Ch.
2 Strategic Management
and Project Selection
Maturity of Project Management
Criteria for PS Models
Nature of PS Models
Types of PS Models
Uncertainty Analysis and Risk Management
Information Base for PS Models
Project Portfolio Process (PPP)
Project Proposal
Ch. 2.0: Overview of PS
Process
Project Management Office (PMO):
Aligning corporate needs and project goals
Project selection: Choose candidate
projects using evaluation criteria
Dealing with uncertainty: Risk analysis
Strategically selecting best projects:
Project Portfolio Process (PPP)
Locking up the deal: Writing a project
proposal
Ch. 2.1: Project Management
Maturity Levels
Ad-hoc (essentially disorganized)
Abbreviated (some processes exist)
Organized (standardized processes)
Managed (measured processes)
Adaptive (continuous improvement)
Ch 2.2: PS Models
Idealized view of reality
Representing the STRUCTURE of the
problem, not the detail
Deterministic or stochastic
Ch. 2.2: Criteria for Project
Selection Models
Realism (technical-, resource-, market-risk)
Capability (adequately sophisticated)
Flexibility (valid results over large domain)
Ease of Use (no expert needed to run model)
Cost (much less than project benefit)
Easy Computerization (use standard
software)
Ch. 2.3: Nature of PS models:
Caveats
Project decisions are made by PM ---
NOT by PS model!
A PS model APPROXIMATES, but does
NOT DUPLICATE reality!
Ch. 2.3: Nature of PS Models:
Methodology
Start with detailed list of firm’s goals
Create list of project evaluation factors
(PEF’s)
Weigh every element in PEF list
Compute an overall score for project
based on weighted PEF’s
Select project that has the closest
alignment with firm’s goals
Ch 2.3: Project Evaluation
Factors (PEFs)
Production Factors
Marketing Factors
Financial Factors
Personnel Factors
Administrative and Misc. Factors
Ch 2.4: Types of PS Models:
Nonnumeric
Sacred Cow
Operating Necessity
Competitive Necessity
Product Line Extension
Comparative Benefit
Model
Ch 2.4: Numeric PS Models:
Profit / Profitability
Payback Period (PB)
Average Rate of Return
Discounted Cash Flow (NPV)
Internal Rate of Return
Profitability Index
Other Profitability Models
Ch 2.4: Numeric PS Models:
Scoring
Unweighted 0-1 S = ∑(x)
Factor Model
Unweighted Factor
Scoring Model
S = ∑(s)
Weighted Factor
Scoring Model S = ∑(s·w)
Constrained
Weighted Factor S = ∑(s·w) ∏(c)
Scoring Model
Ch 2.4: Choosing the PS
Model
Dependent on wishes and philosophy
of management
80% of Fortune 500 firms choose
“nonnumeric” PS models
Firms with outside funding often
choose scoring PS models
Firms without outside funding often
choose profit / profitability PS models
Ch 2.5: Management of Risk:
Terminology
Risk: Decision based on complete
information about the probability of
each possible outcome.
Uncertainty: Decision based on
incomplete or insufficient data.
Game: Decision based under
conditions of conflict.
Ch 2.5: Areas of Uncertainty
Project timing & expected cash flow.
Direct outcome of project, i.e. what
exactly will the project accomplish
Side effects and unforeseen
consequences of project
Ch 2.6: Risk Analysis
Crystal Ball®2000 Software
1) Start with estimated risk profile for all
key parameters of project
2) Use Crystal Ball®, an EXCEL® plug
in, to represent decision by statistical
model
3) Repeat many times to get a statistical
distribution of all possible outcomes
Ch 2.6: Risk Analysis:
Crystal Ball®2000 Software
1) Input of Cash Flow parameter from
Psycho Ceramic example
Ch 2.6: Risk Analysis:
Crystal Ball®2000 Software
2) Select distribution parameter
(Triangular for this example)
Ch 2.6: Risk Analysis:
Crystal Ball®2000 Software
3) Output, 1000 Monte Carlo Runs
(example:Average Project NPV $10,821)
Ch. 2.6: Window-of-
Opportunity Analysis
Estimate in advance economic
impact of innovation before R&D is
undertaken
Set up a baseline of current process
as the sum of all current subprocesses
Compute cost/performance of new
innovation as a multiple of each
subprocess in the baseline system
Ch. 2.6: Problems Affecting
Data Used in PS Models
Accounting: arbitrary assignment of
overhead costs, linear cost and revenue
forecasts
Measurements: subjective vs. objective,
quantitative vs. qualitative, reliable vs.
unreliable, valid vs. invalid
Technology shock: New technology has
to overcome initial resistance threshold.
Ch 2.7: Project Portfolio
Process (PPP)
Step 1: Establish a Project Council
Step 2: Identify project categories & criteria
Step 3: Collect project data
Step 4: Assess resource availability
Step 5: Reduce project and criteria Set
Step 6: Prioritize projects within categories
Step 7: Prioritize the projects within categories
Step 8: Implement the Process
Step 1: Establish a Project
Council
Includes:
Senior Management
Project Managers of major projects
Relevant general managers
Those who identify key risks
Those who could derail PPP later
Step 2: Identify Project
Categories and Criteria
Derivative Projects
Platform Projects
Breakthrough Projects
R & D Projects
Step 3: Collect Project Data
Use “activity based costs”
Verify all data
Include timing for benefits and
resource needs
Document assumptions for future
checking
Step 4: Access Resource
Availability
Access availability of Internal and External
Resources by:
Type
Department
Timing: can vary 100% over project life
cycle
Step 5: Reduce the Project
and Criteria Set
Narrow down existing projects
required competence exists in organization
Market for offering
Profitability
Risk
Potential partner to assist with project
Right resources available at the right times
Good technological fit with organization
Uses organization’s strengths
Synergetic with other important projects
Slipped in desirability
Step 6: Prioritize Projects
within Categories
Rank projects within each category
Measure by
Risk
Development of new knowledge
Consider benefits first
Consider cost second
Step 7: Select the projects to be
Funded and Held in Reserve
Determine the mix of projects across
various categories and time periods
Leave 10-15 % of organization’s
resources free
Focus on committing to FEWER
projects
Step 8: Implement the
Process
Make results of the PPP widely known
Senior management must fully fund
Process will be repeated on a regular
basis
Ch 2.8: Project Proposal:
Content
Cover letter
Executive summary
Description and past experience of project
team
Nature of technical problem to be solved
How to approach solution of technical
problem
Plan for implementation of project
Plan for logistic support and administration
Ch 2.8: Project Proposal:
Cover Letter & Executive Summary
Compose a cover letter as key
marketing instrument
Explain fundamental nature and
general benefits of project
Minimally technical language
Ch 2.8: Project Proposal:
Past Experience of Project Team
List all key project personnel with
titles and qualifications
Include full resume of each principal
Provide all pertinent references
Ch 2.8: Project Proposal:
Technical Approach
General description of problem to be
addressed or project to be undertaken
Major subsystems of problem or
project
Methodology of solving the problem
Special client requirements
Test and inspection procedures
Ch 2.8: Project Proposal:
Implementation Plan
Estimates of time, cost and materials for
each subsystem and the whole project
Establish major milestones to break
project into phases
List equipment, overhead and
administrative cost
Develop contingency plans (including
slack time)
Ch 2.8: Project Proposal:
Plan for Administration and
Logistic Support
Control over subcontractors
Nature and Timing of all reports
(progress, budget, audits)
Change management
Termination Procedures
“Touch of class” capabilities (artist’s
renderings, meeting facilities, video
conferencing, computer graphics)
