Project Initiation

Most. Sadia Akter

Lecturer
Department of Management Information Systems,
Faculty of Business Studies
University of Dhaka
Project Management

2-2
 Chapter 2

Strategic
Management and
Project Selection
Poor Project Results
• Organizations spend $100 billion per year on
creating competitive strategies
• 90% fail due to poor project execution
• Other poor results:
• < 50% strategically projects successful
• >25% lacked sponsor and detailed implementation
process
• 40% had adequately skilled personnel
• Only 20% prioritized hiring skilled staff
How To Improve
• Projects, programs, and project portfolios
• The best firms have:
• Top management involvement
• Get the most feedback
• Dedicate the most resources
• Have the most robust processes
• Implementation is the critical skill in strategic and
competitive success

5
Challenges in Project Management
• Triple Constraint, but also:
• Meeting the strategic goals
• Linking the strategic elements with tactical elements
• Streamlining decision making
• Increase efficiencies
• Better align with organizational goals
• Coping with ambiguity and complexity
• Keeping up with technology
• Coordinating interdependent systems

6
Complex Strategic Project Problems
• Agency Theory
• Governance Theory
• Both of these theories embedded in
organizational project management (OPM)

7
OPM
• Developed as a framework for executing
strategies through projects
• Combines the systems of portfolio, program, and
project management
• Incorporated into PMI’s OPM Maturity Model

8
Governance Structure For Strategic
Projects

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Business Case
• Presented to a funding entity
• Includes
• Monetary cost
• Benefits
• Nonmonetary factors
• Strategic justification
• Expected behavioral impacts
• Increases in efficiency
• Service improvements
• Etc.

Copyright ©2018 John Wiley & Son, Inc. 10

Project Selection Models

• Project selection…
• Evaluating
• Choosing
• Implementing
• Same process as other business decisions
• Project selection is critical to long-term org survival

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Types of Project Selection
Models
• Nonnumeric models
• Numeric models

• These can be used simultaneously

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Nonnumeric Models

• Models that do not return a numeric value for a

project to be compared with other projects
• These are really not “models” but rather
justifications for projects
• Just because they are not true models does not
make them all “bad”

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Types of Nonnumeric Models
(Slide 1 of 2)

• Sacred Cow
• Often suggested by top management
• Maintained until completion or boss terminates it
• Operating Necessity
• A project that is required in order to protect lives or
property or to keep the company in operation
• Competitive Necessity
• A project that is required in order to maintain the
company’s position in the marketplace

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Types of Nonnumeric Models
(Slide 2 of 2)

• Product Line Extension

• Project evaluated on fit with existing product line, fills a
gap, strengthens a weak link, or extends a line
• Comparative Benefit
• Projects are subjectively rank ordered based on their
perceived benefit to the company
• Sustainability
• Focusing on long-term profitability rather than short-run
payoff

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Q-Sort Method

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Numeric Models

• Models that return a numeric value for a project

that can be easily compared with other projects
• Major types
• Profit/profitability
• Real Options
• Scoring
• Window-of-opportunity analysis
• Discovery-driven planning

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Numeric Models:
Profit/Profitability
• Models that look at costs and revenues
• Payback period
• Discounted cash flow (NPV)

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Payback Period

• The length of time until the original investment has

been recouped by the project
• A shorter payback period is better

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Payback Period Example

Project Cost
Payback Period 
Annual Cash Flow

$100,000
Payback Period  4
$25,000

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Payback Period Drawbacks

• Does not consider time value of money

• More difficult to use when cash flows change over
time
• Less meaningful for longer periods of time (due to
time value of money)

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Discounted Cash Flow (Slide 1 of 2)

• The value of a stream of cash inflows and outflows in

today’s dollars
• Also know as discounted cash flow or just
discounting
• Widely used to evaluate projects
• Includes the time value of money
• Includes all inflows and outflows, not just the ones
through payback point

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Discounted Cash Flow (Slide 2 of 2)

• Requires a percentage to use to reduce future cash

flows
• This is known as the discount rate
• The discount rate may also be known as a hurdle rate
or cutoff rate
• There will usually be one overall discount rate for the
company

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NPV Formula

n
Ft
NPV (project)  A0  
(11+ k + p )
t
t
t 1 t

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NPV Formula Terms

A0 Initial cash investment

Ft Cash flow in time period t (negative for
outflows)
k The discount rate
pt Predicted rate of inflation during period t
t The number of years of life
• A higher NPV is better
• Higher the discount rate lower the NPV

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NPV Example

8
$25,000
NPV (project)  $100,000  
t 1 1  0.15  0.03
t

$1,939

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Numeric Models: Real Options

• Positions the organization to capitalize on future

opportunities
• Utilized to reduce both technological and
commercial risk

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Numeric Models: Scoring

• Mimics how managers actually evaluate investments

• Uses multiple criteria
• Can utilize both monetary and qualitative factors
• Weighted factor scoring model

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Weighted Factor Scoring Model

• Each factor is weighted relative to its importance

• Weighting allows important factors to stand out
• A good way to include nonnumeric data in the
analysis
• Factors need to sum to one
• All weights must be set up, so higher values mean
more desirable
• Small differences in totals are not meaningful

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Weighted Factor Model
Example

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Advantages of Scoring Models

1. Allow multiple criteria

2. Structurally simple
3. Intuitive and reflect actual thinking process
4. Direct reflection of managerial policy
5. Easily altered
6. Allow for more important factors
7. Allow easy sensitivity analysis

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Disadvantages of Scoring
Models
1. Relative measure
2. Linear in form
3. Can have large number of criteria
4. Unweighted models assume equal importance

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 Numeric Models:
Window-of-Opportunity
Analysis
• A process where the cost, time, and performance
specs are defined that must be met before any R&D
work

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Numeric Models:
Discovery-Driven Planning
• Similar to W-o-O
• Funds enough of the project to determine if the
initial assumptions were accurate
• Used to learn more about the project, rather than
necessarily implement it

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Choosing a Project Selection
Model
• Weighted scoring models favored:
• Allow multiple objectives to be considered
• Easily adapted
• Not biased toward short-run like the profitability models

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 Risk Considerations in Project
Selection
• Both costs and benefits are uncertain
• Benefits are more uncertain
• There are many ways of dealing with risk
• Can make estimates about the probability of
outcomes
• Subjective probabilities
• Uncertainty about:
• Timing
• What will be accomplished?
• Side effects
• Pro forma documents

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Project Portfolio Management
(PPM)
• Organizations should maintain portfolios of projects
• Links projects directly to the goals and strategy of
the organization
• Means for monitoring and controlling projects

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Symptoms of a Misaligned
Portfolio
• More projects
• Inconsistent determination of benefits
• Projects that don’t contribute to the strategy
• Competing projects
• Costs exceed benefits
• No risk analysis of projects
• Lack of tracking against the plan
• No client for project

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Purpose of Project Portfolio
Process (Slide 1 of 2)
• Identify nonprojects
• Prioritize list of projects
• Limit number of projects
• Identify the real options for each project
• Identify projects with good fit
• Identify co-dependent projects

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Purpose of Project Portfolio
Process (Slide 2 of 2)
• Eliminate risky projects
• Eliminate projects that skip the formal selection
process
• Keep from overloading the organization
• To balance the resources with needs
• To balance returns
• To balance short-, medium-, and long-term returns

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Project Portfolio Process Steps

1. Establish a project council

2. Identify project categories and criteria
3. Collect project 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
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Step 1: Establish a Project
Council
• Senior management
• The project managers of major projects
• The head of the Project Management Office
• Particularly relevant general managers
• Those who can identify key opportunities and risks
facing the organization
• Anyone who can derail the PPP later on

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Step 2: Identify Project
Categories and Criteria
• Derivate projects
• Platform projects
• Breakthrough projects
• R&D projects

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Step 3: Collect Project Data

• Assemble the data

• Document assumptions
• Screen out weaker projects
• The fewer projects that need to be compared and
analyzed, the easier the work of the council

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Step 4: Assess Resource
Availability
• Assess both internal and external resources
• Assess labor conservatively
• Timing is particularly important

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Step 5: Reduce the Project and
Criteria Set
• Organization’s goals • Use strengths
• Have competence • Synergistic
• Market for offering • Dominated by
another
• How risky the project is
• Has slipped in
• Potential partner
desirability
• Right resources
• Good fit

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Step 6: Prioritize the Projects
Within Categories
• Apply the scores and criterion weights
• Consider in terms of benefits first and resource costs
second
• Summarize the returns from the projects

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 Step 7: Select the Projects to
be Funded and Held in
Reserve
• Determine the mix of projects across the categories
• Leave some resources free for new opportunities
• Allocate the categorized projects in rank order

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Step 8: Implement the Process

• Communicate results
• Repeat regularly
• Improve process

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