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Business Plan Analysis Using Multi-Index Methodology: Expectations of Return and Perceived Risks:

Business Plan Analysis Using Multi-Index Methodology: Expectations of Return and Perceived Risks: This article aims to show that business plan risks are clearer and more consistent, compared with classical methodology, when evaluated through the multi-index methodology. To do so, it is necessary to identify the expectations of return and perceived risks in evaluating a business plan. To explain the above statement, we used a case example of a manufacturing unit of purses made of tilapia leather in the city of Campo Mourão, Paraná State, Brazil. Relevant information was collected through documenting research and semi-structured interviews, which were conducted in 2016 and 2017. The adoption of the cost leadership strategy, practicable due to the presence of local production arrangements, proved crucial to this project’s viability. Following this strategy, the demand, initial investments, production costs, and selling price were estimated. The multi-index methodology was used for the generation and analysis of the return indicators vis-à-vis the perceived risks. The multi-index methodology perceptual map signals a medium/high return (return on investment assets = 23.71% per year) and that the perceived risks are compatible with profit expectations. The sensitivity analysis of the results, using the Monte Carlo method, shows that P(net present value ≤ 0) ≈ 0.0002, thus corroborating the decision to invest in this business. This article contributes to the literature on the use of existing productive arrangements in various stages of the production and marketing process and the use of an analysis methodology that leads decision-makers to specify the risks associated with their decision. Keywords investment decision-making, cost management, multi-index methodology, strategy studies, mainly with regard to decision-making processes in Introduction business plans (Bendlin et al., 2017; Harzer et al., 2016; Many studies have been conducted in an attempt to under- Strapasson et al., 2018). stand how the expectations of return and perceived risks are The term “business plan” is not unheard of in academia. identified when evaluating a business plan, demonstrating Its importance to the success of a project had already been the importance and justification of the theme in this study highlighted by Headings (1958) and its scope was extended (Bucciol et al., 2017; Zhang et al., 2018). One of the recent by Gold (1973) to emphasize the need for innovation in new methodologies used to identify the expectations of return and products, processes, and especially in organizational struc- perceived risks is the multi-index methodology, initially pro- ture innovation. The scope is widened even more by Gold posed by A. Souza and Clemente (2009). (1973) and Shanklin (1979), who underscored that the busi- The essence of the multi-index methodology consists of ness plan came to be seen in the 1970s as a tool for medium- (a) not incorporating the premium for the risk as a spread on and long-term planning. Two decades later, the business plan the minimum attractiveness rate (MARR); (b) expressing the profitability of the project through added return resulting Pontifícia Universidade Católica do Paraná, Curitiba, Brazil from the investment (return on investment assets [ROIA]) as 2 Universidade Federal do Paraná, Curitiba, Brazil an additional return beyond what would be received by the Corresponding Author: application of capital in low-risk securities; and (c) compar- Claudimar Pereira da Veiga, Department of Administration, Universidade ing the expected gains with the perceived risks of each proj- Federal do Paraná, 632 Lothário Meissner Ave., Curitiba 80210-170, ect (A. Souza & Clemente, 2012). In the recent literature, the Brazil. Email: claudimar.veiga@gmail.com multi-index methodology has been validated by several Creative Commons CC BY: This article is distributed under the terms of the Creative Commons Attribution 4.0 License (https://creativecommons.org/licenses/by/4.0/) which permits any use, reproduction and distribution of the work without further permission provided the original work is attributed as specified on the SAGE and Open Access pages (https://us.sagepub.com/en-us/nam/open-access-at-sage). 2 SAGE Open assumed the status of “strategic” (Kaplan & Norton, 1997). for the success of enterprises. Following this dynamic, it is According to these authors, it is strategic because its objec- argued that a business plan can be developed by business tives, target consumers, and products or services to be offered undertakers when there is an intention to start a business. to the market must be defined. Otherwise, it can be used as an instrument of the internal “Enterprising,” “adding value,” and “business plan” are marketing management (Melo & Alcantara, 2012). The use among the most commonly used expressions among deci- of strategic plans or a business plan is a dynamic, participa- sion-makers for investments in real assets (Anderson & Lent, tory, continuous, and systemic process because it aims to 2017; Simón-Moya & Revuelto-Taboada, 2016). It is no determine the strategies and actions to be taken by the com- coincidence that these guidelines directed the decision to pany, in addition to being a relevant instrument for dealing start a business unit to add value to the tilapia production with changes in the internal and external environment. chain. The existing regional production arrangements (tila- To develop a business plan, as well as a strategic plan, the pia production, leather treatment, leather sewing in panels, company’s business and its activities, target consumers, cor- sewing the final product, and marketing fairs) guided the porate training, taxation regime, and, especially, what options option for the cost leadership strategy regarding the decision are available to entrepreneurs if the future is substantially to invest in a factory of tilapia leather purses, focusing on other than expected should be made clear. Furthermore, the women buyers. This combination provided the elements mission, view, and values of the company must be devel- required in this project’s risk and return to assist the deci- oped, showing the company’s positioning and business sion-making process regarding the implementation of this objectives (Kotler, 2010). Therefore, one can see that the business unit. Thus, the research question as a whole business plan has become an increasingly important tool for addresses and analyzes whether the strategy of cost leader- anticipating the results of the scenarios of a business unit ship (Block et al., 2015; Ramaswamy & Ozcan, 2018; Shank even before its implementation, and that not only is the return & Govindarajan, 1993) formed from the intensive use of a decisive parameter, but so is the perception of the risks regional productive arrangements enables the project in involved in this new business. All of these are summarized in terms of return and risk dimensions. The originality of this a perceptual map for decision-making. Following this theo- research lies in the use of the multi-index methodology, retical line, the purpose of this article is to identify the expec- which, in addition to positioning the business plan as a nec- tations of return and perceived risks in evaluating a business essary and inherent element in the strategic process, also plan for the deployment of a manufacturing unit of purses specifies, as its analysis prerequisite, the perception of the made of tilapia leather in the city of Campo Mourão in risks involved in decision-making. Paraná State in the south of Brazil. We sought to analyze the This business plan analysis discusses issues such as stra- business plan with the support of the multi-index methodol- tegic positioning, marketing planning, product and market ogy, which uses a perceptual map to compare the expecta- characteristics, and indicators of risk and return, which sup- tions of return against perceived risks (Bendlin et al., 2016; port the decision-making process with regard to investing in Niven, 2005; M. L. R. Souza et al., 2003; Torrico et al., a new business unit. The strategy selection was discussed by 2016). considering environmental analyses, market research, trends, In addition to this introduction, this article is structured opportunities, and threats for inclusion in the national and into seven parts: a systemic view of the commercial exploita- international market. tion of the tilapia production chain as an alternative income According to Noriega and Carvajal (2011), it is important for small and medium-sized business undertakers, the theo- to note that the business world constantly undergoes trans- retical basis, market characterization, methodological formation, resulting in profound changes in management aspects, systematization of the information, feasibility analy- technologies, production technology, and consumer habits. sis by means of the multi-index methodology, and, last but In general, a business unit needs to be monitored by estab- not least, the final considerations. lishing a system to track trends and important developments, with political, economic, and environmental understanding Materials and Methods beyond the opportunities and threats that permeate the busi- ness under analysis (Melo & Alcantara, 2012). Thus, this Theoretical Foundation for the Logic of permanent monitoring and revision consolidates the notion Enterprising of removing the business plan from its view as an event, con- solidating it as a process. Thereafter, it should be clarified According to Guimarães (1987), in the theoretical frame- that it is not enough simply to have an idea, a new creation, work of the Theory of the Growth of the Firm, the firm is the or a new conception to produce wealth: It takes planning, locus of capital accumulation and profit is the main compo- control, and analysis to bring certain projects to fruition nent to generate this accumulation. This statement is aligned (Beheshti et al., 2012). Thus, one might realize that proactive with Penrose (2006), whose original work was published in management and good planning for the effective use of avail- 1959. She had already argued that the growth of the firm is able human, material, and financial resources are a good start saddled to the firm’s opportunities to invest in projects whose Souza et al. 3 return is greater than the current rate of return. To these The Multi-Index Methodology authors, the firm’s growth ability also depends on the strat- There are three major categories for analyzing investment egy adopted to provide the appropriate combination of inter- decision-making: the Classical Methodology, Theory of Real nal and external resources and capabilities to detect and take Options, and Multi-Index Methodology (Penrose, 2006). All advantage of opportunities for profitable investments. It of these methods rely on the discounted cash flow and are in should also be noted that these same strategies are limited by agreement to a certain extent with the analysis of the expected the available portfolio of investment opportunities (A. Souza return, but differ in the analysis of risk perception. These dif- & Clemente, 2007). In addition to this framework, it is ferences depend on the way that the MARR is estimated, argued (Bacic, 2008) that there are two complementary cash flow dynamic capabilities incorporate new information, approaches in the strategy preparation process. (a) The for- and how the sensitivity analysis on key metrics of each mulation of the strategy occurs at times when there are no assessment is undertaken (Nogas et al., 2011). major innovations and business structures are consolidated, The advantages of using the multi-index methodology to and thus first the strategy must be prepared and the structure generate indicators of risk and return and the use of the per- of the company must be changed. The main champions of ceptual map to compare the expectations of return with the this approach are Michael Porter and Alfred Chandler; (b) perceived risks are highlighted by Torrico et al. (2016) and innovations shape the markets, involving structural changes Rêgo et al. (2015). This methodology makes use of two dis- and the reconfiguration of the strategy to this new structure. tinct groups of indicators for evaluating the expectations of This second approach finds support in Schumpeter (1939), return and risk perception. The first group is represented by Barney (1986), and Prahalad and Hamel (1990). the net present value (NPV), yearly NPV, benefit–cost index, Given these assertions that induce growth through new and additional return that resulted from the investment investments (i.e., new projects), let us examine the follow- (ROIA). The second group seeks to represent, on a scale of 0 ing consideration: If, on one hand, investors seek new to 1, the perception of the risks inherent to the project and is heights of profitability through new projects, on the other, composed of the MARR/internal rate of return (IRR) index they also want to know the risks associated with these deci- as a proxy of P(NPV ≤ 0), payback/N index as a proxy of the sions. Therefore, to measure return expectations and risks risk of nonrecovery of the invested capital, and degree of perceptions, it is essential to use the appropriate tools to commitment of the income to represent operational risk, analyze investment decisions involving real assets. Still, management risk, and business risk. these decisions are complex because they require medium- The essence of the multi-index methodology consists of or long-term projections and involve a large sum of not incorporating the premium for the risk as a spread on the resources. In general, they are irreversible and/or have a MARR (A. Souza & Clemente, 2012). By not incorporating high cost of reversibility and may consolidate a trajectory the spread for the risk over the MARR, this happens to be of expansion or jeopardize the survival of the firm (A. represented by an almost risk-free application and will Souza & Clemente, 2012). The complexities of these sce- always be an option in relation to the capital investment in narios depend on the manner that the strategy makers per- analysis. Figure 1 presents the multi-index methodology ceive the uncertainties and risks and also their skills in characteristics and some of the peculiarities. Thus, for the mitigating the associated risks (Rêgo et al., 2015). multi-index methodology, there is always the option of not Following this, the process of implementing the strategy in investing in the project and leaving the investment capital competitive advantage, and the investment project and its applied in the MARR. related analysis is nothing more than the details of the According to, multi-index methodology has proved to be resources needed and their respective monetary values vis- consistent for analyzing small and medium-sized projects, à-vis the cash flow of expected benefits arising from this and its use has been widespread in academia, in undergradu- decision and the perception of the risks associated with it ate, master’s, and PhD dissertations, as well as in several sci- (Dalmoro & Wittmann, 2011). entific articles published in scientific journals and conference From World War II until the mid-1970s, in a market envi- proceedings. The importance of its use for the purpose of ronment with low competitiveness, abundant consumption, having more robust and consistent information in relation to and a rigid production system, risk and uncertainty were con- sidered relatively low and demand was practically stable the risk and return of certain investment projects was (Penrose, 2006). In this relatively stable environment, the observed given these considerations. Figure 2 summarizes classical methodology with a deterministic approach for the the process of using the multi-index methodology, starting evaluation of investment fulfilled its role well. From the with strategy, marketing, and sales forecast. moment when such conditions no longer existed and the The great difference of the multi-index methodology is dynamics of production, distribution, and consumer satisfac- that it is not simply a cash flow analysis tool. It is part of the tion changed, the risks inherent to investment projects led to whole strategic process and attempts to summarize it into a the improvement of the analysis methodologies. set of indicators and a perceptual map that allows the 4 SAGE Open The Multi-Index Methodology does not use, in an isolated way, only one indicator to recommend the project’s approval. Two sets of indicators are used. One to quantify the return expectations, and another (measured on a scale of 0 to 1) to assess the perception of risks involved in the decision of investing. The decision to invest (recommending the project or not) is made by comparing gain expectations and perceived risks using a Perceptual Map, which is the main characteristic of the Multi-Index Methodology. The whole process is synthesized in a Projected Cash Flow. In the Multi-Index methodology, the cash flow is built from the yearly projection of revenue, fixed expenses and variable expenses. The Multi-Index Methodology uses the Almost-Free Risk Rate (AFRR) to discount the projected cash flow. Thus, it is implicit that the analysis of perceived risks is an obligatory and specific phase for each project. In conclusion, if NPV > 0, this only means that it is worth continuing the analysis. Unlike the Classic Methodology, in which the return of investment is measured by the IRR, in the Multi-Index Methodology it is represented by the ROIA. It represents the additional (%) that is obtained over the AFRR. This additional must be compared with the risks that stem (additional risks) from the decision to invest. The AFRR/IRR Index is used as proxy of P(NPV≤0), i.e., the likelihood that the profitability propitiated by the securities that compose the AFRR will present a better return than the business under analysis. The Payback/N Index represents the fraction of time of the planning horizon needed to recover the investment. This indicator strongly depends on the business characteristics. The Degree of Revenue Commitment (DRC) is intended to assess the operational risk of the business. This indicator measures the percentage of the Operational Revenue that is committed to paying costs and expenses. The Management Risk aims to reflect the essential, generic and specific competencies of the project’s management group in similar enterprises at the strategic, managerial and operational levels. Basic information for the composition of this indicator is already extracted in the discussion phase of the positioning strategy that should guide the policies of talent development, attraction and retention. The Business Risk is intended to reflect the perceived risks in the environmental analysis (PEST, SWOT, Porter’s five forces), notably the market structure, barriers to entrance/leaving, bargaining power with suppliers/clients and other players involved. Analogous to the Management Risk, the basic information for composing this index must already be extracted in the phase of preparing and discussing the positioning strategy. In the Multi-Index Methodology, to decide whether a project should be recommend or not, the information on Return and Risks are synthesized in a Perceptual Map to assess the compatibility between expected return and perceived risks. Figure 1. Multi-index methodology characteristics. Source. A. Souza and Clemente (2012). decision-maker to evaluate whether the expected return is from 95,000 tons in 2011 to 219,000 tons in 2015 and as compatible with the perceived risks. Thus, all information much as 400,280 in 2018. Currently, five Brazilian states from here on is necessary for using the multi-index account for approximately 75% of the national production of methodology. tilapia, and 90% of this production is concentrated in only 10 states. Paraná State, located in southern Brazil, stands out with approximately 28% of national production. Table 1 A Systemic View of the Commercial illustrates this situation, emphasizing (a) the state where pro- Exploitation of Tilapia duction occurs, (b) the price per kilogram traded, (c) the To Ênio Queijada, manager of the Agribusiness Sector of the value, and (d) the average price. Brazilian Service of Support for Micro and Small Enterprises Paraná is the leader in tilapia cultivation in Brazil. This is (Serviço Brasileiro de Apoio às Micro e Pequenas Empresas partly due to the expansion of cold storage, slaughterhouses, [SEBRAE], 2015), tilapia is the most cultivated fish species cooperatives, and, especially, the technical assistance pro- in Brazil, representing 47% of national production. Due to its vided by EMATER (Paraná Institute of Technical Assistance quick weight gain (800 g in 6 months), fish farmers love tila- and Rural Extension). Most small and medium-sized rural pia. The coproducts of tilapia are shown in Figure 3: (a) aquaculture–oriented producers working in cooperative sys- human food and (b) leather for industrial objects and raw tems and who rely on the support of AQUIPAR (Association material for animal food (Andrade, 2015). of Fish Farmers in the West of Paraná) are concentrated in It is clear that the business’s “flagship” derives from the the western region of the state. The relationship network fact that tilapia meat is greatly accepted by the Brazilian formed by these players and the higher education institutions population. According to the Instituto Brasileiro de Geografia (federal, state, and private Universities) operating in the e Estatistica (IBGE, 2016), tilapia production in Brazil went region form the basis for local production arrangements with Souza et al. 5 Figure 2. Overview of the multi-index methodology. Source. A. Souza and Clemente (2012). Figure 3. Tilapia and its coproducts. Source. TPC (2018). 6 SAGE Open Table 1. Main Tilapia-Producing States in Brazil (Data of 2015). States Kg Value (R$1,000) Average price (R$/Kg) % Σ% 1 Paraná 63,065,594 295,639 4.69 28.75 28.75 2 São Paulo 29,001,813 141,277 4.87 13.22 41.98 3 Ceará 27,889,101 171,298 6.14 12.72 54.69 4 Minas Gerais 20,571,604 136,079 6.61 9.38 64.07 5 Santa Catarina 25,099,479 121,611 4.85 11.44 75.52 6 Bahia 8,823,321 47,151 5.34 4.02 79.54 7 Goiás 8,655,295 46,057 5.32 3.95 83.48 8 Pernambuco 6,510,557 38,537 5.92 2.97 86.45 9 Espirito Santo 6,506,752 34,487 5.30 2.97 89.42 10 Rio Grande do Sul 2,802,640 22,575 8.05 1.28 90.70 11 Total of Brazil 219,329,236 1,177,643 100.00 Source. Instituto Brasileiro de Geografia e Estatistica (2016). Figure 4. Tilapia’s production chain. Source. Google images. the systemic competitiveness of this agribusiness. Figure 4 The choice of tilapia as a source of raw material is due to the presents tilapia’s production chain in the Paraná state and a fact that its leather has a low value because it is considered a clear overview of this local production arrangement. We pesky residue by fish processors, and after tanning, it results highlight the city of Cianorte, capital of clothing in Paraná, in a raw material of an inimitable and unique-looking quality, the hub of factories, which attracts buyers from all over due to its resistance and the pattern that forms on its surface, Brazil and will serve as a presentation and testing spot for especially the skins of fish with scales (SEBRAE, 2015). fashion trends. According to Godoy et al. (2010), the leather with the great- Highly valued in the market, fish leather has become a est elasticity is fish leather, and it is also easier to achieve the source of income for fish farmers and artisans in the produc- proper thickness for artifacts made of leather. After tanning, tion of shoes, clothes, and accessories such as handbags, the skins of species can be transformed into a type of leather necklaces, and even furniture (Centre for the Brazilian as resistant as cow leather (Strzelczyk et al., 1997). Figure 5 Tanning Industry, 2015). In Brazil, besides tilapia (whose illustrates the result of tanned tilapia leather. production has been growing rapidly due to parks and the Characteristics such as the resistance of raw materials, increased demand for fish meat), there are many freshwater exotic and environmental aspects, applicability to various fish whose skins are suitable for tanning (SEBRAE, 2015). products, and high added value have aroused the interest of Souza et al. 7 lowers the costs of marketing, as it does not require high investments in advertising and publicity to disseminate the maker’s brand. It also ensures access to thousands of consumers. Competition Strategies One of the main goals of strategic planning in companies is to expand levels of rationality in business decisions through the understanding of internal and external factors that influ- ence or determine its operation. To address these factors, managers can react to them appropriately, and if well exe- cuted, strategic planning provides organizations with greater capacity for anticipation (Kotler, 2010; Veiga et al., 2016). Corporate strategy summarizes the purpose, the raison Figure 5. Tilapia leather, post-dyeing process. d’être of the company, and therefore needs to be treated with Source. Google images. discretion. Corporate strategy is the company’s decision- making method wherein lies its goals and objectives, stan- many entrepreneurs. The skin of the fish can be obtained dards and plans for achieving its objectives (Kaplan & directly from the fish processing industry and from artisanal Norton, 1997). The author progresses in the sense of seeking fishermen. In the case of the fish industry, the entire process to identify the relationship of the company with the environ- takes place in its own tannery (SEBRAE, 2015). As for arti- mental context, its motivations for establishing a strategic sanal fishers, they can be trained in the techniques of con- position, and a series of objectives that may consist of a serving and storing several fish skins before marketing them direction for the development of a plan. The competitive (Loizou et al., 2014). Despite the findings of M. L. R. Souza strategy then aims to establish a profitable and sustainable et al. (2003) that “the development of leather, from residual position against the forces that determine industrial competi- skins of the fish filleting process for the manufacture of tion, and this could be developed explicitly through a plan- leather and clothing, has for some years been an alternative ning process or implicitly through the activities of the various source of income,” the fish skin is mostly discarded after functional departments of the company (Porter, 2009). slaughter (Bellmann et al., 2016). This finding shows that, In the process of refining the concept of the business strat- from a systemic and local production arrangements view, an egy, it is categorized into four aspects: market penetration, alternative source of income for medium and small farmers/ product development, market development, and diversifica- producers can be glimpsed. tion (Ansoff, 1965). One more step in the refinement process If Brazil is a quality leather importer, substituting it with was given by Porter (1980), who proposed three generic another leather of equal quality and resistance and a better strategies: cost leadership, differentiation, and focus. visual appeal emerges as a business opportunity, and fish According to the latter author, cost leadership strategies and leather can occupy this space (Moreira et al., 2016). Fish differentiation seek competitive advantages in a wide range leather is increasingly used in the manufacture of purses and of industrial segments, while the focus of strategy is a cost is considered a great potential for Brazil (Brazilian Society advantage (focus on cost) or a differentiation (focus on dif- of Agriculture, 2015). The country can become one of the ferentiation) in a well-defined segment. Furthermore, it is largest fish producers in the world in the medium term pointed out that the differentiation strategy focuses on the because it has favorable conditions for aquaculture: climate, product offered from the perspective of the customer, who availability of grains for the production of fish food, and should perceive some characteristics that add value to the water (Roriz et al., 2017). Furthermore, fish leather is 3 times product (Mintzberg, 1988). To this author, there are six basic stronger than hide, not to mention that the authorization of ways for a company to differentiate its offerings: price, this commercialization does not depend on Brazilian Institute image, product support, perceived quality, attention-seeking of the Environment and Natural Resources (IBAMA). design, and imitation (nondifferentiation). Producers of leather handbags and accessories should Among the strategies highlighted above, it was observed have their own sales point to ensure the feasibility of the through an analysis of the leather bag market that a combina- business. It is also essential for them to have several distribu- tion of cost leadership and differentiation is required. As for tion channels, and this is precisely where the business under- the differentiation, a design with a strong visual appeal, com- taker meets the greatest obstacles to marketing the product bining aspects of attractiveness and sustainability, is sought (Roriz et al., 2017). It is interesting for the business under- to put on the market products that meet the target audience of taker to have a contract with exporters for the production of fashionable and influential women. For this reason, the strat- bags with the retailer’s own brand, which is an option that egy is one of constant design innovation in an attempt to 8 SAGE Open Figure 6. Designs for tilapia leather bags. Source. Google images. anticipate fashion trends. Some possible designs for the first 2016). The barrier to entry, except for the initial capital, is launch on the market are shown in Figure 6. low and even artisanal manufacturers can conquer part of The brand is essential in this process because it identifies this market via online sales. the origin or the manufacturer of the product and trust. It also According to Tagliassuchi (1986), the barriers to entry are determines the quality and retains loyal consumers, resulting considered co-regulators of conduct and performance of the in more stable demand (Kotler, 2000). The brand for the company. In the case of Tilap-bags, the main barrier lies in project was chosen by consensus among its creators, and the the scale and local production arrangements to compete name Tilap-bags was selected because it represents the idea under the cost leadership strategy. The choice of location in that the bags are made of Tilapia. The goal is to produce bags Campo Mourão, Paraná, Brazil, is strategic, taking advan- and resell them to traders in the main Brazilian shopping tage of the synergy of players that provide the region with malls, tourist attractions, and airports. Once the products systemic competitiveness. This is achieved through geo- achieve maturity, that is, from the third year on, exports and graphical distances (a radius of about 150 km), the potential a sales website will become a further option for the of the region to produce tilapia skin, tanning and dyeing pro- company. cesses, companies that tailor the leather to sell it in square meters, professional seamstresses who are already familiar with the process of outsourcing, education institutions in Relevant Players matters of production and management, and government and The firm, as a locus of capital growth, has growth itself as its cooperative technical assistance that is already operational in goal, via customer satisfaction, and, consequently, the satis- the region. faction of the capital holders. Customer satisfaction is imper- ative in this sequence. It is necessary for the company to Methodological Aspects of the Study remain competitive and know how to manage the resources at its disposal to turn expectations into reality. Customer ser- This is applied research of a descriptive and explanatory vice in lower delivery cycles of products, reliable and high- nature with regard to its objectives. At the same time, it is a quality products, meeting deadlines, innovative production, constructive case study with regard to the strategy employed flexible production processes, and low costs are important to address the problem. Data were collected through biblio- drivers of business nowadays (Skinner, 1969). Faced with graphic research, the analysis of documents pertaining to the this reality, the competitive advantage of the firm is linked to operational cycle of the activities of a company that already the dynamism of the entire supply chain because competition produces tilapia leather bags, and unstructured interviews is now globalized (Srinivasan et al., 2015). In this same con- with the unit’s manager. The data analysis is qualitative con- text, a basic analysis unit to understand the competitiveness cerning the perception of risks and quantitative regarding of a company is defined as a group of competitors that pro- the estimation of return indicators and the sensitivity analy- duce goods or services that compete directly with each other, sis of the results. The purpose of this survey was to provide that is, competitiveness becomes the result of the ability, details on investments, costs, and productivity, as well as the skill, and attitude of a company with the goal of maintaining risks associated with this agribusiness. The practical bene- solid vis-à-vis market changes (Porter, 2009). Aware of this fits of this study are that it generates and systematizes the relationship network, those producing leather handbags with information required according to the various stages of the high quality standards are considered direct competitors. In drafting of a business plan. This information is systematized the niche market in which Tilap-bags plans to operate, there according to the methodology used (multi-index), with the are several competitors who already have brand recognition intention of aiding decision-making on investments in real in the manufacture of leather handbags (Balte, 2016; Danka, assets. Souza et al. 9 Figure 7. Price, participation in the mix, and expected demand of products. Source. Research data. Table 2. Variable Cost Per Unit—Purse Model 1. Cost type Unit Quantity Unitary cost Total cost Leather m 0.50 200.00 100.00 Outsourced sewing Unit 1.00 30.00 30.00 Internal tissue m 0.50 20.00 10.00 Grommets Unit 3.00 2.10 6.30 Hardware Unit 1.00 5.00 5.00 Thread Cones 0.30 12.00 3.60 Buttons Unit 2.00 2.00 4.00 Glue Unit 0.05 50.00 2.50 Dye for the edge Unit 0.03 18.00 0.54 Big zipper Unit 1.00 4.00 4.00 0.50 2.00 1.00 EVA (ethylene vinyl acetate) m Small zipper Unit 1.00 1.00 1.00 167.94 Brazilian National Simple Tax. Relevant information on Presentation of the Results demand, cost, and operating expenses and profit after taxes is Figure 7 presents the specifications of the four products and shown in Figure 8. their marketing prices (R$340, R$430, R$550, and R$700), After a few adjustments, the profit flow is converted into and the annual estimates of demand, production units, initial cash flow representative of the business plan as shown in investment, and production costs are also estimated. Table 3—investor’s cash flow. To meet the level of production and sales, the remaining investment was estimated at R$420,000 (fixed assets, Analysis and Discussion of the Results R$150,000; preoperational expenses, R$140,000; and initial working capital, R$130,000). Due the limitation of equity, The first step for the analysis of the feasibility of the business 40% of the initial investment will be financed with third- plan is the construction of the projected cash flow. The sec- party capital at a cost of 14% per year. For the calculation of ond is to fixate the discount rate. For the current context, the the variable cost per unit of goods, aspects of resistance of recent Monetary Policy Committee (Comitê de Política the leather to be used and the quality and visual appeal of the Monetária do Banco Central—COPOM) signaling, and the final product were considered. Table 2 illustrates the unit estimates of profitability of the low-risk securities to capital variable costs related to Product 1. Similarly, the variable investment applications, we decided to use 12% per annum costs per unit of Products 2, 3, and 4 were estimated, result- (net) to represent the almost risk-free rate (ARFR). According ing in R$285.14, R$365.14, and R$445.14, respectively. to Figure 9, the two sets of multi-index methodology indica- Figure 8 presents the demand expectancy, variable unit tors were then calculated. costs, and budgets (production, commercial expenses, and For a better understanding, it is important to stress the administrative expenses) allowed for the projection of the interpretation of some specific indicators of the multi-index Income Statement using the direct costing method and methodology, as shown in Figure 10. 10 SAGE Open Figure 8. Estimates of sales revenue, income, and profit. Source. Research data. Table 3. Investor’s Cash Flow. Investments Initial Assets Financing in fixed working Preoperational Bank Residual Investor cash Profit flow depreciation amortization assets capital expenses financing value flow Year (=) (+) (−) (−) (−) (−) (+) (+) (=) 0 153,401 129,992 46,410 131,921 −197,882 1 −20,080 16,418 −3,662 2 62,357 16,418 26,384 52,391 3 190,150 16,418 26,384 180,184 4 286,234 16,418 26,384 276,268 5 349,186 16,418 26,384 339,220 6 426,960 16,418 26,384 416,994 7 428,843 16,418 445,261 8 428,843 16,418 445,261 9 428,843 16,418 445,261 10 428,843 16,418 714,738 1,159,999 Figure 11 presents the results of the multi-index method- important to estimate P(NPV ≤ 0) for scenarios that consider ology that are synthesized in the perceptual map, enabling a the uncertainties in the parameters of demand, the selling perception of the magnitude of the gains and risks. In this price, and the cost of leather. For this purpose, Crystal Ball map, the business plan receives the green light to enter into software was used. The hypotheses were as follows: varia- business if the perceived risks are in the same ROIA column tion of ±10% in demand and selling price (uniform distribu- or to its left. If that does not occur, further analyses and tion), −20% and +10% around the most likely value for the adjustments will be necessary. cost of leather (triangular distribution), and ±5 percentage The perceptual map shows that the perceived risks are points in annual growth rates. Figures 12 and 13 represent consistent with expectations of return (all risks are on the left the probability distribution for the NPV and ROIA, side of the return), thereby suggesting that the business respectively. undertaking will be continued. It is important to note that the Figure 12 suggests that the result of the simulation of dif- results that were presented were estimated for the most likely ferent scenarios depending on the variations of demand scenario. It is clear that, in alternative scenarios (pessimistic, parameters, selling price, cost of acquisition of leather, and optimistic, or any combination of these), the results may not the demand growth rate is compatible with the recommenda- remain unchanged. To better substantiate the decision, it is tion by the multi-index methodology and that for Souza et al. 11 decision to invest is taken, the profit expected to be recov- Present Value 1,661,366 ered has been applied on ARFR (12%), and an additional Net Present Value (NPV) 1,463,485 return of 23.71% is obtained, which would total to around Yearly Net Present Value (NPV ) 259,014 y 36% per year. Benefit/Cost Index 8.40 The most critical risks perceived were the management risks and the business risk. This was due to the Group Additional Return on Investment (ROIA) 27,1% Manager having no previous experience with this kind of Internal Rate of Return (IRR) 61,24% business and especially no experience of working with the Almost Risk-free Rate / IRR Index 0.20 players to show the potential of cooperative arrangements for Payback 3.5 the production of tilapia leather in large quantities and, thus, Payback/N Index 0.35 reduce the cost of raw materials. Regarding the business risk, Revenue Commitment Index 0.69 there is a natural concern regarding environmental legisla- tion, to the extent that as the commercial exploitation of Management Risk 0.52 natural environments intensifies, phytosanitary problems Business Risk 0.62 may arise, forcing the suspension of the activity for a period Figure 9. Project feasibility indicators. of time before the natural conditions are reestablished. Source. Research data. To compare the results of this study with previous works in the literature (Rae et al., 2014), we performed a sensitivity analysis of the proposed methodology. Crystal Ball software conventional cash flows if the MARR/IRR index is ≤ 0.60, was used, and simultaneous variations were allowed in the then P(NPV ≤ 0) ≤ 0.05. Here, it easy to see an important parameters of the business plan, namely, demand (variation theoretical finding of the multi-index methodology, which is of ±10% according to the uniform distribution), selling price the possibility of creating a proxy of P(NPV ≤ 0) from the (variation of ±10% according to the uniform distribution), MARR/IRR ratio when it is less than 0.66 without any further cost of acquisition of raw material leather (variation of −20% calculation whatsoever. Another important outcome can be and +10% around the most likely value—triangular distri- seen in Figure 13. It is observed that the probability of practi- bution), and rate of growth of the quantities sold (±5 per- cally doubling the gain (retrieving the ARFR and then dupli- centage points according to a uniform distribution). The cating its value) is approximately .50. This information results of this analysis, using the Monte Carlo method, co-substantiates the decision to invest in the business of tila- showed that P(NPV ≤ 0) ≈ 0.0002 and P(ROIA > 2 × pia leather bags. almost risk-free rate) ≈ 48%, backing the decision to invest in the business. Final Considerations In short, in addition to the results presented, four main The main aim of this article was to show that the multi-index contributions of this research can be highlighted. The first methodology imposes more rigorous analysis in the discus- contribution is positioning the business plan as an integral sion of risks and specification of a business plan. To do so, part of the strategic process to increase the profitability of the we analyzed, through a case study, the expectancy of return investor capital. The second contribution is that this study and perceived risks of a business plan to produce and com- can stimulate actions to drive the decision-making process mercialize women’s handbags made of tilapia leather in the toward a direct comparison of estimated returns versus per- city of Campo Mourão, in the southern Brazilian state of ceived risks. The third contribution is the introduction of the Paraná. To achieve this goal, relevant information was col- multi-index methodology as a feasible technique for analyz- lected through document research and semi-structured inter- ing the business plans of small and medium-sized enter- views, which were conducted in 2016 and 2017. For this prises. The fourth is a theoretical finding that allows the easy purpose, analyses were performed regarding the strategic estimation of a proxy of P(NPV ≤ 0) from the MARR/IRR positioning, marketing appeals, location that provided better ratio without any further calculation whatsoever when this synergy with existing local production arrangements, and, ratio is lower than 0.64 (Harzer, 2016). All these contribu- finally, the use of the multi-index methodology to compare tions are important because they improve the decision-mak- the expected return with the perceived risks. er’s perceptions of risks and returns of business plans, For the most likely scenario, the multi-index methodol- especially when a broader view of the factors involved is ogy perceptual map signals a medium/high return, and the required. perceived risks are compatible with profit expectations. The Future studies on the entire utilization of tilapia, with a ROIA, which, according to the multi-index methodology, is focus on collaborative processes and better integration the scorecard that best represents the profitability of a proj- among the existing local production arrangements, could ect, was estimated at 23.71% per year, meaning that if the result in an improvement of the whole process of breeding, RISK RETURN 12 SAGE Open The NPV (R$ 1,463,485) and its annual equivalent (R$ 259,014) only indicate that profit expectations outweigh the gains of the decision not to undertake. It is this expectation of gain that must be faced with the perceived risks in order to make the decision on whether to go into business. In the present case, it is a green light to continue with the analysis. To determine whether the gain is palpable, it is necessary to resort to other parameters of analysis. The Benefit-cost Index (8.40) indicates a profitability of 740% in 10 years (planning horizon of the business plan) and, to a certain extent, is a relativization of the NPV, but insufficient to express the magnitude of the expected gain. The Additional Return from the investment (23.71% p.y.) is the annual equivalent rate of 740% in 10 years. It is this additional (beyond the almost risk-free rate of return) that must be compared, by means of the Perceptual Map, with the perceived risks. By being in the same time measure of the almost risk-free rate (year), it is thus possible to assess the expressiveness of the gain (low; low/medium; medium; medium/high; high) on the same scale in which the perceived risks are evaluated. It is possible to use some 29,37 functions to organize some of the Multi-index Methodology indicators on a scale of 0 (practically no risk) to 1 (very high risk) . Thus, the ROIA of 23.71% frames this project gain in the medium/high category. The function used [0.4338 * ln(ROI) +0.4095] generated an index of expressiveness of gain equal to 0.71. The ARFR/IRR Index is used as a proxy of P (NPV ≤ 0). This is because the almost risk-free rate and the IRR are random variables resulting from characteristics of each project. Just like the ROIA, a function of adjustment [1.4591x -0.2167x+0.0596] was also used to classify this risk on an already established perceptual range. The function was used for classifying the risk as low. For conventional cash flows, when ARFR/IRR Index ≤ 0.60 → P (NPV ≤ 0) ≤ 0.05 and this really happened. The Revenue Commitment Degree (RCD = 0.69) represents the company’s operational risk arising from the installed cost structure. It shows that the percentage of revenue is committed to the payment of costs and expenses. It is a relevant indicator because it makes explicit the minimum sales revenue necessary to target profits. Given this, it can be said that, even in the third year, 69% of revenue is committed to the payment of costs and expenses involving medium/high risk. The Management Risk is associated with the managing group’s competence in carrying out the project in the first two years of activity. The knowledge and experience accumulated in the production process, marketing process, distribution channels and, mainly, in the conducting of negotiations, is necessary to assist the company during periods of turbulence . A key variable in the business plan is the price of leather. Thus, it is important that managers/employees develop specific skills for purchase procedures that guarantee supply at a competitive price. An association with the leather-producing cooperatives may be the best way to mitigate this risk. Considering generic and specific competences, the management risk of this business remains around 0.65. This high risk is due mainly to the fact that none of the managers is familiar with the process of production and trade in handbags for the desired target consumers. The Business Risk covers the project in a broader manner, resorting to traditional analysis discussions such as SWOT, Porter’s Five Forces and PEST. A new look at those same analyses seeks to identify the risks that permeate the business in question and convert them to the desired scale (0 to 1). Three risks were highlighted in this analysis: 1- There is virtually no barrier to entry if the business is shown to be promising; 2- Changes in legislation to prevent the expansion of tilapia cultivation, with direct implications for leather raise the price, and 3- Radical positioning of groups committed to animal welfare, which could hinder trade in objects manufactured with raw materials made from animal sacrifice. That risk remains estimated at 0.62. Figure 10. Specific indicators of the multi-index methodology. Source. 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M., de Araújo, J. A. R., Gurgel, J. C., Journal of Retailing and Consumer Services, 31, 174–181. & Souza, A. (2015). Return expectations and perceived risks in Zhang, Y., Liu, S., Tan, J., Jiang, G., & Zhu, Q. (2018). Effects of agribusiness natural cashew dye into the B2B market. Custos e risks on the performance of business process outsourcing proj- Agronegocio Online, 11, 370–400. ects: The moderating roles of knowledge management capabili- Roriz, G. D., Veiga, M. K., Delphino, C., Gardner, I. A., & ties. International Journal of Project Management, 36, 627–639. Gonçalves, V. S. P. (2017). Characterization of tilapia farm- ing in net cages at a tropical reservoir in Brazil. Aquaculture Author Biographies Reports, 6, 43–48. Schumpeter, J. A. (1939). Business cycles—A theoretical, historical Alceu Souza is full professor at the Pontifical Catholic University. and statistical analysis of the capitalist process. McGraw-Hill. Has experience in Administration, focusing on Financial Serviço Brasileiro de Apoio às Micro e Pequenas Empresas. Management, acting on the following subjects: investment deci- (2015). SEBRAE—Brazilian service to support micro and sions, feasibility indicators, Multi-Index Methodology for project Souza et al. 15 risk assessment, costing methods and strategic cost Emmanuel Óguchi Ogu is MSc in Business Administration at management. Pontifical Catholic University of Paraná. Ariane Maria Machado de Oliveira is PhD in Business Luciano Luiz Dalazen is currently a PhD candidate and master in Administration. She is currently coordinator of distance learning Business Administration (PUCPR), Strategic Administration con- courses at Kroton Educacional. He teaches in the areas of Economics centration area. Preferably studies Behavioral Finance, Strategy and Finance for 12 years. His research interests are economics and and Quantitative Methods in Administration. financial management. Claudimar Pereira da Veiga, professor, PhD, is at the Department Dayla Karolina Fossile is currently a PhD candidate and master in of Marketing in Federal University of Parana. His research interests Production Engineering at the Pontifical Catholic University of include multidisciplinary research focus like marketing health ser- Paraná PUCPR. She is currently a professor at the UNISOCIESC vices, services innovation, retailing and consumer behavior. He is a University Center (Grupo Ânima Educação) teaching in the member of the board of editors of the BMC Health Services accounting science course. Research and Palgrave Communications - NATURE. http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png SAGE Open SAGE

Business Plan Analysis Using Multi-Index Methodology: Expectations of Return and Perceived Risks:

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Abstract

This article aims to show that business plan risks are clearer and more consistent, compared with classical methodology, when evaluated through the multi-index methodology. To do so, it is necessary to identify the expectations of return and perceived risks in evaluating a business plan. To explain the above statement, we used a case example of a manufacturing unit of purses made of tilapia leather in the city of Campo Mourão, Paraná State, Brazil. Relevant information was collected through documenting research and semi-structured interviews, which were conducted in 2016 and 2017. The adoption of the cost leadership strategy, practicable due to the presence of local production arrangements, proved crucial to this project’s viability. Following this strategy, the demand, initial investments, production costs, and selling price were estimated. The multi-index methodology was used for the generation and analysis of the return indicators vis-à-vis the perceived risks. The multi-index methodology perceptual map signals a medium/high return (return on investment assets = 23.71% per year) and that the perceived risks are compatible with profit expectations. The sensitivity analysis of the results, using the Monte Carlo method, shows that P(net present value ≤ 0) ≈ 0.0002, thus corroborating the decision to invest in this business. This article contributes to the literature on the use of existing productive arrangements in various stages of the production and marketing process and the use of an analysis methodology that leads decision-makers to specify the risks associated with their decision. Keywords investment decision-making, cost management, multi-index methodology, strategy studies, mainly with regard to decision-making processes in Introduction business plans (Bendlin et al., 2017; Harzer et al., 2016; Many studies have been conducted in an attempt to under- Strapasson et al., 2018). stand how the expectations of return and perceived risks are The term “business plan” is not unheard of in academia. identified when evaluating a business plan, demonstrating Its importance to the success of a project had already been the importance and justification of the theme in this study highlighted by Headings (1958) and its scope was extended (Bucciol et al., 2017; Zhang et al., 2018). One of the recent by Gold (1973) to emphasize the need for innovation in new methodologies used to identify the expectations of return and products, processes, and especially in organizational struc- perceived risks is the multi-index methodology, initially pro- ture innovation. The scope is widened even more by Gold posed by A. Souza and Clemente (2009). (1973) and Shanklin (1979), who underscored that the busi- The essence of the multi-index methodology consists of ness plan came to be seen in the 1970s as a tool for medium- (a) not incorporating the premium for the risk as a spread on and long-term planning. Two decades later, the business plan the minimum attractiveness rate (MARR); (b) expressing the profitability of the project through added return resulting Pontifícia Universidade Católica do Paraná, Curitiba, Brazil from the investment (return on investment assets [ROIA]) as 2 Universidade Federal do Paraná, Curitiba, Brazil an additional return beyond what would be received by the Corresponding Author: application of capital in low-risk securities; and (c) compar- Claudimar Pereira da Veiga, Department of Administration, Universidade ing the expected gains with the perceived risks of each proj- Federal do Paraná, 632 Lothário Meissner Ave., Curitiba 80210-170, ect (A. Souza & Clemente, 2012). In the recent literature, the Brazil. Email: claudimar.veiga@gmail.com multi-index methodology has been validated by several Creative Commons CC BY: This article is distributed under the terms of the Creative Commons Attribution 4.0 License (https://creativecommons.org/licenses/by/4.0/) which permits any use, reproduction and distribution of the work without further permission provided the original work is attributed as specified on the SAGE and Open Access pages (https://us.sagepub.com/en-us/nam/open-access-at-sage). 2 SAGE Open assumed the status of “strategic” (Kaplan & Norton, 1997). for the success of enterprises. Following this dynamic, it is According to these authors, it is strategic because its objec- argued that a business plan can be developed by business tives, target consumers, and products or services to be offered undertakers when there is an intention to start a business. to the market must be defined. Otherwise, it can be used as an instrument of the internal “Enterprising,” “adding value,” and “business plan” are marketing management (Melo & Alcantara, 2012). The use among the most commonly used expressions among deci- of strategic plans or a business plan is a dynamic, participa- sion-makers for investments in real assets (Anderson & Lent, tory, continuous, and systemic process because it aims to 2017; Simón-Moya & Revuelto-Taboada, 2016). It is no determine the strategies and actions to be taken by the com- coincidence that these guidelines directed the decision to pany, in addition to being a relevant instrument for dealing start a business unit to add value to the tilapia production with changes in the internal and external environment. chain. The existing regional production arrangements (tila- To develop a business plan, as well as a strategic plan, the pia production, leather treatment, leather sewing in panels, company’s business and its activities, target consumers, cor- sewing the final product, and marketing fairs) guided the porate training, taxation regime, and, especially, what options option for the cost leadership strategy regarding the decision are available to entrepreneurs if the future is substantially to invest in a factory of tilapia leather purses, focusing on other than expected should be made clear. Furthermore, the women buyers. This combination provided the elements mission, view, and values of the company must be devel- required in this project’s risk and return to assist the deci- oped, showing the company’s positioning and business sion-making process regarding the implementation of this objectives (Kotler, 2010). Therefore, one can see that the business unit. Thus, the research question as a whole business plan has become an increasingly important tool for addresses and analyzes whether the strategy of cost leader- anticipating the results of the scenarios of a business unit ship (Block et al., 2015; Ramaswamy & Ozcan, 2018; Shank even before its implementation, and that not only is the return & Govindarajan, 1993) formed from the intensive use of a decisive parameter, but so is the perception of the risks regional productive arrangements enables the project in involved in this new business. All of these are summarized in terms of return and risk dimensions. The originality of this a perceptual map for decision-making. Following this theo- research lies in the use of the multi-index methodology, retical line, the purpose of this article is to identify the expec- which, in addition to positioning the business plan as a nec- tations of return and perceived risks in evaluating a business essary and inherent element in the strategic process, also plan for the deployment of a manufacturing unit of purses specifies, as its analysis prerequisite, the perception of the made of tilapia leather in the city of Campo Mourão in risks involved in decision-making. Paraná State in the south of Brazil. We sought to analyze the This business plan analysis discusses issues such as stra- business plan with the support of the multi-index methodol- tegic positioning, marketing planning, product and market ogy, which uses a perceptual map to compare the expecta- characteristics, and indicators of risk and return, which sup- tions of return against perceived risks (Bendlin et al., 2016; port the decision-making process with regard to investing in Niven, 2005; M. L. R. Souza et al., 2003; Torrico et al., a new business unit. The strategy selection was discussed by 2016). considering environmental analyses, market research, trends, In addition to this introduction, this article is structured opportunities, and threats for inclusion in the national and into seven parts: a systemic view of the commercial exploita- international market. tion of the tilapia production chain as an alternative income According to Noriega and Carvajal (2011), it is important for small and medium-sized business undertakers, the theo- to note that the business world constantly undergoes trans- retical basis, market characterization, methodological formation, resulting in profound changes in management aspects, systematization of the information, feasibility analy- technologies, production technology, and consumer habits. sis by means of the multi-index methodology, and, last but In general, a business unit needs to be monitored by estab- not least, the final considerations. lishing a system to track trends and important developments, with political, economic, and environmental understanding Materials and Methods beyond the opportunities and threats that permeate the busi- ness under analysis (Melo & Alcantara, 2012). Thus, this Theoretical Foundation for the Logic of permanent monitoring and revision consolidates the notion Enterprising of removing the business plan from its view as an event, con- solidating it as a process. Thereafter, it should be clarified According to Guimarães (1987), in the theoretical frame- that it is not enough simply to have an idea, a new creation, work of the Theory of the Growth of the Firm, the firm is the or a new conception to produce wealth: It takes planning, locus of capital accumulation and profit is the main compo- control, and analysis to bring certain projects to fruition nent to generate this accumulation. This statement is aligned (Beheshti et al., 2012). Thus, one might realize that proactive with Penrose (2006), whose original work was published in management and good planning for the effective use of avail- 1959. She had already argued that the growth of the firm is able human, material, and financial resources are a good start saddled to the firm’s opportunities to invest in projects whose Souza et al. 3 return is greater than the current rate of return. To these The Multi-Index Methodology authors, the firm’s growth ability also depends on the strat- There are three major categories for analyzing investment egy adopted to provide the appropriate combination of inter- decision-making: the Classical Methodology, Theory of Real nal and external resources and capabilities to detect and take Options, and Multi-Index Methodology (Penrose, 2006). All advantage of opportunities for profitable investments. It of these methods rely on the discounted cash flow and are in should also be noted that these same strategies are limited by agreement to a certain extent with the analysis of the expected the available portfolio of investment opportunities (A. Souza return, but differ in the analysis of risk perception. These dif- & Clemente, 2007). In addition to this framework, it is ferences depend on the way that the MARR is estimated, argued (Bacic, 2008) that there are two complementary cash flow dynamic capabilities incorporate new information, approaches in the strategy preparation process. (a) The for- and how the sensitivity analysis on key metrics of each mulation of the strategy occurs at times when there are no assessment is undertaken (Nogas et al., 2011). major innovations and business structures are consolidated, The advantages of using the multi-index methodology to and thus first the strategy must be prepared and the structure generate indicators of risk and return and the use of the per- of the company must be changed. The main champions of ceptual map to compare the expectations of return with the this approach are Michael Porter and Alfred Chandler; (b) perceived risks are highlighted by Torrico et al. (2016) and innovations shape the markets, involving structural changes Rêgo et al. (2015). This methodology makes use of two dis- and the reconfiguration of the strategy to this new structure. tinct groups of indicators for evaluating the expectations of This second approach finds support in Schumpeter (1939), return and risk perception. The first group is represented by Barney (1986), and Prahalad and Hamel (1990). the net present value (NPV), yearly NPV, benefit–cost index, Given these assertions that induce growth through new and additional return that resulted from the investment investments (i.e., new projects), let us examine the follow- (ROIA). The second group seeks to represent, on a scale of 0 ing consideration: If, on one hand, investors seek new to 1, the perception of the risks inherent to the project and is heights of profitability through new projects, on the other, composed of the MARR/internal rate of return (IRR) index they also want to know the risks associated with these deci- as a proxy of P(NPV ≤ 0), payback/N index as a proxy of the sions. Therefore, to measure return expectations and risks risk of nonrecovery of the invested capital, and degree of perceptions, it is essential to use the appropriate tools to commitment of the income to represent operational risk, analyze investment decisions involving real assets. Still, management risk, and business risk. these decisions are complex because they require medium- The essence of the multi-index methodology consists of or long-term projections and involve a large sum of not incorporating the premium for the risk as a spread on the resources. In general, they are irreversible and/or have a MARR (A. Souza & Clemente, 2012). By not incorporating high cost of reversibility and may consolidate a trajectory the spread for the risk over the MARR, this happens to be of expansion or jeopardize the survival of the firm (A. represented by an almost risk-free application and will Souza & Clemente, 2012). The complexities of these sce- always be an option in relation to the capital investment in narios depend on the manner that the strategy makers per- analysis. Figure 1 presents the multi-index methodology ceive the uncertainties and risks and also their skills in characteristics and some of the peculiarities. Thus, for the mitigating the associated risks (Rêgo et al., 2015). multi-index methodology, there is always the option of not Following this, the process of implementing the strategy in investing in the project and leaving the investment capital competitive advantage, and the investment project and its applied in the MARR. related analysis is nothing more than the details of the According to, multi-index methodology has proved to be resources needed and their respective monetary values vis- consistent for analyzing small and medium-sized projects, à-vis the cash flow of expected benefits arising from this and its use has been widespread in academia, in undergradu- decision and the perception of the risks associated with it ate, master’s, and PhD dissertations, as well as in several sci- (Dalmoro & Wittmann, 2011). entific articles published in scientific journals and conference From World War II until the mid-1970s, in a market envi- proceedings. The importance of its use for the purpose of ronment with low competitiveness, abundant consumption, having more robust and consistent information in relation to and a rigid production system, risk and uncertainty were con- sidered relatively low and demand was practically stable the risk and return of certain investment projects was (Penrose, 2006). In this relatively stable environment, the observed given these considerations. Figure 2 summarizes classical methodology with a deterministic approach for the the process of using the multi-index methodology, starting evaluation of investment fulfilled its role well. From the with strategy, marketing, and sales forecast. moment when such conditions no longer existed and the The great difference of the multi-index methodology is dynamics of production, distribution, and consumer satisfac- that it is not simply a cash flow analysis tool. It is part of the tion changed, the risks inherent to investment projects led to whole strategic process and attempts to summarize it into a the improvement of the analysis methodologies. set of indicators and a perceptual map that allows the 4 SAGE Open The Multi-Index Methodology does not use, in an isolated way, only one indicator to recommend the project’s approval. Two sets of indicators are used. One to quantify the return expectations, and another (measured on a scale of 0 to 1) to assess the perception of risks involved in the decision of investing. The decision to invest (recommending the project or not) is made by comparing gain expectations and perceived risks using a Perceptual Map, which is the main characteristic of the Multi-Index Methodology. The whole process is synthesized in a Projected Cash Flow. In the Multi-Index methodology, the cash flow is built from the yearly projection of revenue, fixed expenses and variable expenses. The Multi-Index Methodology uses the Almost-Free Risk Rate (AFRR) to discount the projected cash flow. Thus, it is implicit that the analysis of perceived risks is an obligatory and specific phase for each project. In conclusion, if NPV > 0, this only means that it is worth continuing the analysis. Unlike the Classic Methodology, in which the return of investment is measured by the IRR, in the Multi-Index Methodology it is represented by the ROIA. It represents the additional (%) that is obtained over the AFRR. This additional must be compared with the risks that stem (additional risks) from the decision to invest. The AFRR/IRR Index is used as proxy of P(NPV≤0), i.e., the likelihood that the profitability propitiated by the securities that compose the AFRR will present a better return than the business under analysis. The Payback/N Index represents the fraction of time of the planning horizon needed to recover the investment. This indicator strongly depends on the business characteristics. The Degree of Revenue Commitment (DRC) is intended to assess the operational risk of the business. This indicator measures the percentage of the Operational Revenue that is committed to paying costs and expenses. The Management Risk aims to reflect the essential, generic and specific competencies of the project’s management group in similar enterprises at the strategic, managerial and operational levels. Basic information for the composition of this indicator is already extracted in the discussion phase of the positioning strategy that should guide the policies of talent development, attraction and retention. The Business Risk is intended to reflect the perceived risks in the environmental analysis (PEST, SWOT, Porter’s five forces), notably the market structure, barriers to entrance/leaving, bargaining power with suppliers/clients and other players involved. Analogous to the Management Risk, the basic information for composing this index must already be extracted in the phase of preparing and discussing the positioning strategy. In the Multi-Index Methodology, to decide whether a project should be recommend or not, the information on Return and Risks are synthesized in a Perceptual Map to assess the compatibility between expected return and perceived risks. Figure 1. Multi-index methodology characteristics. Source. A. Souza and Clemente (2012). decision-maker to evaluate whether the expected return is from 95,000 tons in 2011 to 219,000 tons in 2015 and as compatible with the perceived risks. Thus, all information much as 400,280 in 2018. Currently, five Brazilian states from here on is necessary for using the multi-index account for approximately 75% of the national production of methodology. tilapia, and 90% of this production is concentrated in only 10 states. Paraná State, located in southern Brazil, stands out with approximately 28% of national production. Table 1 A Systemic View of the Commercial illustrates this situation, emphasizing (a) the state where pro- Exploitation of Tilapia duction occurs, (b) the price per kilogram traded, (c) the To Ênio Queijada, manager of the Agribusiness Sector of the value, and (d) the average price. Brazilian Service of Support for Micro and Small Enterprises Paraná is the leader in tilapia cultivation in Brazil. This is (Serviço Brasileiro de Apoio às Micro e Pequenas Empresas partly due to the expansion of cold storage, slaughterhouses, [SEBRAE], 2015), tilapia is the most cultivated fish species cooperatives, and, especially, the technical assistance pro- in Brazil, representing 47% of national production. Due to its vided by EMATER (Paraná Institute of Technical Assistance quick weight gain (800 g in 6 months), fish farmers love tila- and Rural Extension). Most small and medium-sized rural pia. The coproducts of tilapia are shown in Figure 3: (a) aquaculture–oriented producers working in cooperative sys- human food and (b) leather for industrial objects and raw tems and who rely on the support of AQUIPAR (Association material for animal food (Andrade, 2015). of Fish Farmers in the West of Paraná) are concentrated in It is clear that the business’s “flagship” derives from the the western region of the state. The relationship network fact that tilapia meat is greatly accepted by the Brazilian formed by these players and the higher education institutions population. According to the Instituto Brasileiro de Geografia (federal, state, and private Universities) operating in the e Estatistica (IBGE, 2016), tilapia production in Brazil went region form the basis for local production arrangements with Souza et al. 5 Figure 2. Overview of the multi-index methodology. Source. A. Souza and Clemente (2012). Figure 3. Tilapia and its coproducts. Source. TPC (2018). 6 SAGE Open Table 1. Main Tilapia-Producing States in Brazil (Data of 2015). States Kg Value (R$1,000) Average price (R$/Kg) % Σ% 1 Paraná 63,065,594 295,639 4.69 28.75 28.75 2 São Paulo 29,001,813 141,277 4.87 13.22 41.98 3 Ceará 27,889,101 171,298 6.14 12.72 54.69 4 Minas Gerais 20,571,604 136,079 6.61 9.38 64.07 5 Santa Catarina 25,099,479 121,611 4.85 11.44 75.52 6 Bahia 8,823,321 47,151 5.34 4.02 79.54 7 Goiás 8,655,295 46,057 5.32 3.95 83.48 8 Pernambuco 6,510,557 38,537 5.92 2.97 86.45 9 Espirito Santo 6,506,752 34,487 5.30 2.97 89.42 10 Rio Grande do Sul 2,802,640 22,575 8.05 1.28 90.70 11 Total of Brazil 219,329,236 1,177,643 100.00 Source. Instituto Brasileiro de Geografia e Estatistica (2016). Figure 4. Tilapia’s production chain. Source. Google images. the systemic competitiveness of this agribusiness. Figure 4 The choice of tilapia as a source of raw material is due to the presents tilapia’s production chain in the Paraná state and a fact that its leather has a low value because it is considered a clear overview of this local production arrangement. We pesky residue by fish processors, and after tanning, it results highlight the city of Cianorte, capital of clothing in Paraná, in a raw material of an inimitable and unique-looking quality, the hub of factories, which attracts buyers from all over due to its resistance and the pattern that forms on its surface, Brazil and will serve as a presentation and testing spot for especially the skins of fish with scales (SEBRAE, 2015). fashion trends. According to Godoy et al. (2010), the leather with the great- Highly valued in the market, fish leather has become a est elasticity is fish leather, and it is also easier to achieve the source of income for fish farmers and artisans in the produc- proper thickness for artifacts made of leather. After tanning, tion of shoes, clothes, and accessories such as handbags, the skins of species can be transformed into a type of leather necklaces, and even furniture (Centre for the Brazilian as resistant as cow leather (Strzelczyk et al., 1997). Figure 5 Tanning Industry, 2015). In Brazil, besides tilapia (whose illustrates the result of tanned tilapia leather. production has been growing rapidly due to parks and the Characteristics such as the resistance of raw materials, increased demand for fish meat), there are many freshwater exotic and environmental aspects, applicability to various fish whose skins are suitable for tanning (SEBRAE, 2015). products, and high added value have aroused the interest of Souza et al. 7 lowers the costs of marketing, as it does not require high investments in advertising and publicity to disseminate the maker’s brand. It also ensures access to thousands of consumers. Competition Strategies One of the main goals of strategic planning in companies is to expand levels of rationality in business decisions through the understanding of internal and external factors that influ- ence or determine its operation. To address these factors, managers can react to them appropriately, and if well exe- cuted, strategic planning provides organizations with greater capacity for anticipation (Kotler, 2010; Veiga et al., 2016). Corporate strategy summarizes the purpose, the raison Figure 5. Tilapia leather, post-dyeing process. d’être of the company, and therefore needs to be treated with Source. Google images. discretion. Corporate strategy is the company’s decision- making method wherein lies its goals and objectives, stan- many entrepreneurs. The skin of the fish can be obtained dards and plans for achieving its objectives (Kaplan & directly from the fish processing industry and from artisanal Norton, 1997). The author progresses in the sense of seeking fishermen. In the case of the fish industry, the entire process to identify the relationship of the company with the environ- takes place in its own tannery (SEBRAE, 2015). As for arti- mental context, its motivations for establishing a strategic sanal fishers, they can be trained in the techniques of con- position, and a series of objectives that may consist of a serving and storing several fish skins before marketing them direction for the development of a plan. The competitive (Loizou et al., 2014). Despite the findings of M. L. R. Souza strategy then aims to establish a profitable and sustainable et al. (2003) that “the development of leather, from residual position against the forces that determine industrial competi- skins of the fish filleting process for the manufacture of tion, and this could be developed explicitly through a plan- leather and clothing, has for some years been an alternative ning process or implicitly through the activities of the various source of income,” the fish skin is mostly discarded after functional departments of the company (Porter, 2009). slaughter (Bellmann et al., 2016). This finding shows that, In the process of refining the concept of the business strat- from a systemic and local production arrangements view, an egy, it is categorized into four aspects: market penetration, alternative source of income for medium and small farmers/ product development, market development, and diversifica- producers can be glimpsed. tion (Ansoff, 1965). One more step in the refinement process If Brazil is a quality leather importer, substituting it with was given by Porter (1980), who proposed three generic another leather of equal quality and resistance and a better strategies: cost leadership, differentiation, and focus. visual appeal emerges as a business opportunity, and fish According to the latter author, cost leadership strategies and leather can occupy this space (Moreira et al., 2016). Fish differentiation seek competitive advantages in a wide range leather is increasingly used in the manufacture of purses and of industrial segments, while the focus of strategy is a cost is considered a great potential for Brazil (Brazilian Society advantage (focus on cost) or a differentiation (focus on dif- of Agriculture, 2015). The country can become one of the ferentiation) in a well-defined segment. Furthermore, it is largest fish producers in the world in the medium term pointed out that the differentiation strategy focuses on the because it has favorable conditions for aquaculture: climate, product offered from the perspective of the customer, who availability of grains for the production of fish food, and should perceive some characteristics that add value to the water (Roriz et al., 2017). Furthermore, fish leather is 3 times product (Mintzberg, 1988). To this author, there are six basic stronger than hide, not to mention that the authorization of ways for a company to differentiate its offerings: price, this commercialization does not depend on Brazilian Institute image, product support, perceived quality, attention-seeking of the Environment and Natural Resources (IBAMA). design, and imitation (nondifferentiation). Producers of leather handbags and accessories should Among the strategies highlighted above, it was observed have their own sales point to ensure the feasibility of the through an analysis of the leather bag market that a combina- business. It is also essential for them to have several distribu- tion of cost leadership and differentiation is required. As for tion channels, and this is precisely where the business under- the differentiation, a design with a strong visual appeal, com- taker meets the greatest obstacles to marketing the product bining aspects of attractiveness and sustainability, is sought (Roriz et al., 2017). It is interesting for the business under- to put on the market products that meet the target audience of taker to have a contract with exporters for the production of fashionable and influential women. For this reason, the strat- bags with the retailer’s own brand, which is an option that egy is one of constant design innovation in an attempt to 8 SAGE Open Figure 6. Designs for tilapia leather bags. Source. Google images. anticipate fashion trends. Some possible designs for the first 2016). The barrier to entry, except for the initial capital, is launch on the market are shown in Figure 6. low and even artisanal manufacturers can conquer part of The brand is essential in this process because it identifies this market via online sales. the origin or the manufacturer of the product and trust. It also According to Tagliassuchi (1986), the barriers to entry are determines the quality and retains loyal consumers, resulting considered co-regulators of conduct and performance of the in more stable demand (Kotler, 2000). The brand for the company. In the case of Tilap-bags, the main barrier lies in project was chosen by consensus among its creators, and the the scale and local production arrangements to compete name Tilap-bags was selected because it represents the idea under the cost leadership strategy. The choice of location in that the bags are made of Tilapia. The goal is to produce bags Campo Mourão, Paraná, Brazil, is strategic, taking advan- and resell them to traders in the main Brazilian shopping tage of the synergy of players that provide the region with malls, tourist attractions, and airports. Once the products systemic competitiveness. This is achieved through geo- achieve maturity, that is, from the third year on, exports and graphical distances (a radius of about 150 km), the potential a sales website will become a further option for the of the region to produce tilapia skin, tanning and dyeing pro- company. cesses, companies that tailor the leather to sell it in square meters, professional seamstresses who are already familiar with the process of outsourcing, education institutions in Relevant Players matters of production and management, and government and The firm, as a locus of capital growth, has growth itself as its cooperative technical assistance that is already operational in goal, via customer satisfaction, and, consequently, the satis- the region. faction of the capital holders. Customer satisfaction is imper- ative in this sequence. It is necessary for the company to Methodological Aspects of the Study remain competitive and know how to manage the resources at its disposal to turn expectations into reality. Customer ser- This is applied research of a descriptive and explanatory vice in lower delivery cycles of products, reliable and high- nature with regard to its objectives. At the same time, it is a quality products, meeting deadlines, innovative production, constructive case study with regard to the strategy employed flexible production processes, and low costs are important to address the problem. Data were collected through biblio- drivers of business nowadays (Skinner, 1969). Faced with graphic research, the analysis of documents pertaining to the this reality, the competitive advantage of the firm is linked to operational cycle of the activities of a company that already the dynamism of the entire supply chain because competition produces tilapia leather bags, and unstructured interviews is now globalized (Srinivasan et al., 2015). In this same con- with the unit’s manager. The data analysis is qualitative con- text, a basic analysis unit to understand the competitiveness cerning the perception of risks and quantitative regarding of a company is defined as a group of competitors that pro- the estimation of return indicators and the sensitivity analy- duce goods or services that compete directly with each other, sis of the results. The purpose of this survey was to provide that is, competitiveness becomes the result of the ability, details on investments, costs, and productivity, as well as the skill, and attitude of a company with the goal of maintaining risks associated with this agribusiness. The practical bene- solid vis-à-vis market changes (Porter, 2009). Aware of this fits of this study are that it generates and systematizes the relationship network, those producing leather handbags with information required according to the various stages of the high quality standards are considered direct competitors. In drafting of a business plan. This information is systematized the niche market in which Tilap-bags plans to operate, there according to the methodology used (multi-index), with the are several competitors who already have brand recognition intention of aiding decision-making on investments in real in the manufacture of leather handbags (Balte, 2016; Danka, assets. Souza et al. 9 Figure 7. Price, participation in the mix, and expected demand of products. Source. Research data. Table 2. Variable Cost Per Unit—Purse Model 1. Cost type Unit Quantity Unitary cost Total cost Leather m 0.50 200.00 100.00 Outsourced sewing Unit 1.00 30.00 30.00 Internal tissue m 0.50 20.00 10.00 Grommets Unit 3.00 2.10 6.30 Hardware Unit 1.00 5.00 5.00 Thread Cones 0.30 12.00 3.60 Buttons Unit 2.00 2.00 4.00 Glue Unit 0.05 50.00 2.50 Dye for the edge Unit 0.03 18.00 0.54 Big zipper Unit 1.00 4.00 4.00 0.50 2.00 1.00 EVA (ethylene vinyl acetate) m Small zipper Unit 1.00 1.00 1.00 167.94 Brazilian National Simple Tax. Relevant information on Presentation of the Results demand, cost, and operating expenses and profit after taxes is Figure 7 presents the specifications of the four products and shown in Figure 8. their marketing prices (R$340, R$430, R$550, and R$700), After a few adjustments, the profit flow is converted into and the annual estimates of demand, production units, initial cash flow representative of the business plan as shown in investment, and production costs are also estimated. Table 3—investor’s cash flow. To meet the level of production and sales, the remaining investment was estimated at R$420,000 (fixed assets, Analysis and Discussion of the Results R$150,000; preoperational expenses, R$140,000; and initial working capital, R$130,000). Due the limitation of equity, The first step for the analysis of the feasibility of the business 40% of the initial investment will be financed with third- plan is the construction of the projected cash flow. The sec- party capital at a cost of 14% per year. For the calculation of ond is to fixate the discount rate. For the current context, the the variable cost per unit of goods, aspects of resistance of recent Monetary Policy Committee (Comitê de Política the leather to be used and the quality and visual appeal of the Monetária do Banco Central—COPOM) signaling, and the final product were considered. Table 2 illustrates the unit estimates of profitability of the low-risk securities to capital variable costs related to Product 1. Similarly, the variable investment applications, we decided to use 12% per annum costs per unit of Products 2, 3, and 4 were estimated, result- (net) to represent the almost risk-free rate (ARFR). According ing in R$285.14, R$365.14, and R$445.14, respectively. to Figure 9, the two sets of multi-index methodology indica- Figure 8 presents the demand expectancy, variable unit tors were then calculated. costs, and budgets (production, commercial expenses, and For a better understanding, it is important to stress the administrative expenses) allowed for the projection of the interpretation of some specific indicators of the multi-index Income Statement using the direct costing method and methodology, as shown in Figure 10. 10 SAGE Open Figure 8. Estimates of sales revenue, income, and profit. Source. Research data. Table 3. Investor’s Cash Flow. Investments Initial Assets Financing in fixed working Preoperational Bank Residual Investor cash Profit flow depreciation amortization assets capital expenses financing value flow Year (=) (+) (−) (−) (−) (−) (+) (+) (=) 0 153,401 129,992 46,410 131,921 −197,882 1 −20,080 16,418 −3,662 2 62,357 16,418 26,384 52,391 3 190,150 16,418 26,384 180,184 4 286,234 16,418 26,384 276,268 5 349,186 16,418 26,384 339,220 6 426,960 16,418 26,384 416,994 7 428,843 16,418 445,261 8 428,843 16,418 445,261 9 428,843 16,418 445,261 10 428,843 16,418 714,738 1,159,999 Figure 11 presents the results of the multi-index method- important to estimate P(NPV ≤ 0) for scenarios that consider ology that are synthesized in the perceptual map, enabling a the uncertainties in the parameters of demand, the selling perception of the magnitude of the gains and risks. In this price, and the cost of leather. For this purpose, Crystal Ball map, the business plan receives the green light to enter into software was used. The hypotheses were as follows: varia- business if the perceived risks are in the same ROIA column tion of ±10% in demand and selling price (uniform distribu- or to its left. If that does not occur, further analyses and tion), −20% and +10% around the most likely value for the adjustments will be necessary. cost of leather (triangular distribution), and ±5 percentage The perceptual map shows that the perceived risks are points in annual growth rates. Figures 12 and 13 represent consistent with expectations of return (all risks are on the left the probability distribution for the NPV and ROIA, side of the return), thereby suggesting that the business respectively. undertaking will be continued. It is important to note that the Figure 12 suggests that the result of the simulation of dif- results that were presented were estimated for the most likely ferent scenarios depending on the variations of demand scenario. It is clear that, in alternative scenarios (pessimistic, parameters, selling price, cost of acquisition of leather, and optimistic, or any combination of these), the results may not the demand growth rate is compatible with the recommenda- remain unchanged. To better substantiate the decision, it is tion by the multi-index methodology and that for Souza et al. 11 decision to invest is taken, the profit expected to be recov- Present Value 1,661,366 ered has been applied on ARFR (12%), and an additional Net Present Value (NPV) 1,463,485 return of 23.71% is obtained, which would total to around Yearly Net Present Value (NPV ) 259,014 y 36% per year. Benefit/Cost Index 8.40 The most critical risks perceived were the management risks and the business risk. This was due to the Group Additional Return on Investment (ROIA) 27,1% Manager having no previous experience with this kind of Internal Rate of Return (IRR) 61,24% business and especially no experience of working with the Almost Risk-free Rate / IRR Index 0.20 players to show the potential of cooperative arrangements for Payback 3.5 the production of tilapia leather in large quantities and, thus, Payback/N Index 0.35 reduce the cost of raw materials. Regarding the business risk, Revenue Commitment Index 0.69 there is a natural concern regarding environmental legisla- tion, to the extent that as the commercial exploitation of Management Risk 0.52 natural environments intensifies, phytosanitary problems Business Risk 0.62 may arise, forcing the suspension of the activity for a period Figure 9. Project feasibility indicators. of time before the natural conditions are reestablished. Source. Research data. To compare the results of this study with previous works in the literature (Rae et al., 2014), we performed a sensitivity analysis of the proposed methodology. Crystal Ball software conventional cash flows if the MARR/IRR index is ≤ 0.60, was used, and simultaneous variations were allowed in the then P(NPV ≤ 0) ≤ 0.05. Here, it easy to see an important parameters of the business plan, namely, demand (variation theoretical finding of the multi-index methodology, which is of ±10% according to the uniform distribution), selling price the possibility of creating a proxy of P(NPV ≤ 0) from the (variation of ±10% according to the uniform distribution), MARR/IRR ratio when it is less than 0.66 without any further cost of acquisition of raw material leather (variation of −20% calculation whatsoever. Another important outcome can be and +10% around the most likely value—triangular distri- seen in Figure 13. It is observed that the probability of practi- bution), and rate of growth of the quantities sold (±5 per- cally doubling the gain (retrieving the ARFR and then dupli- centage points according to a uniform distribution). The cating its value) is approximately .50. This information results of this analysis, using the Monte Carlo method, co-substantiates the decision to invest in the business of tila- showed that P(NPV ≤ 0) ≈ 0.0002 and P(ROIA > 2 × pia leather bags. almost risk-free rate) ≈ 48%, backing the decision to invest in the business. Final Considerations In short, in addition to the results presented, four main The main aim of this article was to show that the multi-index contributions of this research can be highlighted. The first methodology imposes more rigorous analysis in the discus- contribution is positioning the business plan as an integral sion of risks and specification of a business plan. To do so, part of the strategic process to increase the profitability of the we analyzed, through a case study, the expectancy of return investor capital. The second contribution is that this study and perceived risks of a business plan to produce and com- can stimulate actions to drive the decision-making process mercialize women’s handbags made of tilapia leather in the toward a direct comparison of estimated returns versus per- city of Campo Mourão, in the southern Brazilian state of ceived risks. The third contribution is the introduction of the Paraná. To achieve this goal, relevant information was col- multi-index methodology as a feasible technique for analyz- lected through document research and semi-structured inter- ing the business plans of small and medium-sized enter- views, which were conducted in 2016 and 2017. For this prises. The fourth is a theoretical finding that allows the easy purpose, analyses were performed regarding the strategic estimation of a proxy of P(NPV ≤ 0) from the MARR/IRR positioning, marketing appeals, location that provided better ratio without any further calculation whatsoever when this synergy with existing local production arrangements, and, ratio is lower than 0.64 (Harzer, 2016). All these contribu- finally, the use of the multi-index methodology to compare tions are important because they improve the decision-mak- the expected return with the perceived risks. er’s perceptions of risks and returns of business plans, For the most likely scenario, the multi-index methodol- especially when a broader view of the factors involved is ogy perceptual map signals a medium/high return, and the required. perceived risks are compatible with profit expectations. The Future studies on the entire utilization of tilapia, with a ROIA, which, according to the multi-index methodology, is focus on collaborative processes and better integration the scorecard that best represents the profitability of a proj- among the existing local production arrangements, could ect, was estimated at 23.71% per year, meaning that if the result in an improvement of the whole process of breeding, RISK RETURN 12 SAGE Open The NPV (R$ 1,463,485) and its annual equivalent (R$ 259,014) only indicate that profit expectations outweigh the gains of the decision not to undertake. It is this expectation of gain that must be faced with the perceived risks in order to make the decision on whether to go into business. In the present case, it is a green light to continue with the analysis. To determine whether the gain is palpable, it is necessary to resort to other parameters of analysis. The Benefit-cost Index (8.40) indicates a profitability of 740% in 10 years (planning horizon of the business plan) and, to a certain extent, is a relativization of the NPV, but insufficient to express the magnitude of the expected gain. The Additional Return from the investment (23.71% p.y.) is the annual equivalent rate of 740% in 10 years. It is this additional (beyond the almost risk-free rate of return) that must be compared, by means of the Perceptual Map, with the perceived risks. By being in the same time measure of the almost risk-free rate (year), it is thus possible to assess the expressiveness of the gain (low; low/medium; medium; medium/high; high) on the same scale in which the perceived risks are evaluated. It is possible to use some 29,37 functions to organize some of the Multi-index Methodology indicators on a scale of 0 (practically no risk) to 1 (very high risk) . Thus, the ROIA of 23.71% frames this project gain in the medium/high category. The function used [0.4338 * ln(ROI) +0.4095] generated an index of expressiveness of gain equal to 0.71. The ARFR/IRR Index is used as a proxy of P (NPV ≤ 0). This is because the almost risk-free rate and the IRR are random variables resulting from characteristics of each project. Just like the ROIA, a function of adjustment [1.4591x -0.2167x+0.0596] was also used to classify this risk on an already established perceptual range. The function was used for classifying the risk as low. For conventional cash flows, when ARFR/IRR Index ≤ 0.60 → P (NPV ≤ 0) ≤ 0.05 and this really happened. The Revenue Commitment Degree (RCD = 0.69) represents the company’s operational risk arising from the installed cost structure. It shows that the percentage of revenue is committed to the payment of costs and expenses. It is a relevant indicator because it makes explicit the minimum sales revenue necessary to target profits. Given this, it can be said that, even in the third year, 69% of revenue is committed to the payment of costs and expenses involving medium/high risk. The Management Risk is associated with the managing group’s competence in carrying out the project in the first two years of activity. The knowledge and experience accumulated in the production process, marketing process, distribution channels and, mainly, in the conducting of negotiations, is necessary to assist the company during periods of turbulence . A key variable in the business plan is the price of leather. Thus, it is important that managers/employees develop specific skills for purchase procedures that guarantee supply at a competitive price. An association with the leather-producing cooperatives may be the best way to mitigate this risk. Considering generic and specific competences, the management risk of this business remains around 0.65. This high risk is due mainly to the fact that none of the managers is familiar with the process of production and trade in handbags for the desired target consumers. The Business Risk covers the project in a broader manner, resorting to traditional analysis discussions such as SWOT, Porter’s Five Forces and PEST. A new look at those same analyses seeks to identify the risks that permeate the business in question and convert them to the desired scale (0 to 1). Three risks were highlighted in this analysis: 1- There is virtually no barrier to entry if the business is shown to be promising; 2- Changes in legislation to prevent the expansion of tilapia cultivation, with direct implications for leather raise the price, and 3- Radical positioning of groups committed to animal welfare, which could hinder trade in objects manufactured with raw materials made from animal sacrifice. That risk remains estimated at 0.62. Figure 10. Specific indicators of the multi-index methodology. Source. 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Has experience in Administration, focusing on Financial Serviço Brasileiro de Apoio às Micro e Pequenas Empresas. Management, acting on the following subjects: investment deci- (2015). SEBRAE—Brazilian service to support micro and sions, feasibility indicators, Multi-Index Methodology for project Souza et al. 15 risk assessment, costing methods and strategic cost Emmanuel Óguchi Ogu is MSc in Business Administration at management. Pontifical Catholic University of Paraná. Ariane Maria Machado de Oliveira is PhD in Business Luciano Luiz Dalazen is currently a PhD candidate and master in Administration. She is currently coordinator of distance learning Business Administration (PUCPR), Strategic Administration con- courses at Kroton Educacional. He teaches in the areas of Economics centration area. Preferably studies Behavioral Finance, Strategy and Finance for 12 years. His research interests are economics and and Quantitative Methods in Administration. financial management. Claudimar Pereira da Veiga, professor, PhD, is at the Department Dayla Karolina Fossile is currently a PhD candidate and master in of Marketing in Federal University of Parana. His research interests Production Engineering at the Pontifical Catholic University of include multidisciplinary research focus like marketing health ser- Paraná PUCPR. She is currently a professor at the UNISOCIESC vices, services innovation, retailing and consumer behavior. He is a University Center (Grupo Ânima Educação) teaching in the member of the board of editors of the BMC Health Services accounting science course. Research and Palgrave Communications - NATURE.

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SAGE OpenSAGE

Published: Jan 10, 2020

Keywords: investment decision-making; cost management; multi-index methodology; strategy

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