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Copyright 2012 John Wiley & Sons, Inc.
Part I
Project Initiation
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Project Management
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Copyright 2012 John Wiley & Sons, Inc.
Chapter 2
Strategic Management and Project Selection
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The PMBOK Five Process Groups
InitiatingPlanningExecutingMonitoring & ControllingClosing
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The PMBOK Nine Knowledge Areas (put Management after any)
Integration Scope Time Cost Quality Communications Human Resources Risk Procurement
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Definitions
Program: a group of related projects requiring coordinated management because of shared resources
Portfolio: a group of programs related by common strategic goals
the distinction may be blurry
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Problems With Multiple Projects
Delays in one project delays others Inefficient use of resources Bottlenecks in resource availability
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Project Management Maturity
Project management maturity refers to the mastery of skills required to manage projects competently
Number of ways to measureMost organizations do not do well
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Types of Companies
Companies considering projects fall into two broad categories:
– Companies whose core business is completing projects
– Companies whose core business is something else
They can also be broken down as:– Companies looking at projects to do for others– Companies looking at projects to do for themselves
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Types of Nonnumeric Models
Sacred Cow– A project, often suggested by the top management,
that has taken on a life of its own
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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Numeric Models
Models that return a numeric value for a project that can be easily compared with other projects
Two major categories:– Profit/profitability– Scoring
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Profit/Profitability Models
Models that look at costs and revenues– Payback period– Discounted cash flow (NPV)– Internal rate of return (IRR)– Profitability index
NPV and IRR are the more common methods
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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
4000,25$
000,100$PeriodPayback
FlowCash Annual
CostProject PeriodPayback
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Payback Period Drawbacks
Does not consider time value of money More difficult to use when cash flows
change over time Less meaningful for longer periods of
time (due to time value of money)
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Discounted Cash Flow
The value of a stream of cash inflows and outflows in today’s dollars
Also known as Net Present Value or just discounting
Widely used to evaluate projects Includes the time value of money Includes all inflows and outflows, not just
the ones through payback point
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Discounted Cash Flow Continued
Requires a percentage to use to reduce future cash flows– This is known as the discount rate
The discount rate may also be known as a hurdle rate or cutoff rate
There will usually be one overall discount rate for the company
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NPV Formula
NPV (project) 0
1 1
nt
tt
FA
k
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NPV Formula Terms
A0 Initial cash investment (usually < 0)
Ft Cash flow in time period t (negative foroutflows)
k The discount rate
t The number of years of lifeA higher NPV is betterHigher the discount rate lower the NPVExcel function NPV starts at Y1 not Y0
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NPV Example
939,1$
03.015.01
000,25$000,100$ (project) NPV
8
1
t
t
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Internal Rate of Return [IRR]
The discount rate (k) that causes the NPV to be equal to zero
The higher the IRR, the better– While it is technically possible for a series to
have multiple IRR’s, this is not a practical issue
Finding the IRR requires a financial calculator or computer
In Excel, use goal seek or IRR function.
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Profitability Index
a k a Benefit cost ratioNPV divided by initial cash investmentRatios greater than 1.0 are goodEasy to use and understandBased on accounting data and forecastsFamiliar and well understoodGives a go/no-go indication
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Scoring Models
Unweighted 0–1 factor modelUnweighted factor modelWeighted factor model
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Unweighted 0-1 Factor Model
Factors selected– Listed on a preprinted form
Raters score the project on each factorEach project gets a total scoreMain advantage is that the model uses
multiple criteriaMajor disadvantages are that it assumes
all criteria are of equal importance
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Unweighted 0-1 Factor Model Example
Figure 2-2
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Unweighted Factor Scoring Model
Replaces X’s with factor score– Typically a 1-5 scale
Column of scores is summedProjects with high scores are selected
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Unweighted Weighted Factor Model
Each factor is weighted the sameLess important factors are weighted the
same as important onesEasy to computeJust total or average the scores
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Weighted Factor 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
Figure B Page 60
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Advantages of Scoring Models
Allow multiple criteria Structurally simple Direct reflection of managerial policy Easily altered Allow for more important factors Allow easy sensitivity analysis
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Disadvantages of Scoring Models
Relative measure Linear in form Can have large number of criteria Unweighted models assume equal
importance
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The Project Portfolio Process (PPP)
Links projects directly to the goals and strategy of the organization
Means for monitoring and controlling projects
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Purpose of Project Portfolio Process
Identify nonprojectsPrioritize list of projectsLimit 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 Continued
Eliminate risky projectsEliminate projects that skip the formal
selection processKeep from overloading the organizationTo balance the resources with needsTo balance returnsTo balance short-, medium-, and long-
term returns
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Project Portfolio Process Steps
1. Establish a project council2. Identify project categories and criteria3. Collect project data4. Assess resource availability5. Reduce the project and criteria set6. Prioritize the projects within categories7. Select the projects to be funded and held in
reserve8. Implement the process
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Step 1: Establish a Project Council
Senior managementThe project managers of major projectsThe head of the Project Management
OfficeParticularly relevant general managersThose who can identify key opportunities
and risks facing the organizationAnyone who can derail the PPP later on
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Step 2: Identify Project Categories and Criteria
Derivative projects– Projects that are only incrementally different from previous
efforts.
Platform projects– Projects that impact organization outputs or the processes
that create them.
Breakthrough projects– Projects that involve implementing new, sometimes
“disruptive” technology.
R&D projects– Projects used to acquire new knowledge or create new
technology.
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Step 3: Collect Project Data
Assemble the dataDocument assumptionsScreen out weaker projectsThe 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 conservativelyTiming is particularly important
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Step 5: Reduce the Project and Criteria Set
Organization’s goals Have competence Market for offering How risky the project is Potential partner Right resources Good fit
Use strengths Synergistic Dominated by
another Has slipped in
desirability
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Step 6: Prioritize the Projects Within Categories
Apply the scores and criterion weightsConsider in terms of benefits first and
resource costs secondSummarize 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 resultsRepeat regularly Improve process
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Project Proposals
The project proposal is essentially a project bid
Putting together a project proposal requires a detailed analysis of the project
Project proposals can take weeks or months to complete
A more detailed analysis may result in not bidding on the project
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Project Proposal Contents
Cover letterExecutive summaryThe technical approachThe implementation planThe plan for logistic support and
administrationPast experience