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Part I
Project
Initiation
2012 John Wiley & Sons Inc.
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Project Management
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Chapter 2
Strategic
Managementand ProjectSelection
2012 John Wiley & Sons Inc.
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Prolems With M!ltiple Projects
Delays in one project delays others
Inefficient use of resources
Bottlenecks in resource availability
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Project "es!lts
30 Percent canceled midstream
Over half of completed projects came in
up to190 percent over budetOver half of completed projects came in
up to !!0 percent late
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Challenges
"akin sure projects are closely tied to
oals and stratey
#o$ to handle the ro$in number ofprojects%
#o$ to make these projects successful%
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Project Management Mat!rity
Project manaement maturity refers to
the mastery of skills re&uired to manae
projects competently'umber of $ays to measure
"ost orani(ations do not do $ell
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Project Selection and Criteria o# Choice
Project selection)* +valuatin
* ,hoosin* Implementin
-ame process as other business
decisions
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$ypes o# Companies
,ompanies considerin projects fall into t$o
broad cateories.* ,ompanies $hose core business is completin
projects
* ,ompanies $hose core business is somethin else
/hey can also be broken do$n as.
* ,ompanies lookin at projects to do for others* ,ompanies lookin at projects to do for themselves
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Model Criteria
ealism
,apability
le2ibility +ase of use
,ost
+asy computeri(ation
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$he %at!re o# Project Selection Models
"odels turn inputs into outputs"anaers decide on the values for the inputs
and evaluate the outputs /he inputs never fully describe the situation /he outputs never fully describe the e2pected
results
"odels are tools"anaers are the decision makers
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$ypes o# Project Selection Models
'onnumeric models
'umeric models
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%onn!meric Models
"odels that do not return a numeric value
for a project to be compared $ith other
projects/hese are really not models4 but rather
justifications for projects
5ust because they are not true modelsdoes not make them all bad4
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$ypes o# %onn!meric Models
-acred ,o$* 6 project7 often suested by the top manaement7
that has taken on a life of its o$n
Operatin 'ecessity* 6 project that is re&uired in order to protect lives or
property or to keep the company in operation
,ompetitive 'ecessity* 6 project that is re&uired in order to maintain the
company8s position in the marketplace
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$ypes o# %onn!meric Models Contin!ed
Product ine +2tension* Often7 projects to e2pand a product line are
evaluated on ho$ $ell the ne$ productmeshes $ith the e2istin product line rather
than on overall benefits
,omparative Benefit* Projects are subjectively rank ordered based
on their perceived benefit to the company
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%!meric Models
"odels that return a numeric value for a
project that can be easily compared $ith
other projects /$o major cateories.
* Profit:profitability
* -corin
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Pro#itPro#itaility Models
"odels that look at costs and revenues* Payback period
* Discounted cash flo$ ;'P
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Payac' Period
/he lenth of time until the oriinal
investment has been recouped by the
project6 shorter payback period is better
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Payac' Period ()ample
4000,25$
000,100$
PeriodPayback
FlowCash!!"al
Cos#Proec#PeriodPayback
==
=
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Payac' Period *ra+ac's
Does not consider time value of money
"ore difficult to use $hen cash flo$s
chane over time ess meaninful for loner periods of
time ;due to time value of money=
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*isco!nted Cash ,lo+
/he value of a stream of cash inflo$s and
outflo$s in today8s dollars
6lso kno$ as discounted cash flo$ or justdiscountin
>idely used to evaluate projects
Includes the time value of money Includes all inflo$s and outflo$s7 not just
the ones throuh payback point
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*isco!nted Cash ,lo+ Contin!ed
e&uires a percentae to use to reduce
future cash flo$s
* /his is kno$n as the discount rate/he discount rate may also be kno$n as
a hurdle rate or cutoff rate
/here $ill usually be one overall discountrate for the company
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%P- ,orm!la
( )%P& '(ro$ec#)0
1 1
n
t
t
t
F
Ak=
= + +
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%P- ,orm!la $erms
A0 Initial cash investment
Ft ,ash flo$ in time period t;neative for
outflo$s=k /he discount rate
t /he number of years of life
6 hiher 'P< is better
#iher the discount rate lo$er the 'Phile it is technically possible for a series to
have multiple I8s7 this is not a practicalissue
indin the I re&uires a financialcalculator or computer
In +2cel ?I;-eries7@uess=4
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Pro#itaility Inde)
a k a Benefit cost ratio
'P< divided by initial cash investment
atios reater than 1A0 are ood
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dantages o# Pro#itaility Models
+asy to use and understand
Based on accountin data and forecasts
amiliar and $ell understood @ives a o:noo indication
,an be modified to include risk
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*isadantages o# Pro#itailityModels
Inore nonmonetary factors
-ome inore timevalue of money
Biased to$ard the shortterm Payback inores cash flo$ after payback
I can have multiple solutions
6ll are sensitive to errors 'onlinear
Dependent on determination of cash flo$s
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Scoring Models
Cn$eihted 0*1 factor model
Cn$eihted factor model
>eihted factor model
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n+eighted 031 ,actor Model
actors selected* isted on a preprinted form
aters score the project on each factor+ach project ets a total score
"ain advantae is that the model uses
multiple criteria"ajor disadvantaes are that it assumes
all criteria are of e&ual importance
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n+eighted 031 ,actor Model ()ample
iure !!
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n+eighted ,actor Scoring Model
eplaces 8s $ith factor score* /ypically a 1E scale
,olumn of scores is summedProjects $ith hih scores are selected
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n+eighted Weighted ,actor Model
+ach factor is $eihted the same
ess important factors are $eihted the
same as important ones+asy to compute
5ust total or averae the scores
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Weighted ,actor Model
+ach factor is $eihted relative to its
importance* >eihtin allo$s important factors to stand out
6 ood $ay to include nonnumeric data in the
analysis
actors need to sum to one
6ll $eihts must be set up7 so hiher valuesmean more desirable
-mall differences in totals are not meaninful
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Weighted ,actor Model ()ample
iure B Pae F0
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dantages o# Scoring Models
6llo$ multiple criteria
-tructurally simple
Direct reflection of manaerial policy +asily altered
6llo$ for more important factors
6llo$ easy sensitivity analysis
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*isadantages o# Scoring Models
elative measure
inear in form
,an have lare number of criteria Cn$eihted models assume e&ual
importance
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"is' Considerations in Project Selection
Both costs and benefits are uncertain* Benefits are more uncertain
/here are many $ays of dealin $ith risk
,an make estimates about the probability ofoutcomes* -ubjective probabilities
Cncertainty about.
* /imin* >hat $ill be accomplished%* -ide effects
Pro forma documents
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$he Project Port#olio Process 4PPP5
inks projects directly to the oals and
stratey of the orani(ation
"eans for monitorin and controllinprojects
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Symptoms o# a Misaligned Port#olio
"ore projects
Inconsistent determination of benefits
Projects that don8t contribute to the stratey
,ompetin projects
,osts e2ceed benefits
'o risk analysis of projects
ack of trackin aainst the plan
'o client for project
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P!rpose o# Project Port#olio Process
Identify nonprojects
Prioriti(e list of projects
imit number of projects Identify the real options for each project
Identify projects $ith ood fit
Identify codependent projects
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P!rpose o# Project Port#olio ProcessContin!ed
+liminate risky projects+liminate projects that skip the formal
selection processGeep from overloadin the orani(ation/o balance the resources $ith needs
/o balance returns/o balance short7 medium7 and lon
term returns
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Project Port#olio Process Steps
1A +stablish a project council
!A Identify project cateories and criteria
3A ,ollect project data
HA 6ssess resource availability
EA educe the project and criteria set
FA Prioriti(e the projects $ithin cateories
A -elect the projects to be funded and held inreserve
JA Implement the process
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Step 16 (stalish a Project Co!ncil
-enior manaement/he project manaers of major projects
/he head of the Project "anaementOffice
Particularly relevant eneral manaers
/hose $ho can identify key opportunitiesand risks facin the orani(ation6nyone $ho can derail the PPP later on
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Step 26 Identi#y Project Categories andCriteria
Derivate projects
Platform projects
Breakthrouh projects KD projects
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Step 76 Collect Project *ata
6ssemble the data
Document assumptions
-creen out $eaker projects/he fe$er projects that need to be
compared and analy(ed7 the easier the
$ork of the council
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Step 86 ssess "eso!rce ailaility
6ssess both internal and e2ternal
resources
6ssess labor conservatively/imin is particularly important
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Step 96 "ed!ce the Project and CriteriaSet
Orani(ation8s oals
#ave competence
"arket for offerin#o$ risky the project is
Potential partner
iht resources
@ood fit
Cse strenths
-yneristic
Dominated by
another
#as slipped in
desirability
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Step :6 Prioriti;e the Projects WithinCategories
6pply the scores and criterion $eihts
,onsider in terms of benefits first and
resource costs second-ummari(e the returns from the projects
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Step
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Step >6 Implement the Process
,ommunicate results
epeat reularly
Improve process
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Project Proposals
/he project proposal is essentially a
project bid
Puttin toether a project proposalre&uires a detailed analysis of the project
Project proposals can take $eeks or
months to complete6 more detailed analysis may result in not
biddin on the project
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Project Proposal Contents
,over letter
+2ecutive summary
/he technical approach/he implementation plan
/he plan for loistic support and
administrationPast e2perience