Lecture 2

Organization Strategy and

Project Selection
 Where We Are Now

Project Schedule
Estimate
networks resources & costs
5
6 8

Define Reducing
project duration
4 9

Managing Monitoring Project

Introduction Organization
risk progress closure
1 3
7 13 14

Project
Strategy Teams Outsourcing
manager
2 11 12
10

2
 Learning objectives
1. Explain why it is important for project managers to
understand their organization’s strategy.
2. Identify the significant role projects contribute to the
strategic direction of the organization.
3. Understand the need for a project priority system.
4. Apply financial and nonfinancial criteria to assess the
value of projects.
5. Understand how multi-criteria models can be used to
select projects.
6. Apply an objective priority system to project selection.
7. Understand the need to manage the project portfolio.
3
 Contents
1. Strategy and projects
2. Project Portfolio Management
3. Project selection: financial vs. nonfinancial
4. Applying a Selection Model
5. Managing the portfolio

Key terms
Review questions & exercises

4
 Why understand the strategic management process?

• Two main reasons why project managers need to

understand their organization’s mission and strategy:

1. They can make appropriate decisions and adjustments

2. They can be effective project advocates

5
 Projects and Strategy
• Mistakes caused by not understanding the role of projects
in accomplishing strategy:
– Focusing on problems or solutions with low strategic priority.
– Focusing on the immediate customer rather than the whole
market place and value chain.
– Overemphasizing technology that results in projects that
pursue exotic technology that does not fit the strategy or
customer need
– Trying to solve customer issues with a product or service
rather than focusing on the 20% with 80% of the value
(Pareto’s Law).
– Engaging in a never-ending search for perfection only the
project team really cares about.
6
 Strategic management process
• STRATEGIC MANAGEMENT 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.”
• STRATEGY describes how an organization intends to
compete with the resources available in the existing and
perceived future environment.

7
 Four activities of strategic management process

1. Review and define the organizational mission.

2. Set long-range goals and objectives.

3. Analyze and formulate strategies to reach objectives.

4. Implement strategies through projects

8
 Strategic
Management
Process

FIGURE 2.1

9
 The need for a project priority system
• Problem 1: The Implementation Gap
– Lack of understanding and consensus of organization strategy
among top and middle-level managers
• Problem 2: Organization Politics
– Project selection may be based not so much on facts and
sound reasoning as on the persuasiveness and power of
people advocating projects
• Problem 3: Resource conflicts and multitasking
– Multiproject environment creates the problems of project
interdependency and the need to share resources.

10
 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.

EXHIBIT 2.2

11
 A portfolio management system
• Design of a project portfolio system:
– Classification of a project
– Selection criteria depending upon classification
– Sources of proposals
– Evaluating proposals
– Managing the portfolio of projects.

12
Portfolio of Projects
by Type

FIGURE 2.2

13
 A Portfolio Management System
• Financial criteria:
– Payback
– Net present value (NPV)
• Nonfinancial criteria: projects of strategic importance to
the firm.
– Checklist model
– Multi-weighted scoring models

Contents
14
 Payback model
• Measures the time the project will take to recover
the project investment.
• Uses more desirable shorter paybacks.
• Emphasizes cash flows, a key factor in business.
• Limitations of payback:
– Ignores the time value of money.
– Assumes cash inflows for the investment period
(and not beyond).
– Does not consider profitability.

15
Example Comparing Two Projects
Using Payback Method

EXHIBIT 2.3a

16
 Net present value (NPV) model
• Uses management’s minimum desired rate-of-return
(discount rate) to compute the present value of all net cash
inflows.
– Positive NPV: project meets minimum desired rate of return
and is eligible for further consideration.
– Negative NPV: project is rejected.

17
 Example Comparing Two Projects
Using Net Present Value Method

EXHIBIT 2.3b
Contents
18
 Nonfinancial criteria
• A firm may support projects that do not have high profit
margins for other strategic reasons including:
– 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

19
 Multi-criteria selection models
• Checklist model
– Uses a list of questions to review potential projects and to
determine their acceptance or rejection.
– Fails to answer the relative importance or value of a potential
project and doesn’t to allow for comparison with other
potential projects.
• Multi-weighted scoring model
– Uses several weighted qualitative and/or quantitative
selection criteria to evaluate project proposals.
– Allows for comparison of projects with other potential
projects

20
 Sample Selection Questions Used in Practice

Topic Question
Strategy/alignment What specific organization strategy does this project align with?

Driver What business problem does the project solve?

Sponsorship Who is the project sponsor?

Risk What is the impact of not doing this project?

Risk What is the project risk to our organization?

Benefits, value, ROI What is the value of the project to this organization?

Benefits, value, ROI When will the project show results?

Objectives What are the project objectives?

Organization culture Is our organization culture right for this type of project?

EXHIBIT 2.4

21
 Sample Selection Questions Used in Practice

Topic Question
Resources Will internal resources be available for this project?

Approach Will we build or buy?

Schedule How long will this project take?

Schedule Is the time line realistic?

Training/resources Will staff training be required?

Finance/portfolio What is the estimated cost of the project?

Portfolio Is this a new initiative or part of an existing initiative?

Portfolio How does this project interact with current projects?

Technology Is the technology available or new?

EXHIBIT 2.4

22
 Project Screening Matrix

FIGURE 2.3
Contents
23
 Applying a selection model
• Project classification
– The project’s fit to the organization strategy.
– Weighted scoring models result in bringing projects to closer
alignment with strategic goals
• Sources and solicitation of project proposals
– Not limited to certain types or classes of organization
stakeholders.
– Encourage and keep solicitations open to all sources—
internal and external sponsors
• Ranking proposals and selection of projects
– Data and information are collected to assess the value of the
proposed project to the organization and for future backup
24
A Proposal Form
for an Automatic
vehicular tracking
(AVL) Public
Transportation
Project

FIGURE 2.4A

25
 Risk Analysis
for
500-Acre
Wind Farm

FIGURE 2.4B
Contents
26
 Project
Screening
Process

FIGURE 2.5

27
Priority
Analysis

FIGURE 2.6
28
 Managing the portfolio system
• Senior management input
– Provide guidance in selecting criteria that are aligned with the
organization’s goals
– Decide how to balance available resources among current
projects
• The governance team responsibilities
– Publish the priority of every project
– Ensure that the project selection process is open and free of
power politics.
– Reassess the organization’s goals and priorities
– Evaluate the progress of current projects

29
 Managing the portfolio system
• Balancing the portfolio for risks and types of projects
– Requires a total organization perspective
– Evaluate each new project in terms of what it adds to the
project mix.
– Risk associated with projects:
• Risks associated with the total portfolio of projects, which should
reflect the organization’s risk profile.
• Specific project risks that can inhibit the execution of a project, such as
schedule, cost, and technical.
– Four basic types of projects
• Bread-and-butter
• Pearl
• Oyster
• White elephant
30
 Four basic types of projects
• Bread-and-butter projects
– Involve evolutionary improvements
to current products and services.
• Pearls
– Represent revolutionary commercial
opportunities using proven technical advances.
• Oysters
– Involve technological breakthroughs
with high commercial payoffs.
• White elephants
– Showed promise at one time
but are no longer viable.
Contents
31
 Key terms
• Implementation gap • Priority team
• Net present value • Project portfolio
• Organizational politics • Project sponsor
• Payback • Sacred cow
• Priority system • Strategic management

Contents
32
 Review questions & exercises
• Review questions
– Textbook, page 52: #1–7.

• Exercises
– Textbook, page 52–55: #1-2*-3-4-5*-6-7

33