Professional Documents
Culture Documents
Project Initiation
2-2
Chapter 2
Strategic
Management and
Project Selection
2-4
Project Results
2-5
Challenges
2-6
Project Management Maturity
2-7
Project Selection and Criteria of Choice
Project selection…
– Evaluating
– Choosing
– Implementing
Same process as other business
decisions
2-8
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
2-9
Model Criteria
Realism
Capability
Flexibility
Ease of use
Cost
Easy computerization
2-10
The Nature of Project Selection Models
2-11
Types of Project Selection Models
Nonnumeric models
Numeric models
2-12
Nonnumeric Models
2-13
Types of Nonnumeric Models
Sacred Cow
– A project, often suggested by the top management,
that has taken on a life of its own
Operating Necessity
– 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
company’s position in the marketplace
2-14
Types of Nonnumeric Models Continued
Product Line Extension
– 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
Comparative Benefit
– Projects are subjectively rank ordered based on their
perceived benefit to the company
Sustainability
– Focusing on long-term profitability rather than short-
run payoff
2-15
Q-Sort Method
2-16
Numeric Models
2-18
Payback Period
2-19
Payback Period Example
Project Cost
Payback Period
Annual Cash Flow
$100,000
Payback Period 4
$25,000
2-20
Payback Period Drawbacks
2-21
Discounted Cash Flow
2-23
NPV Formula
n
Ft
NPV (project) A0
1 k
t
t 1
2-24
NPV Formula Terms
2-25
NPV Example
8
$25,000
NPV (project) $100,000
t 1 1 0.15 0.03
t
$1,939
2-26
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 IRR’s, this is not a practical
issue
Finding the IRR requires a financial
calculator or computer
In Excel “=IRR(Series,Guess)”
2-27
Profitability Index
2-28
Advantages of Profitability Models
2-29
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
2-31
Numeric Models: Scoring
2-32
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
2-34
Unweighted Factor Scoring Model
2-35
Unweighted Weighted Factor Model
2-36
Weighted Factor Scoring Model
Each factor is weighted relative to its
importance
– Weighting allows important factors to stand out
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
2-37
Weighted Factor Model Example
2-38
Advantages of Scoring Models
2-39
Disadvantages of Scoring Models
Relative measure
Linear in form
Can have large number of criteria
Unweighted models assume equal
importance
2-40
Numeric Models: Window-of-
Opportunity Analysis
2-41
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
2-42
Choosing a Project Selection Model
2-43
Risk Considerations in Project Selection
Both costs and benefits are uncertain
– Benefits are more uncertain
There are many ways of dealing with risk
Can make estimates about the probability of
outcomes
– Subjective probabilities
Uncertainty about:
– Timing
– What will be accomplished?
– Side effects
Pro forma documents
2-44
The Project Portfolio Management
(PPM)
2-45
Symptoms of a Misaligned Portfolio
More projects
Inconsistent determination of benefits
Projects that don’t contribute to the
strategy
Competing projects
Costs exceed benefits
No risk analysis of projects
Lack of tracking against the plan
No client for project
2-46
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
2-48
Project Portfolio Process Steps
1. Establish a project council
2. Identify project categories and criteria
3. Collect project data
4. Assess resource availability
5. Reduce the project and criteria set
6. Prioritize the projects within categories
7. Select the projects to be funded and held in
reserve
8. Implement the process
2-49
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 PPP later on
2-50
Step 2: Identify Project Categories and
Criteria
2-51
Step 3: Collect Project Data
2-52
Step 4: Assess Resource Availability
2-53
Step 5: Reduce the Project and Criteria
Set
2-54
Step 6: Prioritize the Projects Within
Categories
2-55
Step 7: Select the Projects to be Funded
and Held in Reserve
2-56
Step 8: Implement the Process
Communicate results
Repeat regularly
Improve process
2-57
Project Bids and RFPs
2-58
Project Proposal Contents
Cover letter
Executive summary
The technical approach
The implementation plan
The plan for logistic support and
administration
Past experience
2-59