV Investment WACC Horizon

WACC: Weighted average cost of capital

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