3 Scoping

Question 1

Which measures are important for companies? And how is it connected with performance based salaries?

Answer 1

• important measures:
  
  • financial measures, productivity, customer satisfaction, employee relations, innovation, process quality
• Performance based salaries:
  
  • financial measures & productivity quite popular
  • almost no incentives for innovation

Question 2

Having performed the idea screen - what is the challenge now?

Answer 2

• challenge: get down the bulk of ideas/ projects to a feasible number
  
  • qualitative and financial evaluation
• challenges:
  
  • risk balancing
  • projects should fail as fast possible in order to save resources for the other projects, but PM often want to finish their projects
  • => conflict of interest

Question 3

What should supplement the quantitative financial valuation of projects?

Answer 3

• financial valuation should be supplemented by a structured qualitative valuation in order to include factores reflected by the financial analysis
• qualitative project evaluation is based on a clear set of variables in order to compare different projects
• e.g. projects can be clustered in a return/ risk matrix

Question 4

Which two basic financial KPI can be used for the financial evaluation without risk?

Answer 4

• Net Cash Flow: during innovation phases increased costs, market phase is supposed to earn money back
• NPV is the discounted NCF

Question 5

Which three methods did we discuss for the financial project valuation under risk?

Answer 5

• Sensitivity Analysis
• Scenarios
• Monte Carlo Simulation

Question 6

How does the sensitivity analysis work? What is its output?

Answer 6

• 1 input variable is changed while keeping the others unchanged
• allows to identify the project’s value drivers
• output:
  
  • tornado chart (variables ranked by financial impact)
  • sensitivity profe for each variable
  • critical values

Question 7

How does the scenarios method work? What is its output?

Answer 7

• several variables are changed simultaneously i.o. to assess different scenarios
• output:
  
  • direct comparison of complex scenarios (regarding value and risk profiles)
  • maximum investment reasonable for reaching scenario conditions

Question 8

How does the Monte Carlo Simulation work? What is its output?

Answer 8

• uncertainty in input variables is evaluated using probability distributions instead of discrete probabilities
• simulation picks random variables
• high number of repetitions delivers a reliable risk profile
• output:
  
  • risk profile
  • trend chart
  • overview of complete range of possible outcomes