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Juan Quiroz CIS 550 Assignment 2 Review Questions 1-7 1.

Describe the major components of the strategic management process. The four major component of the strategic management process are (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. 2. Explain the role projects play in the strategic management process. The implementation of strategies through projects is the last step of the strategic management process. A project, and its implementation in the sequence of events, requires certain elements in place in order to go forward with it. Also, strategy formulation ultimately ends with cascading objectives/projects assigned to lower divisions, departments, or individuals. 3. How are projects linked to the strategic plan? Ultimately, projects are the final step in the implementation process. How strategy is implemented will consume 80% of time spent, ultimately leading to the phase of project implementation. In order to implement projects, the following five (5) areas must first be addressed: (1) Sufficient allocation of resources, (2) Formal and informal organization that complements and supports strategy and projects, (3) Planning and control systems must be in place, (4) Motivating project contributors, (5) Prioritizing projects. 4. The portfolio of projects is typically represented by compliance, strategic, and operations projects. What impact can this classification have on project selection? Each classification has a strategic value assigned to it prior to placing it in the project portfolio. Compliance projects are must do projects required in order to operate in a region. Operational projects are projects needed to support current operations. Strategic projects are those that directly support an organizations long-term mission. If a project must be done or else the firm fails, then it is placed in the must category and will be accomplished. Usually, however, projects are selected based on financial and nonfinancial criteria within each of the aforementioned categories. 5. Why does the priority system described in this chapter require that it be open and published? Does the process encourage bottom-up initiation of projects? Does it discourage some projects? Why? The priority system should be open and published in order to avoid power plays within the organization and to make sure that the process is free of power politics. Each project in the priority system is evaluated by the same criteria (or by particular criteria within the class that the project has been placed in). The priority teams major task is to make sure that projects are balanced by type, risk, and resource demand. By doing this, projects that may rank low on most criteria may still be selected because the organizations portfolio does not include too many of these types of projects (the opposite is true as well). By playing this balancing act, the priority team encourages the bottom-up initiation of certain projects and discourages the acceptance of others.

6. Why should an organization not rely only on ROI to select projects? Financial criteria will not ensure that selected projects contribute to the mission and strategy of a firm. Other considerations such as developing new technology, public image, brand loyalty, and ethical position should be considered. These fall under non-financial criteria. While ROI is likely to be a key consideration for many organizations, multiple screening criteria are recommended for selecting and prioritizing projects. 7. Discuss the pros and cons of the checklist versus the weighted factor method of selecting projects. The checklist model uses a list of questions to review potential projects and to determine their acceptance or rejection. Checklist models can be used throughout different divisions and departments due to their flexibility in question design. However, due to its inability to assess relative value of a project to the organization, the checklist model can lead to power plays, politics and other forms of manipulation. A weighted scoring model will use several weighted criteria to evaluate project proposals. This is really the best model to use. A con to it however is that selection criteria used in this model should mirror the critical success factors of the organization. If they do not, then the screening process is rendered useless. Exercise 2 Two new software projects are proposed to a young, start-up company. The Alpha project will cost $150,000 to develop and is expected to have annual net cash flow of $40,000. The Beta project will cost $200,000 to develop and is expected to have annual net cash flow of $50,000. The company is very concerned about their cash flow. Using the payback period, which project is better from a cash flow standpoint? Why? Cost CF Payback Period (Cost/CF) Alpha 150,000 40,000 3.75 years Beta 200,000 50,000 4.00 years Since the Alpha project has a shorter payback period, the company should choose Alpha since it returns the companys initial investment in a shorter time period. Exercise 3 A five-year project has a projected net cash flow of $15,000, $25,000, $30,000, $20,000, and $15,000 in the next five years. It will cost $50,000 to implement the project. If the required rate of return is 20 percent, conduct a discounted cash flow calculation to determine the NPV. Year 0 Required Outflows Inflows Net inflows NPV 12,895 20% (50,000) 15,000 15,000 25,000 25,000 30,000 30,000 20,000 20,000 15,000 15,000 (50,000) 105,000 55,000 Year 1 Year 2 Year 3 Year 4 Year 5 Total

Since the NPV is positive, therefore accept the project

Exercise 4 You work for the 3T company, which expects to earn at least 18 percent on its investments. You have to choose between two similar projects. Below is the cash information for each project. Your analysts predict that inflation rate will be a stable 3 percent over the next 7 years. Which of the two projects would you fund if the decision is based only on financial information? Why?
Omega Year Y0 Y1 Y2 Y3 Y4 Y5 Y6 Y7 Total Inflow 0 0 150,000 220,000 215,000 205,000 197,000 100,000 1,087,000 Outflow Netflow 225,000 -225,000 190,000 -190,000 0 150,000 30,000 190,000 0 215,000 30,000 175,000 0 197,000 30,000 70,000 505,000 582,000 Alpha Year Y0 Y1 Y2 Y3 Y4 Y5 Y6 Y7 Total Inflow 0 50,000 150,000 250,000 250,000 200,000 180,000 120,000 1,200,000 Outflow Netflow 300,000 -300,000 100,000 -50,000 0 150,000 50,000 200,000 0 250,000 50,000 150,000 0 180,000 30,000 90,000 530,000 670,000

Required rate of return = 18% NPV 119,689 Required rate of return = 18% + inflation of 3% = 21% NPV 76,650

NPV 176,525

NPV 129,536

Since in both cases the NPV is positive, you can select both projects. If you only want to select one of the projects, then in both cases select Alpha since its NPV is higher in both cases

Exercise 5 You are the head of the project selection team at SIMSOX. Your team is considering three different projects. Based on past history, SIMSOX expects at least a rate of return of 20 percent. Your financial advisors predict inflation to remain at 3 percent into the foreseeable future. Given the following information for each project, which one should be SIMSOX first priority? Should SIMSOX fund any of the other projects? If so, what should be the order of priority based on return on investment?
Required % Required % w/infl Year 0 Year 1 Year 2 Year 3 Year 4 Year 5 TOTAL NPV (@23%) Dust Devils Ospry Voyagers 20% 20% 20% 23% 23% 23% (500,000) 50,000 250,000 350,000 0 0 150,000 (106,020) (250,000) 75,000 75,000 75,000 50,000 0 25,000 (77,302) (75,000) 15,000 25,000 50,000 50,000 15,000 80,000 7,762

Since Voyagers is the only company with a positive NPV, SIMSOX should go with their project.

Exercise 7 The Custom Bike Company has set up a weighted scoring matrix for evaluation of potential projects. Below are three projects under consideration. a. Using the scoring matrix below, which project would you rate highest? Lowest?
CRITERIA Strong sponsor WEIGHT Project 1 Project 2 Project 3 Project 4 Project 5 Supports 10% of sales from business strategy Urgency new products Competition Fill Market gap WEIGHTED 2.0 5.0 4.0 3.0 1.0 3.0 TOTAL 9 5 2 0 2 5 68 3 7 2 0 5 1 57 6 8 2 3 6 8 99 1 0 5 10 6 9 85 3 10 10 1 8 0 107

Based on the matrix above, Project 2 ranks the lowest at 57; project 5 the highest at 107 b. If the weight for Strong Sponsor is changed from 2.0 to 5.0, will the project selection change? What are the three highest weighted project scores with this new weight?
Supports 10% of sales from CRITERIA Strong sponsor business strategy Urgency new products Competition Fill Market gap WEIGHTED WEIGHT 5.0 5.0 4.0 3.0 1.0 3.0 TOTAL Project 1 9 5 2 0 2 5 95 Project 2 3 7 2 0 5 1 66 Project 3 6 8 2 3 6 8 117 Project 4 1 0 5 10 6 9 88 Project 5 3 10 10 1 8 0 116

If the weight of Strong Sponsor changes to 5.0, project 3 would rank the highest at 117. The top 3 projects would now be (1) project 3, (2) project 5, and (3) project 1. c. Why is it important that the weights mirror critical strategic factors? Selection criteria need to mirror critical success factors in an organization. More weight is placed on more imperative success factors depending on the company; less weight is placed on less imperative success factors (but still pertinent factors). Even once these factors are in place correctly, the final decision on choosing a project ultimately lies in the hands of management since no model can provide a total reality of what it is trying to represent.