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Chapter 2

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9 views

Chapter 2

Uploaded by

Abkar Ali
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© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Engineering Project Management (IENG300)

Chapter 2
Organization
Strategy and Project
Selection

Saeed Bamashmos
PM & Organization Strategy
• Strategy is implemented through projects. Every project should have a clear
link to the organization’s strategy.
• Project management is at the apex of strategy and operations.

• PMs need to understand strategy to:


– Make appropriate decisions and adjustments.
– Be effective project advocates.

• PMs must avoid:


– Focusing on problems or solutions that have low priority strategically.
– Focusing on immediate customers rather than the market place & value
chain.
– Overemphasizing technology as an end in and of itself.
– Trying to solve every customerissue
– Engaging in a never-ending search for perfection.
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The Strategic Management Process
• Assessing “what we are” and deciding & implementing “what we intend to
be & how we are going to get there.”

• Dimensions of strategic management


– Responding to external environment changes.
– Allocating scarce resources to improve competitive position.

• The strategic management process


– Review & define the organizational mission.
– Set long-range goals and objectives (S-M-A-R-T).
– Analyze & formulate strategies to reach objectives.
– Implement strategies through projects.
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Scenario Planning
• A structured process of thinking about future possible
environments that would have potential high impact to
disrupt business & then developing potential strategies
to compete in these altered environments. It involves:

➢ Assessing firm’s core business & industry.


➢ Potential scenarios & impact.
➢ Potential strategies.
➢ Triggers.
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Portfolio Management
• Organizational problems:
– The implementation gap: The lack of understanding and consensus of
organization strategy among top & middle managers.
– Organization politics: Exist in every organization & can have a significant
influence on which projects receive funding & high priority.
– Resource conflicts & multitasking: The multi-project environment
creates interdependency relationships of shared resources which results in
the starting, stopping and restarting projects.

• Portfolio management approach to address organizational problems:


– Classification of a project.
– Selection criteria based on classification.
– Sources of proposals.
– Evaluating proposals.
– Managing the portfolio of projects.
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Selection Criteria
• Non-financial: Projects of strategic importance to the firm.
• Financial models:
– Payback: Measures the time to recover the project investment

Payback period (yrs) = Estimated Project Cost/Annual Savings

– Net present value (NPV): Uses management’s minimum desired rate-


of-return to compute the present value of all net cash inflows.

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Examples
• Project A has an initial investment of $700,000 and projected cash
inflows of $225,000 for 5 years while Project B has an initial
investment of $400,000 and projected cash inflows of $110,000 for
5 years. Required rate of return (RoR) is 15%.

• Payback method calculations:


– Payback period (yrs) = Estimated Project Cost/Annual Savings

– Project A: Payback period = 700/225 = 3.1 & RoR = 225/700 = 32.1 %.

– Project B: Payback period = 3.6 & RoR = 27.5 %.

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Payback Method
• Payback calculations

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Examples
• NPV method calculations:

– Project A: NPV= -700 + 225/1.15 + 225/1.32 + 225/1.52


+ 225/1.75 + 225/2.01 = $54,235.
– Project B: NPV= -$31,263.

– If there is an inflation rate (IR) involved, then K = RoR + IR.


Example: RoR is 15 % & IR is 5 % then k = 0.15 + 0.05 = 0.2.

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NPV Method

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Project Screening Matrix
• Multi-Weighted Scoring Models: Use several weighted
selection criteria to evaluate project proposals.

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Applying a Selection Model
• Project Classification
– Deciding how well a strategic or operations project fits the
organization’s strategy.

• Selecting a Model
– Applying a weighted scoring model to bring projects closer to the
organization’s strategic goals.
• Reduces the number of wasteful projects
• Helps identify proper goals for projects
• Helps everyone involved understand how and why a project is
selected.
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Applying a Selection Model
• Sources & Solicitation of Project Proposals
– Within the organization.
– Request for proposal (RFP) from external sources.

• Ranking Proposals & Selection of Projects


– Prioritizing requires discipline, accountability, responsibility,
constraints, reduced flexibility and loss of power.

• Managing the Portfolio


– Senior management input.
– The priority team (project office) responsibilities.
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Risk Analysis

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Project Screening Process

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Priority Analysis

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Project Portfolio Matrix
– Bread & Butter: Involve
evolutionary improvements to
current products & services.

– Pearls: Represent revolutionary


commercial advances using
proven technical advances.

– Oysters: Involve technological


breakthroughs with high
commercial payoffs.

– White Elephants: Projects that at


one time showed promise but are
no longer viable.

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