CHAPTER 2

STRATEGIC MANAGEMENT AND PROJECT SELECTION

Strategy is making a decision on how the organization will compete with 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 a 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.

Typically, an organization starts with unplanned project management practices, with no common language and methods to undertake a
project. As the firm becomes more mature, it establishes common practices for adoption, begins to train pool of project management professionals, set
up procedures and processes for launching and controlling its projects among others. Lastly, at the last stage the organization does not only make
project management a significant part of its operations but explores ways to make continuous improvements of its techniques and procedures.

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

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.

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 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 Non Numeric Models of Project Selection Models

MODELS DEFINITION SAMPLE APPLICATION

1. Sacred Cow It is a project recommended by a senior and influential
official in the organization. "Sacred" in the sense that it will
be maintained until successfully concluded, or until the boss,
personally, identifies the idea as a failure and terminates it.
✓ undeveloped idea for a new product, for the
development of a new market, for the design and
adoption of a global database and information system,
or for some other project requiring an investment of
the firm's resources.

2. The Operating The project is obligatory in order to keep the system ✓a protective dike if a flood is threatening the plant of
necessity operating: does not necessitate a great extent of formal a factory
evaluation.
✓online library search system

3. Competitive necessity The choice to embark on the project is founded on a desire ✓ restructure undergraduate and graduate programs
to preserve the company's competitive position in the due to declining student enrollment and the need to
market. create stronger programs to attract students.

✓modernize manufactring facility

✓ get a computer numerically controlled machine to
replace the old milling machine.

4. Product line extension A project to develop and distribute new products evaluated ✓ the new Apple Ipod which also plays video
on the level to which it fits the firm's present product line,
fills a gap, strengthens a weak link, or extends the line in a
fresh, advantageous direction.

5. Comparative benefit Often used to select from a list of projects that are complex, ✓ selection of company cars.
model 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 It measures the time it will take to recover the A shorter payback period, the better. ● ignores the time value of money
project investment. ● assumes cash inflows for the
investment period (and not the
Payback period = Total cash out/Average per beyond)
period cash in ● does not consider profitability

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

3. Net Present It is a numerical calculation that shows a Positive NPV: the project meets ● investment with the same NPV
Value present value of an investment based on the minimum desired rate of return may have different project lives
expected income from that invested in the and is eligible for further and different salvage values.
future years minus the cost of the project. consideration. ● investment with the same NPV
may have different may have
The formula is: Negative NPV: project is rejected. different cash flows
If used to compare projects, the ● assumption of the unknown
PV= FV/(1+r)n higher NPV the better. future interest rates
● assumption of the payment at
the end of the period which is
not always the case.

4. Benefit cost ratio It is the ratio of the present value of cash
inflows, at the required rate of return, to the
initial cash outflow of the investment. Also
known as the Profitability index
The formula is:
BCR= PV in/PV out
Project is selected if the PI > 1;
otherwise rejected. If more than one
project is involved, the project with
the greatest PI is selected from
among those with PI > 1.
● profitability index can be used
only to choose projects under
simple, one-period, capital
constraint situation
● does not work when any other
constraint is imposed, or when
mutually exclusive 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 component of strategic project management. There are key players who perform delicate responsibilities in project portfolio
management (see Table 5).

Table 5 . Key Players and Responsibilities in Project Portfolio Management

Business Unit/ Sponsor Project Manager Project Portfolio Manager Executive Team

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

Business unit names projects, aids
project managers in building
business cases for rationalising
projects, and defend its project and
project portfolio. The business unit
is liable for the offering quality
assurance for data connected to its
projects.
Project managers work directly
with business units or sponsors to
afford good data for the portfolio
management process project
managers are responsible for
making certain that indoors
project carry out according to
plan.
The project portfolio manager
ascertains the rules, and procedures
for creating portfolio decisions. The
portfolio manager studies projects and
portfolio suggested by businesses
units and commend the overall project
portfolio.
The executive team gives policy
inputs for the process containing
weights for trading of diverse types
of projects benefit. The team places
targets endorses the budget and
project portfolio, and guarantees
that portfolio decisions are
implemented.

The three phases of the PPM cycle are preparation, execution, and performance management (see Figure 4).

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 unit and presents rules and a timetable for carrying out the
budgeting progression. With the help of the portfolio manager, the team sets up essential assumptions for assessment like value
weights, discount rates, and risk tolerance.

2. Execution – Within each business unit, projects are named, categorized, and properly assembled into groups. Project solution
options are investigated. Decision units for every project are labeled such as go vs. no-go, alternative project solutions, funding
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 level alternatives and extents for the favored project solution. Project descriptions are written, like timelines and resource
requirements. If project proposal templates are produced by the PPM software tool at this stage they are already done. Technical,
financial and risks evaluations are accomplished for approximation of the effects of each project or project grouping on the
attainment of corporate and business unit objectives. Projects within each business unit are prioritized with the aid of the tool,
project and portfolio values estimations. Based on the outcomes, project plans are modified. Business unit priorities are ascertained
and applied to provide priorities for the corporate-level and allocate resources across business units. A value prioritized budget is
instituted and spending approvals are decided.

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. Project deficits are examines, such as reasons, ways for correcting discrepancies,
and decisions for current investments. Lessons discovered are obtained and the PPM process is polished before the next budget
cycle.

A Business Project Proposal: The Technical Approach

The set of documents presented for assessment is called the project proposal. It could be concise or extensive in format. Attention to all
details of the proposal is suggested to amplify the likelihood of success for the project and to astonish promising investor/s.

The project proposal starts with a broad description of the problem to be solved or project to be done. A knowledgeable reader must understand
the accurate intention of the proposal, so adequate details must be presented. The general approach to solve the critical problem should be outlined
also. Special requirements of the client and proposed approaches of meeting them ought to be written down. All tests and inspection procedures must
be noted as well to guarantee performance, quality, reliability and compliance with specifications.

Estimates of the time needed, the cost and the materials used are placed in the implementation plan. Hours of labor and quantities of materials
employed are made known beside wage rates and unit material costs. A list of all equipment overhead and administrative costs are also included. In
order to ensure that resource constraints are followed personnel, equipment and resource usages are recorded on a periodical basis. Major milestones
and contingency plans are distinctively indicated. Any facility that may be crucial, load charts are planned to make certain that facility when needed is
obtainable.

A description of the capability of the proposal writer to furnish the usual facility equipment and skills required during every project is written.
Besides, occasional required capabilities that will provide a “touch of class” must be indicated too Considering all details in every aspects of the project
planning enhances the chance of a successful project. It is vital that a section on how to administer the project is full explained in the proposal. The
proper time submission of deliverables like progress report, budget report, audit report and evaluation are covered plus description of the final document
to be prepared for the consumption of users of the proposed deliverables. How change orders will be handled and their cost estimations should be
addressed in the administrative section. Simple change/s may cause conflict between client and the organization doing the project, so it must be cleared
even in the beginning. The organization doing the project must not mislead the potential client that it is easy to introduce change/s even minor ones,
during the process of project implementation.

In order to make the proposal strong, a description of the past experiences of the proposing team has to be included. It is composed of the list
of key project personnel with their corresponding titles and qualifications. A full resume for each personnel must be attached to the proposal especially
for outside clients. The intention of this document is to persuade a likely financer of the project that the proposal and the proposing group are worthy
of support.

Here is the suggested outline for a business project proposal:

Cover Letter

1. Write a cover letter as an important marketing instrument

2. Make clear primary nature and general benefits of project
3. Using simple technical language

Executive summary- a one to two-pages synopsis of the project Nature of technical problem to be solved

1. Broad description of problem to be resolved or project to be done

2. Main subsystems of problem or project

How to approach solution of technical problem

1. Methodology of resolving the problem

2. Unusual client requirements
3. Test and inspection procedures

Plan for implementation of project

1. Approximates of time, cost and materials for each subsystem and the whole project
2. Sets up major milestones to break project into phases
3. Record equipment, overhead and administrative cost.
4. Create contingency plans like slack time

Plan for logistic support and administration

1. Control over subcontractors

2. Nature and Timing of all reports (progress, budget, audits)
3. Change management
4. Termination Procedures
5. “touch of class” capabilities (artist’s renderings, meeting facilities, video conferencing, computer graphics)

Description and past experience of project team

1. List all key project personnel with titles and qualifications
2. Include full resume of each principal
3. Provide all pertinent references

Glossary of Important Terms

Model – It offers an abstraction of a more intricate reality.

Nonnumeric models – These models do not utilize numbers as inputs.

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Numeric models – These models make use of numbers to measure both objective and subjective criteria. Performance management plan – It is a plan
that spells out project performance markers that permit contrasting predicted and real performance, aside from observing and reporting schedules.

Project management maturity – It is the progressive advancement of project and multi-project management proficiency in approach, methodology,
strategy, and decision-making process.

Project maturity model – It is a model which reflects that maturity is a continuous process of improvement via identifiable incremental steps.

Project portfolio management – It 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.

Project proposal – It is the set of documents presented for assessment.

Project selection – It 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.

CHAPTER 2 Long Quiz

Multiple Choice

Direction: On the space provided write the letter of your best choice for the item.

D 1. It is making a decision on how the organization will compete its rivals in the industry where it is participating.
A.Outcome C. progress
B. Management D. strategy

D 2. What are the challenges being faced by modern-day organizations in terms of project management maturity?
A. tie a project or groups of projects more strongly to the organization’s goals and strategy
B. manage the increasing quantity of ongoing projects
C. create projects successfully
D. all of these

D 3. It is a tint process to appraise each project proposal and decide on the premier priority project/s for more analysis.
A.project management C. project portfolio
B. project maturity D. project selection

A 4.The choice to embark on the project is founded on a desire to preserve the company’s competitive position in that market.
A.Competitive necessity C. product line extension
B. Opening necessity D. sacred cow

D 5. It measures the time it will take to recover the project investment.

A. benefit-cost ratio C. net present value
B. internal rate of retum D. payback period

A 6. It spells out project performance markers that permit contrasting predicted and real performance, aside from observing and reporting
schedules.
A. performance management plan C project selection model
B. project management maturity D. strategy management

D 7. Which among the following is a key player who performs delicate responsibilities in project portfolio management?
A. executive Team C. project portfolio manager
B. project manager D. all of them

C 8. It is the set of documents presented for assessment.

A project deliverable C. project proposal
B. project documentation D. none of these

D 9. Which among the following is NOT a significant criteria in choosing a project?

A. realism C. flexibility
B. cost D. quality

D 10. It is the discount rate which equates the present value of the future cash flows of an investment with the initial investment.
A. Profitability index C. net present value
B. payback period D. internal rate of return

I. True or False
Direction: On the space provided write C if the statement is correct and I if the statement is false.

C 1. A project converts strategy into a new product, service, and process.

C 2. A shorter payback period is better for a project.
C 3. The appropriate level of maturity differs for every organization based on its definite goals, strategies, resource capabilities, scope,
and needs.
I 4. The second step in project selection calls for the naming of the project concepts or ideas with a written brief description of each
project.
I 5. The model makes the decision not the project manager.
I 6. Non-numeric models make use of numbers to measure both objective and subjective criteria.
C 7. Considering all details in every aspects of the project planning enhances the chance of a successful project.
C 8. In order to modemize a manufacturing facility, an operating necessity model for project selection must be used
C 9. A model is a complete version of the certainty it intended to replicate and can produce an optimal decision.
I 10. A strong link to the organization’s strategy is not necessary for every project.

II. Enumeration

Three (3) phases of Project Portfolio Management (PPM)

Preparation
Execution
Performance Management
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Four (4) numeric models of project selection

Payback Period
Internal Rate of Return (IRR)
Net Present Value
Benefit Cost Ratio

Three (3) incremental steps in project management maturity

Low maturity
Moderate Maturity
Low Maturity

WORD SEARCH

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