Project ProposalsSelecting the right project

Aggregate Project Plan

Minor Processchange

Extensive Processchange

Minor Processchange

Extensive ProcesschangeR & D

ProjectsBreakthrough

projects

Platform Projects

Derivativeprojects

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

BreakthroughProjects

New CoreProcesses

NextGeneration

Process

SingleDept.

Upgrade

Tuningand

Incremental

New CoreProduct

NextGeneration

Product

Addition toProduct Family

Add-ons andEnhancements

Product Changes

Process Changes

PlatformProjects

Derivatives(Enhancements,

Hybrids, and CostReduced Versions)

2

3

4

5

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 andEvaluation andSelectionSelection

DevelopmentDevelopmentProjectsProjects

New ProductsNew Products/Services/Services

The Ideal Development Funnel: Screen for Success

New Product

Development Strategy ConceptDevelopment

Project Managementand Execution

Classifying Different Types of Product

Process Changes

New CoreProcess

NextGeneration

Process

SingleDepartment

Upgrade

Tuningand

Incremental

New Core Product

Next Generation of Core Product

Addition toProduct Family

Derivatives and Enhancements

ProductChanges

Break-through

Platform orNext Generation

EnhancementsHybrids, andDerivatives

Research/Advanced

Development

Common Problems: Too Many Derivative Projects

Process Changes

New CoreProcess

NextGeneration

Process

SingleDepartment

Upgrade

Tuningand

Incremental

New Core Product

Next Generation of Core Product

Addition toProduct Family

Derivatives and Enhancements

ProductChanges

Break-through

Platform orNext Generation

EnhancementsHybrids, andDerivatives

Research/Advanced

Development

Classifying Different Types of Products

Breakthrough

Platform

Derivative

Support

New CoreValue

NewBenefits

ImprovedBenefits Variation

Radical

NextGeneration

Incremental

Base

Market Perception

En

abli

ng

Tec

hn

olo

gy

Consumer Products Firm: Before

Breakthrough

Platform

Derivative

Support

New CoreValue

NewBenefits

ImprovedBenefits Variation

Radical

NextGeneration

Incremental

Base

En

abli

ng

Tec

hn

olo

gy

Market Perception

Consumer Products Firm: After

Breakthrough

Platform

Derivative

Support

New CoreValue

NewBenefits

ImprovedBenefits Variation

Radical

NextGeneration

Incremental

Base

En

abli

ng

Tec

hn

olo

gy

Market Perception

Net Present ValueWhat is NPV?

Net present value (NPV) is a standardmethod for evaluating competing long-term projects in capital budgeting. It measures the excess or shortfall of cashflows, in present value (PV) terms, oncefinancing charges are met. All projects with a positive NPV should be undertaken

Net Present ValueBasically 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 ValueCompare 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 5 years

Required rate of return 20% 20%

Payback Period

investmentPB = ------------------------ = Annual net saving

5.8 years

3.3 years

Rate of returna 17.4% 30.0%

NPV (net Present Value)

Present value of annual net cash inflow

Project A £125,000 x 2.991b £383,870

Project B £180,000 x 2.991 £538,380

Investment - £720,000 -£600,000

NPV - £346,130 -£ 61,620

OutcomesProject 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 returnNet Present ValueReject 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 ValueGeneral 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 cashoutflow

“The internal rate of return is the discounted cash flow that equates the present values of the two sets of flows”

Internal Rate of ReturnIncome stream

Invest £1000 in a 5% simple interest

bank account Take out the £50 interest eachyear. (£50 is 5% of £1000.) Take all the money out at the

end of the sixth year.

Internal Rate of Return

Year 0 1 2 3 4 5 6

Income

-£1000

£50 £50 £50 £50 £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 ReturnAn 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 ReturnYear 0 1 2 3 4 5 6

Machine -£1000 £200 £200 £200 £200 £200 £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 ReturnSo which is the best investment?

Bank Account: -1000 + 50 + 50 + 50 + 50 + 50 +1050 =

300 Machine: -1000 + 200 + 200 + 200 + 200 + 200 +

200 = 200

What do you think?