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Unformatted text preview: Capital Budgeting with Staged Entry 16A GULF COAST FISHERIES, INC. Directed The senior executives of Gulf Coast Fisheries, Inc. (GCF), a leading seafood harvester and proces- sor, scheduled a meeting in early 1995 to consider a significant change in corporate strategy. Gulf Coast’s present strategy is to concentrate solely on harvesting and processing seafood from the Atlantic Ocean and the Gulf of Mexico. The company’s products include a variety of saltwater fish, crab, lobster, shrimp, oysters, scallops, and clams. However, increased competition from low- cost foreign producers has hurt profits, and overharvesting and pollution have decreased the fish and shellfish population, resulting in significantly lower yields. Furthermore, the government frequently bans oyster harvesting along much of the Atlantic and Gulf coasts, following cases where people became sick after eating contaminated oysters. These factors prompted GCF to reconsider its basic strategic plan, and management is now thinking of making a major move into the freshwater cat- fish market. GCF was founded in 1960 in New Orleans by a consortium of commercial fishermen whose plan was to provide Americans throughout the country with fresh seafood. GCF’s sales in 1994 were $65 million, and its net income was $1.5 million. The company’s seafood is regarded as being of the highest quality, and the firm has the reputation of being a leader in its chosen line. Still, for the reasons cited above, the profit trend has been down in recent years, and unless there are fundamen- tal changes, losses will eventually occur. All prior proposals to enter the catfish market were rejected because (1) Gulf Coast’s operat- ing and marketing advantages have always been in seafood (saltwater products), and (2) since con- sumer demand for catfish was primarily limited to only a few areas in the Deep South, management did not regard the catfish market as having enough profit potential to make the investment worth- while. Recently, though, consumer demand for catfish has been increasing throughout the United States. Further, by marketing the product under the Gulf Coast Fisheries name and capitalizing on its reputation for quality and freshness, management now believes there is a good chance that the pro- ject could be financially successful. Finally, some of GCF’s executives believe that it simply must make a strategic change if it is to reverse the downtrend in profits. Gulf Coast’s managers are examining two alternative proposals for entering the catfish mar- ket. Plan L (for large) calls for the immediate development of a large facility that would house the entire fresh fish processing division—catfish holding ponds, a hatchery, a major processing plant, research and development (R&D), marketing, and general management. Plan S (for small) calls for Copyright © 1994. The Dryden Press. All rights reserved. the initial construction of a smaller, unsophisticated, no-frills processing plant with limited capacity,...
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