Chapter Two

Organization Strategy and Project Selection

Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
2–1
 Where We Are Now

Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
2–2
 Learning Objectives
1. Explain why it is important for project managers to
understand their organization’s strategy
2. Identify the significant role projects contribute to the
strategic direction of the organization
3. Understand the need for a project priority system
4. Apply financial and nonfinancial criteria to assess
the value of projects
5. Understand how multi-criteria models can be used
to select projects
6. Apply an objective priority system to project
selection
7. Understand the need to manage the project portfolio
Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
2–3
 Chapter Outline

2.1 The Strategic Management Process: An

Overview
2.2 The Need for a Project Priority System
2.3 A Portfolio Management System
2.4 Selection Criteria
2.5 Applying a Selection Model
2.6 Managing the Portfolio System

Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
2–4
 Why Project Managers Need
to Understand Strategy

• Changes in the organization’s mission and

strategy
– Project managers must respond to changes with
appropriate decisions about future projects and
adjustments to current projects.
– Project managers who understand their
organization’s strategy can become effective
advocates of projects aligned with the firm’s mission.

Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
2–5
 The Strategic Management Process:
An Overview

• Strategic Management
– Requires every project to be clearly linked to strategy.
– Provides theme and focus of firm’s future direction.
• Responding to changes in the external environment—
environmental scanning
• Allocating scarce resources of the firm to improve its
competitive position—internal responses to new programs
– Requires strong links among mission, goals,
objectives, strategy, and implementation.

Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
2–6
 Four Activities of the Strategic
Management Process

• Review and define the organizational mission

• Set long-range goals and objectives
• Analyze and formulate strategies to reach
objectives
• Implement strategies through projects

Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. 2–7
 Strategic
Management
Process

FIGURE 2.1

Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. 2–8
 Characteristics of Objectives

S Specific Be specific in targeting an objective

M Measurable Establish a measurable indicator(s) of progress

A Assignable Make the objective assignable to one person

for completion

R Realistic State what can realistically be done with

available resources

T Time related State when the objective can be achieved,

that is, duration

EXHIBIT 2.1

Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. 2–9
 The Need for a Project Priority System

• The Implementation Gap

– The lack of understanding and consensus on strategy
among top management and middle-level (functional)
managers who independently implement the strategy.
• Organization Politics
– Project selection is based on the persuasiveness and
power of people advocating the projects.
• Resource Conflicts and Multitasking
– Multiproject environment creates interdependency
relationships of shared resources which results in the
starting, stopping, and restarting projects.

Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. 2–10
 Benefits of Project Portfolio Management

• Builds discipline into the project selection process

• Links project selection to strategic metrics
• Prioritizes project proposals across a common set
of criteria, rather than on politics or emotion
• Allocates resources to projects that align with
strategic direction
• Balances risk across all projects
• Justifies killing projects that do not support strategy
• Improves communication and supports agreement
on project goals

EXHIBIT 2.2
Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
2–11
 A Portfolio Management System

• Design of a project portfolio system:

– Classification of a project
– Selection criteria depending upon classification
– Sources of proposals
– Evaluating proposals
– Managing the portfolio of projects.

Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
2–12
 Portfolio of Projects by Type

FIGURE 2.2

Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. 2–13
 A Portfolio Management System

• Selection Criteria
– Financial models: payback, net present value (NPV)
– Non-financial models: projects of strategic
importance to the firm
• Multi-Criteria Selection Models
– Use several weighted selection criteria to evaluate
project proposals.

Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
2–14
 Financial Models

• The Payback Model

– Measures the time the project will take to recover
the project investment.
– Uses more desirable shorter paybacks.
– Emphasizes cash flows, a key factor in business.
• Limitations of Payback:
– Ignores the time value of money.
– Assumes cash inflows for the investment period
(and not beyond).
– Does not consider profitability.

Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
2–15
 Financial Models (cont’d)

• The Net Present Value (NPV) Model

– Uses management’s minimum desired rate-of-return
(discount rate) to compute the present value of all net
cash inflows.
• Positive NPV: project meets minimum desired rate

of return and is eligible for further consideration.

• Negative NPV: project is rejected.

Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
2–16
 Example Comparing Two Projects
Using Payback Method

EXHIBIT 2.3A

Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. 2–17
 Example Comparing Two Projects
Using Net Present Value Method

EXHIBIT 2.3b

Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. 2–18
 Nonfinancial Strategic Criteria

• 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
• To restore corporate image or enhance brand recognition
• To demonstrate its commitment to corporate citizenship and support
for community development

Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
2–19
 Multi-Criteria Selection Models
• Checklist Model
– Uses a list of questions to review potential projects
and to determine their acceptance or rejection.
– Fails to answer the relative importance or value of a
potential project and doesn’t to allow for comparison
with other potential projects.
• Multi-Weighted Scoring Model
– Uses several weighted qualitative and/or quantitative
selection criteria to evaluate project proposals.
– Allows for comparison of projects with other potential
projects.

Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
2–20
 Sample Selection Questions Used in Practice

Topic Question
Strategy/alignment What specific strategy does this project align with?

Driver What business problem does the project solve?

Success metrics How will we measure success?

Sponsorship Who is the project sponsor?

Risk What is the impact of not doing this project?

Risk What is the project risk to our organization?

Risk Where does the proposed project fit in our risk profile?

Benefits, value, ROI What is the value of the project to this organization?

Benefits, value, ROI When will the project show results?

Objectives What are the project objectives?

EXHIBIT 2.4

Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. 2–21
 Sample Selection Questions Used in Practice

Topic Question
Organization culture Is our organization culture right for this type of project?

Resources Will internal resources be available for this project?

Approach Will we build or buy?

Schedule How long will this project take?

Schedule Is the time line realistic?

Training/resources Will staff training be required?

Finance/portfolio What is the estimated cost of the project?

Portfolio Is this a new initiative or part of an existing initiative?

Portfolio How does this project interact with current projects?

Technology Is the technology available or new?

EXHIBIT 2.4 cont’d

Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. 2–22
 Project Screening Matrix

FIGURE 2.3

Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. 2–23
 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 align projects
closer with 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

Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
2–24
 Applying a Selection Model (cont’d)

• Sources and Solicitation of Project Proposals

– Within the organization
– Request for proposal (RFP) from external sources
(contractors and vendors)
• Ranking Proposals and Selection of Projects
– Prioritizing requires discipline, accountability,
responsibility, constraints, reduced flexibility,
and loss of power
• Managing the Portfolio
– Senior management input
– The governance team (project office) responsibilities

Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
2–25
 A Proposal Form for
an Automatic
Vehicular Tracking
(AVL) Public
Transportation
Project

FIGURE 2.4A

Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. 2–26
 Risk
Analysis for
500-Acre
Wind Farm

FIGURE 2.4B

Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. 2–27
 Project
Screening
Process

FIGURE 2.5

Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. 2–28
 Priority
Screening
Analysis

FIGURE 2.6

Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. 2–29
 Managing the Portfolio System
• Senior Management Input
– Provide guidance in selecting criteria that are
aligned with the organization’s strategic goals.
– Decide how to balance available resources
among current projects.
• The Governance Team Responsibilities
– Publish the priority of every project.
– Ensure that the project selection process is open
and free of power politics.
– Reassess the organization’s goals and priorities.
– Evaluate the progress of current projects.

Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
2–30
 Balancing the Portfolio for
Risks and Types of Projects

• Bread-and-butter Projects
– Involve evolutionary improvements
to current products and services.
• Pearls
– Represent revolutionary commercial
opportunities using proven technical advances.
• Oysters
– Involve technological breakthroughs
with high commercial payoffs.
• White Elephants
– Showed promise at one time
but are no longer viable.

Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. 2–31
 Key Terms

Implementation gap
Net present value
Organizational politics
Payback
Priority system
Priority team
Project portfolio
Project screening matrix
Project sponsor
Sacred cow
Strategic management process
Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. 2–32