Source: Mc Graw Hill Education.
All Rights Reserved, 2021
CHAPTER 2:
ORGANIZATION STRATEGY &
PROJECT SELECTION
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Why Project Managers Need to Understand
the Strategic Management Process
• Changes in the organization’s mission & strategy
– Project managers must respond to changes with
appropriate decisions about future projects >< current
projects.
– Project managers who understand their organization’s
strategy can become effective advocates of projects
aligned with the firm’s mission.
2–3
The Strategic Management Process:
An Overview
• Strategic Management
– Provides the theme & focus of the future direction for the
firm.
• Responding to changes in the external environment —
environmental scanning
• Allocating scarce resources of the firm to improve its
competitive position — internal responses to new action programs
– Requires strong links among mission, goals, objectives,
strategy, & implementation.
2–4
Strategic Management Process (cont’d)
• Four of Activities of the Strategic Management
Process
1. Review and define the organizational mission.
2. Analyze & formulate strategies
3. Set objectives to achieve strategies.
4. Implement strategies through projects
2–5
Set strategies
and objectives
Strategic
Management
Process
FIGURE 2.1
2–6
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 (duration)
EXHIBIT 2.1
2–7
Project Portfolio Management Problems
• The Implementation Gap
– The lack of understanding & consensus on strategy
among top management & middle-level (functional)
managers who independently implement the strategy.
• Organization Politics
– Project selection is based on the persuasiveness & power
of people advocating the projects.
• Resource Conflicts & Multi-tasking
–The multi-project environment creates interdependency
relationships of shared resources which results in the
starting, stopping, & restarting projects.
2–8
Benefits of Project Portfolio Management
• Builds discipline into project selection process.
• Links project selection to strategic metrics.
• Prioritizes P. proposals across a common set of criteria,
rather than on politics or emotion.
• Allocates resources to Ps that align with strategic direction.
• Balances risk across all projects.
• Justifies killing Ps that do not support organization strategy.
• Improves communication & supports agreement on P. goals.
EXHIBIT 2.2
2–9
Portfolio of Projects by Type
FIGURE 2.2
2–10
A Portfolio Management System
• Selection Criteria
– Financial: payback, net present value (NPV), internal
rate of return (IRR)
– Non-financial: P. of strategic importance to the firm.
• Multi-Weighted Scoring Models
– Use several weighted selection criteria to evaluate
project proposals.
2–11
Criteria in Selecting Projects
• Financial Criteria
• Non-financial criteria
Nguyen Thi Hoang Mai, SIM-HCMUT 2–12
Financial Models
• The Payback Model
– Measures the time it will take to recover the project
investment.
– Shorter paybacks are more desirable.
– Emphasizes cash flows, a key factor in business.
– Limitations of payback:
• Ignores the time value of money.
• Assumes cash inflows for the investment period (& not beyond).
• Does not consider profitability.
Payback formula:
𝐸𝑠𝑡𝑖𝑚𝑎𝑡𝑒𝑑 𝑝𝑟𝑜𝑗𝑒𝑐𝑡 𝑐𝑜𝑠𝑡
𝑃𝑎𝑦𝑏𝑎𝑐𝑘 𝑝𝑒𝑟𝑖𝑜𝑑 𝑦𝑟𝑠 =
𝐴𝑛𝑛𝑢𝑎𝑙 𝑆𝑎𝑣𝑖𝑛𝑔𝑠
2–13
Financial Models
The Payback Model example
EXHIBIT 2.3 a
2–14
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: the project meets the minimum desired rate of
return and is eligible for further consideration.
• Negative NPV: project is rejected.
2–15
Net Present Value (NPV) & Internal Rate of Return (IRR):
Example Comparing Two Projects
EXHIBIT 2.3b
2–16
Non-financial criteria
• Larger market share
• Difficulty of competitors to enter the market
• An enabler product
• Core technology for next-generation products
• Dependency reduction on unreliable suppliers
• Preventing of government intervention and regulation
Nguyen Thi Hoang Mai, SIM-HCMUT 2–17
Multi-criteria decision making process
• Identify a group of projects which are not dominated
• Polygon model
• Electre model
• Performance - Cost model
• Define the best project among non-dominated alternatives
• Multi-weighted scoring model
• Collective utility model
• Compromise model
Nguyen Thi Hoang Mai, SIM-HCMUT 2–18
Polygon Model
Fast
1
A
Price 0 Safe B
C
Comfort
Nguyen Thi Hoang Mai, SIM-HCMUT 2–19
Polygon Model
? Define the dominated alternative
Project
Criteria
A B C
Max Z1 100 70 0
Min Z2 75 25 0
Max Z3 20 40 100
Nguyen Thi Hoang Mai, SIM-HCMUT 2–20
Electre model
• Helps select “better” alternatives
• No transitive property
• Identify the group of non-dominated alternatives: Kernel group
7 1
6 3
2
8
5
Nguyen Thi Hoang Mai, SIM-HCMUT 2–21
Electre model
7 1
6 3
2
8
5
Kernel = {2,4,5}
Nguyen Thi Hoang Mai, SIM-HCMUT 2–22
Performance - Cost model
• Fixed output approach
• Fixed input approach
Nguyen Thi Hoang Mai, SIM-HCMUT 2–23
Performance - Cost model
Performance
A6
A7
A4
A3 A5
A1 A2
A0
K Cost
K0 K1 K2 K3 K4 K5 K6
Nguyen Thi Hoang Mai, SIM-HCMUT 2–24
Multi-weighted scoring model
FIGURE 2.3
2–25
Collective utility model
Weight Project i A1 A2 … Ai ... Am
αj Goal j
α1 Z1 Z11 Z21 … Zi1 … Zm1
α2 Z2 Z12 Z22 … Zi2 … Zm2
… … … … … … … …
αj Zj Z1j Z2j … Zij … Zmj
… … … … … … … …
αn Zn Z1n Z2n … Zin … Zmn
CU CU1 CU2 … CUi … CUm
26 26
Collective utility model
Transform Identify Determine Select the
Step 1
Step 4
Step 2
Step 3
from Zij to weights for CUi for alternative
bij (ignore each each with max
dimension) criterion alternative i CUi
n
MaxCU i = j xbij
j =1
27 27
Collective utility model
Importance notes in Step 1:
• With maximize goal value:
Z ij − Z ij min
bij = i
Z ij max − Z ij min
i i
• With minimize goal value:
Z ij max − Z ij
bij = i
Z ij max − Z ij min
i i 28 28
Collective utility model
? Prioritize the alternatives by applying collective utility
model
Project
Criteria Weight
A B C
Max Z1 100 70 0 0.3
Min Z2 75 25 0 0.4
Max Z3 20 40 100 0.3
Nguyen Thi Hoang Mai, SIM-HCMUT 2–29
Compromise Model
Ideal target: Q(Z1Q,Z2Q)
Z2Max
Li
Optimal solution
Zi2
Zij
Unworthy area
Compromise curve
Zi1 Z1Max
Nguyen Thi Hoang Mai, SIM-HCMUT 2–30
Compromise Model
• Euclide distance 2
• Standardization distance
• Standardization distance with weigting scores
Nguyen Thi Hoang Mai, SIM-HCMUT 2–31
Compromise Model
? Prioritize the alternatives by applying Compromise
Model
Project
Criteria Weight
A B C
Max Z1 100 70 0 0.3
Min Z2 75 25 0 0.4
Max Z3 20 40 100 0.3
Nguyen Thi Hoang Mai, SIM-HCMUT 2–32
Applying a Selection Model
• Project Classification
– Deciding how well a strategic / operations project fits the
organization’s strategy.
• Selecting a Model
– Applying a weighted scoring model to bring projects to
closer with the organization’s strategic goals.
• Reduces the number of wasteful projects
• Helps identify proper goals for projects
• Helps everyone involved understand how & why a project is
selected
2–33
Project Proposals
• Sources and Solicitation of Project Proposals
– Within the organization
– Request for proposal (RFP) from external sources
(contractors & vendors)
• Ranking Proposals and Selection of Projects
– Prioritizing requires discipline, accountability, responsibility,
constraints, reduced flexibility, & loss of power.
• Managing the Portfolio
– Senior management input
– The priority team (project office) responsibilities
2–34
Major Project
Proposal
FIGURE 2.4A
2–35
Risk
Analysis
FIGURE 2.4B
2–36
Managing the Portfolio
• Senior Management Input
– Provide guidance in selecting criteria that are aligned
with the organization’s goals
– Decide how to balance available resources among
current projects
• The Priority Team Responsibilities
– Publish the priority of every project
– Ensure that the project selection process is open and
free of power politics.
– Re-assess the organization’s goals & priorities
– Evaluate the progress of current projects
2–37
Project Screening
Process
FIGURE 2.5
2–38
Priority
Analysis
FIGURE 2.6
2–39
Project Portfolio Matrix
FIGURE 2.7
2–40
Project Portfolio Matrix Dimensions
• Bread-&-butter projects
– 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
– Ps that at one time showed promise but are no longer
viable.
2–41
Key Terms
Balanced scorecard
Implementation gap
Net present value
Payback
Organizational politics
Priority system
Priority team
Project portfolio
Project screening matrix
Sacred cow
Strategic management process
2–42
