Organization Strategy and Selection

of Project

2–1
WHERE WE ARE NOW

2–2
WHY PROJECT MANAGERS NEED
TO UNDERSTAND STRATEGY

• 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.

2–3
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.

2–4
THE STRATEGIC MANAGEMENT
PROCESS: AN OVERVIEW

• Strategic Management
– Requires every project to be clearly linked to strategy.
– Provides theme and focus of firm’s future direction.
• Responding to changes in the external environment—
environmental scanning
• Allocating scarce resources of the firm to improve its
competitive position—internal responses to new programs
– Requires strong links among mission, goals,
objectives, strategy, and implementation.

2–5
FOUR ACTIVITIES OF THE STRATEGIC
MANAGEMENT PROCESS

• Review and define the organizational mission.

• Set long-range goals and objectives.
• Analyze and formulate strategies to reach
objectives.
• Implement strategies through projects

2–6
Strategic
Management
Process

FIGURE 2.1

2–7
CHARACTERISTICS OF OBJECTIVES

S Specific Be specific in targeting an objective

M Measurable Establish a measurable indicator(s) of progress

A Assignable Make the objective assignable to one person

for completion

R Realistic State what can realistically be done with

available resources

T Time related State when the objective can be achieved,

that is, duration

EXHIBIT 2.1

2–8
PROJECT PORTFOLIO MANAGEMENT
THE NEED FOR A STRONG PROJECT PRIORITY SYSTEM

• The Implementation Gap

– The lack of understanding and consensus on strategy
among top management and middle-level (functional)
managers who independently implement the strategy.
• Organization Politics
– Project selection is based on the persuasiveness and
power of people advocating the projects.
• Resource Conflicts and Multitasking
– Multiproject environment creates interdependency
relationships of shared resources which results in the
starting, stopping, and restarting projects.
2–9
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

2–10
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.

2–11
PORTFOLIO OF PROJECTS BY TYPE

FIGURE 2.2

2–12
 Exercise
You manage a hotel resort located on the South Beach on the Island of
Kauai in Hawaii. You are shifting the focus of your resort from a
traditional fun-in-the-sun destination to eco-tourism. (Eco-tourism
focuses on environmental awareness and education.) How would you
classify the following projects in terms of compliance, strategic, and
operational?

a. Convert the pool heating system from electrical to solar power.

b. Build a 4-mile nature hiking trail.
c. Renovate the horse barn.
d. Launch a new promotional campaign with Hawaii Airlines.
e. Convert 12 adjacent acres into a wildlife preserve.
f. Update all the bathrooms in condos that are 10 years or older.
g. Change hotel brochures to reflect eco-tourism image.
h. Test and revise disaster response plan.
i. Introduce wireless Internet service in café and lounge areas.

2–13
Ans

Compliance: f., h.
Operational: a., c., i.
Strategic: b., d., e., g.

2–14
A PORTFOLIO MANAGEMENT SYSTEM

• Selection Criteria
– Financial models: payback, net present value (NPV)
– Non-financial models: projects of strategic
importance to the firm.
• Multi-Weighted Scoring Models
– Use several weighted selection criteria to evaluate
project proposals.

2–15
FINANCIAL MODELS
• The 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.

2–16
FINANCIAL MODELS (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: project meets minimum desired rate

of return and is eligible for further consideration.

• Negative NPV: project is rejected.

2–17
EXAMPLE COMPARING TWO PROJECTS
USING PAYBACK METHOD

EXHIBIT 2.3a

2–18
EXAMPLE COMPARING TWO PROJECTS
USING NET PRESENT VALUE METHOD

EXHIBIT 2.3b

2–19
NONFINANCIAL STRATEGIC CRITERIA
• 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
• To restore corporate image or enhance brand
recognition
• To demonstrate its commitment to corporate citizenship
and support for community development. 2–20
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

2–21
PROJECT SCREENING MATRIX

FIGURE 2.3

2–22
APPLYING A SELECTION 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 align projects
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

2–23
PROJECT PROPOSALS
• Sources and Solicitation of Project Proposals
– Within the organization
– Request for proposal (RFP) from external sources
(contractors and vendors)
• Ranking Proposals and Selection of Projects
– Prioritizing requires discipline, accountability,
responsibility, constraints, reduced flexibility,
and loss of power.
• Managing the Portfolio
– Senior management input
– The priority team (project office) responsibilities

2–24
Project
Screening
Process

FIGURE 2.5

2–25
BALANCING THE PORTFOLIO FOR
RISKS AND 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.
2–26
Exercise
Two new software projects are proposed to a young,
start-up company. The Alpha project will cost $150,000
to develop and is expected to have annual net cash flow
of $40,000. The Beta project will cost $200,000 to
develop and is expected to have annual net cash flow of
$50,000. The company is very concerned about their
cash flow. Using the payback period, which project is
better from a cash flow standpoint? Why?

2–27
Exercise
Payback = Investment / Annual Savings
 
Project Alpha: $150,000 / $40,000 = 3.75 years
 
Project Beta: $200,000 / $50,000 = 4.0 years
 
Project Alpha is the better payback.

2–28
Exercise
A five-year project has a projected net cash flow of
$15,000, $25,000, $30,000, $20,000, and $15,000 in the
next five years. It will cost $50,000 to implement the
project. If the required rate of return is 20 percent,
conduct a discounted cash flow calculation to determine
the NPV. (See the Excel sheet for Answer)

2–29
 Exercise
You work for the 3T company, which expects to earn at
least 18 percent on its investments. You have to choose
between two similar projects. Your analysts predict that
inflation rate will be a stable 3 percent over the next 7
years. Below is the cash flow information for each project.
Which of the two projects would you fund if the decision is
based only on financial information? Why? (Refer Excel
sheet for answer)
Omega         Alpha      
Year Inflow Outflow Netflow   Year Inflow Outflow Netflow

Y0 0 $225,000 -225,000   Y0 0 $300,000 -300,000

Y1 0 190,000 -190,000   Y1 $50,000 100,000 -50,000

Y2 $150,000 0 150,000   Y2 150,000 0 150,000

Y3 220,000 30,000 190,000   Y3 250,000 50,000 200,000
Y4 215,000 0 215,000   Y4 250,000 0 250,000
Y5 205,000 30,000 175,000   Y5 200,000 50,000 150,000
Y6 197,000 0 197,000   Y6 180,000 0 180,000
Y7 100,000 30,000 70,000   Y7 120,000 30,000 90,000

Total 1,087,000 505,000 582,000   Total 1,200,000 530,000 670,000

2–30
 Exercise
You are the head of the project selection team at
SIMSOX. Your team is considering three different
projects. Based on past history, SIMSOX expects at least
a rate of return of 20 percent. Your financial advisors
predict inflation to remain at 3 percent into the
foreseeable future.

Given the following information for each project, which

one should be SIMSOX first priority? Should SIMSOX
fund any of the other projects? If so, what should be the
order of priority based on return on investment? (Refer
Answer sheet for Excel)

2–31
Exercise
Project: Dust Devils
Year Inflows Outflows
0   500,000
1 50,000  
2 250,000  
3 350,000  
     

Project: Voyagers
Project: Ospry
Year Inflows Outflows Year Inflows Outflows
0   250,000 0   75,000
1 75,000   1 15,000  
2 75,000   2 25,000  
3 75,000   3 50,000  
4 50,000   4 50,000  
5 150,000  

2–32