Focussed growth : the development of a system to rank and prioritise new capital projects of mining companies
Thesis (MBA)--University of Stellenbosch, 2010.
With limited financial and management resources companies cannot afford to spend resources on every growth opportunity that presents itself, and must therefore continuously rank potential opportunities in order to focus its resources and efforts on the most valuable opportunities. The aim of this study is to develop a system to rank and prioritise new capital projects of mining companies, and specifically Exxaro, which will allow the company to focus its growth efforts on the most valuable opportunities. The literature study firstly examines the use of portfolio management, and particularly the CFA Investment Management Process for ranking investment opportunities. Secondly, various methodologies utilised in the ranking of R&D projects are investigated, providing a guideline for terminology and steps to be used in a capital project ranking system. The project development cycle is also investigated in order to understand the impact of ranking projects that are in different stages of development. Lastly, the utilisation and merits of different financial measures and multi-criteria decision analysis techniques is examined. The literature study emphasised the following principles: Portfolio management is a very structured and formalised process for matching investments with the strategic objectives of an individual or company. The formalised nature of the process ensures that there are clear direction and rigorous criteria for decision making regarding investments, which in turn ensures that resources are spent only on robust investment opportunities. The ranking systems for Research and Development projects emphasised that a ranking system should contain multiple perspectives and criteria in order to comprehensively evaluate all aspects of investment opportunities, but that these perspectives and criteria should not duplicate or overlap in terms of measuring a certain aspect of an opportunity. When rigorous front end loading is applied in the project development process, there is sufficient information to compare and rank projects in different stages of the project development cycle. The financial criteria form a very important part of the ranking criteria and there are various financial criteria utilised to measure the merits of a project. While there are pros and cons to the use of certain criteria, companies should acknowledge and understand the shortcomings of each criteria, the financial aspect of a project measured by each criteria, and ensure that there is no duplication while it utilises the criteria that is well understood and accepted throughout the company. Multiple criteria decision analysis is a comprehensive and structured decision making process which requires the focussed participation of personnel involved in the decisions. The structured process provides a better understanding of the decision to be made, a means to clarify the decision and its implications and the stimulation of discussion and sharing of ideas about the decision and its context. A second part of the research entails qualitative research where interviews were held with four senior mining executives in order to utilise their experience with project ranking systems. The knowledge and understanding gained from the literature study was used to guide the interviews and adapt conversations to specific issues and different points of view. The focus of the interviews was not to obtain statistical data, but rather on having strategic conversations about how project ranking can and should be applied, and to extract inputs from the experience of the interviewees on the design of a ranking system. Findings from the interviews included an emphasis on the importance of guidance from the company strategy in determining perspectives and criteria for project ranking; a requirement to discard unworthy projects as soon as possible via a rigorous filter per commodity; guidance on perspectives and criteria that could be included in the ranking system; the need to firstly rank projects within a commodity before comparing the top projects across commodities; and the need to carefully manage the ranking process in order to ensure that it is included in the annual business process cycle of the company. The knowledge and practical inputs gained from the literature and the strategic conversations were finally applied to Exxaro’s processes and ranking system. Possible reasons for the failure of previous attempts at implementing a ranking system were found to be the lack of a clearly articulated strategy and insufficient involvement of the decision makers in the design of the project ranking system. With the design of a new ranking system, specific perspectives, criteria, filters and templates were designed and a process was suggested to ensure inclusion of the ranking system in the annual business process cycle of Exxaro. In conclusion, a number of suggestions were made for continuous improvement of the project ranking system and its outputs.