MANAGEMENT OF ENGINEERING PROJECT MANAGEMENT Chapter-2 Strategies of Organization and Project selection

Why Project Managers Need to Understand the Strategic Management Process Project managers who understand their organization’s strategy can become effective advocates of projects aligned with the firm’s mission. Project managers must respond to changes with appropriate decisions about future projects and adjustments to current projects.

Objective Objectives translate the organization mission into specific, concrete, measurable terms.

Objective Where the firm is headed When it is going to get there

Characteristic of Objective: SMART S- Specific M- Measurable A- Assignable R- Realistic T- Time related

Objectives 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 related State when the objective can be achieved, that is, duration

Project Selection Project selection is the process of evaluating individual projects or groups of projects, and then choosing to implement selected criteria so that the objectives of the organization will be achieved

Project Selection Selection Criteria Although there are many criteria for selecting projects, selection criteria are typically identified as financial and nonfinancial.

Nature of Project Selection Models 2 Basic Types of Models Numeric (or financial models) Nonnumeric (or nonfinancial models)

Nature of Project Selection Models Two Critical Facts: Models do not make decisions - People do! All models, however sophisticated, are only partial representations of the reality they are meant to reflect

Numeric Models: Profit/Profitability Payback period - NPV-Method –

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.

Payback Period The payback period for a project is the initial fixed investment in the project divided by the estimated annual net cash inflows from the project. The ratio of these quantities is the number of years required for the project to repay its initial fixed investment.

For example, assume a project costs $100,000 to implement and has annual net cash inflows of $25,000. Then Payback period $100,000/$25,000 = 4 years

Financial Models (cont’d) -see page-37 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.

Net Present Value (NPV): Example page-38 Statement 1- Project-A has initial investment of $700,000 and projected cash inflows of $225,000 for 5 years Statement 2- Project-B has initial investment of $400,000 and projected cash inflows of $110,000 for 5 years – Desired rate of return is 15% for both projects compare project A & B using payback period method (project cost/annual saving) and NPV method. Which project can be selected? Inflows- Outflows=Net flow

Payback period Example Comparing Two Projects (see page 38) Project A: Payback period $700,000/$225,000 = 3.1 years Project B: Payback period $400,000/$110,000 = 3.6 years Can be seen on excel

Payback period Example Comparing Two Projects (see page 38) Project A: Payback period $700,000/$225,000 = 3.1 years Project B: Payback period $400,000/$110,000 = 3.6 years The payback for Project A is 3.1 years and for Project B is 3.6 years. Using the payback method both projects are acceptable since both return the initial investment in less than five years and have returns on the investment (reciprocal of payback period) of 32.1 and 27.5 percent and exceeds 15% desired rate Can be seen on excel

Net Present Value (NPV): Example Comparing Two Projects (see page 38) Project A: can also be solved as: Can be seen on excel

Net Present Value (NPV): Example Comparing Two Projects (see page 38) Project B: can also be solved as: Can be seen on excel

Net Present Value (NPV): Example Comparing Two Projects (see page 38) Based on NPV calculation: Accept Project A: NPV positive Reject Project B : NPV negative Can be seen on excel

Exercise Problem-5 ( see page 52)

Problems - 5 See page 52

Financial Models (cont’d) The Net Present Value (NPV) Model If in the questions they have given inflation rate as well then you need to add it in calculations as follows: pt --- is inflation rate

Problem - 5 Rate of return = 20% and Inflation =3%

Problem - 5 Project. Ospory

Problems - 5 Project: Voyagers

Problems - 5 The only project SIMSOX should consider is Voyagers. The other two projects have NPV negative

Strategic Importance Nonnumeric or nonfinancial criteria Financial return, while important, does not always reflect strategic importance. Now the prevailing thinking is that long-term survival is dependent upon developing and maintaining core competencies. For example

Strategic thinking Nonfinancial Criteria To capture larger market share To make it difficult for competitors to enter the market To develop an enabler product To develop core technology that will be used in next-generation products To reduce dependency on unreliable suppliers To prevent government intervention and regulation

Nonfinancial criteria Operating Necessity - the project is required to keep the system running Competitive Necessity - project is necessary to sustain a competitive position

Nonnumeric criteria Product Line Extension - projects are judged on how they fit with current product line, fill a gap, strengthen a weak link, or extend the line in a new desirable way. Comparative Benefit Model - several projects are considered and the one with the most benefit to the firm is selected

Multi-Weighted Scoring Model

Multi-Weighted Scoring Model A weighted scoring model typically uses several weighted selection criteria to evaluate project proposals. Scores are assigned to each criterion for the project, based on its importance to the project being evaluated. Using these multiple screening criteria, projects can then be compared using the weighted score. Projects with higher weighted scores are considered better.

Project Screening Matrix FIGURE 2.3

Project Portfolio

Benefits of Project Portfolio Management Builds discipline into project selection process. Links project selection to strategic requirements of organization. Prioritizes project 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.

Project Portfolio Matrix Weight method

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.