New Heritage Doll

Risk considerations

A major concern to be addressed in the New Heritage Doll case study is the risk, the two projects being evaluated having very different risk profiles. The strategy typically employed by New Heritage Company when assessing a projects' risk is based on customer acceptance, technological uncertainty and high fixed costs. This note suggests an alternate strategy, trying to quantify the strategic growth potential for the New Heritage Doll Company of each project; therefore an integrated risk assessment approach based on both uncertainty and strategic and product positioning advantage delivered by each project will be used for project valuation.

The "Match My Doll Clothing Line Expansion" project delivers an increment in the existing market segment by expanding the current warm weather clothing and accessories line, capitalizing on the popularity of the current offering and its premium pricing, having a similar risk profile as the current division business.

The "Design Your Own Doll" project would deliver a "one-of-a-kind" doll ownership experience, and is expected to command the premium price associated with a custom doll. But more important, beside the new possibilities opened by the online customization of the dolls for expanding the current New Heritage market segment, the impact of the actual experience delivered by the girl interaction with the software while designing the doll should be further evaluated. This is a gaming-like experience that the project could deliver to its customers, consequently presenting a strategic opportunity of opening a new market segment for the "Design Your Own Doll" and further possibilities for investing in this market (leveraging the gaming aspect) should be considered when evaluating the risk of this project.

Therefore a purely numerical analysis based on the Net Present Value or IRR of these projects using the classic New Heritage Doll risk assessment strategy may not be sufficient. The aspects related to the strategic growth potential of the "Design Your Own Doll" project may be undermined by its higher breakeven volume; nonetheless the impact of opening a new market segment and delivering yet another time a unique experience for its customers, further strengthening the New Heritage Doll brand should compensate for it, justifying a lower risk assessment and a less conservative growth rate.

Project Valuation

Based on the standard New Heritage Doll company risk assessment strategy, the "Match My Doll Clothing Line Expansion" is considered a low risk project; therefore its associated discount rate would be 7.7%. In the case of "Design Your Own Doll", based on the same risk assessment