The gearing effect of projects : threats or opportunities ? Inseec – Euro MBA Course «...

The gearing effect of projects : The gearing effect of projects : threatsthreats or or opportunitiesopportunities ? ?

Inseec – Euro MBAInseec – Euro MBACourse « International Project Management » Course « International Project Management »

March/April 2005March/April 2005Bernard TerrierBernard Terrier

march 2005 BD Terrier Conseil 2

Course progress : where are we ?Course progress : where are we ?

Day 1 : IntroductionDay 1 : Introduction

Day 2 : Tools and techniquesDay 2 : Tools and techniques

Day 3 : R&D project (case study)Day 3 : R&D project (case study)

Day 4 : Acquisition project (case study)Day 4 : Acquisition project (case study)

Day 5 : Alternative projects (case study)Day 5 : Alternative projects (case study)


Day 3 agendaDay 3 agenda

Case introduction Case introduction Working groups Working groups Groups presentations; Groups presentations;

discussion & analysisdiscussion & analysis

Introduction to exam caseIntroduction to exam case

Conclusion - Wrap-upConclusion - Wrap-up

Coffee Coffee breakbreak


R & D project case : general R & D project case : general Your company –‘Pro Boxes’, 220 M€- has a Your company –‘Pro Boxes’, 220 M€- has a

solid market share, mainly in Europe, on the solid market share, mainly in Europe, on the mature market of electrical cubiclesmature market of electrical cubicles

Executive marketing VP is to set up a new Executive marketing VP is to set up a new strategic R&D project (~ 25 M€)strategic R&D project (~ 25 M€)

The purpose of this project is, in 2 years time, The purpose of this project is, in 2 years time, to change 60% of the offer, in order toto change 60% of the offer, in order to1.1. Revamp the offer and boost the existing growthRevamp the offer and boost the existing growth2.2. Improve/protect profitabilityImprove/protect profitability3.3. Prevent new competitors to enterPrevent new competitors to enter

You are requestedYou are requested 1.1. To review market survey and bus.plan reliabilityTo review market survey and bus.plan reliability2.2. To set out list of possible risks and corresponding To set out list of possible risks and corresponding

action plansaction plans


Pro Boxes sales breakdownPro Boxes sales breakdown

Sales breakdown by region

100; 45%

90; 41%

30; 14%France

EU (15) out of France

ROW

Sales breakdown by market

70; 32%

40; 18%

90; 41%

20; 9% Electrical distribution

Telecom & IS

Industrial mkt

Niches


Market breakdown (1/2)Market breakdown (1/2)


Market breakdown (2/2)Market breakdown (2/2)


Market - issues to be adressedMarket - issues to be adressed

Where is expected the growth ?Where is expected the growth ?– By regionBy region– By business segmentBy business segment

What is a reasonable CAGR (compound average growth What is a reasonable CAGR (compound average growth rate) for the market, the competitors and your rate) for the market, the competitors and your company ?company ?

What is the combination price x volume ?What is the combination price x volume ? What are the cost drivers ? Is your company cost What are the cost drivers ? Is your company cost

structure sensitive to: $/€ fluctuations ? oil/energy costs ? structure sensitive to: $/€ fluctuations ? oil/energy costs ? Wages increase ? … ?Wages increase ? … ?

Could the 25 M€ budget be invested in a different way : Could the 25 M€ budget be invested in a different way : (acquisition ? Make or Buy ? License agreement ?)(acquisition ? Make or Buy ? License agreement ?)


Business plan - main assumptionsBusiness plan - main assumptions Sales CAGR : 5% (instead of 2% in the past 4 years)Sales CAGR : 5% (instead of 2% in the past 4 years) Very fast ramp-up Very fast ramp-up DVC CAGR : 4.5%DVC CAGR : 4.5% Margin on DVC : 40% (year 0)Margin on DVC : 40% (year 0) Overheads % on incremental sales : 20% Overheads % on incremental sales : 20% (without (without

depreciation ans provisions)depreciation ans provisions) Depreciation and provisions ratio 3.5%Depreciation and provisions ratio 3.5% Financial expenses : 5% Financial expenses : 5% (over current year cash flow bal)(over current year cash flow bal) Income tax Income tax (effective)(effective) : 33% : 33% Incremental working capital : 12% salesIncremental working capital : 12% sales Capex : 26 M€Capex : 26 M€ WACC (cost of capital) : 10%WACC (cost of capital) : 10%


Business plan summaryBusiness plan summary


Project behind scheduleProject behind schedule Start up costs higher than expectedStart up costs higher than expected Slow ramp-up =>Slow ramp-up =>

– Dual offer to be managed (sales and operations)Dual offer to be managed (sales and operations)– Inventories and working capital temporary increaseInventories and working capital temporary increase– At the opposite, less risks on obsolete stocksAt the opposite, less risks on obsolete stocks

New offer changes sales mix (regions, business segments, New offer changes sales mix (regions, business segments, standard products vs customized products) standard products vs customized products)

Productivity target (on DVC) achieved later than expected Productivity target (on DVC) achieved later than expected Logistic costs dramatic increaseLogistic costs dramatic increase Market turns downMarket turns down

– Less growthLess growth– Selling prices steady or going downSelling prices steady or going down– Advertising costs increase (push/pull)Advertising costs increase (push/pull)

Business plan – risksBusiness plan – risks


Growth project : Offer DevelopmentGrowth project : Offer Development Key IssuesKey Issues

End the delayed reniewing of our existing offerDevelop 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


RiskRisk 1 1 – – growthgrowth lower than expected (2% pa instead of 5%) lower than expected (2% pa instead of 5%)– Market sluggishMarket sluggish– Note: only volume risk is here consideredNote: only volume risk is here considered

RiskRisk 2 2 – – productivityproductivity (DVC %) below bus.plan (DVC %) below bus.plan– Sales prices move downSales prices move down– Sales mix (by region; by product lines)Sales mix (by region; by product lines)– Productivity targets not met, or far behind bus.plan scheduleProductivity targets not met, or far behind bus.plan schedule– Start-up costs (new range); scraps (old range)Start-up costs (new range); scraps (old range)

RiskRisk 3 3 – incremental – incremental working capitalworking capital higher than expected higher than expected (13% pa instead 12%)(13% pa instead 12%)– Credit control issues (more volume means more risks and/or Credit control issues (more volume means more risks and/or

extended credit conditions)extended credit conditions)– Inventories issues (dual ranges, obsolescence, goods in transit…)Inventories issues (dual ranges, obsolescence, goods in transit…)– Suppliers terms of paymentSuppliers terms of payment

Business plan – 3 possible scenariosBusiness plan – 3 possible scenarios


Risk 1 – growth and volumeRisk 1 – growth and volume


Risk 1 – growth and volumeRisk 1 – growth and volume

-16

-12

-8

-4

0

4

8

Y 0 Y 1 Y 2 Y 3 Y 4 Y 5 Y 6 Y 7 Y 8 Y 9

back


Risk 2 – productivityRisk 2 – productivity


Risk 2 – productivityRisk 2 – productivity

-16

-12

-8

-4

0

4

8

Y 0 Y 1 Y 2 Y 3 Y 4 Y 5 Y 6 Y 7 Y 8 Y 9

back


Risk 3 – working capitalRisk 3 – working capital


Risk 3 – working capitalRisk 3 – working capital

-16

-12

-8

-4

0

4

8

Y 0 Y 1 Y 2 Y 3 Y 4 Y 5 Y 6 Y 7 Y 8 Y 9


Risks – summaryRisks – summary


Case study – issues to be adressedCase study – issues to be adressed

Market and business environment : strategic Market and business environment : strategic and marketing and marketing commentscomments

Business plan : reliability Business plan : reliability analysisanalysis Risks management : scenarios and action Risks management : scenarios and action

plans plans descriptiondescription Propose a clear project Propose a clear project definitiondefinition WRITEWRITE a summary of your work a summary of your work


Conclusion – Wrap upConclusion – Wrap up

Project vs business environment : Project vs business environment : stay global, with a good strategic stay global, with a good strategic visionvision

Project management is localProject management is local– Don’t expect everything from figuresDon’t expect everything from figures– Risk taking is part of manager’s Risk taking is part of manager’s

responsibilityresponsibility– Simulations purpose is just to anticipate Simulations purpose is just to anticipate

and ease the implementation of and ease the implementation of corrective action planscorrective action plans

Time management is a critical issueTime management is a critical issue


Project definitionProject definition

Clear definition of a project ensures the Clear definition of a project ensures the project's successproject's success

The way to define a project is to ask a standard The way to define a project is to ask a standard set of questions :set of questions :

PurposePurpose TargetsTargets ScopeScope Objectives (measurable) Objectives (measurable) DeliverablesDeliverables Performance criteriaPerformance criteria Constraints (quality/resources/time)Constraints (quality/resources/time) Risks / Key success factors (KSF)Risks / Key success factors (KSF)

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