2

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
Chapter 2 • 2.6 Selection Criteria
Organization Strategy and
Project Selection • 2.7 Applying a Selection Model
• 2.8 Managing the Portfolio System

3 4

2.1 Why Project Managers Need to Understand Strategy 2.2 The Strategic Management Process: An Overview

• Two main reasons project managers need to understand their • Strategic Management Defined
organization’s mission and strategy: • Is the process of assessing “what we are” and deciding and implementing
1. So they can make appropriate decisions and adjustments. “what we intend to be and how we are going to get there.”
▫ How a project manager would respond to a suggestion to modify the • Is a continuous, iterative process aimed at developing an integrated and
design of a product or to delays may vary depending upon strategic coordinated long-term plan of action.
concerns. • Requires strong links among mission, goals, objectives, strategy, and
2. So they can be effective project advocates. They have to be able to: implementation.
• Two Major Dimensions of Strategic Management:
▫ demonstrate to senior management how their project contributes to
the firm’s mission in order to garner their continued support. 1. Responds to changes in the external environment and allocates the
▫ explain to stakeholders why certain project objectives and priorities firm’s scare resources to improve its competitive position.
are critical in order to secure buy-in on contentious trade-off 2. Internal responses to new action programs aimed at enhancing the
decisions. competitive position of the firm.
▫ explain why the project is important to motivate and empower the
project team (Brown, Hyer and Ettenson, 2013).
 5 6

Four Activities of the Strategic Management Process 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.

• FIGURE 2.1

7 8

Characteristics of Objectives 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.
• 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—which involves starting
and stopping work on one task to go and work on another project, then returning to the
work on the original task.

• EXHIBIT 2.1
 9 10

Benefits of Project Portfolio Management 2.4 Project Classification

• EXHIBIT 2.2 • FIGURE 2.2

11 12

2.5 Phase Gate Model Phase Gate Process Diagram

• 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).

• FIGURE 2.3
 13 14

2.6 Selection Criteria Financial Criteria: The Payback Model

• Financial Criteria • The Payback Model

• Measures the time the project will take to recover the project investment.
▫ Payback
• Desires shorter paybacks.
▫ Net present value (NPV)
• Is the simplest and most widely used model.
• Nonfinancial Criteria • Emphasizes cash flows, a key factor in business.
▫ Projects of strategic importance to the firm • Limitations of the Payback Method

• Two Multi-Criteria Selection Models • Ignores the time value of money.

• Assumes cash inflows for the investment period (and not beyond).
▫ Checklist Models
• Does not consider profitability.
▫ Multi-Weighted Scoring Models
• The Payback formula is

•
! " #

15 16

Example Comparing Two Projects Using Payback Method 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
,-
• $ %& ' () * ∑ 3/ ./012-

• 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

• EXHIBIT 2.3A
 17 18

Example Comparing Two Projects Using Net Present Value Method 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.

• EXHIBIT 2.3B

19 20

Two Multi-Criteria Selection Models Checklist Models: Sample Selection Questions Used in Practice

• 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.

• EXHIBIT 2.4
 21 22

Multi-Weighted Scoring Models: Project Screening Matrix

Exercise

The company B has set up a weighted scoring matrix for evaluation of potential projects.
Criteria Strong Support Urgency 10% of sale from Competition Fill market
sponsor business new products gap
strategy
Weight 2.0 5.0 4.0 3.0 2.0 2.0
Project 1 9 5 2 0 2 5

Project 2 3 7 2 0 5 1

Project 3 6 8 2 3 6 8

Project 4 1 0 5 10 6 9

Project 5 3 10 10 1 8 0

a) Which project do you choose?

b) If the weight for “strong sponsor” is changed from 2.0 to 5.0, will the project
selection change?
c) Why is it important that the weights mirror critical strategic factors?

• FIGURE 2.4

CHỌN
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PERFORMANCE/EFFECTIVENESS AND COST

Polygon Model
METHOD
FAST
• Constant performance/effectiveness
C 3  Identify the lowest cost alternative that meets the requirement of
A performance

• Constant cost
PRICE 3 3 SAFE  Identify the highest performance alternative that meets the
requirement of cost

B is dominated by A B

3
COMFORTABLE
2–23
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PERFORMANCE/EFFECTIVENESS AND COST METHOD

ELECTRE MODEL
• Identify nondominated alternatives (Kernel)
Hiệu quả • R(1  2): 1 is better than 2
Effectiveness boundary A6
(Effectiveness)

25
A7

A4
4
A5
7 1
A3 Unaccepted area
6
F 3
A1 A2

A0 2
8
5
K K K6 Chi phí (Cost)
K0 K1 K2 3 K4 K5
•  Nondominated alternative set is {2,4,5}

CHỌN CHỌN
27 DỰ ÁN 28 DỰ ÁN

COLLECTIVE UTILITY METHOD (LỢI ÍCH CHUNG) CU METHOD

Weight Alternative i A1 A2 … Ai ... Am Weight Alternative i A1 A2 … Ai ... Am
αj Objective j αj Objective j
α1 Z1 Z11 Z21 … Zi1 … Zm1 α1 Z1 b11 b21 … bi1 … bm1
α2 Z2 Z12 Z22 … Zi2 … Zm2 α2 Z2 b12 b22 … bi2 … bm2
… … … … … … … … … … … … … … … …
αj Zj Z1j Z2j … Zij … Zmj αj Zj b1j b2j … bij … bmj
… … … … … … … … … … … … … … … …
αn Zn Z1n Z2n … Zin … Zmn αn Zn b1n b2n … bin … bmn
CU CU1 CU2 … CUi … CUm CU CU1 CU2 … CUi … CUm

n
CU i =  α j * bij
j =1
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CHỌN 30
CHỌN
DỰ ÁN DỰ ÁN
CU METHOD - EXAMPLE
Transform Z to b OBJECTIVE ALTERNATIVES WEIGHT
A B C
 Objective Z -> max: Max Z1 100 70 0 0.3
Min Z2 75 25 0 0.4
Z ij − Z ij min Max Z3 20 40 100 0.3
i
bij = 1
Bảng lợi ích
min

Z ij max − Z ij min
i i Mục tiêu Giá trị của các mục tiêu theo PA Trọng số
A B C
• Objective Z -> min: Max Z1 b1A = 1 0.7 0 0.3
Min Z2 b2A = 0 0.67 1 0.4
Z ij max − Z ij Max Z3 0 0.25 1 0.3
i CU 0.3 0.56 0.7
bij = 2

Z ij max − Z ij min CUC = 0*0.3+1*0.4+1*0.3 = 0.7

i i
Xếp hạng dự án: C>B>A

CHỌN CHỌN
31 DỰ ÁN 32 DỰ ÁN

COMPROMISED METHOD (PP. QUY HOẠCH THỎA HIỆP) COMPROMISED METHOD (PP. QUY HOẠCH THỎA HIỆP)
• Euclide distance  Objectives with same directions (or units)
CONSIDER THE COMPROMIZATION BETWEEN THE TWO OBJECTIVES 1
 2  2 2
Miền nghiệm
UNACCEPTED AREA Min Li =   (Z jQ − Z ji ) 1
Z2max
không khả thi
Q (Z1Q, Z2Q)
i
 j =1 
• Standardized distance:
L1 Nghiệm lý tưởng 1
IDEAL VALUE
 2  Z −Z 
2
2
Zi2 
Min Li =   
Nghiệm tối ưu jQ ji
 2
Zij OPTIMAL VALUE
i  j =1  Z j max − Z j min  
NORMALLY ACCEPTED AREA   
Miền nghiệm
tầm thường Đường đánh đổi • Standardized distance with weights:
1
PARETO LINE
 2  Z − Z ×α  2
 2
 jQ j 
Min Li =   
ji

i  j =1  Z j max − Z j min   3
Zi1 Z1max    
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CHỌN
DỰ ÁN 34

EXAMPLE 2.7 Applying a Selection Model

Objective Alternatives Weights
A B C • Project Classification
Max Z1 100 70 0 0.4
• Deciding whether the project fits with the organization strategy.
Min Z2 75 25 0 0.6
L 0.6 0.23 0.4
• Selecting a Model
▫ Weighted scoring criteria seem the best alternative because:
Ideal value: (Z1, Z2) = (100,0) They reduce the number of wasteful projects using resources.
1
 2  Z − Z × α 2  2
 jQ j  They help to identify project goals that can be communicated using the
Li =   
ji

 j =1  Z j max − Z j min   selection criteria as corroboration.

   
They help project managers understand how their project was selected, how
Ranking: B>C>A
their project contributes to organization goals, and how it compares with other
projects.

35 36
A Proposal Form for an Automatic Vehicular Tracking (AVL) Public
Applying a Selection Model (Continued)
Transportation Project

• 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.

• FIGURE 2.5A
 37 38

Risk Analysis for a 500-Acre Wind Farm Project Screening Process

• FIGURE 2.5B • FIGURE 2.6

39 40

Priority Screening Analysis 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.

• FIGURE 2.7
 41

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.