In Ch 1: The World of Project Management The differences between project management and general management are overviewed. The three interrelated project management objectives of budget, schedule, and specifications are introduced. Two alternative project life cycles are presented and the importance of understanding this distinction is discussed. Both qualitative (non-numeric) and quantitative (numeric) project selection methods are discussed. Aggregate project plan is also discussed 4/23/2017 Ardavan Asef-Vaziri

Why the emphasis on project management? Projects are temporary endeavors undertaken to create a unique product or service. Many tasks do not fit into business-as-usual. temporary (specific start and stop) unique (a one-of-a-kind output or deliverable aimed at meeting a specific need of the client. A non-project (a process) refers to the routine, repetitive work of the organization. Need to assign responsibility and authority for achievement of organizational goals. 4/23/2017 Ardavan Asef-Vaziri

Characteristics of Projects Main Characteristics Unique Specific deliverable Specific due date Other Characteristics Multidisciplinary Complex Conflict Part of programs 4/23/2017 Ardavan Asef-Vaziri

PMI Definition Project: A project is a unique temporary endeavor, with a set beginning and end. Project Management: The application of knowledge, skills, tools and techniques to a broad range of activities in order to meet the requirements of a particular project. 4/23/2017 Ardavan Asef-Vaziri

fig_01_01

Goals and Trade-offs The three goals of a project are: On time On budget To specification (including “quality” and “client satisfaction”) The project manager meets the goals by making trade-offs.  shorten the project duration by using more resources.  An overdetermined project: has a fixed budget, fixed delivery time, and fixed specifications. No place for trade-off. Is it Good? 4/23/2017 Ardavan Asef-Vaziri

Abilities Needed For Effective Project Management Conflict Resolution Creativity and Flexibility Ability to Adjust to Change Good Planning Negotiation Win-lose negotiation is like a zero-sum game. Any time one side wins the other side loses. In a win-win negotiation, the outcome is such that both parties gain something from the interchange.  Win-lose negotiating is dangerous for project managers who will have to deal with the same parties over and over again. The project manager who forces a functional manager to lose will have created a permanent enemy. 4/23/2017 Ardavan Asef-Vaziri

Project Life Cycle: S-Shaped fig_01_03 Project Life Cycle: S-Shaped

Level of Effort in a S-Shaped Life Cycle fig_01_04 Level of Effort in a S-Shaped Life Cycle

fig_01_05 Life Cycle: J-Shaped Resource allocation for S=shaped and J-shaped is quite different.

Project Selection: Qualitative Methodes The Sacred Cow A project proposed by the CEO, a big guy The Operating/Competitive Necessity It is required to continue our operations We may lose our market share Comparative Benefits Q-sort 4/23/2017 Ardavan Asef-Vaziri

The Q-Sort Method 4/23/2017 Ardavan Asef-Vaziri

Project Selection: Quantitative Methods Financial Assessment Methods Payback period Discounted cash flow NPV IRR B/C Scoring Methods Unweighted 0-1 factor method Weighted factor scoring method 4/23/2017 Ardavan Asef-Vaziri

Payback Period 4/23/2017 Ardavan Asef-Vaziri

Payback Period Number of years needed for the project to repay its initial fixed investment. A project costs $100,000 and is expected to save the company $20,000 per year. PP = $100,000 / $20,000 = 5 years Shortcoming Ignores the time value of money, including interest rates and inflation. Ignores money earned after the payback period.

Future Value (FV) Go to board Define r  MARR $100, 10%, one year $100, 10% , two years Compute F P, i, 1  P,i, 2,  P, i, N 4/23/2017 Ardavan Asef-Vaziri

Present Value (PV) Go to board Define r  MARR $100, 10%, one year $100, 10% , two years Compute F P, i, 1  P,i, 2,  P, i, N 4/23/2017 Ardavan Asef-Vaziri

Present Value of an Annuity (PVA) Assume N= 10 Then change 10 to N 4/23/2017 Ardavan Asef-Vaziri

Net Present Value (NPV) I0 = the initial investment Ft = the net cash flow in period t r = the required rate of return or hurdle rate Important note: NPV function in excel assumes that the first cash flow is at the end of year 1. PV function computes the present value of an annuity 4/23/2017 Ardavan Asef-Vaziri

Internal Rate of Return [IRR] The discount rate (r) 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 IRRs, this is not a practical issue Finding the IRR requires a financial calculator or computer In Excel “=IRR(Series,Guess)” Compare IRR with MARR

Internal Rate of Return (IRR) Find a value of r such that NPV is equal to 0 (note: this value may not be unique) Example (with T = 2): Find r such that Note that, in a typical project, early cash flows are negative.

Profitability Index or B/C Ratio 4/23/2017 Ardavan Asef-Vaziri

Profitability Models Advantages Disadvantages Easy to use and understand Based on accounting data and forecasts Familiar and well understood Give a go/no-go indication Can be modified to include risk Disadvantages Ignore non-monetary factors Discounting models (NPV, IRR) are biased to the short-term

Expected Commercial Value (ECV) Develop New Product Technical Failure Technical Success Probability = pt Probability = 1 - pt Launch New Product Commercial Failure (with net benefit = 0) Commercial Success (with net benefit = NPV) Probability = pc Probability = 1 - pc Risk class 1 Risk class 2 In fact, the previous example for DCF is also an ECV example. ECV is the expected NPV of the project, calculated by using the probabilities of the various alternatives.

ECV Example The design of a new product is expected to take 3 years, at a cost of $6m/year. The first payment is at the end of year 1. There is a .8 probability that the product will be technically feasible If feasible, the product can be launched in year 4 with an estimated cost of $5.5M If launched, the product will be a commercial success with probability 0.6, earning gross revenues of $15M per year for 5 years If it is a commercial failure, then the revenue is only $2M per year for 5 years The discount rate is 10 percent

Research & Product Development ECV Example 5 Years Probability = 0.6 One-time cost of $5.5M Commercial Success Rev.= 15M/yr 3 Years Probability = 0.8 Launch New Product Development Succeeds Research & Product Development Commercial Failure Rev.= 2M/yr Probability = 0.2 Drop Product Annual Cost: $6M Development Fails Probability = 0.4 No Cost Discount rate r1=10% Discount rate r2=10%

ECV Example $M 10% Year What’s Happening Commercial Success Commercial Failure Expected Annual Cash Flow Discounted Cash Flow 1 Technical development (6.00) (5.45) 2 Technical dev. (4.96) 3 (4.51) 4 Product sales $15 $2 3.44 2.35 5 7.84 4.87 6 4.43 7 4.02 8 3.66 Total = 4.40 Example calculation: .8[(.6)(15)+(.4)(2)-5.50]+.2(0)=3.44

A Discrete Probability Distribution What is probability of demand to be equal to 130? What is probability of demand to be less than or equal to 140? What is probability of demand to be greater than 140? What is probability of demand to be equal to 133?

Another Discrete Probability Distribution What is probability of demand to be equal to 116? What is probability of demand to be less than or equal to 116? What is probability of demand to be greater than 116? What is probability of demand to be equal to 13.3?

A Continuous Probability Distribution What is probability of demand to be equal to 130? What is probability of demand to be less than or equal to 140? What is probability of demand to be greater than 140? What is probability of demand to be equal to 133?

Continuous Probability Distributions A continuous random variable can assume any value in an interval on the real line or in a collection of intervals. We never compute the probability of a continuous random variable being equal to a specific value . This probability is always 0. Instead, we talk about the probability of the random variable assuming a value within a given interval.

Continuous Probability Distributions The probability of the random variable assuming a value within some given interval from x1 to x2 is defined to be the area under the graph of the probability density function between x1 and x2.

Average for Grouped Data: Discrete or Continuous +100×0.02 +110×0.05+120×0.08 +130×0.09+140×0.11 +150×0.16 +160×0.20 +170×0.15 +180×0.08 +190×0.05+200×0.01 Average = 151.6

Standard Deviation for Grouped Data: Discrete or Continuous Variance = +(100- 151.6 )2 ×0.02 +(110- 151.6 )2×0.05 +(120- 151.6 )2 ×0.08 +……. +…….. +(190- 151.6 )2 ×0.05 +(200- 151.6 )2 ×0.01 Variance = 503.4 Standard Deviation = 22.4

The Weighted Scoring Model where Si = the total score of the ith project sij = the score of the ith project on the jth criterion wj = the weight or importance of the jth criterion 4/23/2017 Ardavan Asef-Vaziri

Uncertainties encountered in project management Time required to complete a project Availability of key resources Cost of resources Timing of solutions to technological problems Actions taken by competitors Uncertainty cannot be eliminated, but if managed properly, it can be minimized. This is why we need trade-off. 4/23/2017 Ardavan Asef-Vaziri

Risk Analysis Estimate probabilities or distributions associated with key parameters Develop analytic or simulation model Analyze distribution of outcomes generated by model 4/23/2017 Ardavan Asef-Vaziri

Project Portfolio Process (PPP) PPP links projects to the goals and strategies of the organization. In the initiation and planning phases, and throughout the life cycle of the projects. The PPP is also a means for monitoring and controlling the organization's strategic projects. This may mean shutting down projects prior to their completion because of their risks or their costs, or because another project does a better job of supporting the goals. 4/23/2017 Ardavan Asef-Vaziri

Steps In The Project Portfolio Process 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 4/23/2017 Ardavan Asef-Vaziri

Step 1: Establish a Project Council Establishes strategic direction for projects. Allocates funds and control the allocation of human and capital resources to the projects. Senior management The project managers of major projects The head of the Project Management Office Relevant functional managers Anyone who can identify key opportunities and risks facing the organization

Step2: Identify Project Categories and Criteria Project categories are identified so the mix of projects will contribute to the organization's goals. Within each category various criteria are established to rank the projects. The criteria are also weighted. List the goals of each project and relate them to the organization's goals and strategies. Identify the categories that are important to achieving the organization's goals. 4/23/2017 Ardavan Asef-Vaziri

Wheelwright and Clark (1992) position - particularly product /service projects 4/23/2017 Ardavan Asef-Vaziri

unfig_02_03 unfig_02_03

Wheelwright and Clark (1992) positioning Derivative projects: Incrementally different in product or process from existing offerings. Often replace current offerings or add an extension to them (lower priced version, upscale version). Platform projects : Major departures from existing offerings in terms of either the product or process. They become "platforms" for the next generation of organizational offerings, such as a new model of automobile or a new type of insurance plan. 4/23/2017 Ardavan Asef-Vaziri

Wheelwright and Clark (1992) positioning Breakthrough projects: Involve a newer technology. A technology that is known to the industry or something proprietary that the organization has been developing over time. Use of fiber optic cables for data transmission, and hybrid gasoline-electric automobiles. R&D projects: Blue sky, visionary endeavors, oriented toward using newly developed technologies, or existing technologies in a new manner. They may also be for acquiring new knowledge, or developing new technologies themselves. 4/23/2017 Ardavan Asef-Vaziri

fig_02_10 Size  size/resource needs. Shape and shade  internal/ external, long/medium/short term. Numbers  the order, or time frame, in which the projects are to be implemented, separated by category.

Benefits of the Aggregate Project Plan View the mix of projects Analyze and adjust the mix of projects Assess the resource requirement indicated by the size, timing, and number of projects Identify and adjust the gaps in the categories, sizes, and timing of the projects Identify potential career paths for developing project managers, such as team members of a derivative project, then team members of a platform project, manager of a derivative project, members of a breakthrough project, and so on 4/23/2017 Ardavan Asef-Vaziri

Analyzing Project Portfolios: Bubble Diagram Expected NPV Prob. of Commercial Success High Zero Low Shapes Shading Color Size Bubble diagrams are useful for representing a set of projects and visualizing a project portfolio.

Step 3: Collect Project Data Collect data on timing, expected benefit and costs using existing/past projects and expert opinion. Use the scoring models to screen out high cost or lower benefit projects ( because the organization's goals have changed). Screen in any projects mandated by regulations or laws, competitive or operating necessities, projects required for environmental or personnel reasons. 4/23/2017 Ardavan Asef-Vaziri

Step 4: Assess Resource Availability Assess the availability of internal /external resources by type/department/ timing. Balance aggregate project resource needs over future periods. Needing a normally plentiful resource at the same moment by several projects = catastrophe. Scheduling resource usage as closely as possible to system capacity = catastrophe. 4/23/2017 Ardavan Asef-Vaziri

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

Step 6: Prioritize the Projects within Categories Apply the scores and criterion weights to rank the projects within each category. Hold some hard-to-measure criteria out for subjective evaluation, such as riskiness, or development of new knowledge. Subjective evaluations can be translated from verbal to numeric terms easily by the Delphi, Pair-wise Comparisons, or other methods. Different projects are offering different packages of benefits that are not comparable. For example, R&D projects will not have the expected monetary return of derivative projects 4/23/2017 Ardavan Asef-Vaziri

Step 7: Select the Projects to be Funded and Held in Reserve Determine the mix of projects across the various categories and time periods. Leave 10-15 percent of the organization's resource capacity free for variability and new opportunities. Include some speculative projects in each category to allow future options, knowledge improvement, additional experience in new areas. 4/23/2017 Ardavan Asef-Vaziri

Step 8: Implement the Process Communicate results Repeat regularly Improve process 4/23/2017 Ardavan Asef-Vaziri

Assignments Review Questions: 2,3,4,5,6,8 Discussion Questions: 10,11,13,16 Incidents for Discussion: None Problems: 19(with and without CB),23,25 Cases: 1,2 4/23/2017 Ardavan Asef-Vaziri