This case brings to life concepts from Chapters 3 and 4 by illustrating how one company struggled with vertical co-ordination decisions, including make-or-buy decisions, market versus vertical integration and contracting (licensing).  It further examines the interrelationship between these vertical co-ordination choices and corporate strategy(ies).

 

This case relies on decision tree, financial forecasting, NPV analysis and sensitivity analysis.  You will need to be able to do some simple Excel work.   

 

Create a decision tree for CRP from current to commercialization / retail.  It won’t be super complicated.  There are only 5 real pathways.

For each pathway, put together net cash flow / sales projections for 1991 through 2009.  Calculate the NPV for each pathway.  Use the same discount rate for each pathway.  What is your discount rate?  How did you choose it?  

Hint 1:  remember that cash flows can be negative

Hint 2:  use excel spreadsheet provided

What other non-financial considerations would you need to consider with each pathway?  Could you model / quantify these in your financial model of #2?  

NOTE:  HERE YOU NEED TO UTILIZE CONCEPTS FROM THE ADDITIONAL READING.  HERE WE ARE APPLYING ECONOMIC CONCEPTS ON VERTICAL COORDINATION AND GOVERNANCE MECHANISMS.

What are your recommendations regarding manufacturing of CRP-1 for Phase I&II? For Phase III?  Justify your recommendations.

How confident are you in your recommendation in #3?  Assume I’m the owner (VC or majority stockholders or equity partner, etc).  I’m going to challenge you under different scenarios.  

What is your suggestion regarding long-term strategy?  What are the pros of this choice?  What are the risks associated with this choice?  Does your choice of long-term strategic positioning alter your choice of pathway for CRP-1?