THE

SHRI RAM CASE COMPETITION PRELIM 2

Shri Ram Case

Competition
Preliminary Round - 2

1 | S R C C B u s i n e s s C o n c l a v e 2 0 1 6

THE SHRI RAM CASE COMPETITION PRELIM 2

Instructions:
o This document consists of one case study with 4 distinct questions. There is NO word
limit to the recommendations.

o Teams shall be judged on the basis of creativity, analytical skills and feasibility.

o Teams must submit their solution by 11:59 PM on 22nd January 2016 by mailing it to
the following email ID: shriramcase.bc16@gmail.com

o The solution should be in the Portable Document Format (PDF). The solution document
and subject of the mail should be named as ShriRamCase_TeamCode. (For example:
ShriRamCase_caseit!16)

o The body of the mail should contain the name and contact details of the participants.

o The shortlisted teams would be sent an e-mail, so keep checking your e-mail at regular
intervals.

o The list of the shortlisted teams will also be uploaded on the Shri Ram Case Study
Facebook Event page.

o The decision of the organizers shall be binding on all the participants.

If it can be thought, it can be done.

Team Business Conclave 2016

In case of any queries, feel free to contact:
Aastha Kamra +91 9873384580
Vishal Sahoo +91 9999662884

2 | S R C C B u s i n e s s C o n c l a v e 2 0 1 6

THE SHRI RAM CASE COMPETITION PRELIM 2

The Making of Velcro

Nature has laid out all the dots. All we have to do is connect them. Biomimicry provides for such a
connection by using Natures 3.8 billion years of trial and error as inspiration to find solutions to today's
problems, and creative processes.

The Birth of an Idea (1941 - 1948)
Such was the case one beautiful summer morning of 1941 when George De Mestral, a Swiss electrical
engineer and nature lover took his dog for a hike through the fields and forests of the Jura Mountains.
Upon arriving home, he noticed burrs of the cocklebur flowering plant (See Exhibit 1, Part A), stuck to his
clothes and his dogs fur. Fascinated by the tenacity with which these seeds latched on to materials,
Mestral observed these burrs under a microscope to discover that each was covered with many small
hooks that caught onto tiny natural loops in surfaces like fiber and fur.

Recognizing the potential of his observation as the basis for a miracle synthetic fastener of extraordinary
capacity, he decided to create a prototype, a synthetic fastening system that exactly mimicked the
hooks and loops of such burrs. This idea sparked a 20 year long battle inviting not just technical
challenges but also criticism along the way. Three problems plagued the development of such a
synthetic material. First, obtaining the means of making the prototype was a challenge as all the
weavers Mestral approached laughed his idea off, even questioning his sanity. Second, considerable
difficulty was faced in identifying a material with the appropriate adhesion and strength required to hold
the hooks. And third, no manufacturing process seemed to exist that could automate the production
process to yield consistent results in terms of fastening performance and quality.

In a final move of desperation, Mestral retreated to a hut deep in the Alps to free himself from all
distractions and devote himself completely to further research and development. Finally, one weaver
from a textile plant in France agreed to offer help, owing to Mestrals sheer persistence and
stubbornness. Together, through trial and error, they selected Nylon fiber as the base material over
cotton because it was stronger, did not wear down much with regular use and could be produced in
threads of varying thickness. Furthermore, an entirely new machine was designed consisting of looms
that stimulated the cutting motion of shears, facilitating mass production of his invention. Thus, after 8
years of devotion, pre commercial R&D costs and uncommonly high capital investments raised in
venture capital, what was created was two strips of fabric, one covered in thousands of tiny hooks and
the other in thousands of tiny loops, that gripped together firmly while still allowing easy release (See
Exhibit 1, Part B and C). The invention was named Velcroa combination of the French words velours
(velvet) and crochet (hook).

3 | S R C C B u s i n e s s C o n c l a v e 2 0 1 6





PHASE I: An idea becomes a Company? (1948 - 1960)

THE SHRI RAM CASE COMPETITION PRELIM 2

Like a true innovator in awe of his invention, Mestral was of the belief that Velcros properties were so
superior to those of its counterparts that precious time would be wasted, if the product was not
released into the market immediately. Thus, he submitted the technology for a patent in 1951 and
established his own company, Velcro S.A. in Switzerland by 1952 to market his novel product. An
$18,000 plant was constructed and began with an initial capacity of 5000 yards per year, without ever
having put out any samples to industries for preliminary assessment. Mestral had projected that the
plant could generate a net return on investment of 10%, if operating at 100% scale/capacity ratio.
Expecting that Velcro was a reusable, strong and reliable product (that did not break like zippers or fall
like buttons) and consequently attracted immediate customers, a Return on Sales of 10% was projected
on the clothing business. Meanwhile, Mestral got the patent in 1955 for a period of 23 years.

However, despite the superior function Velcro provided, it was not an immediate commercial success.
Velcro in the early 1950s looked like it had been made from leftover bits of cheap fabric, an unappealing
aspect that certainly could not capture the imagination and attention of the fashion world, the only
industry expected to generate demand at the time. Further, the unpleasant sound made on opening and
closing the Velcro strips made them unviable for certain purposes. The strips also tended to accumulate
hair, dust and fur after a few months of regular use. Also, certain materials could get damaged by
contact with these strips. The result was that sales fell short of expectations and the plant operated well
below capacity. Mestral barely managed to generate sales revenue of $60 per week in his first years in
business (See Exhibit 3). Hence, the product could not gain broader market acceptance confirming that
the market growth for such industrial products was generally a slow, uncertain and tedious process
because customers were unwilling to substitute unknown materials for the tried and tested established
products.

Moreover, competition existed between zips, buttons, safety pins and laces for they all provided the
same utility, and the additional features Velcro had to offer seemed trivial to a section of customers.
Zipper gauges, which provided primary competition, were in short supply and their prices had risen
recently to 60 cents per yard. But in contrast to these general trends in demand, the managers remained
confident that if Velcro could be priced at no more than 4 times the price of zips, (what they called the
replacement ratio) Velcro could compete successfully and gain market share.

The bets seemed fair but the risks were large. If the clothing industry did not adopt Velcro, the company
stood to lose in a big way.

4 | S R C C B u s i n e s s C o n c l a v e 2 0 1 6



THE SHRI RAM CASE COMPETITION PRELIM 2


PHASE II : Turnaround for Velcro (19601978)

Even the best financial analysts and experts of the era could not foresee what happened next.
Within a few years, Mestral started branching out of Switzerland and began selling Velcro in other
European countries such as Belgium, Germany, Italy, Sweden and the United Kingdom. A lucrative
licensing agreement in 1957 with Velok Ltd. of Canada turned his fortunes around. The agreement gave
Velok the exclusive rights to produce and sell Velcro branded hook and loop fasteners in the Western
hemisphere as well as in the Asia Pacific region. In return, Velok agreed to give Velcro the right to all
intellectual property subsequently developed. The licensing agreement with Velok expanded the
products market reach in North America and Asia and as sales grew so did press coverage and
enthusiasm for the product.
With NASAs decision to embrace Velcro in the early 1960s, the company rocketed to fame. NASA
decided to use Velcro as fasteners so that astronauts could get in and out of spacesuits with ease and to
secure pens, food packets and equipment that they did not want floating away in zero gravity. Following
this huge image makeover, the same idea was applied to ski apparel. Hospitals affixed Velcro to
everything from blood pressure gauges to patient gowns. It showed up in cars underneath floor mats, in
slipcovers and drapes for home decor and even on airplanes as seat cushions. A fashion show at New
York City's Waldorf-Astoria Hotel displayed everything from Velcro diapers to Velcro golf jackets. A New
York Times report declared that it was "the end of buttons, toggles, hooks, zippers, snaps and even
safety pins." In 1968, Puma became the first major shoe company to offer a sneaker with Velcro
fasteners. Other companies soon caught on until every child in America seemed to own at least one pair
of those three-strap Velcro wonders.
The popularity of Velcro branded products, especially in North America allowed Velok and Velcro to
innovate and grow at a rapid pace. In the late 1960s the two companies decided to merge to form
Velcro Industries B.V., which retained all rights to patents relating to De Mestrals invention. In order to
fund its rapid expansion, Velcro Industries B.V. now started looking out for investments.

PHASE III : Troubled Times Approaching Again (1978 onwards)
Competition due to Patent Expiry
However, by the time Velcro became hugely useful, the commercial success was threatened as the
patent on the hook-and-loop technology expired in 1978, opening the market to a slew of low-cost
competitors, operating in regions where Velcro Industries B.V. did not have any presence. The French
company Aplix (the leading European fastener supplier) and Japanese-owned YKK (a leading
manufacturer of zippers for clothing) capitalized on the opportunity, particularly in the apparel and
footwear industries. The demand for the fastener among shoemakers was so great that Velcro could not
meet it alone, and it lost some business to other foreign suppliers as well.

5 | S R C C B u s i n e s s C o n c l a v e 2 0 1 6



THE SHRI RAM CASE COMPETITION PRELIM 2

This forced Velcro to begin a lifelong battle of maintaining the integrity of its products name to prevent
it from becoming a generic term. "Velcro is the name of our company and is a registered trademark for
our products," the highly defensive CEO said in an interview. "It is not the generic name of the product,
that is generically known as hook-and-loop fastener." Velcro thus realized that their brand needed
clarity and energy to become more contemporary and establish its originality. It was important to lift the
company from a regional manufacturing-driven industrial setting, into a lifestyle brand that emphasized
innovation and position. They also realized that they needed to be more coordinated across products
and countries, bringing different regional entities and global business units under one umbrella brand of
recognition.

Fall in Demand
When the fashion buzz and shoe fad wore off, there was an excess capacity among hook and loop tape
suppliers. The resulting excess supply, created disequilibrium, thus forcing prices to fall below desired
levels. Although Velcro survived the severe decline in prices, the management realized that the
company lacked any stable, industrial markets that would ensure sustainable demand for the company
in the long run.

Quality Issues
Just when talks were in order about diversification of the product line, a phone call came one morning in
August 1985 from their Detroit sales manager, informing the management that General Motors was
dropping them from its highest supplier quality rating. The blow was especially hard because they felt
confident about their systems and had not only been regularly sending employees to learn statistical
process control, but had also been conducting training sessions and seeking advice from top consultants
for improvement. The particular problem General Motors raised was all the more puzzling as the
management was told that their products were fine and that they were meeting their delivery schedules
but the process was unacceptable: they were inspecting quality in the product, not manufacturing
quality into the product. In Velcros case, if a weave defect cropped up, by the time it was noticed
thousands of yards of material might have been made, compelling them to throw away 5% to 8% of
tape. They needed quality maintained at all levels along the assembly line to prevent such waste.

Problem in Team Dynamics
A blame game over quality followed. The CEO realized the need for a major overhaul when he heard
comments like, My boss wont let me shut the machine down. We make junk on my shift, but he
doesnt care. He just says weve got to get x yards of material out. I show him the material, and he says
we have to run it anyway. It was not just about quality but a general lack of respect and recognition for
subordinates in the organization, a major cause of low employee morale and dissatisfaction among the
workforce.

6 | S R C C B u s i n e s s C o n c l a v e 2 0 1 6



THE SHRI RAM CASE COMPETITION PRELIM 2


The idea that fastened the world
Despite all these challenges, Velcro has come a long way since the days when it enjoyed patent
protection and did not have to worry much about its customers. Such is the story of Velcro- something
that was a common annoyance to the world emerged as a cause of curiosity and inspiration for Mestral,
and what had started as a routine hike in the woods eventually laid the foundations of a multi-million
dollar company.
EXHIBITS
Exhibit 1: Part A







Xanthium Strumarium (Typical burr of a cocklebur flowering pant)

Exhibit 1 : Part B











Working of Hooks and Loops in Cocklebur Plant

7 | S R C C B u s i n e s s C o n c l a v e 2 0 1 6

THE SHRI RAM CASE COMPETITION PRELIM 2

Exhibit 1 : Part C









Hooks and Loops in Velcro

Exhibit 2

Sales of Velcro (1952-59)

80

Sales in $/week

75
70
65
Sales in $/week

60
55
50
1952 1953 1954 1955 1956 1957 1958 1959
Year

8 | S R C C B u s i n e s s C o n c l a v e 2 0 1 6

THE SHRI RAM CASE COMPETITION PRELIM 2

Exhibit 3

Financial Summary of Velcro Industries B.V. (1971 194)

Fiscal Year (Calendar year)

Net Income
Net borrowings
Depreciation &
Amortization
Changes in Fixed Capital
Investment (Cash)
Changes in Working Capital
Investment (Non Cash)
(in $ million)

1971
2.056
5.646

1972
2.0544
5.89

1973
2.1772
5.986

1974
2.3796
6.978

0.47288

0.431424

0.5443

0.79099

2.34

1.8

1.89

1.56

0.34

0.25

0.46

0.32

*Rate of growth of equity is constant at 5% from 1974 onwards

Exhibit 4
Financial Summary of Velcro Industries B.V (1978)
Fiscal Year (Calendar Year)
Net Sales
Net income
Net borrowings
Shareholders equity
Dividend

1978
23.783
4.04311
7.886
8.188
0.783

(in $ million)

9 | S R C C B u s i n e s s C o n c l a v e 2 0 1 6

THE SHRI RAM CASE COMPETITION PRELIM 2

QUESTIONS

All questions are to be answered independent of each other. Answers need not necessarily be
restricted to hints and suggestions given in the question.
Question 1
Information
Whartons Rita Gunther McGrath and Columbias Ian C. MacMillan articulated a system they termed
Discovery Driven Planning, which in their words acknowledges that at the start of a new venture, little
is known and much is assumed.
This, they contrast with Platform Based Planning for more conventional, existing lines of business in
which one can extrapolate future results from a well understood and predictable platform of past
experience and knowledge. This implies that assumptions underlying a plan are treated as facts rather
than estimates to be tested and questioned.
However, following this platform based approach for operating or venturing into arenas with significant
amounts of uncertainty would mean committing a folly. For a new initiative-whether a new business,
new market or new product, extrapolation rarely works because the predictions for a new initiative are
based upon assumptions and not past knowledge. Discovery Driven Planning accordingly imposes
planning discipline through four key documents:
1. Reverse Income Statement - This models the business economics through a bottom-up
approach of the income statement wherein instead of starting with estimates of revenues and
working down the income statement to derive profits, first required profits are obtained and
then the level of sales, plant capacity and price required to deliver the level of profits is
determined.
2. Key Assumptions Checklist - This identifies the implicit assumptions for the initiative and
ensures that they are flagged, discussed and tested before committing irreversibly to a venture.
3. Milestone Planning Chart This first identifies the milestones that the project will be moving
through as it unfolds, and in what sequence. Examples of milestones typically would include
initial research, prototype testing and so on. Second, it maps assumptions to key milestones to
identify and know when the key assumptions will be tested. For example, assumptions during
Initial Research include market sizing, customer preference analysis, consumer purchasing
power survey and so on. Assumptions represent factors to be estimated to reach a particular
milestone.
4. Pro Forma Operations Specs gives the ventures allowable costs including estimates for
wages and salaries, raw material and inventory cost, manufacturing costs, insurance, marketing
and advertising and whatever other annualized costs the firm may incur to achieve required
sales target. It also details out the production plan of the company.

10 | S R C C B u s i n e s s C o n c l a v e 2 0 1 6



Question

THE SHRI RAM CASE COMPETITION PRELIM 2

Apply Discovery Driven Planning approach to Velcro S.A.-

Through the Reverse Income Statement, test whether the assumptions of price and capacity
initially made by the managers of Velcro S.A. (mentioned in the case) were correct to achieve
the required Return on Investment of 10% and Return on Sales of 10%. If not, use the
return/profit and sales/revenue obtained through your calculations to arrive at the correct
replacement ratio or capacity the plant should have operated at to compete successfully and
gain
market
share.

Through the Key Assumptions Checklist, identify all significant assumptions that had been made
by the team at Velcro S.A when beginning the production of Velcro. Show whether these
assumptions stood validated by analyzing the trends and factors that were neglected by the
management in their absolute awe of the product and hurry to enter the market.

Independent of the assumptions throughout the venture, draft a Milestone Planning Chart for
Velcro Company. Using key milestones of Initial research, Prototyping, Testing by customers,
Production and Selling, Market Reaction, Product Redesign and Repricing Analysis, isolate the
key assumptions to be tested at each such milestone. Adapt these assumptions to the Velcro
Company.
For
example-

Milestone
Assumption to be tested
Application to Velcro S.A.
Initial Research Market sizing
Estimate figure through calculations

and projections
Use the estimates or conclusions of the assumptions arrived at through the Milestone Planning
Chart, to design a Pro Forma Operations Specs. It should include details of sales and
manufacturing process. For example, some headings under Sales and Manufacturing could be-

Sales
Estimate
Assumptions backing the estimate
Required Unit Sales
25,000 yards
Market sizing assumption.

Sales Person needed


Manufacturing


Annual
Production

Capacity
Production Lines Needed

Question 2
Imagine that you are the founder of Velcro S.A. and you established the company in 1952 in Switzerland.
Initially, you expect to capitalize on the clothing industry (excluding footwear and other accessories).

11 | S R C C B u s i n e s s C o n c l a v e 2 0 1 6



THE SHRI RAM CASE COMPETITION PRELIM 2

Ignoring all assumptions made by Mestral, guesstimate the market size for Velcro S.A in Switzerland in
the year of its establishment.
(The focus is on the logic used and creativity of the approach. Assumptions must be clearly stated.)
Question 3
Information
Free Cash Flow to Equity Model of Discounted Cash Flow Valuation is used to value the equity of a firm.
In this model, the FCFE for different years is first estimated and then discounted using a discounting
factor to arrive at the present value of the equity.
Question

Amazed at the companys quick progress and its readiness to collaborate, imagine that Velcro Industries
B.V. was approached by ABC Investment Firm in early 1971 with an offer to buy 30% equity of the
company at an investment of $37 million. The managers of Velcro had done enough research to
ascertain that similar deals to sell a certain portion of the equity at that time, would ideally attract a
premium of at least 25% over the value of equity.

Assuming a prevailing cost of equity at 12% and constant growth rate of 5% from 1974 onwards, use the
FCFE valuation technique and the optimum level of premium desired to determine whether the offer
made by ABC Investment Firm is lucrative for Velcro Industries B.V. Also qualitatively analyze what
implications the acceptance of this offer will have on the Company.
Question 4 -

In light of the problems Velcro faced post 1978, suggest a comprehensive planning strategy to put the
company back in its premier position. Make sure to include-

Promotional & Branding Strategy

Stable markets opportunities
Quality Control Measures
Human Resource Management techniques

RESOURCES
1. Free Cash Flow to Equity Method - http://www.financeformulas.net/Free-Cash-Flow-to-
Equity.html

2. Discovery Driven Planning - https://hbr.org/1995/07/discovery-driven-planning

12 | S R C C B u s i n e s s C o n c l a v e 2 0 1 6