Chapter 2:

Organization Strategy and

Project Selection

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 Chapter Outcomes
Explain Strategic Management Process

Identify and Develop Link between Organization

Strategy and Project Selection

Define and Develop a Project Portfolio

Management System

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Organization Strategy and Project Selection
Strategy – Deciding how the organization will compete.
Use of Projects – Converting strategy into new products,
services, and processes needed for success.
Intel’s strategy is one of differentiation. So, its projects
target innovation and time to market. Intel is directing
its strategy toward specialty chips for products other
than computers, such as autos, security, smart phones,
air controls, etc.
Many well-known companies have reduced their cycle
times by 15-20% by implementing many projects.
Projects and project management play the key role in
supporting strategic goals.

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Organization Strategy and Project Selection….

Aligning projects with strategic goals is crucial for

success.
Today’s economic climate is characterized by –
Rapid changes in technology
Global competition
Financial Uncertainty
Ensuring a strong strategic link between the
strategic plan and projects is a difficult task that
demands constant attention from top and middle
management.

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Challenges and Significance of Linking Projects
with Strategy

• The larger and more diverse an organization, the more

difficult it is to create and maintain strong link.
• Many companies have not developed a process that
clearly aligns project selection to the strategic plan.
• This results to poor utilization of resources – people,
money, equipment, and core competencies.

Conversely, organizations that have coherent link of

projects to strategic plan have more cooperation within
organization, perform better on projects, and have
fewer projects.
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 Projects and Strategic Plan
Integration of projects with strategic plan
Effective integration means the existence of a strategic
plan and an open and transparent process for
prioritizing projects by their contribution to the plan.

Intended outcomes –
Clear organizational focus
Best use of scarce resources
Improved communication across projects and
departments

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 Project Managers (PM) and Strategic
Management Process
• Changes in the organization’s mission and strategy
Project management is at the apex of strategy and operations. There
are mainly two reasons why PM need to understand mission and
strategy.
– Project managers must respond to changes with appropriate
decisions about future projects and adjustments to current
projects (How a PM would respond to a suggestion to modify the
design of a product to enhance performance will vary depending
upon whether his/her company strives to be a product leader
through innovation or to achieve operational excellence through
low-cost solutions), (A PM will authorize overtime if firm places
premium on getting to the market first. Another PM will accept the
delay if speed is not essential)
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 Project Managers (PM) and Strategic
Management Process……
 Project managers who understand their
organization’s strategy can become effective
advocates of projects aligned with the firm’s mission.

 PMs must be able to demonstrate to top management

how their projects contribute to the firm’s mission.
Protection and continued support come from being
aligned with corporate objectives.

 PM also need to be able to explain to team members

and other stakeholders why certain project objectives
and priorities are critical.

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 The Strategic Management Process:
Definition

• Strategic Management
– Strategic management is the process of assessing “what
we are” and deciding and implementing “what we intend
to be and how we are going to be there”.

– Strategy describes how an organization intends to

compete with the resources available in the existing and
perceived future environment.

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The Strategic Management Process: An Overview

• Strategic Management
– Provides the theme and focus of the future direction for the
firm.
• Responding to changes in the external environment—constant
environmental scanning for changes is a major requirement for
survival in the current dynamic competitive environment.

• Allocating scarce resources of the firm to improve its competitive

position—internal responses to new action programs aimed at
enhancing the competitive position of the firm. The nature of the
changes depends on the type of business environment volatility,
competition, and the organizational culture.
– Requires strong links among mission, goals, objectives,
strategy, and implementation.
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Characteristics of The Strategic Management Process

A continuous, iterative process aimed at developing an

integrated and coordinated long-term plan of action
Supports consistency of action at every level
Encourages integration because effort and resources are
committed to common goals and strategies
Positions the organizations to meet the long-term need
and requirements of the customers

With the long-term position identified, objectives are set,

and strategies are developed to achieve objectives, and
then translated into actions by implementing projects.
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 Overview of The Strategic Management Process

Strategic management requires strong links among

mission, goals, objectives, strategy, and
implementation.
1.The mission gives the general purpose of the
organization.
2.Goals gives global targets within the mission.
3.Objectives gives specific targets to goals.
4.Objectives gives rise to formulation of strategies to reach
objectives.
5.Strategies require actions and tasks to be implemented.
6.The actions to be taken represent project.
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 Strategic
Management
Process

FIGURE 2.1

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 Strategic Management Process (cont’d)
• Four Activities of the Strategic Management
Process
1. Review and define the organizational
mission
2. Set long-range goals and objectives
3. Analyze and formulate strategies to
reach objectives
4. Implement strategies through projects

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Review and Define the Organizational Mission
Mission statements identify the scope of the organization in
terms of its product or service. Everyone should be keenly
aware of the organization’s mission.
Components found in mission statements are major
products and service, target customers and markets, and
geographical domain. Now, organizational philosophy,
public image, key technologies, contribution to society,
etc. are also included.
Mission statement communicates and identifies the purpose
of the organization to all stakeholders. It can be used for
evaluating performance.
More specific mission statements tend to give better results
because of a tighter focus. Mission statements decrease the
chance of false directions by stakeholders.
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 Analyze and Formulate Strategies
Formulating strategy answers the questions 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.
 The first step is a realistic evaluation of past and current
position of the enterprise
 The next step is an assessment of the internal and external
environment (SWOT Analysis)
 The next step is to identify critical issues and strategic
alternatives from SWOT analysis
 Strategy formulation ends with cascading objectives or
projects to lower organizational units
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 SWOT Analysis
Strength / Weakness
(Internal Factors)

Technology, Product Quality, Management Talent, Low

Debt, Dealer Network, etc.

Opportunity / Threat
(External Factors)

Threat: Slowing of the economy, Maturing Life Cycle,

Exchange Rates, Government Regulation, etc.

Opportunity: Increasing Demand, Emerging Market,

Demographic, etc.
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 Set Objectives to Achieve Strategies
 Objectives translate the organization strategy into specific,
concrete, measurable terms.

 Objectives pinpoint the direction managers believe the

organization should move forward. It answers in detail where
a firm is headed and when it is going to get there.

 Objectives cover markets, products, innovation,

productivity, quality, finance, profitability, employees,
and consumers. It should be as operational as possible.

 Each level below the organizational objectives should support

the higher-level objectives.
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 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 Definite time frame about when to achieve

EXHIBIT 2.1

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 Implement Strategies Through Projects
 Implementation answers the question of how strategies will be
realized, given available resources. It requires actions and
completing tasks.
1. Completing tasks require resource allocation (funds, people,
management talents, technological skills, and equipment).
However, multiple objectives place conflicting demands on
organizational resources.
2. Implementation requires a formal and informal organization that
complements and supports strategy and projects. Authority,
responsibility and performance all depends on strategy and
culture.
3. Planning and control systems must be in place to ensure that
project activities necessary to ensure strategies are effectively
performed.
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 Implement Strategies Through Projects….

4. Motivating project contributors will be a major

factor for achieving project success.
5. Finally, areas receiving more attention in recent
years are portfolio management and prioritizing
projects.

 Strategy implementation is not as clear as

formulation, without implementation success is
impossible.

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 Changes in the Strategic Management Process

Although, the four major steps of the strategic

management process have not been altered
significantly over the years, the view of the time
horizon in the strategy formulation process has
been altered radically in the last two decades.

Global competition and rapid innovation require

being highly adaptive to short-run changes while
being consistent in the longer run.

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 Project Portfolio Management System
Implementation of projects without a strong
priority system linked to strategy creates
problems.

Three of the most obvious problems will be

discussed.

A project portfolio system can go a long way to

reduce, or even eliminate, the impact of these
problems.

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 Project Portfolio Management Problems
• 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
– The multiproject environment creates interdependency
relationships of shared resources which results in the
starting, stopping, and restarting projects.

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 The Implementation Gap
In most companies,
-top management formulates strategy and then
-functional managers implement strategy on their own (with more
detailed strategies and objectives of their own)
This causes problems.

Symptoms:
• Conflicts frequently occur among functional managers and cause
lack of trust
• Frequent meetings are called to establish and negotiate priorities
• People frequently shift from one project to other
• People are working on multiple projects and feel inefficient
• Resources are not adequate

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 The Implementation Gap……
Because clear linkage do not exist, the organizational
environment becomes dysfunctional, confused, and ripe for
ineffective implementation of strategy and thus of projects.

One study found that only 25% of Fortune 500 executives

believe there is strong linkage.

It is the responsibility of senior/top management to set

policies that show a distinct link between organizational
strategy and objectives and projects that implement those
strategies.

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 Organization Politics
Politics exist in organization and can have a significant
influence on which projects receive funding and high
priority. This is especially true when the criteria and
process for selecting projects are ill-defined and not
aligned with the mission.

The term ‘sacred cow’ is often used to denote a project

that a powerful, high-ranking official is advocating.

Project sponsors (high-ranking managers) play a

significant role in the selection and implementation of
product innovation projects. They are instrumental in
winning approval and in protecting the project during
implementation stage.

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 Example
The significance of politics can be seen in the ill-faced ALTO
computer project at XEROX during the mid-1970s. The
project was a tremendous technological success. It developed
first workable mouse, the first laser printer, the first user
friendly software, and the first LAN. All of these developments
were five years ahead of their competitors.

Over the next five years this opportunity to dominate the

personal computer market was squandered because of
internal in-fighting at XEROX and the absence of a strong
project sponsor. (Apple’s MacIntosh computer was inspired by
many of these developments)

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 Organization Politics……
Politics can play a role not only in selection but also in
aspirations behind projects. Individual can enhance their
power within the organization by managing extraordinary
projects. Many ambitious managers pursue high-profile
projects as a means for moving quickly up the corporate
ladder.

Many would argue that politics and project management

should not mix. A more proactive response is that projects
and politics invariably mix, and PM recognizes that any
significant project has political ramifications. Top management
needs to develop a system for identifying and selecting
projects that reduce the impact of internal politics and fosters
the selection of best projects.
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 Resource Conflicts and Multitasking
• Multi-project environment creates the problem of project
interdependency and the need to share resources.
• All PM seek to have the best people that leads to conflicts.
• The problems of sharing resources and scheduling resources
across projects grow exponentially as the number of projects
rise.
• In multi-project environments, the stakes are higher and the
benefits or penalties for good or bad resource scheduling
become more significant.

Resource sharing leads to multitasking. People working on several

tasks concurrently are far less efficient, especially when conceptual
or physical shutdown and startup are significant. Multitasking adds
to delays and costs.
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 Resource Conflicts and Multitasking….
The number of projects in a portfolio always exceeds the
available resources. This capacity overload leads to confusion
and inefficient use of resources.

The presence of implementation gap, politics, and

multitasking adds to the problem of which projects are
allocated resources first.

A multi-project organization faces major problems without a

priority system that is clearly linked to strategic plan.

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 Reducing Problems
• A set of integrative criteria and a process for evaluating and
selecting projects that support higher-level strategies and
objectives.

• Development and use of a meaningful project priority process

for project selection.

• A single-project priority system that ranks projects by their

contribution to the strategic plan would be very useful.

• Organizations that managed independent projects and

allocated resources ad hoc have shifted focus to selecting the
right portfolio of projects to achieve their strategic objectives.
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 Benefits of Project Portfolio Management

• Builds discipline into 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
organization strategy
• Improves communication and supports agreement on
project goals

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 Portfolio of Projects by Type

FIGURE 2.2

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 Compliance Projects

This type of projects are needed to meet regulatory

conditions to operate in a region; hence, they are
called “must do” projects.
For example, building a auto parts factory destroyed
by tsunami is an example of a compliance projects.

These projects usually have penalties if they are

not implemented.

EXHIBIT 2.2

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 Operational Projects
• These projects are needed to support current
operations. These projects usually are designed to
improve efficiency of operations, reduce
product/service costs, improve performance, etc.

• Some of these projects, given their limited scope

and cost, require only immediate manager approval
(modifying a production process), while bigger,
more expensive projects need detailed review
(introducing a new production process).

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 Strategic Projects
• These projects directly support the organization’s
long-term mission. They frequently are directed
toward increasing revenue or market share.
For example, developing new products or new
technology.

EXHIBIT 2.2

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 A Portfolio Management System
• Selection Criteria
– Financial: payback, net present value (NPV), internal
rate of return (IRR)
– Non-financial: projects of strategic importance to the
firm.

• Multi-Weighted Scoring Models

– Use several weighted selection criteria to evaluate
project proposals.

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 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 (and not
beyond).
• Does not consider profitability.

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 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.

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 Net Present Value (NPV) and Internal Rate of Return (IRR):
Example Comparing Two Projects

EXHIBIT 2.3

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 Nonfinancial Criteria
Financial return does not always reflect strategic
importance. So, some nonfinancial criteria should
also be considered in selecting projects.
For example, a firm may support projects that do not have high profit
margins for other strategic reasons like:
• To capture larger market share
• To make it difficult for competitors to enter
• 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
• To enhance brand recognition

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 Multi – Criteria Selection Models
Since no single criteria can reflect strategic
significance, portfolio management requires
multi-criteria screening models. Two such
models will be discussed here.

1.Checklist Models
2.Multi-Weighted Scoring Models

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 Checklist Models
It is the most frequently used models. It uses a list of questions to
review potential projects and to determine their acceptance or
rejection.
A justification of this models is that it allows great flexibility in
selecting among different types of projects and are easily used
across various divisions and locations.

Shortcomings:
• It fails to answer the relative importance or value of a potential
project and fails to allow for comparison with other projects.
• Ranking and prioritizing projects by their importance is very
difficult.
• It leaves the door open to the potential opportunity for power plays,
politics, and other forms of manipulation.

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 Multi-Weighted Scoring Models
• This model uses several weighted selection criteria to evaluate
project proposals.
• It generally includes qualitative and quantitative criteria.
• Each selection criteria is assigned a weight.
• Scores are assigned to each criteria for the project, based on its
importance to the project being evaluated.
• The weights and scores are multiplied to get a total weighted score
for the project.
• Projects can then be compared using the weighted score.
• Projects with higher weighted score are considered better.

Selection criteria need to mirror the critical success factors of an

organization.

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 Project Screening Matrix

FIGURE 2.3

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 Important Things To Remember
Any selection model like the above ones may yield
numerical solutions to project selection decisions.

But selection models should not make the final

decisions – the people using the models should make
the final decisions.

No model can capture the total reality it is meant to

represent.

Models are tools guiding the evaluation process so that

the decision-makers will consider relevant issues and
reach a logical decision about supporting or not
supporting projects.
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 Applying a Selection Model
• Project Classification
–Most uses similar criteria across all types of
projects.
–Deciding how well a strategic or operations
project fits the organization’s strategy is the most
important criteria.
–The above criteria should be consistent across all
types.
–Project proposals should be classified by type so
that appropriate criteria can be used for
evaluation.
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 Applying a Selection Model
• Selecting a Model
– Now a days, multiple criteria are used for project selection
(profitability is not the only criteria)
– Top management is interested in identifying the potential mix of
projects that will yield the best use of human and capital
resources to maximize ROI in the long run
– Factors such as researching new technology, public image,
environment protection, core competencies, strategic fit, etc.
are important criteria
– Weighted scoring models result in bringing 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 and why a project is
selected and how projects contribute to the goals and mission
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 Project Proposals
• Sources and Solicitation of Project Proposals
–Projects should come from anyone within the
organization who believe his/her project will add value.

–Good ideas are not limited to certain types or classes of

organization stakeholders.

–Encourage and keep solicitation open to all sources –

internal and external sponsors.

–Request for proposal (RFP) from external sources

(contractors and vendors) when knowledge requirements
are not available within.
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 Project Proposals
Ranking Proposals and Selection of Projects
1. Comparing many proposals to identify those that add the
most value requires a structured process.
2. Data and information are collected to assess the value of
the project to the organization.
3. If a project does not meet designated “must” objectives,
it is not considered.
4. If the sponsor decides to pursue the project, it is
forwarded to the project priority team.
5. The priority team rejects or accepts the project based on
selection criteria and current portfolio of projects.
6. If the project is accepted, the priority team sets the
implementation in motion.
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 Project Proposals
Responsibility for Prioritizing
Prioritizing projects is a major responsibility for senior
management. It means discipline, accountability,
responsibility, constraints, reduced flexibility, and loss of
power.
Top management commitment means more than giving a
blessing to the priority system.
The management will have to rank and weigh the critical
objectives and strategies which they believe to be most
critical.
A good project priority system develops a culture in which
everyone is contributing to the goals of the organization.

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 Major Project
Proposal

FIGURE 2.4A

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 Risk
Analysis

FIGURE 2.4B

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 Project Screening
Process

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 Priority
Analysis

FIGURE 2.6

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 Managing the Portfolio System
It takes the selection system one step higher in that
the merits of a particular project are assessed within
the context of existing projects. It involves
monitoring and adjusting selection criteria to reflect
the strategic focus of the organization.

The priority system can be managed by a small

group of key employees, or by the project office, or
by a governance team of senior managers.

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 Managing the Portfolio
• Senior Management Input
– Provide guidance in selecting criteria that are aligned
with the organization’s goals
– Annually decide how they wish to balance available
resources (people and capital) among different types
of projects

Given these inputs the priority team or project office can

carry out its many responsibilities, which include
supporting project sponsors and represent the
interests of the total organization.

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 Managing the Portfolio….
• The Governance/Priority 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

If the above process is managed well, it can have a profound

impact on the success of an organization.

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 The Project Portfolio System
• For successful project portfolio system:
Constant scanning of the external environment to determine if
organizational focus and/or selection criteria need to be
changed

Periodic priority review and changes need to keep current

with the changing environment

Evaluation of each project by the same criteria

Keeping the whole system open and aboveboard to maintain

the integrity of the system

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Balancing the Portfolio for Risks and Types of Projects

• A major responsibility of the priority team is to balance

projects by type, risk, and resource demand.
• Hence, a proposed project that ranks high on most criteria
may not be selected because there might be project with
same characteristics exist in the current portfolio.
• Organizations need to evaluate each new project in terms of
what it adds to the project mix.
• Short-term needs need to balanced with long-term potential.
• Resource usage needs to be optimized across all projects,
not just the most important project
There are two types of risk –
1.Risk associated with portfolio (organization’s risk profile)
2.Risk associated with specific project
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 Project Portfolio Matrix

Developed by
David and Jim
Matheson

FIGURE 2.7

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 Project Portfolio Matrix Dimensions
• Bread-and-butter projects
– Relatively easy to accomplish
– Produce modest commercial value
– Involve evolutionary improvements to current products and
services (i.e., software updates, manufacturing cost
reduction efforts)

• Pearls
– Relatively low risk development projects
– Produce high commercial payoffs
– Represent revolutionary commercial advances using
proven technical advances (i.e., Next-generation IC chip,
Subsurface imaging to locate oil and gas)
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 Project Portfolio Matrix Dimensions…..
• Oysters
– Involve high risk and high value projects
– Involve technological breakthroughs with high commercial
payoffs (i.e., Embryonic DNA treatments, New kinds of
metal alloys)

• White elephants
– Projects that at one time showed promise but are no
longer viable (i.e., Products for a saturated market, A
potent energy source with toxic-side-effects)

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 Project Portfolio Matrix Choice
To gain strategic advantage, David and Jim
recommend that organizations-

• capitalize on pearls
• eliminate or reposition white elephants, and
• balance resources devoted to bread-and-butter
and oyster projects

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 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
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