Project Financials and Risk Management
Overview
Companies tend to gain more at less cost but often fail to accomplish their goals as the business process and projects suffer time overrun escalating the predetermined cost. Thus, companies assume that little can be done to reduce costs once a project design for innovative products development is set. This belief has either driven foreclosure or delayed the life cycles of many business projects. Cost and time management is an important consideration for the business firms in completing their projects successfully. Delay in innovative business projects causes market nonresponsiveness for the new products, besides serious cost and time overruns. Consequently, resources are drained out, causing a low performance and driving projects to turn black holes. This chapter discusses applied approaches for laying project cost estimation and earned value management (EVM), and developing risks and contingency plan. The project budgeting and controls as well as equity and stakeholder management during the overall project process have been discussed in this chapter with various examples.
Innovation, manufacturing, and commercialization of innovative products have become essential to sustain market competition and stimulate business growth. Companies engage innovation think tanks such as innovation consultants, start-up enterprises, and community innovators to develop innovation-embedded business models. This practice has now turned as a national strategy for many countries to combat slow economic growth, which is favorably viewed in context of the current trend of on-shoring foreign manufacturing operations and off-shoring innovation consultation. Often, multinational companies prefer manufacturing of innovative products also at off-shore destinations through the licensed contract enterprises such as maquiladora1 in Mexico. Financial management of innovation project is easier for large multinational companies by following the off-shore or licensed manufacturing practices as the innovation projects are centrally designed at the corporate headquarters of the company, which are implemented by the off-shore enterprises under the project leadership of sponsor companies. The off-shore innovation projects are of mutual benefit to both the multinational companies and the small and medium enterprises in the destination countries. Some of the major attraction for the large multinational companies to let innovation licensing for manufacturing are lower factors of production including lower cost of land, infrastructure, wages, and easy capital in destination markets. The advantages in the production factors help companies achieve the economy of scale. As infrastructure and human capital develop in the local companies, there is a tendency to pursue advanced manufacturing in support of higher-valued goods. The manufacturing process is then outsourced to destinations that demonstrate lower costs and higher project management efficiency. While this model suggests that current efforts in revitalization of domestic manufacturing also raise the question on planning and implementation of project budgets effectively by the organizations, the appreciable notion in outsourcing innovation-led product manufacturing is that this trend is emerging as a rising tide and is narrowing geographic and economic distances across the destinations for achieving the global quality of life (Kazmer 2014).
Cost Estimations in Innovation Projects
Innovative projects often do not begin with abundant budget as they are largely grown on an experimental basis where contingencies cannot be fully avoided. Hence, the budget of the innovation projects is often unstable and they have to operate under limited funds and project managers keep exploring the sources of new capital constantly in the various stages of the project. However, the thumb rule to start an innovation project is to first get the right budget for the project. This needs right estimates of project cost by activities, time, and region. A cost estimate should be realistic, transparent, and reliable. These factors are particularly important for start-up innovation enterprises because they operate with a small budget. The project management teams use standard techniques of cost calculations such as activity-based costing, expert judgments (EJs), and vendor analysis (VA). Other cost estimation technique includes top-down and bottom-up cost estimation approaches, analogous and parametric approaches, three-point analysis, and cost of quality (COQ) measures.
Accurate costing of products is an essential activity in innovation projects with a diverse task, time, and cost mix. It is a key requirement for determining the profitability of the project. Analogous estimating uses historical data from similar projects as a basis for the cost estimate. Project managers can adjust the estimate by understanding the differences in reference to similar projects. This type of estimate is usually used in the early phases of a project, though it appears less accurate than other methods. One of the common methods of estimating project cost is to base it on a previous work, though sometimes it leads to biased decisions. Project managers search the data archives in the same company to find the costing made in a similar project. It is believed that the cost data from the previous projects of the same company are less biased. Sometimes, project managers also get clues of costing from competitors if they are bidding for identical or similar projects. Historical cost data referring to costs of identified tasks for days, weeks, or months can also be extrapolated for projecting the cost estimates in a project.
Cost estimations through analogous technique use the values of scope, cost, budget, and duration or measures of scale such as time, profitability, and complexity from a previous, similar project as the basis for estimating the same parameter for this project. It is most often used in the early stages of a project when there is less information available to base the cost estimates. In this type of estimation, estimates from a closed project are used to determine the estimates for the new project. The accuracy of analogous estimates is dependent on the similarities between the two projects. The accuracy of the estimate depends upon the nature and similarity of the previous projects in terms of tasks, time, deliverables, scope creep possibilities, and level of expertise and experience of the project team. Analogous estimating may be considered as a form of expert judgment that is most reliable when the previous activities are similar to the current activity and when the team members preparing the estimates have the necessary experience.
The three-point estimates originated with the Program Evaluation and Review Technique (PERT) and Critical Path Method (CPM) techniques. This method uses three estimates to define an approximate range for the cost of each activity in reference to most likely, optimistic, and pessimistic costs. The cost estimate is calculated using a weighted average:
In this equation, Ec denotes the expected cost, Oc and Mlc indicate the optimistic and most likely costs, respectively, and Pc is expressed for pessimistic cost. The statistical weight for each cost variable is used from 1 to 4 and some of the weights serve as the denominator in this equation. Analyzing the expected time helps to bias time estimates away from the unrealistically short cost scales normally assumed. In addition to various costing estimates, project managers also use reserve analysis to determine how much contingency reserve, if any, should be allocated to the project. This funding is used to account for cost uncertainty. During cost estimation, assumptions about the COQ are recommended to include in the project cost estimate. The COQ costing is estimated on the basis of the money spent during the project to avoid failures and money spent during and after the project due to failures. This is a very sensitive estimate but is essential to support the overall budget of an innovation project. There are many cost estimation techniques illustrated in Figure 1.1 that help project managers to arrive at the right project costing.
Figure 1.1 exhibits the attributes of activity-based costing, EJ, VA, top-down and bottom-up approaches, analogues method, parametric method, COQ, resource costing, and unit cost estimation as major techniques to be used in innovation projects. Activity-based costing is a methodology that identifies activities in a project and assigns the cost of each activity with resources in reference to the actual consumption by each. This model assigns more overhead costs into direct costs compared with conventional costing. EJ is used extensively during the generation of cost estimates. In this process, project managers along with the cost accountants need to make numerous assumptions and judgments about what they think a new product will cost. Cost estimates produced from both algorithmic and nonalgorithmic cost models can be widely inaccurate, and innovation projects might require extensive use of judgment in order to produce a meaningful result. Most judgments are based on the results referring to historical costs data, and then adjusting up or down accordingly in order to predict the cost of a new project. However, through modeling the reasoning processes of EJ, it becomes possible to capture, structure, and integrate EJ and rationale into the cost estimating process as estimates are being generated. Consequently, the project managers are able to improve the understanding of estimates throughout a product life cycle, and also take advanced management decisions based upon these cost estimates.
Figure 1.1 Costing techniques for innovation projects
VA-based costing largely estimates supplier-driven costs for projects at predetermined prices. It also accounts for probabilities in price variations for the supplies required for the project till its competition. VA-based costing is useful for the projects that have continuous dependency on the supplies. For example, the innovation projects in dairy industry depend on the supply of milk from farmers, which is often uncertain and the cost estimation should be based on the probability of the supply costs. VA-based costing is also adopted by companies that fully depend on outsourcing their activities with original equipment manufacturers and serve as value-added resellers, for example, Apple Inc. The top-down approach can provide a balanced benefit to the innovation projects that are aiming to align limited resources to explore lucrative new product opportunities. Project managers could integrate top-down approach to integrated resource planning and initially develop a rough cost estimate. Top-down resource planning can be implemented early in the project cycle using simple tools. The visibility provided by the top-down approach is more than adequate to support the level of portfolio planning required to maximize returns from the investment of R&D and other resources. The bottom-up approach uses project planning techniques to create task-based estimates. The bottom-up resource planning requires a detailed project plan and supporting project management software for calculating the cost accurately.
Analogous costing is used by the project managers when limited information on the project is available. In this method, cost is estimated on the basis of historical data of similar projects. Analogous estimate is similar to top-down cost estimation approach and is generally not as accurate as other estimating techniques. Parametric estimating is a more accurate technique for estimating cost and time. This estimation technique uses the relationship between variables to calculate the cost, time, and risk. Essentially, a parametric estimate is determined by identifying the unit cost or duration and the number of units required for the project or activity. COQ is a methodology for estimating the cost of innovation projects that allows the project managers to determine the extent to which its resources are used for activities that prevent poor quality of tasks and deliverables. COQ appraises the quality of the deliverables to suggest preventive costs, and internal and external failures. Quality-related activities that incur costs in an innovation project may be divided into prevention costs, appraisal costs, and internal and external failure costs. The prevention costs in an innovation project are associated with the design protection, tasks implementation, and maintenance of the innovation project system. The appraisal costs are associated with measuring and monitoring activities related to quality. The failure costs consist of internal and external letdowns while implementing the project task, such as raw material wastes, repetitive tasks, and poor-quality products. Resource costs include the costs of all elements used to carry out business activities, such as salaries of the project staff and the cost of materials. Another type of cost estimation is the unit cost in reference to the total expenditure incurred in a project to generate required deliverables, store, and sell one unit of it in the marketplace. Unit costs include all fixed costs, or overhead costs, and all variable costs, or direct material costs and direct labor costs, involved in production.
Besides the nonconventional costing practices, a common technique for cost estimation used conventionally by low resources enterprises is to list the resources required for the project and summing up their total costs. Typically, the basic resources include human resources, equipment, material, services, and labor. You can get costs for equipment, raw material, infrastructure, technology, services, risk coverage, and marketing costs. Project managers may allow a buffer cost of about 10 percent over the list price of the requirements on account of the probability of cost escalation. The start-up innovation enterprises use resource costing method to prepare budget for a larger or more complicated projects. However, small and less complicated projects where the tasks–time grid is easy to manage, a cost-per-unit (CPU) method can be used for mapping the project costs and preparing the budget. The CPU is a unit measure of the task in the different segments of the project that is summed up as the total cost of the project. It might be a cubic foot, a square foot, cost of the work station, or an area of the project serving as a cost center. Typical cost areas in an innovation project include the cost of ideation process, research and development, design process, prototype development, testing at various stages, fabrication, technology services, market test, commercialization, and customer services. Costs should be calculated in the convertible currency of the respective regions to present the project to the sponsor for financial aid. Upon multiplying from the number of units required to complete the task, the total cost of the project can be calculated.
A project budget is a detailed time-phased estimate of all resource costs of an innovation project, which is developed from an initial rough estimate to a detailed estimate to a completed, approved project budget. A project budget includes both direct and indirect costs.
It is necessary for the project managers to account for the direct costs that are incurred toward salaries for team members, raw materials and indented supplies, equipment and infrastructure, logistics and inventory, and all subcontracts that provide operational support to the project. The indirect costs should be categorized in to operational overhead and administrative overhead costs. The costs of the former category should be accounted for the money spent on the products and services that are difficult to subdivide and allocate directly under the structured head of the budget proposal, for example, employee benefits, office space rent, general supplies, and the costs of furniture, fixtures, and recurring costs on office equipment. The project team should be aware of administrative overhead costs that lead to expenditure on the functionality of the project within the organization. Often large organizations allocate high resources on this budgetary head as they plan for long hierarchical set-up of project supervisory, monitoring, and evaluation staff. Besides, the administrative overhead costs in an innovation project include also the expenses that account for executive entertainment and legal services. One basic assumption to be made while estimating project costs is whether the estimates will be limited to direct project costs only or whether the estimates will also include indirect costs. Indirect costs are those costs that cannot be directly traced to a specific project and therefore will be accumulated and allocated equitably over multiple projects by the formally approved and documented accounting procedure. Cost estimates are influenced by numerous variables such as labor rates, material costs, inflation, risk factors, and other variables.
Parametric estimation is used to calculate the cost by using the following formula when the productivity rate of the resource performing the activity is available:
Activity cost |
= Units of work in the activity/Productivity rate of the resources. |
Parametric estimation leverages mechanical calculations that take historical information as the input, makes assumptions, and then extrapolates the information to compute the overall cost estimates. The accuracy of parametric estimation is dependent on the assumptions used in the calculations. This technique is used with the time-series data by establishing the statistical relationship that converges costs and the tasks in the project. It provides the following advantages in cost estimation:
It consumes lesser time in estimations than other techniques,
It is based on quantitative inputs that are linked to algorithms, which allows the project manager to trace the costs by tasks and monitor the spending process accordingly,
Parametric models provide a consistent estimate format and provide scope for documenting the estimation and simulate the cost projections, and
It provides variable costs for a range of input values, extrapolating to derive costs for projects of a different size or nature from the cost estimates of the previous projects.
Large innovation companies generally explore the role for activity-based costing and measure customer profitability when they incur financial losses. In the competitive marketplace today, customers tend to demand increasingly more specialized services for higher convenience, which needs the companies to pump more capital in the project for planning deliverables of higher quality. However, allocating more resources and spending more money on an innovation project without proper market assessment often turns into losses as customers are often unpredictable and shift their preferences toward buying substitute products. Pricing is based on a fixed markup of the cost of the purchased item. The managers feel that the fixed markup may not be compensating them for the higher costs and standard deliverables of the project (Kaplan 2001).
Reserve analysis cost estimates include contingency reserves to account for cost uncertainty. The contingency reserve may be a percentage of the estimated cost, a fixed number, or may be developed by using quantitative analysis methods. One method of calculating the contingency reserve is to take a percentage of the original activity cost estimate, and when more information about the project becomes available, the contingency reserve can be reduced or eliminated. Probable contingencies in the innovation projects management should be clearly identified in cost documentation, and the cost estimations to meet the identified contingencies should be estimated based on the responsive bids from qualified vendors. Where projects are awarded to a vendor under competitive processes, additional cost estimating work can be required of the project team to examine the price of individual deliverables and to derive a cost that supports the final total project cost.
Multinational companies such as General Electric are switching to industrial production at economy of scale by achieving innovative differentiation and cost efficiency. More companies are following similar strategies as the option for managing innovation projects continues to expand. The cost estimations are usually done on activity and unit basis in innovation projects to accommodate critical and peripheral activities in all segments of the innovation projects. It has been observed that in many start-up enterprises that are engaged in developing innovative products with competitive differentiation, the commercialization of innovation has turned out as one of the major challenges. Lack of right commercialization approach of innovation is driving several manufacturing projects to be decommissioned. However, customer-centric innovations quickly gain advantages in the competitive marketplace (D’Aveni 2015).
Earned Value Management
EVM is a project management technique for measuring project performance and progress in an objective manner. EVM is a well-known technique to control time and cost performance of a project. It is a methodology used since the 1960s, which relies on a set of often straightforward metrics to measure and evaluate the general health of a project. These metrics serve as early warning signals for timely detection of problems or for exploitation of project opportunities. Controlling a project is key to the success or failure of the project. EVM provides the opportunity to measure the project performance along the life cycle of the project and predict early warning signals that can be used as triggers for corrective actions in case the project is in danger. EVM analysis makes a significant impact on the areas of planning and control and helps in improving both scope of the project and the overall project performance. Previous research indicates that the principles of EVM are positive predictors of project success. This technique has become popular in the recent years beyond the large projects as its importance continues to rise as well among the start-up enterprises engaged in innovation projects management. EVM emerged as a financial analysis specialty in U.S. government programs in the 1960s, but it has since become a significant branch of project management and cost engineering. Implementation of EVM can be scaled to fit projects of all sizes and complexities. The essential features of the EVM implementation help the project managers in mapping the work to be accomplished according to a project plan, calculating the EMV with reference to the planned value (PV) or budgeted cost of work scheduled (BCWS), and earned value (EV) or budgeted cost of work performed (BCWP). However, the EV of a project has major implications of the actual cost incurred in various tasks performed in the project.
EVM implementations for large or complex projects need analysis of cost and risk indicators and forecasts of cost performance to measure the over- or under-budget performance of the projects. EVM is also helpful in determining time plans of the project and measuring whether the projects are on time, behind, or ahead of schedule situations. However, the most basic requirement of an EVM system is that it quantifies progress using PVs and EVs in a project. An EVM system is an aid to both the EVM contractor and EVM customer. The benefits of implementing an EVM can be summarized as follows:
Improves the planning process;
Fosters a clear definition of the work scope;
Establishes clear responsibility for work effort;
Integrates technical, schedule, and cost performance;
Provides early warning and analysis of potential EV problems;
Identifies problem areas for immediate and proactive management attention;
Enables more accurate reporting of cost and schedule impacts of known problems;
Enhances the ability to assess and integrate technical, schedule, cost, systems analysis, and risk factors;
Provides consistent and clear communication of progress at all management levels; and
Improves project visibility and accountability.
A simple explanation to the EV in a project is the difference between the proposed budget for completion of the project and the actual cost incurred, as exhibited in Figure 1.2.
Figure 1.2 exhibits that the basic premise of EVM is that the expenditure incurred on a task is equal to the amount of funds budgeted to complete it. However, the “schedule variance” that determines the project schedules—on time, delayed, or ahead of schedule—and the “cost variance” that explains the corresponding expenditure on each task of the project determine the “earned value” of a project at the point of assessment of EVM. The schedule variance is the difference between the amounts budgeted for the work actually performed and for the work planned to do. This expenditure is related to the variance in time (more or less) to the scheduled project time. The cost variance is explained as the difference between the amount budgeted and the amount actually spent for the work performed. Project time management involves the processes required to ensure timely completion of a project as stated as follows:
Activity definition
Activity sequencing
Activity duration estimating
Schedule development
Schedule control
Figure 1.2 Earned value management in an innovation project
The ratio of the approved budget for the work performed to the approved budget for the work planned is analyzed to measure the variations in utilization of the financial resources of the project. The schedule performance index (SPI) reflects the relative amount by which the project is ahead of or behind schedule, sometimes referred to as the project’s schedule efficiency. Project managers can use SPI to predict the schedule performance for the remainder of the task. The ratio of the approved budget for work performed to what you actually spent for the work, the cost performance index (CPI) reflects the relative value of work done as compared to the amount paid for it, sometimes referred to as the project’s cost efficiency. The project team can use the CPI to predict the cost performance for the remaining tasks in the project. The schedule and cost variances and performance indicators are defined mathematically as follows:
Schedule variance (SV) = Earned value (EV) – Planned value (PV)
Cost variance (CV) = Earned value (EV) – Actual cost (AC)
Schedule performance index (SPI) = Earned value (EV)/Planned value (PV)
Cost performance index (CPI) = Earned value (EV)/Actual cost (AC)
The final project performance can be measured by analyzing the expenditures upon completion of all tasks required for offering the deliverables and creating value among the stakeholders. The budgetary estimate at completion (EAC) is estimated for a project at the current prices to know the resources commitment of the project and sponsor. However, such budgetary provision can be adjusted with the projected increase in the cost per task and project team can arrive at the estimate to complete (ETC) the project, which offers a holistic estimate of the amount of funds required to complete all tasks planned in the project. By assuming that the cost performance for the remainder of the task will be the same, the EAC can be calculated as:
EAC |
= Budget at completion (BAC)/Cumulative cost performance index (CPI) |
One of the most fundamental requirement is that the contractor must establish a work breakdown structure (WBS) extended down to a level that describes the tasks that will be performed as well as their relationship to product deliverables. This is the foundation for ensuring the project planning, scheduling, budgeting, work authorization, and cost accumulation processes are fully integrated. The integrated master schedule is the project’s road map to meet project objectives. This schedule must be resource loaded to determine the budget for the work as scheduled. The resource-loaded schedule is the basis for the monthly budget, or BCWS, for each task and thus the project. This time-phased budget is the performance measurement baseline. The total budget for each task, control account, or the entire project is defined as the budget at complete (BAC). Because most projects are initiated with some level of uncertainty, the project managers typically keep aside a proportion of budget of the total project value as a management reserve, which is added to the BAC while finalizing the total project budgeted value of the project.
The EVM is fundamentally applicable in the planning, implementation, and control. During the project planning process, EVM requires the establishment of a performance measurement baseline. This requirement strengthens scope of the project, schedule, and cost. EVM raises the need for the executable project work and fixing accountability for improving the performance of the project. EVM is also a fundamental requirement for implementing and monitoring the WBS by dividing into executable tasks and small controllable accounts. The start-up enterprises generally fail in managing innovation projects as they are unable to logically schedule and manage resources in a work plan. The work scope, schedule, and cost need to be integrated and recorded in a time-phased budget known as a performance measurement baseline. In the planning process, assigning budgetary EV also needs to be established. In addition to routine project management planning, EV measurement techniques are selected and applied for each task, based on scope, schedule, and cost considerations.
Project Planning Process
The project planning for innovation business projects begins with the ideation process. Idea generation in the process of new product development is a major exercise. This technique calls for listing of all major attributes of the existing product and the needed attributes in order to improve the same product. The forced relationship of the new product with the existing accessories also needs to be studied, for example, developing a new television set may be related with the consumer need of clock, multichannel viewing on one screen, microphone attachment, and a built-in video game. Such forced relationship has to be identified by the company before launching the product. The morphological analysis calls for identifying the structural dimensions of a problem and examining the relationships among them. The need identification can be done by interacting with the potential and existing customers in a focus group meet. Industrial marketers can identify new product ideas working in association with the lead users of the product. Brainstorming has a major role in the idea generation process. Contemporary methods for ranking the relative merits of ideas generated by brainstorming sessions rely on comparing average scores across members of the group. The average is a measure of the overall merit assigned to an idea but does not measure unanimity or the concentration of opinion across members of the group with respect to the idea under consideration. The standard deviation of responses is the accepted measure of group consensus but is rarely used in brainstorming, possibly because the ranking of ideas is a more complex cognitive procedure when the two statistics, mean and standard deviation, are considered separately or possibly because most voting schemes are very simple (Walsh and Wood 1992).
There are many approaches to drive the ideation process for putting through the project management process. The most contemporary ideation approached for innovative products include crowdsourcing and co-designing new products with the start-up enterprises. Most multinational companies engaged in bringing out the new innovative and competitively differentiated products in the market prefer the latter approach of co-designing. After the globalization effect experienced by the companies in the recent past, the product had changed in many ways. The switch from a shared house phone to a personal phone has had a significant impact on product appearance as well as product use. People do not use their personal phone only for calling, but also for taking pictures, making movies, playing games, listening to music, and as an agenda. This has changed the consumer attitudes toward a phone. What once was a rather functional product has become a product that expresses one’s personality. Therefore, customers require their phone to be modern, easy to use, and of good quality. In the meantime, they do not want the phone to be expensive, as they would like to buy a new one periodically. The needs of these consumers reflect in increasing demand on the one hand and increasing product complexity on the other. Hence, developing innovative products require a far-reaching integration of the different knowledge domains of the actors from different disciplines during the collaborative new product development (Co-NPD) process (Garcia and Calantone 2002). During Co-NPD, knowledge management should focus on knowledge integration instead of focusing on knowledge transfer. They also stated that the effectiveness of knowledge integration required a mutual understanding of the actor’s contributions. This is in line with research on design communication, which finds that the quality of the Co-NPD project is dependent on the process of creating a shared understanding (Dong 2005). In developing collaborative product designs, managers should consider the following perspectives:
Be an involved consumer of your own and competitor’s goods and services
Transfer of knowledge
Document experiences to retain personal knowledge
Relativity of needs in reference to average consumers
Obtaining information through mutual cooperation
Critically observe and live with consumers
Critical observation rather than casual viewing
Investing time
Realistic and precise conclusions
Talk to consumers and get needs information
Structured, in-depth, one-on-one, situational interviews
Engineer trade-offs during product development
Technical design information
Exploring tacit and product-related needs of consumers
Co-NPD process is considered as a socio-organizational process. In collaborative new product development, many actors are involved in the process. An actor executes three main activities during this social process. The first activity is the construction of the task that an actor needs to perform. This allows the actor to understand that the task is a part of a system and that others perform different and complementary tasks. Thus, an actor may relate his action to those of others. This shows that the relations among actors are not predefined but constructed during the process and that actors depend on findings from other actors. A result derived by an actor performing a development task may lead another actor to make an interactive loop (Weick and Roberts 1993).
A product development manager should actively observe the activities of the team during their regular meetings by taking notes about the most important issues concerning communication about the design content. During the regular face-to-face meetings with the separate actors, which are now mostly about planning and monitoring issues and design problems or changes, the project leader could use the notes as input for discussing the collaborative aspects with the actors. This form of storytelling will provide the project leader with knowledge about the collaborative aspects of the design process. A project leader should also learn to distill the barriers and enablers from these conversations (Maaike, Buijs, and Valkenburg 2010).
Besides the ideation element in the innovation projects, there are three approved starting requirements including the scope, schedule, and cost baselines. These project requirements determine whether or not the project is on track during the execution of the project. These requirements in an innovation project help the project team in documenting how variances to the baselines will be handled throughout the project. Each project baseline will need to be reviewed and managed periodically, irrespective of the size of the project. Sometimes the project needs to be supported with new tasks (project scope creep) that require additional planning, with the possibility that the baseline(s) will change. Project management plans document what the project team will do when variances to the baselines occur, including what process will be followed, who will be notified, how the changes will be funded, and so on. The key players in the team have specific roles in the project process, which include:
Project sponsor owns and funds the entire project. He is responsible for reviewing and approving all aspects of the plan.
The business experts define requirements for the deliverables. They help the project teams to develop the scope baseline and approve the documents relating to scope and schedule (timeline).
Project manager creates, executes, and controls the project plan. The project manager serves not only as a team leader but is also accountable for the commercialization of the deliverables. Hence, in innovation business projects, the project managers work closely in association with the market team.
The project team contributes to the development of many aspects of the plan, such as identifying risks, quality, and design issues, and produces the right deliverables that are defined by the stakeholders. Commonly, the consumers or end-users are the stakeholders for the public innovation deliverables. However, in many projects leading to mass commercialization, sponsors and other investors constitute stakeholders.
Others, such as auditors, quality and risk analysts, and procurement specialists, also participate in the implementation of innovation business project. They may need sponsors to approve the quality or procurement plan.
In order to initiate the project, a kickoff meeting is considered to be an effective way to bring stakeholders and project team together to discuss the competitive differentiation and commercialization potential of the project. It is a dynamic option to initiate the planning process and can be used to start building trust among the team members and to bring everyone on the operational platform to plan and implement the project. Kickoff meetings also demonstrate commitment from the sponsor for the project. These meetings are essentially held in the initial phase of the project to discuss the business vision and strategy, and project vision, roles and responsibilities, building teams and commitments, defining decision ladder, and setting ground rules. The scope statement is the most important document in the project plan that presents the project deliverables. It describes the project and is used to get common agreement among the stakeholders about the scope. It is the basis for getting approval of the project from the sponsor and other stakeholders and provides a clear communication about the project. The project charter is another important document, which includes the business need and the uniqueness the project, core objectives, WBS, and benefits of completing the project as well as the project justification. The project scope states and justifies the deliverables to be included and excluded from the project, while the project charter emphasizes the key milestones, techniques, and other components by the size and nature of the project.
Once the deliverables are confirmed in the scope statement, they need to be developed into a WBS, which is a decomposition of all the deliverables in the project. This deliverable WBS forms the scope baseline and identifies all the deliverables produced on the project, and therefore, identifies all the work to be done. The WBS should be mapped by breaking large deliverables into a hierarchy of smaller deliverables by dividing the project tasks into the work package to correspond to listed activities and tasks in the project plan. The WBS is often thought of as a task breakdown, but activities and tasks are a separate breakdown, as identified in the next step. The next step involved in developing the schedule and cost baselines by identifying activities and tasks needed to produce each of the work packages, creating a WBS of tasks. At this stage, the project team should identify resources for each task and estimate the time span for completing each task. The cost of each task should be estimated using an average hourly rate for each resource.
Once the project scope, task schedule, and cost baselines have been established, the project team should create the plans to manage potential variances in the project. All these management plans usually include a review and approval process for modifying the baselines. Project quality consists of ensuring project deliverables and creating value to the stakeholders. The emphasis on project quality should be made from the viewpoint to prevent errors, rather than inspecting the deliverables at the end of the project and then eliminating errors. Project quality recognizes that quality is a responsibility of the project management team and should be maintained throughout the project. Creating the Quality Plan involves setting the standards, acceptance criteria, and metrics that will be used throughout the project. The project plan should be periodically reviewed and revised and the project should be implemented and measured periodically to monitor the performance and stakeholder value generated throughout the project.
Project Budgeting and Control
Budgeting sets control standards and follows systematic checks and balances in innovation projects, where there are possibilities of some loose ends in WBS that might drain the financial resources. Hence, it is necessary to have a very realistic and accurate budget to manage the innovation projects where actual costs can be compared with and measured against the budget. In order for the project plan to determine whether scope, budget, or schedule needs adjustment when project costs begin to escalate, the project manager should revisit the requirements for project deliverables. Innovation projects demand a flexible budgeting policy as innovation process may encounter several contingencies during the project phases. The cost estimations made at the initiation of the project might change as some phases may suffer from cost and time overrun due to test and trials. Hence, activity-based costing with enhanced time elapse would be the appropriate budgeting strategy for managing innovation projects. However, it is also important for the project managers to set boundaries on budgeting to reduce the cost spree. The project budgets should be realistic, which should neither overpump the resources nor create paucity of resources to make the project management run through the budgetary extremes. Accordingly, simple rules should be laid to set budgetary boundaries, such as 5 percent reduction in time toward performing the tasks, decrease in administrative costs as a percentage of revenue by setting realistic measures, and reduction in inventories in project management—say 2 percent task by task (TBT). The budget should also have the qualitative perspectives such as how the goals can be achieved in a TBT manner and contribute to the revenue stream of the project within the resource boundaries. The project budget is a linear projections exercise based on the assumptions to the current project status. Hence, project managers should meticulously look at the assumptions they are making to prepare a budget for innovation projects. Usually budgeters take a referral point to start with the budgeting exercise, which is either a previous project or sheer assumption.
In 1997, building on its earlier success with Tokyo Disneyland, Oriental Land Corp. Japan and the Walt Disney Co. discussed the possibility of a new joint project known as the Tokyo Disney Sea Park. Both companies had different approaches toward capital budgeting, and distinct corporate governance regimes led the two firms to evaluate the project in different ways. Budgetary proposals are often regarded as the principal instrument for integrating innovation projects between two companies. Although globalization of Japanese economy has advanced rapidly, the management philosophy and capital budgeting techniques still differ significantly among Japanese and American firms. As innovation projects are largely outsourced by the sponsor organizations and are initiated by the start-up enterprises, the budget appropriation in innovation projects are often less realistic and suffer from financial setbacks. In a joint venture, such differences have a momentous impact on the decision-making processes (Misawa 2006).
Project managers of start-up enterprises should also allocate budget for the various management phases during the postcommercialization situation in the market. These budgetary stages begin from the point an innovation project delivers the outcome to sponsors and is positioned in the market for everyday operations. The budget at this stage should be within the overall resource limits of the project that is preplanned with the estimates of the returns on investment. Over a period, an innovation positioned in the market would move to the second phase of “incremental innovation,” which demands improvements in the existing product according to the customer experience and it is necessary to reach higher efficiencies in managing the innovation by driving it cheaper. It is necessary to allocate budget to manage incremental innovation for driving faster business growth of the product. Innovation in a competitive marketplace has a short life cycle. Hence, companies try to earn maximum profit within a short span, which often pushes the innovations off the market by competing products. However, some innovations sustain in the market with different versions of products, because some companies take care of such innovations by building customer networks and loyalty by providing adequate budgetary support for the marketing activities. It is likely that the growth of innovative products is transformed by the disruptive innovations that appear in the market with new customer values (Villanueva 2013; Anderson and Narus 1998). Companies need to earmark budget to manage disruptive innovations in the market also at this stage. Thus, it should be understood by the companies that once innovation projects are on, they continue till the deliverables stay in the market and it is necessary to allocate budget for serving the products in the market till their life span (Power and Stanton 2014).
The project manager should carry out prebudgetary exercises, and upon simulation, allocate all costs to the predetermined project activities, including the cost of internal and external human resources, equipment, travel, materials, and supplies. The budget should be comprehensive, realistic, and more accurate to implement the project without financial disruption. Corporate budgeting, resource allocation, and risk control should be designed to promote predictability and efficiency as there are chances of project scope creep during the project, which may hit the budgetary allocations in the project midway. Project managers can increase return on projects by rigorously extracting value from them by fixing such loose ends of budgets and minimizing their downsides. Innovation leaders of the start-up projects should expand their project insights on deliverables to the customers, markets, and catering to the future trends of related innovative products and services. The project team also needs to magnify the impact of periodical project reviews by sharing among their team members. Such qualitative project analytics with the project team and supporting staff will build trust and goodwill and encourage future initiatives. Project managers should guard the innovation projects against execution failures by encouraging more openness among the team members to respond to the probable risks. Mistakes are the inevitable consequence of trying something new, but project managers can fence tremendous value and develop right mindset to meet the challenges (Birkinshaw and Hass 2016).
Most organizations have policies, procedures, and guidelines for handling cost budgeting. It is necessary to ensure that all project team members, administrative staff, and supporting manpower are well acquainted with the project budget and cooperate in implementing the project with the approved budgetary norms. The project team should find a controller who will help the project team to understand how project fits into the overall financial structures of the project as well as of the company and sponsor’s organizational needs. The project managers require the following information to prepare the project budget:
Activity Cost Estimates
Basis of Estimates
Scope Baseline
Project Schedule
Resource Calendars
Contracts
The project team should prepare the cost checklists for estimating the project budget, which should include the cost of the human resources and the equipment and materials required to perform the work. The method of acquiring new project staff or drawing staff from the other departments within the organization will incur cost to the project cost center. Hence, the project manager should also account for the hiring cost of human resources in the project budget. As the budget estimate is being developed, additional tasks may be identified and accordingly the WBS and the project schedule should be updated to include the other activities in the budget estimation. The principal deliverables need to be listed for developing budget estimations and controls.
In addition to many common budgeting practices, there are two main approaches. The top-down approach of budgeting estimates and decides the total cost of the project by categorically allocating the costs between the work packages. The bottom-up approach is used for estimating the total cost of the project by costing the lowest-level work packages and rolling up. Both approaches have their advantages and disadvantages, and a project manager will be faced with both at some time while managing the project. A decision on project costing and budgeting is usually made by the senior management. This amount is divided between the work packages. This approach is more than extrapolating the budgetary requirements referring to the previous experience. Managers need to explain how the tasks in the project can be performed within the allocated budget for each work package. Prior experience from other projects will help in validating the budget allocation for work packages. However, project managers need to ascertain whether the budget appears realistic based on experience from past projects. The advantage of the top-down budgeting approach is that it focuses on achieving the project within the budget allocated and leads to deliver the performance with desired efficiencies by reducing wasteful practices that escalate costs and time. However, the top-down budgeting approach is subjective as it assumes that the budget makers have substantial knowledge and expertise to make a reasonable cost estimate. Conflicts with assumptions would lead to unrealistic budget proposal that is insufficient to deliver the project on the plea of cost savings. In the bottom-up budgeting approach, the project team identifies the tasks and activities needed to complete the project based on the lowest-level work packages. The project team sums up the total project cost, including the direct and indirect costs, calculated for each work package. The bottom-up budgeting approach is more accurate than the arbitrary estimates made in the top-down budgetary method. It is good for the team morale because the project manager involves the team in budget creation. One of the major risks in the bottom-up approach is the missing of any tasks and forcing it to include later when the gap is noticed. Such loose-end WBS and work packages drive the need for supplementary budgeting, which is considered as a serious flaw in the project financial management.
There are three types of budget estimates during the project cycle, which include rough order of estimate, contract, and definitive. These estimates vary marginally from each other in the way they are calculated, adjusted, and used in the budget document. Project managers develop the first budget estimate for use before or during the project initiation phase with rough estimates with arbitrary rounding of cost figures and appropriations. The rough budget estimates of a project are based on matching the goals of the project with the predetermined project deliverables. Most rough estimates, depending on the project, have a range of variance from –25 percent (underestimations) to +50 percent (overestimations) of the costing exercise. Contrary to the rough budgetary estimates, the contract estimate is more accurate and can be developed in the first stage of the project by collecting the required financial information from the sponsor and the innovation project handling company. The exercise for developing the contract estimate can be started right from the stage of formulating objectives and enhanced while developing the WBS. Definitive estimate is the most accurate of all the estimate types but time consuming. The definitive estimate makes use of the WBS, which is a deliverables-oriented decomposition of the project scope. This type of estimate is usually done during the planning phase of the project to get detailed information on all the project costs are available and work packages are created for each tasks. The definitive budgets provide the organizational chart of accounts to track costs in the accounting system and impose required controls. The definitive estimate is used to estimate final project costs and for making purchase decisions where the actual costs are required before making payments.
Executing the budget is the act of authorizing the expenses approved on the project budget allowing the project manager to initiate spending. This follows budget approval and then the project is scheduled to begin operations according to the project plan. In the meantime, the finance department of the organization and the sponsor would have established a disbursement schedule through an authorized financial institution. A company can pursue either an internal, organic approach to its financing options or an external, inorganic approach that uses borrowed funds to make acquisitions it hopes will increase its business. This is the route taken by Bharti Airtel Limited, India’s leading telecommunications giant. Beginning in 2010, it has borrowed heavily on the international market to invest in acquisitions of a 3G license in India, in Zain Africa, and in the broadband wireless access branch of Qualcomm Inc. However, due to many politico-economic reasons, including the effects of the global recession on the industry, high market competitiveness in the Indian telecom industry, restructuring and disorganization within the management levels in the organization, and lack of innovation in offering and delivering new services in India, the profitability is seriously affected. Lack of appropriate budgeting, cost estimations, and profit projects were found to be other prominent setbacks in the operations of the company. Such decline in the business growth has reflected in the quality of the deliverables and stakeholders value (Goel 2014).
Factors Affecting Budgeting, Control, and Project Administration
In addition to the internal and external factors influencing the project financial, analytical, organizational, and system-based rationale significantly affect the planning and project budget execution. Project managers and sponsors of innovation projects should decide upon the analytical rationale in drawing the project budget, considering whether the project performance should lean toward increasing stakeholder value or profitability of the project. Analytical perspectives that are developed through reasoning and based on project information, economic trends, and market forces guide meticulously the budgeting process of innovation projects. The financial strategies derived from this perspective are simple, specific, and prescriptive to the project goals. The organizational rationale in developing budget considers the corporate values of the start-up enterprises or sponsor companies, and applies them to the situation to make an appropriate financial decision. While it might be expected that analytic rationale would play a far greater role in innovation strategy and market appropriateness, the organizational identity is also a very significant variable in developing and implementing the innovation projects. The organizational perspective in innovation projects is usually cohesive with the project goals. The project team may find some latent objectives, tasks, and deliverables that might get aligned with the predetermined tasks of the project over time. The organizational rationale in budgeting helps the project team identify such latent expenditure points to plan for well in advance. This perspective of in-depth exploration over the costs also fosters a long-term view. The system-based rationale in an organization employs a mixture of experience and insight in reference to the experience of the organization in a similar project in the past and new insights in creating the commercial success through sustainable branding. The overall knowledge developed through the profound knowledge of the real-time prospects of the project deliverables in the market would help the project team to refine the budgetary provisions as well as allocate additional financial provisions for the post-project management of deliverables in the market. The systems perspective also guides the project team to develop a sustainable business model for commercializing the innovative products emerging as project deliverables. Each project has different orientation toward managing the project financials. For example, Google, Johnson & Johnson, and Ikea adopt a single best-suitable perspective for planning the innovation projects and developing budget. Some companies such as IBM and General Electric have excelled on more than one perspective—analytical insight, organizational rationale, and systems approach and integration has helped these companies to develop their innovation and business growth stronger as compared to the companies that are still performing with a single approach (Peña and Enric 2015).
Besides the internal and external factors affecting the budgeting process, the most significant and core requirement is the commitment of management to the budget of the innovation project. This factor is apparently the foundation on which any robust budgetary provisions to the innovation projects can be developed. Management needs to understand that innovation is not merely an add-on or a privilege but key to the profitability. This sense of project would help the project team to get the fair cost estimates and provision TBT resources allocation in the project. Some studied reveal that in successful firms, CEOs and executive board members act as leaders of the innovation journey and stimulate the project team passionately by providing substantial resources for the project. Allocating adequate financial resources in the budget not only helps the teams to complete the project but also supports the robust innovation for gaining competitive advantage. In public companies, often stakeholders overpower the corporate management and seek explanations on project finance and budgetary appropriations. Hence, it is important for the project team to take the stakeholder into confidence about preparing the project budget and its implementation. It is also necessary for the project manager to be proactive in communications with the project team and supporting staff, sponsors, and other stakeholders to monitor the project deliverables and expectations in the innovation process. Openly and actively communicating with employees, for example, earns their trust and engagement. In order to develop participation in the developing innovation project plan and budgeting, project managers should go beyond brainstorming among the stakeholders and sponsor. The project team should link strategy and purpose with project and initiative development by implementing a process of idea generation, selection, and conversion, known as “front-end innovation.” Once the project charter is complete, the debate on project budgeting can be initiated by assessing the adequacy of financial resources, people, and competencies to execute new innovation plans. The project team can accordingly make changes in hiring people, cost estimations, and contingency planning with required skills (Joan and Joaquim 2016).
Project Risk Management
The risk in the innovation projects exists similar to any other manufacturing project linked to commercialization. Among various types of risks, the financial, human resource, and quality of supplies risks are very significant. The financial risks in a project are often seen as cash flow shortage during third quarter and onwards due to the project scope creep to handle additional tasks. Human resources risks also pose financial implication in the project because of a wrong decision in human resources management such as unexpected retrenchments of employees or forced downsizing. Such situation is also aggravated by employees leaving the organization voluntarily, abandoning the tasks midway. Hiring of substitute staff demands additional capital through supplementary budgeting, which is often a difficult task for the project managers. Supply delays or changes in the attributes of products are commonly incurred during the project unless the project staff foresees such contingencies and maintains adequate inventory of supplies. Supplier risks include also escalation of price, variations in the quality, and client services. Such supply risks jeopardize the financial plans and budgeting process in the innovation projects. The quality risks are often associated with the low-cost suppliers who are not consistent with the quality supplies.
In order to overcome the projects risks, the project managers should identify the possible contingencies and prioritize them to resolve them timely. Planning for managing the predicted and latent project risks prevents the project tasks from any unsmooth transitions and chaos, which lowers the operational efficiency and quality of deliverables. To prioritize the risks and map their expected occurrence, project managers should conduct periodical project audits, make an assessment of negative impact on the project at each risk, assign probability of occurrence to each risk, budget for the contingency plan, and rank the risk audit. A proper audit to identify the project risks would help the project managers in streamlining the project financials by allocating adequate budgetary provisions, checks and balances, and loss prevention. Some risks like cost escalation cannot be avoided, while others can be reduced. Hence, every innovation project should have a contingency plan and the project team should be trained in implementing this plan when the need is felt (Gary 2005). Innovation project teams should undertake a systematic, disciplined review of their innovation portfolios and increase the number of major innovations at an acceptable level of risk. In mapping and managing the risks in the innovation projects, the project teams may consider the following risk-fixing tools:
The project team may construct a risk matrix, which would graphically reveal the distribution of risk across the project stages and within the entire innovation portfolio. The matrix allows the project leader and team members to estimate the probability of each risk and the success or failure of managing the risk based on its spatial and temporal size, impact, estimated loss, and the cost of fixing such risk. It is observed in several innovation projects that the less familiar the product or technology and the intended market, the higher the risk.
The second tool is an internal competence map exhibiting decision on R-W-W (real-win-worth it) parameters that allows the project teams to evaluate the risks and potential of project solutions by answering six fundamental questions such as: Is the risk apparent, does it affect the deliverable, and how the commercialization of project outcome would affect the profitability of the project? The project team should also explore the impact of risk on the customers’ needs, their willingness to buy, and the size of the potential market (Day 2007).
Big projects are susceptible to failures as they often suffer from cost and time overrun, causing lack of market competitiveness toward price, quality, services, and competitive advantage. The high-budget and complex long-term projects are developed by a series of teams working along parallel tracks by customizing their deliverables to the specific geodemographic end-user segments. Managers fail to anticipate everything that might fall through the cracks, those tracks will not converge successfully at the end to reach the goal due to widespread customization of the project deliverables across the regions and customer segments. Take a companywide customer relations management (CRM) project. Traditionally, one team might analyze customers, another selects the software, a third develops training programs, and so forth. For example, innovating CRM services upon completion of the project may face the jeopardy of educating consumers on the benefits of innovation, which could decline the performance of the project deliverables. Under such circumstances, the way to uncover unanticipated problems is to inject into the overall plan a series of mini projects, or “rapid-results initiatives,” to provide quick and sustainable solutions of educating the consumers, bringing consumers close to the innovative product, allowing rapid experience sharing, and reducing the cost of the innovation at the end-user level. The World Bank has used rapid-results initiatives to great effect to keep a sweeping 16-year project on track and deliver visible results years ahead of schedule (Matta and Ashkenas 2003).
Managing innovation projects is a challenging task for the project team. Failure may be inevitable but, if managed well, can be very useful. A certain amount of failure can help the project team keep options open, find out the troubleshooting tasks, create the conditions to attract new resources and expert attention, make room for new leaders, develop intuition to success, and improve the project management skills. Sometimes the project failures at the middle of the project process can be considered as “intelligent failure” as such situations provide the project team to learn from the failures and strengthen their strategies for succeeding in the tasks ahead. It is necessary for the project managers to document initial assumptions, test and revise them as the work moves on to the next stages, and share them with the project team. Project managers can limit the number of uncertainties in innovation projects and build a culture to increase failure resistance (McGrath 2011). The real challenge in budgetary estimates is optimizing the trade-off between the direct costs on the one hand and the hidden costs on the other. The senior managers should adjust to their particular context to ensure that the most promising innovation proposals stand a good chance of being implemented (Reitzig 2011).
Stakeholder Management
Large firms engaged in multidimensional business optimize their value chain activities and competition to leverage valuable capabilities to acquire sustainable competitive advantage. Effectively performing value chain activities allow firms to develop capabilities to outmaneuver competitors and gain strategic advantage in enhancing their market share. However, value chain activities are not of equal significance to all firms due to varied specific goals. In order to understand the elements of the value chain, it is important to first understand the resources and abilities that create these underlying elements of the chain. The resource-based view of the firm indicates that firms can achieve sustainable competitive advantage by implementing value-creating strategies with their valuable, uncommon, inimitable, and nonsubstitutable resources (Prajogo, McDermott, and Goh 2008).
The postulate of value chain concept suggests that firms may achieve competitive advantage as a result of intensive organizational expertise in successfully performing value chain activities. As firms build higher proficiency in performing the backward (knowledge, technology, resources, and manpower) and forward (supply chain, retailing, and marketing) value chain activities, they may develop sustainable growth and posture in the marketplace (Porter 1985). The companies known for their exceptional backward linkages having efficiency in technology, managerial know-how, and resources allocation include Honda, Intel, and Du Pont. Similarly, Sony and Toyota are noted for both excellent backward and forward value chains in reference to manufacturing and marketing competencies, respectively, while Procter & Gamble and Wal-Mart are acclaimed for their effective forward linkage concerning brand promotion and distribution system, respectively.
Firms need to clearly understand the term “value chain” that suggests an orderly progression of activities allowing managers to formulate profitable strategies and coordinate operations with suppliers and customers. The value chain should be integrated within a “value grid.” The grid approach allows firms to identify opportunities and threats in the competitive marketplace. It drives managers to understand the power balance between suppliers and manufacturers. The new pathways to value can be vertical as firms explore opportunities upstream or downstream from the adjacent tiers in their value chain, while horizontal pathways can be determined by identifying opportunities from spanning similar tiers in multiple value chains among all functionaries and customers (Pil and Holweg 2006).
Social media can be an extremely valuable way to create the stakeholder value by enriching culture toward adaptation of innovative products and enhancing the scope of commercialization of project deliverables. However, managing stakeholder value through the social media is sensitive to misconceptions of communications about the new and untested innovations. The main reason that some social media initiatives fail to bring benefits to companies is because the initiatives are unable to create emotional capital to establish connection between stakeholders and the company. Marketing firms should develop strategic value chain for enhancing organizational capability for getting fast response to rapidly evolving market dynamics (Huy and Shipilov 2012). In order to efficiently implement the value chain, firms should strive at finding response to some of critical questions that include:
Where is value being created?
How to expand business?
Does the firm need outsourcing?
Which areas need investment?
How to optimize the value chain? and
Does the firm need to establish strategic alliance?
Firms are required to employ economic value-added analysis and strategic value assessment such as customer preferences, the rate of change of underlying technology, and competitive position in the marketplace (Fine et al. 2002). Most multinational firms are targeting the bottom-of-the-pyramid market segments to acquire higher market share in the mass market and these firms are fostering to develop sustainable value chain by building local capacity through 4A’s comprising awareness, acceptance, adaptability, and affordability. Firms also invest in educating local market players and alliance partners, developing infrastructure, and providing basic community services. The large firms also create shared value opportunities by improving products and reorganizing market segments, redefining productivity in the value chain, and enabling local cluster development. As discussed earlier, large and emerging firms also aim at co-creation of products and business models to upgrade the shareholder value and enhance the value creation process. Emerging companies such as AXA Group, dealing with financial and insurance business, is engaged in dramatically redesigning the upper- and lower-end value chain architecture by reinventing the concept of customer value (Thomke and von Hippel 2002). Companies should not only focus on operational efficiencies, but also modify their activities in the value chain to reach low-income consumers or small suppliers (Anderson and Billou 2007). The creation and governing of value chains in the firms will be critical to successful implementation of the strategy for effective backward and forward linkages. Firms should stay in the marketplace constantly innovating new products and processes and understand the changing behavior of markets to develop long-term customer-centric strategies and efficient value chain models (Esko, Zeromskis, and Hsuan 2013).
Managing stakeholder trust is difficult because there are many different stakeholder groups, each with its own particular needs and perspective. That is, trust is multidimensional, and it’s not obvious which dimension do executives need to focus on when dealing with any particular constituency. The new framework challenges some existing beliefs and sheds light on areas that companies would be wise not to ignore. Indeed, as the authors illustrate, fundamental misunderstandings about stakeholder trust have tripped up corporations such as Coca-Cola, Google, Apple, Delta Air Lines, Mattel, and Sprint. A deeper knowledge of stakeholder trust will help businesses reap numerous benefits, including improved cooperation with suppliers, increased motivation and productivity among employees, enhanced loyalty from customers, and higher levels of support from investors (Pirson and Malhotra 2008).
A social media activist may have a mix of experience with product design, marketing, software applications, and the extended reach of communication. Companies should analyze consumer experience centered on social interactions to develop community-linked marketing approaches. Such consumer connectivity helps the managers stay on social media platforms, such as a Facebook page and work with the social media account management, social advertising, and social media campaign management, that are the typical consumer-centric marketing tasks for a company. As the social networks are growing fast and gaining the psychodynamics, there emerges a need for a new executive level as social marketing strategist, who can fully embrace the focus on social marketing. Companies should develop social media strategies on the basis of Hub and Spoke model, where a hub is located around social media. The hub may be led by the corporate social strategist to monitor the core communication movements within the networks and draw a framework of marketing strategy integrating consumer attributes and corporate policy. The hub marketing framework need to be further converged with the functionaries accountable in various departments of the company that denotes spokes in the model.
Social media enveloping several consumer networks across the regions in the world has rapidly gained share and attention among mass consumers and companies, often at the cost of traditional media. Hence, most companies have started to redefine key aspects of their marketing mix, considering the activities of the informal networks of consumers. With advertising and online word of mouth competing for shrinking marketing budgets, many companies regard having an active presence in social media as a viable alternative to traditional advertising. A comparison of advertising and word of mouth shows that social media follows rules that are very different from traditional advertising. Social media can start conversations or build brand recognition, but the results are much more difficult to predict or measure (Armelini and Villanueva 2011).
Social technologies are forcing marketers to form new kinds of relationships with customers, but traditional brand management models are different for these new kinds of interactions between companies and consumers. Brand marketers need to update their models to include new-media mentors, who are digitally knowledgeable executives and intend to move fast, understand how to integrate social media into corporate communications, and can organize cross-functional teams (Spenner 2010). The pharmaceutical industry provides a good example of interventions of social networks in marketing. It has been observed that social networks play a key role in doctors’ prescribing choices. Doctors tend to be slow to recommend a drug despite being proven effective, and patients and pharmacists often wait until the doctors they trust start doing so. Studies have shown that physicians were much more likely to prescribe the diabetes medication Januvia if they had Januvia adopters in their networks. Social connections can also work the other way, turning physicians away from certain drugs. Sales of Pfizer’s cholesterol drug Lipitor declined quickly when a generic penetrated the U.S. market. Consequently, interconnected doctors switched their prescriptions accordingly. The drug industry is an apparent place for the activists of social networks to comment on drugs, doctors, and hospitals (Miller and Christakis 2011).
Most consumer-centric companies in the postglobalization era are leaning toward decentralization of organizations and declining operational boundaries, because coordination increasingly occurs through networks of informal relations. As such, firms are moving to various network forms through joint ventures, alliances, and other collaborative relationships, executives generally pay little attention to assessing and supporting informal networks within their own organizations. Social network analysis is valuable in facilitating collaboration among various strategic groups in the company such as leadership networks, strategic business units, new product development teams, communities of practice, joint ventures, and mergers. By making informal networks visible, social network analysis helps managers systematically assess and support strategically important collaboration (Cross, Borgatti, and Parkar 2002).
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1 Maquiladora is a small and medium-scale enterprise engaged in manufacturing operation, where contracted companies import raw material and equipment on a duty-free, cross-border, tariff-free basis for assembling, processing, or manufacturing their predesigned products. Upon manufacturing, these companies export the products either back to the country of origin or to other destinations through the export agencies. Such practices are also followed in the emerging markets that have identified special economic zones and export-oriented units in their countries.