Project Management 5e

Organization Strategy and Project SelectionCHAPTER TWO Copyright 2011 by The McGraw-Hill Companies, Inc. All rights reserved.McGraw-Hill/Irwin122Where We Are Now

223Why Project Managers Need to Understand the Strategic Management ProcessChanges in the organizations mission and strategyProject managers must respond to changes with appropriate decisions about future projects and adjustments to current projects.Project managers who understand their organizations strategy can become effective advocates of projects aligned with the firms mission.3Project managers need to understand strategy. PM is at the apex of strategy and operationsits time to expand the traditional role of the PM from an operational to a more strategic perspective. There are two reasons for why PMers need to understand strategy. The first is so they can make appropriate decisions and adjustments. The second is so PMers can be effective pfroject advocates. Projecgt managers have to be able to demonstrate to senior management how their projecgt contributes to their firms mission.

24Projects and StrategyMistakes 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 needTrying to solve customer issues with a product or service rather than focusing on the 20% with 80% of the value (Paretos Law).Engaging in a never-ending search for perfection only the project team really cares about.4Aligning projects with strategic goals is crucial to project success. Ample evidence suggests that many organizations have not developed a process that clearly aligns project selection to the strategic planthe result is poor utilization of the organizations resources.

How can organizations ensure this link and alignment? By integration of projects with the strategic plan.

25The Strategic Management Process: An OverviewStrategic ManagementRequires every project to be clearly linked to strategy.Provides theme and focus of firms future direction.Responding to changes in the external environmentenvironmental scanningAllocating scarce resources of the firm to improve its competitive positioninternal responses to new programsRequires strong links among mission, goals, objectives, strategy, and implementation.526Strategic Management Process ActivitiesReview and define the organizational mission.Set long-range goals and objectives.Analyze and formulate strategies to reach objectives.Implement strategies through projects6Mission statements identify the scope of the firm in terms of its products and services. Everyone in the firm should be keenly aware of the mission.Mission statements determine purpose and relevance of any given project; mission statements are used to generate measures of performance. A good mission statement is one that provides the guidance and focus needed. If the mission statement can be anybodys statement, it is NOT a good mission statement.27Strategic Management ProcessFIGURE 2.1

728Characteristics of ObjectivesEXHIBIT 2.1S 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 completionR Realistic State what can realistically be done with available resourcesT Time relatedState when the objective can be achieved, that is, duration829Scenario Planning: A Supplement to Traditional Strategic PlanningClarifying your core business and assessing drivers of change in the industry environmentDeveloping potential scenarios and assessing the impact of STEEP factorsDeveloping potential contingency strategies and best future strategic optionsIdentifying early indicators and establishing triggers for strategic action9210Project Portfolio Management ProblemsThe Implementation GapThe lack of understanding and consensus on strategy among top management and middle-level (functional) managers who independently implement the strategy.Organization PoliticsProject selection is based on the persuasiveness and power of people advocating the projects.Resource Conflicts and MultitaskingMultiproject environment creates interdependency relationships of shared resources which results in the starting, stopping, and restarting projects.10211Benefits of Project Portfolio ManagementBuilds 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 2.211212A Portfolio Management SystemDesign of a project portfolio system:Classification of a projectSelection criteria depending upon classificationSources of proposalsEvaluating proposalsManaging the portfolio of projects.

12213Portfolio of Projects by TypeFIGURE 2.2

13214A Portfolio Management SystemSelection CriteriaFinancial: payback, net present value (NPV), internal rate of return (IRR)Non-financial: projects of strategic importance to the firm.Multi-Weighted Scoring ModelsUse several weighted selection criteria to evaluate project proposals.14215Financial ModelsThe Payback ModelMeasures 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.15216Financial Models (contd)The Net Present Value (NPV) modelUses managements 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.

16217Example Comparing Two Projects Using Payback MethodEXHIBIT 2.3a

17218Example Comparing Two Projects Using Net Present Value MethodEXHIBIT 2.3b

18219Nonfinancial Strategic CriteriaTo capture larger market shareTo make it difficult for competitors to enter the marketTo develop an enabler product, which by its introduction will increase sales in more profitable productsTo develop core technology that will be used in next-generation productsTo reduce dependency on unreliable suppliersTo prevent government intervention and regulation19220Multi-Criteria Selection ModelsChecklist ModelUses 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 doesnt to allow for comparison with other potential projects.Multi-Weighted Scoring ModelUses several weighted qualitative and/or quantitative selection criteria to evaluate project proposals.Allows for comparison of projects with other potential projects20221Sample Selection Questions Used in PracticeEXHIBIT 2.4Topic Question Strategy/alignment What specific strategy does this project align with? Driver What business problem does the project solve? Success metrics How will we measure success? 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? Risk Where does the proposed project fit in our risk profile? 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? 21222Sample Selection Questions Used in PracticeEXHIBIT 2.4 contdTopic Question Organization culture Is our organization culture right for this type of project? 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? 22223

Project Screening MatrixFIGURE 2.323224Applying a Selection ModelProject ClassificationDeciding how well a strategic or operations project fits the organizations strategy.Selecting a ModelApplying a weighted scoring model to bring projects to closure with the organizations strategic goals.Reduces the number of wasteful projectsHelps identify proper goals for projectsHelps everyone involved understand how and why a project is selected24225Project ProposalsSources and Solicitation of Project ProposalsWithin the organizationRequest for proposal (RFP) from external sources (contractors and vendors)Ranking Proposals and Selection of ProjectsPrioritizing requires discipline, accountability, responsibility, constraints, reduced flexibility, and loss of power.Managing the PortfolioSenior management inputThe priority team (project office) responsibilities25226A Proposal Form for an Automatic vehicular tracking (AVL) PublicTransportation ProjectFIGURE 2.4A

26227Risk Analysis for500-Acre Wind FarmFIGURE 2.4B

27228Managing the PortfolioSenior Management InputProvide guidance in selecting criteria that are aligned with the organizations goalsDecide how to balance available resources among current projectsThe Priority Team ResponsibilitiesPublish the priority of every projectEnsure that the project selection process is open and free of power politics.Reassess the organizations goals and prioritiesEvaluate the progress of current projects28229

Project Screening ProcessFIGURE 2.529230Priority AnalysisFIGURE 2.6

30231Project Portfolio MatrixFIGURE 2.7

31232Project Portfolio Matrix DimensionsBread-and-butter ProjectsInvolve evolutionary improvements to current products and services.PearlsRepresent revolutionary commercial opportunities using proven technical advances.OystersInvolve technological breakthroughs with high commercial payoffs.White ElephantsShowed promise at one time but are no longer viable.

32233Key TermsImplementation gapNet present valueOrganizational politicsPaybackPriority systemPriority teamProject portfolioProject screening matrixProject sponsorSacred cowStrategic management process33