Project Initiation

Strategy & Selection

Six criteria for a useful project selection/screening
model
1. Realism • An effective model must reflect organizational objectives, including a
firm’s strategic goals and mission.
• Criteria must also be reasonable in light of such constraints on
resources as money and personnel.
• Finally, the model must consider both commercial risks and technical
risks, including performance, cost, and time.

2. Capability • It should be robust enough to accommodate new criteria and

constraints, suggesting that the screening model must allow the
company to use it as widely as possible to cover the greatest possible
range of project types.
3. Flexibility • The model should be easily modified if trial applications require
changes.
• It must, for example, allow for adjustments due to changes in exchange
rates, tax laws, building codes, and so forth.
Six criteria for a useful project selection/screening
model
4. Ease of use. • A model must be simple enough to be used by people in all areas
of the organization, both those in specific project roles and those in
related functional positions.
5. Cost. • The screening model should be cost-effective.
6. Comparability. • The model should be easily modified if trial applications require
changes.
• It must, for example, allow for adjustments due to changes in
exchange rates, tax laws, building codes, and so forth.
 Project Selection Models

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

• Nonnumeric models
• Numeric models
• These can be used simultaneously
 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”
 Types of Nonnumeric Models
• 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
 Types of Nonnumeric Models

• 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

2-8
 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
 Numeric Models: Profit/Profitability
• Models that look at costs and revenues
• Payback period
• Discounted cash flow (NPV)
 Payback Period
• The length of time until the original investment has been recouped by
the project
• A shorter payback period is better
Payback Period Example
Example
• Our company wants to determine which of two project alternatives is the more
attractive investment opportunity by using a payback period approach. We have
calculated the initial investment cost of the two projects and the expected revenues
they should generate for us (see Table). Which project should we invest in?
Example
 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)
 Discounted Cash Flow

• The value of a stream of cash inflows and outflows in today’s

currency
• 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
 Discounted Cash Flow (Net
Present Value)

Net present value (NPV) refers to the difference between the

value of cash now and the value of cash at a future date. NPV in
project management is used to determine whether the anticipated
financial gains of a project will outweigh the present-day
investment — meaning the project is a worthwhile undertaking.
 Discounted Cash Flow

• Requires a 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
 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
n
Ft
NPV (project) = A0 + 
( ) t
t
t =1 1
(1 +
+ k
k + p ) t

• A higher NPV is better

• Higher the discount rate lower the NPV
Payback Period Example
k
Example
Example
 Example
• Assume that you are considering whether to invest in a project that will
cost $100,000 in initial investment. Your company requires a rate of
return of 10%. You anticipate a useful life of four years for the project and
have projected future cash flows as follows:

Year 1: $20,000
Year 2: $50,000
Year 3: $50,000
Year 4: $25,000
 Numeric Models: Scoring

• Mimics how managers evaluate investments

• Uses multiple criteria
• Can utilize both monetary and qualitative factors
• Weighted factor scoring model
 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
Weighted Factor Scoring Model: Formula
 Weighted Factor Model Example
The Project Council of a company is trying to select an initial strategic project to
improve their customer service processes. They have five proposals to evaluate,
and they want to select the one that is most promising . They will use the
weighted factor scoring model to make the choice and then review the selection
again in a full council discussion
The scoring model must have the following elements:
1. A set of criteria on which to judge the value of each alternative
2. A numeric estimate of the relative importance (i.e., the “weight”) of each criterion
in the set
3. Scales by which to measure or score the performance or contribution to value of
each alternative on each criterion
The weights represent the relative importance of the criteria measured on a
10-point scale. The numbers in parentheses show the proportion of the total
weight carried by each criterion.
Scoring Criteria
 Evaluation of Alternatives

Fifth alternative is best

internal rate of return (IRR)
1. The internal rate of return (IRR) is the annual rate of growth that an
investment is expected to generate.
2. IRR is calculated using the same concept as net present value (NPV),
except it sets the NPV equal to zero.
3. The ultimate goal of IRR is to identify the rate of discount, which
makes the present value of the sum of annual nominal cash inflows
equal to the initial net cash outlay for the investment.
Cost-Volume-Profit (CVP) Analysis
• The cost-volume-profit analysis, also commonly known as breakeven analysis,
looks to determine the breakeven point for different sales volumes and cost
structures, which can be useful for managers making short-term business
decisions.
• CVP analysis makes several assumptions, including that the sales price, fixed
and variable costs per unit are constant.
• Running a CVP analysis involves using several equations for price, cost, and
other variables, which it then plots out on an economic graph.
Profitability Index (PI)

• A profitability index of 1 indicates that the project will break even.

• If it is less than 1, the costs outweigh the benefits.
• If it is above 1, the venture should be profitable.
• For example, if a project costs $1,000 and will return $1,200, it's a
"go.“

• For example, a project that costs $1 million and has a present value
of future cash flows of $1.2 million has a PI of 1.2.
 CHECKLIST MODEL
Cost of development. What is a reasonable cost estimate?
Potential return on investment. What kind of return can we expect? What is the
likely payback period?
Riskiness of the new venture. Does the project entail the need to create new-
generation technology? How risky is the venture in terms of achieving our
anticipated specifications?
Stability of the development process. Are both the parent organization and the
project team stable?
Governmental or stakeholder interference. Is the project subject to levels of
governmental oversight that could potentially interfere with its development?
Might other stakeholders oppose the project and attempt to block completion?
Product durability and future market potential. Is this project a one-shot
opportunity, or could it be the forerunner of future opportunities? A software
development firm may, for example, develop an application for a client in hopes
that successful performance on this project will lead to future business.
example
Let’s assume that SAP Corporation, a leader in the business applications software
industry, is interested in developing a new application package for inventory
management and shipping control. It is trying to decide which project to select from a
set of four potential alternatives.
Based on past commercial experiences, the company feels that the most important
selection criteria for its choice are cost, profit potential, time to market, and
development risks. Table shows a simple checklist model with only four project
choices and the four decision criteria.
In addition to developing the decision criteria, we create evaluative descriptors that
reflect how well the project alternatives correspond to our key selection criteria. We
evaluate each criterion (which is rated high, medium, or low) to see which project
accumulates the highest checks—and thus may be regarded as the optimal choice.
SOLUTION
Based on this analysis, Project Gamma is the best alternative in terms of maximizing our
key criteria— cost, profit potential, time to market, and development risks.
EXERCISES
• Problem 1: Two new Internet site projects are proposed to a young start-up company. Project A will
cost $250,000 to implement and is expected to have annual net cash flows of $75,000. Project B
will cost $150,000 to implement and should generate annual net cash flows of $52,000. The
company is very concerned about their cash flow. Using the payback period, which project is better,
from a cash flow standpoint?

• Problem 2: A four-year financial project has net cash flows of $20,000; $25,000; $30,000; and
$50,000 in the next four years. It will cost $75,000 to implement the project. If the required rate of
return is 0.2, conduct a discounted cash flow calculation to determine the NPV.

• Problem 3: What would happen to the NPV of the above project if the inflation rate was expected to
be 4 percent in each of the next four years?
EXERCISES
Problem 4: Use a weighted score model to choose between three projects (A, B, C) for updating an
important internal process. The relative weights for each criterion are shown in the following table as
are the scores for each project on each criterion. A score of 1 represents unfavorable, 2 satisfactory,
and 3 favorable.

Project
Category Weight A B C
Cost 20 1 2 3
Risk 20 2 3 1
Opportunity 10 2 1 3
Profitability 10 3 3 2
Sustainability 10 2 1 1
Safety 25 1 2 3
Competitiveness 10 2 2 2
 DEFINITION OF A PROJECT MANAGER (PM)
The role of a project manager is distinct from that of a functional manager
or operations manager. The project manager is the person assigned by the
performing organization to lead the team that is responsible for achieving
the project objectives.
 ROLES OF A PROJECT MANAGER
1.Facilitator
Because projects are often multidisciplinary, the PM (Project Manager) rarely has technical
competence in more than one or two of the several technologies involved in the project. As a
result, the PM is not a competent overseer and thus has a different role. The PM is a facilitator.

• The PM ensure that those who work on the project have the appropriate knowledge and
resources, including that most precious resource, time, to accomplish their assigned
responsibilities
• Manage the conflict between members of the project team, conflict between the team and senior
managers, conflict with the client and other outsiders
2. Communicator

The PM is responsible to the project team, to senior management, to the

client, and to anyone else who may have a stake in the project’s performance
or outcomes.
 ATTRIBUTES OF A PROJECT MANAGER
• A strong technical background
• A hard-nosed manager
• A mature individual
• Someone who is currently available
• Someone in good terms with senior executives
• A person who can make the project team happy
• One who has worked in several different departments
• A person who can walk on the waters
 PROJECT STAKEHOLDERS

A stakeholder is an individual, group, or organization that may affect, be

affected by, or perceive itself to be affected by a decision, activity, or outcome

of a project. Project stakeholders may be internal or external to the project,

they may be actively involved, passively involved, or unaware of the project.

Project stakeholders may have a positive or negative impact on the project, or

be positively or negatively impacted by the project.

Internal stakeholders:
• Program manager
• Resource manager
• Portfolio steering committee
• Project management office (PMO)
• Project managers of other projects
• Team members.
External stakeholders:
• Customers
• End users
• Suppliers
• Shareholders
• Regulatory bodies
• Competitors
 MONITOR STAKEHOLDER ENGAGEMENT

Monitor Stakeholder Engagement is the process of monitoring project

stakeholder relationships, and tailoring strategies for engaging stakeholders

through modification of engagement strategies and plans. The key benefit of this

process is that it maintains or increases the efficiency and effectiveness of

stakeholder engagement activities as the project evolves and its environment

changes. This process is performed throughout the project

 STAKEHOLDER POWER/INTEREST GRID

HIGH
POWER

LOW

HIGH
LOW

INTEREST
 STAKEHOLDER POWER/INTEREST GRID

HIGH
POWER

LOW

HIGH
LOW

INTEREST
 Application

Radiologists 1.Cardiologists
2.Administration

Patients/Families Test Technicians

Commitment Assessment Matrix
Project Organizational
Structure
 What is Organizational Structure?

An organizational structure is a system that outlines

how activities are directed in order to achieve the
goals of an organization. These activities can include
roles, rules, and responsibilities (RRR).
What is Project Organizational Structure?
The project organizational structure is an essential
configuration for determining the hierarchy of
people, their function, workflow and reporting
system.
 Types of project organizational structures
1.Pure Project Organization

2.Functional organizational structure

3.Matrix organizational structure

Pure Project Organization

Pure
1.Infrastructure
2.Construction
3.Power
4.Heavy Engineering
5.Defence
6.Defence Ship building
7.Hydrocarbon
8.Information Technology
Pure
 Limitations of Pure Project Organizations

1.One challenge that pure project organizations face is planning the smooth transition of

resources from one project to another

2.People assigned to the project tend to form strong attachments to it and a disease called

“projectitis” is developed

Pure
Functional Project Organizations

Pure
 Examples of Projects carried out in Functional Project Organization format

1.Implementation of Industry 4.0 practices in shop floor

2.Implementation of new corporate IT application

Pure
 Advantages

• The functional project has immediate, direct, and complete contact with the most

important technologies it may need, and it has in‐depth access

• Because the project is housed in the department that will benefit from the project, the

department’s leadership team has more leeway in determining the priority of the

project relative to other departmental work and is subjected less to the concerns and

priorities of other departments.

Pure
 Challenges
• Communication gap across functional departments
• Communications across functional department boundaries are rarely as
simple as most firms think they are.
• When technological assistance is needed from another department, it may or
may not be forthcoming on a timely basis.
• Technological depth is certainly present, but technological breadth is missing.
• In most functionally organized projects, the lines of communication to people
or units outside the functional department are slow and tortuous.
Pure
Matrix organizational structure

Pure
 Advantages

• If the project is likely to require complex technical problem solving, it

will probably have the appropriate technical specialists assigned to it.

• Flexibility in the way it can interface with the parent organization.

• In general, matrix organized projects have the advantages of both pure

and functional projects.

Pure
 Disadvantages
• The Unity of Command Principle in management theory ,i. e : for
each subordinate,there shall be one, and only one, superior is violated
• In matrix projects, the individual specialist borrowed from a function
has two bosses. Thus, project workers are often faced with conflicting
orders from the PM and the functional manager. The result is
conflicting demands on their time and activities.
• In matrix organizations the PM controls administrative decisions and
the functional heads control technological decisions. This distinction is
simple enough when writing about project management, but during
operation , the partial division of authority and responsibility of PM is
complex.
Pure
 Typical causes of conflict within project-based organizations

1. Conflicts over costs and budgets

2. Ego and personality clashes
3. Differing views, ways of working and internal biases
4. Verbal miscommunication and misunderstandings
5. Lack of trust and respect between team members