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Zagazig University College of Engineering

Department of Industrial Engineering

Project Management
Chapter 2
Organization Strategy and Project
Selection

Dr. Mansour Abou Gamila

February, 2019 Project Management, Lecture 2 1

Why Project Managers Need to Understand

the Strategic Management Process
• Changes in the organization’s 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
organization’s strategy can become effective
advocates of projects aligned with the firm’s
mission.
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Projects and 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 (Pareto’s Law).
– Engaging in a never-ending search for perfection only the project
team really cares about.

February, 2019 Project Management, Lecture 2 3

The Strategic Management Process:

An Overview
Strategic Management
– Requires every project to be clearly linked to
strategy.
– Provides theme and focus of firm’s future direction.
• Responding to changes in the external environment—
environmental scanning
• Allocating scarce resources of the firm to improve its
competitive position—internal responses to new
programs
– Requires strong links among mission, goals,
objectives, strategy, and implementation.
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Strategic Management Process 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

February, 2019 Project Management, Lecture 2 5

Figure 2.1: Strategic Management Process

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Characteristics of Objectives
S Specific Be specific in targeting an objective
M Measurable Establish a measurable indicator(s) of
progress
A Assignable Make the objective assignable to one
person for completion
R Realistic State what can realistically be done
with available resources
T Time related State when the objective can be
achieved, that is, duration

February, 2019 Project Management, Lecture 2 7

Scenario Planning: A Supplement to

Traditional Strategic Planning

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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
– Multi project environment creates interdependency
relationships of shared resources which results in the
starting, stopping, and restarting projects.
February, 2019 Project Management, Lecture 2 9

Benefits of Project Portfolio 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.
February, 2019 Project Management, Lecture 2 10

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A Portfolio Management 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.

February, 2019 Project Management, Lecture 2 11

Portfolio of Projects by Types

‫اﻻمتثال‬

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A Portfolio Management System

• Selection Criteria
– Financial: payback, net present value (NPV),
internal rate of return (IRR)
– Non-financial: projects of strategic importance to
the firm.
• Multi-Weighted Scoring Models
– Use several weighted selection criteria to evaluate
project proposals.

February, 2019 Project Management, Lecture 2 13

Financial 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.
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Example, Problem 2, page 51

• Payback = Investment/ Annual saving

• Payback of Project Alpha = 150,000/40,000 =
3.75 years
• Payback of Project Bata= 200,000/50,000 = 4
years
• Project Alpha is the better payback.
February, 2019 Project Management, Lecture 2 15

Financial Models Con.

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Example, Problem 3, page 51

 15000   25000 
NPV   50 , 000     2 

 (1.2)   (1.2) 
 30000   20000   15000 
 3 
  4 
  5 
 (1.2)   (1.2)   (1.2) 
 $ 12 , 895 . 4
NPV  50,000  15,000( P / F ,20%,1)  25,000( P / F ,20%,2)
 30,000( P / F ,20%.3)  20,000( P / F ,20%,4)  15,000( P / F ,20%,5) 

NPV =-50,000 + 15,000(0.8333) + 25,000(0.6944) + 30,000(0.5787)

+20,000(0.4823)+15,000(0.4019) = $12,895
February, 2019 Project Management, Lecture 2 17

Example, Problem 6, page 52

Time Fades Away On the Beach Tonight’s the Night

Year Investment Revenue Investment Revenue Investment Revenue
Stream Stream Stream
0 600,000 0 400,000 0 200,000 0
1 600,000 400,000 200,000
2 75,000 100,000 125,000
3 20,000 25,000 75,000
4 15,000 20,000 20,000
5 10,000 10,000 10,000
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Example, Problem 6, page 52

Time Fades Away
1 1
NPV  600,000  600,000  75,000
1  0.22 1  0.22 2
1 1 1
 20,000( )  15,000  10,000  $  36,321.7
1  0.223 1  0.224 1  0.225
On the Beach
1 1
NPV   400 , 000  400 , 000  100 , 000
1  0 . 22  1  0 . 22 2
1 1 1
 25 , 000 ( )  20 , 000  10 , 000  $ 21 ,565 . 75
1  0 . 22 3
1  0 . 22 4
1  0 . 22 5 2
Tonight’s the Night
1 1
NPV  200,000  200,000  125,000
1  0.22  1  0.222
1 1 1
 75,000( )  20,000  10,000  $101,958.75
1  0.223
1  0.22 4
1  0.225 1
February, 2019 Project Management, Lecture 2 19

P= value or amount of money at a time designated as the present or time 0, preset

worth(PW), Present Value “PV”, Net present value ”NPV”, Discounted cash flow ”DCF”,
and capitalized cost “ CC”.
F = value of money at some future time. It is future worth “ FW”, Future value” FV”.
A = series of consecutive, equal, end of period amounts of money. It is the annual worth”
AW” and Equivalent uniform annual worth ”EUAW”.
n = number of interest periods; years, month, days.
i = interest rate or rate of return per time period; percent per year; percent per month;
percent per day.

 1 
P  F  n 
 (1  i) 

 (1  i )n  1 
P  A n 
for i  0
 i (1  i ) 
 i 
A F 
 (1  i )  1 
n

February, 2019 Project Management, Lecture 2 20

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Example
The amount of money deposit and the amount of money received after
specified number of years are known, and the interest rate or rate of
return is unknown.
If a company made a $30,000 investment in a project and received $50,000 5
years latter, determine the rate of return?
P = $30,000, F =1 $50,000, n = 5, i=?
$5,0000
P  F(P/F, i, n)  F
(1  i)n i=?

1 0 1 2 3 4 5
30000  50000
(1  i )5
1
0 .6  $3,0000
(1  i )5
1 0.2
i ( )  1  0 . 1076 (10 . 76 %)
0 . 6 5
Another solution: (1+i) = 1/0.6=1.6666
5 Ln (1+i) = Ln 1.666=0.5108
Ln(1+i) = 0.5108/5 = 0.10216 1+ i = 1.10756,
i = 10.76%
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February, 2019 Project Management, Lecture 2

Example
Pyramid Energy requires that for each of its offshore wind power generators
$5000 per year be placed into a capital reserve fund to cover unexpected major
rework on field equipment. In one case, $5000 was deposited for 15 years and
covered a rework costing $100,000 in year 15. What rate of return did this
practice provide to the company? Solve by hand and spreadsheet.

The cash flow diagram is shown in Figure. Either the A/F or F/A factor can be
used.
Using A/F,
A = F(A/F, I, n)
5000 = 100,000(A/F, i, 15)
(A/F, i, 15) = 0.05

From the A/F interest tables for 15 years, the value 0.05 lies between 3% and 4%.
i=3% (A/F, 3%, 15) = 0.0538, i=4% (A/F, 4%, 15) = 0.0499
By interpolation, i = 3.974%.
0.0538 - 0.05
i *  0.03  (0.01)  0.03974  3.974%
0.0538 - (0.0499)
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Example

The University of California at San Diego is considering a plan to

build an 8-megawatt cogeneration plant to provide for part of
its power needs. The cost of the plant is expected to be $41
million. The university consumes 55,000 megawatt-hours per
year at a cost of $120 per megawatt-hour. (a) If the university
will be able to produce power at one-half the cost that it now
pays, what rate of return will it make on its investment if the
power plant lasts 30 years? (b) If the university can sell an
average of 12,000 megawatt-hours per year back to the utility
at $90 per megawatt-hour, what rate of return will it make?

February, 2019 Project Management, Lecture 2 23

Solution
(a)
Cost of power = 55000*120=$6,600,000 per year.
University cost to produce power = 0.5*6600000 = $3,300,000
University saving in 1 year = 6600000-3300000= $3,300,000
0 = -41,000,000+3,300,000(P/A,i, 30)
(P/A, i , 30) = 12.424
n
(1  i )  1
( P / A , i, n )  n
i (1  i )
(1  i )  1
30
12 . 424 
i (1  i ) 30

I = 6.988 = 7%

(b)
0 = -41,000,000+3,300,000(P/A,i,30)+12000*90(P/A, i,30)
(P/A, i, 30) = 41000000/4380000 = 9.36
I = 10.086%

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Nonfinancial Strategic 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 next-
generation products
• To reduce dependency on unreliable suppliers
• To prevent government intervention and regulation

February, 2019 Project Management, Lecture 2 25

Multi-Criteria Selection 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 doesn’t allow for comparison with
other potential projects.

Multi-Weighted Scoring Model

• Uses several weighted qualitative and/or quantitative
selection criteria to evaluate project proposals.
• Allows for comparison of projects with other potential
projects
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Sample Selection Questions Used in Practice

Topic Question
Strategy/alignment What specific strategy 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?
Risk Where does the proposed project fit in our risk
profile?
Benefits, value, ROI What is the value of the project to this organization?
Benefits, value, ROI When will the project show results?
Objectives What are the project objectives?

February, 2019 Project Management, Lecture 2 27

Sample Selection Questions Used in Practice

Topic Question
Organization culture Is our organization culture right for this type of
project?
Resources Will internal resources be available for this project?
Approach Will we build or buy?
Schedule How long will this project take?
Schedule Is the time line realistic?
Training/resources Will staff training be required?
Finance/portfolio What is the estimated cost of the project?
Portfolio Is this a new initiative or part of an existing initiative?
Portfolio How does this project interact with current projects?
Technology Is the technology available or new?

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Project Screening Matrix

February, 2019 Project Management, Lecture 2 29

Applying a Selection Model

• Project Classification
– Deciding how well a strategic or operations project
fits the organization’s strategy.
• Selecting a Model
– Applying a weighted scoring model to bring projects
to closer with the organization’s strategic goals.
• Reduces the number of wasteful projects
• Helps identify proper goals for projects
• 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
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February, 2019 Project Management, Lecture 2 33

Managing the Portfolio

• Senior Management Input
– Provide guidance in selecting criteria that are
aligned with the organization’s 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 organization’s goals and priorities
– Evaluate the progress of current projects
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Problems
Solve the following Problems in page 51-53:
4, 5, and 7

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