Henkel: Building a Winning Culture 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 Henkel: Building a Winning Culture case study

At Oak Spring University, we provide corporate level professional Net Present Value (NPV) case study solution. Henkel: Building a Winning Culture case study is a Harvard Business School (HBR) case study written by Robert L. Simons, Natalie Kindred. The Henkel: Building a Winning Culture (referred as “Henkel Rorsted” from here on) case study provides evaluation & decision scenario in field of Finance & Accounting. It also touches upon business topics such as - Value proposition, Change management, Collaboration, Executive compensation, Financial analysis, Organizational culture, Performance measurement, Personnel policies, Social responsibility, Strategy execution, Work-life balance.

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 Henkel: Building a Winning Culture Case Study

This case illustrates a CEO-led organizational transformation driven by stretch goals, performance measurement, and accountability. When Kasper Rorsted became CEO of Henkel, a Germany-based producer of personal care, laundry, and adhesives products, in 2008, he was determined to transform a corporate culture of "good enough" into one singularly focused on winning in a competitive marketplace. Historically, Henkel was a comfortable, stable place to work. Many employees never received negative performance feedback. Seeking to overturn a pervasive attitude of complacency, Rorsted implemented a multi-step change initiative aimed at building a "winning culture." First, in November 2008, he announced a set of ambitious financial targets for 2012. As financial turmoil roiled the global economy, he reaffirmed his commitment to these targets, sending a clear signal to Henkel employees and external stakeholders that excuses were no longer acceptable. Rorsted next introduced a new set of five company values-replacing the previous list of 10 values, which few employees could recite by memory-the first of which emphasized a focus on customers. He also instituted a new, simplified performance management system, which rated managers' performance and advancement potential on a four-point scale. The system also included a forced ranking requirement, mandating that a defined percentage of employees (in each business unit and company-wide) be ranked as top, strong, moderate, or low performers. These ratings significantly impacted managers' bonus compensation. In late 2011-the time in which the case takes place-Henkel is well on its way to achieving its 2012 targets. Having shed nearly half its top management team, along with numerous product sites and brands, Henkel appears to be a leaner, more competitive, "winning" organization.

Case Authors : Robert L. Simons, Natalie Kindred

Topic : Finance & Accounting

Related Areas : Change management, Collaboration, Executive compensation, Financial analysis, Organizational culture, Performance measurement, Personnel policies, Social responsibility, Strategy execution, Work-life balance

---

Calculating Net Present Value (NPV) at 6% for Henkel: Building a Winning Culture Case Study

Years	Cash Flow	Net Cash Flow	Cumulative     Cash Flow	Discount Rate @ 6 %	Discounted Cash Flows
Year 0	(10015027)	-10015027	-	-
Year 1	3458960	-6556067	3458960	0.9434	3263170
Year 2	3960518	-2595549	7419478	0.89	3524847
Year 3	3972931	1377382	11392409	0.8396	3335749
Year 4	3228795	4606177	14621204	0.7921	2557508
TOTAL			14621204		12681274

The Net Present Value at 6% discount rate is 2666247

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. Payback Period
2. Internal Rate of Return
3. Net Present Value
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. Timing of the expected cash flows – stockholders of Henkel Rorsted 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. Henkel Rorsted shareholders have preference for diversified projects investment rather than prospective high income from a single capital intensive project.

---

Formula and Steps to Calculate Net Present Value (NPV) of Henkel: Building a Winning Culture

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 Finance & Accounting 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 Henkel Rorsted 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 Henkel Rorsted 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	(10015027)	-10015027	-	-
Year 1	3458960	-6556067	3458960	0.8696	3007791
Year 2	3960518	-2595549	7419478	0.7561	2994721
Year 3	3972931	1377382	11392409	0.6575	2612267
Year 4	3228795	4606177	14621204	0.5718	1846074
TOTAL					10460853

The Net NPV after 4 years is 445826

(10460853 - 10015027 )

---

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	(10015027)	-10015027	-	-
Year 1	3458960	-6556067	3458960	0.8333	2882467
Year 2	3960518	-2595549	7419478	0.6944	2750360
Year 3	3972931	1377382	11392409	0.5787	2299150
Year 4	3228795	4606177	14621204	0.4823	1557096
TOTAL					9489073

The Net NPV after 4 years is -525954

At 20% discount rate the NPV is negative (9489073 - 10015027 ) so ideally we can't select the project if macro and micro factors don't allow financial managers of Henkel Rorsted 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 Henkel Rorsted has a NPV value higher than Zero then finance managers at Henkel Rorsted 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 Henkel Rorsted, then the stock price of the Henkel Rorsted 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 Henkel Rorsted 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 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.

What can impact the cash flow of the project.

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 Henkel: Building a Winning Culture

References & Further Readings

Robert L. Simons, Natalie Kindred (2018), "Henkel: Building a Winning Culture Harvard Business Review Case Study. Published by HBR Publications.