Ch02 Meredith

7/25/2019 Ch02 Meredith

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Part I

Project

Initiation

2012 John Wiley & Sons Inc.


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Project Management


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Chapter 2

Strategic

Managementand ProjectSelection

2012 John Wiley & Sons Inc.


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Prolems With M!ltiple Projects

Delays in one project delays others

Inefficient use of resources

Bottlenecks in resource availability


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Project "es!lts

30 Percent canceled midstream

Over half of completed projects came in

up to190 percent over budetOver half of completed projects came in

up to !!0 percent late


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Challenges

"akin sure projects are closely tied to

oals and stratey

#o$ to handle the ro$in number ofprojects%

#o$ to make these projects successful%


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Project Management Mat!rity

Project manaement maturity refers to

the mastery of skills re&uired to manae

projects competently'umber of $ays to measure

"ost orani(ations do not do $ell


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Project Selection and Criteria o# Choice

Project selection)* +valuatin

* ,hoosin* Implementin

-ame process as other business

decisions


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$ypes o# Companies

,ompanies considerin projects fall into t$o

broad cateories.* ,ompanies $hose core business is completin

projects

* ,ompanies $hose core business is somethin else

/hey can also be broken do$n as.

* ,ompanies lookin at projects to do for others* ,ompanies lookin at projects to do for themselves


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Model Criteria

ealism

,apability

le2ibility +ase of use

,ost

+asy computeri(ation


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$he %at!re o# Project Selection Models

"odels turn inputs into outputs"anaers decide on the values for the inputs

and evaluate the outputs /he inputs never fully describe the situation /he outputs never fully describe the e2pected

results

"odels are tools"anaers are the decision makers


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$ypes o# Project Selection Models

'onnumeric models

'umeric models


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%onn!meric Models

"odels that do not return a numeric value

for a project to be compared $ith other

projects/hese are really not models4 but rather

justifications for projects

5ust because they are not true modelsdoes not make them all bad4


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$ypes o# %onn!meric Models

-acred ,o$* 6 project7 often suested by the top manaement7

that has taken on a life of its o$n

Operatin 'ecessity* 6 project that is re&uired in order to protect lives or

property or to keep the company in operation

,ompetitive 'ecessity* 6 project that is re&uired in order to maintain the

company8s position in the marketplace


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$ypes o# %onn!meric Models Contin!ed

Product ine +2tension* Often7 projects to e2pand a product line are

evaluated on ho$ $ell the ne$ productmeshes $ith the e2istin product line rather

than on overall benefits

,omparative Benefit* Projects are subjectively rank ordered based

on their perceived benefit to the company


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%!meric Models

"odels that return a numeric value for a

project that can be easily compared $ith

other projects /$o major cateories.

* Profit:profitability

* -corin


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Pro#itPro#itaility Models

"odels that look at costs and revenues* Payback period

* Discounted cash flo$ ;'P


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Payac' Period

/he lenth of time until the oriinal

investment has been recouped by the

project6 shorter payback period is better


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Payac' Period ()ample

4000,25$

000,100$

PeriodPayback

FlowCash!!"al

Cos#Proec#PeriodPayback

==

=


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Payac' Period *ra+ac's

Does not consider time value of money

"ore difficult to use $hen cash flo$s

chane over time ess meaninful for loner periods of

time ;due to time value of money=


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*isco!nted Cash ,lo+

/he value of a stream of cash inflo$s and

outflo$s in today8s dollars

6lso kno$ as discounted cash flo$ or justdiscountin

>idely used to evaluate projects

Includes the time value of money Includes all inflo$s and outflo$s7 not just

the ones throuh payback point


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*isco!nted Cash ,lo+ Contin!ed

e&uires a percentae to use to reduce

future cash flo$s

* /his is kno$n as the discount rate/he discount rate may also be kno$n as

a hurdle rate or cutoff rate

/here $ill usually be one overall discountrate for the company


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%P- ,orm!la

( )%P& '(ro$ec#)0

1 1

n

t

t

t

F

Ak=

= + +


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%P- ,orm!la $erms

A0 Initial cash investment

Ft ,ash flo$ in time period t;neative for

outflo$s=k /he discount rate

t /he number of years of life

6 hiher 'P< is better

#iher the discount rate lo$er the 'Phile it is technically possible for a series to

have multiple I8s7 this is not a practicalissue

indin the I re&uires a financialcalculator or computer

In +2cel ?I;-eries7@uess=4


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Pro#itaility Inde)

a k a Benefit cost ratio

'P< divided by initial cash investment

atios reater than 1A0 are ood


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dantages o# Pro#itaility Models

+asy to use and understand

Based on accountin data and forecasts

amiliar and $ell understood @ives a o:noo indication

,an be modified to include risk


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*isadantages o# Pro#itailityModels

Inore nonmonetary factors

-ome inore timevalue of money

Biased to$ard the shortterm Payback inores cash flo$ after payback

I can have multiple solutions

6ll are sensitive to errors 'onlinear

Dependent on determination of cash flo$s


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Scoring Models

Cn$eihted 0*1 factor model

Cn$eihted factor model

>eihted factor model


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n+eighted 031 ,actor Model

actors selected* isted on a preprinted form

aters score the project on each factor+ach project ets a total score

"ain advantae is that the model uses

multiple criteria"ajor disadvantaes are that it assumes

all criteria are of e&ual importance


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n+eighted 031 ,actor Model ()ample

iure !!


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n+eighted ,actor Scoring Model

eplaces 8s $ith factor score* /ypically a 1E scale

,olumn of scores is summedProjects $ith hih scores are selected


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n+eighted Weighted ,actor Model

+ach factor is $eihted the same

ess important factors are $eihted the

same as important ones+asy to compute

5ust total or averae the scores


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Weighted ,actor Model

+ach factor is $eihted relative to its

importance* >eihtin allo$s important factors to stand out

6 ood $ay to include nonnumeric data in the

analysis

actors need to sum to one

6ll $eihts must be set up7 so hiher valuesmean more desirable

-mall differences in totals are not meaninful


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Weighted ,actor Model ()ample

iure B Pae F0


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dantages o# Scoring Models

6llo$ multiple criteria

-tructurally simple

Direct reflection of manaerial policy +asily altered

6llo$ for more important factors

6llo$ easy sensitivity analysis


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*isadantages o# Scoring Models

elative measure

inear in form

,an have lare number of criteria Cn$eihted models assume e&ual

importance


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"is' Considerations in Project Selection

Both costs and benefits are uncertain* Benefits are more uncertain

/here are many $ays of dealin $ith risk

,an make estimates about the probability ofoutcomes* -ubjective probabilities

Cncertainty about.

* /imin* >hat $ill be accomplished%* -ide effects

Pro forma documents


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$he Project Port#olio Process 4PPP5

inks projects directly to the oals and

stratey of the orani(ation

"eans for monitorin and controllinprojects


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Symptoms o# a Misaligned Port#olio

"ore projects

Inconsistent determination of benefits

Projects that don8t contribute to the stratey

,ompetin projects

,osts e2ceed benefits

'o risk analysis of projects

ack of trackin aainst the plan

'o client for project


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P!rpose o# Project Port#olio Process

Identify nonprojects

Prioriti(e list of projects

imit number of projects Identify the real options for each project

Identify projects $ith ood fit

Identify codependent projects


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P!rpose o# Project Port#olio ProcessContin!ed

+liminate risky projects+liminate projects that skip the formal

selection processGeep from overloadin the orani(ation/o balance the resources $ith needs

/o balance returns/o balance short7 medium7 and lon

term returns


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Project Port#olio Process Steps

1A +stablish a project council

!A Identify project cateories and criteria

3A ,ollect project data

HA 6ssess resource availability

EA educe the project and criteria set

FA Prioriti(e the projects $ithin cateories

A -elect the projects to be funded and held inreserve

JA Implement the process


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Step 16 (stalish a Project Co!ncil

-enior manaement/he project manaers of major projects

/he head of the Project "anaementOffice

Particularly relevant eneral manaers

/hose $ho can identify key opportunitiesand risks facin the orani(ation6nyone $ho can derail the PPP later on


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Step 26 Identi#y Project Categories andCriteria

Derivate projects

Platform projects

Breakthrouh projects KD projects


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Step 76 Collect Project *ata

6ssemble the data

Document assumptions

-creen out $eaker projects/he fe$er projects that need to be

compared and analy(ed7 the easier the

$ork of the council


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Step 86 ssess "eso!rce ailaility

6ssess both internal and e2ternal

resources

6ssess labor conservatively/imin is particularly important


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Step 96 "ed!ce the Project and CriteriaSet

Orani(ation8s oals

#ave competence

"arket for offerin#o$ risky the project is

Potential partner

iht resources

@ood fit

Cse strenths

-yneristic

Dominated by

another

#as slipped in

desirability


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Step :6 Prioriti;e the Projects WithinCategories

6pply the scores and criterion $eihts

,onsider in terms of benefits first and

resource costs second-ummari(e the returns from the projects


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Step


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Step >6 Implement the Process

,ommunicate results

epeat reularly

Improve process


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Project Proposals

/he project proposal is essentially a

project bid

Puttin toether a project proposalre&uires a detailed analysis of the project

Project proposals can take $eeks or

months to complete6 more detailed analysis may result in not

biddin on the project


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Project Proposal Contents

,over letter

+2ecutive summary

/he technical approach/he implementation plan

/he plan for loistic support and

administrationPast e2perience

Ch02 Meredith

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