PowerPoint Presentation by Charlie Cook Copyright © 2006 The McGraw-Hill Companies. All rights reserved. THE MANAGERIAL PROCESS Clifford F. Gray Eric W. Larson Third Edition Project Management Chapter 2 Organization Strategy and Project Selection

Copyright © 2006 The McGraw-Hill Companies. All rights reserved. McGraw-Hill/Irwin 2–2 How much are we going to cover?

Copyright © 2006 The McGraw-Hill Companies. All rights reserved. McGraw-Hill/Irwin 2–3 Chapter 2: Organization Strategy & Project Selection Strategy is implemented through projects. Every project should have a clear link to the organization’s strategy.

Copyright © 2006 The McGraw-Hill Companies. All rights reserved. McGraw-Hill/Irwin 2–4 Chapter 2: Organization Strategy & Project Selection Common complain from Project Managers: Where did this project come from? Should I stop working on this project & start on new one? Why are we doing this project? How can all these project be first priority? Where are we going to get the resources to do this project?

Copyright © 2006 The McGraw-Hill Companies. All rights reserved. McGraw-Hill/Irwin 2–5 Common Problem in a Projects There are too many organizations. –Managers cant identify priorities. –Managers cant link it with strategic plan. –This results in poor utilization of organization resources, i.e., people, money & equipment.

Copyright © 2006 The McGraw-Hill Companies. All rights reserved. McGraw-Hill/Irwin 2–6 Common Problem in a Projects Shell water heaters -Too many companies. -There is a missing link. -Too many departments. -Project priorities. Shell Sime Sembawang AVC Engineering GE Engineering Wembly Industry

Copyright © 2006 The McGraw-Hill Companies. All rights reserved. McGraw-Hill/Irwin 2–7 Common Problem in a Projects Shell water heaters -Too many companies. -There is a missing link. -Too many departments. -Project priorities. Sales Engineering Production Purchasing Customers QC

Copyright © 2006 The McGraw-Hill Companies. All rights reserved. McGraw-Hill/Irwin 2–8 Why Project Managers Need to Understand Strategy Old School of Thought: Strategy was considered to be under the purview of senior management. “you cant touch this phenomena” New School of Thought: Recognize project management is at the apex of strategy and operations. Aaron Shenhar “…. It is time to expand the traditional role of the project managers from an operational to a more strategic perspective.

Copyright © 2006 The McGraw-Hill Companies. All rights reserved. McGraw-Hill/Irwin 2–9 Why Project Managers Need to Understand Strategy Two Main Reasons 1.Project managers will be able to make appropriate decision and adjustment. i.e., How project managers respond to a suggestion to design modification to enhance performance? This depends on company strategy. To be a leader or a follower. True stories: Iomega Zip Wall clock. Table fan.

Copyright © 2006 The McGraw-Hill Companies. All rights reserved. McGraw-Hill/Irwin 2–10 Common Serious Mistakes by Managers Focusing on problems or solution with low priority. Focusing only on the immediate customers. Overemphasizing technology. Trying to solve every customer issues. Engaging in a never-ending search for perfection, i.e. original polo shirt.

Copyright © 2006 The McGraw-Hill Companies. All rights reserved. McGraw-Hill/Irwin 2–11 Why Project Managers Need to Understand Strategy Two Main Reasons 2.To be effective project advocates. Project managers need to be able to demonstrate to senior management how their project contribute to the firm’s mission. Fully understand the project well so that they are in sync with the management people.

Copyright © 2006 The McGraw-Hill Companies. All rights reserved. McGraw-Hill/Irwin 2–12 The Strategic Management Process Strategic management is the process of assessing “what we are” and deciding and implement “what we intend to be and how we are going to get there” Strategy describes how an organization intends to compete with the resources available in the existing and perceived environment.

Copyright © 2006 The McGraw-Hill Companies. All rights reserved. McGraw-Hill/Irwin 2–13 Two Major Dimension of Strategic Management 1.Responding to changes in the external environment. Allocating scarce resources of the firm to improve its competitive position. Need constant scanning of the external environment. 2.Internal response to new action program aimed to enhanced competitive position of the firm.

Copyright © 2006 The McGraw-Hill Companies. All rights reserved. McGraw-Hill/Irwin 2–14 Dimension of Strategic Management Strategic management provides the theme and focus of the future direction of the organization. It supports consistency of action at every level of the organization. It encourages integration since effort & resources are committed to common goal and strategies. See Snapshot: Move Beyond Computer INTEL CEO, Craig R. Barret His Vision: INTEL to move beyond computers. INTEL is everywhere. Wants INTEL chips to be the guts of every digital device on the planet. Project: WiMAX versus WiFi. 30 miles versus 200 feet, costs only one-tenth of the conventional. The mission: Create INTEL chips to meet the need of digital products.

Copyright © 2006 The McGraw-Hill Companies. All rights reserved. McGraw-Hill/Irwin 2–15 Four Activities of the Strategic Management Process 1.Review and define the organization mission. 2.Set long-range goal and objectives. 3.Analyze and formulate strategies to reach objectives. 4.Implement strategies through projects.

Copyright © 2006 The McGraw-Hill Companies. All rights reserved. McGraw-Hill/Irwin 2–16 Four Activities of the Strategic Management Process Review and define the organization mission. The mission identifies “what we want to become” or the raison d’etre. A written mission statement provide focus for decision making for everybody. Everyone in the organization should be aware of the organization mission. Components found in mission statement: Major products, services, target customers, markets and geographical domain.

Copyright © 2006 The McGraw-Hill Companies. All rights reserved. McGraw-Hill/Irwin 2–17 Mission Statement Review and define the organization mission. Provide hospital design services. Provide voice/data design services. Provide information technology services. Increase shareholder values. Provide high-value products to customers. ROT If the statement can be anybody’s mission statement, it will not provide the guidance and focus intended.

Copyright © 2006 The McGraw-Hill Companies. All rights reserved. McGraw-Hill/Irwin 2–18 Long-Range Goal & Objectives Review and define the organization mission Objective translate organization mission into specific, concrete, measurable terms. Objectives answer in detail where a firm is headed and when it is going to get there. Objectives should be as operational as possible. It should include a time frame, measurable, identifiable and realistic. i.e., Mission: going to the outer space Objective: to fix satellite probes.

Copyright © 2006 The McGraw-Hill Companies. All rights reserved. McGraw-Hill/Irwin 2–19 S Specific Be specific in targeting an objective M Measurable Establish a measurable indicator(s) of progress A Assignable Make the objective assignable to one person for completion R Realistic State what can realistically be done with available resources T Time relatedState when the objective can be achieved (duration) Characteristics of Objectives

Copyright © 2006 The McGraw-Hill Companies. All rights reserved. McGraw-Hill/Irwin 2–20 Analyze and Formulate Strategies Formulating strategy answers the question what needs to be done to reach objective. Realistic evaluation of the past and current position of the company. Analysis of “who are the customers” and “what are their needs as they see them”. Next step: Assessment of the internal & external environments. SWOT analysis. Strength, Weakness, Opportunity and Threats.

Copyright © 2006 The McGraw-Hill Companies. All rights reserved. McGraw-Hill/Irwin 2–21 Implement Strategies through Projects Implementation answer “how strategies will be realized”. Everybody can plan but not everybody can make it happen. Implementation requires action and completing tasks. Major Key Areas in Implementation 1.Allocation of resources, i.e., fund, people, equipment, technological skills and etc. 2.Formal & informal organization chart that spell out responsibilities. 3.Planning & control system must be in place to make sure project activities are effectively performed. 4.Motivating project contributors. 5.Prioritizing projects.

Copyright © 2006 The McGraw-Hill Companies. All rights reserved. McGraw-Hill/Irwin 2–22 Common Problems in Implementation 1.The Implementation Gap The lack of understanding and consensus on strategy among top management and middle-level (functional) managers who independently implement the strategy. It is always the case: Top management formulate strategy. Functional manager implement strategy.

Copyright © 2006 The McGraw-Hill Companies. All rights reserved. McGraw-Hill/Irwin 2–23 Project Portfolio Management Problems 2. Organization Politics Project selection is based on the persuasiveness and power of people advocating the projects. ALTO computer project at Xerox Mid. 1970s, first workable mouse, first laser printer, first User friendly software, first local area network. Over the next 5 years, they failed to dominate due to internal fighting at Xerox.

Copyright © 2006 The McGraw-Hill Companies. All rights reserved. McGraw-Hill/Irwin 2–24 Project Portfolio Management Problems 3. Resource Conflicts and Multitasking Share of resources among managers. Everybody wants the best people. May lead to subcontracting. Resource sharing leads to multitasking. Multitasking = Start work 1, Stop work 1, Start work 2, Start work 1 again. Multitasking leads to delays & costs.

Copyright © 2006 The McGraw-Hill Companies. All rights reserved. McGraw-Hill/Irwin 2–25 How Can We Do the Following? 1.Narrow implementation gap. 2.Reduce power politics. 3.Reduce resources conflict and multitasking. The answer is : Project Portfolio A set of integrative criteria & a process for evaluating and selecting projects that support higher-level strategies & objectives. Projects will be ranked to shows their urgency & importance.

Copyright © 2006 The McGraw-Hill Companies. All rights reserved. McGraw-Hill/Irwin 2–26 Benefits of Project Portfolio Management Builds discipline into project selection process. Links project selection to strategic metrics. Prioritizes project proposals across a common set of criteria, rather than on politics or emotion. Allocates resources to projects that align with strategic direction. Balances risk across all projects. Justifies killing projects that do not support organization strategy. Improves communication and supports agreement on project goals. EXHIBIT 2.2

Copyright © 2006 The McGraw-Hill Companies. All rights reserved. McGraw-Hill/Irwin 2–27 Type of Project Portfolio FIGURE 2.2 Compliance Projects needed to meet regulatory conditions required to operate in a region, i.e., emergency projects. Penalties imposed if not implemented. Operational Projects needed to support current operation. i.e., cost reduction, efficiency improvement. Strategic Projects that directly support long term mission. i.e., New products, new design, R&D.

Copyright © 2006 The McGraw-Hill Companies. All rights reserved. McGraw-Hill/Irwin 2–28 A Portfolio Management System Selection Criteria –Financial: payback, net present value (NPV), internal rate of return (IRR). –Non-financial: projects of strategic importance to the firm. Multi- weighted scoring model- the use of weighted selection criteria to evaluate proposal.

Copyright © 2006 The McGraw-Hill Companies. All rights reserved. McGraw-Hill/Irwin 2–29 Financial Models The Payback Model –Measures the time it will take to recover the project investment. –Shorter paybacks are more desirable. –Emphasizes cash flows, a key factor in business. –Limitations of payback: Ignores the time value of money. Assumes cash inflows for the investment period (and not beyond). Does not consider profitability.

Copyright © 2006 The McGraw-Hill Companies. All rights reserved. McGraw-Hill/Irwin 2–30 Financial Models (cont’d) The Net Present Value (NPV) model –Uses management’s minimum desired rate-of-return (discount rate) to compute the present value of all net cash inflows. Positive NPV: the project meets the minimum desired rate of return and is eligible for further consideration. Negative NPV: project is rejected.

Copyright © 2006 The McGraw-Hill Companies. All rights reserved. McGraw-Hill/Irwin 2–31 Net Present Value (NPV) and Internal Rate of Return (IRR): Example Comparing Two Projects EXHIBIT 2.3

Copyright © 2006 The McGraw-Hill Companies. All rights reserved. McGraw-Hill/Irwin 2–32 Project Screening Matrix FIGURE 2.3 Multi-Weighted Scoring Model Project 5: (2x1)+(3x10)+(2x5)+(2.5x1 0)+(1x0)+(1x8)+(3x9)=102 Must be given first priority. Project 2: Total point = 27. Project 4: Appears to have some urgency but is not classified as a “must do”.

Copyright © 2006 The McGraw-Hill Companies. All rights reserved. McGraw-Hill/Irwin 2–33 Applying a Selection Model Project Classification –Deciding how well a strategic or operations project fits the organization’s strategy. Selecting a Model –Applying a weighted scoring model to bring projects to closer with the organization’s strategic goals. Reduces the number of wasteful projects Helps identify proper goals for projects Helps everyone involved understand how and why a project is selected

Copyright © 2006 The McGraw-Hill Companies. All rights reserved. McGraw-Hill/Irwin 2–34 Project Proposals Sources and Solicitation of Project Proposals –Within the organization –Request for proposal (RFP) from external sources (contractors and vendors)

Copyright © 2006 The McGraw-Hill Companies. All rights reserved. McGraw-Hill/Irwin 2–35 Major Project Proposal FIGURE 2.4A

Copyright © 2006 The McGraw-Hill Companies. All rights reserved. McGraw-Hill/Irwin 2–36 Risk Analysis FIGURE 2.4B

Copyright © 2006 The McGraw-Hill Companies. All rights reserved. McGraw-Hill/Irwin 2–37 Project Proposals Ranking Proposals and Selection of Projects –Prioritizing requires discipline, accountability, responsibility, constraints, reduced flexibility, and loss of power. –Consists of project screening process & priority analysis.

Copyright © 2006 The McGraw-Hill Companies. All rights reserved. McGraw-Hill/Irwin 2–38 Project Screening Process FIGURE 2.5

Copyright © 2006 The McGraw-Hill Companies. All rights reserved. McGraw-Hill/Irwin 2–39 Priority Analysis FIGURE 2.6

Copyright © 2006 The McGraw-Hill Companies. All rights reserved. McGraw-Hill/Irwin 2–40 Managing the Portfolio Requires two major inputs from senior management. 1. Senior management must provide guidance in establishing selection criteria that strongly align with organization strategies. 2. Senior management must annually decide how they wish to balance organization resources (people & capital) among different types of projects. i.e., 20% compliance, 50% strategic, and 30% operational.

Copyright © 2006 The McGraw-Hill Companies. All rights reserved. McGraw-Hill/Irwin 2–41 Managing the Portfolio The Priority Team Responsibilities –Publish the priority of every project –Ensure that the project selection process is open and free of power politics. –Reassess the organization’s goals and priorities –Evaluate the progress of current projects

Copyright © 2006 The McGraw-Hill Companies. All rights reserved. McGraw-Hill/Irwin 2–42 Project Portfolio Matrix FIGURE 2.7 Where do you wanna be? Bread-and-butter projects Involve evolutionary improvements to current products and services. i.e. software upgrade & cost reduction efforts. Pearls Represent revolutionary commercial advances using proven technical advances. i.e.,New seismic tool for oil & gas detection. Oysters Involve technological breakthroughs with high commercial payoffs. i.e. new kind of metal alloy. White elephants Projects that at one time showed promise but are no longer viable. Biofuel?.

Copyright © 2006 The McGraw-Hill Companies. All rights reserved. McGraw-Hill/Irwin 2–43 Project Portfolio Matrix Dimensions Bread-and-butter projects –Involve evolutionary improvements to current products and services. Pearls –Represent revolutionary commercial advances using proven technical advances. Oysters –Involve technological breakthroughs with high commercial payoffs. White elephants –Projects that at one time showed promise but are no longer viable.

Copyright © 2006 The McGraw-Hill Companies. All rights reserved. McGraw-Hill/Irwin 2–44 Key Terms Balanced scorecard Implementation gap Net present value Payback Organizational politics Priority system Priority team Project portfolio Project screening matrix Sacred cow Strategic management process