1. Part I
Project Initiation
© 2012 John Wiley & Sons Inc.

2. Project Management

3. Strategic Management and Project Selection
Chapter 2
Strategic Management and Project Selection
© 2012 John Wiley & Sons Inc.

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

5. Project Results 30 Percent canceled midstream
Over half of completed projects came in up to190 percent over budget
Over half of completed projects came in up to 220 percent late

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

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

9. Types of Companies
Companies considering projects fall into two broad categories:
Companies whose core business is completing projects
Companies whose core business is something else
They can also be broken down as:
Companies looking at projects to do for others
Companies looking at projects to do for themselves

10. Model Criteria Realism Capability Flexibility Ease of use Cost
Easy computerization

11. 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

12. Types of Project Selection Models
Nonnumeric models
Numeric models

13. 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”

14. 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

15. 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

16. Numeric Models
Models that return a numeric value for a project that can be easily compared with other projects
Two major categories:
Profit/profitability
Scoring

17. Profit/Profitability Models
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

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

19. Payback Period Example

20. 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)

21. 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

22. 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

23. NPV Formula

24. 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

25. NPV Example

26. 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)”

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

28. 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

29. 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

30. Scoring Models Unweighted 0–1 factor model Unweighted factor model

31. Unweighted 0-1 Factor Model
Factors selected
Listed on a preprinted form
Raters score the project on each factor
Each project gets a total score
Main advantage is that the model uses multiple criteria
Major disadvantages are that it assumes all criteria are of equal importance

32. Unweighted 0-1 Factor Model Example
Figure 2-2

33. Unweighted Factor Scoring Model
Replaces X’s with factor score
Typically a 1-5 scale
Column of scores is summed
Projects with high scores are selected

34. Unweighted Weighted Factor Model
Each factor is weighted the same
Less important factors are weighted the same as important ones
Easy to compute
Just total or average the scores

35. Weighted Factor Model
Each factor is weighted relative to its importance
Weighting allows important factors to stand out
A good way to include nonnumeric data in the analysis
Factors need to sum to one
All weights must be set up, so higher values mean more desirable
Small differences in totals are not meaningful

36. Weighted Factor Model Example
Figure B Page 60

37. Advantages of Scoring Models
Allow multiple criteria
Structurally simple
Direct reflection of managerial policy
Easily altered
Allow for more important factors
Allow easy sensitivity analysis

38. Disadvantages of Scoring Models
Relative measure
Linear in form
Can have large number of criteria
Unweighted models assume equal importance

39. 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
Pro forma documents

40. The Project Portfolio Process (PPP)
Links projects directly to the goals and strategy of the organization
Means for monitoring and controlling projects

41. Symptoms of a Misaligned Portfolio
More projects
Inconsistent determination of benefits
Projects that don’t contribute to the strategy
Competing projects
Costs exceed benefits
No risk analysis of projects
Lack of tracking against the plan
No client for project

42. Purpose of Project Portfolio Process
Identify nonprojects
Prioritize list of projects
Limit number of projects
Identify the real options for each project
Identify projects with good fit
Identify co-dependent projects

43. Purpose of Project Portfolio Process Continued
Eliminate risky projects
Eliminate projects that skip the formal selection process
Keep from overloading the organization
To balance the resources with needs
To balance returns
To balance short-, medium-, and long-term returns

44. 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

45. 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

46. Step 2: Identify Project Categories and Criteria
Derivate projects
Platform projects
Breakthrough projects
R&D projects

47. 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

48. Step 4: Assess Resource Availability
Assess both internal and external resources
Assess labor conservatively
Timing is particularly important

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

50. 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

51. 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

52. Step 8: Implement the Process
Communicate results
Repeat regularly
Improve process

53. Project Proposals 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

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