CaseStudy

Starting Right Corporation

After watching a movie about a young woman who quit a
successful corporate career to start her own baby food company, Julia Day decided that she wanted to do the same. In
the movie, the baby food company was very successful. Julia
knew, however, that it is much easier to make a movie about
a successful woman starting her own company than to actually do it. The product had to be of the highest quality, and
Julia had to get the best people involved to launch the new
company. Julia resigned from her job and launched her new
company-Starting Right.
Julia decided to target the upper end of the baby food market by producing baby food that contained no preservatives but
had a great taste. Although the price would be slightly higher
than for existing baby food, Julia believed that parents would
be willing to pay more for a high-quality baby food. Instead of
putting baby food in jars, which would require preservatives to
stabilize the food, Julia decided to try a new approach. The baby

food would be frozen. This would allow for natural

no preservatives, and outstanding nutrition.
Getting good people to work for the new co
also important. Julia decided to find people w
ence in finance, marketing, and production to gl
with Starting Right. With her enthusiasm and
Julia was able to find such a group. Their first steI
velop prototypes of the new frozen baby food and
a small pilot test of the new product. The pilot te
rave reviews.
The final key to getting the young company oj
start was to raise funds. Three options were considf
rate bonds, preferred stock, and common stock. Ju
that each investment should be in blocks of $30,O
more, each investor should have an annual incoill(
$40,000 and a net worth of $100,000 to be eligible
Starting Right. Corporate bonds would return 13%]

CASE STUDY

s. Julia furthermore guaranteed that investors

bonds would get at least $20,000 back at the
s. Investors in preferred stock should see their
~ntincrease by a factor of 4 with a good market
;tmentworth only half of the initial investment
ablemarket. The common stock had the greatest
mitialinvestment was expected to increase by a
Ia good market, but investors would lose every'ketwas unfavorable. During the next five years,
thatinflation would increase by a factor of 4.5%

Questions
!ky,a retired elementary school teacher, is connvestingin Starting Right. She is very conserva,.s ariskavoider.What do you recommend?

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2. Ray Cahn, who is currently a commodities broker, is also

considering an investment, although he believes that there is
only an 11% chance of success. What do you recommend?
3. Lila Battle has decided to invest in Starting Right. While
she believes that Julia has a good chance of being successful, Lila is a risk avoider and very conservative. What
is your advice to Lila?
4. George Yates believes that there is an equally likely
chance for success. What is your recommendation?
5. Peter Metarko is extremely optimistic about the market
for the new baby food. What is your advice for Pete?
6. Julia Day has been told that developing the legal documents for each fundraising alternative is expensive. Julia
would like to offer alternatives for both risk-averse and
risk-seeking investors. Can Julia delete one of the financial alternatives and still offer investment choices for risk
seekers and risk avoiders?

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!y
ctronics
'e Blakefounded Blake Electronics in Long Beach,
0 manufacture resistors, capacitors, inductors, and
)Diecomponents. During the Vietnam War, Steve
operator, and it was during this time that he be;ientat repairing radios and other communications
Steve viewed his four-year experience with the
nixedfeelings. He hated army life, but this experiimthe confidence and the initiative to start his own
firm.
Ieyears,Steve kept the business relatively unchanged.
,talannual sales were in excess of $2 million. In 1996,
, Jim,joined the company after finishing high school
~arsof courses in electronics at Long Beach Commu:e.Jim was always aggressive in high school athletics,
:ameeven more aggressive as general sales manager
lectronics. This aggressiveness bothered Steve, who
onservative. Jim would make deals to supply compalectroniccomponents before he bothered to fmd out if
tronicshad the ability or capacity to produce the comIseveral occasions this behavior caused the company
iarrassingmoments when Blake Electronics was unable
the electronic components for companies with which
ade deals.
00, Jim started to go after government contracts for
: components. By 2002, total annual sales had inmore than $10 million, and the number of employees
200. Many of these employees were electronic sped graduates of electrical engineering programs from
Iges and universities. ,But Jim's tendency to stretch
~ctronics to contracts continued as well, and by 2007,
'ectronics had a reputation with government agencies
fpany that could not deliver what it promised. Almost
It,government contracts stopped, and Blake Electroneft with an idle workforce and unused manufacturing

equipment. This high overhead started to melt away profits, and

in 2009, Blake Electronics was faced with the possibility of sustaining a loss for the first time in its history.
In 2010, Steve decided to look at the possibility of manufacturing electronic components for home use. Although this was a
totally new market for Blake Electronics, Steve was convinced
that this was the only way to keep Blake Electronics from dipping into the red. The research team at Blake Electronics was
given the task of developing new electronic devices for home
use. The first idea from the research team was the Master Control Center. The basic components for this system are shown in
Figure 3.15.

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FIGURE 3.15
Master Control Center

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Master 9Qqtrol Box

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Outlet
Adapter

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tight Switch
Adapter

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Lightbulb
Disk

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CHAPTER 3

DECISION

ANALYSIS

The heart of the system is the master control box. This unit,
which would have a retail price of $250, has two rows of five
buttons. Each button controls one light or appliance and can be
set as either a switch or a rheostat. When set as a switch, a light
finger touch on the button either turns a light or appliance on
or off. When set as a rheostat, a finger touching the button controls the intensity of the light. Leaving your finger on the button
makes the light go through a complete cycle ranging from off to
bright and back to off again.
To allow for maximum flexibility, each master control box
is powered by two D-sized batteries that can last up to a year,
depending on usage. In addition, the research team has developed three versions of the master control box-versions A, B,
and C. If a family wants to control more than 10 lights or appliances, another master control box can be purchased.
The lightbulb disk, which would have a retail price of
$2.50, is controlled by the master control box and is used to
control the intensity of any light. A different disk is available
for each button position for all three master control boxes.
By inserting the lightbulb disk between the lightbulb and the
socket, the appropriate button on the master control box can
completely control the intensity of the light. If a standard light
switch is used, it must be on at all times for the master control
box to work.
One disadvantage of using a standard light switch is that
only the master control box can be used to control the particular
light. To avoid this problem, the research team developed a speciallight switch adapter that would sell for $15. When this device is installed, either the master control box or the light switch
adapter can be used to control the light.
When used to control appliances other than lights, the master
control box must be used in conjunction with one or more outlet
adapters. The adapters are plugged into a standard wall outlet, and
the appliance is then plugged into the adapter. Each outlet adapter
has a switch on top that allows the appliance to be controlled
from the master control box or the outlet adapter. The price of
each outlet adapter would be $25.
The research team estimated that it would cost $500,000 to
develop the equipment and procedures needed to manufacture
the master control box and accessories. If successful, this venture could increase sales by approximately $2 million. But will
the master control boxes be a successful venture? With a 60%
chance of success estimated by the research team, Steve had
serious doubts about trying to market the master control boxes
even though he liked the basic idea. Because of his reservations, Steve decided to send requests for proposals (RFPs) for

TABLE 3.15

Unsuccessful
venture

Success Figures for MAl

35

20

15

30

additional marketing research to 30 marketingresea

nies in southern California.
The first RFP to come back was from a sma!
called Marketing Associates, Inc. (MAl), whichWI
$100,000 for the survey. According to its proposa
been in business for about three years and has cond
100 marketing research projects. MAl's major sf
peared to be individual attention to each account,(
staff, and fast work. Steve was particularly interestel
of the proposal, which revealed MAl's successreco
vious accounts. This is shown in Table 3.15.
The only other proposal to be returned wasI
office of Iverstine and Walker, one of the larges
research firms in the country. The cost for a com]
would be $300,000. While the proposal did not cont
success record as MAl, the proposal from Iverstine
did contain some interesting information. The ch
ting a favorable survey result, given a successful,
90%. On the other hand, the chance of getting an
survey result, given an unsuccessful venture, was
it appeared to Steve that Iverstine and Walker WOll
predict the success or failure of the master control
great amount of certainty.
Steve pondered the situation. Unfortunately, 1
ing research teams gave different types of inform:
proposals. Steve concluded that there would be no
two proposals could be compared unless he got add
mation from Iverstine and Walker. Furthermore,
sure what he would do with the information, an.
be worth the expense of hiring one of the markel
firms.
Discussion Questions
1. Does Steve need additional information fre
and Walker?
2. What would you recommend?