Chapter 2

Strategic Management and Project

Selection
 Outline

 Introduction to project selection

 Models
 Criteria, limitations, types
 Non-numeric models
 Numeric models
 Project Portfolio Management (PPM)
 Intro
 Process
 Tools
 Proposals

2-2
 Introduction
 Project selection is the process of evaluating individual projects or groups
of projects and then choosing to implement some set of them so that the
objectives of the parent organization will be achieved
 Rarely a project manager is involved in project selection but it is important
to the success of the PM that he/she fully understands the parent
organization’s objectives in undertaking that project.
 The project manager who does not understand what a given project is
expected to contribute to the parent organization lacks the critical
information needed to manage the project in order to optimize its
contribution

2-3
 Project Selection Criteria and Models
 Project selection…
 Evaluating

 Choosing

 Implementing

 Project selection is usually based on models. The model allows us to strip away
almost all the reality from a problem, leaving only the relevant aspects of the
“real” situation for us to deal with. This process of carving away the unwanted
reality from the bones of a problem is called modeling the problem.

2-4
 Project Selection Criteria and Models
 When a firm chooses a project selection model, the following
criteria, based on Souder (1973), are the most important
 Realism

 Capability

 Flexibility

 Ease of use

 Cost

 Easy computerization

2-5
 Types of Project Selection Models
 There are two basic types of project selection models, numeric and non-numeric
 Nonnumeric models, as the name implies, do not use numbers as inputs. Numeric
models do, but the measured criteria may be objective or subjective.
 Before examining specific kinds of models let us consider the two critically important,
but often overlooked, facts.
• Models do not make decisions—people do. The manager, not the model, bears responsibility
for the decision. The manager may “delegate” the task of making the decision to a model, but
the responsibility cannot be abdicated.
• All models, however sophisticated, are only partial representations of the reality they are
meant to reflect. Reality is far too complex for us to capture more than a small fraction of it in
any model. Therefore, no model can yield an optimal decision except within its own, possibly
inadequate, framework.

2-6
 Types of Project Selection Models
 Of the two basic types of selection models (numeric and non-
numeric), non-numeric models are older and simpler and have
only a few subtypes to consider. We examine them first.
 Nonnumeric Models

 The Sacred Cow:- In this case the project is suggested by a

senior and powerful official in the organization. This project is
“sacred” in the sense that it will be maintained until successfully
concluded, or until the boss, personally, recognizes the idea as a
failure and terminates it.

2-7
 Types of Project Selection Models
 The Operating Necessity:- If the project is required in order to keep the
system operating, the primary question becomes: Is the system worth
saving at the estimated cost of the project? If the answer is yes, the project
will be funded.
 The Competitive Necessity:- A project that is required in order to
maintain the company’s position in the marketplace
 Nokia CEO Stephen Elop ended his speech saying, “we didn't do
anything wrong, but somehow, we lost.”
 Product Line Extension:- In this case, a project to develop and distribute
new products would be judged on the degree to which it fits the firm’s
existing product line, fills a gap, strengthens a weak link, or extends the
line in a new, desirable direction.
2-8
 Types of Project Selection Models
 Comparative Benefit:- For this situation, assume that an organization
has many projects to consider, perhaps several dozen. Senior
management would like to select a subset of the projects that would most
benefit the firm, but the projects do not seem to be easily comparable.
Projects are prioritized through scores and ranks and the most suitable
group of projects is selected.
 Sustainability:- More and more organizations are building sustainability
into the set of criteria that must be met for proposed projects to be
selected for funding. Sustainability focuses on long-run profitability
rather than a short-run payoff.
 Customers don’t want to buy products from child or “slave” labor.

2-9
 Types of Project Selection Models
 Numeric Models: Profit/Profitability
 A large majority of all firms using project evaluation and selection models use
profitability as the sole measure of acceptability. We will consider these models first,
and then discuss more comprehensive models.
 Payback Period:- The payback period for a project is the initial fixed investment in
the project divided by the estimated annual net cash inflows from the project. The
ratio of these quantities is the number of years required for the project to repay its
initial fixed investment. For example, assume a project costs $100,000 to
implement and has annual net cash inflows of $25,000. Then
Payback period= $100,000/$25,000 =4 years
 This method assumes that the cash inflows will persist at least long enough to pay
back the investment, and it ignores any cash inflows beyond the payback period.
 The faster the investment is recovered, the less the project risk
2-10
Types of Project Selection Models

2-11
Types of Project Selection Models

2-12
 Types of Project Selection Models
 Numeric Models: Profit/Profitability (cont..)
 Internal Rate of Return:- If we have a set of expected cash
inflows and cash outflows, the internal rate of return is the
discount rate that equates to the present values of the two sets
of flows. The value of the internal rate of return (k) is found
by trial and error.

2-13
 Types of Project Selection Models
 Numeric Models: Profit/Profitability (cont..)
 Profitability Index:- Also known as the benefit–cost ratio, the
profitability index is the net present value of all future
expected cash flows divided by the initial cash investment.
(Some firms do not discount the cash flows in making this
calculation.) If this ratio is greater than 1.0, the project may be
accepted.
 Other profitability Models:- There are a great many variations of
the models just described

2-14
Example
Example (Continue)
 Types of Project Selection Models
 Numeric Models: Scoring
 In an attempt to overcome some of the
disadvantages of profitability models,
particularly their focus on a single decision
criterion, a number of evaluation/selection
models that use multiple criteria to evaluate a
project have been developed.
 Unweighted 0–1 Factor Model:- A set of
relevant factors is selected by management and
then usually listed in a preprinted form. One or
more raters score the project on each factor,
depending on whether or not it qualifies for an
individual criterion.
 Figure 2-2 shows an example of the rating sheet
for an unweighted, 0–1 factor model. 2-17
 Types of Project Selection Models
 Numeric Models: Scoring
 Unweighted 0–1 Factor Model (Cont…):-
 The columns of Figure 2-2 are summed and
those projects with a sufficient number of
qualifying factors may be selected
 The main advantage of such a model is that it
uses several criteria in the decision process.
 The major disadvantages are that it assumes
all criteria are of equal importance and it
allows for no gradation of the degree to
which a specific project meets the various
criteria.

2-18
 Types of Project Selection Models
 Numeric Models: Scoring
 Unweighted Factor Scoring Model:- the disadvantages of the previous
method are handled by this one.
 The x marks in Figure 2-2. would be replaced by numbers. Often a five-
point scale is used, where 5 is very good, 4 is good, 3 is fair, 2 is poor, and
1 is very poor. Any other scale is also applicable
 The second column of Figure 2-2 would not be needed. The column of
scores is summed, and those projects with a total score exceeding some
critical value are selected.
 However, the criticism that the criteria are all assumed to be of equal
importance still holds.

2-19
 Types of Project Selection Models
 Numeric Models: Scoring  The quality of the final product is:-
 Unweighted Factor Scoring Model:-
Consider the following two simple Score Performance Level
examples. Using the criterion “ estimated 5 Significantly and visibly improved
annual profits in dollars,” we might 4 Significantly improved, but not visible to
construct the following scale: the buyer
Score Performance Level
3 Not significantly changed
5 Above $1,100,000
2 Significantly lowered, but not visible to the
4 $750,001 to $1,100,000 buyer
3 $500,001 to $750,000 1 Significantly and visibly lowered
2 $200,000 to $500,000
1 Less than $200,000
 This scale is an example of a scoring
model
 For the criterion “ no decrease in quality of
the final product” can be scaled on a 5-point
scale as follows 2-20
Types of Project Selection Models

2-21
Types of Project Selection Models

An Example of a weighted scoring model

2-22
 Types of Project Selection Models

 Problem 6. Use a weighted score model

to choose between three projects (A, B,
C) for updating an important internal
process The relative weights for each
criterion are shown in the following
table as are the scores for each project
on each criterion. A score of 1
represents unfavorable, 2 is satisfactory,
and 3 is favorable.

2-23
 Types of Project Selection Models

 Problem 6. Solution
 In this example, Project C has the
highest score, so the decision-maker
would regard it as the best option.
 Note:- it is not necessary for the weights
to sum to 100. It is only necessary that
the model use the same scoring
categories to evaluate each option.

2-24
 Types of Project Selection Models

Advantages of Scoring Techniques Disadvantages of the Scoring Techniques

 Allow multiple criteria  Unweighted models assume
 Structurally simple equal importance
 Direct reflection of managerial  Relative measure
policy  Consider criteria independent
 Easily altered  Can have large number of
 Allow for more important criteria
factors
 Allow easy sensitivity analysis
2-25
 Choosing a Project Selection Model
 We strongly favor weighted scoring models for three fundamental
reasons. First, they allow the multiple objectives of all
organizations to be reflected in the important decision about
which projects will be supported and which will be rejected.
Second, scoring models are easily adapted to changes in
managerial philosophy or changes in the environment. Third,
they do not suffer from the bias toward the short run that is
inherent in profitability models that discount future cash flows.

2-26
 THE PROJECT PORTFOLIO PROCESS (PPP)
 Organizations typically maintain a portfolio of projects, and trying to keep a
proper balance among this portfolio is the real task of upper management.
 With limited resources, management must choose between long-term and
short-term projects, safe and risky projects manufacturing and marketing
projects, and so on.
 To help choose between the myriad of project proposals, in competition
with ongoing projects as well as each other, management needs some
measures to evaluate each of the projects, and those measures are
commonly related to the organization’s mission, goals, and strategy.

2-27
 THE PROJECT PORTFOLIO PROCESS (PPP)
 Symptoms of a Misaligned Portfolio (Deloitte Consulting)
 Many more projects than management expected
 Inconsistent determination of benefits, including double counting
 Projects that don’t contribute to the strategy
 Competing projects; no cross-comparison of projects
 Costs exceed benefits
 No risk analysis of projects
 Lack of tracking against the plan, at least quarterly
 No identified “client” for many projects

2-28
 THE PROJECT PORTFOLIO PROCESS (PPP)
 Project Portfolio Process Steps
1. Establish a project council

2. Identify project categories and criteria

3. Collect projects’ data

4. Assess resource availability

5. Reduce the Project and Criteria Set

6. Prioritize the projects within categories

7. Select the projects to be funded and held in reserve

8. Implement the process

2-29
 THE PROJECT PORTFOLIO PROCESS (PPP)
 Step 1: Establish a Project Council
 The purpose of the project council is to establish and articulate a strategic direction
for those projects spanning the internal or external boundaries of the organization.
 The council will also be responsible for allocating funds to those projects that support
the organization’s goals and controlling the allocation of resources and skills to the
projects
 In addition to senior management, others who should be members of the project
 the project managers of major projects
 the head of the Project Management Office, if one exists
 particularly relevant general managers
 those who can identify key opportunities and risks facing the organization
 anyone who can derail the progress of the PPP later on in the process

2-30
 THE PROJECT PORTFOLIO PROCESS (PPP)

Step 2: Identify Project Categories and Criteria

In this step, various project categories are identified so the mix of
projects funded by the organization will be spread appropriately across
those areas making major contributions to the organization’s goals.
In addition, within each category, criteria are established to discriminate
between very good and even better projects.
The criteria are also weighted to reflect their relative importance.
Identifying separate categories not only facilitates the achievement of
multiple organizational goals but also keeps projects from competing with
each other on inappropriate categories
 THE PROJECT PORTFOLIO PROCESS (PPP)

Step 2: Identify Project Categories and Criteria Figure 2-3:- Aggregate Project Plan
Wheelwright et al. (1992) have developed a matrix called (Wheelwright et al. (1992)
the aggregate project plan illustrating these changes, as
shown in Figure 2-3. Based on the extent of product
change and process change, they identified four separate
categories of projects:
 Derivate projects:- These are projects with
objectives or deliverables that are only
incrementally different in both product and process
from existing offerings. They are often meant to
replace current offerings or add an extension to
current offerings
 Platform projects:- The planned outputs of these
projects represent major departures from existing
offerings in terms of either the product/service itself
or the process used to make and deliver it, or both
 THE PROJECT PORTFOLIO PROCESS (PPP)

Step 2: Identify Project Categories and Figure 2-3:- Aggregate Project Plan
Criteria (Wheelwright et al. (1992)

 Breakthrough projects:-Breakthrough
projects typically involve a newer
technology than platform projects.
Examples here include the use of fiber-
optic cables for data transmission, cash-
balance pension plans, and hybrid
gasoline-electric automobiles.
 R&D projects:- These projects are “blue-sky,”
visionary endeavors oriented toward using
newly developed technologies, or existing
technologies in a new manner
 THE PROJECT PORTFOLIO PROCESS (PPP)

Step 2: Identify Project Categories and Figure 2-3:- Aggregate Project Plan
Criteria (Wheelwright et al. (1992)

The size of the projects plotted on the array

indicates the size/resource needs of the project
and the shape may indicate another aspect of the
project, e.g., internal/external,
long/medium/short term, or whatever aspect
needs to be shown. The numbers indicate the
order, or time frame, in which the projects are to
be (or were) implemented, separated by category,
if desired
 THE PROJECT PORTFOLIO PROCESS (PPP)

Step 2: Identify Project Categories and Criteria Figure 2-3:- Aggregate Project Plan
(Wheelwright et al. (1992)
Next, the council should develop separate criteria and
cost ranges for each category that determine those
projects that will support the organizational strategy
and goals. Example criteria might include, but are not
limited to,:-
 alignment with the organization’s goals/strategy

 riskiness of the project, financial return, probability

of success, and so on
Lastly, the management should develop scales and
weights for each criterion similar to the weighted
factor scoring model such that projects are prioritized
according to tier overall scores, and the projects with the
highest scores are deemed more important
 THE PROJECT PORTFOLIO PROCESS (PPP)
 Step 3: Collect Project Data
 For each existing and proposed project, assemble the data appropriate to
that category’s criteria.
 Then document any assumptions made so that they can be checked in the
future as the project progresses
 Identify any projects that can be deferred to a later time period
 Next, use the criteria score limits to screen out the weaker projects
 Also, screen in any projects that do not require deliberation such as projects
mandated by regulations or laws, projects that are operating or competitive
necessities
 The fewer projects that need to be compared and analyzed, the easier the
work of the council
2-36
 THE PROJECT PORTFOLIO PROCESS (PPP)

 Step 4: Assess Resource Availability

 Next, assess the availability of both internal and external resources, by
type, department, and timing.
 Timing is particularly important since project resource needs by type
typically vary up to 100 percent over the life cycle of projects.
 Needing a normally plentiful resource at the same moment it is fully
utilized elsewhere may doom an otherwise promising project
 Eventually, the council will be trying to balance aggregate project
resource needs over future periods with resource availabilities so timing
is as important as the amount of maximum demand and availability

2-37
 THE PROJECT PORTFOLIO PROCESS (PPP)

Step 5: Reduce the Project and Criteria Set

In this step, multiple screens are employed to try to narrow down the number of
competing projects. As noted earlier, the first screen is each project’s support of the
organization’s goals. Other possible screens might be criteria such as:
Whether the required competence exists in the organization

Whether there is a market for the offering

How profitable the offering is likely to be

How risky the project is

If there is a potential partner to help with the project

If the right resources are available at the right times

If the project is a good technological/knowledge fit with the organization

2-38
 THE PROJECT PORTFOLIO PROCESS (PPP)

Step 5: Reduce the Project and Criteria Set

In this step, multiple screens are employed to try to narrow down the number of competing
projects. As noted earlier, the first screen is each project’s support of the organization’s goals.
Other possible screens might be criteria such as: (Cont..)
If the project uses the organization’s strengths, or depends on its weaknesses

If the project is synergistic with other important projects

If the project is dominated by another existing or proposed project

If the project has slipped in its desirability since the last evaluation

2-39
 THE PROJECT PORTFOLIO PROCESS (PPP)

 Step 6: Prioritize the Projects Within Categories

 Apply the scores and criterion weights to rank the projects within each
category.
 It is also possible at this time for the council to summarize the “returns”
from the projects to the organization. However, this should be done by
category, not for each project individually since different projects are
offering different packages of benefits that are not comparable.
 For example, R & D projects will not have the expected monetary return
of derivative projects yet it would be foolish to eliminate them simply
because they do not measure up on this (irrelevant, for this category)
criterion.
2-40
 THE PROJECT PORTFOLIO PROCESS (PPP)

 Step 7: Select the Projects to be Funded and Held in the Reserve

 The first task in this step is an important one: determining the mix of
projects across the various categories (and aspects, if used) and time
periods
 Next, be sure to leave some percent (often 10–15 percent) of the
organization’s resource capacity free for new opportunities, crises in
existing projects, errors in estimates, and so on
 Then allocate the categorized projects in rank order to the categories
according to the mix desired
 Overall, the focus should be on committing to fewer projects but with
sufficient funding to allow project completion
2-41
 THE PROJECT PORTFOLIO PROCESS (PPP)

 Step 7: Select the Projects to be Funded and

Held in the Reserve Figure 2-4 Plan of Record.
 The result of this step (and most of the project
portfolio process) is illustrated in the Plan of
Record shown in Figure 2-4.
 Here, the mix across categories is listed, the
priorities and resource needs of each project
are given, the timing (schedule) of each
project over the PPP cycle (6 months assumed
here) is shown (to match resource availability),
the out-plan projects, if any, are shown, and
the total resource needs and availabilities are
listed

2-42
 THE PROJECT PORTFOLIO PROCESS (PPP)
 Step 8: Implement the Process
 The first task in this final step is to make the results of the PPP widely
known, including the documented reasons for project cancellations,
deferrals, and non-selection as was mentioned earlier.
 Top management must now make their commitment to this project
portfolio process totally clear by supporting the process and the results
 Senior management must fully fund the selected projects.

2-43
 Techniques/Softwares
 Delphi method
 Analytical Hierachy Process (AHP)

 Analytical Network Process (ANP)

Softwares
 Expert Choice

 Super Decisions

2-44