Jacobs

3214 Words May 18th, 2014 13 Pages
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Jacobs Division 2003

Richard Soderberg, financial analyst for the Jacobs Division of MacFadden Chemical Company, was reviewing several complex issues relating to possible investment in a new product for the following year, 2004. The product was a specialty coating material, which qualified for investment according to company guidelines. Mr. Reynolds, however, the Jacobs Division manager, was fearful that it might be too risky. While regarding the project as an attractive opportunity, Mr. Soderberg believed that the only practical way to sell the product in the short run would place it in a weak competitive position over the long run. He was also concerned that the estimates used in the probability analysis were
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Reynolds would say. Third, Mr. Reynolds was skeptical of estimates. “I don’t know what’s going to happen here on this project, but I’ll bet we overstate returns by 2 to 5 percent on average,” was a typical comment. He therefore tended to look for at least 4 percent more than the company standard before becoming enthusiastic about a project. “You’ve got to be hard-nosed about taking risk,” he said. “By demanding a decent return for riskier opportunities, we have a better chance to grow and prosper.”

Mr. Soderberg knew that Mr. Reynolds’s views were reflected in decisions throughout the division. Projects that did not have promising returns according to Mr. Reynolds’s standards were often dropped or shelved early in the decision process. Mr. Soderberg guessed that at Jacobs almost as many projects with returns meeting the company hurdle rates were abandoned as were ultimately approved. In fact, the projects that were finally submitted to Mr. Reynolds were usually so promising that he rarely rejected them. Capital projects from his division were accepted virtually unchanged, unless top management happened to be unusually pessimistic about prospects for business and financing in general.

The Silicone-X Project

A new product was often under study for several years after research had developed a “test tube” idea. The product had to be evaluated relative to market
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