Because learning changes everything.

Chapter Two
Organization Strategy
and Project Selection

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 Where We Are Now

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 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

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 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

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 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 sponsors. They have to be able to:
• demonstrate to senior management how their project
contributes to the firm’s mission in order to gather 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.

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 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.

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 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.

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 Strategic Management Process

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 Characteristics of Objectives

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 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 agreement 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 supporting 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.

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 Benefits of Project Portfolio Management

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 2.4 Project Classification

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 2.4 Project Classification

Compliance projects are typically those needed to meet regulatory conditions

required
to operate in a region; hence, they are called “must do” projects.
Emergency projects, such as building an auto parts factory destroyed by tsunami,
or recovering a crashed network, are examples of must do projects. Compliance
and emergency projects usually have penalties if they are not implemented.

Operational projects are those that are needed to support current operations.
These projects are designed to improve efficiency of delivery systems, reduce
product costs, and improve performance.

Strategic projects are those that directly support the organization’s long-run
mission. They frequently are directed toward increasing revenue or market share.

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 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

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 Financial Criteria: The Payback Model

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 Example Comparing Two Projects Using Payback Method

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 Financial Criteria: Net Present Value (NPV)

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 Example Comparing Two Projects Using Net Present Value Method

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 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.

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 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.

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 Checklist Models: Sample Selection Questions Used in Practice

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 Multi-Weighted Scoring Models: Project Screening Matrix

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 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
• They help project managers understand how their project was selected,
how their project contributes to organization goals, and how it compares
with other projects.

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 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.

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 A Proposal Form for an Automatic Vehicular Tracking (AVL)
Public Transportation Project

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 Risk Analysis for a 500-Acre Wind Farm

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 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.

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 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 are relatively easy to accomplish and produce modest
commercial value.
• They typically involve evolutionary improvements to current products and
services.
• Examples include software upgrades and manufacturing cost reduction efforts.
• Pearls are low risk development projects with high commercial payoffs.
• They represent revolutionary commercial advances using proven technology.
• Examples include next-generation integrated circuit chip and subsurface
imaging to locate oil and gas.

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 Balancing the Portfolio for Risks and Types of Projects

• Oysters are high risk, high value projects.

• These projects involve technological breakthroughs with tremendous
commercial potential.
• Examples include embryonic DNA treatments and new kinds of metal
mixtures.
• White elephants are projects that at one time showed promise but
are no longer viable.
• Examples include products for a flooded market or a strong energy
source with toxic side-effects.

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