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Organization Strategy and Project Selection: Chapter Two
Organization Strategy and Project Selection: Chapter Two
Organization
Strategy and
Project Selection
McGraw-Hill/Irwin
Copyright 2011 by The McGraw-Hill Companies, Inc. All
rights reserved.
Where
Where We
WeAre
Are Now
Now
22
Why
Why Project
Project Managers
Managers Need
Need to
to Understand
Understand
the
the Strategic
Strategic Management
Management Process
Process
Changes in the organizations 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
organizations strategy can become effective
advocates of projects aligned with the firms mission.
23
Projects
Projects and
and Strategy
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 (Paretos Law).
Engaging in a never-ending search for perfection only the
project team really cares about.
24
The
The Strategic
Strategic Management
Management Process:
Process:
An
An Overview
Overview
Strategic Management
Requires every project to be clearly linked to strategy.
Provides theme and focus of firms future direction.
Responding to changes in the external
environmentenvironmental scanning
Allocating scarce resources of the firm to improve
Strategic
Strategic Management
Management Process
Process Activities
Activities
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
26
Strategic
Strategic
Management
Management
Process
Process
FIGURE 2.1
27
Characteristics
Characteristics of
of Objectives
Objectives
S
Specific
Measurable
Assignable
Realistic
Time related
EXHIBIT 2.1
28
Scenario
Scenario Planning:
Planning: AASupplement
Supplement
to
to Traditional
Traditional Strategic
Strategic Planning
Planning
Clarifying
Clarifying
your
yourcore
core
business
businessand
and
assessing
assessing
drivers
driversof
of
change
changeinin
the
theindustry
industry
environment
environment
Developing
Developing
potential
potential
scenarios
scenarios
and
and
assessing
assessing
the
theimpact
impact
of
ofSTEEP
STEEP
factors
factors
Developing
Developing
potential
potential
contingency
contingency
strategies
strategies
and
andbest
best
future
future
strategic
strategic
options
options
Identifying
Identifying
early
early
indicators
indicators
and
and
establishing
establishing
triggers
triggersfor
for
strategic
strategic
action
action
29
Project
Project Portfolio
Portfolio Management
Management Problems
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.
Benefits
Benefits of
of Project
Project Portfolio
Portfolio Management
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.
EXHIBIT 2.2
211
AA Portfolio
Portfolio Management
Management System
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.
212
Portfolio
Portfolio of
of Projects
Projects by
by Type
Type
FIGURE 2.2
213
AA Portfolio
Portfolio Management
Management System
System
Selection Criteria
Financial: payback, net present value (NPV),
internal rate of return (IRR)
Non-financial: projects of strategic importance
to the firm.
214
Financial
Financial Models
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.
215
Financial
Financial Models
Models (contd)
(contd)
The Net Present Value (NPV) model
Uses managements minimum desired rate-of-return (discount
rate) to compute the present value of all net cash inflows.
Positive NPV: project meets minimum desired rate
216
Example
ExampleComparing
ComparingTwo
TwoProjects
Projects
Using
UsingPayback
PaybackMethod
Method
EXHIBIT 2.3a
217
Example
ExampleComparing
ComparingTwo
TwoProjects
Projects
Using
UsingNet
NetPresent
PresentValue
ValueMethod
Method
EXHIBIT 2.3b
218
Nonfinancial
Nonfinancial Strategic
Strategic Criteria
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 nextgeneration products
To reduce dependency on unreliable suppliers
To prevent government intervention and regulation
219
Multi-Criteria
Multi-Criteria Selection
Selection Models
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 doesnt to allow for comparison
with other potential projects.
Sample
Sample Selection
Selection Questions
Questions Used
Used in
in Practice
Practice
Topic
Question
Strategy/alignment
Driver
Success metrics
Sponsorship
Risk
Risk
Risk
Objectives
Sample
Sample Selection
Selection Questions
Questions Used
Used in
in Practice
Practice
Topic
Question
Organization culture
Resources
Approach
Schedule
Schedule
Training/resources
Finance/portfolio
Portfolio
Portfolio
Technology
Project
Project Screening
Screening Matrix
Matrix
FIGURE 2.3
223
Applying
Applying aa Selection
Selection Model
Model
Project 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.
Reduces the number of wasteful projects
Helps identify proper goals for projects
Helps everyone involved understand how
Project
Project Proposals
Proposals
Sources and Solicitation of Project Proposals
Within the organization
Request for proposal (RFP) from external sources
(contractors and vendors)
AAProposal
ProposalForm
Form
for
for an
anAutomatic
Automatic
vehicular
vehiculartracking
tracking
(AVL)
(AVL) Public
Public
Transportation
Transportation
Project
Project
FIGURE 2.4A
226
Risk
Risk
Analysis
Analysisfor
for
500-Acre
500-Acre
Wind
WindFarm
Farm
FIGURE 2.4B
227
Managing
Managing the
the Portfolio
Portfolio
Senior Management Input
Provide guidance in selecting criteria that are
aligned with the organizations goals
Decide how to balance available resources
among current projects
Project
ProjectScreening
Screening
Process
Process
FIGURE 2.5
229
Priority
Priority
Analysis
Analysis
FIGURE 2.6
230
Project
Project Portfolio
Portfolio Matrix
Matrix
FIGURE 2.7
231
Project
Project Portfolio
Portfolio Matrix
Matrix Dimensions
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.
232
Key
Key Terms
Terms
Implementation gap
Net present value
Organizational politics
Payback
Priority system
Priority team
Project portfolio
Project screening matrix
Project sponsor
Sacred cow
Strategic management process
233