Chapter 2

Strategic Management and Project Selection

Copyright 2012 John Wiley & Sons, Inc.

Overview
Project Selection and Criteria Project Selection Models Uncertainty and Risk Information for Project Selection Project Proposals

Project Maturity and Reality

The accomplishment of important tasks and goals in organizations today is being achieved through the use of projects and as a result: (1)Explosively rapid adoption of such a powerful tool as project management to help organizations achieve their goals and objectives when correctly used, however, its utility has also led to many misapplications.

Rapid adoption of project management means:

Many projects fall outside company mission. Many Projects dont fit with organizational goal/objective Project budgets not tied to cost-benefit analysis (funding levels that are excessive relative to their expected benefits).

(2)Multiple

Project Management Issues

80 percent of all projects are not actually projects at all, since they do not include the three project requirements for objectives, budget, and due date.) Problems in organizations trying to manage multiple projects are:
1.

Delays in one project impacting others because of:

Resource

2.

3.

conflicts (common resource needs) Technological dependencies The inefficient use of corporate resources results in peaks and valleys of resource utilization. Bottlenecks in resource availability (Lack of resource ) or lack of required technological inputs

(2)Multiple

Project Management Issues

A major development among those choosing to develop project management expertise in house, is the initiation of a Project Management Office (PMO), This office strives to develop multi-project management expertise throughout the organization, to evaluate the interrelationships between projects (e.g., such as resource and skill requirements), and to ensure that projects are clearly related to the organizations goals.

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?

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Project Management Maturity

Project management maturity refers to the mastery of skills required to manage projects competently Number of ways to measure

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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 Companies looking at projects to do for others Companies looking at projects to do for themselves

They can also be broken down as:

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Project Selection

Is the process of evaluating individual projects or groups of projects and then Choosing to implement some set of them so that Organizational objectives will be achieved.

Project Selection

Each project will have different costs, benefits, and risks, the selection of one project out of a set is a difficult task. Choosing a number of different projects, a portfolio, is even more complex. rarely will a project manager be involved in the process by which projects are selected for inclusion

Project Selection

There are several techniques (DSS)that can be used to help senior managers select projects. Project selection is only one of many decisions associated with project management. To deal with all of these problems, models are used because it abstracts the relevant issues about a problem from the mass of detail in which the problem is embedded

This process of carving away the unwanted reality from the bones of a problem is called modeling the problem. Models represent the problems structure Aid in evaluating risks and options

Criteria for choosing Project Selection Models

1.

Realism - reality of managers decision:

The model should reflect the reality of the firms decision situation. The model should also take into account the realities of the firms limitations on facilities, capital, personnel, and so forth, and include factors that reflect project technical and market risks: performance, cost, time, customer rejection, and implementation.
1.

Capability- The model should be sophisticated enough to deal with the relevant factors: multiple time periods, situations both internal and external to the project (e.g., strikes, interest rate changes), and so on.

Criteria for choosing Project Selection Models

3.

Flexibility - The model should be easy to modify in response to

changes in the firms environment; for example, tax law changes. Ease of Use The Model should be reasonably convenient, easy execution, and easily understood Cost - Data gathering and modeling costs should be low relative to the cost of the project. Easy Computerization - must be easy and convenient to gather, store and manipulate data in the model

4.

5.

6.

Nature of Project Selection Models

Two Basic Types of Models

Numeric Nonnumeric:

do not use numbers as inputs

Two Critical Facts:

Models

do not make decisions - People do!, The manager may delegate the task of making the decision to a model, but the responsibility cannot be abdicated. All models are only partial representations of reality, Therefore, no model can yield an optimal decision except within its own, possibly inadequate, framework.

Nonnumeric Models
1.

Sacred Cow - project is suggested by a senior and powerful

official in the organization

2.

Operating Necessity - the project is required to keep the system

running

3.

Competitive Necessity - project is necessary to sustain a

competitive position

4.

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.

5.

Comparative Benefit Model if several projects are considered

and the one with the most benefit to the firm is selected (benefits like automation, etc..)

Numeric Models: Profit/Profitability

1.

Payback period is the initial fixed

investment/estimated annual cash inflows from the project

2.

Average Rate of Return - average annual profit/average

investment, If we have a set of expected cash inflows and cash outflows, the internal rate of return is the discount rate that equates the present values of the two sets of flows.

3.

Discounted Cash Flow -

Net Present Value (NPV) Method determines the net present value of all cash flows, Early in the life of a project, net cash flow is likely to be negative, the major outflow being the initial investment in the project. If the project is successful, however, cash flows will become positive.

4.

Profitability Index all future NPV expected cash

flows/initial cash investment

2.5 Analysis Under Uncertainty The Management of Risk (SS)

risk has been interpreted as being unsure about project task durations and/or costs, uncertainty plagues all aspects of the work on projects and is present in all stages of project life cycles. In this section, we will consider uncertainty as it affects the selection process.

Risk Versus Uncertainty

The difference between risk and uncertainty:

Risk - when the decision maker knows the probability of each

and every state of nature (nature being the set of exogenous factors that interact with the decision makers course of action to produce an outcome) and thus each and every outcome. An expected value of each alternative action can be determined, This is decision making under conditions of risk.

Uncertainty - when a decision maker has information that

is not complete and therefore cannot determine the probability of occurrence for some states of nature, he cannot find the expected value of each alternative. This is decision making under conditions of uncertainty

Risk Analysis
Principal contribution of risk analysis is to focus the attention on understanding the nature and extent of the uncertainty associated with some variables used in a decision making process Usually understood to use financial measures in determining the desirability of an investment project

2.7 Project Portfolio Process - Purpose

the PPP can serve many purposes:
1.

Identify Projects that Meet Strategic Needs

Support Multiple Goals Direct Organizational Improvement Enhance/Enable Key Areas Limit Active Projects to Manageable Level Identify Risk Balance Short, Medium, Long-term Returns

2.

Prioritize Potential Projects

Project Portfolio Process - Steps

Step 1: Establish a Project Council
Establish a Project Management Structure 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
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Step 2: Identify Project Categories and Criteria

In this step, various project categories are identified. In addition, within each category, criteria are established to discriminate between projects. The first task in this step is to list the goals of each existing and proposed project: What is the mission, or purpose, of this project? Relating these to the organizations goals and strategies should allow the council to identify a variety of categories that are important to achieving the organizations goals.

Derivate projects Platform projects Breakthrough projects R&D projects

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Step 3: Collect Project Data

For each project, assemble the data appropriate to that categorys criteria. Project Attributes Tied to Selection Criteria cost data, the timing (both date and duration), expected benefits and resource needs, etc.. Document assumptions Screen out weaker projects The fewer projects that need to be compared and analyzed, the easier the work of the council

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Step 4: Assess Resource Availability

Assess both internal and external resources

Financial and Other

Assess labor conservatively Timing is particularly important

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Step 5: Reduce the Project and Criteria Set

Organizations goals Have competence Market for offering How risky the project is Potential partner Right resources Good fit

Use strengths Synergistic Dominated by another Has slipped in desirability

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Step 6: Prioritize the Projects Within Categories

Assuring Balance of Portfolio

Apply the scores and criterion weights Consider in terms of benefits first and resource costs second Summarize the returns from the projects

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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

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Step 8: Implement the Project Process

I.e., to make the results of the PPP widely known. Top management must now make their commitment to this project portfolio process totally clear by supporting the process and the results.

Communicate results Repeat regularly Improve process

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2.8 Project Proposals

It is the set of documents submitted for evaluation Issues face firms preparing proposals
1. 2.

3.

4.

5.

Which projects should be bid on? How should the proposal-preparation process be organized and staffed? How much should be spent on preparing proposals for bids? How should the bid prices be set? What is the bidding strategy? Is it ethical?

Project Proposal Contents

1. 2.

Executive Summary
Cover Letter: All proposals should be accompanied
by a cover letter.

3. 4. 5.

Nature of the technical problem Plan for Implementation of Project Plan for Logistic Support & Administration of the project Description of group proposing to do the work
Any relevant past experience that can be applied

6.
7.