Ch - 2 Strategic Project Selection

8/3/2019 Ch - 2 Strategic Project Selection

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Strategic Project Selection



SELECTING PROJECTS STRATEGICALLY

PROJECT MANAGEMENT MATURITY

As organizations have employed more and more projects

for accomplishing their objectives, it has become natural for

senior managers to wonder if the organization¶s project

manager have a mastery of skills required to manage

projects competently.

In the last few years, a number of ways to measure this -

referred to as ³project management maturity´ ± have been

suggested, such as basing the evaluation on ISO 9001

standards, etc.



PROJECT SELECTION AND CRITERION OF CHOICE

1. Realism

2. Capability

3. Flexibility

4. Ease of use

5. Cost

6. Easy computerization



PROJECT EVALUATION FACTORS

1. Production Factors

2. Marketing Factors

3. Financial Factors

4. Personnel Factors

5. Administrative and Miscellaneous Factors



TYPES OF PROJECT SELECTION MODELS

1. The Sacred Cow

2. The Operating Necessity

3. The Competitive Necessity

4.The Product Line Extension

5. Comparative Benefit Model

Nonnumeric Models



Numeric Models: Profit / Profitability

1. Payback Period

2. Discounted Cash Flow

3. Internal Rate of Return

4. Profitability Index

5. Other Profitability Methods



Advantages of profit-profitability numeric models

The undiscounted models are simple to use and understand.

All use readily available accounting data to determine the cash

flows.

Models output is in terms familiar to business decision makers.

With a few exceptions, model output is on an ³absolute´

profit/profitability scale and allows ³absolute´ go/no-go

decisions.

Some profit models can be amended to account for project risk.



These models ignore all nonmonetary factors except risk.

Models that do not include discounting ignore the timing of

the cash flows and the time-value of money.

Models that reduce cash flows to their present value are

strongly biased toward the short run.

Payback-type models ignore cash flows beyond the

payback period.

The internal rate of return model can result in multiple

solutions.

Disadvantages of profit-profitability numeric models



Continued ««

Models that do not include discounting ignore the timing of the cash

flows and the time-value of money.

All are sensitive to errors in the input data for the early years of the

project.

All discounting models are nonlinear, and the effects of changes (or

errors) in the variables or parameters are generally not obvious to

most decision makers.

All these models depend for input on a determination of cash flows,

but it is not clear exactly how the concept of cash flow is properly

defined for the purpose of evaluating projects.



Numeric Models: Scoring

Unweighted 0-1 Factor Model

Unweighted Factor Scoring Model

Weighted Factor Scoring Model

Advantages of Scoring Models

These models allow multiple criteria to be used for evaluation

and decision making, including profit/profitability models and

both tangible and intangible criteria.

They are structurally simple and therefore easy to

understand and use.

They are a direct reflection of managerial policy.



They are easily altered to accommodate changes in the

environment or managerial policy.

Weighted scoring models allow for the fact that some criteria

are more important than others.

These models allow easy sensitivity analysis. The trade-offs

between the several criteria are readily observable.

Continued «««

Disadvantages of Scoring Models

The output of a scoring model is strictly a relative measure.

Project scores do not represent the value or ³utility´

associated with a project and thus do not directly indicate

whether or not the project should be supported.



In general, scoring models are linear in form and the elements of

such models are assumed to be independent.

The ease of use of these models is conducive to the inclusion of

a large number of criteria, most of which have such small weights

that they have little impact on the total project score.

Unweighted scoring models assume all criteria are of equal

importance, which is almost certainly contrary to fact.

To the extent that profit/profitability is included as an element in

the scoring model, this element has the advantages and

disadvantages noted earlier for the profitability models

themselves.



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.

The traditional approach has been to implement thetechnology in question (or a pilot version of it) and then test it

to see if it qualifies as useful and economic.

This is often a wasteful process because it assumes the

innovation will be successful ± a condition not always met in

practice.



Given some idea for a new product or process, we can invertthis traditional approach by attempting to determine the cost,

timing, and performance specifications that must be met by this

new technology before any R & D is undertaken.

This is called the window-of-opportunity for the innovation.

Continued ««..



PROJECT PORTFOLIO PROCESS (PPP)

An eight-step procedure for selecting, implementing, and

reviewing projects that will help an organization achieve its

strategic goals.

Step 1: Establish a Project Council

Step 2: Identity Project Categories and CriteriaStep 3: Collect Project Data

Step 4: Assess Resource Availability

Step 5: Reduce the Project and Criteria Set

Step 6: Prioritize the Project within Categories

Step 7: Select the Projects to Be Funded and Held in Reserve

Step 8: Implement the Process

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Ch - 2 Strategic Project Selection