Bio-Tech Inc. Case Solution And Analysis, HBR Case Study Solution & Analysis of Harvard Case Studies

Q4.) Evaluate the proposal to sell the CPG division?

According to Montgomery, the CPG division is not performing well because revenues of this division are not growing in line with the growth in other two divisions whose sales revenues are growing each year by greater percentage in relation to the growth rate of CPG division, whereas, according to the general manager of CPG division, this is not a reasonable basis for the evaluation of his division’s performance because he says that the market for consumer medical products is not growing as fast as the market for laboratory and other medical products but still his division has managed to get reasonable growth from the stable market, which means that his division has performed well during the past four years. Furthermore, he also claims that since his division does not use the research and development activities directly instead he uses the byproduct, which is developed by the process of developing other medical products for the rest of two divisions. Moreover, the research and development activities are principally carried for laboratory and medical, therefore, allocating the research and development cost to CPG division would not be a reasonable allocation and this would decrease the profitability of this division.

Meanwhile, the performance of CPG division can be measured in accordance with the EBIT generated by each division in relation to the capital expenditure being made on each division, therefore, evaluation of each division’s performance has been made and it reveals that CPG division has generated EBIT as a percentage of capital expenditure made in that year. However, the EBIT as percentage of sales is lower in case of LPG division, which means that PCG division has performed better than the performance of CPG.

In addition to this, the performance of CPG division over the last four years and the concerns of CPG division manager reveal that the allocation of research and development work has been charged to CPG division. For the mean time, the manager of CPG division states that he does not uses the research and development activities directly, instead his division uses the byproduct, which was discovered as a result of primary research for the other two divisions, therefore, the allocation of research and development cost should have been reversed, which will increase the profits of the CPG division and its comparison with other divisions would also improve (the results and impact of reversion of allocation of fixed research and development cost has been demonstrated in Appendix of the excel sheet). Additionally, the CPG division operates in a stable market where revenues can certainly be projected and do not deviate a lot over the years, which makes sure the profitability of division is possible, whereas other divisions that are operating in a more dynamic market makes the profits more volatile, which represents high risk of those divisions, meanwhile, the volatility of the market in other division exposes their equipments to become obsolete in short time period in the event of new technological improvement whereas the CPG division has no such risks so this is an additional point, which will make the division more stable investment than other divisions.

However, the CPG division generates lower growth in sales and EBIT, but since it sells the product that gets discovered during the product development for the principle divisions; hence, if this division is divested then that byproduct will not be marketed and sold. Consequently, that product will be thrown to the basket and no revenue will be gained through the development of that byproduct. Furthermore, the divestment of this division would lead to the loss of $13 million on book value in case of available offer of $25 million; meanwhile, it has to bear the divestment cost of this division. Therefore, based on the evaluation of different aspects related to the CPG division of Bio Tech Inc., Mr. Montgomery is recommended not divest the division...................................

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