Because learning changes everything.

Chapter Two
Organization Strategy
and Project Selection

© 2021 McGraw-Hill Education. All rights reserved. Authorized only for instructor use in the classroom.
No reproduction or further distribution permitted without the prior written consent of McGraw-Hill Education.
 Where We Are Now

© McGraw-Hill Education 2
 Learning Objectives

02-01 Explain why it is important for project managers to understand

their organization’s strategy
02-02 Identify the significant role projects contribute to the strategic
direction of the organization
02-03 Understand the need for a project priority system
02-04 Distinguish among three kinds of projects
02-05 Describe how the phase gate model applies to project
management
02-06 Apply financial and nonfinancial criteria to assess the value of
projects
02-07 Understand how multi-criteria models can be used to select
projects
02-08 Apply an objective priority system to project selection
02-09 Understand the need to manage the project portfolio

© McGraw-Hill Education 3
 Chapter Outline

2.1 Why Project Managers Need to Understand Strategy

2.2 The Strategic Management Process: An Overview
2.3 The Need for a Project Priority System
2.4 Project Classification
2.5 Phase Gate Model
2.6 Selection Criteria
2.7 Applying a Selection Model
2.8 Managing the Portfolio System

© McGraw-Hill Education 4
 2.1 Why Project Managers Need to Understand Strategy

Two main reasons project managers need to understand their

organization’s mission and strategy:
1. So they can make appropriate decisions and adjustments.
• How a project manager would respond to a suggestion to modify the
design of a product or to delays may vary depending upon strategic
concerns.
2. So they can be effective project advocates. They have to be able to:
• demonstrate to senior management how their project contributes to
the firm’s mission in order to garner their continued support.
• explain to stakeholders why certain project objectives and priorities
are critical in order to secure buy-in on contentious trade-off
decisions.
• explain why the project is important to motivate and empower the
project team (Brown, Hyer and Ettenson, 2013).

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 2.2 The Strategic Management Process: An Overview

Strategic Management Defined

• 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.”
• Is a continuous, iterative process aimed at developing an integrated
and coordinated long-term plan of action.
• Requires strong links among mission, goals, objectives, strategy, and
implementation.
Two Major Dimensions of Strategic Management:
1. Responds to changes in the external environment and allocates the
firm’s scare resources to improve its competitive position.
2. Internal responses to new action programs aimed at enhancing
the competitive position of the firm.

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 Four Activities of the Strategic Management Process

The sequence of activities of the strategic management process is:

1. Review and define the organizational mission
• The mission identifies “what we want to become.” Mission statements identify
the scope of the organization in terms of its product and service.
2. Analyze and formulate strategies
• Formulating strategy answers the question of what needs to be done to reach
objectives. Strategy formulation includes determining and evaluating
alternatives that support the organization’s objectives and selecting the best
alternative.
3. Set objectives to achieve strategies
• Objectives translate the organization strategy into specific, concrete,
measureable terms. Objectives answer in detain where a firm is headed and
when it is going to get there.
4. Implement strategies through projects
• Implementation answers the question of how strategies will be realized, given
available resources.

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 Strategic Management Process

© McGraw-Hill Education FIGURE 2.1 8

 Characteristics of Objectives

© McGraw-Hill Education EXHIBIT 2.1 9

 2.3 The Need for a Project Priority System

Implementation of projects without a strong priority system linked to strategy

create problems.

Problem 1: The Implementation Gap

• The implementation gap is the lack of understanding and consensus of
organization strategy among top and middle-level managers.
Problem 2: Organization Politics
• Project selection may be based not so much on facts and sound reasoning as on
the persuasiveness and power of people advocating projects.
• The term sacred cow is often used to denote a project that a powerful, high-
ranking official is advocating.
• Project sponsor

Problem 3: Resource Conflicts and Multitasking

• A multi-project environment creates the problems of project interdependency
and the need to share resources. Resource sharing leads to multitasking—
involves starting and stopping work on one task to go and work on another project,
then returning to the work on the original task.
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 Benefits of Project Portfolio Management

© McGraw-Hill Education EXHIBIT 2.2 11

 2.4 Project Classification

© McGraw-Hill Education FIGURE 2.2 12

 You manage a hotel resort located on the South Beach on the Island of Kauai in
Hawaii. You are shifting the focus of your resort from a traditional fun-in-the-sun
destination to eco-tourism. (Eco-tourism focuses on environmental awareness
and education.) How would you classify the following projects in terms of
compliance, strategic, and operational?

a. Convert the pool heating system from electrical to solar power.

b. Build a four-mile nature hiking trail.
c. Renovate the horse barn.
d. Launch a new promotional campaign with Hawaii Airlines.
e. Convert 12 adjacent acres into a wildlife preserve.
f. Update all the bathrooms in condos that are 10 years or older.
g. Change hotel brochures to reflect eco-tourism image.
h. Test and revise disaster response plan based on new requirements.

© McGraw-Hill Education 13
 2.5 Phase Gate Model

Phase Gate Model

• Is a series of gates that a project must pass through in order to be
completed.
• Its purpose is to ensure that the organization is investing time and
resources on worthwhile projects that contribute to its mission and
strategy.
• Each gate is associated with a project phase and represents a
decision point.
• A gate can lead to three possible outcomes: go (proceed), kill
(cancel), or recycle (revise and resubmit).

© McGraw-Hill Education 14
 Phase Gate Process Diagram

© McGraw-Hill Education FIGURE 2.3 15

 2.6 Selection Criteria

• Financial Criteria
• Payback
• Net present value (NPV)
• Nonfinancial Criteria
• Projects of strategic importance to the firm
• Two Multi-Criteria Selection Models
• Checklist Models
• Multi-Weighted Scoring Models

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 Financial Criteria: The Payback Model

The Payback Model

• Measures the time the project will take to recover the project investment.
• Desires shorter paybacks.
• Is the simplest and most widely used model.
• Emphasizes cash flows, a key factor in business.
Limitations of the Payback Method
• Ignores the time value of money.
• Assumes cash inflows for the investment period (and not beyond).
• Does not consider profitability.
The Payback formula is

𝐸𝑠𝑡𝑖𝑚𝑎𝑡𝑒𝑑 𝑝𝑟𝑜𝑗𝑒𝑐𝑡 𝑐𝑜𝑠𝑡

𝑃𝑎𝑦𝑏𝑎𝑐𝑘 𝑝𝑒𝑟𝑖𝑜𝑑 𝑦𝑟𝑠 =
𝐴𝑛𝑛𝑢𝑎𝑙 𝑆𝑎𝑣𝑖𝑛𝑔𝑠

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 Example Comparing Two Projects Using Payback Method

© McGraw-Hill Education EXHIBIT 2.3A 18

 Financial Criteria: Net Present Value (NPV)

Net Present Value (NPV)

• Uses management’s minimum desired rate of return (discount rate) to
compute the present value of all net cash inflows.
• Prefers positive NPV to negative NPV.
• Desires higher positive NPVs.
• Is more realistic because it considers the time value of money, cash flows,
and profitability.
The NPV formula using Microsoft Excel is
𝑛
𝐹𝑡
𝑃𝑟𝑜𝑗𝑒𝑐𝑡 𝑁𝑃𝑉 = 𝐼0 + ෍
(1 + 𝑘)𝑡
𝑡=1
where
I0 = Initial investment (since it is an outflow, the number will be negative)
Ft = Net cash inflow for period t
k = Required rate of return
n = Number of years

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 Example Comparing Two Projects Using Net Present Value Method

© McGraw-Hill Education EXHIBIT 2.3B 20

 Nonfinancial Criteria

Examples of strategic objectives are:

• To capture larger market share.

• To make it difficult for competitors to enter the market.

• To develop an enabler product, which by its introduction will increase

sales in more profitable products.

• To develop core technology that will be used in next-generation

products.

• To reduce dependency on unreliable suppliers.

• To prevent government intervention and regulation.

© McGraw-Hill Education 21
 Two Multi-Criteria Selection Models

Checklist Models
• Use a list of questions to review potential projects and to determine their
acceptance or rejection.
• Allow greater flexibility in selecting among many different types of projects
and are easily used across different divisions and locations.
• Fail to answer the relative importance or value of a potential project to the
organization and does not allow for comparison with other potential
projects.
Multi-Weighted Scoring Models
• Use several weighted selection criteria to evaluate project proposals.
• Include qualitative and/or quantitative criteria.
• Allow for comparison with other potential projects.

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 Checklist Models: Sample Selection Questions Used in Practice

© McGraw-Hill Education EXHIBIT 2.4 23

 Multi-Weighted Scoring Models: Project Screening Matrix

© McGraw-Hill Education FIGURE 2.4 24

 2.7 Applying a Selection Model

Project Classification
• Deciding whether the project fits with the organization strategy.
• Selecting a Model
• Weighted scoring criteria seem the best alternative because:
• They reduce the number of wasteful projects using resources.
• They help to identify project goals that can be communicated using the
selection criteria as corroboration.
• They help project managers understand how their project was
selected, how their project contributes to organization goals, and
how it compares with other projects.

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 Applying a Selection Model (Continued)

Sources and Solicitation of Project Proposals

• Within the organization
• Request for Proposal (RFP) from external sources
(contractors/vendors)
Ranking Proposal and Selection of Projects
• Evaluating each proposal in terms of feasibility, potential contribution
to strategic objectives, and fit within a portfolio of current projects.
• Rejecting or accepting the projects based on given selection criteria
and current portfolio.
• Prioritizing projects by senior management.

© McGraw-Hill Education 26
 A Proposal Form for an Automatic Vehicular Tracking (AVL)
Public Transportation Project

© McGraw-Hill Education FIGURE 2.5A 27

 Risk Analysis for a 500-Acre Wind Farm

© McGraw-Hill Education FIGURE 2.5B 28

 Project Screening Process

© McGraw-Hill Education FIGURE 2.6 29

 Priority Screening Analysis

© McGraw-Hill Education FIGURE 2.7 30

 2.8 Managing the Portfolio System

Senior Management Input

• Provides guidance in establishing selection criteria that strongly align
with the current organization strategies.
• Annually decides how to balance the available organizational
resources (people and capital) among the different types of projects.
Governance Team Responsibilities
• Publish the priority of every project.
• Ensure the selection process is open and free of power politics.
• Evaluate the progress of current projects.
• Constantly scan the external environment to determine if organization
focus and/or selection criteria need to be changed.

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 Balancing the Portfolio for Risks and Types of Projects

David and Jim Matheson studied R&D organizations and developed a

classification scheme that could be used for assessing a project portfolio.
They separated projects in terms of degrees of difficulty and commercial
value. The four basic types of projects are:
• Bread-and-butter projects involve evolutionary improvements to current
products and services.
• Pearls represent revolutionary commercial advances using proven
technology.
• Oysters involve technological breakthroughs with tremendous
commercial potential.
• White elephants showed promise at one time but are no longer viable.

© McGraw-Hill Education 32
 Key Terms

Implementation gap
Net present value (NPV)
Organization politics
Payback
Phase gate model
Priority system
Priority team
Project portfolio
Project sponsor
Sacred cow
Strategic management

© McGraw-Hill Education 33
Because learning changes everything. ®

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© 2021 McGraw-Hill Education. All rights reserved. Authorized only for instructor use in the classroom.
No reproduction or further distribution permitted without the prior written consent of McGraw-Hill Education.