HP Enterprise Group in 2015: Igniting Organizational Transformation Net Present Value (NPV) / MBA Resources

Introduction to Net Present Value (NPV) - What is Net Present Value (NPV) ? How it impacts financial decisions regarding project management?

NPV solution for HP Enterprise Group in 2015: Igniting Organizational Transformation case study

At Oak Spring University, we provide corporate level professional Net Present Value (NPV) case study solution. HP Enterprise Group in 2015: Igniting Organizational Transformation case study is a Harvard Business School (HBR) case study written by Robert A. Burgelman, Debra Schifrin. The HP Enterprise Group in 2015: Igniting Organizational Transformation (referred as “Ignite Enterprise” from here on) case study provides evaluation & decision scenario in field of Organizational Development. It also touches upon business topics such as - Value proposition, International business, Leadership, Organizational structure, Sales, Strategy, Technology.

The net present value (NPV) of an investment proposal is the present value of the proposal’s net cash flows less the proposal’s initial cash outflow. If a project’s NPV is greater than or equal to zero, the project should be accepted.

NPV = Present Value of Future Cash Flows LESS Project’s Initial Investment

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Case Description of HP Enterprise Group in 2015: Igniting Organizational Transformation Case Study

This 2015 case is about the internal organizational transformation of the Hewlett Packard (HP) Enterprise Group (EG), which brought in $28 billion in annual revenue and had 50,000 employees. "EG Ignite," led by a small team of 10 people who reported directly to the head of EG, was designed to be the catalyst for the transformation and provide both a framework and problem-solving support for the most critical transformation initiatives. These included: 1) accelerating growth, 2) simplifying company processes, 3) becoming more customer-centric, 4) driving down costs, and 5) driving go-to-market changes. EG's leadership was especially focused on transforming the front line sales force. The EG Ignite team served as the interlock point between functions, business units, and regions, and it helped with the execution of the initiatives. At the same time EG Ignite was in full swing (18 months in), Hewlett Packard was in the process of splitting the $111 billion, 75-year-old company into two independent, publicly traded companies: HPI (Personal Systems and Printing business segments), and HPE (Enterprise Group, Enterprise Services, Enterprise Software, and Financial Services). The split came out of HP's desire to act with greater speed and agility so it could better compete in an environment in which technology, market, and customer expectations were rapidly changing. As a critical part of HPE, the Enterprise Group had to be sure its transformation was speedy, successful, and aligned with the imperatives of the company as a whole.

Case Authors : Robert A. Burgelman, Debra Schifrin

Topic : Organizational Development

Related Areas : International business, Leadership, Organizational structure, Sales, Strategy, Technology

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Calculating Net Present Value (NPV) at 6% for HP Enterprise Group in 2015: Igniting Organizational Transformation Case Study

Years	Cash Flow	Net Cash Flow	Cumulative     Cash Flow	Discount Rate @ 6 %	Discounted Cash Flows
Year 0	(10023178)	-10023178	-	-
Year 1	3446319	-6576859	3446319	0.9434	3251244
Year 2	3963461	-2613398	7409780	0.89	3527466
Year 3	3942118	1328720	11351898	0.8396	3309878
Year 4	3242862	4571582	14594760	0.7921	2568650
TOTAL			14594760		12657239

The Net Present Value at 6% discount rate is 2634061

In isolation the NPV number doesn't mean much but put in right context then it is one of the best method to evaluate project returns. In this article we will cover -

Different methods of capital budgeting

What is NPV & Formula of NPV,
How it is calculated,
How to use NPV number for project evaluation, and
Scenario Planning given risks and management priorities.

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Capital Budgeting Approaches

Methods of Capital Budgeting

There are four types of capital budgeting techniques that are widely used in the corporate world –

1. Profitability Index
2. Net Present Value
3. Internal Rate of Return
4. Payback Period

Apart from the Payback period method which is an additive method, rest of the methods are based on Discounted Cash Flow technique. Even though cash flow can be calculated based on the nature of the project, for the simplicity of the article we are assuming that all the expected cash flows are realized at the end of the year.

Discounted Cash Flow approaches provide a more objective basis for evaluating and selecting investment projects. They take into consideration both –

1. Timing of the expected cash flows – stockholders of Ignite Enterprise have higher preference for cash returns over 4-5 years rather than 10-15 years given the nature of the volatility in the industry.
2. Magnitude of both incoming and outgoing cash flows – Projects can be capital intensive, time intensive, or both. Ignite Enterprise shareholders have preference for diversified projects investment rather than prospective high income from a single capital intensive project.

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Formula and Steps to Calculate Net Present Value (NPV) of HP Enterprise Group in 2015: Igniting Organizational Transformation

NPV = Net Cash In Flowt1 / (1+r)t1 + Net Cash In Flowt2 / (1+r)t2 + … Net Cash In Flowtn / (1+r)tn
Less Net Cash Out Flowt0 / (1+r)t0

Where t = time period, in this case year 1, year 2 and so on.
r = discount rate or return that could be earned using other safe proposition such as fixed deposit or treasury bond rate. Net Cash In Flow – What the firm will get each year.
Net Cash Out Flow – What the firm needs to invest initially in the project.

Step 1 – Understand the nature of the project and calculate cash flow for each year.
Step 2 – Discount those cash flow based on the discount rate.
Step 3 – Add all the discounted cash flow.
Step 4 – Selection of the project

Why Organizational Development Managers need to know Financial Tools such as Net Present Value (NPV)?

In our daily workplace we often come across people and colleagues who are just focused on their core competency and targets they have to deliver. For example marketing managers at Ignite Enterprise often design programs whose objective is to drive brand awareness and customer reach. But how that 30 point increase in brand awareness or 10 point increase in customer touch points will result into shareholders’ value is not specified.

To overcome such scenarios managers at Ignite Enterprise needs to not only know the financial aspect of project management but also needs to have tools to integrate them into part of the project development and monitoring plan.

Calculating Net Present Value (NPV) at 15%

After working through various assumptions we reached a conclusion that risk is far higher than 6%. In a reasonably stable industry with weak competition - 15% discount rate can be a good benchmark.

Years	Cash Flow	Net Cash Flow	Cumulative     Cash Flow	Discount Rate @ 15 %	Discounted Cash Flows
Year 0	(10023178)	-10023178	-	-
Year 1	3446319	-6576859	3446319	0.8696	2996799
Year 2	3963461	-2613398	7409780	0.7561	2996946
Year 3	3942118	1328720	11351898	0.6575	2592007
Year 4	3242862	4571582	14594760	0.5718	1854117
TOTAL					10439869

The Net NPV after 4 years is 416691

(10439869 - 10023178 )

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Calculating Net Present Value (NPV) at 20%

If the risk component is high in the industry then we should go for a higher hurdle rate / discount rate of 20%.

Years	Cash Flow	Net Cash Flow	Cumulative     Cash Flow	Discount Rate @ 20 %	Discounted Cash Flows
Year 0	(10023178)	-10023178	-	-
Year 1	3446319	-6576859	3446319	0.8333	2871933
Year 2	3963461	-2613398	7409780	0.6944	2752403
Year 3	3942118	1328720	11351898	0.5787	2281318
Year 4	3242862	4571582	14594760	0.4823	1563880
TOTAL					9469534

The Net NPV after 4 years is -553644

At 20% discount rate the NPV is negative (9469534 - 10023178 ) so ideally we can't select the project if macro and micro factors don't allow financial managers of Ignite Enterprise to discount cash flow at lower discount rates such as 15%.

Acceptance Criteria of a Project based on NPV

Simplest Approach – If the investment project of Ignite Enterprise has a NPV value higher than Zero then finance managers at Ignite Enterprise can ACCEPT the project, otherwise they can reject the project. This means that project will deliver higher returns over the period of time than any alternate investment strategy.

In theory if the required rate of return or discount rate is chosen correctly by finance managers at Ignite Enterprise, then the stock price of the Ignite Enterprise should change by same amount of the NPV. In real world we know that share price also reflects various other factors that can be related to both macro and micro environment.

In the same vein – accepting the project with zero NPV should result in stagnant share price. Finance managers use discount rates as a measure of risk components in the project execution process.

Sensitivity Analysis

Project selection is often a far more complex decision than just choosing it based on the NPV number. Finance managers at Ignite Enterprise should conduct a sensitivity analysis to better understand not only the inherent risk of the projects but also how those risks can be either factored in or mitigated during the project execution. Sensitivity analysis helps in –

What are the uncertainties surrounding the project Initial Cash Outlay (ICO’s). ICO’s often have several different components such as land, machinery, building, and other equipment.

What can impact the cash flow of the project.

Understanding of risks involved in the project.

What will be a multi year spillover effect of various taxation regulations.

What are the key aspects of the projects that need to be monitored, refined, and retuned for continuous delivery of projected cash flows.

Some of the assumptions while using the Discounted Cash Flow Methods –

Projects are assumed to be Mutually Exclusive – This is seldom the came in modern day giant organizations where projects are often inter-related and rejecting a project solely based on NPV can result in sunk cost from a related project.

Independent projects have independent cash flows – As explained in the marketing project – though the project may look independent but in reality it is not as the brand awareness project can be closely associated with the spending on sales promotions and product specific advertising.

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Negotiation Strategy of HP Enterprise Group in 2015: Igniting Organizational Transformation

References & Further Readings

Robert A. Burgelman, Debra Schifrin (2018), "HP Enterprise Group in 2015: Igniting Organizational Transformation Harvard Business Review Case Study. Published by HBR Publications.