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Open Innovation at Fujitsu (A) 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 Open Innovation at Fujitsu (A) case study


At Oak Spring University, we provide corporate level professional Net Present Value (NPV) case study solution. Open Innovation at Fujitsu (A) case study is a Harvard Business School (HBR) case study written by Amy C. Edmondson, Jean-Francois Harvey. The Open Innovation at Fujitsu (A) (referred as “Fujitsu's Fujitsu” from here on) case study provides evaluation & decision scenario in field of Strategy & Execution. It also touches upon business topics such as - Value proposition, Collaboration, Emerging markets, IT, Leadership, Organizational culture, Strategy.

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






Case Description of Open Innovation at Fujitsu (A) Case Study


This case study examines the open innovation journey at Fujitsu, a global information and communication technology company. The case ends with the location decision between Tokyo, Japan, downtown San Francisco or Sunnyvale, California, regarding establishing a small unit for the purpose of institutionalizing Fujitsu's open innovation journey. Mohi Ahmed, together with Mikito Kiname and Tango Matsumoto, embarked on the journey to strengthen Fujitsu's marketing and innovation platform in North America, and to transform the company's innovation culture by making the Japanese giant more open and leaner in its approach to innovation. In the past, Fujitsu struggled with opening up its innovation process in Silicon Valley: partnering with other organizations to integrate outside technology in its products and services; spinning out unexploited technology had proved challenging. With input from thinkers and practitioners inside and outside of Fujitsu, Ahmed identified the maker movement as a potential avenue to begin Fujitsu's open innovation journey because of the significance of Monozukuri (art and science of making) in the company's origin. He engaged with Mark Hatch, CEO of TechShop Inc., a fast-growing chain of member-based maker spaces, in a conversation about how companies could focus on "doing well by doing good," and they jointly initiated four projects on which they could collaborate. Ahmed planned to leverage these projects to transform Fujitsu's innovation culture by illustrating that the company could successfully engage in exploration with new external partners, and could move quickly into experimentation to accelerate learning and innovation. This case also shows how two very different organizations managed to team across boundaries. Doing so, it emphasizes the human side of inter-organizational collaboration by highlighting leadership activities that served to develop a shared vision, nurture psychological safety, leverage collective capabilities, and promote execution-as-learning.


Case Authors : Amy C. Edmondson, Jean-Francois Harvey

Topic : Strategy & Execution

Related Areas : Collaboration, Emerging markets, IT, Leadership, Organizational culture, Strategy




Calculating Net Present Value (NPV) at 6% for Open Innovation at Fujitsu (A) Case Study


Years              Cash Flow     Net Cash Flow     Cumulative    
Cash Flow
Discount Rate
@ 6 %
Discounted
Cash Flows
Year 0 (10023687) -10023687 - -
Year 1 3454611 -6569076 3454611 0.9434 3259067
Year 2 3982085 -2586991 7436696 0.89 3544041
Year 3 3957462 1370471 11394158 0.8396 3322761
Year 4 3234351 4604822 14628509 0.7921 2561909
TOTAL 14628509 12687779




The Net Present Value at 6% discount rate is 2664092

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.




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. Fujitsu's Fujitsu 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 Fujitsu's Fujitsu have higher preference for cash returns over 4-5 years rather than 10-15 years given the nature of the volatility in the industry.






Formula and Steps to Calculate Net Present Value (NPV) of Open Innovation at Fujitsu (A)

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 Strategy & Execution 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 Fujitsu's Fujitsu 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 Fujitsu's Fujitsu 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 (10023687) -10023687 - -
Year 1 3454611 -6569076 3454611 0.8696 3004010
Year 2 3982085 -2586991 7436696 0.7561 3011028
Year 3 3957462 1370471 11394158 0.6575 2602096
Year 4 3234351 4604822 14628509 0.5718 1849251
TOTAL 10466384


The Net NPV after 4 years is 442697

(10466384 - 10023687 )








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 (10023687) -10023687 - -
Year 1 3454611 -6569076 3454611 0.8333 2878843
Year 2 3982085 -2586991 7436696 0.6944 2765337
Year 3 3957462 1370471 11394158 0.5787 2290198
Year 4 3234351 4604822 14628509 0.4823 1559776
TOTAL 9494153


The Net NPV after 4 years is -529534

At 20% discount rate the NPV is negative (9494153 - 10023687 ) so ideally we can't select the project if macro and micro factors don't allow financial managers of Fujitsu's Fujitsu 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 Fujitsu's Fujitsu has a NPV value higher than Zero then finance managers at Fujitsu's Fujitsu 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 Fujitsu's Fujitsu, then the stock price of the Fujitsu's Fujitsu 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 Fujitsu's Fujitsu 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 –

Understanding of risks involved in the project.

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.

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.

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.






Negotiation Strategy of Open Innovation at Fujitsu (A)

References & Further Readings

Amy C. Edmondson, Jean-Francois Harvey (2018), "Open Innovation at Fujitsu (A) Harvard Business Review Case Study. Published by HBR Publications.


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