Because learning changes everything.

®
Where We Are Now

Chapter Two
Organization Strategy
and Project Selection

© 2021 McGraw-Hill Education. All rights reserved. Authorized only for instructor use in the classroom.
No reproduction or further distribution permitted without the prior written consent of McGraw-Hill Education. © McGraw-Hill Education 2

Learning Objectives Chapter Outline

02-01 Explain why it is important for project managers to understand 2.1 Why Project Managers Need to Understand Strategy
their organization’s strategy
02-02 Identify the significant role projects contribute to the strategic 2.2 The Strategic Management Process: An Overview
direction of the organization 2.3 The Need for a Project Priority System
02-03 Understand the need for a project priority system 2.4 Project Classification
02-04 Distinguish among three kinds of projects
02-05 Describe how the phase gate model applies to project 2.5 Phase Gate Model
management 2.6 Selection Criteria
02-06 Apply financial and nonfinancial criteria to assess the value of
2.7 Applying a Selection Model
projects
02-07 Understand how multi-criteria models can be used to select 2.8 Managing the Portfolio System
projects
02-08 Apply an objective priority system to project selection
02-09 Understand the need to manage the project portfolio

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 2.1 Why Project Managers Need to Understand Strategy 2.2 The Strategic Management Process: An Overview

Two main reasons project managers need to understand their
organization’s mission and strategy:
1. So they can make appropriate decisions and adjustments.
• How a project manager would respond to a suggestion to modify the
design of a product or to delays may vary depending upon strategic
concerns.
2. So they can be effective project advocates. They have to be able to:
• demonstrate to senior management how their project contributes to
the firm’s mission in order to garner their continued support.
• explain to stakeholders why certain project objectives and priorities are
critical in order to secure buy-in on contentious trade-off decisions.
• explain why the project is important to motivate and empower the
project team (Brown, Hyer and Ettenson, 2013).
Strategic Management Defined
• Is the process of assessing “what we are” and deciding and
implementing “what we intend to be and how we are going to get
there.”
• Is a continuous, iterative process aimed at developing an integrated
and coordinated long-term plan of action.
• Requires strong links among mission, goals, objectives, strategy, and
implementation.
Two Major Dimensions of Strategic Management:
1. Responds to changes in the external environment and allocates the
firm’s scare resources to improve its competitive position.
2. Internal responses to new action programs aimed at enhancing the
competitive position of the firm.

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Four Activities of the Strategic Management Process Characteristics of Objectives

The sequence of activities of the strategic management process is:

1. Review and define the organizational mission
• The mission identifies “what we want to become.” Mission statements identify
the scope of the organization in terms of its product and service.
2. Analyze and formulate strategies
• Formulating strategy answers the question of what needs to be done to reach
objectives. Strategy formulation includes determining and evaluating
alternatives that support the organization’s objectives and selecting the best
alternative.
3. Set objectives to achieve strategies
• Objectives translate the organization strategy into specific, concrete,
measureable terms. Objectives answer in detain where a firm is headed and
when it is going to get there.
4. Implement strategies through projects
• Implementation answers the question of how strategies will be realized, given
available resources.

© McGraw-Hill Education 7 © McGraw-Hill Education EXHIBIT 2.1 8

 Strategic Management Process 2.3 The Need for a Project Priority System

Implementation of projects without a strong priority system linked to strategy

Ability to see create problems.
the high-level
MISSION Problem 1: The Implementation Gap
overview of the
organization • The implementation gap is the lack of understanding and consensus of
organization strategy among top and middle-level managers.

Effectively Problem 2: Organization Politics

STRATEGY
negotiate and • Project selection may be based not so much on facts and sound reasoning as on
implement the persuasiveness and power of people advocating projects.
decisions • The term sacred cow is often used to denote a project that a powerful, high-
OBJECTIVES ranking official is advocating.
Knowledge of
other functions Problem 3: Resource Conflicts and Multitasking
such as finance, • A multi-project environment creates the problems of project interdependency and
PROJECTS marketing, and the need to share resources. Resource sharing leads to multitasking—involves
operations starting and stopping work on one task to go and work on another project, then
returning to the work on the original task.

© McGraw-Hill Education FIGURE 2.1 9 © McGraw-Hill Education 10

PRIORITIZATION MATRIX Benefits of Project Portfolio Management

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 2.4 Project Classification 2.5 Phase Gate Model

Phase Gate Model

• Is a series of gates that a project must pass through in order to be
completed.
• Its purpose is to ensure that the organization is investing time and
resources on worthwhile projects that contribute to its mission and
strategy.
• Each gate is associated with a project phase and represents a
decision point.
• A gate can lead to three possible outcomes: go (proceed), kill (cancel),
or recycle (revise and resubmit).

© McGraw-Hill Education FIGURE 2.2 13 © McGraw-Hill Education 14

Phase Gate Process Diagram 2.6 Selection Criteria

• Financial Criteria
• Payback Period (PBP)
• Net present value (NPV)
• Internal Rate of Return (IRR)
• Nonfinancial Criteria
• Projects of strategic importance to the firm
• Two Multi-Criteria Selection Models
• Checklist Models
• Multi-Weighted Scoring Models

© McGraw-Hill Education FIGURE 2.3 15 © McGraw-Hill Education 16

 Financial Criteria: The Payback Model Example Comparing Two Projects Using Payback Method

The Payback Model

• Measures the time the project will take to recover the project investment.
• Desires shorter paybacks.
• Is the simplest and most widely used model.
• Emphasizes cash flows, a key factor in business.
PBP Rule of Thumb
• The shorter the payback period, the faster you will recover the initial investment in a project

• The shorter the payback period, the sooner your project will start making profits

• As long as the cash flow is positive, you will profit from your project – even if the profit is relatively small

• The longer the payback period, the greater the risk that something will go wrong to disrupt your
revenue stream

The Payback formula is

𝐸𝑠𝑡𝑖𝑚𝑎𝑡𝑒𝑑 𝑝𝑟𝑜𝑗𝑒𝑐𝑡 𝑐𝑜𝑠𝑡

𝑃𝑎𝑦𝑏𝑎𝑐𝑘 𝑝𝑒𝑟𝑖𝑜𝑑 𝑦𝑟𝑠 =
𝐴𝑛𝑛𝑢𝑎𝑙 𝑆𝑎𝑣𝑖𝑛𝑔𝑠

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Financial Criteria: Net Present Value (NPV) Example Comparing Two Projects Using Net Present Value Method

Net Present Value (NPV)

• Uses management’s minimum desired rate of return (discount rate) to
compute the present value of all net cash inflows.
• Prefers positive NPV to negative NPV.
• Desires higher positive NPVs.
• Is more realistic because it considers the time value of money, cash flows,
and profitability.
NPV Rule of Thumb:
• Positive NPV (NPV > 0): the project is profitable. The anticipated
financial gains outweigh your present-day investment.
• Negative NPV (NPV < 0): the project is not profitable. Expenses are more
significant than returns, so you will likely lose money on this project.
• A net present value of 0 is unrealistic. It essentially means there will be
no return on your investment, but you won’t lose money either.

© McGraw-Hill Education 19 © McGraw-Hill Education EXHIBIT 2.3B 20

 Nonfinancial Criteria Two Multi-Criteria Selection Models

Examples of strategic objectives are: Checklist Models

• To capture larger market share.
• To make it difficult for competitors to enter the market.
• To develop an enabler product, which by its introduction will increase
sales in more profitable products.
• To develop core technology that will be used in next-generation
products.
• To reduce dependency on unreliable suppliers.
• To prevent government intervention and regulation.
• Use a list of questions to review potential projects and to determine their
acceptance or rejection.
• Allow greater flexibility in selecting among many different types of projects
and are easily used across different divisions and locations.
• Fail to answer the relative importance or value of a potential project to the
organization and does not allow for comparison with other potential
projects.
Multi-Weighted Scoring Models
• Use several weighted selection criteria to evaluate project proposals.
• Include qualitative and/or quantitative criteria.
• Allow for comparison with other potential projects.

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Checklist Models: Sample Selection Questions Used in Practice Multi-Weighted Scoring Models: Project Screening Matrix

© McGraw-Hill Education EXHIBIT 2.4 23 © McGraw-Hill Education FIGURE 2.4 24

 2.7 Applying a Selection Model Applying a Selection Model (Continued)

Project Classification Sources and Solicitation of Project Proposals

• Deciding whether the project fits with the organization strategy.
• Selecting a Model
• Weighted scoring criteria seem the best alternative because:
• They reduce the number of wasteful projects using resources.
• They help to identify project goals that can be communicated using the
selection criteria as corroboration.
• They help project managers understand how their project was selected,
how their project contributes to organization goals, and how it compares
with other projects.
• Within the organization
• Request for Proposal (RFP) from external sources
(contractors/vendors)
Ranking Proposal and Selection of Projects
• Evaluating each proposal in terms of feasibility, potential contribution
to strategic objectives, and fit within a portfolio of current projects.
• Rejecting or accepting the projects based on given selection criteria
and current portfolio.
• Prioritizing projects by senior management.

© McGraw-Hill Education 25 © McGraw-Hill Education 26

A Proposal Form for an Automatic Vehicular Tracking (AVL)

Public Transportation Project
Risk Analysis for a 500-Acre Wind Farm

© McGraw-Hill Education FIGURE 2.5A 27 © McGraw-Hill Education FIGURE 2.5B 28

 Project Screening Process Priority Screening Analysis

© McGraw-Hill Education FIGURE 2.6 29 © McGraw-Hill Education FIGURE 2.7 30

2.8 Managing the Portfolio System Balancing the Portfolio for Risks and Types of Projects

David and Jim Matheson studied R&D

Senior Management Input
organizations and developed a classification
• Provides guidance in establishing selection criteria that strongly align scheme that could be used for assessing a project
with the current organization strategies. portfolio. They separated projects in terms of
degrees of difficulty and commercial value. The
• Annually decides how to balance the available organizational
four basic types of projects are:
resources (people and capital) among the different types of projects.
• Bread-and-butter projects involve
Governance Team Responsibilities evolutionary improvements to current products
• Publish the priority of every project. and services.
• Pearls represent revolutionary commercial
• Ensure the selection process is open and free of power politics.
advances using proven technology.
• Evaluate the progress of current projects.
• Oysters involve technological breakthroughs
• Constantly scan the external environment to determine if organization with tremendous commercial potential.
focus and/or selection criteria need to be changed. • White elephants showed promise at one time
but are no longer viable.

© McGraw-Hill Education 31 © McGraw-Hill Education 32

 SUMMARY

• “Multiple competing projects, limited skilled resources, dispersed virtual teams,

time-to-market pressures, and limited capital serve as forces for the emergence of
project portfolio management that provides the infrastructure for managing multiple
projects and linking business strategy with project selection. The most important
element of this system is the creation of a ranking system that utilizes multiple,
weighted criteria that reflect the mission and strategy of the firm. It is critical to
communicate priority criteria to all organizational stakeholders so that the criteria
can be the source of inspiration for new project ideas.”
• “Every significant project selected should be ranked and the results published.
Senior management must take an active role in setting priorities and supporting
the priority system. Going around the priority system will destroy its effectiveness.
Project review boards need to include seasoned managers who are capable of
asking tough questions and distinguishing facts from fiction. Resources (people, Because learning changes everything. ®

equipment, and capital) for major projects must be clearly allocated and not
conflict with daily operations or become an overload task.”
• “The governance team needs to scrutinize significant projects in terms of not only
their strategic value but also their fit with the portfolio of projects currently being
implemented. Highly ranked projects may be deferred or even turned down if they
upset the current balance among risks, resources, and strategic initiatives. Project www.mheducation.com
selection must be based not only on “the merits of the specific project but also on
what it contributes to the current project portfolio mix. This requires a holistic
approach to aligning projects with organization strategy and resources.”
© 2021 McGraw-Hill Education. All rights reserved. Authorized only for instructor use in the classroom.
© McGraw-Hill Education 33 No reproduction or further distribution permitted without the prior written consent of McGraw-Hill Education.