The gearing effect of projects : threats or opportunities ?

1. The gearing effect of projects : threats or opportunities ? Inseec – Euro MBA Course « International Project Management » March/April 2005 Bernard Terrier

2. Course progress : where are we ? • Day 1 : Introduction • Day 2 : Tools and techniques • Day 3 : R&D project (case study) • Day 4 : Acquisition project (case study) • Day 5 : Alternative projects (case study) BD Terrier Conseil

3. Day 3 agenda • Case introduction • Working groups • Groups presentations; discussion & analysis • Introduction to exam case • Conclusion - Wrap-up Coffee break BD Terrier Conseil

4. R & D project case : general • Your company –‘Pro Boxes’, 220 M€- has a solid market share, mainly in Europe, on the mature market of electrical cubicles • Executive marketing VP is to set up a new strategic R&D project (~ 25 M€) • The purpose of this project is, in 2 years time, to change 60% of the offer, in order to • Revamp the offer and boost the existing growth • Improve/protect profitability • Prevent new competitors to enter • You are requested • To review market survey and bus.plan reliability • To set out list of possible risks and corresponding action plans BD Terrier Conseil

5. Pro Boxes sales breakdown BD Terrier Conseil

6. Market breakdown (1/2) BD Terrier Conseil

7. Market breakdown (2/2) BD Terrier Conseil

8. Market - issues to be adressed • Where is expected the growth ? • By region • By business segment • What is a reasonable CAGR (compound average growth rate) for the market, the competitors and your company ? • What is the combination price x volume ? • What are the cost drivers ? Is your company cost structure sensitive to: $/€ fluctuations ? oil/energy costs ? Wages increase ? … ? • Could the 25 M€ budget be invested in a different way : (acquisition ? Make or Buy ? License agreement ?) BD Terrier Conseil

9. Business plan - main assumptions • Sales CAGR : 5% (instead of 2% in the past 4 years) • Very fast ramp-up • DVC CAGR : 4.5% • Margin on DVC : 40% (year 0) • Overheads % on incremental sales : 20% (without depreciation ans provisions) • Depreciation and provisions ratio 3.5% • Financial expenses : 5% (over current year cash flow bal) • Income tax (effective) : 33% • Incremental working capital : 12% sales • Capex : 26 M€ • WACC (cost of capital) : 10% BD Terrier Conseil

10. Business plan summary BD Terrier Conseil

11. Business plan – risks • Project behind schedule • Start up costs higher than expected • Slow ramp-up => • Dual offer to be managed (sales and operations) • Inventories and working capital temporary increase • At the opposite, less risks on obsolete stocks • New offer changes sales mix (regions, business segments, standard products vs customized products) • Productivity target (on DVC) achieved later than expected • Logistic costs dramatic increase • Market turns down • Less growth • Selling prices steady or going down • Advertising costs increase (push/pull) BD Terrier Conseil

12. Growth project : Offer Development • Key Issues • End the delayed reniewing of our existing offer • Develop new offers : telecom offer, specific products, added practicalities • Detailed project planning • Resources (Y0 to Y4) • Increase of R&D Exp. from 2.4 to 3.0% of Sales. Investment : #26 M€ • Allocation of dedicated ressources to customized products BD Terrier Conseil

13. Business plan – 3 possible scenarios • Risk 1 – growth lower than expected (2% pa instead of 5%) • Market sluggish • Note: only volume risk is here considered • Risk 2 – productivity (DVC %) below bus.plan • Sales prices move down • Sales mix (by region; by product lines) • Productivity targets not met, or far behind bus.plan schedule • Start-up costs (new range); scraps (old range) • Risk 3 – incremental working capital higher than expected (13% pa instead 12%) • Credit control issues (more volume means more risks and/or extended credit conditions) • Inventories issues (dual ranges, obsolescence, goods in transit…) • Suppliers terms of payment BD Terrier Conseil

14. Risk 1 – growth and volume BD Terrier Conseil

15. back Risk 1 – growth and volume BD Terrier Conseil

16. Risk 2 – productivity BD Terrier Conseil

17. back Risk 2 – productivity BD Terrier Conseil

18. Risk 3 – working capital BD Terrier Conseil

19. Risk 3 – working capital BD Terrier Conseil

20. Risks – summary BD Terrier Conseil

21. Case study – issues to be adressed • Market and business environment : strategic and marketing comments • Business plan : reliability analysis • Risks management : scenarios and action plans description • Propose a clear project definition • WRITE a summary of your work BD Terrier Conseil

22. Conclusion – Wrap up • Project vs business environment : stay global, with a good strategic vision • Project management is local • Don’t expect everything from figures • Risk taking is part of manager’s responsibility • Simulations purpose is just to anticipate and ease the implementation of corrective action plans • Time management is a critical issue BD Terrier Conseil

23. back Project definition • Clear definition of a project ensures the project's success • The way to define a project is to ask a standard set of questions : • Purpose • Targets • Scope • Objectives (measurable) • Deliverables • Performance criteria • Constraints (quality/resources/time) • Risks / Key success factors (KSF) BD Terrier Conseil