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Organization
Strategy
and Project
Selection
CHAPTER 2
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Learning Objectives

u Explain why it is important for project managers to understand their

organization’s strategy.
u Identify the significant role projects contribute to the strategic
direction of the organization.
u Understand the need for a project priority system.
u Apply financial and nonfinancial criteria to assess the value of
projects.
u Understand how multi-criteria models can be used to select
projects.
u Apply an objective priority system to project selection.
u Understand the need to manage the project portfolio.
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Chapter Outline

u Introduction
u The Strategic Management Process: An Overview
u The Need for a Project Priority System
u A Portfolio Management System
u Selection Criteria
u Applying a Selection Model
u Managing the Portfolio System
u Assignment
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Introduction
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Introduction

u Strategy is fundamentally deciding how the organization will

compete.
u Organizations use projects to convert strategy into new products,
services, and processes needed for success.
u Aligning projects with the strategic goals of the organization is
crucial for business success.
u Today’s economic climate is unprecedented by rapid changes in
technology, global competition, and financial uncertainty.
u Ensuring a strong link between the strategic plan and projects is a
difficult task that demands constant attention from top and middle
management.
u The larger and more diverse an organization, the more difficult it is
to create and maintain this strong link.
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Introduction

u How can an organization ensure this link and alignment?

u The answer requires integration of projects with the strategic
plan.
u Integration assumes the existence of a strategic plan and a
process for prioritizing projects by their contribution to the plan.
u A crucial factor to ensure the success of integrating the plan
with projects lies in the creation of a process that is open and
transparent for all participants to review.
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The Strategic
Management
Process: An
Overview
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The Strategic Management
Process: An Overview

u Strategic management 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.”
u Strategy describes how an organization intends to compete
with the resources available in the existing and perceived
future environment.
u Two major dimensions of strategic management are
responding to changes in the external environment and
allocating scarce resources of the firm to improve its
competitive position.
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The Strategic Management
Process: An Overview

u Strategic management positions the organization to meet the

needs and requirements of its customers for the long term.
u With the long-term position identified, objectives are set, and
strategies are developed to achieve objectives and then
translated into actions by implementing projects.
u Most organizations are successful in formulating strategies for
what course(s) they should pursue.
u However, the problem in many organizations is implementing
strategies—that is, making them happen. Integration of strategy
formulation and implementation often does not exist.
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Four Activities of the Strategic
Management Process

u The typical sequence of activities of the strategic management

process is:
1. Review and define the organizational mission.
2. Analyze and formulate strategies.
3. Set objectives to achieve strategy.
4. Implement strategies through projects.
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Characteristics of Objectives
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The Need for

a Project
Priority System
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The Need for a Project Priority
System

u Implementation of projects without a strong priority system linked to strategy

creates problems.
u Three of the most obvious problems are:
1. The Implementation Gap – refers to the lack of understanding and consensus
of organization strategy among top and middle-level managers.
2. Organization Politics – Politics exist in every organization and can have a
significant influence on which projects receive funding and high priority.
a. Project sponsors play a significant role in the selection and successful implementation
of product innovation projects.

3. Resource Conflicts and Multitasking – The organization environment creates

the problems of project interdependency and the need to share resources.
u A priority driven project portfolio system can go a long way to reduce, or
even eliminate, the impact of these problems.
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A Portfolio
Management
System
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A Portfolio Management
System

u The aim of portfolio management is to ensure that projects are

aligned with strategic goals and prioritized appropriately.
u Since projects clamoring for funding and people usually
outnumber available resources, it is important to follow a logical
and defined process for selecting the projects to implement.
u Design of a project portfolio system should include classification
of a project, selection criteria depending upon classification,
sources of proposals, evaluating proposals, and managing the
portfolio of projects.
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Classification of the Project

u Compliance projects are

typically those needed to
meet regulatory conditions
required to operate in a
region; hence, they are
called “must do” projects.
u Operational projects are
those that are needed to
support current operations.
u Strategic projects are those
that directly support the
organization’s long-run
mission.
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Selection
Criteria
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Selection Criteria – Financial
Criteria

u For most managers, financial criteria are the preferred method

to evaluate projects through using financial models.
u These models are appropriate when there is a high level of
confidence associated with estimates of future cash flows.
u Two models and examples are demonstrated here—payback
and net present value (NPV).
Project A has an initial investment of $700,000 and projected cash
inflows of $225,000 for 5 years.
Project B has an initial investment of $400,000 and projected cash
inflows of $110,000 for 5 years.
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Selection Criteria – Financial
Criteria

u The payback model measures the time it will take to recover

the project investment.
u Shorter paybacks are more desirable.
u The major limitations of payback are that it:
u ignores the time value of money,
u assumes cash inflows for the investment period (and not beyond),
and
u does not consider profitability.
Payback period (yrs) = Estimated Project Cost/Annual Savings
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Selection Criteria – Financial
Criteria
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Selection Criteria – Financial
Criteria

u The net present value (NPV) model uses management’s minimum desired rate-of-
return (discount rate, for example, 20 percent) to compute the present value of
all net cash inflows.
u If the result is positive (the project meets the minimum desired rate of return), it is
eligible for further consideration.
u If the result is negative, the project is rejected.
u Thus, higher positive NPVs are desirable.
u Excel uses this formula:

u where
u I0 = Initial investment (since it is an outflow, the number will be negative)
u Ft = Net cash inflow for period t
u k = Required rate of return
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Selection Criteria – Financial
Criteria
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Selection Criteria –
Nonfinancial Criteria

u Financial return, while important, does not always reflect strategic importance.
u Now the prevailing thinking is that long-term survival is dependent upon
developing and maintaining core competencies.
u Companies have to be disciplined in saying no to potentially profitable projects
that are outside the realm of their core mission.
u For example, a firm may support projects that do not have high profit margins for
other strategic reasons including:
u To capture larger market share
u To make it difficult for competitors to enter the market
u To develop an enabler product, which by its introduction will increase sales in more
profitable products
u To develop core technology that will be used in next-generation products
u To reduce dependency on unreliable suppliers
u To prevent government intervention and regulation
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Checklist Models
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Checklist Models

u Although many projects are selected using some variation of the

checklist approach, this approach has serious shortcomings.
u Major shortcomings of this approach are that it fails to answer the
relative importance or value of a potential project to the
organization and fails to allow for comparison with other potential
projects.
u Each potential project will have a different set of positive and negative
answers. How do you compare? Ranking and prioritizing projects by their
importance is difficult, if not impossible.
u This approach also leaves the door open to the potential
opportunity for power plays, politics, and other forms of
manipulation.
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Multi-Weighted Scoring Models
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Applying a
Selection
Model
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Project
Screening
Process
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Priority Screening
Analysis
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Managing the
Portfolio
System
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Managing the Portfolio System

u Managing the portfolio takes the selection system one step

higher in that the merits of a particular project are assessed
within the context of existing projects.
u At the same time it involves monitoring and adjusting selection
criteria to reflect the strategic focus of the organization.
u The priority system can be managed by a small group of key
employees in a small organization.
u Or, in larger organizations, the priority system can be managed
by the project office or a governance team of senior managers.
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Balancing the Portfolio for Risks
and Types of Projects

u A classification scheme that could be used for assessing a

project portfolio in terms of degree of difficulty and commercial
value yields four basic types of projects:
u Bread-and-butter projects 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.
u 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

u A classification scheme that could be used for assessing a

project portfolio in terms of degree of difficulty and commercial
value yields four basic types of projects:
u 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 alloys.
u White elephants are projects that at one time showed promise but
are no longer viable. Examples include products for a saturated
market or a potent energy source with toxic side-effects.
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Balancing the Portfolio for Risks
and Types of Projects
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Balancing the Portfolio for Risks
and Types of Projects

u Organizations often have too many white elephants and too

few pearls and oysters.
u To maintain strategic advantage it is recommended that
organizations capitalize on pearls, eliminate or reposition white
elephants, and balance resources devoted to bread-and-
butter and oyster projects to achieve alignment with overall
strategy.
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Assignment
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Assignment

u Exercises – Page 52.

u 3, 4, 6 & 7
u Case 2.1 – Hector Gaming Company (Page 57).
u Case 2.2 – Film Prioritization (Page 59).
u Case 2.3 – Fund Raising Project Selection case (Page 62).
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Thank You