Copyright 2015 John Wiley & Sons, Inc. Part I Project Initiation

2-2 Project Management

Copyright 2015 John Wiley & Sons, Inc. Chapter 2 Strategic Management and Project Selection

2-4 Problems With Multiple Projects Delays in one project delays others Inefficient use of resources Bottlenecks in resource availability

2-5 Project Results 30% canceled midstream Over half of completed projects came in up to – 190% over budget – 220% late <50% of strategic projects successful

2-6 Challenges Making sure projects are closely tied to goals and strategy. How to handle the growing number of projects? How to make these projects successful?

2-7 Project Management Maturity Project management maturity refers to the mastery of skills required to manage projects competently Number of ways to measure Most organizations do not do well Maturity can be rated in levels Initial  Repeatable  Defined  Managed  Optimizing

2-8 Project Selection and Criteria of Choice Project selection… – Evaluating – Choosing – Implementing Same process as other business decisions

2-9 The Nature of Project Selection Models Models turn inputs into outputs Managers decide on the values for the inputs and evaluate the outputs The inputs never fully describe the situation The outputs never fully describe the expected results Models are tools Managers are the decision makers

2-10 Types of Project Selection Models Nonnumeric models Numeric models

2-11 Nonnumeric Models Models that do not return a numeric value for a project to be compared with other projects These are really not “models” but rather justifications for projects Just because they are not true models does not make them all “bad”

2-12 Types of Nonnumeric Models Sacred Cow – A project, often suggested by the top management, that has taken on a life of its own Operating Necessity – A project that is required in order to protect lives or property or to keep the company in operation Competitive Necessity – A project that is required in order to maintain the company’s position in the marketplace

2-13 Types of Nonnumeric Models Continued Product Line Extension – Often, projects to expand a product line are evaluated on how well the new product meshes with the existing product line rather than on overall benefits Comparative Benefit – Projects are subjectively rank ordered based on their perceived benefit to the company Sustainability – Focusing on long-term profitability rather than short- run payoff

2-14 Numeric Models Models that return a numeric value for a project that can be easily compared with other projects Major types – Profit/profitability – Real Options – Scoring – Window-of-opportunity analysis – Discovery-driven planning

2-15 Numeric Models: Profit/Profitability Models that look at costs and revenues – Payback period – Discounted cash flow (NPV) – Internal rate of return (IRR) – Profitability index NPV and IRR are the more common methods

2-16 Payback Period The length of time until the original investment has been recouped by the project A shorter payback period is better

2-17 Payback Period Example

2-18 Payback Period Drawbacks Does not consider time value of money More difficult to use when cash flows change over time Less meaningful for longer periods of time (due to time value of money)

2-19 Discounted Cash Flow The value of a stream of cash inflows and outflows in today’s dollars Also know as discounted cash flow or just discounting Widely used to evaluate projects Includes the time value of money Includes all inflows and outflows, not just the ones through payback point

2-20 Discounted Cash Flow Continued Requires a percentage to use to reduce future cash flows – This is known as the discount rate The discount rate may also be known as a hurdle rate or cutoff rate There will usually be one overall discount rate for the company

2-21 NPV Formula

2-22 NPV Formula Terms A 0 Initial cash investment F t Cash flow in time period t (negative for outflows) kThe discount rate tThe number of years of life A higher NPV is better Higher the discount rate lower the NPV

2-23 NPV Example

2-24 Internal Rate of Return [IRR] The discount rate (k) that causes the NPV to be equal to zero The higher the IRR, the better – While it is technically possible for a series to have multiple IRR’s, this is not a practical issue Finding the IRR requires a financial calculator or computer In Excel “=IRR(Series,Guess)”

2-25 Profitability Index a k a Benefit cost ratio NPV divided by initial cash investment Ratios greater than 1.0 are good

2-26 Advantages of Profitability Models Easy to use and understand Based on accounting data and forecasts Familiar and well understood Gives a go/no-go indication Can be modified to include risk

2-27 Disadvantages of Profitability Models Ignore nonmonetary factors Some ignore time-value of money Biased toward the short-term Payback ignores cash flow after payback IRR can have multiple solutions All are sensitive to errors Nonlinear Dependent on determination of cash flows

Numeric Models: Real Options Positions the organization to capitalize on future opportunities Utilized to reduce both technological and commercial risk 2-28

2-29 Risk Considerations in Project Selection Both costs and benefits are uncertain – Benefits are more uncertain There are many ways of dealing with risk Can make estimates about the probability of outcomes – Subjective probabilities Uncertainty about: – Timing – What will be accomplished? – Side effects

2-30 Project Portfolio Process Steps  Establish a project council  Identify project categories and criteria  Collect project data  Assess resource availability  Reduce the project and criteria set  Prioritize the projects within categories  Select the projects to be funded and held in reserve  Implement the process

2-31 Step 1: Establish a Project Council Senior management The project managers of major projects The head of the Project Management Office Particularly relevant general managers Those who can identify key opportunities and risks facing the organization Anyone who can derail the PPP later on

2-32 Step 2: Identify Project Categories and Criteria Derivate projects Platform projects Breakthrough projects R&D projects

2-33 Step 3: Collect Project Data Assemble the data Document assumptions Screen out weaker projects The fewer projects that need to be compared and analyzed, the easier the work of the council

2-34 Step 4: Assess Resource Availability Assess both internal and external resources Assess labor conservatively Timing is particularly important

2-35 Step 5: Reduce the Project and Criteria Set Organization’s goals Have competence Market for offering How risky the project is Potential partner Right resources Good fit Use strengths Synergistic Dominated by another Has slipped in desirability

2-36 Step 6: Prioritize the Projects Within Categories Apply the scores and criterion weights Consider in terms of benefits first and resource costs second Summarize the returns from the projects

2-37 Step 7: Select the Projects to be Funded and Held in Reserve Determine the mix of projects across the categories Leave some resources free for new opportunities Allocate the categorized projects in rank order

2-38 Step 8: Implement the Process Communicate results Repeat regularly Improve process

2-39 Project Bids and RFPs The project proposal is essentially a project bid Putting together a project proposal requires a detailed analysis of the project Project proposals can take weeks or months to complete A more detailed analysis may result in not bidding on the project

2-40 Project Proposal Contents Cover letter Executive summary The technical approach The implementation plan The plan for logistic support and administration Past experience