In Ch 1: The World of Project Management The differences between project management and general management are overviewed. The three interrelated project

In Ch 1: The World of Project Management

The differences between project management and general management are overviewed.

The three interrelated project management objectives of budget, schedule, and specifications are introduced.

Two alternative project life cycles are presented and the importance of understanding this distinction is discussed.

Both qualitative (non-numeric) and quantitative (numeric) project selection methods are discussed.

Aggregate project plan is also discussed

04/19/23 Ardavan Asef-Vaziri 1-1

Why the emphasis on project management?

Projects are temporary endeavors undertaken to create a unique product or service.

Many tasks do not fit into business-as-usual. temporary (specific start and stop) unique (a one-of-a-kind output or deliverable aimed at meeting a specific need of the client.

A non-project (a process) refers to the routine, repetitive work of the organization.

Need to assign responsibility and authority for achievement of organizational goals.


Characteristics of Projects

Main Characteristics Unique Specific deliverable Specific due date

Other Characteristics Multidisciplinary Complex Conflict Part of programs


PMI Definition

Project: A project is a unique temporary endeavor, with a set beginning and end.

Project Management: The application of knowledge, skills, tools and techniques to a broad range of activities in order to meet the requirements of a particular project.


Goals and Trade-offs

The three goals of a project are: On time On budget To specification (including “quality” and “client

satisfaction”)

The project manager meets the goals by making trade-offs. shorten the project duration by using more resources.

An overdetermined project: has a fixed budget, fixed delivery time, and fixed specifications. No place for trade-off. Is it Good?


Abilities Needed For Effective Project Management

Conflict Resolution Creativity and Flexibility Ability to Adjust to Change Good Planning Negotiation

Win-lose negotiation is like a zero-sum game. Any time one side wins the other side loses. In a win-win negotiation, the outcome is such that both parties gain something from the interchange.

Win-lose negotiating is dangerous for project managers who will have to deal with the same parties over and over again. The project manager who forces a functional manager to lose will have created a permanent enemy.


Project Life Cycle: S-Shaped

Level of Effort in a S-Shaped Life Cycle

Life Cycle: J-Shaped

Resource allocation for S=shaped and J-shaped is quite different.

Project Selection: Qualitative Methodes

The Sacred Cow A project proposed by the CEO, a big guy

The Operating/Competitive Necessity It is required to continue our operations We may lose our market share

Comparative Benefits Q-sort


The Q-Sort Method


Project Selection: Quantitative Methods

Financial Assessment Methods Payback period Discounted cash flow

– NPV– IRR– B/C

Scoring Methods Unweighted 0-1 factor method Weighted factor scoring method


Payback Period


InflowsCash Net Annual

Investment Fixed Initial

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Payback Period

Number of years needed for the project to repay its initial fixed investment.

A project costs $100,000 and is expected to save the company $20,000 per year.

PP = $100,000 / $20,000 = 5 yearsShortcoming

Ignores the time value of money, including interest rates and inflation.

Ignores money earned after the payback period.

Future Value (FV)


Go to board

Define r MARR

$100, 10%, one year

$100, 10% , two years

Compute F

P, i, 1 P,i, 2, P, i, N

Present Value (PV)


Go to board

Define r MARR

$100, 10%, one year

$100, 10% , two years

Compute F

P, i, 1 P,i, 2, P, i, N

Present Value of an Annuity (PVA)


Assume N= 10

Then change 10 to N

Net Present Value (NPV)


n

tt

t

r

F

10 )1(

I- (project) NPV

I0 = the initial investment

Ft = the net cash flow in period t

r = the required rate of return or hurdle rate

Important note: NPV function in excel assumes that the first cash flow is at the end of year 1.

PV function computes the present value of an annuity

Internal Rate of Return [IRR]

The discount rate (r) that causes the NPV to be equal to zero

The higher the IRR, the better While it is technically possible for a series to have

multiple IRRs, this is not a practical issue

Finding the IRR requires a financial calculator or computer

In Excel “=IRR(Series,Guess)”Compare IRR with MARR

21

Internal Rate of Return (IRR)

Find a value of r such that NPV is equal to 0 (note: this value may not be unique)

Example (with T = 2):

Find r such that

0)1(1 2

210

r

F

r

FF

Note that, in a typical project, early cash flows are negative.

Profitability Index or B/C Ratio


n

tt

t

r

F

1 )1( B

0I C

Profitability Models

Advantages Easy to use and understand Based on accounting data and forecasts Familiar and well understood Give a go/no-go indication Can be modified to include risk

Disadvantages Ignore non-monetary factors Discounting models (NPV, IRR) are biased to the

short-term

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Expected Commercial Value (ECV)

Develop New

Product

Technical Failure

Technical Success

Probability = pt

Probability = 1 - pt

Launch New

Product Commercial Failure (with net

benefit = 0)

Commercial Success (with net benefit = NPV)

Probability = pc

Probability = 1 - pc

Risk class 1 Risk class 2

ECV is the expected NPV of the project, calculated by using the probabilities of the various alternatives.

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ECV Example

The design of a new product is expected to take 3 years, at a cost of $6m/year. The first payment is at the end of year 1.

There is a .8 probability that the product will be technically feasible

If feasible, the product can be launched in year 4 with an estimated cost of $5.5M

If launched, the product will be a commercial success with probability 0.6, earning gross revenues of $15M per year for 5 years

If it is a commercial failure, then the revenue is only $2M per year for 5 years

The discount rate is 10 percent

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ECV Example

Discount rate r1=10%

Discount rate r2=10%

Research & Product

Development

Development Succeeds

Probability = 0.8

Development Fails

Probability = 0.2

Launch New Product

One-time cost of $5.5M

3 Years

5 Years

Drop ProductAnnual

Cost: $6M

Commercial Success

Rev.= 15M/yr

Probability = 0.6

Commercial Failure

Rev.= 2M/yrProbability = 0.4

No Cost

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ECV Example

Year What’s Happening

Commercial Success

Commercial Failure

Expected Annual Cash Flow

Discounted Cash Flow

1 Technical development

(6.00) (5.45)

2 Technical dev. (6.00) (4.96)

3 Technical dev. (6.00) (4.51)

4 Product sales $15 $2 3.44 2.35

5 Product sales $15 $2 7.84 4.87

6 Product sales $15 $2 7.84 4.43

7 Product sales $15 $2 7.84 4.02

8 Product sales $15 $2 7.84 3.66

$M

Example calculation: .8[(.6)(15)+(.4)(2)-5.50]+.2(0)=3.44

10%

Total = 4.40

A Discrete Probability Distribution

Demand Probability of Demand100 0.02110 0.05120 0.08130 0.09140 0.11150 0.16160 0.20170 0.15180 0.08190 0.05200 0.01

What is probability of demand to be equal to 130?What is probability of demand to be less than or equal to 140?What is probability of demand to be greater than 140?What is probability of demand to be equal to 133?

Another Discrete Probability Distribution

Demand Probability of Demand100 0.002101 0.002102 0.002103 0.002104 0.002105 0.002106 0.002107 0.002108 0.002109 0.002

What is probability of demand to be equal to 116?What is probability of demand to be less than or equal to 116?What is probability of demand to be greater than 116?What is probability of demand to be equal to 13.3?

Demand Probability of Demand110 0.005111 0.005112 0.005113 0.005114 0.005115 0.005116 0.005117 0.005118 0.005119 0.005

A Continuous Probability Distribution

What is probability of demand to be equal to 130?What is probability of demand to be less than or equal to 140?What is probability of demand to be greater than 140?What is probability of demand to be equal to 133?

Average Demand Probability of Demand100 0.02110 0.05120 0.08130 0.09140 0.11150 0.16160 0.20170 0.15180 0.08190 0.05200 0.01

Continuous Probability Distributions

A continuous random variable can assume any value in an interval on the real line or in a collection of intervals.

We never compute the probability of a continuous random variable being equal to a specific value . This probability is always 0.

Instead, we talk about the probability of the random variable assuming a value within a given interval.

Continuous Probability Distributions

The probability of the random variable assuming a value within some given interval from x1 to x2 is defined to be the area under the graph of the probability density function between x1 and x2.

Average for Grouped Data: Discrete or Continuous

r P( R=r)

100 0.02110 0.05120 0.08130 0.09140 0.11150 0.16160 0.20170 0.15180 0.08190 0.05200 0.01

)( AverageN

1iii xXPx

Average = +100×0.02 +110×0.05+120×0.08 +130×0.09+140×0.11 +150×0.16+160×0.20 +170×0.15 +180×0.08 +190×0.05+200×0.01Average = 151.6

Standard Deviation for Grouped Data: Discrete or Continuous

r P( R=r)

100 0.02110 0.05120 0.08130 0.09140 0.11150 0.16160 0.20170 0.15180 0.08190 0.05200 0.01

)()( Variance 2N

1i

2ii xXPx

Variance = +(100- 151.6 )2 ×0.02 +(110- 151.6 )2×0.05+(120- 151.6 )2 ×0.08 +…….+……..+(190- 151.6 )2 ×0.05+(200- 151.6 )2 ×0.01Variance = 503.4Standard Deviation = 22.4

The Weighted Scoring Model


n

jjiji wsS

1

where

Si = the total score of the ith project

sij = the score of the ith project on the jth criterion

wj = the weight or importance of the jth criterion

Uncertainties encountered in project management

Time required to complete a project Availability of key resources Cost of resources Timing of solutions to technological problems Actions taken by competitors

Uncertainty cannot be eliminated, but if managed properly, it can be minimized.

This is why we need trade-off.


Risk Analysis

Estimate probabilities or distributions associated with key parameters

Develop analytic or simulation model Analyze distribution of outcomes generated by

model


Project Portfolio Process (PPP)

PPP links projects to the goals and strategies of the organization. In the initiation and planning phases, and throughout the life cycle of the projects.

The PPP is also a means for monitoring and controlling the organization's strategic projects. This may mean shutting down projects prior to their completion because of their risks or their costs, or because another project does a better job of supporting the goals.


Steps In The Project Portfolio Process

1. Establish a Project Council2. Identify Project Categories and Criteria3. Collect Project Data4. Assess Resource Availability5. Reduce the Project and Criteria Set6. Prioritize the Projects within Categories7. Select the Projects to be Funded and Held in

Reserve8. Implement the Process


Step 1: Establish a Project Council

Establishes strategic direction for projects. Allocates funds and control the allocation of human and capital resources to the projects.

Senior management The project managers of major projects The head of the Project Management Office Relevant functional managers Anyone who can identify key opportunities and risks

facing the organization

Step2: Identify Project Categories and Criteria

Project categories are identified so the mix of projects will contribute to the organization's goals.

Within each category various criteria are established to rank the projects. The criteria are also weighted.

List the goals of each project and relate them to the organization's goals and strategies.

Identify the categories that are important to achieving the organization's goals.


Wheelwright and Clark (1992) position - particularly product /service projects


unfig_02_03

Wheelwright and Clark (1992) positioning

Derivative projects: Incrementally different in product or process from existing offerings. Often replace current offerings or add an extension to them (lower priced version, upscale version).

Platform projects : Major departures from existing offerings in terms of either the product or process. They become "platforms" for the next generation of organizational offerings, such as a new model of automobile or a new type of insurance plan.


Wheelwright and Clark (1992) positioning

Breakthrough projects: Involve a newer technology. A technology that is known to the industry or something proprietary that the organization has been developing over time. Use of fiber optic cables for data transmission, and hybrid gasoline-electric automobiles.

R&D projects: Blue sky, visionary endeavors, oriented toward using newly developed technologies, or existing technologies in a new manner. They may also be for acquiring new knowledge, or developing new technologies themselves.


Size size/resource needs.

Shape and shade internal/ external, long/medium/short term.

Numbers the order, or time frame, in which the projects are to be implemented, separated by category.

Benefits of the Aggregate Project Plan

View the mix of projects Analyze and adjust the mix of projects Assess the resource requirement indicated by the size,

timing, and number of projects Identify and adjust the gaps in the categories, sizes, and

timing of the projects Identify potential career paths for developing project

managers, such as team members of a derivative project, then team members of a platform project, manager of a derivative project, members of a breakthrough project, and so on

Ardavan Asef-Vaziri 1-4704/19/23

48

Analyzing Project Portfolios: Bubble Diagram

Expected NPV

Prob. of Commercial Success

HighZero

Low

High

Bubble diagrams are useful for representing a set of projects and visualizing a project portfolio.

Shapes

Shading

Color

Size

Step 3: Collect Project Data

Collect data on timing, expected benefit and costs using existing/past projects and expert opinion.

Use the scoring models to screen out high cost or lower benefit projects ( because the organization's goals have changed).

Screen in any projects mandated by regulations or laws, competitive or operating necessities, projects required for environmental or personnel reasons.


Step 4: Assess Resource Availability

Assess the availability of internal /external resources by type/department/ timing.

Balance aggregate project resource needs over future periods. Needing a normally plentiful resource at the same moment by several projects = catastrophe.

Scheduling resource usage as closely as possible to system capacity = catastrophe.


Step 5: Reduce the Project and Criteria Set

Organization’s goalsHave competenceMarket for offeringHow riskyPotential partnerRight resourcesGood fit

Use strengthsSynergisticDominated by anotherHas slipped in

desirability

Step 6: Prioritize the Projects within Categories

Apply the scores and criterion weights to rank the projects within each category.

Hold some hard-to-measure criteria out for subjective evaluation, such as riskiness, or development of new knowledge.

Subjective evaluations can be translated from verbal to numeric terms easily by the Delphi, Pair-wise Comparisons, or other methods.

Different projects are offering different packages of benefits that are not comparable. For example, R&D projects will not have the expected monetary return of derivative projects


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

Determine the mix of projects across the various categories and time periods.

Leave 10-15 percent of the organization's resource capacity free for variability and new opportunities.

Include some speculative projects in each category to allow future options, knowledge improvement, additional experience in new areas.


Step 8: Implement the Process


Communicate resultsRepeat regularlyImprove process

Assignments

Review Questions: 2,3,4,5,6,8

Discussion Questions: 10,11,13,16

Incidents for Discussion: None

Problems: 19(with and without CB),23,25

Cases: 1,2


Documents

In Ch 1: The World of Project Management The differences between project management and general management are overviewed. The three interrelated project