ProjMan - Chapter 2 - Organization Strategy and Project Selection

Financial Criteria: The Payback Model - Definition

- Measures the time it will take to recover the project investment - Shorter paybacks are more desirable - Simplest and most widely used model - Emphasizes cash flows, a key factor in business. - Provides especially useful information for firms concerned with liquidity and having sufficient resources to manage their financial obligations

Financial Criteria (Selection Criteria)

- Payback - Net Present Value (NPV)

Limitations of Payback Method

-Ignores the time value of money. -Assumes cash inflows for the investment period (and not beyond). -Does not consider profitability.

Four Activities of the Strategic Management Process

1. Review and define the organizational mission 2. Analyze and formulate strategies 3. Set objectives to achieve strategies 4. Implement strategies through projects

Balancing the Portfolio for Risks and Types of Projects

David and Jim Matheson studied R&D organizations and developed a classification scheme that could be used for assessing a project portfolio. They separated projects in terms of degrees of difficulty and commercial value. The four basic types of projects are: - Bread-and-butter - Pearls - Oysters - White elephants

Oysters (4 Basic Types of Projects)

- High risk, high value projects. - Involve technological breakthroughs with tremendous commercial potential. - Examples include embryonic DNA treatments and new kinds of metal alloys.

Pearls (4 Basic Types of Projects)

- Low risk development projects with high commercial payoffs. - Represent revolutionary commercial advances using proven technology. - Examples include next-generation integrated circuit chip and subsurface imaging to locate oil and gas.

Operational projects (Project Classification)

- Operational projects are those that are needed to support current operations. - These projects are designed to improve efficiency of delivery systems, reduce product costs, and improve performance.

Applying a Selection Model

- Project Classification - Sources and Solicitation of Project Proposals - Ranking Proposal and Selection of Projects

Nonfinancial Criteria (Selection Criteria)

- Projects of strategic importance to the firm

Bread-and-butter (4 Basic Types of Projects)

- Relatively easy to accomplish and produce modest commercial value. - Typically involve evolutionary improvements to current products and services. - Examples include software upgrades and manufacturing cost reduction efforts.

Analyze and formulate strategies (Four Activities of the Strategic Management Process)

- Second step - Formulating strategy answers the question of what needs to be done to reach objectives. Strategy formulation includes determining and evaluating alternatives that support the organization's objectives and selecting the best alternative.

Managing the Portfolio System

- Senior Management Input - Governance Team Responsibilities

Strategic projects (Project Classification)

- Strategic projects are those that directly support the organization's long-run mission. - They frequently are directed toward increasing revenue or market share.

Two Multi-Criteria Selection Models: Checklists Models

- The most frequently used method in selecting projects - Use a list of questions to review potential projects and to determine their acceptance or rejection. - Allow greater flexibility in selecting among many different types of projects and are easily used across different divisions and locations. (Justification) - Fail to answer the relative importance or value of a potential project to the organization and does not allow for comparison with other potential projects. (Shortcoming)

Set objectives to achieve strategies (Four Activities of the Strategic Management Process)

- Third step - Objectives translate the organization strategy into specific, concrete, measureable terms. Objectives answer in detain where a firm is headed and when it is going to get there.

Two Multi-Criteria Selection Models: Multi-Weighted Scoring Models

- Use several weighted selection criteria to evaluate project proposals. - Include qualitative and/or quantitative criteria. - Allow for comparison with other potential projects.

Financial Criteria: Net Present Value (NPV) - Definition

- Uses management's minimum desired rate-of-return to compute the present value of all net cash inflows - Prefers positive NPV to negative NPV - Desires higher positive NPVs - Is more realistic because it considers time value of money, cash flows, and profitability.

Two Major Dimensions of Strategic Management

1. Responds to changes in the external environment and allocates the firm's scare resources to improve its competitive position. 2. Internal responses to new action programs aimed at enhancing the competitive position of the firm.

Two main reasons project managers need to understand their organization's mission and strategy

1. So they can make appropriate decisions and adjustments. 2. So they can be effective project advocates.

Problem 3: Resource Conflicts and Multitasking (Implementation of projects without a strong priority system linked to strategy create problems)

• A multi-project environment creates the problems of project interdependency and the need to share resources. Resource sharing leads to multitasking—involves starting and stopping work on one task to go and work on another project, then returning to the work on the original task.

Project Classification (Applying a Selection Model)

• Deciding whether the project fits with the organization strategy. • Selecting a Model - Weighted scoring criteria seem the best alternative because: ~ They reduce the number of wasteful projects using resources. ~They help to identify project goals that can be communicated using the selection criteria as corroboration. ~ They help project managers understand how their project was selected, how their project contributes to organization goals, and how it compares with other projects.

Ranking Proposal and Selection of Projects (Applying a Selection Model)

• Evaluating each proposal in terms of feasibility, potential contribution to strategic objectives, and fit within a portfolio of current projects. • Rejecting or accepting the projects based on given selection criteria and current portfolio. • Prioritizing projects by senior management.

Phase Gate Model

• Is a series of gates that a project must pass through in order to be completed. • Its purpose is to ensure that the organization is investing time and resources on worthwhile projects that contribute to its mission and strategy. • Each gate is associated with a project phase and represents a decision point. • A gate can lead to three possible outcomes: go (proceed), kill (cancel), or recycle (revise and resubmit).

Strategic Management Defined

• Is the process of assessing "what we are" and deciding and implementing "what we intend to be and how we are going to get there." • Is a continuous, iterative process aimed at developing an integrated and coordinated long-term plan of action. • Requires strong links among mission, goals, objectives, strategy, and implementation.

Problem 2: Organization Politics (Implementation of projects without a strong priority system linked to strategy create problems)

• Project selection may be based not so much on facts and sound reasoning as on the persuasiveness and power of people advocating projects. • The term sacred cow is often used to denote a project that a powerful, high ranking official is advocating.

Senior Management Input (Managing the Portfolio System)

• Provides guidance in establishing selection criteria that strongly align with the current organization strategies. • Annually decides how to balance the available organizational resources (people and capital) among the different types of projects

Governance Team Responsibilities (Managing the Portfolio System)

• Publish the priority of every project. • Ensure the selection process is open and free of power politics. • Evaluate the progress of current projects. • Constantly scan the external environment to determine if organization focus and/or selection criteria need to be changed.

Problem 1: The Implementation Gap (Implementation of projects without a strong priority system linked to strategy create problems)

• The implementation gap is the lack of understanding and consensus of organization strategy among top and middle-level managers.

Nonfinancial Criteria: Examples of strategic objectives

• To capture larger market share. • To make it difficult for competitors to enter the market. • To develop an enabler product, which by its introduction will increase sales in more profitable products. • To develop core technology that will be used in next-generation products. • To reduce dependency on unreliable suppliers. • To prevent government intervention and regulation.

Sources and Solicitation of Project Proposals (Applying a Selection Model)

• Within the organization • Request for Proposal (RFP) from external sources (contractors/vendors)

Benefits of Project Portfolio Management

•Builds discipline into the project selection process •Links project selection to strategic metrics •Prioritizes project proposals across a common set of criteria, rather than on politics or emotion •Allocates resources to projects that align with strategic direction •Balances risk across all projects •Justifies killing projects that do not support strategy •Improves communication and supports agreement on project goals

Payback Formula

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

Implementation of projects without a strong priority system linked to strategy create problems

Problem 1: The Implementation Gap Problem 2: Organization Politics Problem 3: Resource Conflicts and Multitasking

White elephants (4 Basic Types of Projects)

- At one time showed promise but are no longer viable. - Examples include products for a saturated market or a potent energy source with toxic side-effects.

Two Multi-Criteria Selection Models (Selection Criteria)

- Checklists Models - Multi-Weighted Scoring Models

Project Classification

- Compliance (must do) projects - Strategic projects - Operational projects

Compliance (must do) projects (Project Classification)

- Compliance projects are typically those needed to meet regulatory conditions required to operate in a region; hence, they are called "must do" projects. - Compliance and emergency projects usually have penalties if they are not implemented.

Symptoms of organizations struggling with strategy disconnect and unclear priorities

- Conflicts frequently occur among functional managers and cause lack of trust. - Frequent meetings are called to establish or renegotiate priorities. - People frequently shift from one project to another, depending on current priority. Employees are confused about which projects are important. - People are working on multiple projects and feel inefficient. - Resources are not adequate.

Selection Criteria

- Financial Criteria - Nonfinancial Criteria - Two multi criteria selection models

2 Types of Risks Associated with Projects

- First are risks associated with the total portfolio of projects, which should reflect the organization's risk profile. - Second are specific project risks that can inhibit the execution of a project, such as schedule, cost, and technical.

Review and define the organizational mission (Four Activities of the Strategic Management Process)

- First step - The mission identifies "what we want to become." Mission statements identify the scope of the organization in terms of its product and service.

Implement strategies through projects (Four Activities of the Strategic Management Process)

- Fourth step - Implementation answers the question of how strategies will be realized, given available resources.

Characteristics of Objectives

SMART Specific Measurable Assignable/Attainable Realistic Time-bound