The Sonic Cruiser Project - Assignment Example

The Sonic Cruiser Project initiated by Boeing Corporation in the early part of the 21st century was a program that had good potential to generate income on paper. A quantitative or qualitative comparative analysis of the aircrafts specifications and attributes demostrated that this plane had the potential to penetrate the industry and achieve great things. This company fell victim to a thing that occurs many times in the business world, the manifestation of uncertaintly. September 11, 2001 changed the life of American foreever and the world air travel industry drastically. Suddendly the entire metrics for which a capital project used by evaluated were distorted and did not apply to the new economic reality in the aftermath of 9/11. The Sonic Cruiser project was planned under an optimist forecast of the future that did not apply anymore. The management of the company failed to apply the accounting principles of consertivism which stipulates a situation must be evaluated based on the worst possible scenario. The market also underwent other radical changes such as the inclination of airlines of demanding the aircraft industry to move to a phase in which the best plane for them was larger plane with the capacity to carry more passenger in one way trips, while at the same time achieving fuel economy. These characteristic are the opposite of the attributes the Sonic Cruiser offer the customers. There is no way to predict the future, but manager must must tecnquines in risk management in better mitigate the challenges that may lie ahead for a corporation. 1. Boeing noticed a market niche that was not being fulfilled by the airline industry. Market research and many years of experience studying the fads and tendencies in the air travel marketplace allowed the company to create the design of a new midsize airplane model. The Sonic Cruiser was a midsize plane that met the new noise specification standards that would come into effect in 2006 that lowered noise pollution in airports located in residential areas. It traveled at higher altitudes which created a new air pathway not utilize by commercial planes that eliminated air traffic parameters. The plane Sonic Cruiser was also fuel efficient. 2. The challenges at estimating the potential returns of the Sonic Cruiser project were exorbitant and unpredictable. The tragic event of 9/11 created panic in the industry due to record size losses, numerous bankruptcy of large airlines, industry wide year end losses for consecutive years, lower demand for air travel and high level of uncertainty. The technological advances in aeronautics technology allowed the introduction of new models. The larger models with similar or better fuel efficiency numbers that could perform direct trips to anywhere in the world with seat capacity of 500 passengers were a more attractive product that hurt the Sonic Cruiser’s chances of succeeding in a competitive marketplace. 3. A capital project such as the Sonic Cruiser platform requires the use of many managerial techniques to determine the viability of the income generation initiative. Forecasting the market trends that will influence the industry in the future is mandatory. The financial models to accept or reject the project must use time value of money considerations. Models such as net present value (NPV), internal rate of return (IRR) and payback period can determine if the project meets the return on investment requirements of the firm considering the cost of capital of acquiring funds of the corporation. 4. The planning phase and viability report which including initial marketing cost to introduce the concept to the general public was a good decision since at the time the project seem to have lots of potential. The high R&D requirements as well as external forces caused the project to become a sunk cost for the company. Questions page 150 1. Financial model such as NPV and IRR which implement time value of money by discounting future cash flows against an interest rate known as the discount rate that represents the required return of return provide the advantage of considering inflation and the devaluation of money due to inflation. The models have the weakness of not being able to consider qualitative factors such as goodwill that could make a project more attractive. 2. A real option approach is more suitable for project in which the risk factor is high such as petroleum projects, projects with a high capital requirement, and those that involved a virgin technology. The Sonic Cruise project due to the 10 billion dollar R&D requirement is a candidate for this approach. 3. The combined use of qualitative and quantitative techniques provide analyst with the ability to better dissect any business problem or beneficial alternative. The reason the use of both methods provides better result is that qualitative techniques can analyze certain things such as market trends or product profiles which quantitative techniques can not achieve alone due to its numerical focus. 4. A development project I’m familiar with is the WRM project. This project consisted on developing a new remote airplane model with the enhance attribute of being cash proof. This project required extensive market research to determine if the marketplace would be willing to pay a premium for such a characteristic. Quantitative research was needed to forecast the demand for the product. 5. Different methods to study a project can yield different result since each method is designed to test a particular business factor. For example a marketing plan is good to determine the type of investment required to achieve a particular sales goal in the near future. The plan may not be able to determine the future R&D requirement of the company since its focus is limited to one aspect. In finance the payback period method does not consider TVM, thus the NPV method can have a contradictory recommendation of acceptance than the lather. Questions page 171 1. Many times firms are not able to achieve a higher level of growth because they lack certain attributes that they do not have and can not afford. In order to neutralize this constraint a firm must find a secondary agent to provide the solution. For example if a company does not have the marketing expertise to launch a top notch ecommerce operation joining forces with a high tech company who specializes in internet related services can be extremely beneficial. 2. There are different collaboration modes such as joint ventures, alliances, licensing, outsourcing, partnerships and collective research associations that are geared to provide different solution. Each business scenario must be analyzed to determine the right option. The optimal alternative strategic choice depends chosen should consider factors such as desired level of involvement with the second party, the size of the project, bargaining power and specific necessities of the parties negotiating the deal. 3. An example of a collaborative agreement between two corporations is the Papyrus Australia Ltd. (PPY) and Sage Automation strategic alliance. PPY is a company that invented a new form of paper called banana ply paper. The small firm need manufacturing expertise in order to design a production layout to mass produce its product effectively to optimize productivity. The firm entered into a strategic alliance with Sage Automation on October of 2006 to acquire the desired expertise with investing their liquid assets or lending capacity (Papyrusaustralia, 2008). Sage obtained the benefit of landing a lucrative contract that will generate future income streams for the company. 4. The best governmental structure is a location with a democratic political system and an open economic structure in which competition is not hinder and the infrastructure of the place complies with the requirements for productivity. The specific international expansion strategy depends on the nature of the business proposal. Strategic alliance obligate firms to interchange equity holdings, but other options such as strategic alliance can be negotiated under flexible terms. References Papyrusaustralia.com.au (2008). 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