Harvard Case - Destron Petroleum Services: Bidding for a Project
"Destron Petroleum Services: Bidding for a Project" Harvard business case study is written by Saadia Irfan. It deals with the challenges in the field of Accounting. The case study is 6 page(s) long and it was first published on : Jun 8, 2018
This case study solution recommends that Destron Petroleum Services (DPS) should carefully analyze the project's financial viability, considering all associated costs, risks, and potential returns. DPS should develop a comprehensive bidding strategy that aligns with its long-term growth strategy and focuses on maximizing profitability while maintaining a competitive edge. This strategy should incorporate a robust cost accounting system and activity-based costing to ensure accurate cost estimations and pricing decisions. Furthermore, DPS should diversify its revenue streams by exploring new markets and services, thereby mitigating the risks associated with relying solely on large-scale projects.
2. Background
Destron Petroleum Services (DPS) is a privately held company specializing in providing services to the oil and gas industry. The company is currently facing a decision regarding a large-scale project bid, which presents both significant potential revenue and substantial risks. The case study focuses on the internal deliberations within DPS, particularly the tension between John, the company's founder and CEO, who is eager to secure the project, and David, the CFO, who is concerned about the financial implications and potential risks.
3. Analysis of the Case Study
This case study highlights several key issues that need to be addressed:
- Financial Analysis: DPS needs to perform a thorough financial analysis, including a detailed cost breakdown, risk assessment, and return on investment (ROI) calculation. This analysis should consider factors such as the project's duration, resource requirements, potential delays, and potential for cost overruns.
- Cost Accounting: DPS should implement a robust cost accounting system that incorporates activity-based costing (ABC) to accurately track and allocate costs. ABC can help DPS identify and manage cost drivers, leading to more accurate pricing and better decision-making.
- Pricing Strategy: DPS needs to develop a pricing strategy that considers its cost structure, market competition, and the project's risk profile. The company should aim for a price that maximizes profitability while remaining competitive.
- Growth Strategy: The project's potential impact on DPS's long-term growth strategy needs to be considered. The company should assess whether this project aligns with its overall business goals and whether it will contribute to sustainable growth.
- Risk Management: DPS should identify and assess the various risks associated with the project, including financial risks, operational risks, and regulatory risks. The company should develop a comprehensive risk management plan to mitigate these risks.
4. Recommendations
- Conduct a Comprehensive Financial Analysis:
- Develop a detailed cost breakdown, including direct costs, indirect costs, and overhead costs.
- Analyze the project's timeline and potential for delays, considering the impact on costs and profitability.
- Assess the project's financial risks, including potential cost overruns, revenue shortfalls, and regulatory changes.
- Calculate the project's ROI and NPV to determine its financial viability.
- Implement Activity-Based Costing (ABC):
- Develop an ABC system to accurately track and allocate costs associated with the project.
- Identify cost drivers and analyze the impact of different activities on costs.
- Use ABC data to refine pricing strategies and improve cost management.
- Develop a Competitive Bidding Strategy:
- Analyze the competitive landscape and identify key competitors.
- Determine a pricing strategy that balances profitability with competitiveness.
- Consider offering value-added services or innovative solutions to differentiate DPS from competitors.
- Diversify Revenue Streams:
- Explore new markets and services to reduce dependence on large-scale projects.
- Develop a strategic plan for diversifying DPS's revenue base.
- Consider expanding into new geographic markets or offering complementary services.
- Enhance Risk Management:
- Identify and assess potential risks associated with the project.
- Develop a comprehensive risk management plan that includes mitigation strategies and contingency plans.
- Establish clear lines of responsibility for risk management within the organization.
5. Basis of Recommendations
These recommendations are based on the following considerations:
- Core Competencies and Consistency with Mission: The recommendations align with DPS's core competencies in providing services to the oil and gas industry. They also support the company's mission to deliver high-quality services while maintaining profitability.
- External Customers and Internal Clients: The recommendations consider the needs of external customers, such as the client for this project, while also addressing the concerns of internal clients, such as the CFO.
- Competitors: The recommendations acknowledge the competitive landscape and emphasize the need for a competitive bidding strategy.
- Attractiveness ' Quantitative Measures: The recommendations emphasize the importance of financial analysis, including ROI and NPV calculations, to assess the project's attractiveness.
- Assumptions: The recommendations explicitly state assumptions, such as the accuracy of cost estimates and the availability of resources, to ensure transparency and informed decision-making.
6. Conclusion
By following these recommendations, Destron Petroleum Services can make a well-informed decision regarding the project bid while ensuring long-term financial stability and growth. A comprehensive financial analysis, robust cost accounting system, and a competitive bidding strategy will allow DPS to maximize profitability and mitigate risks. Diversifying revenue streams will further strengthen the company's position and contribute to its long-term success.
7. Discussion
Alternatives:
- Rejecting the bid: This option would avoid the potential risks associated with the project but would also miss out on potential revenue.
- Accepting the bid without a thorough analysis: This option could lead to financial losses and damage to DPS's reputation.
Risks:
- Cost overruns: The project could experience unforeseen costs, potentially impacting profitability.
- Delays: Delays could extend the project timeline, increasing costs and potentially impacting revenue.
- Regulatory changes: Changes in regulations could impact the project's feasibility or profitability.
Key Assumptions:
- The cost estimates are accurate and reliable.
- The project timeline is realistic and achievable.
- The regulatory environment will remain stable.
Options Grid:
| Option | Advantages | Disadvantages |
|---|---|---|
| Accept the bid with a comprehensive analysis | Potential for significant revenue, strengthens DPS's position in the market | Risk of cost overruns, delays, and regulatory changes |
| Reject the bid | Avoids potential risks, preserves financial resources | Misses out on potential revenue, may signal a lack of ambition |
| Accept the bid without a thorough analysis | Quick decision, potential for quick revenue | High risk of financial losses, potential damage to reputation |
8. Next Steps
- Develop a detailed project proposal: This proposal should include a comprehensive financial analysis, a detailed cost breakdown, and a risk management plan.
- Implement activity-based costing: This should be done in a timely manner to ensure accurate cost tracking and allocation.
- Negotiate with the client: DPS should negotiate a contract that reflects the project's risks and rewards.
- Monitor project progress: DPS should closely monitor the project's progress to ensure it stays on schedule and within budget.
- Continuously evaluate the project's financial performance: DPS should regularly assess the project's profitability and make adjustments as needed.
By taking these steps, Destron Petroleum Services can make a well-informed decision regarding the project bid and ensure its long-term success.
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Case Description
Destron Petroleum Services (DPS) was an oil drilling contractor that had just won a bid to provide a land drilling rig on a rental basis to a major oil producing company in Pakistan. The case outlines how the company projected all of its costs related to the project and finally quoted a price for the project to the client.
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