1. Part I
Project Initiation

2. Project Management

3. Strategic Management and Project Selection
Chapter 2
Strategic Management and Project Selection

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

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

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?

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

8. Project Selection and Criteria of Choice
Evaluating
Choosing
Implementing
Same process as other business decisions

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

10. Types of Project Selection Models
Nonnumeric models
Numeric models

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”

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

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

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

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

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

17. Payback Period Example

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)

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

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

21. NPV Formula

22. NPV Formula Terms A0 Initial cash investment
Ft Cash flow in time period t (negative for outflows)
k The discount rate
t The number of years of life
A higher NPV is better
Higher the discount rate lower the NPV

23. NPV Example

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)”

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

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

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

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

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

30. 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

31. Project Proposal Contents
Cover letter
Executive summary
The technical approach
The implementation plan
The plan for logistic support and administration
Past experience