CASE STUDY

BEACH FOODS
CASE HISTORY:
Beach Foods (Beach) is a family-owned business which has grown strongly over its 100 year
history. The objective of the business is to maximise the family's wealth through their
shareholdings. Beach has three divisions. It manufactures a variety of foods in two of the
divisions: Beach Baby Foods (Baby) and Beach Chocolate Foods (Chocolate). Each of these
divisions knows its own market and sets prices accordingly. The third division (R&D) researches
new products on the instructions of the other divisions and is considered to be vital to the
survival and growth of Beach. The board of Beach has been considering the impact of using a
divisional structure and has come to you as a performance management consultant to ask for
your advice.
ISSUES AT HAND:
All this job was partially triggered by the group managers' concerns. Divisional managers in the
Chocolate division are complaining that their main production line needs to wait a year to be
upgraded. This is what we are talking about. The improvement to the manufacturing line
eliminated duplication and increased the gross margin for Chocolate by 10 percentage points.
FACTS AND FIGURES:

ROI is lower than for similar companies (20 percent) on the basis of divisive profit
(14.2percent). The ROI is however higher on the basis of controllable profit or R&D profit than
the Benchmark. So we don't know the income estimates were included in the calculation, and
we don't know whether the Baby's ROI number is better or lower than the average of
comparable companies.

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ALTERNATIVES:

 It provides an absolute output indicator and thus demonstrates the overall value that
the divisions make to the business.

 The fundamental value measure is plain. If a division has a positive EVA, it generates a
return that is higher than that required by financial providers. (ROI requires the setting
of a target level , usually based on the industry's benchmarking).

 The changes appropriate for the measurement of NOPAT imply that it is similar to cash
flows than normal accounting earnings, and thus that EVA is less prone to accounting
policy choices.
RECOMMENDATIONS:
Increases potential spending (e.g. in advertisement and development) by taking back these
expenses and counting them as capital expenditure to support the success era. Which through
the urge to make short-term choices that would otherwise be inefficient be a problem in which
ROI and RI use the capital figure employed in the financial statements. In Beach, where R&D is
important, that is potentially especially relevant.
Because of the prices of innovative goods and fast development (such as the promotional
campaign Baby conducted to promote the latest product launch), we recommend initial usage
of a non-accounting model.

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