Leadership, Culture Change and Transformation at AVIVA (B): Norwich Union Insurance 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 Leadership, Culture Change and Transformation at AVIVA (B): Norwich Union Insurance case study

At Oak Spring University, we provide corporate level professional Net Present Value (NPV) case study solution. Leadership, Culture Change and Transformation at AVIVA (B): Norwich Union Insurance case study is a Harvard Business School (HBR) case study written by D. Charles Galunic, Anne-Marie Carrick. The Leadership, Culture Change and Transformation at AVIVA (B): Norwich Union Insurance (referred as “Norwich Nui” from here on) case study provides evaluation & decision scenario in field of Leadership & Managing People. It also touches upon business topics such as - Value proposition, Corporate governance, Growth strategy, International business, Leadership, Mergers & acquisitions, Organizational culture, Strategy execution.

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 Leadership, Culture Change and Transformation at AVIVA (B): Norwich Union Insurance Case Study

This two-part case study describes the initial merger and cultural transformation of Aviva's Norwich Union (NUI) operation in the UK. It examines the complexities of integration that arose following a series of mergers that created NUI from 1998 to 2000. Case A describes how, after CGU Plc and Norwich Union joined forces to become NUI, top management's priority was to restore profits. Behind the scenes, however, the need for a whole new corporate culture was becoming increasingly imperative. It shows the tension between the need for immediate gains in efficiencies vs. longer-term approaches to the business that required careful nurturing and attention. It ends as the executive team's announcement of the new corporate philosophy - "to be a service provider with insurance at our core and care at our heart" - is greeted with complete disbelief by employees. Case B describes the actions taken to overcome their skepticism and successfully implement the new philosophy - actions that required significant change to the organisational culture.

Case Authors : D. Charles Galunic, Anne-Marie Carrick

Topic : Leadership & Managing People

Related Areas : Corporate governance, Growth strategy, International business, Leadership, Mergers & acquisitions, Organizational culture, Strategy execution

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Calculating Net Present Value (NPV) at 6% for Leadership, Culture Change and Transformation at AVIVA (B): Norwich Union Insurance Case Study

Years	Cash Flow	Net Cash Flow	Cumulative     Cash Flow	Discount Rate @ 6 %	Discounted Cash Flows
Year 0	(10016568)	-10016568	-	-
Year 1	3443221	-6573347	3443221	0.9434	3248322
Year 2	3970396	-2602951	7413617	0.89	3533638
Year 3	3956168	1353217	11369785	0.8396	3321675
Year 4	3243129	4596346	14612914	0.7921	2568862
TOTAL			14612914		12672497

The Net Present Value at 6% discount rate is 2655929

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

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. Norwich Nui 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 Norwich Nui 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 Leadership, Culture Change and Transformation at AVIVA (B): Norwich Union Insurance

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 Leadership & Managing People 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 Norwich Nui 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 Norwich Nui 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	(10016568)	-10016568	-	-
Year 1	3443221	-6573347	3443221	0.8696	2994105
Year 2	3970396	-2602951	7413617	0.7561	3002190
Year 3	3956168	1353217	11369785	0.6575	2601245
Year 4	3243129	4596346	14612914	0.5718	1854270
TOTAL					10451809

The Net NPV after 4 years is 435241

(10451809 - 10016568 )

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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	(10016568)	-10016568	-	-
Year 1	3443221	-6573347	3443221	0.8333	2869351
Year 2	3970396	-2602951	7413617	0.6944	2757219
Year 3	3956168	1353217	11369785	0.5787	2289449
Year 4	3243129	4596346	14612914	0.4823	1564009
TOTAL					9480028

The Net NPV after 4 years is -536540

At 20% discount rate the NPV is negative (9480028 - 10016568 ) so ideally we can't select the project if macro and micro factors don't allow financial managers of Norwich Nui 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 Norwich Nui has a NPV value higher than Zero then finance managers at Norwich Nui 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 Norwich Nui, then the stock price of the Norwich Nui 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 Norwich Nui 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.

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 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.

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Negotiation Strategy of Leadership, Culture Change and Transformation at AVIVA (B): Norwich Union Insurance

References & Further Readings

D. Charles Galunic, Anne-Marie Carrick (2018), "Leadership, Culture Change and Transformation at AVIVA (B): Norwich Union Insurance Harvard Business Review Case Study. Published by HBR Publications.