Chapter 2

Organization Strategy and Project Selection

McGraw-Hill/Irwin

2008 The McGraw-Hill Companies, All Rights Reserved

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Why Project Managers Need to Understand the Strategic Management Process

in the Organizations Mission and Strategy

managers must respond to changes with appropriate decisions about future projects and adjustments to current projects. managers who understand their organizations strategy can become effective advocates of projects aligned with the firms mission.
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Project

The Strategic Management Process: An Overview

Management

Provides

the theme and focus of the future direction for the firm.
o Responding to changes in the external environmentenvironmental scanning o Allocating scarce resources of the firm to improve its competitive positioninternal responses to new action programs

Requires

strong links among mission, goals, objectives, strategy, and implementation.

Strategic Management Process (contd)

of Activities of the Strategic Management Process

Review and define the organizational mission. Set long-range goals and objectives. Analyze and formulate strategies to reach objectives.

2. 3.

4.

Implement strategies through projects.

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Strategic Management Process

FIGURE 2.1

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Characteristics of Objectives
S
Specific Be specific in targeting an objective

M
A R T

Measurable

Establish a measurable indicator(s) of progress

Assignable

Make the objective assignable to one person for completion State what can realistically be done with available resources

Realistic

Time related

EXHIBIT 2.1

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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 The multiproject 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

EXHIBIT 2.2

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Portfolio of Projects by Type

FIGURE 2.2

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A Portfolio Management System

Criteria

Financial:

payback, net present value (NPV), internal rate of return (IRR) Non-financial: projects of strategic importance to the firm.
Multi-Weighted
Use

Scoring Models

several weighted selection criteria to evaluate project proposals.

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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. Limitations of payback:
o Ignores the time value of money. o Assumes cash inflows for the investment period (and not beyond). o Does not consider profitability.

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Financial Models (contd)

Net Present Value (NPV) Model

Uses

managements minimum desired rate-ofreturn (discount rate) to compute the present value of all net cash inflows.
o Positive NPV: the project meets the minimum desired rate of return and is eligible for further consideration. o Negative NPV: project is rejected.

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Net Present Value (NPV) and Internal Rate of Return (IRR): Example Comparing Two Projects

EXHIBIT 2.3

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Nonfinancial Criteria
To

capture larger market share To make it difficult for competitors to enter the market To develop an enabler product 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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Checklist Selection Model

Strategy alignment: What specific organization 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? Benefits: What is the value of the project to this organization? Organization culture: Is our organization culture right for this type of project? Approach: Will we build or buy? Training/resources: Will staff training be required? Finance: What is estimated cost of the project? Portfolio: How does the project interact with current projects?
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Project Screening Matrix

FIGURE 2.3

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Applying a Selection Model

Classification

Deciding how well a strategic or operations project fits the organizations strategy.

Selecting

a Model

Applying a weighted scoring model to bring projects to closer with the organizations strategic goals. o Reduces the number of wasteful projects o Helps identify proper goals for projects o 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)
Ranking

Proposals and Selection of Projects

Prioritizing requires discipline, accountability, responsibility, constraints, reduced flexibility, and loss of power

Managing

the Portfolio

Senior management input The priority team (project office) responsibilities

Major Project Proposal

FIGURE 2.4A

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Risk Analysis

FIGURE 2.4B

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Managing the Portfolio

Management Input

Provide guidance in selecting criteria that are aligned with the organizations 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 organizations goals and priorities Evaluate the progress of current projects
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Project Screening Process

FIGURE 2.5

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Priority Analysis

FIGURE 2.6

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Project Portfolio Matrix

FIGURE 2.7

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Project Portfolio Matrix Dimensions

Projects

Involve evolutionary improvements to current products and services. Represent revolutionary commercial advances using proven technical advances. Involve technological breakthroughs with high commercial payoffs.

Pearls

Oysters

White

Elephants

Projects that at one time showed promise but are no longer viable.
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Key Terms
Implementation gap Net present value Payback Organizational politics Priority system Priority team Project portfolio Project screening matrix Sacred cow Strategic management process

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