Monitoring and Controlling the Project
This chapter addresses issues related to monitoring and controlling the project. Monitoring refers to collecting, recording and reporting information about the project while controlling uses this information to bring actual performance into agreement with the plan. The chapter begins with an overview of the plan-monitor-control cycle. Emphasis is given to the importance of designing the planning-monitoring-controlling process. Next the issue of data collection and reporting is discussed including the topics of data collection and types of data, data analysis, types of reports, and meetings. Following this, the earned value approach is presented. As the chapter notes, earned value represents a way to capture both in-process performance and cost on a certain date as measured against budget or schedule. Finally the chapter concludes with a discussion of project control, the design of the control system, and scope creep.
Cases and Readings
Some cases appropriate to the subject of this chapter are:
Harvard: 9-193-013 American Airlines: The InterAAct Project (A) and 9-193-014 (B) This 17-page (and 11-page) set of cases describes the design and implementation of an extensive knowledge information system project. The implementation is in trouble in the A case and must be reassessed. The (B) case describes the outcome of the successful implementation. (A) 17 page teaching note (5-194-095) is available.
Western Ontario: 9-91-E009 Riverview Children’s Hospital This 14-page case concerns an upcoming audit while in the middle of an information system changeover that is in difficulty. The manager has to decide whether to go ahead with the implementation or wait until the audit is over, either alternative having serious negative consequences.
Harvard: 9—681-091 Corning Glass Works: The Z-Glass Project This excellent, 15-page case shows how a project can get into trouble on many fronts: strategically, technically, and behaviorally. Involves a turn-around project for a new production process that is getting worse instead of better. Involves issues of monitoring, control, strategy, organization, and behavior. Lots of data to work with. A 14 page teaching note (5-683-045) is available.
Harvard: 9-396-312 BAE Automated System (B): Denver International Airport Baggage-Handling System This 3-page follow-up to the (A) case (see Chapter 1) describes the control actions finally taken to address the airport baggage system problem. A 32 page teaching note for the (A) and (B) cases (5-399-099) is available.
Some readings appropriate to the subject of this chapter are:
T.L. Fox et al. Tools of the Trade: A Survey of Project Management Tools (Project Management Journal, September 1998). The article reports the results of a survey of PMI members concerning the computer tools they employ. The results identify the tools they use, their level of use, what they are used for, satisfaction with the tools, training received on the tools, and the adequacy of the tools. Software beyond project management packages are included in the survey.
H.J. Thamhain et al. Criteria for Controlling Projects According to Plan (Project Management Journal, June 1986). This article reports on a study of hundreds of project managers and the challenges and barriers they perceived in successfully controlling projects. The potential problems leading to schedule slips and budget overruns are identified and compared to the directly observed reasons. Also, the general manager’s reasons for the slips and overruns are compared to the project managers’ reasons and significant differences are noted. Last, the criteria that seem to be important to control are listed and discussed.
The value of this article for managers is the insight it gives concerning what needs to be controlled to bring about successful projects. The major factors are defining a detailed project plan that includes all key project personnel, reaching agreement on the plan among the project team members and the customer, obtaining the commitment of management, defining measurable milestones, and detecting problems early.
Answers to Review Questions
1. Why can’t the PM use the organization’s current information system for project monitoring and reporting?
There are two main reasons why the PM can’t use the organization’s current information system for project monitoring and reporting:
o These systems are often set up to report information at certain specific periods (e.g., the end of the month or quarter). The information required to control a project often does not conform to such rigid timetables.
o The organization’s system is usually structured to deal with the organization’s standard divisions, and departments. Projects rarely conform to these boundaries.
2. What does it mean to say that project monitoring and control are on the opposite sides of project selection and planning?
o Project selection and planning specify the goals for the project. The plan also details what activities and schedule must be met; things the project manager must control.
o Project monitoring and control seek to ensure that the project is making progress toward the achievement of these goals.
3. The monitoring system is the direct connection between project planning and control. Why is this true?
Project planning specifies the activities, resource usage, and the goals for the project while control seeks to ensure that the project is making progress toward the achievement of these goals.
Monitoring is concerned with collecting and reporting information. As such, monitoring connects planning and control in that the plan specifies the types of data that need to be collected and the reporting becomes the basis of control.
4. Why is it probably a good idea to avoid periodic reports, except in specific cases such as reports tied to the organization’s accounting system?
It is probably a good idea for two reasons:
o It is more appropriate to let schedules, milestones, scope changes, problems, and the project team’s general need for information dictate the timing of reports.
o There is a tendency for recipients to ignore periodic reports.
5. Aside from the obvious benefits for project control, what other benefits might result from a good project reporting system?
Other benefits from a good project reporting system include:
o Less wasted time reporting information that is not used.
o Better informed team members and stakeholders, and
o A better record of the project that can be used to facilitate future project planning.
6. If the calendar should not dictate reporting frequency, what should?
The need for information should dictate the report frequency. For projects, it is more appropriate to let milestones, scope changes, problems, and the project team’s general need for information dictate the timing of reports.
7. Using earned value analysis, explain how the total cost of a partially completed can be estimated.
The total cost of a partially completed project can be estimated by dividing the amount spent to date by the estimate of the project’s percentage completion. However, in general, this is not an effective way to estimate the cost of a partially completed project.
A considerably more accurate approach is apt to be that of summing the costs of completed activities and a knowledgeable guess on the cost incurred on activities underway.
Suggested Answers to Discussion Questions
8. When making an estimate for the time and cost to execute a project, should the time and cost required to develop the planning, monitoring, and controlling systems be included as well? Should the actions required to monitor and control a project be included in the project’s action plan or WBS?
Yes, the time and cost required to develop the planning, monitoring, and controlling systems should be included in the project’s budget. Similarly, the actions required to monitor and control the project should be included in the WBS. These are essential tasks for the successful completion of the project.
9. The chapter includes an example of a firm where the PM dispensed with all the planning formality because no one ever looked at it anyway. What did the PM think the purpose of such planning was in this firm? What should the firm do in the future to correct this problem?
It appears the PM in this case believed that project planning was not important since no one looked at it. Therefore, the PM likely believed that project planning was a waste of time that distracted him/her from more important work. The result was a major loss of business.
To correct this situation the company needs to:
o Emphasize the importance of planning to the ultimate success of the project. This may require formal training programs, perhaps including case studies that demonstrate the types of problems encountered in projects that were inadequately planned.
o Ensure that management become more involved in project planning and review project plans.
o Modify the system used to review the performance of project managers to include project planning.
10. In such fields as psychology and sociology, verbal characterizations are frequently used to show the amount of some factor. How might one set up such a measure for a project management characteristic such as the “energy” of the project team?
Team members could be asked to score on a 5 or 7 point scale the extent of their agreement/disagreement to statements such as:
o I look forward to coming to work each day.
o I find facing and resolving new challenges stimulating.
o I often take immediate action when I discover a problem.
11. How might one measure team morale?
There are a wide variety of instruments in the organizational behavior literature available for accessing team morale. Again, using a 5 or 7 point scale, team members could be asked to rate the extent of their agreement/disagreement to statements such as:
o I enjoy working with my fellow team members.
o I have confidence that our project team can satisfactorily resolve any issues that may arise.
o I would welcome the opportunity to be assigned to another project team.
12. How can the PM circumvent the problem that the monitoring system can only report on activities that have passed, thus telling the PM what has already gone wrong but not what will go wrong in the future?
One way the project manager can use the monitoring system to predict future problems is to extrapolate trends in the data to the future and then compare this projection with the plan. Indeed, a better use of the monitoring system would be to use the information to anticipate future problems rather than reacting to them once they occur. Along these lines, the monitoring system could also include “lead indicators” as symptoms of problems.
13. How might using electronic media to report project information lead to problems with control?
There are two main ways the use of electronic media could lead to problems with control:
o The PM spends more time managing the electronic media (e.g., the project management software) than actually managing the project.
o The speed that information can be transmitted can create problems. For example, an inaccurate entry could immediately trigger an exception report causing team members to shift their focus to an erroneous or irrelevant issue.
14. Explain how the earned value chart captures all three objectives of a project: performance, cost, and schedule.
A cost variance is calculated as the difference between Budgeted Cost of Work Performed (BCWP) and the Actual Cost of Work Performed (ACWP). If the ACWP is larger than the BCWP, the variance is negative indicating that more was spent for the work performed than was budgeted. The schedule variance is calculated as the difference between the BCWP and the Budgeted Cost of Work Scheduled (BCWS). A negative schedule variance indicates a behind schedule situation. In terms of performance, the earned value chart indicates whether progress is up to expectation, the “baseline” planned for this point in time.
15. Why isn’t there an earned value reporting convention that allows progress on a task to be credited when the task is half completed? Wouldn’t this be more accurate than giving credit only when the task is fully completed?
It would be if, and only if, there was a reliable way to estimate the 50% completion point.
Note: The answer to Question 7 notes a better way to proceed with an in-process cost estimation.
16. When would spending and schedule variances be more informative than ratios? When would ratios be better?
o Spending and scheduling variances are more informative when trying to understand the in-process performance for a given project at a particular point in time.
o Ratios are more informative when trying to compare the performance across projects, project managers, or the progress of a project over time.
17. How should a PM reconcile the dual purposes of control: conserving resources and regulating results through the use of resources?
The bottom line with control is that you don’t want the costs of the control systems to exceed the benefits.
18. Identify situations where each of the following control tools might be useful: earned value charts, benchmarking, critical ratios, control charts, variance analysis, trend projections.
o Earned value charts are useful for monitoring the progress of in-process projects.
o Benchmarking is useful in the project planning phase in helping determine project goals and resource requirements. Benchmarking can also be used to access an organization’s project management systems and procedures.
o Critical ratios, control charts, and variance analysis are also useful for monitoring the progress of in-process projects. In particular, the critical ratio is a single measure that includes performance, cost and schedule. Plotting the critical ratio on a control chart provides opportunities to spot patterns that may lead to problems.
o Trend projections can be performed on any of the data collected by the monitoring and control system to estimate future values of the data and take corrective actions before the situation becomes a serious problem.
19. How might the existence of a change control system affect the behavior of a client, or a project team member, who desires to make a change in the project?
By adding greater scrutiny, a change control system may reduce the number of change requests, particularly casual requests for changes.
20. “In order to manage for overall project success, control must be exercised at the detailed work level for each aspect of project performance or no significant change will occur.” Does this mean that the PM should micromanage the project? If not, what does it mean?
It does not mean that the project manager should micromanage the project. Rather, it suggests that each project team member needs to monitor and control his or her own work.
21. Select a hypothetical project (e.g. designing and building a Web site, installing a new machine in an assembly line, or conducting a major inspection and repair of a passenger aircraft), and briefly describe an example of how each of the following types of control data might be used for project control:
(a) Frequency counts
(b) Raw numbers
(c) Subjective numeric ratings
(d) Indicator and surrogate measures
Designing and building a new Web site, gave the following types of data control:
(a) Frequency counts: Spelling errors per page, number of incorrect links, pages that take longer than 30 seconds to load.
(b) Raw numbers: Time for pages to download, size of graphic files, number of lines of code.
(c) Subjective numeric ratings Quality of webpages, ease of navigation, search capabilities.
(d) Indicator and surrogate Time spent at a site could be used as a surrogate
measures for user satisfaction.
22. Of all the rules for conducting meetings, the most difficult to enforce is the injunction against the weekly (or daily) standard project progress report (the “show and tell” meeting). Why is this, and under what circumstances do you think such meetings are justified?
One reason it is hard to not have the weekly progress meeting is that people like to (a) report on the aspect(s) of the project with which they are familiar and (b) demonstrate what they have accomplished.
The weekly progress meeting might be appropriate early in the project when coordination is required but team members are still getting to know each other and have not had an opportunity to develop informal communication channels.
23. If your project management software calculates earned value, or any other standard item to be reported, differently than the Project Management Institute suggests, should you deal with this matter in management reports? If so, how?
The important thing about variances is that you understand what they mean and interpret them correctly in reports. Whether the sign is positive or negative when the cost is over budget or behind schedule is not that important as long as you understand what the calculation is telling you. Being able to properly interpret the variance and act accordingly is the critical task.
Therefore, making a point in a report to note that the software package calculated a specific item differently that the standards set by the PMI is not that important, interpreting the number correctly and discussing the implications are.
24. Logically, when using earned value data in the critical ratio formula, should the “budgeted” cost be the planned value or the earned value? What problems occur with each choice?
The critical ratio (CR) is the product of the schedule ratio times the cost ratio:
CR = (actual progress/scheduled progress) x (budgeted cost/actual cost).
The budgeted cost can be either the planned value or the earned value. If the planned value (i.e., the budgeted cost of the work scheduled) is used then it may be identical to actual cost (giving a value of 1) and thus may suggest that the project is on budget. However, if the earned value (i.e., the budgeted cost of the work performed) is used then it may be considerably less than 1 showing that considerable work still needs to be done on the project resulting in a cost overrun.
Solutions to Problems
25. The project in this problem is in its 26th week.
Actual cost of work performed (ACWP) = $270,000
Budgeted cost of work performed (BCWP) = $272,000
Budgeted cost of work scheduled (BCWS) = $261,000
Cost/spending variance = BCWP – ACWP = $272,000 – 270,000 = $2,000
Schedule variance for the project = BCWP – BCWS = $272,000 – 261,000 = $11,000
Schedule Performance Index (SPI) = BCWP/BCWS = $272,000/261,000 = 1.042
Cost Performance Index (CPI) = BCWP/ACWP = $272,000/270,000 = 1.007
In summary, less has been spent than the baseline plan, and given what has been spent, more progress has been made than was anticipated.
26. In this problem, the project has just completed the 87th item on its action plan.
Actual cost of work performed (ACWP) = $156,000
Budgeted cost of work performed (BCWP) = $162,000
Budgeted cost of work schedule (BCWS) = $168,000
Cost/spending variance = BCWP – ACWP = $162,000 – 156,000 = $6,000
Schedule variance = BCWP – BCWS = $162,000 – 168,000 = -$6,000
Schedule Performance Index (SPI) = BCWP/BCWS = $162,000/168,000 = 0.964
Cost Performance Index (CPI) = BCWP/ACWP = $162,000/156,000 = 1.038
In this case, less has been spent than the baseline plan. However, given what has been spent, less progress has been made than should have been.
27. The project being considered in this problem is in its 6th week.
Actual cost of work performed (ACWP) = $400 + 180 + 300 + 400 + 200 = $1480
Budgeted cost of work performed (BCWP) = $300 + 200 + 250 + .2(600) + .2(400) = $950
Budgeted cost of work scheduled (BCWS) = 300 + 200 + 250 + .8(600) + .5(400) = $1430
Cost/spending variance = BCWP – ACWP = $950 – 1,480 = -$530
Schedule variance = BCWP – BCWS = 950 – 1,430 = -$480
Schedule Performance Index (SPI) = BCWP/BCWS = $950/1,430 = 0.664
Cost Performance Index (CPI) = BCWP/ACWP = $950/1,480 = 0.642
In this instance, more has been spent than the baseline plan and, given what has been spent, less progress has been made than should have been.
Critical ratio (CR) = (BCWP/BCWS)(BCWP/ACWP) = ($950/1430)($950/1480) = 0.426
Budget at completion BAC) = $300 + 200 + 250 + 600 + 400 = $1,750
Estimated (remaining cost) to completion (ETC) = (BAC – BCWP)/CPI = ($1750 – 950)/0.642 = $1246.11
Projected (total cost) estimated at completion (EAC) = ETC + ACWP = $1246.11 + $1480 = $2726.11
28. This assignment involves repeating problem 26 using MSP.
Students should begin by inputting the original planned project data into MSP’s entry table as it appears in the problem. Only the activity names, predecessors, durations, can be entered in the Entry table.
The Gantt chart would look as follows:
The budgeted cost data is entered using the Cost Table. To enter this data you select the View menu, then Tables, then select Cost from the drop down list. Enter the budgeted cost information under the Fixed Cost section of the table. Fixed costs are assigned by activities as opposed to by resources. This problem is concerned about a cost of activity not a resource cost. The table will look as follows:
Once the original data is in the action plan format, the students should save the Baseline data so that a comparison to actual can be calculated by MSP. To do this you need to go to the Tools menu, select Tracking, then select Save Baseline, then click OK so that you are saving the baseline for the entire project.
Once the baseline has been saved, students need to enter the actual data provided in the problem. You next need to create a table to enter the actual costs and percent complete. By default MSP automatically calculates actual costs based on the percent an activity has been completed. In this example we need to turn off this feature. To do this you must select the Tools menu, then the Options line, then you select Calculations Tab. Next you deselect the option “Actual costs are calculated by MSP”. Once the automatic cost calculation is turned off, you select Table from the View menu and then select the Tracking table from the drop down menu to enter the information that you have on actual costs and percent complete. Enter the information that is provided in the case. The software will calculate the rest. Your spreadsheet/table should look as follows:
Note: The start and finished dates will be based on the dates that you start the project, in this example the project was started on January 15, 2001. If you choose not to enter a start date, MSP will default to using “today’s date.”]
Once you have entered the actual data, MSP will calculate the information needed to answer questions #27 based on the date of comparison, in this problem, that is the end of the sixth week. Using the start date of January 15th, the end of the sixth week would be February 23, 2001. (No matter what your start date is, it is easy to see in MSP when the end of the sixth week would be.)
You must first enter that date for the comparison, to do that you go to the Project Menu, select Project Information and enter the date under Current Date. Next, you are ready to view the earned value information for this project. Select the View menu, then Table, then More Tables, from this drop down menu select Earned Value table and click Apply. The following is the chart that should appear:
By adding or subtracting the totals of the columns you can determine the total project variances as outlined in Problem #26. Note: Please recall that MSP reverses the calculations.
Incidents for Discussion Suggested Answers
St. Margaret’s Hospital
Question: what should Mary Lynn do?
Mary Lynn needs an aggregate measure of project performance for the three projects in question. An earned value analysis would be an effective tool to see if the projects are on schedule, behind, etc. She would be able to determine the expected completion dates for the projects. Milestones should also be built into the project plans so that she could measure clearly along those progress points, for each project.
Stoneworth Paving Company
Question: if you were Preston, what characteristics would you be looking for in a new control system?
For the future, Preston needs a control system that will better identify and report on supplier constraints and dates, staffing, and quality. If the project is to be expedited in order to catch up with the schedule, a control system that is oriented toward a high-pressure, time-critical projects will be required. Monitoring of the proper measures will also be critical.
Will a new control system be adequate for the problem? Explain.
A new control system is needed, but will not solve all of the problems, or keep this project from being late.
Question: what do you suggest Jeremy Smith do?
Jeremy needs to be sure control systems for monitoring the project are incorporated into the plan. He should ask his project team to develop additional steps and processes throughout the life of the project to include more than an update of status. The controls should include a method to accurately report duration changes from the original estimate, resource utilization changes, etc. An earned value analysis during the project would be appropriate. This type of analysis would allow the team to make adjustments to the steps in the action plan in a timely fashion so that the entire project is not affected. This would also allow Alex to monitor the project more closely.
The company should also develop a change control system for their work with clients. Such a system will minimize the impact of the scope creep that appears to happen at J. Z. Smith. They need a formal process to deal with changes to the original project plan. Jeremy can design this system to include his input. He can make sure that the budget and estimate of completion dates are adjusted if he and the client both agree on the cost and duration of any changes the client wants in the scope of the project.
Cable Tech, Inc.
Question: Does the monitoring and control method seem adequate?
No, the monitoring and control method is not adequate. Jean will not be able to take effective action from headquarters, being removed from the site.
What are the potential problems?
Among some of the potential problems:
o Jean is located at headquarters … and any delays in getting reports to her will leave too long a period between occurrence of the attendance problem and a response.
o The policies themselves are also in question. There is no flexibility in the policies for differences in reasons between sites. In many cases the problem may be the company’s fault, beyond the control of the employee.
o The employees were never consulted on the design of these policies and may reject their enforcement.
o Although punishment is provided for, rewards for good attendance are not recognized so no positive motivation is being considered.
Additional Incidents for Discussion
Carver Insurance Company
Alex Franks joined Carver Insurance Company eight months ago. He is an experienced management information systems executive who has been given the task of improving the responsiveness of Carver’s information systems group to the end-user. After several months of investigation, Alex felt he understood the current situation clearly enough to proceed. First, approximately 90 percent of end-user requests came to Information Services (IS) in the form of a project, or, more commonly, one step of a project. Accordingly, Alex felt he should initially direct his efforts toward integrating IS’s approach to projects with the company’s formal project management system.
It has been Alex’s experience that most problems associated with IS projects suffer from poor project definition and inadequate participation by the end-user during the system design phase. Typically, the end-user does not become heavily involved in the project until the new system is ready to install. At that point, a great deal of work is required to adapt the system to meet end-user requirements. Alex decided to institute a procedure that put end-user cooperation and participation on the front end of the project. The idea was to define the objective and design of the system carefully, making it consistent with the end-user’s need. If that was done, system implementation would be reasonably simple, rather than the always disturbing initial introduction to the end-user of “his or her new system.”
Alex also recognized that something had to be done to control the programming quality of IS’s output. A more effective front-end approach to IS projects would subject IS managers to more intense pressure to produce results within user’s needs, including time constraints. Alex was concerned that the quality of the IS output would deteriorate under those conditions, especially given the lack of technical expertise on the part of the end-users and outside project managers. To solve this problem, Alex recommended creation of an IS quality assurance (QA) manager who would approve the initial steps of the project and review each additional step. The QA manager would have authority to declare any step or portion of the output inadequate and to send it back to be reworked.
Questions: Is this a good control system for IS? Why or why not? Does it represent a good control point for company projects using IS to accomplish one portion of the project objective? What would be your answer if you were a non-IS project manager?
This is a good control system for improving the user responsiveness of IS but may be unresponsive to the larger needs of the firm, particularly if later activities depend on the completion of IS’s tasks. An external PM would be concerned about the delay on the IS activities as they strive for meeting internal quality requirements.
Suggested Case Analyses and Solutions
St. Dismas Assisted Living Facility -- 5
Teaching Purpose: This installment of the Assisted Living Facility case addresses issues related to project progress meetings and determining how much time has to be made up to get back to the original baseline schedule.
Question 1: What do you think the construction project manager should have done when the Director of Security stopped attending the project meetings?
The construction project manager has set up a very good communications system to keep the project team informed, even if they were not able to attend the meetings. Kyle Nanno should deliver the CEO’s message to the Director of Security, if he does not respond within the deadline date that Kyle sets, Kyle should have Fred and the other members of the project team give their input into the security panel location decision. Fred needs to take appropriate disciplinary action against the Director of Security for not fulfilling his job duties as a member of the project team.
Question 2: Do you think it is an effective communications tool to send the construction project meeting minutes to the ALF steering team and the President? Support your answer.
It is an effective means of communications to send project team meeting minutes on this project to the construction team, especially as the project nears completion and a great number of details need to be followed up on. However, the Steering Team and the President do not necessarily need the level of detail that they are given. If details of a project are provided, most people will want to comment on it and be involved in any decisions that need to be made. If this is not appropriate, then those people should only be provided with information about what directly affects their area and told that their input is important to the success of the project.
Question 3: How much time has to be made up for the original, baseline schedule to be met?
The Gantt chart in the case has been updated as of 4/11/01. The project shows a finish date variance of 14 days. The project as a whole is 14 days behind schedule. They ran 15 days late on Phase 1 of the project. The project was 14 days early on both Phase 2 and Phase 3 of the project.
Question #4: Develop an action plan and draw a Gantt chart for the Parking Lot phase of the project. Answer Fred’s questions.
If everything goes as scheduled the Gantt chart for the Parking Lot construction would look as follows:
If St. Dismus did not hear from the city until May 1, 2001, the Gantt chart would be adjusted as follows: (New end date for the project would be 6/12/01.)
The latest date to be notified by the city to meet the June 15th deadline is May 7th. This would make the end date of the project June 15th.
Question 5: What information does Fred need to make a decision about building a hair salon?
This is an example of scope creep. The building of the hair salon was not in the original project plan. Fred must determine, first if he wants to build a hair salon for residents, he should have the COO and VP of marketing do a complete business plan with a cost benefit analysis/return on investment for this endeavor. After that is done, Fred must determine the impact that this would have on the construction project. He must identify the additional costs, changes necessary to the design and schedule.
Palmstar Enterprises, Inc.
Teaching Purpose: This case provides students with the opportunity to investigate the trade-off of introducing a product late but staying on budget versus increasing the budget to complete the project on schedule.
Question 1: What has a larger impact on Palmstar’s profits, delaying the 2000c’s introduction by 3 months or increasing the project’s budget by 30 percent?
Delaying the launch of the product by 3 months would result in a loss of $18,000,000 (200,000 units $450/unit .2 contribution margin) in contribution to profit and overhead. Adding resources to complete the project on time would increase costs and therefore lower profits by $900,000 (30% of $3 million).
Therefore, not launching the 2000c on time would have a much larger impact on Palmstar’s profits.
Question 2: Are there other factors you would consider in addition to profit?
There are a variety of other factors that should be considered including damage to Palmstar’s reputation and loss of market share. The analysis could also be enhanced had information been available on how rapidly unit prices decline in this market and Palmstar’s cost of capital. With this added information, a discounted cash flow analysis could have been undertaken.
Question 3: What should Palmstar do? Why?
Clearly, Palmstar should spend the extra $900,000 to launch the 2000c on time. This will maximize its profits, help to enhance its reputation, and help preserve its competitive position. There is usually very little to be gained from being late to the market.
Question 4: How generalizable do you think the results of your analysis in this particular case are to other situations?
Companies often focus too much on the added cost of completing a project on time but fail to investigate the benefits of getting a product to the market sooner. The benefits of getting to market sooner increase as the intensity of competition increases, as product life cycles shorten, and as pricing pressure increases. These characteristics are all common in today’s globally competitive marketplace.