Project Management (MGT 540)
Case Study #4: Project Selection at Nova Western, Inc.
Submitted to: Mr. Willy Cuason
Submitted by: Bucalbos, JC Luzaran, Xelina Mapoy, Rey Ann Mosteiro, Denise Salvador, Jocel CASE BACKGROUND
Using different methods can yield to different things and the outcome will always be different. There are many methods on how to screen a project and the output can result in distinctive ways. The checklist method can have a conclusion different from other methods because how a project is evaluated is not similar to others. The case has two projects proposal but only one can be done because of budget constraints. Project Janus supported by the Software Development Group of the company and Project Gemini by Business Applications Organizations. The company used a weighted scoring model and the output was that Project Gemini is better of the two with the criteria given. Another approach was used, the Discounted Cash Flow, which the results were in favor of Project Janus because of the greater returns on initial investment. Phyllis Henry, the vice president of new product development, will present to the top management his recommendations and he is not yet confident on what to give as an answer.
STATEMENT OF THE PROBLEM
In dilemmas where a decision has to be made in choosing one of the two options is not an easy task to do especially in cases that involves big money. Projects in organizations involve the use of money and often times it requires a lot. Management has to pick the best option because it will use time and resources but in some cases if all projects can be funded then it can be executed but involves of more risk. The case is in a dilemma of choosing between the two proposed projects and only one can be funded. The scoring model suggests that Project Gemini is the choice for the next new project. On the other hand, NPV analysis suggests the other project, which is Project Janus. It is clear that the results of the two methods that have been mentioned in the case are conflicting. Given this predicament, what are other possible project selection methods, which will support the claim of either the scoring model or the NPV analysis, that can aid Nova in choosing the right project?
ALTERNATIVE SOLUTIONS
The group considers two alternatives to help the company determine which project should be carried out. One must keep in mind that the alternative to be chosen here is to be used considering that previous methods - weighted scoring and NPV - have already been done. These are different from those examples present in the case but are to be added to them to help the firm.
1) Analytical Hierarchy Process (AHP)
a. In this process, there are three criteria for evaluating project alternatives: (1) Financial benefits, (2) Contribution to strategy, and (3) Contribution to IT
infrastructure. The Financial benefits criterion, which focuses on the tangible benefits of the project, is further subdivided into long-term and short-term benefits. Contribution to strategy, an intangible factor, is subdivided into three sub criteria: (a) Increasing market share for product X; (b) Retaining existing customers for product Y; and (c) Improving cost management. Because the hierarchy can reflect the structure of organizational strategy and critical success factors, it also provides a way to select and justify projects according to their consistency with business objectives.
b. AHP requires that all criteria be fully exposed and accounted for at the beginning of the selection process. c. Application: In the case, there are strategic categories. The group would divide these according to the three criteria for evaluating project alternatives as seen in the table below. Three Main AHP Criteria
1. Contribution to Financial Benefits
3. Contribution to Strategy
Subcategories 1a) Long-term benefits 1b)Short-term benefits 2a) increasing market share for the products 2b) retaining existing customers for existing product lines 2c) Improving Cost Management
6. Contribution to IT infrastructure
Key Categories of Nova (as divided by the group) - NPV computed - Potential profit - Strategic fit - Strategic leverage - Probability of technical success
The AHP Process is advisable because this is a more intensive view of the different aspects of the projects. Aside from that, there is the division, organization, and prioritizing of categories. If one has got all the necessary information from top-to-bottom, the AHP process is advisable. A software, called Expert Choice is also used by Experts to apply AHP.
2) Payback Period
The Payback Period is another alternative because the rates of return for each project are given already. Using Excel application on this, Project Gemini’s and Project Janus’s Payback Period is determined.
Using the simple Payback Period WITHOUT incorporating the discount rate,
Project Janus Years
Cash Flow
Cum. Cash Flow
0
(250,000)
1
50,000
50,000
2
100,000
150,000
3
100,000
250,000
4
200,000
450,000
5
75,000
525,000
recovered the capital in 3 years
Project Gemini Years
Cash Flow
Cum. Cash Flow
0
(400,000)
1
75,000
75,000
2
250,000
325,000
3
300,000
625,000
Recovered between 1st and 2nd year.
With the use of Rates of Returns for 15% for the Discounted Payback Period, the years slightly go higher but STILL, Project Gemini has the earlier recovery period than Project Janus.
Project Janus
Year 0 1 2 3
Cash Flow (250,000) 50,000 100,000 100,000
0.869565217391304 0.756143667296787 0.657516232431988
43,478.26 75,614.37 65,751.62
43,478.26 119,092.63 184,844.25
4
200,000
0.571753245593033
114,350.65
299,194.90
5
75,000
0.497176735298290
37,288.26
336,483.16
Between years 3 and 4. According to Excel, specifically 3 years and 7 months.
Project Gemini Year
Cash Flow
0
(400,000)
1
75,000
0.869565217391304
65,217.39
65,217.39
2
250,000
0.756143667296787
189,035.92
254,253.31
197,254.87
Between years 2 and 3. According to 451,508.18 Excel, specifically 2 years and 9 months.
3
300,000
0.657516232431988
Using the Payback Period Method, the group realizes that even if Project Janus has a higher NPV than Project Gemini as recognized in the book, in terms of Payback Period, the company will gain back its investment faster with Project Gemini.
RECOMMENDATION Considering the project selection methods that the company has tested, the Weighted Scoring Model and NPV Analysis, the group recommends the Payback Period Financial Model Analysis, which supplements the claim of the Weighted Scoring Model, as another project selection method that Nova Western Inc. can consider. In choosing project to be executed, it is necessary to always take into consideration its
relative importance, as well as the money it will generate in the future upon execution. Thus, it is a bad idea to consider only one aspect of the project, such as the financial capability of the project only.
Although AHP is an effective project selection method, considering that it exemplifies a very detailed list of possible outcomes of the project, this is more advisable in the future. This is more applicable and effective to use if there are more than enough given data from the company to make an extensive rating for each criterion. In this case, the data given is very limited. Hence, the group chooses the Payback Period Model over AHP. One major reason as to why the group recommends the Payback Period Model as an Alternative Project Selection Method is that it supports the results of one of the methods that Nova Western has tested, that is, the Weighted Scoring Model.
ANSWER TO CASE QUESTIONS
1. Phyllis has called you into her office to help her make sense of the contradictions in project evaluation. How would you explain the reasons for this divergence of opinion from one technique to the next? What are the strengths and weaknesses of each screening method? The results of the two selection methods performed by the company, specifically the scoring model and the NPV analysis, have clearly yielded opposite outcomes. The scoring model, a non-financial screening method, suggests that Project Gemini is the right choice for the next new project. On the other hand, the NPV Analysis, a financial screening method, suggests the opposite. It is not uncommon for financial and non-financial screening methods to yield competing information; thus an argument can be made that using only these two methods is insufficient. Another screening model/s should be developed, which will give assurance that Nova will be able to select the next best project. Below is a table that lists the strengths and weaknesses of the screening methods that have been mentioned in the case as well as the other alternative methods that have been suggested by the group. This table will help the company to know which method/s is/are appropriate to use to make the wisest decision. SCREENING METHODS Scoring Model
STRENGTHS •
•
NPV Analysis
• •
Appropriate to use in terms of knowing whether a project is aligned with the company’s strategic goals or not Easy to use and to comprehend as well
Easy method to execute Ensures that the company will invest in a project that will
WEAKNESSES •
•
• •
The rating scale (1 – 3 or above) that is used is not very accurate There is no certainty whether the link between the selected/chosen criteria and the company’s strategic goals are 100% aligned or not Ignores probabilities and risk Assumes that financial projections are accurate
definitely generate profit
•
•
•
AHP
•
•
Ability to rank choices relative to their effectiveness in meeting conflicting objectives Ability to detect inconsistent judgments
•
•
Payback Period
•
•
“Allows the company to make a more intelligent determination of the length of time needed to satisfy the initial project investment” (Pinto, 2010) Easy to compute
•
Assumes that strategic considerations are irrelevant Fails to deal with constrained resources Difficulty in making accurate long-term predictions “It only works because the matrices are all of the same mathematical form – known as a positive reciprocal matrix.” (Coyle, 2004) The rating scale that is used is not very accurate and is not standardized Leaves out information regarding profitability during project payback periods as well as any profits made after payback periods end
2. Choose the project that you feel, based on the above analysis, Nova Western should select. Defend your choice.
Considering all project selection methods – both the methods stated in the case and the methods suggested by the group – that apply to the case of Nova Western, the group decided to choose Project Gemini as the best project to be executed. Both projects are profitable. Both have relative importance to the market and to the company. However, they differ on the level or height of profitability and importance. So, the best way to look which project is better to select is to know how long it will take for the project to pay back its initial budget and begin to generate positive cash flow for the company. Taking into account the rationale behind the NPV Analysis that it recognizes the time value of a money (a $ received today is worth more than a $ received tomorrow), it measures the project’s true profitability, and it has a value additively, Project Janus is the best project since it offers a higher net present value for the initial investment. However, when it comes to its relative importance as tested by the Weighted Scoring Method, Gemini is the choice. Hence, the results are contradicting. Therefore, the only solution to know which of the two projects is to be chosen is to conduct the payback period analysis. Based on the computations and analysis above, although Project Janus has higher NPV, its payback period is two years longer than Project Gemini. So, if
the firm does not wish to tie its money up too long, Gemini might be a reasonable alternative. Likewise, the weighted criteria model also favors Project Gemini. Hence, among the four project selection methods, two of them support Project Gemini as the best project to choose.
3. What does the above case suggest to you about the use of project selection methods in organizations? How would you resolve the contradictions found in this example? A lot of opportunities are coming in many firms. However, the top managers have to make a good decision in order to succeed. That is why using projection selection method is very important for many organizations since it will help them in choosing the best choice among the options within the usual constraints of time and money. Based on the case, Phyllis’ staff constructed two projection selection methods in order to determine which project they have to support: scoring model or NPV analysis. However, there were problems in the results because it yielded different findings. Project Gemini was the best alternative in the scoring model while Project Janus has the higher NPV. From this conflict, the group suggested that it would be better to use another selection criterion so that to avoid biases and it would be easier for the top management to decide the best project that would give positive impacts in the company.
LEARNINGS
Project Selection is one of the tough decisions that an organization has to deal with since many resources are at stake, especially money. In choosing the right project to execute, it is best to always consider not only the possible revenue that it will generate in the future but also its relative importance to the market and to the company itself. A project’s profitability mainly depends in its importance in the market. In choosing the best project, there will be at least three evaluations to conduct by the top management in order to avoid biases in the organization. Moreover, the decision will be more precise since the project that will be supported has good evaluations. In choosing projects for organizations, choose the projects that will have long-term benefits. In addition, it is better to have more evaluations for each project to determine the best option. Project Selection is not a fast process - especially if it involves a huge amount of money (as most cases do in project management). It lies on the hands of the managers - not the top ones but those who will actually overlook the project - to maintain good judgment on choosing the right one. Most of the time, this will involve going through more than one method. Even in the end, there is no assurance that the predictions would happen. After all, it was a prediction. It could also be a tedious process especially because results may vary, but with the right head and good timing, choosing can be easier and helpful.
SOURCES
Cooper, R. (2010-2012). Portfolio Management: Fundamental for New Product Success. StageGate International and Product Development Institute Inc. Coyle, G. (2004). The Analytical Hierarchy Process. In Practical Strategy: Structured tools and techniques. Pearson Education Limited 2004. Open Access Material Pinto, J. (2010). Project Management: Achieving Competitive Advantage, Second Edition. New Jersey: Prentice Hall
