Project Management

THE MANAGERIAL PROCESS

Chapter 2
Organizational Strategy and Project Selection

Strategy / Projects Strategy / Projects

• Strategy is implemented through projects
• Therefore, every project should have a clear link to the
organization’s strategy
• Problem: PMs should have motivation to complete
project
– Where did project come from?
– Which project should have priority
– Why are we doing this project?
– Where are we going to get the resources to do this one?
• Problem: Not an easy thing to do. Not many companies
do it well
• Companies that have a coherent link…
–Have more cooperation across the organization
–Perform better on projects
–Have fewer projects
• How? … Integration
–Existence of a Strategic Plan
–Process for prioritizing projects by their contribution to
the plan
–Process that is transparent to all participants

This Lecture / Chapter Why Project Managers Need to Understand

the Strategic Management Process
• Process for developing Strategic Plan
• Methodology for ensuring integration • Old School thinking:
–PM is planning and execution of projects
–Strategy
gy is for senior management
g responsibility
p y

• New School thinking:

–PM goes from operational to strategic
–PMs go from getting the job done to achieving
business results and winning in the marketplace

1
Why Project Managers Need to Understand Why Project Managers Need to Understand
the Strategic Management Process the Strategic Management Process
• Why? • Why?
1. So PMs can make appropriate decisions and
adjustments 2. So PMs can be effective project advocates
• Modify design (innovation)? • PMs must be able to demonstrate to senior management how
• Overtime to get to market earlier vs. accepting delay
th i project
their j t contributes
t ib t tto th
their
i firm’s
fi ’ mission.
i i
• Rent vs. buy, equipment placement • Protection and continued support come from being aligned
with corporate objectives.
• What happens when they don’t
– Focus on problems and solutions that have low strategic priority
– Focus on immediate customer rather than whole marketplace
– Overemphasize technology as end product
– Try to satisfy every customer issue equally (Pareto’ s 20/80 Law)
– Attempt at perfection on less meaningful projects

The Strategic Management Process: The Strategic Management Process:

An Overview An Overview

• Strategic Management • Most organizations are successful at formulating

–“What we are”, What do we intend to be”, “How are we strategies, but have problems implementing.
going to get there”
• Requires strong links among mission, goals,
–Provides
o des tthe e ttheme
e eaand
d focus
ocus o
of tthe
e future
utu e d
direction
ect o
objectives strategy
objectives, strategy, and implementation.
implementation
for the firm. 2 dimensions:
• Responding to changes in the external environment— • You NEED a strong priority system.
constant environmental scanning
• Allocating scarce resources of the firm to improve its
competitive position—internal responses to new action
programs

The Strategic Management Process: Project Portfolio Management Problems

An Overview
• 3 Problems with implementing projects without a
• Four Activities of the Strategic Management Process priority system
(p.24) #1: The Implementation Gap
• The lack of understanding and consensus on strategy among
1.Review and define the organizational mission (define general
top management and middle-level (functional) managers who
purpose to the firm, not good if anyone can use it)
independently implement the strategy
strategy.
2.Set long-range goals and objectives (specific global targets, – Conflicts / lack of trust
measurable, time frame, realistic)(p.27- SMART) – Renegotiation of priorities
3.Analyze and formulate strategies to reach objectives (“what – People shift to different projects … causing confusion
needs to be done to reach objective”, past/current position in – Work on multiple projects / inefficiencies
marketplace, who are customers, what are their needs, SWOT) – Overextension of resources

4.Implement strategies through projects (“how strategies will be

realized”, allocate resources)

2
 Project Portfolio Management Problems Project Portfolio Management Problems
• 3 Problems with implementing projects without a • 3 Problems with implementing projects without a
priority system priority system
#2: Organization Politics #3: Resource Conflicts and Multitasking
• Project selection is based on the persuasiveness and power of • The multiproject environment creates interdependency
people advocating the projects. relationships of shared resources which results in the starting,
• “Sacred
Sacred Cow”
Cow stopping and restarting projects.
stopping, projects
• It is important to have executive advocates • Competition among PMs
• One can become a company hero by effectively managing a • Outsource?
worthwhile project. • Errors / fatigue increase

• Need a system to manage the project portfolio

Project Portfolio Management A Portfolio Management System

• Benefits • Should include:
–Builds discipline into project selection process 1. Project Classification
–Links project selection to strategic metrics 2. Selection Criteria
–Prioritizes project proposals across a common set of
3. Proposal Sources
criteria, rather than some politics or emotion
–Allocates
Allocates resources to projects that align with strategic 4. p
Proposal Evaluation
direction 5. Management of the portfolio of projects
–Balances risk across all projects
–Justifies killing projects that do not support
organizational strategy
–Improves communication and support agreement on
project goals

1. Project Classification 2. Selection Criteria

• Compliance
– Must do to meet regulatory compliance • Financial: payback, net present value (NPV),
– Emergency projects such as fire repair internal rate of return (IRR)
– Penalties if not implemented
• Non-financial: projects of strategic importance
• Operational
to the firm.
– Needed to support current operations
– Designed to improve efficiency (delivery, cost, performance)
–Multi-Weighted Scoring Model: Use several
– TQM
weighted selection criteria to evaluate project
proposals.
• Strategic
– Directly support organization’s long-run mission
– Frequently dealing with increasing revenue or market share
– New product, R&D

3
 2. Selection Criteria: Financial Models
• The Payback Period 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.
Project A
Initial investment = $700,000
Projected Cash inflows =$225,000
for 5 years
• The Payback Period Model
Project B
Initial investment = $400,000
Projected Cash inflows =$110,000
for 5 years
2. Selection Criteria: Financial Models
–Limitations of payback:
• Ignores the time value of money.
• Assumes cash inflows for the investment period (and not
beyond).
• Does not consider profitability
profitability.
–But… it’s easy to calculate
–Most widely used
–Maybe it’s better to use it as a qualifier. Use to
eliminate unusually risky projects

Payback period (yrs) = Estimated Project Cost / Annual savings

Note return on investment (p. 33)

2. Selection Criteria: Financial Models 2. Selection Criteria: Non-

Non-Financial Criteria
• The Net Present Value (NPV) Model • Financial return does not reflect strategic importance
• Long term survival is dependent upon developing and
–Uses management’s minimum desired rate-of-return maintaining core competencies
(discount rate) to compute the present value of all net
• Companies must say no to potentially profitable projects
cash inflows. that are outside their core mission
• Positive NPV: the project meets the minimum desired rate of • This requires
q non-financial criteria
return andd is
i eligible
li ibl for
f further
f h consideration.
id i – Capture market share
• Negative NPV: project is rejected. – Make it difficult for competitors to enter market
• Hurdle rate depends on project type and level of risk – Develop core technologies to be used in future products
– Reduce dependencies on suppliers
– Prevent government intervention and regulation
– Restore corporate image
– Enhance brand recognition

2. Selection Criteria: Non-

Non-Financial Criteria 2. Selection Criteria: Non-
Non-Financial Criteria
• Multi-Weighted Scoring Models • Multi-Weighted Scoring Models (p.36)
–Several weighted selection criteria. –Some notables
– Quantitative and/or qualitative criteria. • Must pick the correct factors and assign the correct weights.
• Priority team to ensure consistency
– Each criterion is assigned a weight by its relative importance to
the organization’s objectives (weights do not need to sum to • Use a threshold weighted score
100)…
) sayy 0 to 3. • High “Urgency” does not make a project a “must do”
– Scores are assigned to each criterion for the project based on its • Ties could go to the project that consumes the fewest
resources
importance to the project being evaluated (scores must be same
range for each criterion)… say 0 to 10. • This is becoming more popular method
• Models do not capture the complete reality of the system
– Weights and scores are multiplied and summed to get a total
weighted score. • Models do not make final decisions, people do!
– Projects with higher scores are more desirable.

4
 2. Selection Criteria: Applying a Selection 3., 4., 5.
Model
3. Sources and Solicitation of Project Proposals
–Within the organization
• Selecting a Model –Request for proposal (RFP) from external sources
–Apply a weighted scoring model to choose projects (contractors and vendors)
that are closer to the organization’s strategic goals. 4. Ranking
g Proposals
p and Selection of Projects
j
• Reduces the number of wasteful projects
–Prioritizing requires discipline, accountability,
• Helps identify proper goals for projects responsibility, constraints, reduced flexibility, and loss
• Helps everyone involved understand how and why a project is of power.
selected
5. Managing the Portfolio
–Senior management input
–The priority team (project office) responsibilities

5. Managing the Portfolio Project Portfolio Matrix Dimensions

• Senior Management Input • Bread-and-butter projects
–Provide guidance in selecting criteria that are aligned – Involve evolutionary improvements to current products and
services.
with the organization’s goals
• Pearls
–Decide how to balance available resources among
– Represent revolutionary commercial advances using proven
current projects technical advances.
• The Priority Team Responsibilities • Oysters
–Publish the priority of every project – Involve technological breakthroughs with high commercial
payoffs.
–Ensure that the project selection process is open and
free of power politics. • White elephants
– Projects that at one time showed promise but are no longer
–Reassess the organization’s goals and priorities viable.
–Evaluate the progress of current projects