Project Proposals Selecting the right project

Aggregate Project Plan Minor Process change Extensive Process change Minor Process change Extensive Process change R & D Projects Breakthrough projects Platform Projects Derivative projects

Aggregate Project Plan Classifications Advanced R&D Projects Innovations and technology development that provides a precursor to commercial development Breakthrough Projects Projects that involve significant change in the product and process establish a new core product and process Platform Projects Projects provide a base for a product and process family that can be leveraged over several years Derivative Projects Cost-reduced versions of an existing product or platform or add-ons or enhancements to an existing production process Allied Partnerships Partnerships in any of these project areas to leverage development resources and activities

Aggregate Project Plan Advanced R&D Projects Allied Partnerships 1 Breakthrough Projects New Core Processes Next Generation Process Single Dept. Upgrade Tuning and Incremental New Core Product Next Generation Product Addition to Product Family Add-ons and Enhancements Product Changes Process Changes Platform Projects Derivatives (Enhancements, Hybrids, and Cost Reduced Versions) Source: (Wheelwright and Clark, 1995)

Aggregate Project Plan Usefulness Identification of gaps in types of projects being undertaken in the organisation Facilitates evolutions of the resources commitments of the ongoing or proposed projects Model for employee development

The New Product Development Challenge: Creating the right set of development projects Different types of projects Product line architecture and Aggregate Project Planning (APP) Executing these projects on target, on time and on budget Different types of team structure Different types of development process Learning across projects The role of measurement and incentive systems Projects as a “school” for leaders

Project: Product and Service Development Grab the Idea Assess the Market Define the Concept Develop the Product Develop the Marketing Plan Test the Product Launch Product and Marketing Plan Define target, needs & size Identify competitive offerings Build Prototype Position product within market Establish name and packaging Establish price, sales and distribution Set market test objectives, sites, timeframe, training, documentation Client Satisfaction Quality Control Define Product and its components Identify inputs needed Confirm content and source Innovate, brainstorm, create Manage the Product

The Development Funnel Evaluation and SelectionDevelopmentProjects New Products /Services

The Ideal Development Funnel: Screen for Success New Product Development StrategyConcept Development Project Management and Execution

Classifying Different Types of Product Process Changes New Core Process Next Generation Process Single Department Upgrade Tuning and Incremental New Core Product Next Generation of Core Product Addition to Product Family Derivatives and Enhancements Product Changes Break- through Platform or Next Generation Enhancements Hybrids, and Derivatives Research/ Advanced Development

Common Problems: Too Many Derivative Projects Process Changes New Core Process Next Generation Process Single Department Upgrade Tuning and Incremental New Core Product Next Generation of Core Product Addition to Product Family Derivatives and Enhancements Product Changes Break- through Platform or Next Generation Enhancements Hybrids, and Derivatives Research/ Advanced Development

Classifying Different Types of Products Breakthrough Platform Derivative Support New Core Value New Benefits Improved Benefits Variation Radical Next Generation Incremental Base Market Perception Enabling Technology

Consumer Products Firm: Before Breakthrough Platform Derivative Support New Core Value New Benefits Improved Benefits Variation Radical Next Generation Incremental Base Enabling Technology Market Perception

Consumer Products Firm: After Breakthrough Platform Derivative Support New Core Value New Benefits Improved Benefits Variation Radical Next Generation Incremental Base Enabling Technology Market Perception

Net Present Value What is NPV? Net present value (NPV) is a standard method for evaluating competing long- term projects in capital budgeting. It measures the excess or shortfall of cash flows, in present value (PV) terms, once financing charges are met. All projects with a positive NPV should be undertaken

Net Present Value Basically NVP takes into account the value of £ in the future Each cash inflow/outflow is discounted back to its PV. Then they are summed. In this formula t is the time of the cash flow, N the total time of the project, i the discount rate and C is the cash flow at that point in time.

Net Present Value Compare 2 projects Project A Project B Cost of Project £720,000 £600,000 Estimated annual cash inflow £125,000 £180,000 Estimated useful life of project 5 years Required rate of return 20% Payback Period investment PB = = Annual net saving 5.8 years 3.3 years Rate of return a 17.4% 30.0% NPV (net Present Value) Present value of annual net cash inflow Project A £125,000 x b £383,870 Project B £180,000 x £538,380 Investment- £720,000 -£600,000 NPV- £346,130 -£ 61,620 Outcomes Project A – 5.8 years; reject, longer than life of project (5 years) Project B – 3.3 years; accept, less than 5 years and exceeds 20% desired rte of return Net Present Value Reject both because they have negative net present values Notes a 125/720 x 100 = 17.4% b Present value of an annuity of £1 for 5 years at 20% Found in annuity tables

Net Present Value General principle Accept a project where the Payback period is less than useful life of project and Where the NPV is positive

Internal Rate of Return (IRR) What is the Internal Rate of Return? This considers cash inflow and cash outflow “The internal rate of return is the discounted cash flow that equates the present values of the two sets of flows”

Internal Rate of Return Income stream Invest £1000 in a 5% simple interest bank account Take out the £50 interest each year. (£50 is 5% of £1000.) Take all the money out at the end of the sixth year.

Internal Rate of Return Year Income-£1000£50 £1050 Year 0 is a negative figure since we put the money in the bank, so this is cash out flow Each year we take the 5% (£50) interest The original £1000 stays in the bank until year six, therefore this is available with interest

Internal Rate of Return An alternative investment We buy a new machine for £1000 It gives us an operating profit of £200 a year for six years At the end of the six years the machine has no value (out of date etc)

Internal rate of Return Year Machine-£1000£200 The machine devalues each year and has no value in the sixth year Therefore the operating profit pays for the machine cost and depreciation

Internal Rate of Return So which is the best investment? Bank Account: = 300 Machine: = 200 What do you think?