Operational Improvements

Business Plan

While comparables provide a useful starting point, whether this acquisition is a successful investment for Kleiner Perkins depends on Ideko’s post-acquisition performance. Thus, it is necessary to look in detail at Ideko’s operations, investments, and capital structure, and to assess its potential for improvements and future growth.

Operational Improvements

On the operational side, you are quite optimistic regarding the company’s prospects. The market is expected to grow by 5% per year, and Ideko produces a superior product.

Ideko’s market share has not grown in recent years because current management has devoted insufficient resources to product development, sales, and marketing.

Indeed, its Profit & Loss for 20X5 reveals that Ideko’s current administrative expenses are 13,500/75,000 = 18% of sales, a rate that exceeds its expenditures on sales and marketing (15% of sales). This is in stark contrast to its rivals, which spend less on administrative overhead than they do on sales and marketing.

Kleiner Perkins plans to cut administrative costs immediately and redirect resources to new product development, sales, and marketing. By doing so, you believe Ideko can increase its market share from 10% to 15% over the next five years.

The increased sales demand can be met in the short run using the existing production lines by increasing overtime and running some weekend shifts. However, once the growth in volume exceeds 50%, Ideko will definitely need to undertake a major expansion to increase its manufacturing capacity.

The spreadsheet below shows sales and operating cost assumptions for the next five years based on this plan. In the spreadsheet, numbers in blue represent data that has been entered, whereas numbers in black are calculated based on the data provided. For example, given the current market size of 10 million units and an expected growth rate of 5% per year, the spreadsheet calculates the expected market size in years 1 through 5. Also shown is the expected growth in Ideko’s market share.

Note that Ideko’s average selling price is expected to increase because of a 2% inflation rate each year. Likewise, manufacturing costs are expected to rise. Raw materials are forecast to increase at a 1% rate and, although you expect some productivity gains, labour costs will rise at a 4% rate due to additional overtime. The spreadsheet also shows the reallocation of resources from administration to sales and marketing over the five-year period.

Production Capacity

Production volume each year can be estimated by multiplying the total market size and Ideko’s market share shown above.

Based on this forecast, production volume will exceed its current level by 50% by 2008, necessitating an expansion then.