Pm Session 2

Project Management: Session 2

Organization Strategy and Project Selection

Session Outcomes

• Following completion of this session the delegate should have an understanding of the following:• The link between strategic and project

management;• The application of project portfolio

management;• The time value of money.

• In addition the delegate should be able to calculate/apply the following project selection techniques in a simple case example:• Payback model;• Return on Investment;• Net Present Value;• Multi-Weighted Scoring Model

Pre-Amble

Pertinent Questions Re: Projects

• Where did this project come from?

• Should I stop all my work and focus on yet another project?

• Why all these projects?

• How can this project be a priority?

• What about resources to get all this done?

Pertinent Questions About Projects

• Project manager need to know the priority and be sure of its link to the strategic plan of the organization;

• Alignment is crucial – misalignment leads to misplaced projects and poor utilization of resources;

• Therefore a need for a methodology to link strategic management and execution – specifically project.

The Need to Understand Strategic Management

• Changes in the 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.

The Strategic Management Process

• Provides the theme and focus of the future directiondirection for the firm;• Responding to changes in the

external environment—environmental scanning;

• Allocating scarce resources of the firm to improve its competitive position—internal responses to new action programs;

• A key requirement however is strong link among mission, goals, objectives, strategy, and and implementation.

• Four of Activities of the Strategic Management Process:

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.


• Mission• ““What we want to become”• Reason for existence;• Expressed as:

• Purpose statement;• Products and service mix;• Customer/ stakeholder;• Geographical reach;• Also sometimes key

technologies, philosophy etc


• Long range goals and objectives• Translate mission into concrete

measurable and achievable;• Thus more detail about direction

and key deliverables,, as well as by when;

• Identifiable end state, time frame, measurable, realistic


• Analyze and formulate strategies:• What needs to be done to achieve objectives

(statement of approach); based on• Assessment of the internal and external

environments;• Internal strengths and weaknesses;• External threats and opportunities;• Outcome is portfolio of strategic alternatives

that show:• How risk can be managed;• How strengths can be leveraged;• How opportunities can be pursued.


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 forcompletion

R Realistic State what can be done with available resources

T Time related Assign a realistic timeframe

Characteristics of Objectives

Vision &

Strategy

CUSTOMER

“To achieve our vision, how should we appear to our customers?”

Objectives Measures Targets Initiatives

FINANCIAL

“To succeed financially, how should we appear to our shareholders?”


INTERNAL BUSINESS PROCESSES

“To satisfy our shareholders and customers, what business processes must we excel at?”


INNOVATION AND LEARNING

“To achieve our vision, how will we sustain our ability to change and improve?”


Balanced Scorecard Method

This is where the issue of project selection comes to the fore…what is the best

alternative?

Need for Project Portfolio Management

• The Implementation Gap:• The lack of understanding and consensus on

strategy between top management and middle-level (functional) managers who independently implement the strategy;

• Manifest in:• Lack of trust between functional managers;• Meetings to establish and renegotiate

priorities;• People assignment is inconsequent;• People who work on multiple projects feel

ineffective;• Resources are not adequate to deliver.

• Organization Politics:• Project selection is based on the persuasiveness

and power of people advocating the projects:• Sacred cows;• “Pet” projects;• Status of projects and potential for personal

gain;• Importance of project sponsors:

• Link between strategy level and project;• Provide mandate and political link;• Important to manage the expectations and

perceptions of stakeholders;• Politics an inevitable of all projects.


• Resource Conflicts and Multitasking:• The multiproject environment creates

interdependency relationships of shared resources which results in the starting, stopping, and restarting projects:• Competition for resources;• Conflicting priorities;• Individuals working often need to do their

normal functional work as well as many projects;

• Multitasking and consequent stop, start etc is very real.


Direction

Execution – cross functional and

concentration of resources

Portfolio Management (incl. Selection)

Portfolio’s Management System

Strategic Management

Opportunities/Needs

Research SolutionsSelect and Determine

Feasibility

Projects

• Builds discipline into 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 organization strategy;

• Improves communication and supports agreement on project goals.

Benefits of Project Portfolio Management

Project Portfolio’s by Type

• Compliance (must do) projects:• Compliance:

• To ensure that legislative and regulatory requirements are adhered to;

• Emergency:• Projects that cannot be postponed

else it will have a significantly negative impact on the business;


• Operational projects:• Support maintenance and

improvement of operation:• Specific maintenance projects;• Performance improvement projects;• Cost reduction projects;• Improvement of effectiveness and

efficiency of projects;• NB! Not routine, repetitive work.


• Strategic projects:• In support of long term goals of the

organization:• Market penetration;• Research;• New business lines;• New product lines.


Project Selection Models

• Quantitative and Qualitative Models (Criteria):• Financial: payback, net present

value (NPV), internal rate of return (IRR)

• Non-financial: projects of strategic importance to the firm.

• Multi-Weighted Scoring Models• Use several weighted selection

criteria to evaluate project proposals.• Other (qualitative) models like

murder board, peer review etc

Portfolio’s Management System

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

Example: Project costs R100,000 and is expected to save company R 20,000 per year

Payback Period = R 100,000 / R 20,000 = 5 years

Financial Models

The Payback Model

Year Year Cash flow Cash flow project Aproject A

Cash flow Cash flow project Bproject B

0 (35,000) (35,000)

1 20,000 10,000

2 15,000 10,000

3 10,000 15,000

Financial Models

• The Payback Model:• Measures the time it will take to recover the

project investment;• Shorter paybacks are more desirable;• Emphasizes cash flows, a key factor in business;• Advantages of payback:

• Simple and easy to understand;• Concept familiar to management;• Information readily available.

Financial Models

• The Payback Model:• Limitations of payback:

• Ignores the time value of money;• Assumes cash inflows for the investment period

only (and not beyond – thus does not take the life cycle of the project into account);

• Does not consider profitability – only cash flows;• Like most quantitative methods it does not take

into account “soft” issues such as perceptions.

Financial Models

Return on Investment (ROI):

• How:• Average annual profit =

(total gains)-(total investment)/number of years;

• Return on investment = Average annual profit/total investment x 100/1.

• Example:• (55,000-35,000)/4 = 5,000;• 5000/35,000x100/1=14 %

Financial Models


Cash flow Cash flow project Bproject B

0 (35,000) (35,000)

1 20,000 10,000

2 15,000 10,000

3 10,000 15,000

4 10,000 20,000

Total gains 55,000 55,000

Financial Models

Return on Investment (ROI)

• Advantages:

• Also relatively simple to calculate;

• However takes the whole life cycle of the project into account;

• The total outcome of the investment is expressed as a profit and percentage return on investment, both concepts understandable to management.

• Disadvantages:

• Does not consider the time value of money;

• Therefore not ideal for longer term projects;

• Also works on an average over successive years – in example A and B above both projects have the same ROI, but which project will you choose.

Financial Models

Return on Investment (ROI)

To solve the problem of time value of money, discounted cash flow techniques (DCF) are used.

Financial Models

Which would you prefer -- $10,000 today $10,000 today or

$10,000 in 5 years$10,000 in 5 years?

Obviously, $10,000 today$10,000 today.

You already recognize that there is

TIME VALUE TO MONEYTIME VALUE TO MONEY!!

Financial Models

TIMETIME allows you the opportunity

to postpone consumption

and get a RETURNRETURN .

Financial Models

• 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: the project meets the minimum desired rate of return and is eligible for further consideration;

• Negative NPV: project is rejected.

Financial Models

What:

• It provides the total value of cash flow at a discounted rate. The effect is that it gives the value of future cash flows at “ present value” – that makes comparison possible.

How:

• Project cash flow = income – expenditure;

• Present value = project cash flow x discount factor;

• Discount factor = 1/(1+i)n i = projected interest rate;n = number of years from start rate

Financial Models


Discount Discount factorfactor

20 %20 %

Present Present valuevalue

0 (35,000) 1 (35,000)

1 20,000 0.8333 16,666

2 15,000 0.6944 10,416

3 10,000 0.5787 5,787

4 10,000 0.4823 4,823

Total NPV 2,692

Financial Models

Internal Rate of Return:

• The yield of a project expressed as interest earned;

• Expressed as the return where the NPV = 0;

• Very popular;

• Difficult to calculate without a business calculator or computer;

• NB ! IRR is calculated where the NPV = 0.

Financial Models

Financial Models

Internal Rate of Return:

• Decision making pertaining to IRR:• Comparative projects

you accept the project with the highest IRR > as the cost of capital.

• Problem with IRR is that it uses the same discount factor over the time of the project – thus as the project gets longer this limitation will become more significant. This can be addressed through variable method of NPV.

Financial Models

Non-Financial Models

Adapted from: Michael E. Porter. Competitive Strategy, New York: Free Press, 1980.

Porter’s Five Porter’s Five Forces ModelForces Model



Porter’s Competitive StrategiesPorter’s Competitive Strategies

Multi-Weighted Scoring Models

Other Project Selection Methods

Peer Review

No good idea should go unchalleng

ed…

Murder Board

• Project Classification:

• Classifications may differ from organization to organization;

• Criteria however often similar;

• Most important criterion is indeed strategic fit;

• World Bank “ you cannot have good projects in a poor policy and strategy environment”

Applying a Selection Model

• Selecting a Model

• Classically financial models;

• However a shift to look at longer term, sustainability and stakeholder interests;

• Applying a weighted scoring model to bring projects to 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.

Applying a Selection Model

• Sources and Solicitation of Project Proposals:• Within the organization:

• Typically anyone in the organization;• Often restricted to certain levels of management –

could stifle initiative and have opportunities lost;• Balanced Scorecard – assist in identifying projects

and then let lower levels define;• Request for proposal (RFP) from external sources

(contractors and vendors):• Following this external contractors will prepare

proposals.

Project Proposals

Project Proposals

Risk Analysis

Priority Analysis

Ranking Proposals and Selection of ProjectsPrioritizing requires discipline, accountability,

responsibility, constraints, reduced flexibility, and loss of power

• Managing the portfolio essentially assess projects in context of other projects, including existing one’s;

• Senior Management Input• Provide guidance in selecting criteria that are

aligned with the organization’s goals;• Decide how to balance available resources

among current projects;

• The Priority Team Responsibilities• Publish the priority of every project;• Ensure that the project selection process is

open and free of power politics;• Reassess the organization’s goals and

priorities;• Evaluate the progress of current projects;• Manage by balance by type, risk and resource

demand.

Managing the Portfolio

Project Portfolio Matrix

• Bread-and-butter projects:• Involve evolutionary improvements to

current products and services.

• Pearls:• Represent revolutionary commercial

advances using proven technical advances.

• Oysters:• Involve technological breakthroughs with

high commercial payoffs.

• White elephants:• Projects that at one time showed promise

but are no longer viable.

Project Portfolio Matrix Dimensions

Education

Pm Session 2