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• Strategy:
• What do you want to be?
Why Project • Where do you want to be?
• How are you going to get there?
Managers • Changes in the organization’s mission and
Need to strategy
Organization Strategy
&
Project Understand • Project managers must respond to
changes with appropriate decisions about
Project Selection Management the Strategic
Management
future projects and adjustments to current
projects.

Process • Project managers who understand their

organization’s strategy can become
effective advocates of projects aligned
with the firm’s mission.

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The Strategic Management Process: Strategic Planning versus Projects

An Overview
• Strategic Management
• Provides the theme and focus of the future
direction for the firm.
• Responding to changes in the external
environment—environmental scanning
• Allocating scarce resources of the firm
to improve its competitive position—
internal responses to new action
programs
• Projects are the conversion of strategy into outputs.
• Aligning projects with the strategy is important for the
success of both the project and the organization.
• Implementation of organizational strategy through
projects helps:
• Elimination of focusing on problems or solutions that are
strategically not important.
• Elimination of using unnecessary and expensive technology
just because of the hype.
• Prioritizing projects according to Pareto’s law.
• Involvement of all team members.

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Project Portfolio Management

Problems
• The Implementation Gap
• The lack of understanding and consensus on strategy
Strategic among top management and middle-level (functional)
managers who independently implement the strategy.
Management
• Organization Politics
Process • Project selection is based on the persuasiveness and
power of people advocating the projects.
• Sacred cow
• Resource Conflicts and Multitasking
• The multi project environment creates interdependency
relationships of shared resources which results in the
starting, stopping, and restarting projects.

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Benefits of Project Portfolio Management Portfolio of Projects by Type

• Builds discipline into project selection process.

• Links project selection to strategic metrics.
• Prioritizes project proposals across a common set of
criteria, rather than on politics or emotion.
• Allocates resources to projects that align with strategic
direction.
• Balances risk across all projects.
• Justifies killing projects that do not support
organization strategy.
• Improves communication and supports agreement on
project goals.

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How to Select Projects Project Selection Steps

One of the most important questions an organization has to answer is:

Which projects to undertake?

Identification Decision Collection Evaluation

An organization cannot undertake every project all at the same time:
Identify the Decide on a Gather necessary Evaluate each
selection criteria. Project Selection data and potential project
Due to limited amount of resources Not all projects are feasible Method based on information on using the
criteria. each potential selected method.
project.

At this point implementation of project selection methods is required

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• The Payback Model

A Portfolio Management System • Measures the time it will take to

recover the project investment.
Determine the breakeven point.

Payback period = Estimated

Financial: payback, net present value (NPV), internal rate cost/Annual savings
Selection
Criteria
of return (IRR), cost benefit Analysis (CBA)
Non-financial: projects of strategic importance to the firm.
Financial • Shorter paybacks are more desirable.
Models • Emphasizes cash flows, a key factor in
business.
• Limitations of payback:
Multi- • Ignores the time value of money.
Weighted Use several weighted selection criteria to evaluate project • Assumes cash inflows for the
Scoring proposals. investment period (and not
beyond).
Models
• Does not consider profitability.

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• The Net Present Value (NPV)

model
• Uses management’s minimum desired
rate-of-return (discount rate) to
compute the present value of all net • The Internal Rate of Return (IRR)
cash inflows. model
Financial • Positive NPV: the project meets the
Financial • The rate of return at which the
Models minimum desired rate of return
and is eligible for further
Models project’s NPV is zero.

(cont’d) consideration. (cont’d) • The IRR is expected to be greater than

or equal to the company’s required
• Negative NPV: project is rejected. rate of return.
• Higher IRRs are more desirable.

𝐹
𝐼 =
(1 + 𝐼𝑅𝑅)

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Example: Comparing two Projects

• The Cost Benefit Analysis (CBA) Required rate of return 15%

model Project A
Initial investment $700,000 Year 1 Year 2 Year 3 Year 4 Year 5
• Evaluates whether benefits are Inflow ($700,000) $225,000 $225,000 $225,000 $225,000 $225,000

greater than or less than the costs 225000/ 225000/ 225000/ 225000/ 225000/

Financial
PV (1+0.15)^1 (1+0.15)^2 (1+0.15)^3 (1+0.15)^4 (1+0.15)^5
($700,000) $195,652 $170,132 $147,941 $128,644 $111,865 $54,235 =SUM(B7:G7)
• Accept the project when CBA is Cumulative flow ($700,000) ($475,000) ($250,000) ($25,000) $200,000 $425,000

Models greater than 1 NPV

Payback period
$54,235 =B5+NPV($B$1,C5:G5)
3.1 years
• Reject the project when CBA is less
(cont’d)
IRR 18.23% =IRR(B5:G5)

than 1 CBA 1.08 =NPV($B$1,C5:G5)/B4 $1.08

Project A
Initial investment $400,000 Year 1 Year 2 Year 3 Year 4 Year 5
Inflow ($400,000) $110,000 $110,000 $110,000 $110,000 $110,000
110000/ 110000/ 110000/ 110000/ 110000/
𝐹 PV (1+0.15)^1 (1+0.15)^2 (1+0.15)^3 (1+0.15)^4 (1+0.15)^5
∑
(1 + 𝑘) ($400,000) $95,652 $83,176 $72,327 $62,893 $54,689 ($31,263) =SUM(B18:G18)
𝐶𝐵𝐴 = Cumulative flow ($400,000) ($290,000) ($180,000) ($70,000) $40,000 $150,000
𝐼 NPV ($31,263) =B16+NPV($B$1,C16:G16)
Payback period 3.6 years
IRR 11.65% =IRR(B16:G16)
CBA 0.92 =NPV($B$1,C16:G16)/B15

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Example: Payback Period Integer Linear Programming (ILP)

𝑀𝑎𝑥𝑖𝑚𝑖𝑧𝑒 𝑏𝑥

Payback Period
Initial investment ($700,000)
= Initial Investment ÷ Annual Cash Flow
𝑆𝑢𝑏𝑗𝑒𝑐𝑡 𝑡𝑜 𝑐𝑥 ≤𝐶
Cash flows $225,000
Years 5
= $700K ÷ $225K
= 3.1 years or ~ 3 years 1 month 1 week 1 𝑖𝑓 𝑝𝑟𝑜𝑗𝑒𝑐𝑡 𝑖𝑠 𝑠𝑒𝑙𝑒𝑐𝑡𝑒𝑑
𝑥 =
0 𝑖𝑓 𝑝𝑟𝑜𝑗𝑒𝑐𝑡 𝑖𝑠 𝑛𝑜𝑡 𝑠𝑒𝑙𝑒𝑐𝑡𝑒𝑑
𝑖 = 1,2, … , 𝑚

𝑚 = 𝑛𝑢𝑚𝑏𝑒𝑟 𝑜𝑓 𝑝𝑜𝑡𝑒𝑛𝑡𝑖𝑎𝑙 𝑖𝑛𝑑𝑒𝑝𝑒𝑛𝑑𝑒𝑛𝑡 𝑝𝑟𝑜𝑗𝑒𝑐𝑡𝑠

𝐶 = 𝑎𝑣𝑎𝑖𝑙𝑎𝑏𝑙𝑒 𝑏𝑢𝑑𝑔𝑒𝑡
𝑏 = 𝑏𝑒𝑛𝑒𝑓𝑖𝑡 𝑜𝑓 𝑝𝑟𝑜𝑗𝑒𝑐𝑡 𝑖
𝑐 = 𝑐𝑜𝑠𝑡 𝑜𝑓 𝑝𝑟𝑜𝑗𝑒𝑐𝑡 𝑖

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Multi-criteria Methods
Nonfinancial
• Reasons to take on a project that has • There can be quite a long list of criteria to consider
lower profit margins: when selecting projects
Methods • Increase market share
• Apply Pareto’s 80/20 principal: few criteria (20%) are vital
• Increase barriers to entry and many (80%) are trivial
• Develop a new technology
• Establish new markets
• Vital criteria to consider:
• Strengthen the brand image • Risk factors
• Increase customer loyalty • Financial factors
• Increase employee loyalty • Operational factors
• Other factors
• External factors depending on industry and competition

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Project Screening Matrix RFP (Request for Proposal)

Multi-weighted Scoring Models

Project Management, The Managerial Process, Gray J. F., Larson E.W., ©2006 The McGraw-Hill Companies. All rights reserved.

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A Proposal Form
for an Risk
Automatic Analysis
Vehicular for a
Tracking (AVL) 500-Acre
Public Wind
Transportation Farm
Project

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• Senior Management Input

• Provide guidance in selecting criteria
Project
that are aligned with the Screening
Managing organization’s goals Process
the • Decide how to balance available
resources among current projects
Portfolio
• The Priority Team Responsibilities
• Publish the priority of every project
• Ensure that the project selection
process is open and free of power
politics
• Reassess the organization’s goals and
priorities
• Evaluate the progress of current
projects

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Project Portfolio Matrix

Priority
Analysis

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Project Portfolio Matrix

Dimensions
• Bread-and-butter projects
• Involve evolutionary improvements to current products and
services.
• Pearls
• Represent revolutionary commercial advances using proven
technical advances.
• Oysters
• Involve technological breakthroughs with high commercial
payoffs.
• White elephants
• Projects that at one time showed promise but are no longer
viable.

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