Value of Project SMU

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Quantitative Methods in Project Management Unit 1

Sikkim Manipal University B2011 Page No. 1

Unit 1 Value of a Project

Structure

1.1 Introduction

Objectives

1.2 Meaning of Successful Projects

1.3 Value of a Project

1.4 Business Value Models

Balanced scorecard model

The Treacy-Wiersema model

The Kano model

1.5 Summary

1.6 Glossary

1.7 Terminal Questions

1.8 Answers

1.9 Case Study: Implementing Balanced Scorecard in a Service

Provider

1.1 Introduction

Quantitative techniques are part of almost every management activity. We

even use them in our daily lives, for example, while planning we use data

such as our income, our debts (if any), various bills, tuition fees, necessary

household things and our leisure requirements. On the basis of this data, we

plan where and how much we can spend and thus use quantitative

techniques for our budgeting. Now, the question that arises is what are the

quantitative activities or methods?

Quantitative methods provide the basis for calculating value, setting up the

projects, measure success, and quantify risk. Quantitative techniques in

project management are key indicators for project success and are

extensively used by project managers. They provide the basis of


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calculations that helps in solving various problems related to business

processes such as decision making, business research, forecasting, andmeeting predetermined goals.

Quantitative techniques are widely used through-out the project

management life cycle to plan, manage, and track performance. Therefore,

to be an efficient project manager, it is imperative to understand the concept

of data analysis. This enables project managers to understand project-

specific techniques of network analysis, scheduling, forecasting, and

monitoring of project outcomes.

Quantitative management borrows data heavily from statistical management

to predict project outcome and take corrective action. Statistical

management involves the use of a variety of statistical techniques, such as

run charts, control charts, etc., which will be discussed in later units.

In this unit, you will study the meaning of a successful project. Further, you

will study the measures to value a project. Later in the unit, you will come

across various business models such as Balanced scorecard, Treacy-

Wiersema Model, and the Kano model.

Objectives

After completing this unit, you will be able to:

define a successful project

explain the value of a project

describe the various business value models

1.2 Meaning of Successful Projects

A project can be described as a temporary effort, which collectively aims at

producing combined objectives to deliver various results, products, or

services. A project has a definite beginning and an end. It may be

performed by a group of people and even group of teams. Similarly, theduration of a project may be short-term or long-term, depending upon the

objectives framed.


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Let us consider an example. Apple is a renowned name in mobile handsets.

Imagine that Apple has taken up a new project to launch its latest model.Now, the company would consider various factors before announcing and

actually starting work on this new project. There will be a time frame,

availability of certain features and technology in the set, and an investment

done to initiate the project. If the company is able to launch the mobile

handset with the promised features and timeframe, earning more capital

than what was invested, then it would be regarded as a successful project of

the company.

The temporary nature of a project does not necessarily indicate short

duration. It depends upon the nature and the type of the project. For

instance, constructing a building will take longer than recruiting staff. Inaddition, there are certain projects that are repetitive in nature, but the

result, product, or services produced always remains unique. For example,

a construction company will usually take up a project of building

construction using the same workforce and material. However, the

uniqueness of the project will always be there because of the difference in

designs, place, situation, and circumstances. The construction project may

be of an office building, a school building, or a hospital. Also, designs and

size of the buildings may vary, maintaining the uniqueness of each and

every project.

Project success is based on the customers realisation of their Return on

Investment (ROI). Hence, as a project manager, it is imperative to

understand what the customer really needs and what is the business value

that the customer will derive. Projects are associated with time lines,

uncertainties, risks, and there is not much opportunity to go back and

reduce the errors. A project managers mission is to achieve the assigned

scope with the available resources and taking measured risks to do so.

It is easy to identify a successful project, as it tends to improve the process

and productivity of the business. A project is considered successful if it is

completed in the approved time and an approved budget. Successfulprojects are generally indicated by numbers, however, these numbers need

not be financial numbers alone. In fact, quantitative measures of resource

versus profit, customer satisfaction scores, market share, time to market,


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product differentiator and ROI, project benefit in totality define the projects

success.Self Assessment Questions:

1. A project has a definite beginning and an end. (True/False)

2. A successful project tends to improve the _________ and ________

of the business.

3. Project success is based on the customers realisation of their

__________.

1.3 Value of a Project

There is a value associated with every project, which also defines its

success and aids in managing valuable projects. There are different ways to

measure the project value. To analyse a successful project or measure the

value of a project, five concepts have been given as depicted in Fig. 1.1:

Fig. 1.1: Five Concepts to Measure the Value of a Project


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Now, let us discuss these five concepts in detail in the following section:

Concept 1: Achievement of project goals

Every organisation has its predefined goals, short term and long term. A

goal is a desired state or result that a company and its projects aspire for,

and hence, its achievement adds value to a project. In simple words, the

goal associated with the project and its achievement makes it valuable,

otherwise a project does not hold any value on its own.

NOTE:

Every project has the following three objectives:

1. Schedule objective:to complete the project in a given time

2. Cost objective: to complete the project in a given budget

3. Quality objective: to complete the project satisfying the declared

quality standard

Concept 2: Investments by management

A project is a temporary phase or part of a continuous business and also the

investment by the management in terms of resources and capital. These

investments are expected to deliver desirable results along with certainbenefits. This also defines the value of a project in a way that determines

the investment made on a project and the return benefits.

Concept 3: Risk tolerance by investors or sponsors

There is always an element of risk involved in any project investment. In the

beginning, when an investment is made, there is a commitment on the

results or outcomes of the project. It is also expected that some

unfavourable circumstances may occur in any project. Generally, these

situations are tolerated by investors and are termed as risk. The greater the

risk associated, higher will be the value of a project. Thus, in this manner,

the concept of risk tolerance defines the value of a project. However, it

should be noted that project risk is an uncertain event or condition, which, if

it occurs, has a positive or negative effect on one or more project objectives

such as cost, schedule, and quality.


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Concept 4: Investment equation as project equation

The traditional investment equation (Total returns = principal + gain)becomes the project equation to evaluate the value of a project. Thus, a

project value is derived from the resources used and the risks taken. This

equation works as a formula for project managers to evaluate project value.

Though it has been observed that projects often have the equation missing

and hence the project value.

Concept 5: Balance of quality, resources, and risk

The balance between quality, resources, and risk is when resources and

risks balance the quality. Quality is the satisfaction of needs and

expectations of stakeholders and customers. When they are satisfied usingthe available resources and covering the predicted risks, a balance between

quality, resources, and risk is achieved, which makes project value.

Self Assessment Questions:

4. The traditional investment equation is _______.

5. There is only one way to measure the value of a project. (True/False)

6. What is generally absent in most projects making them lack project

value?

1.4 Business Value Models

Different companies use different models to measure the value of their

businesses. For example, Ericsson implemented the business scorecard

model as one of the company techniques to succeed as a multinational

brand expanding in four different industries, namely, communication,

services, mobile phones, and multimedia solutions. The large size of the

company demands a system that can not only monitor success and failure

but can also make everyone in the company participate in it. This makes the

company adopt the business scorecard model as its performance

measurement system.

Let us now discuss the following business models in detail in the following

section:


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1.4.1 Balanced scorecard model

The balanced scorecard model defines four scoring areas for businessvalue and was first published by Robert S. Kaplanand David P. Nortonin

an article, The Balanced Scorecard Measures that Drive Performance.

The model was developed as a replacement for earlier systems; those only

included the financial perspective to measure performance. The business

scorecard model is an educational, informational, and communication

instrument, instead of being a controlling instrument. As the name of the

model suggests, it is a balance between the internal and external factors of

the company. Areas present on the scorecard are referred to as

perspectives, namely, financial perspective, customer perspective, internal

business perspective, and innovation and learning perspective, which aredepicted in Fig. 1.2:

Fig. 1.2: The Balanced Scorecard Model

This business model helps to prepare a scorecard for the business. This

scorecard assists in justifying strategies with the vision statement of the

organisation by measuring strategies with respect to four perspectives.


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Measuring strategies on this scorecard gives a planned view, so that the

planner can review and work on them efficiently. The strategy is generallypresented in a long document and is not of much assistance in planning.

The scorecard presents them in the form of a framework, and the

organisation is viewed from these four perspectives.

Now, let us discuss the four perspectives in detail in the following section:

1. Financial perspective: Financial data has always been a part of

business models. Kaplan and Norton suggest some additional financial

data such as cost-benefit and risk-assessment data. Financial data is of

prime concern for project managers, because irrespective of any

situation, they have to make capital available for the project. These are

the long-term goals of the company.

2. Customer perspective: This defines the ability of the company to

market its products and services. The present market has ample

competition. If the customer is not satisfied with you, he/she will find

another option, which is not good for the growth of your business. This

also explains the poor performance of the business. This perspective is

also about how and what customers feel about the company and its

products. If customers receive on-time and quality delivery of goods

and services at reasonable rates, they will feel good about the

company, which in turn will pay the business. This perspective needs toencounter both short-term and long-term goals.

3. Internal business perspective: This perspective refers to the

operational efficiencies of the business. It aids managers in analysing

the health of the business, that is, whether products and services of the

business are doing well or not. This perspective talks about the

processes that fulfil the expectations of shareholders by meeting those

of the customers. Therefore, this perspective is also referred to as the

combination of both internal and external objectives.

NOTE:

Internal business perspective is often referred as operation effectiveness

perspective.


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4. Innovation and learning perspective: It has long-term goals and is

meant to meet the goals of the three previous perspectives. Employeecapabilities, motivation, empowerment, and alignment are some major

categories related to this perspective.

Activity 1:

Discuss with your classmates the four areas of the balanced scorecard

model, and prepare a brief note on how does the score of each area affect

the project management of a company.

Objective:To help students identify the balanced scorecard model

1.4.2 The Treacy-Wiersema model

The Treacy-Wiersema model is very similar to the balanced scorecard

model. There are three areas of focus in this model, namely, customer

intimacy, product excellence or superiority, and operational excellence.

Fig. 1.3 depicts the Treacy-Wiersema model:

Fig. 1.3: The Treacy-Wiersema Model


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Customer intimacy: This is derived from the concept of relationship

management. Your business needs to perform well in terms of customersupport and satisfaction to survive a competitive market, as a customer can

easily find other options.

Product excellence or superiority:This is again related to the customers

needs and demands. If your product will be superior and different enough to

create more demand than your competitors, your business will grow faster

and better. A typical performance measures are customer satisfaction,

market share, revenues, and profits. A business also needs to take risks in

order to manufacture and produce a unique and different product.

Operational excellence:This area is similar to the innovation and learning

perspective of the balanced scorecard, as it also strives for maintaining

good operational standards and practices. Healthcare administration is one

of the examples of operational excellence, as they are accustomed to

providing uniform services to all the customers.

Table 1.1 shows the three perspectives of the Treacy-Wiersema Model:

Table 1.1: Three Perspectives of the Treacy-Wiersema Model

Customer intimacy Excel in customer attention and customer service.

Tailor the products, services, and process to

individual customers. Focus is on delivering services

on time, reliability, value service, etc.

Operational

excellence

Excel in operations and execution by providing a

reasonable quality at a low price. The focus here is

efficiency, streamlining, inventory management, JIT

etc.

Product

leadership

Excel in innovation and marketing. The focus here is

on development, innovation, design, and time to

market higher margins in the short time frame.

Though Treacy and Wiersema have coined these three focus areas, theyagree that it is difficult, if not impossible, to excel in all the three areas.

Operational excellence tends to contradict with customer satisfaction and

product excellence, as they are inversely proportional to each other. For

instance, product superiority will be given priority for the product may be


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expensive to the customer because of its high manufacturing cost. This may

lead to loss of customers for the business. On the other hand, if themanufacturer keeps low production cost, then it may compromise the quality

of the product resulting in losing customers.

Activity 2:

Visit the nearest store of a mobile company, and try to comprehend up to

what extent the areas we studied in the Treacy-Wiersema model

influenced their project management.

Objective:To identify the three areas of Treacy-Wiersema model

1.4.3 The Kano model

In comparison to the previous two models, the Kano modelis narrow in its

approach. Its primary focus is on the customer and his/her requirement of

products and services from the business. Unlike the above-mentioned two

models, it focuses on only two factors, namely, customer perspective and

product excellence. The perspective of operational effectiveness, which is

considered in the balanced scorecard and the Treacy-Wiersema model,

remain hidden in the Kano model until it has its reflection on the quality of

the product and services influencing customer satisfaction.

In traditional instruments, the prime focus used to be the financial health of

the business. Similarly, the Kano model has its prime focus on customer

needs. This model is named after Dr Noriaki Kanoand can be dated back

to a quality tool of the 1970s based on the needs of the customer and

features of the products and services. Using this quality tool, projects

managers not only measure product performance but can also evaluate

budget allocation and priorities.

We all know that customer needs keep changing, because as a customer,

we also keep changing our priorities. The Kano model is used by a business

to analyse customer needs, i.e., what delights customers. The model

analyses customer needs on the basis of three types of customerrequirements namely:

Basic needs:These are needs that help a company in entering a market.


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Performance needs:These needs allow a company to survive the market

by maintaining competitiveness.Excitement needs: These needs make a company stand out and excel

among competitors.

Out of the three business models that we discussed, the Kano model is

considered more practical and can be easily implemented in projects. The

usual representation of the Kano model is in the form of a graph with a

vertical and a horizontal axis. This representation has been depicted in

Fig. 1.4:

Fig. 1.4: Graphical Representation of the Kano Model

In Fig. 1.4, the vertical scale represents customer satisfaction, ranging from

very satisfied to indifferent, towards the center, and very dissatisfied. The

horizontal scale represents the performance of the product and service.

Desired or available performance is depicted on the right, and stronger

desire is represented by the farther distance from the center. Poor

performance is depicted on the left.


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As discussed, the Kano model analyses the customers needs; it classifies

customer preferences into five categories, which is also shown inFig. 1.5:

Fig. 1.5: Customer Requirements-The Kano Model

Now, let us discuss the different categories of customer preferences in the

Kano model:

Must-be quality

These are the factors, the absence of which raises great dissatisfaction

while their presence does not increase satisfaction. For example, if the

packaging of any food item or milk is found open, it would not be liked and

accepted by customers, while the sealed packet is expected and does not

increase customer satisfaction. Since customers see this as a basic need,they will not consider it into quality attributes. Therefore, it can be concluded

that if these factors are fulfilled, they are a given, but if remained unfulfilled,

they result in dissatisfaction for the customer.


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One-dimensional quality

The absence of these factors results in dissatisfaction, whereas theirpresence results in satisfaction. Generally, companies compete with each

other on these factors. Customers also consider these factors while buying

a product. For example, a customer enters a shop after seeing a 50% sale

banner outside a shop. However, the customer later realises that only a few

items are available on sale, and rest of the items have no discount. The

customer might feel disappointed, whereas, if all the items were on 50%

discount, he/she would have been satisfied.

Attractive quality

The presence of these factors results in complete satisfaction, but theirabsence does not lead to dissatisfaction. These are least expected by the

customer, and hence, amuse customers making them feeling satisfied. For

example, if a customer has planned to purchase a home theatre, and after

making his/her purchase, the store offers him/her the services of annual

maintenance for two years without any extra charges, the customer will be

delighted. Since the customer does not expect this service with every

product on every purchase, its absence would not make any difference,

while its presence will result in complete satisfaction.

Indifferent quality

These are the factors that neither satisfy nor dissatisfy customers. For

example, when a customer expects hot water available in his/her hotel

room, the kind of equipment used by the hotel will not affect the customer in

any way. Be it an instant geyser, a storage geyser, or any other heating

element, all that the customer wants is hot water. So, the customer is

generally indifferent about the processes of a business in providing him with

facilities and amenities.

Reverse quality

This refers to a high degree of achievement resulting in a high degree ofdissatisfaction. This happens because the market consists of different types

of customers. For example, there could be some customers who would

prefer expensive electronic gadgets loaded with features, while others


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would only desire simple and less expensive products, and hence, the

superior quality may disappoint them.Activity 3:

Work in a team with your classmates or friends, and rate the products or

the services of any company of your choice from any industry on the

graph of the Kano model.

Objective:To help students describe a Kano Model

Self Assessment Questions:

7. The business scorecard model is an educational, informational, and

communication instrument. (True/False)

8. __________is a balance between the internal and external factors of

a company.

9. Mention the areas of focus under the balanced scorecard model.

10. Must-be quality are the factors, the absence of which raises great

dissatisfaction while their presence does not increase satisfaction.

(True/False)

11. Product excellence or superiority is related to customers needs and

demands. (True/false)

12. ________ is taken from the concept of relationship management.

13. Using this quality tool, projects managers not only measure product

performance but also evaluate budget allocation and priorities.

(True/False)

14. The Kano model focuses on only two factors, namely customer

perspective and _______.

1.5 Summary

In this unit you have studied:

Quantitative methods or techniques are essential part of almost every

management activity. Examples of use of quantitative techniques in our

daily lives are while planning monthly budget, EMIs, and shopping etc.


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Successful projects are the ones that improve productivity of the

business.

There are different models that can be used to analyse business value,

namely, the business scorecard model, the Treacy-Wiersema, and the

Kano model.

The balanced scorecard model, invented by Robert S. Kaplan and David

P. Norton, defines four scoring areas for business value.

The Treacy-Wiersema model has three areas of focus, namely,

customer intimacy, product excellence or superiority, and operational

excellence.

The Kano model is used by businesses to analyse customer needs, i.e.,

what delights customers or what are the basic needs of customers.

The different categories of customer preferences in a Kano model are

must-be quality, one-dimensional quality, attractive quality, indifferent

quality, and reverse quality.

1.6 Glossary

Customer intimacy:This refers to the customers support and satisfaction

about the products and services of a business.

Indifferent quality:These are the factors of a product and the services that

the customer is not concerned about.

Must-be-quality:This is the quality assumed and expected by customers in

products and services offered by a business; the absence of which results in

dissatisfaction.

One-dimensional quality:These are the qualities that delight the customer

if present and disappoint him/her if absent.

Project value:The value of a project is the balance of quality, resources,

and risk and is measured in several ways.


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Quantitative techniques: These are the statistical methods of data

collection and its analysis, which help in different business processes, suchas decision making, business research, forecasting, etc., to measure the

success of a project.

Successful project:A project that improves the productivity of a business,

meeting the predetermined objectives, is called a successful project.

Value equation:This equation defines the success criteria at the beginning

of a project.

1.7 Terminal Questions

1. How will you define a successful project?

2. What are the different perspectives explained in a balanced scorecard

business model?

3. Discuss what makes the Treacy-Wiersema model different from the

balanced scorecard model.

4. Explain how the Kano model is used by companies to analyse the

customer needs.

1.8 Answers

Self Assessment Questions

1. True

2. Process and productivity

3. Return on Investment.

4. Total returns = principal + gain

5. False

6. Value equation7. True

8. Balance Scorecard


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9. There are three areas of focus in this model, namely customer intimacy,

product excellence or superiority, and operational excellence.

10. True

11. True

12. Customer intimacy

13. True

14. Product excellence

Terminal Questions

1. A project that increases business value is defined as a successful

project. It is also quite easy to recognise a successful project in terms of

business growth. Refer to section 1.2 Meaning of Successful Projects.

2. The balanced scorecard model of business value explains four areas of

scoring a business. Each area has its set goals. Refer to section 1.4.1

Balanced scorecard model.

3. The Treacy-Wiersema model is very similar to the balanced scorecard

model but has only three areas of focus, unlike four areas in a balanced

scorecard model. Refer to section 1.4.2 The Treacy-Wiersema model.

4. The Kano model is used by companies to analyse customer needs and

quality preferences to enter, remain, and grow in a competitive market.

Refer to section 1.4.3 The Kano model.

1.9 Case Study: Implementing Balanced Scorecard in a Service

Provider

2GC Active Management worked with the UK subsidiary of Zenith System

for more than 8 months in 2007 in order to introduce a Corporate Balanced

Scorecard and cascade the system down to the two largest divisions of thefirm. The company worked closely with the Executing Board and the firm`s

Quality Manager.


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Zenith Systems is a small engineering services firm in UK. It comprises a

field engineering force, a Business Development team, an in-houseengineering support team, and some administration support. The firm

provides outsourced engineering services to large public and private sector

organisations in the UK.

The executive team of the company and the newly appointed CEO were

concerned about mainly four issues that made it difficult for the firm to meet

the expectations of the new owner regarding strategic and financial

performance. These issues were:

The lack of clarity in the board regarding the medium to long-term

priorities of the firm.o The tendencies of the directors to micromanage various

departments and divisions.

o Lack of progress on transformational projects.

o Some occasional disharmony between Client Services (effectively

the Operations team) and Business Development (Sales) Divisions

in relation to client relationships.

2GC used its normal 3rdGeneration Balanced Scorecard process that was

supplemented by assistance from the internal project leader, who assisted

with the workshops and provided much of the internal inputs to complete the

requisite Balanced Scorecard design activities. Because of the small size of

Zenith Systems, 2GC was able to implement a simple Balance Scorecard

process in two divisionsclient service and business development. The

implementation process involved:

A workshop to prepare a divisional destination statement and define

objectives. In the workshop, each divisional management team reviewed

the corporate destination of the division and adjusted the destination to

reflect where they wanted to see their division four years ahead. This

process took around 1.5 days of each team.


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A second and final workshop was conducted to finalise the definition of

the selected objectives, to select various measures and targets to trackthese objectives, and to agree how the resulting balance scorecard was

going to be used in the management of the divisions.

An analysis of how the three Balanced Scorecards Corporate, Client

Services and Business Development interacted and which objectives

were reflected on all the three was produced by 2GC for consideration

by the Board.

Two particular challenges were encountered and met during the project:

The culture of the organisation provided resistance to the

implementation of the project. The culture of the organisation was very

short term focused. Therefore, it was hard for the company to determine

where to focus to transform the way the company operates.

Another challenge faced by the project implementation team was

completion of the detail. Balanced scorecard design workshops produce

high quality thinking about the choices that the organisation needs to

make. However, the information created in various workshops is mainly

in the form of indicative and draft statements. Therefore, the workshop

participants need to find adequate time to finalise these statements after

the completion of the workshop.

Outcomes:

At the Executive Board level:

The Board agreed on a clear set of strategic priorities for the business in

the medium- to long-term period.

Transformational projects were clearly identified with an owner assigned

and resources allocated against a timeline.

The tendency of directors to micromanage their divisions/departmentswas reduced this was addressed in two ways: by having a more

strategic set of priorities at the corporate level and by an open debate

about handing down responsibilities


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in the Client Services division. The boundary issues between the two

divisions have not disappeared altogether.

Within the two divisions, the results were equally positive:

The two divisions established a clear statement of what they were doing

to contribute to the organisations overall success.

The divisional strategic linkage models proved valuable in both

articulating the local strategic goals within each division, and acting as a

basis for the discussion of performance within the wider organisation.

Discussionquestion:

1. On the basis of the case, discuss the usefulness of balanced scorecard

in project environment.

(Hint: It is a balance between the internal and external factors of a

company. Analyse the case.)

References and Suggested Readings

Goodpasture, J. C. 2004. Quantitative methods in project management.

Boca Raton, Fla.: J. Ross Pub.

Goodpasture, J. C. 2002. Managing projects for value. Vienna, Va.:

Management Concepts.

Berman, J. (2007). Maximizing project value. New York: Amacom,

American Management Association.

Budd, C. I. & Budd, C. S. (2010). A practical guide to earned value

project management. Vienna, VA: Management Concepts.

Goodpasture, J. C. (2010). Project management the agile way. Ft.

Lauderdale, FL: J. Ross Pub.

E-References

Eriksson, M. (2013). Using the kano model to prioritize product

development - mindtheproduct. [online] Retrieved from:


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http://www.mindtheproduct.com/2013/07/using-the-kano-model-to-

prioritize-product-development/ [Accessed: 14 Feb 2014]. Sigmazone.com. (2014). Kano's model case study - cruise line industry.

[online] Retrieved from: http://sigmazone.com/Articles_KanosModel.htm

[Accessed: 14 Feb 2014].

Value of Project SMU

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