Question 1 Case Study 31: Keflavik Paper Company

Question 1case Study 31 Keflavik Paper Companykeflavik Paper Is An Or

Question 1case Study 31 Keflavik Paper Companykeflavik Paper Is An Or

Analyze the case of Keflavik Paper, which has experienced inconsistent project outcomes, including late deliveries, budget overruns, and fluctuating product performance. The underlying issue identified is the company's inadequate project selection process, particularly its reliance on a single screening method, such as discounted cash flow, without considering strategic fit and portfolio management. The case emphasizes the importance of evaluating multiple screening criteria beyond financial metrics when selecting projects. It demonstrates how poor screening methods can impair a firm's ability to manage projects effectively, leading to inefficient resource allocation and suboptimal project outcomes.

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Introduction

Keflavik Paper exemplifies the challenges companies face when their project selection processes are excessively reliant on a single criterion, primarily financial metrics like discounted cash flow (DCF). While DCF provides valuable insights into a project's profitability, dependence solely on this method can overlook critical strategic considerations. This paper explores alternative screening measures that incorporate strategic alignment, risk assessment, and organizational capacity, aiming to enhance project portfolio management and optimize overall performance.

Limitations of Exclusive Use of Discounted Cash Flow

Discounted cash flow analysis is a popular tool for evaluating project viability by estimating future cash flows and discounting them to present value. However, focusing solely on DCF can lead to misguided decisions. For instance, projects with high financial returns might clash with corporate strategy or pose unacceptable risks. Moreover, DCF calculations are sensitive to assumptions about future market conditions and discount rates, which can be uncertain or volatile (Brealey et al., 2020). Consequently, relying primarily on DCF may exclude projects that could offer strategic advantages despite lower immediate financial returns.

Alternative Screening Criteria for Project Selection

To address these limitations, companies like Keflavik Paper should adopt comprehensive project screening frameworks that include multiple criteria:

  1. Strategic Fit: Assess whether the project aligns with the organization's long-term goals and core competencies. Projects that strengthen strategic positioning should receive higher priority (Drucker, 2007).
  2. Risk Assessment: Evaluate potential risks related to market, technical feasibility, and regulatory environment to prevent high-risk projects from consuming disproportionate resources.
  3. Resource Availability: Ensure the organization has the necessary personnel, technology, and capital to execute the project successfully.
  4. Customer and Market Potential: Consider customer demand, competitive landscape, and market growth potential to prioritize projects with high commercial prospects.
  5. Environmental and Social Impact: Incorporate sustainability and social responsibility factors into project evaluation, aligning with corporate values and stakeholder expectations.

Implementing a balanced scorecard approach that integrates both financial and non-financial metrics can improve project selection processes. Such frameworks enable organizations to evaluate projects holistically, reducing the risk of strategic misalignment and resource misallocation (Kaplan & Norton, 2004).

Implications for Effective Project Portfolio Management

Adopting multiple screening criteria supports effective project portfolio management by facilitating better alignment of individual projects with organizational strategy, managing risks proactively, and balancing resource distribution. Organizations can prioritize projects that deliver the greatest strategic value while maintaining flexibility to adapt to changing conditions. Regular portfolio reviews and scoring models based on comprehensive evaluation metrics enhance decision-making, leading to improved project success rates and overall organizational performance (Archer & Ghasemzadeh, 1999).

Conclusion

In conclusion, Keflavik Paper's experience underscores the risk of over-reliance on a singular screening method like discounted cash flow. Incorporating multiple evaluation criteria, including strategic alignment, risk, resource capacity, and market potential, is pivotal to selecting projects that contribute to long-term organizational success. A balanced, multi-criteria screening approach can significantly improve project outcomes and enable more effective project portfolio management, ultimately fostering sustainable growth and competitive advantage.

References

  • Archer, N.P., & Ghasemzadeh, F. (1999). An integrated framework for project portfolio selection. International Journal of Project Management, 17(4), 207-216.
  • Brealey, R.A., Myers, S.C., & Allen, F. (2020). Principles of Corporate Finance (13th ed.). McGraw-Hill Education.
  • Drucker, P.F. (2007). Management Challenges for the 21st Century. HarperBusiness.
  • Kaplan, R.S., & Norton, D.P. (2004). Using the balanced scorecard as a strategic management system. Harvard Business Review, 82(7-8), 72-85.

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