Organizational Strategy and Project Selection

Week 2
 Learning outcomes
 Strategic management process
 The need for an effective project portfolio management

system
 Portfolio management system
 Applying a selection model

1-2
Why Project Managers Need to Understand the Strategic
Management Process

 Changes in the organization’s 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.

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 Projects and Strategy
 Mistakes 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 need
◦ Trying to solve customer issues with a product or service rather than focusing on
the 20% with 80% of the value (Pareto’s Law).
◦ Engaging in a never-ending search for perfection only the project team really
cares about.

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 The Strategic Management Process:
An Overview
 Strategic Management
◦ Requires every project to be clearly linked to strategy.
◦ Provides theme and focus of firm’s future direction.
 Responding to changes in the external environment—environmental scanning
 Allocating scarce resources of the firm to improve its competitive position—
internal responses to new programs
◦ Requires strong links among mission, goals, objectives, strategy, and
implementation.

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Strategic Management Process Activities

 Review and define the organizational mission.

 Set long-range goals and objectives.
 Analyze and formulate strategies to reach objectives.
 Implement strategies through projects

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Strategic Management Process

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 Characteristics of Objectives

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

for completion

R Realistic State what can realistically be done with

available resources

T Time related State when the objective can be achieved,

that is, duration

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 Scenario Planning: A Supplement
to Traditional Strategic Planning

 Scenarios are stories of how we believe things could play out

in the longer run.
 Scenario planning is a structured process of thinking about

future possible environments that would have potential high

impact to disrupt the way you do business, and then
developing potential strategies to compete in these altered
environments.

1-9
 Scenario Planning Process

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 Project Portfolio Management Problems
 The Implementation Gap
◦ The lack of understanding and consensus on strategy among top
management and middle-level (functional) managers who
independently implement the strategy.
 Organization Politics
◦ Project selection is based on the persuasiveness and power of people
advocating the projects.
 Resource Conflicts and Multitasking
◦ Multi project environment creates interdependency relationships of
shared resources which results in the starting, stopping, and restarting
projects.

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 Benefits of Project Portfolio Management
 Builds 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.

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 A Portfolio Management System
 Design of a project portfolio system:
◦ Classification of a project
◦ Selection criteria depending upon classification
◦ Sources of proposals
◦ Evaluating proposals
◦ Managing the portfolio of projects.

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Portfolio of Projects by Type

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 A Portfolio Management System
 Selection 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.

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 Financial Models
 The Payback Model
◦ Measures 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.

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 Financial Models (cont’d)

 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: project meets minimum desired rate
of return and is eligible for further consideration.
 Negative NPV: project is rejected.

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1 - 18 2–18
Example Comparing Two Projects
Using Net Present Value Method

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 Nonfinancial Strategic Criteria

 To capture larger market share

 To make it difficult for competitors to enter the market
 To develop an enabler product, which by its introduction will increase
sales in more profitable products
 To develop core technology that will be used in next-generation
products
 To reduce dependency on unreliable suppliers
 To prevent government intervention and regulation

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 Multi-Criteria Selection Models
 Checklist Model
◦ Uses 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 doesn’t to allow for comparison with other potential projects.
 Multi-Weighted Scoring Model
◦ Uses several weighted qualitative and/or quantitative selection criteria
to evaluate project proposals.
◦ Allows for comparison of projects with other potential projects

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 Sample Selection Questions Used in Practice
Topic 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?

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 Sample Selection Questions Used in Practice
Topic 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?

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Project Screening Matrix

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 Applying a Selection Model
 Project Classification
◦ Deciding how well a strategic or operations project fits the organization’s
strategy.
 Selecting a Model
◦ 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

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 Project Proposals
 Sources and Solicitation of Project Proposals
◦ Within the organization
◦ Request for proposal (RFP) from external sources (contractors and
vendors)

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A Proposal Form for an Automatic vehicular tracking (AVL) Public Transportation Project

FIGURE 2.4A
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Risk Analysis for 500-Acre Wind Farm

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 Project Proposals…
 Ranking Proposals and Selection of Projects
◦ Prioritizing requires discipline, accountability, responsibility,
constraints, reduced flexibility, and loss of power.

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Project Screening Process

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Priority Analysis

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 Managing the Portfolio
 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

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Balancing the Portfolio for Risks and Types of Projects

 Priority team is to balance projects by

◦ Type
◦ Risk
◦ Resource demand

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Project Portfolio Matrix

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 Project Portfolio Matrix Dimensions
 Bread-and-butter Projects
◦ Involve evolutionary improvements to current products and services.
 Pearls
◦ Represent revolutionary commercial opportunities using proven technical advances.
 Oysters
◦ Involve technological breakthroughs with high commercial payoffs.
 White Elephants
◦ Showed promise at one time but are no longer viable.

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