CHAPTER 2

Strategic Management and Project

Selection
Objectives
• At the end of this chapter, the learner will be able to:
• Analyze the project management maturity of different organizations;
• Adapt the project selection process in the choice of project portfolio;
• Develop an optimal combination of numeric and non-numeric models
for project selection using suggested criteria;
• Synthesize the process involved in project portfolio management;
Develop a business project proposal using the technical approach.
 Strategy is making a decision how the organization will compete its rivals in the industry where it is
participating. A project converts strategy into a new product, service, and process. Hence, it is vital for the success of a
project to be parallel with strategic goals of the organization. A strong link to the organization's strategy is a must for
every project. The project manager should therefore have a very good understanding of the strategy and mission being
implemented by the organization.

On the other hand, strategy management is responding to changes in the external environment for
competitive position. It is a key requisite for survival to always keep updated of external changes through continuous
scan of the political-legal, economic, socio-cultural, technological and natural (PESTN) environment of the organization.
Thus, with fitting mission and strategy, a project must be chosen that is consistent with the strategic goals of the
organization.
 Project Management Maturity
How to tie a project or groups of projects more strongly to the organization's goals and strategy, how to
manage the increasing quantity of ongoing projects, and how to create these projects successfully are the challenges
being faced by modern-day organizations. Managing the growing figure of ongoing projects and completing them more
fruitfully are the objectives relating to project management maturity.

Project management maturity is the progressive advancement of project and multi-project management
proficiency in approach, methodology, strategy, and decision-making process. The appropriate level of maturity will
differ for every organization based on its definite goals, strategies, resource capabilities, scope, and needs.

Illustrated in a pyramid format (see Figure 2) is a generic model that shows the progression in project
management maturity. The project maturity model reflects that maturity is a continuous process of improvement via
identifiable incremental steps.
Figure 2 Genetic Model of Project
Management Maturity

Institutionalize, seeks continuous

improvement
HIGH
MATURITY

MODERATE Defined practices, training

MATURITY programs organizational support

LOW
Ad hoc process, no common
MATURITY language, little support
Project Selection and Models

All projects need resources partly or completely made available by the organization itself. Since most
resources are scarce not all of the projects a firm wanted to do can be provided with enough workforce or
sufficiently supported financially. As a result, projects in diverse areas will rival with each other to get staffing
and funding support of the organization. A wise project selection is very important to respond to the problem of
resource limitations in the organization.

Project selection is the process of appraising a project or groups of projects and afterward deciding to
execute some of them in order to realize the objectives of the organization. It is a first process to appraise each
project proposal and decide on the premier priority project/s for more analysis. Usually stakeholders who
would benefit from the project, management and the project manager are part of the project selection
process. Project selection follows a four-stage process namely the identification of project/s, evaluation and
prioritizing projects, selection and initiation of projects and review of projects (see Figure 3).
Figure 3 The Generic Process of Project Selection

Identify projects that Evaluate and Select and Initiate Review projects
support the strategy prioritize projects projects regularly

The first step calls for the naming of the project concepts or ideas with a written brief description of
each project. In the second step each project is evaluated using different criteria and models and the outcomes
become the basis for prioritization. Project selection and initiation is the step that logically follows evaluation
and prioritization focusing mainly on the delicate decision of staffing the project teams. After project selection
a regular review of project/s is imperative to find out if they are still in-line with the strategy of the firm. One
way of checking is to repeat the preliminary evaluation with more precise estimates as they become accessible.
Another way of evaluating is to hold regular project management review meetings to spot key problems on a
per-project basis, using project status reports.
 There are various factors that require to be reflected on prior to an organization's decision to take up a project
once it has been proposed. The most doable project needs to be selected, bearing in mind the goals and requirements
of the organization. For this reason, selecting a project using the correct model must be given paramount worth.

Since project selection is a decision-making activity it is easier to use models for this purpose. A model offers
an abstraction of a more intricate reality. However, a model is just a fractional version of the certainty it intended to
replicate and cannot produce an optimal decision. It is also important to remember that the project manager makes the
decision not the model.

There are diverse project selection models used by modern business organizations. Two widely-used basic
types of models for project selection are nonnumeric and numeric. As the name suggests nonnumeric models do not
utilize numbers as inputs (see Table 3). These models are older and simpler. Numeric models make use of numbers to
measure both objective and subjective criteria (see Table 4). Sometimes a combination of the two is used by
organizations
Table 3 Nonnumeric Models of Project Selection
Models Definition Sample Application
1. Sacred cow It is a project recommended by a senior  Undeveloped idea for a new product,
and influential official in the organization. “ for the development of a new market,
Sacred” in the sense that it will be for the design and adoption of a global
maintained until successfully concluded, or database and information system, or
until the boss, personally, identifies the for some other project requiring an
idea as a failure and terminates it. investment of the firms resources .

2. The operating necessity The project is obligatory in order to keep  A protective dike if a flood is
the system operating ; does not necessitate threatening the plant of the factory.
a great extent of formal evaluation.

3. Competitive necessity The choice to embark on the project is  Restructure

founded on a desire to preserve the Undergraduate and graduate programs due
company’s competitive position in the to declining student enrollment and the
market. need to create stronger programs to attract
students
 Modernize
Manufacturing facility
 Get a computer numerically controlled
machine to replace the old milling
machine.
4. Product line extension A project to develop and disbritube  the new Apple Ipod which also
new products evaluated on the plays video
level to which it fits the firm’s
present product line, fills a gap,
strengthen a weak link, or extends
the line in a fresh, advantageous
direction.
5. Comparative benefit model Often used to select from a list of  selection of company cars
projects that are complex, difficult
to assess and often non-
comparable. The one with the most
benefit to the firm is selected.
 When a firm chooses a project selection model, the following criteria developed by Shouder (Meredith & Mantel, 2012) are
the most significant:
1. Realism- The model should mirror the reality of the manager's decision situation together with the various objectives of both the firm
and its managers; it should take into consideration the realities of the firm's limitations on facilities, capital, human resources,
technology, and so forth; it includes factors that reveal project risks, including the technical risks of performance, cost, and time as well as
the market risks of customer rejection and other implementation risks.
2. Capability - The model should be complicated enough to deal with numerous time periods, simulate different situations both inside
and external to the project (like strike, interest rate changes, system behavior changes, etc.) and optimize the decision; an optimizing
model will formulate the assessments that management believe to be significant, reflect on key risks and constraints on the projects, and
afterward choose the best project or set of projects in general.
3. Flexibility -The model should offer convincing outcomes among the conditions that the firm may experience; it should have the ability
to be effortlessly modified or to be self-adjusting in answer to changes in the firm's environment like tax laws change, new technological
advancements alter risk levels, and a change organization's goals.
4. Ease of Use - The model should be realistically convenient, not require a long time to carry out, and be simple to employ and
comprehend; it must not need out of the ordinary explanation, data that are hard to obtain, unnecessary personnel, or out of stock
equipment.
5. Cost - The data gathering and modeling costs should be low in relation to the cost of the project and must certainly be less than the
probable benefits of the project.
6. Easy Computerization - The model should be simple and suitable to collect and accumulate the information in a computer database,
and to maneuver data in the model by using a commonly accessible, standard computer package programs; similar simplicity and
handiness should relate to moving the information to any standard decision support system.
Table 4 Numeric Models of Project Selection
Models Definition Interpretation Limitations

1. Payback period 1. It measures the time it will take to A shorter payback period, the better.  Ignores the time value of money
recover the project investment.  Assumes
The formula is : Cash inflows for the investment
total cash out period ( and not beyond)
Payback =___________  Does not c o n s i d e r
Period average per period cash in profitability

2. Internal Rate of IRR is the discount rate which equates the A project should only be accepted if its IRR is  IRR does not consider cost of
Return (IRR) present value of the future cash flows of an NOT less the target internal rate of return. capital
investment with the initial investment . It is When comparing two or more mutually  Cannot be used to compare
the discount rate at which the net present exclusive projects, the project having highest projects of different duration.
value of an investment becomes zero. value of IRR should be accepted.

3. N e t present value It is a numerical calculation that shows the Positive NPV: the project meets the  Investment with the same NPV
present value of an investment based on minimum desired rate of return and is may have different project lives
expected income from that investment in eligible for further consideration. and different salvage values
the future years minus the cost of the Negative NPV: project is rejected. If used to  Investment with the same NPV
project. compare projects, the higher NPV the better. may have different cash flows
The formula is :  Assumption of the unknown
FV future interest rates
PV= ______  Assumption of payment at the
(1+r )n end of the period which is not
always the case
 Models Definition Interpretation Limitations
4. Benefit-cost ratio It is the ration of the Project is selected if PI > 1;  Profitability index can
present value of cash otherwise rejected. be used only to choose
inflows, at t required rate If ,more than one project is projects under simple,
of return, to the initial cash involved, the project with one-period, capital
outflow of the investment. the greatest PI is selected constraint situation.
Also known as the from among those with
Profitability index. PI>1.  Does not work when
any other constraint is
The formula is: imposed, or when
PV in
BCR= ________
mutually exclusive
PV out projects, or dependent
projects are being
considered.
 Project Portfolio Management (PPM)
Project portfolio Management is a set of business practices and systematic process of selecting, supporting and
managing a firm’s sets of projects as a strategic portfolio based on cost, benefits and use of resources ensuring the
alignment of programs and projects with organizational objectives. For this reason , it is an important components of
strategic project management. There are key players who perform delicate responsibilities in project portfolio management.

Business Unit/ Sponsor Project Manager Project Portfolio Manager Executive Team
Any organizational constituent Individual with general Manager with responsibility for Choose corporate officers who
who needs or uses a fraction of responsibility for victorious the project portfolio. Usually direct and offer inputs to the
the budget for the intention of planning and execution of a assisted by a team. Team may be PPM process.
accomplishing projects. project. comprised of directors of the
business areas.

Each business unit names Project managers work directly The project portfolio manager The executive team gives policy
projects, aids project managers with business units/ sponsors to ascertains the rules, and inputs for the process,
in building business cases for afford good data for the procedures for creating portfolio containing weights for trading
rationalizing projects, and portfolio management process. decisions. The portfolio manager off diverse types of project
defends its project and project Project managers are studies project and portfolios benefits. The team places
portfolio. The business unit is responsible for making certain suggested by business units and targets endorses the budget and
liable for offering quality that endorsed projects carry out commend the overall project project portfolios, and
assurance for data connected to according to plan. portfolio. guarantees that portfolio
its projects decisions are implemented.
 The three phases of the PPM cycle are preparation , execution, and performance management.
1. Preparation – A calendar is created and responsibilities are delegated. Corporate executives set high-level strategy. The
executive team institutes monetary and performance objectives for every business unknit and presents rules and
timetable for carrying out the budgeting progression.
2. Execution- Within each business unit, projects are named, categorized, and properly assembled into groups. Project
solution options are investigated. Decision units every project are labeled such as go vs. no-go, alternative project
solutions, funding level alternatives and extents for the favored project solution.
3. Performance Management – the success of the project portfolio is examined and supervised by a
performance management plan. The performance management plan spells out project performance markers
that permit contrasting predicted and real performance, aside from observing and reporting schedules.