Bakers Adhesives Case Solution And Analysis, HBR Case Study Solution & Analysis of Harvard Case Studies

Bakers Adhesives Case Study Analysis

This again offers a great opportunity for the companies to provide different product lines for different industries they serve, such as: toy manufacturers, body care products and so on. In addition to this, Baker can reduce the costs because the company has not invested much in the large machines, since the order placement;unlike large companies, which require large capital and manpower.

Threats of Existing Rivalry (HIGH)

Some of the existing competitors of Baker Adhesives in the market shares are BASE Dow Chemicals. Henkel. Bayer. H. B. Fuller. Acucote Inc., Ashland. Inc. Beardow Adams (Adhesives) Ltd. Creative Materials Inc. and Franklin International Inc. which are all large firms that provide bulk of adhesives for consumers. Given that they are the large firms; it can be concluded that this industry has fierce competition. To become successful these companies invested in an efficient and flexible production system as well as good chemists, which are all also owned by the Baker Adhesives. The competitive advantage of the others is they were able to dominate the international market and sourcing capabilities while Baker Adhesives is experiencing issues in entering the international market. This leads to HIGH threats of existing rivalry.

Alternate Courses of Action:

Net Present Value of the Future Cash Inflow from New Order of Novo

Because the company operates in abroad; it faces exchange rate risk in these transactions. The above risk management is very important for the profitability of the business. The case stressed. Moreno has tried to find the best way to reduce the risk and has planned to device hedging plans in the futures and money markets. Under such circumstances,the table below shows the net present value of the company’s future inflows until the hedge is hedged. The present value is calculated because the cash flow from the money market hedging transaction are the current cash flow collateral in the future’s market and a hedging transaction in the foreign market, so the present value will be more explanatory in comparison.

Effect of Foreign Exchange Rate Fluctuation in the Original Order

As the previous transaction with Novo was affected by sudden changes in the interest rates, we expect to determine the impact of this event on the company and use it for further calculations, for comparison. The table shows the changes in the company's profits as well as its revenues, due to the changes in the exchange rates.

Analysis of New Novo Orders

We know that Novo is actually trying to order a Baker sticker by ordering more than 50% of the stickers previously ordered. The problem is that Novo is unwilling to pay a higher price than it paid in the previous transaction. The following analysis describes how the transaction will affect the business profits. This will help Moreno in deciding whether to accept or reject the proposal.

The table below shows the calculation of the profit (loss) that a company is expected to generate when it receives new orders from Novo. This calculation accounts for the indirect costs of new orders. The final figures show that the business will incur losses after the offer gets accepted.

When calculating the table below. We did not include the additional costs in the management fees, because the company’s current operating capacity is insufficient. Eliminating the additional indirect costs can erroneously underestimate the business profits by accepting an offer.

Recommendation:

Currently. Novo is entering into another transaction with Baker, with more than 50% of the orders being previously ordered during the first transaction. Given the problems with the ongoing transactions: Baker wants to consider the factors that can help.

The first is the NPV method. To reduce currency risk; Baker Adhesives is currently conducting overseas transactions with Novo. Alissa Moreno has planned to compare the present value of cash flow hedges in the futures or foreign exchange market. As for the results of the calculation; it can be seen that as compared to the futures market; the company tends to choose to hedge the futures market because of the present value of the cash flow when the hedge in the futures market is 564,766.33, which is larger than the futures market. When hedging the foreign exchange market; the present value is $ 64,190.10.

The second is the effect of exchange rate fluctuations on international transactions.

Finally, regarding the profitability of NOVO's acceptance of new orders;some say that if a company’s current operating capacity is not sufficient, eliminating the extra cost will underestimate the company’s profits, so changing the cost structure will result in a profit for the company to around 7,186.95 USD. So. The company should consider accepting an additional 50% order from Novo......................................

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