ENMA 401.

Project Management
Class 2
Dr. Jeff Temple
Department of
Engineering Management
& Systems Engineering
Old Dominion University

Topics

Organizational Strategy
Project Selection
Strategic Management Process
Scenario Planning

(Supplemental Information)

Objectives
Understand the relation of organization
strategy and projects
Understand the relation of organization
strategy and project management
Learn about how to write SMART objectives

Organization Strategy
Strategy is deciding how the organization will
compete
Strategy is implemented through projects.
Projects convert strategy into new products,
services and/or processes

How Strategy Relates to Projects

Projects need to ensure a strong link and align
with the organizations strategic plan
Affects organizations resources: people,
money, equipment and core competencies

Project Managers and Strategy

Project managers have a strategic influence in
organizations
Project managers need to understand the
organizations mission and strategy
To make appropriate decisions and adjustments
Prioritizations, chain value, customer satisfaction

Be effective project advocates

Demonstrate how projects contribute to the
organizations mission
Communication with team and other stakeholders
6

Strategic Management Process

Strategic Management
Responding to changes in the environment and
allocating resources of the firm to improve
competitive position
Provide focus and direction
Encourages integration
Requires strong link between mission, goals,
objectives, strategy and implementation

Formulating Strategies
Implementing Strategies
7

Strategic Management Process

Review Mission

Iterative

New Goals and Objectives

Portfolio of strategic choices

Strategy Implementation

Project Selection

Projects

Considerations:
External Environment
(Opportunities & Threats)
Economy
Market
Competition
Internal Environment
(Strengths & Weaknesses)
Competencies
Intellectual Capital
Human
Structural
Relational
Values
8

Four 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

Activity 1. Review and Define the

Organizational Mission
Mission statements identify the scope of the
organization in terms of its product or service
Missions statement change infrequently
Need to be specific and unique
Set the parameters for developing objectives

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Activity 2. Set Long-range

Goals and Objectives
Translate mission into specific, concrete
measurable terms
Indicate where and when
Objectives should:

Include a time frame

Be measurable
Be an identifiable state
Be realistic

Objectives should cascade through the

organization levels
Be SMART
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SMART Objectives

S Specific
M Measurable
A Assignable
R Realistic
T Time related

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Objectives Discussion
Are these SMART objectives?
Implement project effectively during this year
Increase product x sales by 20% by the end of
the fiscal year

13

Objective Example
SMART Objectives
Example: The objective is for the team leader to
develop a Work Breakdown Structure that
contains 20 elements describing the tasks
necessary to develop an Unmanned Undersea
Vehicle by 7 October 2016.

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Activity 3. Analyze and Formulate

Strategies to Reach Objectives
Identifies what needs to be done to reach
objectives
Includes determining, evaluating and selecting
alternatives
Seek to be proactive rather than reactive to
environment changes
SWOT analysis asses external and internal
environment changes in terms of strengths,
weaknesses, opportunities and threats
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Activity 4. Implement Strategies

through Projects
Key areas:
Allocation of resources
Organization structure and culture
Planning and control
Motivation
Project prioritization

16

Scenario Planning
Structure process of thinking about future
possible environments that can affect the
organization and then develop strategies to
succeed in those environments
Supplements strategic planning
Seeks to think about the big picture

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Part I

Project Initiation

Copyright 2015 John Wiley & Sons, Inc.

Project Management

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Chapter 2
Strategic
Management and
Project Selection

Copyright 2015 John Wiley & Sons, Inc.

Purpose
Chapter 2 describes how to evaluate and
select projects that contribute to the
organizations strategy
Discusses the information needed
Management of risk during this process
Concludes with 8-step procedure

Project portfolio process

Aligns project selection with the strategy
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Problems With Multiple Projects

Delays in one project delays others

Inefficient use of resources
Bottlenecks in resource availability

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Project Results
30% canceled midstream
Over half of completed projects came in
up to

190% over budget

220% late

<50% of strategic projects successful

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Strategic Responsibility
Use projects to change business, not to
run it
Understand the strategic objectives and
goals
Three parties responsible for success

Project manager
Internal project sponsor
Client
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Challenges
Making sure projects are closely tied to
goals and strategy.
How to handle the growing number of
projects?
How to make these projects successful?

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Project Management Maturity

Project management maturity refers to
the mastery of skills required to manage
projects competently
Most organizations do not do well

Improvement through standardization

Number of ways to measure

Maturity can be rated in levels

Initial Repeatable Defined Managed Optimizing

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Types of Companies

Companies considering projects fall into two

broad categories:

Companies whose core business is completing

projects
Companies whose core business is something else

They can also be broken down as:

Companies looking at projects to do for others

Companies looking at projects to do for themselves

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Project Selection and Criteria of Choice

Project selection

Evaluating
Choosing
Implementing

Same process as other business

decisions

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Model Criteria

Realism
Capability
Flexibility
Ease of use
Cost
Easy computerization

Project selection models have:

Alignment with organization goals, Ease of

implementation, Reasonable cost of implementation
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The Nature of Project Selection Models

Models turn inputs into outputs

Managers decide on the values for the inputs
and evaluate the outputs
The inputs never fully describe the situation
The outputs never fully describe the expected
results
Models are tools
Managers are the decision makers

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Types of Project Selection Models

Nonnumeric models
Numeric models

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Nonnumeric Models
Models that do not return a numeric value
for a project to be compared with other
projects
These are really not models but rather
justifications for projects

Criteria in support of strategic objectives

Just because they are not true models

does not make them all bad
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Types of Nonnumeric Models

Sacred Cow

Operating Necessity

A project, often a favorite of and suggested by upper

management, that has taken on a life of its own
A project that is required in order to protect lives or
property or to keep the company in operation

Competitive Necessity

A project that is required in order to maintain the

companys position in the marketplace

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Types of Nonnumeric Models Continued

Product Line Extension

Comparative Benefit

Often, projects to expand a product line are

evaluated on how well the new product meshes with
the existing product line rather than on overall
benefits
Projects are subjectively rank ordered based on their
perceived benefit to the company

Sustainability

Focusing on long-term success of the organization,

profitability rather than short-run payoff
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Q-Sort Method

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Numeric Models
Models that return a numeric value for a
project that can be easily compared with
other projects
Major types

Profit/profitability
Real Options
Scoring
Window-of-opportunity analysis
Discovery-driven planning
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Numeric Models: Profit/Profitability

Models that look at costs and revenues

Payback period
Discounted cash flow (NPV)
Internal rate of return (IRR)
Profitability index

NPV and IRR are the more common

methods

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Payback Period
The length of time until the original
investment has been recouped by the
project
A shorter payback period is better

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Payback Period Example

Project Cost
Payback Period
Annual Cash Flow
$100,000
4
Payback Period
$25,000
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Payback Period Drawbacks

Does not consider time value of money

More difficult to use when cash flows
change over time
Less meaningful for longer periods of
time (due to time value of money)

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Discounted Cash Flow

The value of a stream of cash inflows and
outflows in todays dollars
Also known as Net Present Value (NPV),
discounted cash flow or just discounting
Widely used to evaluate projects
Includes the time value of money
Includes all inflows and outflows, not just
the ones through payback point

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Discounted Cash Flow Continued

Requires a percentage to use to reduce

future cash flows

This is known as the discount rate

The discount rate or required rate of

return may also be known as a hurdle
rate or cutoff rate
There will usually be one overall discount
rate for the company

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NPV Formula
n

NPV (project) A0
t 1

Ft

1 k

Including inflation (or deflation), the denominator would be:

(1 + k + p)

If the NPV is positive, the

project is deemed acceptable
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NPV Formula Terms

A0

Initial cash investment (outflow is

negative)
Ft Cash flow in time period t (positive for
inflows, negative for outflows)
k
The discount rate (rate of return)
p
The inflation rate
t
The number of years of life
A higher NPV is better
Higher the discount rate, lower the NPV

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NPV Example
A0
Ft
k
p

= $100,000
= $25,000
= 15%
= 3%
8

$25,000
NPV (project) $100,000
t
t 1 1 0.15 0.03
$1,939
A0
Ft
k
pt
t

Initial cash investment (outflow is negative)

Cash flow in time period t (positive for inflows, negative for outflows)
The discount rate (rate of return)
The inflation rate
Time period

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Internal Rate of Return [IRR]

The discount rate (k) that causes the NPV
to be equal to zero
The higher the IRR, the better

While it is technically possible for a series to

have multiple IRRs, this is not a practical
issue

Finding the IRR requires a financial

calculator or computer
In Excel =IRR(Series,Guess)

A0 + A1/(1+k)1 + A2/(1+k)2 + + An/(1+k)n = R1/(1+k)1 + R2/(1+k)2 + + Rn/(1+k)n

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Profitability Index
a k a Benefit cost ratio
NPV divided by initial cash investment
Ratios greater than 1.0 are good

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Advantages of Profitability Models

Easy to use and understand

Based on accounting data and forecasts
Familiar and well understood
Gives a go/no-go indication
Can be modified to include risk

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Disadvantages of Profitability Models

Ignore nonmonetary factors

Some ignore time-value of money
Biased toward the short-term
Payback ignores cash flow after payback
IRR can have multiple solutions
All are sensitive to errors
Nonlinear
Dependent on determination of cash flows
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Numeric Models: Real Options

Positions the organization to capitalize on
future opportunities
Utilized to reduce both technological and
commercial risk

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Numeric Models: Scoring

Unweighted 01 factor model
Unweighted factor model
Weighted factor model

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Unweighted 0-1 Factor Model

Factors selected

Listed on a preprinted form

Raters score the project on each factor

Each project gets a total score
Main advantage is that the model uses
multiple criteria
Major disadvantages are that it assumes
all criteria are of equal importance

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Unweighted 0-1 Factor Model Example

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Unweighted Factor Scoring Model

Replaces Xs with factor score

Typically a 1-5 scale

Column of scores is summed

Projects with high scores are selected

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Unweighted Factor Models

Each factor is weighted the same
Less important factors are weighted the
same as important ones
Easy to compute
Just total or average the scores

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Weighted Factor Scoring Model

Each factor is weighted relative to its

importance

Weighting allows important factors to stand out

Increased attention to relative importance of each
selection criterion

A good way to include nonnumeric data in the

analysis
Factors need to sum to one
All weights must be set up, so higher values
mean more desirable
Small differences in totals are not meaningful

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Weighted Factor Model Example

Project 1
Project 2
Project 3
Project 4
Project 5

2
9
3
6
1
3

5
5
7
8
0
10

4
2
2
2
5
10

3
0
0
3
10
1

1
2
5
6
6
8

3 Weighted
5
68
1
57 low
8
99
9
85
0
107 high

Project 1
Project 2
Project 3
Project 4
Project 5

5
9
3
6
1
3

5
5
7
8
0
10

4
2
2
2
5
10

3
0
0
3
10
1

1
2
5
6
6
8

3 Weighted
5
95
1
66 low
8
117 high
9
88
0
116

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Advantages of Scoring Models

Allow multiple criteria

Structurally simple
Direct reflection of managerial policy
Easily altered
Allow for more important factors
Allow easy sensitivity analysis

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Disadvantages of Scoring Models

Relative measure
Linear in form
Can have large number of criteria
Unweighted models assume equal
importance

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Numeric Models: Window-ofOpportunity Analysis

A process where the cost, time, and

performance specs are defined that must
be met before any R&D work

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Numeric Models: Discovery-Driven

Planning
Similar to W-o-O
Funds enough of the project to determine
if the initial assumptions were accurate
Used to learn more about the project,
rather than necessarily implement it

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Choosing a Project Selection Model

Weighted scoring models favored:

Allow multiple objectives to be considered

Easily adapted
Not biased toward short-run like the
profitability models

Inputs must be updated to reflect change

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Risk Considerations in Project Selection

Both costs and benefits are uncertain

Benefits are more uncertain

Subjective probabilities

Timing
What will be accomplished?
Side effects

There are many ways of dealing with risk

Can make estimates about the probability of
outcomes
Uncertainty is present in all projects and in all
stages of Project Management:

Pro forma documents

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The Project Portfolio Management

(PPM)
Links projects directly to the goals and
strategy of the organization
Means for monitoring and controlling
projects

Effective PPM balances projects

Includes projects of various sizes,

timeframes, and levels of risk
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Symptoms of a Misaligned Portfolio

More projects
Inconsistent determination of benefits
Projects that dont contribute to the
strategy
Competing projects
Costs exceed benefits
No risk analysis of projects
Lack of tracking against the plan
No client for project

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Purpose of Project Portfolio Process

Identify nonprojects
Prioritize list of projects
Limit number of projects
Identify the real options for each project
Identify projects with good fit
Identify co-dependent projects

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Purpose of Project Portfolio Process Continued

Eliminate risky projects
Eliminate projects that skip the formal
selection process
Keep from overloading the organization
To balance the resources with needs
To balance returns
To balance short-, medium-, and longterm returns

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Project Portfolio Process Steps

1.
2.
3.
4.
5.
6.
7.
8.

Establish a project council

Identify project categories and criteria
Collect project data
Assess resource availability
Reduce the project and criteria set
Prioritize the projects within categories
Select the projects to be funded and held in
reserve
Implement the process
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Step 1: Establish a Project Council

Senior management
The project managers of major projects
The head of the Project Management
Office
Particularly relevant general managers
Those who can identify key opportunities
and risks facing the organization
Anyone who can derail the PPM later on

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Step 2: Identify Project Categories and

Criteria

Derivate projects
Platform projects
Breakthrough projects
R&D projects

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Step 3: Collect Project Data

Assemble the data
Document assumptions
Screen out weaker projects
The fewer projects that need to be
compared and analyzed, the easier the
work of the council

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Step 4: Assess Resource Availability

Assess both internal and external
resources
Assess labor conservatively
Timing is particularly important

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Step 5: Reduce the Project and Criteria Set

Organizations goals
Have competence
Market for offering
How risky the project is
Potential partner
Right resources
Good fit

Use strengths
Synergistic
Dominated by
another
Has slipped in
desirability

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Step 6: Prioritize the Projects Within

Categories
Apply the scores and criterion weights
Consider in terms of benefits first and
resource costs second
Summarize the returns from the projects

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Step 7: Select the Projects to be Funded

and Held in Reserve
Determine the mix of projects across the
categories
Leave some resources free for new
opportunities
Allocate the categorized projects in rank
order

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Step 8: Implement the Process

Communicate results
Repeat regularly
Improve process

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Project Bids and RFPs

The project proposal is essentially a
project bid
Putting together a project proposal
requires a detailed analysis of the project
Project proposals can take weeks or
months to complete
A more detailed analysis may result in not
bidding on the project

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Project Proposal Contents

Cover letter
Should begin with an Executive summary
The technical approach
The implementation plan
The plan for logistic support and
administration
Past experience

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Assignment

Due no later than Tuesday by 11pm:

Quiz #2

Available in Blackboard starting this

evening at 9pm

For next class, read Chapter 3

The Project Manager

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