Digital Transformation at Novartis to Improve Customer Engagement 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 Digital Transformation at Novartis to Improve Customer Engagement case study

At Oak Spring University, we provide corporate level professional Net Present Value (NPV) case study solution. Digital Transformation at Novartis to Improve Customer Engagement case study is a Harvard Business School (HBR) case study written by Donald A. Marchand, Polina Bochukova. The Digital Transformation at Novartis to Improve Customer Engagement (referred as “Novartis Epstein” 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, Customers, Sales.

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 Digital Transformation at Novartis to Improve Customer Engagement Case Study

The pharmaceutical industry was under siege, with regular price rollbacks and the powerful advance of generics frequently making news headlines. Many of the industry's leading companies, including Novartis, were cutting their sales forces, while sales representatives who still had jobs felt increasingly disengaged. David Epstein, the head of Novartis's Pharmaceuticals division, bucked the trend. He introduced a strategic initiative that aimed to fundamentally transform Novartis' selling model. Epstein committed to an aspirational goal of equipping 80% of the company's field forces worldwide with the latest iPad technology by the end of 2012, in just 15 months. A few months later, he set his teams an even more ambitious challenge: to equip 100% of the sales force by the end of 2013, which meant rolling out 25,000 new devices across the globe within a two-year period. Novartis was about to embark on a digital transformation journey, with the ultimate goal of providing the right drug to the right patient at the right time.

Case Authors : Donald A. Marchand, Polina Bochukova

Topic : Leadership & Managing People

Related Areas : Customers, Sales

Calculating Net Present Value (NPV) at 6% for Digital Transformation at Novartis to Improve Customer Engagement Case Study

Years              Cash Flow     Net Cash Flow     Cumulative    
Cash Flow
Discount Rate
@ 6 %
Cash Flows
Year 0 (10018808) -10018808 - -
Year 1 3459557 -6559251 3459557 0.9434 3263733
Year 2 3976811 -2582440 7436368 0.89 3539348
Year 3 3939775 1357335 11376143 0.8396 3307911
Year 4 3247438 4604773 14623581 0.7921 2572275
TOTAL 14623581 12683267

The Net Present Value at 6% discount rate is 2664459

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. Magnitude of both incoming and outgoing cash flows – Projects can be capital intensive, time intensive, or both. Novartis Epstein 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 Novartis Epstein 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 Digital Transformation at Novartis to Improve Customer Engagement

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 Novartis Epstein 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 Novartis Epstein 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 %
Cash Flows
Year 0 (10018808) -10018808 - -
Year 1 3459557 -6559251 3459557 0.8696 3008310
Year 2 3976811 -2582440 7436368 0.7561 3007040
Year 3 3939775 1357335 11376143 0.6575 2590466
Year 4 3247438 4604773 14623581 0.5718 1856733
TOTAL 10462550

The Net NPV after 4 years is 443742

(10462550 - 10018808 )

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 %
Cash Flows
Year 0 (10018808) -10018808 - -
Year 1 3459557 -6559251 3459557 0.8333 2882964
Year 2 3976811 -2582440 7436368 0.6944 2761674
Year 3 3939775 1357335 11376143 0.5787 2279962
Year 4 3247438 4604773 14623581 0.4823 1566087
TOTAL 9490688

The Net NPV after 4 years is -528120

At 20% discount rate the NPV is negative (9490688 - 10018808 ) so ideally we can't select the project if macro and micro factors don't allow financial managers of Novartis Epstein 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 Novartis Epstein has a NPV value higher than Zero then finance managers at Novartis Epstein 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 Novartis Epstein, then the stock price of the Novartis Epstein 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 Novartis Epstein 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 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.

Understanding of risks involved in the project.

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.

References & Further Readings

Donald A. Marchand, Polina Bochukova (2018), "Digital Transformation at Novartis to Improve Customer Engagement Harvard Business Review Case Study. Published by HBR Publications.