Chapter 2: Strategic Management and Project Selection

Learning Objectives
1. Discuss the primary model selection criteria.
2. Describe the preparatory steps in using the model.
3. Distinguish a project selection models between numeric or non-numeric.
4. Identify and explain the two models.
5. Describe the content of the project proposal.

Chapter Outline
2.0 The Introduction

 It is not unusual these days for organizations to be wrestling with

hundreds of new projects. With so many ongoing projects it becomes
difficult for smaller projects to get adequate support, or even the attention
of senior management.
 The challenges thus facing the contemporary organization are how to
make sure that projects are closely tied to the organization’s goals and
strategy, how to handle the growing number of ongoing projects, and how
to make these projects more successful.
 The project manager who does not understand what a given project is
expected to contribute to the parent organization lacks critical information
needed to manage the project in order to optimize its contribution to the
parent organization.

2.1 Project Management Maturity

 Strategic plan usually developed at the executive level, implementation in

the middle level managers is a problem due in poor understanding in the
organizations capability and top management expectation.
 The bottom up development of departmental goals and future plans has
an invariably lacks in the vision in the overall market & competitive
environment.

A. CPAG also works with the project teams to develop their plans,
monitoring activities and reports so they dovetail with the
strategic intentions. The primary benefits of the system have
been that it allows:
a. Senior management to select any corporate initiative and
determine its status;

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 b. PMs to report progress in a relevant, systematic, timely
manner;
c. All officers, directors, and managers to view the
corporate initiatives in terms of the overall strategic plan;
and
d. Senior management to plan, tracks, and adjust strategy
through use of financial project data captured by the
system.

2.2 Project Selection and Criteria of Choice

 Project selection is the process of evaluating proposed projects or groups

of projects, and then choosing to implement some set of them so that the
objectives of the parent organization will be achieved.
 The proper choice of investment projects is crucial to the long-run survival
of every firm.
Daily we witness the results of both good and bad investment choices.

A. When a firm chooses a project selection model, the following

criteria, based on Souder (1973), are most important.
a. Realism-The model should reflect the reality of the firm’s
decision situation, especially the multiple objectives of
both the firm and its managers.
b. Capability-The model should be sophisticated enough to
deal with the situations both internal and external to the
project
c. Flexibility-The model should give valid results within the
range of conditions that the firm might experience.
d. Ease of Use-The model should be reasonably
convenient, not take a long time to execute, and be easy
to use and understand.
e. Cost-Data-gathering and modeling costs should be low
relative to the cost of the project and less than the
potential benefits of the project.
f. Easy Computerization-It should be easy and convenient
to gather and store the information in a computer
database.
2.3 The Nature of Project Selection Models

 A model of some sort is implied by any conscious decision, including the

selection of projects.
 Project selection decisions are no exception, being based primarily on the
degree to which the financial goals of the organization are met.

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 A. There are two basic types of project selection models, numeric and
nonnumeric.
a. Nonnumeric models - as the name implies, do not use
numbers as inputs.
b. Numeric models - do, but the criteria being measured may be
either objective or subjective.
B. Two Critical Facts
a. Models do not make decisions—people do.
b. All models, however sophisticated, are only partial
representations of the reality they are meant to reflect.

2.4 Types of Project Selection Models

I. Non numeric models

A. The Sacred cow -The result of the bland statement is
the creation of the project. The project is called “sacred”
because it is maintained until it is successfully concluded
or until the boss recognizes it as a failure.
B. The Operating Necessity- A project is built upon the
need of another; if the project is needed to continue the
operations
C. The Competitive necessity- A project is built to main
the competitive position of the company in the market
D. The Product Line Extension- Project is develop to help
the existing product line, it can strengthen the weak links
or sometimes be creates a new line of direction for the
existing product
E. Comparative Benefit Model- Several projects have
benefits for the organization, some have more, this
comparative benefit model is used to select project that
has the most benefits.

II. Numeric Models

A. Payback Period- Payback period is the amount of initial
invest divided by the estimated annual profit.
B. Discounted Cash Flow- This model uses the net
present value of all cash flows by discounting them by
the required rate of return. If the value is positive over the
course of life of the project then the project is deemed
acceptable

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 C. Internal Rate of Return- The model uses the expected
cash inflow and outflows with their present value to
equate the internal rate of return.
D. Profitability Index- Also called the benefit-cost ratio,
uses the present value of all future expected cash inflows
and then divided to initial investment. If the answer is
greater than 1.0, the project can be accepted
E. Other profitability model- Falls into three categories
a. those that subdivide net cash flow into the elements that
comprise the net flow;
b. those that include specific terms to introduce risk (or
uncertainty, which is treated as risk) into the evaluation;
and
c. Those that extend the analysis to consider effects that
the project might have on other projects or activities in
the organization.

III. Numeric Scoring Models

A. Un weighted 0–1 Factor Model -A set of relevant
factors is selected by management and then usually
listed in a preprinted form
B. Un weighted Factor Scoring Model - The use of a
discrete numeric scale to represent the degree to which a
criterion is satisfied is widely accepted
C. Weighted Factor Scoring Model- When numeric
weights reflecting the relative importance of each
individual factor are added, we have a weighted factor
scoring model. In general, it takes the form.
D. Window-of-Opportunity Analysis - In the early stages
of new product development, one may know little more
than the fact that the potential product seems technically
feasible.

IV. Choosing a Project Selection Model

A. Type of model selection to aid the evaluation/selection
process are depends thru the philosophy and wishes of
management.
B. Weighted scoring models three fundamental reasons.
a. First, they allow the multiple objectives of all
organizations to be reflected in the important

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 decision about which projects will be supported
and which will be rejected.
b. Second, scoring models are easily adapted to
changes in managerial philosophy or changes in
the environment.
c. Third, they do not suffer from the bias toward the
short run that is inherent in profitability models that
discount future cash flows.
C. Scoring models for project screening much more
frequently than firms with negligible levels of outside
funding.
D. The structure of a weighted scoring model is quite
straightforward.

2.5 Analysis Under Uncertainty — The Management of Risk

 During the past several years, increasing attention has been paid to the
subject of managing some of the risks inherent in most projects.
 The subject first appeared in PMI’s 1987 edition of A Guide to the Project
Management Body of Knowledge (Project Management Institute, 2001),
more commonly referred to as PMBOK

I. Risk and Uncertainty

A. Risk has been interpreted as being unsure about project
task durations and/or costs, but uncertainty plagues all
aspects of the work on projects and is present in all
stages of project life cycles.
B. The distinction between two words, “risk” and
“uncertainty.” The outcome of any decision depends on
two things:
a. what the decision maker does; and
b. what nature does—“nature”

II. The Decision making under condition;

A. The decision making under Conditions of Risk - The
expected value of a specific action is the sum of the
values of each outcome associated with the action times
the probability that it will occur.
B. The decision making under Condition of Uncertainty
- If the decision maker’s information is not so complete
and she does not know and cannot collect sufficient data

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 to determine the probability of occurrence for some
states of nature, cannot find the expected value for each
of her alternative actions.
C. The decision making under Condition of Certainty - If
the decision maker elects to ignore all states of nature
except the one she thinks most likely, she then assumes
there is one and only one possible outcome.
D. The decision making under Condition of Conflict - the
decision maker could assume that an opponent controls
the state of nature and try to use game theory to solve
her problem.

III. Risk Analysis and Simulation

A. As we have noted, risk analysis techniques will be
introduced when they are relevant to a problem at hand.
B. The information associated with project selection is
characterized by uncertainty and is thus appropriate for
the application of risk analysis.
C. Risk analysis does not remove the ambiguity, it simply
describes the uncertainties in a way that provides the
decision maker with a useful insight into their nature

IV. To apply risk analysis

A. One must make assumptions about the probability
distributions that characterize key parameters and
variables associated with a decision and then use these
to estimate the risk profit les or probability distributions of
the outcomes of the decision.
B. When the decisions involve several input variables or
parameters, simulation is highly preferable to the tedious
calculations required by analytic methods.
C. By assigning monetary values to risks and balancing
them against projected profitability
 This process is repeated many times and the statistical
distribution of the outcomes is then displayed
 This risk profile is used to assess the value of the decision along
with other factors that might be relevant such as strategic
concerns, socio/political factors, and impact on market share.

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 V. General Simulation Analysis
A. Simulation is used in Project Management when it is
generally not feasible to rely on concrete data to
generate a result. The analysis gives a picture of the
proposed change in terms of the costs and times that will
be affected.
B. Program evaluation review technique is planning tools
used to calculate the amount of time it will take
realistically finish a project.

2.6 Comments on the Information Base for Selection.

I. Accounting Data
A. Cost and revenue data are assumed to vary linearly
B. The cost-revenue information derived from standard cost
analyses and equally standardized assumptions
regarding revenues provided by the accounting system.
C. Decision maker is concerned solely with cost-revenue
elements that will be changed as a result of the project
under consideration.
II. Measurements
 To use the scoring methods discussed or to practice risk
management in project selection, we need to represent, though
not necessarily collect, expected project performance for each
criterion in numeric form
A. Subjective versus objective
a. A measurement taken by reference to an external
standard is said to be “objective.”
b. Reference to a standard that is internal to the system
is said to be “subjective.”
B. Quantitative versus Qualitative
a. The distinction between quantitative and qualitative is
also misunderstood.
b. It is not the same as numeric and nonnumeric.
c. The true distinction is that one may apply the law of
addition to quantities but not to qualities (van Gigch,
1978).

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 C. Reliable versus Unreliable
a. A data source is said to be reliable if repetitions of a
measurement produce results that vary from one
another by less than a pre specified amount.
b. The distinction is important when we consider the use
of statistical data in our selection models.
D. Valid versus Invalid
a. Validity measures the extent to which a piece of
information actually means what we believe it to
mean.
b. A measure may be reliable but not valid.
c. It performs consistently, so it is reliable.

III. Uncertain Information

 These methods are commonly used when a group must
develop a consensus concerning such items as the
importance of a technological change, an estimate of cash
flows, a forecast of some economic variable, and similar
uncertain future conditions or events.

2.7 Project Portfolio Process (PPP)

 Project Portfolio Process is a method which can maximized the output

potential of all project undertaken by your organization at a given time,
subjects to limited resources.
 These processes are the organization goals and strategies, through
analytic method such as SWOT.
A. Symptoms of misaligned portfolio:
o Many more projects than management expected
o Inconsistent determination of benefits, including double counting
o Competing projects
o “Interesting” projects that don’t contribute to the strategy
o Project whose cost exceed their benefits
o Project with much higher risks than other in the portfolio
o Lack of tracking against the plan, at least quarterly
B. If the goals and strategies have been well articulated, however,
then the PPP can serve many purposes:
o To identify proposed projects that are not really projects and
should be handled through other processes
o To prioritized the list of available projects
o To intentionally limit the overall project being managed

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 o To identify projects that support multiple organization goals and
cross reinforce other important projects
o To eliminate projects that incur excessive risks
o To eliminate projects that bypassed a formal selection process
o To keep from overloading the organization’s resources
availability
o To balance the resources with the needs
o To balance short-, medium-, and long-term returns

 The steps in this process generally follow those described in Longman et

al. (1999) and England et al. (1999)

I. Step 1: Established a Project Council

 To establish and articulate and strategic direction.
 Others who should be members of the Project Council
A. The project manager of the project
B. The head of the project
C. Particularly relevant general managers
D. Those who can identify key opportunities and risks
facing the organization, and
E. Anyone who can derail the progress of the PPP
later on the process
II. Step 2: Identify Project Categories and Criteria
 Four separate categories of projects:
A. Derivative projects – Projects with objectives or
deliverables
B. Platform projects – The planned output of these
projects represent major departure
C. Breakthrough projects – typically involve a
newer technology than platform projects
D. R & D projects – These projects are “blue- sky,”
visionary endeavors oriented toward oriented
toward using newly developed technology
III. Step 3: Collect Project Data
 For each existing and proposed projects, assemble the
data appropriate to the category’s criteria
IV. Step 4: Assess Resource Availability
 Assess the availability of both internal and external
resources, by type, department and timing.
V. Step 5: Reduce the Project and Criteria Set
 Multiple screens are employed to try to narrow down the
number of competing projects.

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  The result of this step may involve cancelling some
ongoing projects or replacing them with new, more
promising projects.
VI. Step 6: Prioritize the Projects within Categories
 Apply the score and criterion weight to rank the projects
within each category
VII. Step 7: Select the Project to be Funded and Held in
Reserved
 The focus should be on committing to fewer projects
but with sufficient funding to allow project completion.
VIII. Step 8: Implement the Process
 The first task in this final step is to make the result of
PPP widely known, including the documented reasons
for project cancellation, deferrals and non- selection\
 Senior management must fully fund the selected
project.
 The process will need to be repeated on a regular
basis.
 Finally, the process should be flexible and improved
continuously.

2.8 Project Proposals

 The topic of proposals and bidding on proposals is highly relevant to the

PMBOK knowledge area of Procurement.
 It is a set of documents submitted for evaluation.
o Project Proposal Contents
A. Executive Summary
B. Cover letter
C. Nature of the Technical problem
D. Plan for implementation of Project
E. Plan for Logistics Support & Administration of the Project
F. Description of group proposing to do the work
G. Any relevant past experience that can be applied

I. The Technical Approach

A. The proposal begins with a general description of the problem
of a project to be undertaken.
a. The major subsystems of the project are noted,
together with the organization’s approach. (problem
complex)

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 b. Presentation must be sufficient detailed.
c. The general method of solving critical problem must
be outlined.
B. Any special client requirements are listed along with ways of
meeting them. All tests of inspections are included.
a. Performance
b. Quality reliability
c. Compliance with specification

II. The Implementation Plan

A. The Implementation of the project contains:
a. Time
b. Cost
c. Materials used
B. Each major subsystem of the project is listed along with the
estimates of its cost.
a. Costs are aggregated for the whole project.
b. Totals are shown for each cost category.
c. Hours of works and quantities of materials used.
d. Wage rates and unit materials costs are shown.
C. The following are estimated on a period-by-period basis. It
was to ensure that resources are not violated.
a. Personnel
b. Equipment
c. Resource Usage
D. Major milestones are indicated on the time chart.
Contingency plans are specifically noted.

III. The Plan for Logistics Support and Administration

A. The Proposal includes the ability of the proposer to supply.
a. Routine Skills
b. Equipment
c. Skills
B. The following are required capabilities of an artist that
provides a “touch of class”
a. Artist’s Degree
b. Special Design
c. Meeting Rooms
d. Stenographic Assistance
e. Reproduction of Oversized Documents
f. Computer Graphics
g. Word Processing
h. Video Teleconferencing

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 C. It is important that the proposal contain selection explaining
how the project will be ministered.

IV. Past Experience

A. The strength of the proposal including section of describing
the past experience of proposing group.
B. The Proposing group need to apply the basic purpose of the
documents to convince potential funder to prove that the
project are worthy of support
a. List of Key Project Personnel
b. Resume of every Principle

Chapter Summary
 Project selection is a process of evaluating proposed projects or groups of
projects; then choosing to implement some set of them so that the
objectives of the parent organization will be achieved.
 The challenges facing the contemporary organization are the following:
how to make sure that projects are closely tied to the organization’s goals
and strategy, how to handle the growing number of ongoing projects, and
how to make these projects more successful.
 Project management maturity is the development of the project and multi-
project management expertise.
 Modeling the problem is the process of carving away the unwanted reality
from the bones of a problem.
 The two basic types of project selection models are numeric and non-
numeric.
 The outcome of any decision depends on two things: first, what the
decision-maker does, and the other one is what nature does.
 Risk is when the decision maker knows the probability of each and every
state of nature and thus of each and every outcome. Uncertainty is when
the decision maker’s information is not so complete and he does not know
and cannot collect sufficient data to determine the probability of
occurrence for some states of nature.
 To be satisfactory when used in the previous project selection models, the
measures may be subjective or objective, quantitative or qualitative, but
they must be numeric, reliable, and valid.
 The main purpose of the project council is to establish and articulate a
strategic direction for those projects spanning internal or external
boundaries of the organization, such as cross-departmental or joint
venture.
 Criteria are established to discriminate between very well and even better
projects. The criteria are also weighted to reflect their relative importance.

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  Project portfolio process is an eight-step procedure for selection or setting
up the phases, implementation of the proposal, and evaluating and look
over of the projects that will help for strategic goals of an organization to
achieve it.
 Project proposals generally consist of a number of sections such as the
technical approach which contains the proposal initiates with a general
description of the problem to be addressed or project to be carried out.
 The implementation plan is a proposal section which contains the
approximations of the time required, the cost and the materials used.
 The plan for logistic support and administration is a proposal section which
includes an explanation of the ability of the proposer to supply the routine
facilities, equipment, and skills needed during any project.
 Past experience is a proposal section which states that all proposals are
strengthened by including a section that describes the past practice of the
proposing group that helps to make decisions.
 Project selection models has its history told that it is seen to be an
increase in the use of proper models, particularly profitability models that
can help to such project management and its evaluation processes.

Assessment
A. Identify the following.

1. It is the process of evaluating proposed project or groups of projects, and

then choosing to implement some set of them so that the objectives of the
parent organization will be achieved.
2. The model should give valid results within the range of conditions that the
firm might experience. It should be easy to modify in response to changes
in the firm’s environment.
3. Project selection model that are further subdivided into profitability and
scoring categories.
4. The proposal includes a description of the ability of the proposer to supply
the routine facilities, equipment, and skills needed during any project.
5. This contains estimates of the time required, the cost, and the material
used.
B. Choose the best answer.

1. Project selection models can be classified as Numeric or Non-numeric; Non-

numeric is subdivided into profitability and scoring categories.

a. First statement is true; second statement is false

b. Second statement is true; first statement is false
c. Both statements are true
d. Both statements are false

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2. Sacred Cow means the project is suggested by a senior and powerful official
in the organization; the project is “sacred” in the sense that it will be maintained
until successfully concluded, or until the boss, personally, recognizes the idea as
a failure and terminates it.

a. First statement is true; second statement is false

b. Second statement is true; first statement is false
c. Both statements are true
d. Both statements are false
3. Realism means the model should not reflect the reality of the firm’s decision
situation; the model should also not take into account the realities of the firm’s
limitations on facilities, capital, personnel, and so forth.
a. First statement is true; second statement is false
b. Second statement is true; first statement is false
c. Both statements are true
d. Both statements are false
4. Payback Period is the total fixed investment in the project divided by the
estimated annual net cash inflows from the project; the ratio of these quantities is
the number of years required for the project to repay its initial fixed investment.

a. First statement is true; second statement is false

b. Second statement is true, first statement is false
c. Both statements are true
d. Both statements are false
5. It is appropriate to consider what document is needed to evaluate a project
that is being considered; Project Proposal is the set of documents submitted for
evaluation, whether it is brief or extensive, and regardless of the formality with
which it is presented.

a. First statement is true; second statement is false

b. Second statement is true; first statement is false
c. Both statements are true
d. Both statements are false

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