MM ZG 523 / QMJ ZG 523

PROJECT MANAGEMENT
0011 0010 1010 1101 0001 0100 1011

1
2
4
LECTURE 2

1
 Why
Why Project
Project Managers
Managers Need
Need to
to Understand
Understand
the
the Strategic
Strategic Management
Management Process
Process

• Changes in the organization’s mission and

strategy
– Project managers must respond to changes with
appropriate decisions about future projects and
adjustments to current projects.
– Project managers who understand their organization’s
strategy can become effective advocates of projects
aligned with the firm’s mission.

Copyright © 2006 The McGraw-Hill Companies. All rights reserved. McGraw-Hill/Irwin 1–2
 Applying
Applying aa Selection
Selection Model
Model
• Project Classification
– Deciding how well a strategic or operations project fits
the organization’s strategy.
• Selecting a Model
– Applying a weighted scoring model to bring projects to
closer with the organization’s strategic goals.
• Reduces the number of wasteful projects
• Helps identify proper goals for projects
• Helps everyone involved understand how and why a project is
selected

Copyright © 2006 The McGraw-Hill Companies. All rights reserved. McGraw-Hill/Irwin 1–3
 Benefits
Benefits of
of Project
Project Portfolio
Portfolio Management
Management
• Builds discipline into 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 organization
strategy.
• Improves communication and supports agreement on
project goals.

EXHIBIT 2.2

Copyright © 2006 The McGraw-Hill Companies. All rights reserved. McGraw-Hill/Irwin 1–4
 Portfolio
Portfolio of
of Projects
Projects by
by Type
Type

FIGURE 2.2

Copyright © 2006 The McGraw-Hill Companies. All rights reserved. McGraw-Hill/Irwin 1–5
Setting Goals and
Objectives

6
 Setting Goals & Objectives
Setting Goals

Goals are a desired end result. Goals can be

evaluated using the “SMART” criteria:
•Specific
•Measurable
•Acceptable
•Realistic
•Time-framed

7
 Setting Goals & Objectives
Setting Goals

Example of Good Project Goal:

To develop a database by the end of the

semester that tracks Student Evaluation data
on College of Business Instructors.

8
 Setting Goals & Objectives
Setting Objectives

Objectives are the steps you take to accomplish

your Goals.

Purpose for setting Objectives:

•Clear documented statement of purpose
•Basis for measuring performance
•Positive motivation to achieve goals
•Increased likelihood of getting there
9
 Setting Goals & Objectives
Setting Objectives

Qualities of good Objectives:

• Acceptable
• Flexible
• Measurable
• Motivating
• Suitable
• Understandable
• Achievable
10
 Setting Goals & Objectives
Setting Objectives

What are the steps that you need to take to

build a database?

11
Venture Life Cycle
 Development Stage
 Startup Stage

 Survival Stage

 Rapid Growth Stage

 Maturity Stage

12
Financing Life Cycle
 Development Stage – Seed
 Startup Stage – Startup
 Survival Stage – First Round
 Rapid Growth Stage – Second
Round, Mezzanine, Liquidity
 Maturity Stage – Bank Loans,
Bonds, Stock

13
Sound Business Model
 Generate Revenues
 Make Profits
 Produce Free Cash Flows

14
Marketing
 Deliver high quality products or
services
 Develop new products or services
considered best
 Offer products, services that
command higher prices & margins
 Develop efficient distribution
channels & superior service support
facilities
15
Financial
 Monthly financial plans for 1 year &
annual plans for 5 years
 Anticipate, obtain multiple rounds
financing as venture grows
 Efficiently & effectively manage
firm’s assets, financial resources, &
operating performance
 Plan exit strategy consistent with
entrepreneur’s objectives & business
plan
16
 Management
 Assemble management team balanced
in functional area coverage &
industry/market knowledge
 Employ decision-making style viewed
as being collaborative
 Identify & develop managers that
support entrepreneurial endeavors
 Assemble board of directors balanced
in terms of internal & external
members
17
Time-to-Market and Other
Timing Implications
 Exist in Real Time
 Narrow Window of Opportunity
 Ideas ahead of their time
 “First to Market” does not
guarantee success

18
Screening Opportunities
 Creates or Meets Customer
Need
 Provides Competitive
Advantage
 Timely, Time to Market
 Expectation Added Value to
Investors

19
Qualitative Screening
 The Big Picture
 Know Thy Customer
 Production and Development
Challenges
 Financial Fortune-Telling

20
Quantitative Categories
Evaluating Potential Venture’s
Attractiveness
 Industry/Market
 Pricing/Profitability
 Financial/Harvest
 Management Team

21
Industry/Market
 Potential Attractiveness:
 Market Size Potential
 >Average: $20-$100 M
 Venture Growth Rate
 >Average: 10%-30%
 Market Share (Year 3)
 >Average: 5%-20%
 Entry Barriers
 >Average: Timing/Size

22
Pricing/Profitability
 Gross Margins
 >Average: 20%-50%
 After-Tax Margins
 >Average: 10%-20%
 Asset Intensity
 >Average: 1.0-3.0 turnover
 Return on Assets
 >Average: 10%-25%

23
Financial/Harvest
 Cash Flow Breakeven
 Average: 2-4 years
 Rates of Return
 Average: 20%-50% per year
 IPO Potential
 Average: 2-5 years
 Founder’s Control
 Average: High Minority

24
Management Team
 Experience/Expertise
 >Average: General/General
 Functional Areas
 >Average: Most Covered
 Flexibility/Adaptability
 >Able to Adapt
 Entrepreneurial Focus
 >Average: Founder

25
Business Plan
 Cover Page
 Confidentiality Statement
 Executive Summary
 Business Description
 Marketing Plan and Strategy
 Operations and Support
 Management Team
 Financial Plans and Projections
 Risks and Opportunities
 Appendix 26
Investor Group Evaluation
Criteria
 Proven management team with relevant
successes and a desire for advice and
coaching or a team looking for
leadership from a key investor
 Realistic, achievable financial
projections and potential for high return
on investment (ROI)
 Sustainable competitive strategies that
are clearly articulated
27
Investor Group Evaluation
Criteria
 Patents or other barriers to entry
 Credible and balanced business plans
including key execution milestones
 Preference for businesses located in or
near Yakima, Benton, Franklin or Walla
Walla counties

28
 PROJECT FEASIBILITY
“Can It Work?”
-Marketability ?
-Demand ?
-Technically ?
-Financially ?
-Economically ?
-Administratively ?

Copyright © 2006 The McGraw-Hill Companies. All rights reserved.

 The Stages of the Development Process

• Creating the Concept • Construction Finance

• Testing the market • “Gap” Financing
• Evaluate Site Costs • Construction
• Pro Forma – Under Budget
– Income – Within schedule
– Expenses • Managing Property
• Finding Tenants • Selling the Asset
• Permanent Financing • Starting Over

Copyright © 2006 The McGraw-Hill Companies. All rights reserved.

 PROJECT ANALYSIS
–Determining facts
–Making reasonable assumptions
–Analyzing risks
–Making recommendations to minimize risks

Copyright © 2006 The McGraw-Hill Companies. All rights reserved.

 FINANCING & INVESTOR CONSIDERATIONS:
Public v. Conventional
Conv. Lenders consider: Public Lenders also
• market risk consider:
• borrower risk • public purpose
• project risk • regulatory compliance
• portfolio risk • affordability
• gap analysis

Copyright © 2006 The McGraw-Hill Companies. All rights reserved.

 Borrower Risk
The Five C’s:
– Cash
– Capability
– Creditworthiness
– Character
– Collateral

Copyright © 2006 The McGraw-Hill Companies. All rights reserved.

 Project Risk
• Completion risk

• Financial feasibility risk

• Collateral risk

Copyright © 2006 The McGraw-Hill Companies. All rights reserved.

 Scope of Borrower Analysis
Assessing risks that the borrower will
complete the project, considering:
• Organizational structure
• Business experience & qualifications
• Financial condition & prospects
• General credit history

Copyright © 2006 The McGraw-Hill Companies. All rights reserved.

 Collateral
• Completion guarantee
• Operating guarantee
• Portfolio:
– Overall stability, profitability, liquidity & vulnerability of
other assets in portfolio
– Diversification of portfolio
– Other direct & contingent liabilities
– Cross-collateralization

Copyright © 2006 The McGraw-Hill Companies. All rights reserved.

 What to Look at: Collateral
• Net worth
• Schedule of real estate investments
• Notes on contingent liabilities
• Level of reserves/escrows
• Potential refinancings (e.g., balloons)
• Trends in property cash flows
• Market factors

Copyright © 2006 The McGraw-Hill Companies. All rights reserved.

 Creditworthiness
• Loan payment history
• Current debt load
• Current performance
• Discrepancies

Copyright © 2006 The McGraw-Hill Companies. All rights reserved.

 Capability
• Legal entity
• Experience: projects of similar scope
• Prior collaboration of team members
• Loan history (incl. defaults)
• Property management performance
• Not-for-profit issues

Copyright © 2006 The McGraw-Hill Companies. All rights reserved.

 How to look at Capability
• Financial statements: debt load
• Credit report: payment history
• Lender contacts
• Property inspections

Copyright © 2006 The McGraw-Hill Companies. All rights reserved.

 Character
• Subjective judgments:
– Likelihood to perform/stick with it
– Integrity/live up to commitments
• Look at:
– Past development performance
– Physical/management condition
– References on past debt performance & problem
resolution

Copyright © 2006 The McGraw-Hill Companies. All rights reserved.

 Financial Statements
• Used to identify “current” problems
– losing $$ on operations
– not enough cash to meet obligations
• Used to identify “potential problems”
– look at trends
• Used to identify “source of problems”

Copyright © 2006 The McGraw-Hill Companies. All rights reserved.

 Analyzing Project INVESTMENT Risk

Development Budget

Copyright © 2006 The McGraw-Hill Companies. All rights reserved.

 Budgets are...
• Estimates
• Iterative
• Dynamic
• Linked

Copyright © 2006 The McGraw-Hill Companies. All rights reserved.

 The Budgets
Development Budget Operating Budget
• Sources • Revenue

• Uses • Expenses

• NOI
• Cash Flow

Copyright © 2006 The McGraw-Hill Companies. All rights reserved.

 Development Cost Analysis
• Investors make their own estimates & analyze
variance from developer’s budgets
• All development costs analyzed:
• Acquisition cost
• Construction cost
• Soft costs, esp. developer fees
• Development Sources: gap analysis

Copyright © 2006 The McGraw-Hill Companies. All rights reserved.

 Operating Analysis
Key Operating Measures:
• Net Operating Income (NOI)
• Cash flow (ROI/ROE)
• Debt coverage ratio
• Break-even ratio

Copyright © 2006 The McGraw-Hill Companies. All rights reserved.

 INVESTMENT
INVESTMENT ANALYSIS
ANALYSIS Models
Models
• The Payback 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.
– Limitations of payback:
• Ignores the time value of money.
• Assumes cash inflows for the investment period (and not
beyond).
• Does not consider profitability.

Copyright © 2006 The McGraw-Hill Companies. All rights reserved. McGraw-Hill/Irwin 1–48
 INVESTMENT
INVESTMENT ANALYSIS
ANALYSIS Models
Models (cont’d)
(cont’d)
• The 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: the project meets the minimum desired rate of
return and is eligible for further consideration.
• Negative NPV: project is rejected.

Copyright © 2006 The McGraw-Hill Companies. All rights reserved. McGraw-Hill/Irwin 1–49
 Net
NetPresent
PresentValue
Value(NPV)
(NPV)and
andInternal
InternalRate
Rateof
ofReturn
Return(IRR):
(IRR):
Example
ExampleComparing
ComparingTwo
TwoProjects
Projects

EXHIBIT 2.3

Copyright © 2006 The McGraw-Hill Companies. All rights reserved. McGraw-Hill/Irwin 1–50
 General Financing Issues
• Equity required
• Firmness of other commitments
• Inter-creditor issues
• Rate/order of disbursements
• Overruns
• Balloons & other long-term issues
• Financing Methods & Cost- Selection

Copyright © 2006 The McGraw-Hill Companies. All rights reserved.

 Project
Project Screening
Screening Matrix
Matrix

FIGURE 2.3

Copyright © 2006 The McGraw-Hill Companies. All rights reserved. McGraw-Hill/Irwin 1–52
 AA Portfolio
Portfolio Management
Management System
System
• Selection Criteria
– Financial: payback, net present value (NPV), internal
rate of return (IRR)
– Non-financial: projects of strategic importance to the
firm.
• Multi-Weighted Scoring Models
– Use several weighted selection criteria to evaluate
project proposals.

Copyright © 2006 The McGraw-Hill Companies. All rights reserved. McGraw-Hill/Irwin 1–53
 Wrap-up
0011 0010 1010 1101 0001 0100 1011

• Questions
1
2
4
???