HDTV DIVISION OF GLOBAL ELECTRONICS, INC.

Journal of the International Academy for Case Studies, 2009 by Kirkpatrick, Alan J, Gashugi, Leonard K

CASE DESCRIPTION

The primary objective of this case is to describe realistic capital budgeting issues within a large organization. The case illustrates ways that staff inside a corporate finance department (and in related departments) position themselves in the capital planning process. The case also stresses steps that a large firm can take to leverage its size to gain the maximum benefit of investment projects. Further, the case demonstrates sensitivity analyses in the capital budgeting process, and the resulting internal rates of return.

We suggest the case be used to follow the related case "HDTV Systems", which shows the firm as a medium-sized enterprise and its capital budgeting issues before becoming a division of Global Electronics. This case should be used for students who have been exposed to capital budgeting in a prior course, either undergraduate or graduate. Class time should not exceed two hours, with approximately four hours of student preparation time.

CASE SYNOPSIS

This case involves a need for a decision regarding a large capital expenditure. Students will find that capital planning involves not only the use of accepted capital budgeting techniques, but also a considerable impact based on staff viewpoints that reflect their particular department's biases. Also explicitly presented are multiple levels of investment worth based on alternative, realistic assumptions. Students can verify IRR and payback calculations using Excel, and they will see that capital budgeting involves fragile forecasts and biases that managers bring to the analytical process.

INSTRUCTORS' NOTES

Teaching Suggestions

This case is primarily intended to demonstrate the nature of capital budgeting within a multinational firm. Instructors can emphasize both advantages and disadvantages that large firms possess. For example, although large firms may have strong negotiating power with regard to external purchasing, and advantages through synergy with other divisions, there is uncertainty about quality and reliability of parts purchased from outside suppliers. As specific divisions compete for funding, staff may overestimate the projected performance of their division's projects and receive funding. Other divisions that more objectively develop their capital requests may not be funded because they appear less worthy. The case provides an opportunity to consider the effects of capital rationing.

Also, the instructor may want to stress that the involvement in capital planning by a large number of people may be an asset or a liability. While it will be useful to obtain a number of inputs into the process, it may also cause capital planning to drag on beyond the ideal time for introduction of a new product before the firm's competition beats them to the market.

In order to demonstrate that large firms may also use weak capital budgeting methods, Global also uses Payback Period. Instructors can use Global' s environment in which divisions compete for capital, and then focus on the impact of capital rationing.

The case uses a number of financial management personnel at both the division and corporate levels. Instructors can use the interactions between these people to demonstrate real-life capital budgeting processes, as well as the divergent opinions expressed by the staff. Additionally, the challenging nature of forecasting is displayed within the case.

The case demonstrates the difficulty of generating above average IRRs in a highly competitive market. One way to achieve higher return on projects is to include a product "enhancer" like the television stand which will be a source of additional cash flow. Instructors may also want to stress the issue of timing of equipment changes to accommodate product modifications in an industry characterized by rapidly changing technology.

Instructors may wish to emphasize the realistic assumption of a decline in product price over time in the electronics industry. Further, the case shows the IRR on the project moving around with different assumptions about inputs such as product pricing and investment cost savings when combined with the cost associated with capital requests from other divisions. The case also brings in the possibility of accepting a project which does not meet the customary criteria, but holds a "protect position" benefit in which the company maintains its presence in the market.

A committee of staff from various departments within Global Electronics is introduced with the assignment of improving the firm's overall capital expenditure process, as well as pinning down the merits of the Ultra High Definition TV project. One person recommends the stand as a closely aligned TV product that could make a difference for the sucess of the primary product, encouraging students to look for creative ways to present a firm's products to the marketplace. Also, the case provides explicit differences of opinion about the merits of the project when viewed by individuals with differing stakes in the capital budgeting process; included are staff in engineering, procurement, marketing, plant management, and capital planning. In this way, instructors can enhance interest in capital budgeting processes for students with majors other than finance, and at the same time emphasize the importance of company departments outside of corporate finance to students majoring in finance.