If You Can't Beat Them, Let Them Join: The Development of Strategies to Foster Consumers' Co-Creative Practices 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 If You Can't Beat Them, Let Them Join: The Development of Strategies to Foster Consumers' Co-Creative Practices case study

At Oak Spring University, we provide corporate level professional Net Present Value (NPV) case study solution. If You Can't Beat Them, Let Them Join: The Development of Strategies to Foster Consumers' Co-Creative Practices case study is a Harvard Business School (HBR) case study written by Krittinee Nuttavuthisit. The If You Can't Beat Them, Let Them Join: The Development of Strategies to Foster Consumers' Co-Creative Practices (referred as “Consumers Consumer” from here on) case study provides evaluation & decision scenario in field of Sales & Marketing. It also touches upon business topics such as - Value proposition, Customers.

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 If You Can't Beat Them, Let Them Join: The Development of Strategies to Foster Consumers' Co-Creative Practices Case Study

Faced with the challenges of consumer resistance due to the separation of roles between producer and consumer, as well as overpowering marketing tools and techniques, a company can resolve the problem by letting consumers join in the process of value co-creation. Advocating the consumer-oriented perspective, this article explains how and why consumers co-create, which leads to the development of a typology of consumers' co-creative practices. Four interrelated categories (participation-for-self, creation-for-self, participation-for-others, creation-for-others) are illustrated with the proposed four Cs strategies-choice, complement, cause, and communality-to foster these different practices accordingly. From well-established to newly-developed, these consumer-oriented strategies work to enhance deeper consumer involvement yielding a possibility to attain continual and interconnected benefits for a company. However, implementation is based on a company's readiness and willingness to achieve different degrees of commitment. This article promotes collaborative efforts between consumers and companies, and highlights mutuality of benefits which leads to sustainable relationships.

Case Authors : Krittinee Nuttavuthisit

Topic : Sales & Marketing

Related Areas : Customers

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Calculating Net Present Value (NPV) at 6% for If You Can't Beat Them, Let Them Join: The Development of Strategies to Foster Consumers' Co-Creative Practices Case Study

Years	Cash Flow	Net Cash Flow	Cumulative     Cash Flow	Discount Rate @ 6 %	Discounted Cash Flows
Year 0	(10013178)	-10013178	-	-
Year 1	3472742	-6540436	3472742	0.9434	3276172
Year 2	3978344	-2562092	7451086	0.89	3540712
Year 3	3973242	1411150	11424328	0.8396	3336011
Year 4	3226009	4637159	14650337	0.7921	2555301
TOTAL			14650337		12708196

The Net Present Value at 6% discount rate is 2695018

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

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

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Formula and Steps to Calculate Net Present Value (NPV) of If You Can't Beat Them, Let Them Join: The Development of Strategies to Foster Consumers' Co-Creative Practices

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 Sales & Marketing 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 Consumers Consumer 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 Consumers Consumer 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	(10013178)	-10013178	-	-
Year 1	3472742	-6540436	3472742	0.8696	3019776
Year 2	3978344	-2562092	7451086	0.7561	3008200
Year 3	3973242	1411150	11424328	0.6575	2612471
Year 4	3226009	4637159	14650337	0.5718	1844481
TOTAL					10484928

The Net NPV after 4 years is 471750

(10484928 - 10013178 )

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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	(10013178)	-10013178	-	-
Year 1	3472742	-6540436	3472742	0.8333	2893952
Year 2	3978344	-2562092	7451086	0.6944	2762739
Year 3	3973242	1411150	11424328	0.5787	2299330
Year 4	3226009	4637159	14650337	0.4823	1555753
TOTAL					9511773

The Net NPV after 4 years is -501405

At 20% discount rate the NPV is negative (9511773 - 10013178 ) so ideally we can't select the project if macro and micro factors don't allow financial managers of Consumers Consumer 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 Consumers Consumer has a NPV value higher than Zero then finance managers at Consumers Consumer 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 Consumers Consumer, then the stock price of the Consumers Consumer 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 Consumers Consumer 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 can impact the cash flow of the project.

Understanding of risks involved in the project.

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

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

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.

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 If You Can't Beat Them, Let Them Join: The Development of Strategies to Foster Consumers' Co-Creative Practices

References & Further Readings

Krittinee Nuttavuthisit (2018), "If You Can't Beat Them, Let Them Join: The Development of Strategies to Foster Consumers' Co-Creative Practices Harvard Business Review Case Study. Published by HBR Publications.