Project Management Chapter Two PDF

Because learning changes everything. ® Chapter Two Organization Strategy and Project Selection © 2021 McGraw-Hill Education. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or further distribution permitted without the pri...

Because learning changes everything. ® Chapter Two Organization Strategy and Project Selection © 2021 McGraw-Hill Education. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or further distribution permitted without the prior written consent of McGraw-Hill Education.  Where We Are Now © McGraw-Hill Education 2  Learning Objectives 02-01 Explain why it is important for project managers to understand their organization’s strategy 02-02 Identify the significant role projects contribute to the strategic direction of the organization 02-03 Understand the need for a project priority system 02-04 Distinguish among three kinds of projects 02-05 Describe how the phase gate model applies to project management 02-06 Apply financial and nonfinancial criteria to assess the value of projects 02-07 Understand how multi-criteria models can be used to select projects 02-08 Apply an objective priority system to project selection 02-09 Understand the need to manage the project portfolio © McGraw-Hill Education 3  Chapter Outline 2.1 Why Project Managers Need to Understand Strategy 2.2 The Strategic Management Process: An Overview 2.3 The Need for a Project Priority System 2.4 Project Classification 2.5 Phase Gate Model 2.6 Selection Criteria 2.7 Applying a Selection Model 2.8 Managing the Portfolio System © McGraw-Hill Education 4  2.1 Why Project Managers Need to Understand Strategy Two main reasons project managers need to understand their organization’s mission and strategy: 1. So they can make appropriate decisions and adjustments. How a project manager would respond to a suggestion to modify the design of a product or to delays may vary depending upon strategic concerns. 2. So they can be effective project advocates. They have to be able to: demonstrate to senior management how their project contributes to the firm’s mission in order to garner their continued support. explain to stakeholders why certain project objectives and priorities are critical in order to secure buy-in on contentious trade-off decisions. explain why the project is important to motivate and empower the project team (Brown, Hyer and Ettenson, 2013). © McGraw-Hill Education 5  2.2 The Strategic Management Process: An Overview Strategic Management Defined Is the process of assessing “what we are” and deciding and implementing “what we intend to be and how we are going to get there.” Is a continuous, iterative process aimed at developing an integrated and coordinated long-term plan of action. Requires strong links among mission, goals, objectives, strategy, and implementation. Two Major Dimensions of Strategic Management: 1. Responds to changes in the external environment and allocates the firm’s scare resources to improve its competitive position. 2. Internal responses to new action programs aimed at enhancing the competitive position of the firm. © McGraw-Hill Education 6  Four Activities of the Strategic Management Process The sequence of activities of the strategic management process is: 1. Review and define the organizational mission The mission identifies “what we want to become.” Mission statements identify the scope of the organization in terms of its product and service. 2. Analyze and formulate strategies Formulating strategy answers the question of what needs to be done to reach objectives. Strategy formulation includes determining and evaluating alternatives that support the organization’s objectives and selecting the best alternative. 3. Set objectives to achieve strategies Objectives translate the organization strategy into specific, concrete, measureable terms. Objectives answer in detain where a firm is headed and when it is going to get there. 4. Implement strategies through projects Implementation answers the question of how strategies will be realized, given available resources. © McGraw-Hill Education 7  Strategic Management Process © McGraw-Hill Education FIGURE 2.1 8  Characteristics of Objectives © McGraw-Hill Education EXHIBIT 2.1 9  2.3 The Need for a Project Priority System Implementation of projects without a strong priority system linked to strategy create problems. Problem 1: The Implementation Gap The implementation gap is the lack of understanding and consensus of organization strategy among top and middle-level managers. Problem 2: Organization Politics Project selection may be based not so much on facts and sound reasoning as on the persuasiveness and power of people advocating projects. The term sacred cow is often used to denote a project that a powerful, high-ranking official is advocating. Problem 3: Resource Conflicts and Multitasking A multi-project environment creates the problems of project interdependency and the need to share resources. Resource sharing leads to multitasking—involves starting and stopping work on one task to go and work on another project, then returning to the work on the original task. © McGraw-Hill Education 10  Benefits of Project Portfolio Management © McGraw-Hill Education EXHIBIT 2.2 11  2.4 Project Classification © McGraw-Hill Education FIGURE 2.2 12  2.5 Phase Gate Model Phase Gate Model Is a series of gates that a project must pass through in order to be completed. Its purpose is to ensure that the organization is investing time and resources on worthwhile projects that contribute to its mission and strategy. Each gate is associated with a project phase and represents a decision point. A gate can lead to three possible outcomes: go (proceed), kill (cancel), or recycle (revise and resubmit). © McGraw-Hill Education 13  Phase Gate Process Diagram © McGraw-Hill Education FIGURE 2.3 14  2.6 Selection Criteria Financial Criteria Payback Net present value (NPV) Nonfinancial Criteria Projects of strategic importance to the firm Two Multi-Criteria Selection Models Checklist Models Multi-Weighted Scoring Models © McGraw-Hill Education 15  Financial Criteria: The Payback Model The Payback Model Measures the time the project will take to recover the project investment. Desires shorter paybacks. Is the simplest and most widely used model. Emphasizes cash flows, a key factor in business. Limitations of the Payback Method Ignores the time value of money. Assumes cash inflows for the investment period (and not beyond). Does not consider profitability. The Payback formula is © McGraw-Hill Education 16  Example Comparing Two Projects Using Payback Method © McGraw-Hill Education EXHIBIT 2.3A 17  Financial Criteria: Net Present Value (NPV) Net Present Value (NPV) Uses management’s minimum desired rate of return (discount rate) to compute the present value of all net cash inflows. Prefers positive NPV to negative NPV. Desires higher positive NPVs. Is more realistic because it considers the time value of money, cash flows, and profitability. The NPV formula using Microsoft Excel is where I0 = Initial investment (since it is an outflow, the number will be negative) Ft = Net cash inflow for period t k = Required rate of return n = Number of years © McGraw-Hill Education 18  Example Comparing Two Projects Using Net Present Value Method © McGraw-Hill Education EXHIBIT 2.3B 19  Nonfinancial Criteria Examples of strategic objectives are: 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. © McGraw-Hill Education 20  Two Multi-Criteria Selection Models Checklist Models Use a list of questions to review potential projects and to determine their acceptance or rejection. Allow greater flexibility in selecting among many different types of projects and are easily used across different divisions and locations. Fail to answer the relative importance or value of a potential project to the organization and does not allow for comparison with other potential projects. Multi-Weighted Scoring Models Use several weighted selection criteria to evaluate project proposals. Include qualitative and/or quantitative criteria. Allow for comparison with other potential projects. © McGraw-Hill Education 21  Checklist Models: Sample Selection Questions Used in Practice © McGraw-Hill Education EXHIBIT 2.4 22  Multi-Weighted Scoring Models: Project Screening Matrix © McGraw-Hill Education FIGURE 2.4 23  2.7 Applying a Selection Model Project Classification Deciding whether the project fits with the organization strategy. Selecting a Model Weighted scoring criteria seem the best alternative because: They reduce the number of wasteful projects using resources. They help to identify project goals that can be communicated using the selection criteria as corroboration. They help project managers understand how their project was selected, how their project contributes to organization goals, and how it compares with other projects. © McGraw-Hill Education 24  Applying a Selection Model (Continued) Sources and Solicitation of Project Proposals Within the organization Request for Proposal (RFP) from external sources (contractors/vendors) Ranking Proposal and Selection of Projects Evaluating each proposal in terms of feasibility, potential contribution to strategic objectives, and fit within a portfolio of current projects. Rejecting or accepting the projects based on given selection criteria and current portfolio. Prioritizing projects by senior management. © McGraw-Hill Education 25  A Proposal Form for an Automatic Vehicular Tracking (AVL) Public Transportation Project © McGraw-Hill Education FIGURE 2.5A 26  Risk Analysis for a 500-Acre Wind Farm © McGraw-Hill Education FIGURE 2.5B 27  Project Screening Process © McGraw-Hill Education FIGURE 2.6 28  Priority Screening Analysis © McGraw-Hill Education FIGURE 2.7 29  2.8 Managing the Portfolio System Senior Management Input Provides guidance in establishing selection criteria that strongly align with the current organization strategies. Annually decides how to balance the available organizational resources (people and capital) among the different types of projects. Governance Team Responsibilities Publish the priority of every project. Ensure the selection process is open and free of power politics. Evaluate the progress of current projects. Constantly scan the external environment to determine if organization focus and/or selection criteria need to be changed. © McGraw-Hill Education 30  Balancing the Portfolio for Risks and Types of Projects David and Jim Matheson studied R&D organizations and developed a classification scheme that could be used for assessing a project portfolio. They separated projects in terms of degrees of difficulty and commercial value. The four basic types of projects are: Bread-and-butter projects involve evolutionary improvements to current products and services. Pearls represent revolutionary commercial advances using proven technology. Oysters involve technological breakthroughs with tremendous commercial potential. White elephants showed promise at one time but are no longer viable. © McGraw-Hill Education 31  Key Terms Implementation gap Net present value (NPV) Organization politics Payback Phase gate model Priority system Priority team Project portfolio Project sponsor Sacred cow Strategic management © McGraw-Hill Education 32 Because learning changes everything. ® www.mheducation.com © 2021 McGraw-Hill Education. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or further distribution permitted without the prior written consent of McGraw-Hill Education.