Juan QuirozCIS 550

Assignment 2

Review Questions 1-7

1. Describe the major components of the strategic management process.The four major component of the strategic management process are (1) review and define the organizational mission, (2) Set long-range goals and objectives, (3) Analyze and formulate strategies to reach objectives, (4) Implement strategies through projects.

2. Explain the role projects play in the strategic management process.The implementation of strategies through projects is the last step of the strategic management process. A project, and its implementation in the sequence of events, requires certain elements in place in order to go forward with it. Also, strategy formulation ultimately ends with cascading objectives/projects assigned to lower divisions, departments, or individuals.

3. How are projects linked to the strategic plan?Ultimately, projects are the final step in the implementation process. How strategy is implemented will consume 80% of time spent, ultimately leading to the phase of project implementation. In order to implement projects, the following five (5) areas must first be addressed: (1) Sufficient allocation of resources, (2) Formal and informal organization that complements and supports strategy and projects, (3) Planning and control systems must be in place, (4) Motivating project contributors, (5) Prioritizing projects.

4. The portfolio of projects is typically represented by compliance, strategic, and operations projects. What impact can this classification have on project selection?Each classification has a strategic value assigned to it prior to placing it in the project portfolio. Compliance projects are “must do” projects required in order to operate in a region. Operational projects are projects needed to support current operations. Strategic projects are those that directly support an organization’s long-term mission. If a project “must” be done or else the firm fails, then it is placed in the “must” category and will be accomplished. Usually, however, projects are selected based on financial and nonfinancial criteria within each of the aforementioned categories.

5. Why does the priority system described in this chapter require that it be open and published? Does the process encourage bottom-up initiation of projects? Does it discourage some projects? Why?The priority system should be open and published in order to avoid power plays within the organization and to make sure that the process is free of power politics. Each project in the priority system is evaluated by the same criteria (or by particular criteria within the class that the project has been placed in). The priority team’s major task is to make sure that projects are balanced by type, risk, and resource demand. By doing this, projects that may rank low on most criteria may still be selected because the organization’s portfolio does not include too many of these types of projects (the opposite is true as well). By playing this balancing act, the priority team encourages the bottom-up initiation of certain projects and discourages the acceptance of others.

6. Why should an organization not rely only on ROI to select projects?Financial criteria will not ensure that selected projects contribute to the mission and strategy of a firm. Other considerations such as developing new technology, public image, brand loyalty, and ethical position should be considered. These fall under non-financial criteria. While ROI is likely to be a key consideration for many organizations, multiple screening criteria are recommended for selecting and prioritizing projects.

7. Discuss the pros and cons of the checklist versus the weighted factor method of selecting projects.The checklist model uses a list of questions to review potential projects and to determine their acceptance or rejection. Checklist models can be used throughout different divisions and departments due to their flexibility in question design. However, due to its inability to assess relative value of a project to the organization, the checklist model can lead to power plays, politics and other forms of manipulation. A weighted scoring model will use several weighted criteria to evaluate project proposals. This is really the best model to use. A con to it however is that selection criteria used in this model should mirror the critical success factors of the organization. If they do not, then the screening process is rendered useless.

Exercise 2

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?

Cost CF Payback Period (Cost/CF)Alpha 150,000 40,000 3.75 yearsBeta 200,000 50,000 4.00 years

Since the Alpha project has a shorter payback period, the company should choose Alpha since it returns the company’s initial investment in a shorter time period.

Exercise 3

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.

Year 0 Year 1 Year 2 Year 3 Year 4 Year 5 TotalRequired 20%

Outflows (50,000)

(50,000)

Inflows 15,000

25,000

30,000

20,000

15,000

105,000

Net inflows 15,000

25,000

30,000

20,000

15,000

55,000

NPV Since the NPV is positive, therefore accept the project

12,895Exercise 4

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. Below is the cash information for each project. Your analysts predict that inflation rate will be a stable 3 percent over the next 7 years. Which of the two projects would you fund if the decision is based only on financial information? Why?

Exercise 5

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?

NPV 12,895

Dust DevilsRequired % 20%Required % w/infl 23%

Year 0 (500,000)Year 1 50,000 Year 2 250,000

Since Voyagers is the only company with a positive NPV, SIMSOX should go with their project.

Omega AlphaYear Inflow Outflow Netflow Year Inflow Outflow Netflow

Exercise 7

The Custom Bike Company has set up a weighted scoring matrix for evaluation of potential projects. Below are three projects under consideration.

a. Using the scoring matrix below, which project would you rate highest? Lowest?

CRITERIA Strong sponsor UrgencyWEIGHT 2.0 5.0 4.0Project 1 9 5 2Project 2 3 7 2Project 3 6 8 2Project 4 1 0 5

Supports business strategy

Based on the matrix above, Project 2 ranks the lowest at 57; project 5 the highest at 107

b. If the weight for “Strong Sponsor” is changed from 2.0 to 5.0, will the project selection change? What are the three highest weighted project scores with this new weight?

CRITERIA Strong sponsor UrgencyWEIGHT 5.0 5.0 4.0Project 1 9 5 2Project 2 3 7 2Project 3 6 8 2Project 4 1 0 5

Supports business strategy

If the weight of Strong Sponsor changes to 5.0, project 3 would rank the highest at 117. The top 3 projects would now be (1) project 3, (2) project 5, and (3) project 1.

c. Why is it important that the weights mirror critical strategic factors?Selection criteria need to mirror critical success factors in an organization. More weight is placed on more imperative success factors depending on the company; less weight is placed on less imperative success factors (but still pertinent factors). Even once these factors are in place correctly, the final decision on choosing a project ultimately lies in the hands of management since no model can provide a total reality of what it is trying to represent.