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How Executives Can Enhance IP Strategy and Performance 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 How Executives Can Enhance IP Strategy and Performance case study


At Oak Spring University, we provide corporate level professional Net Present Value (NPV) case study solution. How Executives Can Enhance IP Strategy and Performance case study is a Harvard Business School (HBR) case study written by Markus Reitzig. The How Executives Can Enhance IP Strategy and Performance (referred as “Ip Survey” from here on) case study provides evaluation & decision scenario in field of Strategy & Execution. It also touches upon business topics such as - Value proposition, Knowledge management, Leadership.

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 How Executives Can Enhance IP Strategy and Performance Case Study


This is an MIT Sloan Management Review article. How are companies approaching intellectual property (IP) strategy, and what are successful strategies for managing IP? To explore such questions, the author and his research team conducted a detailed survey of senior IP executives at 34 companies. The survey findings indicate that IP has become an area of focus for the executive committee and the board at many companies. What's more, the study found that top executives' involvement in IP strategy was correlated with better IP performance. Analysis of the survey data suggests another intriguing point: Some companies are now using an approach to IP strategy that the author calls "full-fledged IP protection." This "full-fledged IP protection" strategy includes seeking technical and nontechnical IP protection for even minor inventions, in an attempt to "pack" technology spaces with IP claims. This practice differs from a classic IP strategy of using IP to support core research and development. At least in some industries, this change in IP use may, the author suggests, be causing the nature of IP competition to shift from the world of "real" products to that of "potential" products. The study also found that, in the companies surveyed, IP-related tasks often entail cooperation among staff from different functional areas within a company, such as product designers and patent and trademark attorneys. Having clear-cut rules about IP at the functional level was associated with better IP performance in the companies surveyed, as was having corporate management devote time to listening to the company's most senior IP officers. On the other hand, failure to sell or license out IP when circumstances facilitated or necessitated such a trade was associated with significantly lower IP performance.


Case Authors : Markus Reitzig

Topic : Strategy & Execution

Related Areas : Knowledge management, Leadership




Calculating Net Present Value (NPV) at 6% for How Executives Can Enhance IP Strategy and Performance Case Study


Years              Cash Flow     Net Cash Flow     Cumulative    
Cash Flow
Discount Rate
@ 6 %
Discounted
Cash Flows
Year 0 (10018244) -10018244 - -
Year 1 3463603 -6554641 3463603 0.9434 3267550
Year 2 3973750 -2580891 7437353 0.89 3536623
Year 3 3936460 1355569 11373813 0.8396 3305128
Year 4 3245733 4601302 14619546 0.7921 2570925
TOTAL 14619546 12680226




The Net Present Value at 6% discount rate is 2661982

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. Profitability Index
4. Internal Rate of Return

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. Ip Survey 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 Ip Survey 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 How Executives Can Enhance IP Strategy and Performance

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 Ip Survey 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 Ip Survey 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 (10018244) -10018244 - -
Year 1 3463603 -6554641 3463603 0.8696 3011829
Year 2 3973750 -2580891 7437353 0.7561 3004726
Year 3 3936460 1355569 11373813 0.6575 2588286
Year 4 3245733 4601302 14619546 0.5718 1855758
TOTAL 10460599


The Net NPV after 4 years is 442355

(10460599 - 10018244 )








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 (10018244) -10018244 - -
Year 1 3463603 -6554641 3463603 0.8333 2886336
Year 2 3973750 -2580891 7437353 0.6944 2759549
Year 3 3936460 1355569 11373813 0.5787 2278044
Year 4 3245733 4601302 14619546 0.4823 1565265
TOTAL 9489193


The Net NPV after 4 years is -529051

At 20% discount rate the NPV is negative (9489193 - 10018244 ) so ideally we can't select the project if macro and micro factors don't allow financial managers of Ip Survey 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 Ip Survey has a NPV value higher than Zero then finance managers at Ip Survey 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 Ip Survey, then the stock price of the Ip Survey 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 Ip Survey 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 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.

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.

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 How Executives Can Enhance IP Strategy and Performance

References & Further Readings

Markus Reitzig (2018), "How Executives Can Enhance IP Strategy and Performance Harvard Business Review Case Study. Published by HBR Publications.


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