Lecture 2_Projects Strategy and Selection_Project Managers_FA23_V2

V.
1-FA 2023
Figure 1
Dr. Omar J. Al-Khatib MEME 634 FA23 L2: Projects Strat. & Sele. Project Managers Page 1 of 25
Chapter 2
Part 1: Project Strategy and Selection
Question 2-1
What is the objective of Chapter 2?
In construction management, what is Project Strategy and Selection? Proper project strategy and
selection involves an objective evaluation of all options, considering cost, schedule, and risk. This
allows construction managers to make decisions that are both effective and in the best interests
of both the organization and the project. Project Strategy and Selection is the process of selecting
the best approach to a construction project, evaluating the various alternatives and determining
the optimal solution for the desired outcome. It involves analyzing the risks associated with the
project, considering the cost, time, and other factors, and making an informed decision that best
.
Question 2-2
Why would a project fail? How to Improve Project Results?
Poor Project Results
1. Organizations spend $100 billion per year on creating competitive strategies
a. 90% fail due to poor project execution
2. Other poor results:
a. < 50% strategically projects successful
b. >25% lacked sponsor and detailed implementation process
c. 40% had adequately skilled personnel
d. Only 20% prioritized hiring skilled staff
Under Project Purpose and Area of Focus to improve Project Results

1. Projects, programs, and project portfolios
Table 1 - Projects, programs, and project portfolios
2. The best project management firms have:
a. Top management involvement
b. Get the most feedback
c. Dedicate the most resources
d. Have the most robust processes
3. Implementation is the critical skill in strategic and competitive success
Project managers must possess a combination of technical, interpersonal, and
communication skills. They must also have the ability to think creatively and strategically
in order to develop effective solutions to the project's challenges. Lastly, they must be able
to manage resources and prioritize tasks.
Question 2-3
What are the typical challenges and constraints of a project?
Challenges in Project Management

1. Triple Constraint (e.g., scope-tasks or quality or performance, schedule-Time, and
budget-cost) but also:
a. Meeting the strategic goals
b. Linking the strategic elements with tactical elements
Table 2 strategic vs. tactical element

Strategy Tactics
Long term (Years) Short term (Months)
Broad Goals (A company's large-scale objectives. I.E; Specific Objectives (Hitting Milestones and
Increase Shareholder value, Gain market share etc..) Release Dates)
Setting global business or strategic goals such as your Micromanaging the day-to-day goals and
release criteria, workflow setup and lifecycle.? activities, focusing on execution.
Selecting and assigning which resources are allocated to People: Assigning individuals or teams with
which projects (What team resources can I allocate? What domain expertise to specific actions.
can I afford to dedicate to this project?)
c. Streamlining decision making

d. Increase efficiencies
e. Better align with organizational goals
f. Coping with ambiguity and complexity (unclear or challenging issues in the project)
g. Keeping up with technology
h. Coordinating interdependent systems
- Interdependent Systems: An organizational "system" is a structure that is designed
to fulfill a certain goal within the organization.
Question 2-4
How do you define a complex project? What are Complex Strategic Project
Problems?
Complex projects are those that are large, expensive, have multiple stakeholders, and involve
many different teams and processes. Complex strategic project problems are those that require
careful thought and planning to successfully navigate the challenges and risks associated with the
project.
Complex Strategic Project Problems
1. Agency Theory
What Is Agency Theory?
Agency theory is a principle that is used to explain and resolve issues in the relationship
between business principals and their agents. Most commonly, that relationship is the one
between shareholders, as principals, and company executives, as agents.
2. Governance Theory
- In project management, governance theory refers to the coordination and control of
projects, portfolios, and programs by senior management in collaboration with project
sponsors (stakeholders). Furthermore, it involves the management of project capabilities
and competences, often under a separate project management office (PMO). Project
governance involves aligning project objectives with organizational objectives, prioritizing
projects to maximize resource utilization, and identifying and managing challenging
projects.
- The purpose of this theory is not to describe how corporate managers govern
themselves, but how they are governed.
- Managing the relationship among various corporate stakeholders, and common
stockholders have the right to elect members of the board of directors.
3. Both of these theories embedded in organizational project management (OPM)
Organizational Project Management (OPM)

1. Developed as a framework for executing strategies through projects
Question 2-5
2. What is Organizational project management (OPM) ? What is a Maturity Model in the
context of Project Management Institute (PMI) and OPM ?
Organizational Project Management (OPM) is an approach to managing projects within an
organization in a coordinated and integrated way. It involves aligning all project activities
with the strategic objectives and values of the organization. OPM provides a framework for
planning, executing, and controlling projects, programs, and portfolios in line with the
organization's strategy and goals.
3. Incorporated into (PMI) and OPM Maturity Model

- A maturity model refers to a framework or tool that assesses and measures the maturity or
capability of an organization in managing projects. Maturity models provide a structured
approach to evaluate an organization's project management practices and identify areas for
improvement.
- A maturity model is a tool that businesses and software development teams use to
measure how well their business or project is doing and how capable they are of
continuous improvement. Unlike other goal-driven measuring tools, maturity models
can evaluate qualitative data to determine a company's long-term trajectory and
performance. Models aim to see if companies are maturing, which means they're
constantly testing, growing and improving. Models define different levels of
effectiveness and can pinpoint a person, team, project or company's current position
within the model.
Figure 1
Governance Structure for Strategic Projects
Figure 2
- MY NOTES: A project manager can also use the steering committees or project boards that
are part of the most governance structures of organization to resolve conflicts. As these high-
level committee members do not work on the project on a daily basis, they can serve as fresh
eyes to see what is causing the conflict and offer an outside voice of reason. They can also offer
solutions on how to resolve the conflict and adhere to the standards-while still sticking to the
overall goals of the organization.
- MY NOTES: In order to avoid the sources of project failure outlined in Table 3, the
Governance Structure model aims to bring all project members together.
Table 3 Common Causes of Project Failure
Question 2-6
In the context of project management, what is the meaning of Project Selection Models?
Project selection models are tools used to evaluate and select projects, based on criteria such as
cost, timelines, and technical requirements. They are used to prioritize projects and determine
which ones should be implemented first. They can also help to make sure that resources are
allocated efficiently and that projects are chosen that will give the greatest return on investment.
To understand the project selection models, we need to understand the characteristics of
business cases.
Characteristics of Business Case

4. Business Cases presented to funding agencies with the intention of deciding whether or not
to support a project would include the following information:
A. Monetary cost (Cash based cost):
- Benefits: What are the benefits of the project?
B. Nonmonetary factors
1. Strategic justification:
- Strategic justification approaches are less technical in nature compared with other
approaches, but they highlight qualitative attributes including business strategies ,
flexibility in meeting customer demand, and competitive advantage.
2. Expected behavioral impacts (e.g., resistance to support project)
3. Increases in efficiency
4. Service improvements
5. competitiveness effects
Project Selection Models
1. Project selection is the process of evaluating proposed projects or groups of projects, and then
choosing to implement some set of them so that the strategic objectives of the organization
will be achieved.
- It is often the case that managers use decision-aiding models to extract the relevant
elements of a problem from the details that surround the problem.
- Models represent the problem's structure and are useful for selecting and evaluating
projects.
2. Project selection Tools:
- Each project will have different costs, benefits, and risks. Rarely are these known with
certainty.
a. Evaluating
- Despite this difficulty, selecting the appropriate portfolio of projects is critical as it is the
portfolio of projects that determines an organization's success, not the completion of an
individual project.
b. Choosing
- The selection of one (or more) project out of a set is a difficult task.
c. Implementing
- Effectively executing the PM's primary role of managing trade-offs requires that the PM make
trade-offs in a way that best supports the organization's overall strategy.
3. Same process as other business decisions
4. Project selection is critical to long-term org survival.
Question 2-6
What types of "Project Selection Models" are used in project management?
Types of Project Selection Models
1. Criteria for Project Selection Models
A. Nonnumeric models
- Nonnumeric Models These models do not attempt to reduce the evaluation process to
numbers, but instead look at other factors that make for "obvious" choices for that
organization. These models could include senior management mandates and regulatory
necessities. Examples include The Sacred Cow, The Operating Necessity, The Competitive
Necessity, The Product Line Extension, Comparative Benefit Model, and Sustainability.
- Non-numeric project selection models may consider issues such as market share, client
retention, skills requirements and availability, compliance with standards and
environmental issues.
- Non-numeric project selection models may consider issues such as market share, client
retention, skills requirements and availability, compliance with standards and
environmental issues.
B. Numeric models
- Numeric Models: Profit/Profitability These models analyze the potential projects in
terms of the single criteria of monetary return. The analysis may or may not include the
time value of money. These include traditional measures such as Payback Period and
Discounted Cash Flow (also referred to as Net Present Value).
- These can be used simultaneously.
- Decisions are not made by models - they are made by people!
- It is important to note that all models, regardless of how sophisticated, are incomplete
representations of the reality they are intended to reflect.
- Numeric project selection models include scoring and financial models. Financial numeric
project selection models quantify projects in terms of payback time, return on investment
(ROI), whether their net present values (NPVs) arc positive or whether their internal rates
of return (IRRs) are bigger than required hurdle rates.
- The simplistic weighted scoring model in Example 1 utilizes a combination of financial
and other considerations.
Table 1 : Example 1 PM Numerical Models
Weight or Projects Weighted Average
Category/Criteria Importance
factor A B C A B C
Country risk & socio-economic environment 0.2 3/5 2/5 1/5 3X0.2=0.6 0.4 0.2
Labor productivity 0.002 3/5 2/5 2 0.6 0.4 0.4
Labor supply 0.01 2 2 3 0.2 0.2 0.3
Transportation Infrastructure 0.15 3 2 1 0.45 0.3 0.15
Financials (ROI, IRR and NPV) 0.35 2 3 2 0.7 1.05 0.7
Total 2.55 2.4 1.75
2. Nonnumeric Models Description
a. Models that do not return a numeric value for a project to be compared with other
projects
b. These are really not "models" but rather justifications for projects
c. The fact that they do not represent true models does not imply that they are all
undesirable or bad.
Types of Nonnumeric Models

3. What types of non-numeric models are there?
a. Sacred Cow (the boss wants it!)
- The Sacred Cow model is a type of project selection model in project management. It is
based on the idea that the most important projects are identified by top-level
management and are implemented regardless of cost or benefit. The model focuses on
preventing the most important projects from being cancelled or delayed.
- Projects Often suggested by top management.
- Maintained until completion or boss terminates it.
MY NOTES:
- The project is suggested by a senior and powerful official in the organization. The project
is 'sacred' in the sense that it will be maintained until successfully concluded, or until
the boss, personally, recognizes the idea as a failure and terminates it.
b. Operating Necessity (we need to do it)
Operating Necessity model is a project selection model based on the idea that
projects must be carried out to maintain the current operations of a business. This
model is useful in situations where a project must be completed in order to keep
the business running, and where the cost of the project is not a major
consideration.
A project that is required in order to protect lives, property or to keep the company
in operation.
The operating necessity is the decision to undertake the project is based on the
condition where the project is required in order to keep the organization in
operating.
c. Competitive Necessity (competitiveness requires it)
The Competitive Necessity model is an example of a Project Selection Model which
focuses on the strategic importance of the project and its potential to increase the
competitive advantage of the organization. It is used to identify projects that are
essential for the organization to remain competitive.
A project that is required in order to maintain the company's position in the
marketplace (the project is required to keep the system running)
Operational necessity projects are prioritized over competitive necessity projects,
although both types of projects may bypass the more precise numerical analysis
used for projects deemed less urgent or less important to the firm's survival.
d. Product Line Extension (new products or service requires it)
The Product Line Extension model is a project selection model that evaluates a
project's potential for profitability based on its ability to expand or extend an
existing product line. The product line extension model is a specialized model that
focuses on extending a product line or range of products.
Project evaluated on fit with existing product line, fills a gap, strengthens a weak
link, or extends a line.
e. Comparative Benefit Model (comparing and contrasting alternatives, as in Q-sort)

The Comparative Benefit Model is a project selection model that employs the Q-
sort technique. The Q-sort technique can be used to rank projects based on how
they will benefit an organization. The Q-sort technique involves rank-ordering
projects based on their relative importance. The model takes into account both
qualitative and quantitative data to help determine which projects should be
prioritized.
Projects are subjectively rank ordered based on their perceived benefit to the
company.
f. Sustainability (We need this project to support our company's long-term activity)
The Sustainability Selection Model is based on the idea that projects should not
only be selected based on their financial return, but also on their environmental
and social impact. The model uses criteria such as financial performance,
environmental impact, and social benefits to identify projects that offer long-term
value for the company, its shareholders, and society.
Focusing on long-term profitability rather than short-run payoff.
Question 2-7
What is the Q-Sort Method?
Q-Sort Method (in more details)
4. What is the Q-Sort Method?
- Comparative Benefit Model (CBM) assumes that an organization has many projects to
consider, perhaps several dozen. Senior management would like to select a subset of the
projects that would most benefit the firm, but the projects do not seem to be easily
comparable. Q-sort method is one method among CBM.
- The Q-Sort Method is a tool used in construction management to evaluate different
options and prioritize projects based on their comparative advantages. The Comparative
Benefit Model (CBM) is a more advanced version of the Q-Sort Method and is used to
assign value to various components of a project and evaluate them in terms of cost and
benefit. Moreover, CBM is a decision-making tool used to analyze and compare the
advantages of different options and determine the most appropriate course of action.
- The Q-Sort approach for projects is one method to consider. It is based on work done
initially by Stephenson (1953) to help rank or prioritize valuable, complex, and partially
overlapping models (e.g., projects). The purpose of this method is to enable selecting
complex project such as portfolios.
a. In a typical application of Q-Sort method to Project Management, projects are divided
into two groups: high priority and low priority. These projects are further decomposed
into three groups: high priority, medium priority, and low priority. They are decomposed
again into highest priority, high priority, medium priority, low priority, and lowest priority.
b. Another approach is to divide the projects into three groups- good, fair, and poor-
according to their relative merits. If a group has more than eight projects in it, it is then
subdivided according to fair-plus and fair-minus. Then, projects in each category are
ordered from highest to lowest.
Step 1:
Create a deck of cards for each participant in
the exercise with the name and description of
one project on each card.
Step 2:
Divide the deck into two piles, one representing
a high priority and the other representing a low
priority. Stacks need not be equal.
Step 3:
Participants should select cards from each pile
in order to form a third pile that represents the
medium priority level.
Step 4:
To produce another pile representing the very
high level of priority, you may instruct each
participant to select cards from the high-level
pile. Similarly, you may instruct each
participant to select cards from the low-level
pile representing the very low level of priority.
Step 5:
Finally, instruct each participant to survey
the selections and shift any cards that seem
out of place until the classifications are
satisfactory.
Figure 1
Question 2-8
What are the types of numerical models?
Types of Numeric Models

Numeric Models are formal, numeric procedures for the evaluation and selection of projects. The
emphasis is usually upon profit. Computer scoring, and simulation modeling (considering multiple
criteria) are become more common.
5. Types of Numerical Models

A. Profit/profitability
- Models that focus on project costs and revenues (profits).
Example of This Model:
1. Payback Period (investment: cash flow generated).
- An estimate of how long it will take for the initial investment to be recouped (paid
back) by the project.
- A shorter payback period is better.
- Example 1: if a company invests $100,000 in a new production line and the line is
expected to generate $30,000 in cash flow each year, then the payback period is
calculated by dividing the initial investment by the cash flow: $100,000/30,000 = 3.33
years. Therefore, the payback period is 3.33 years.
- Example 2: if a company invests $10,000 in a new piece of equipment and expects to
make $2,000 in profits each year from the equipment, the payback period would be five
years ($10,000 / $2,000 = 5).
2. Discounted Cash Flow (Net Present Value method - NPV)

- Example 3: An example of Discounted Cash Flow would be a company that has an
expected cash flow of $10,000 one year from now. If the cost of capital is 5%, the present
value of the cash flow would be discounted to $9,524. This means the company would be
able to start using the money now, rather than waiting a year.
Explain:
A company with an expected cash flow of $10,000 one year from now. If the cost of capital
is 5%, the present value of cash flow would be discounted to (or reduced to) $9,524
(10,000/1.05). This means the company can start using the money now, rather than waiting
a year. This is because the value of money decreases over time due to inflation or interest
rate. If the company waited a year to get the $10,000, it would be worth less than $10,000
due to inflation. The discounted cash flow model takes this into account and discounts the
future cash flow by the cost of capital, which in this example is 5%, to calculate the present
value. This means the company can start using the money now, as if it had already received
the $10,000.
3. Average Rate of Return (estimation of average rate of return: initial or average

investment required)
4. Internal Rate of Return (discount rate relating sets of expected cash inflows and
outflows)
5. Profitability Index (cost-benefit ratio net present value of all future expected cash
flows: initial cash investments),
6. Other models which introduce risk, the effects on other projects and activities, etc.
B. Scoring (Criteria Scoring Models)

1. Real Options
- Martino (2003) suggests consideration of the Real Options Approach as a method of
project selection that presents a way to select projects that is analogous to selecting
financial options. This approach is helpful for a project that is too large to be treated as
overhead but is not ready to be considered as a capital investment. If the project produces
a wide range of possible benefits, then it is a candidate for future investments. Investing in
this approach is similar to selecting an opportunity to make a further investment if the
investment is one that is profitable.
- Martino Real Option Method is a construction management tool that helps determine the
optimal decision for a project by analyzing the cost and risk of the project. It uses a
mathematical model to evaluate different options and determine which option will yield
the highest return on investment.
- There may be options that the organization might take to reduce each of the specific risks, which
Martino states are "shadow options". This forces project professionals to confront risks. The
next step is to determine different methods to structure the project. During this analysis,
each method considers a different combination of the shadow options that have been
identified. Then, the combination of the options that results in the most favorable option
is determined, and the shadow options are converted into Real Option. Disadvantage
include the time, efforts, and expense that are needed to implement the approach.
- The Real Option method is a way of estimating the value of a project by taking into account
future options such as expansion, abandonment and postponement. The shadow option
is a way of estimating the value of a project by taking into account future risks such as cost
overruns, delays, and changes in market conditions. The "shadow option" also allows
organizations to evaluate potential investments by comparing different scenarios and
expected outcomes. Both tools help construction managers make better decisions by
estimating the value of future projects based on a variety of factors.
2. Criteria scoring models:

a. Unweighted 0 I Factor Model (yes | no against criteria)
b. Unweighted Factor Scoring (scoring against criteria on a 5-point scale)
c. Weight factor scoring (as above, but criteria on a 5-point scale)
d. Sensitivity Analysis (what happens if we change this or that feature ...?)
e. Constrained Weighted Factor Scoring (some criteria fixed for all options e.g., it
.
f. Other numeric models introduce uncertainty and risk e.g. Risk Analysis
describing the variables and outcomes statistically, taking into account
probabilities; General Simulation Analysis (machine simulation of all variables), etc.
C. Window-of-opportunity Analysis
- Also called the critical window, a window of opportunity is the short period of time
within which some action can be taken that will achieve a desired outcome. Once this
period is over, or the "window is closed" the chance to take the opportunity is no longer
possible.
- If we have a new idea for a product or process, we can use a different approach by
determining the cost, timing, and performance specifications using a new technology
before undertaking R & D. This is called the window of opportunity for innovation.
- Window-of-opportunity Analysis is a type of management technique which looks at a

certain period of time in which a company can take advantage of a certain market
opportunity. It involves analyzing the costs and benefits of taking certain action within
that time frame, and then using discounted cash flow models to determine the present
value of the expected cash flow from the opportunity.
D. Discovery-driven planning
This is a learning process about evaluating project assumptions for their validity. The
assumptions about the project are written down and analyzed carefully to determine two
aspects about them:
1. Which are the critical assumptions that will make or break the success of the project?
2. How much will it cost to test each of the assumptions?
Examples and Additional Notes on All Models Above
1. Payback Period Example 1
2. (MY NOTES)
- Payback Period Example 2: Which project is better ? Project X or Project Y ?
3. Payback Period Drawbacks or disadvantages?

a. Does not consider time value of money
b. More difficult to use when cash flows change over time
c. Less meaningful for longer periods of time (due to time value of money)
4. Discounted Cash Flow Important Issues

a. The value of a stream of cash inflows and outflows in today's dollars
b. Also known as discounted cash flow or just discounting
c. Widely used to evaluate projects
d. Includes the time value of money
e. Includes all inflows and outflows, not just the ones through payback point
f. Requires a percentage to be used to reduce future cash flows
a. This is known as the discount rate
g. The discount rate may also be known as a hurdle rate or cutoff rate
h. There will usually be one overall discount rate for the company
5. Present value method Net Present Value method NPV
- Net Present Value (NPV) or present worth is the estimated present value of the cash
inflows (Profit or revenue of investment) in a proposed investment less the estimated
present value of the cash outflow (cost and expenses of bussiness or investment)
- NPV = inflow outflow
- NPV Notes:
- Tocalculated present values, we need a rate of return. This is the rate need for investor
to consider a minimum attractive rate of return (MARR). This is called the hurdle rate,
the cutoff rate to rete to required to make decision weather to accept this investment
or not.
- Significant of NPV:
Positive NPV: indicating that the hurdle rate is more than satisfied.
Zero NPV: indicating hurdel rate is just satisfied
Negative NPV: indicating hurdle rate is not satified
Example 1:
NPV Terms:
n = the number of periods in the future in which the cash flow will occur
Example 2
Problem 3: 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.
i= 20%
Investment Yr 1 Yr 2 Yr 3 Yr 4
Cashflow $ 75,000 $ 20,000 $ 25,000 $ 30,000 $ 50,000
1.0000 (1 + 20/100)1 = (1 + 20/100)2 (1 + 20/100)3 (1 + 20/100)4
PVIF
0.8333 = 0.6944 = 0.5787 = 0.4823
$75,000 x 1 $20,000 x $25,000 x $30,000 x $50,000 x
PV $ = $75,000 0.8333 = 0.6944= 0.5787= 0.4823=
$16,666 $17,360 $17,361 $24,115
NPV NPV = ($16,666 + $17,360 + $17,361 + $24,115) = $75502 - $75000 = $502
----------Net Present Value (NPV)---------Present Value Interest Factor (PVIF)--------
- The profitability index (or benefit cost ratio) is the sum of the discounted cash flows
divided by the initial investment.
- The sum of the PV's for years 1-4 divided by $75000
Benefit Cost ratio (BCR) = Discounted Cash Inflow / Discounted Cash Outflow =
$75502/$75000 = 1.0067 (is this a good investment ?)
- The profitability index or benefit cost ratio is used to calculate the expected return on
investment. It takes into account the cost of the investment and the expected cash flow from
the investment and divides the two. For example, if a company invests $10,000 and expects
to get $20,000 in return, the profitability index would be 2.0 (how ? 20,000/10000).
6. Numeric Models: Scoring
1. Mimics how managers actually evaluate investments
2. Uses multiple criteria
Can utilize both monetary and qualitative factors ( )
3. Weighted factor scoring model (What is a weighted factor?)
7. Weighted Factor Scoring Model (MY NOTES)

1. Each factor is weighted relative to its importance
a. Weighting allows important factors to stand out
2. A good way to include nonnumeric data in the analysis
3. Factors need to sum to one
4. All weights must be set up, so higher values mean more desirable
8. Small differences in totals are not meaningful (MY NOTES)
Check example: Choose the Best Location
Figure 2
9. Weighted Factor Scoring Model: Formula
10. Weighted Factor Scoring Model: Formula Example

Table 1: Evalautions
Table 1: Weighted Factors Examples
11. Advantages of Scoring Models
a. Allow multiple criteria
b. Structurally simple
c. Intuitive and reflect actual thinking process
d. Direct reflection of managerial policy
e. Easily altered
f. Allow for more important factors
g. Allow easy sensitivity analysis
12. Disadvantages of Scoring Models
1. Relative measure
2. Linear in form
3. Can have a large number of criteria
4. Unweighted models assume equal importance
13. Numeric Models: Window-of-Opportunity Analysis
- A process where the cost, time, and performance specs are defined that must be met
before any R&D work.
14. Numeric Models: Discovery-Driven Planning
Similar to Window-of-Opportunity
Funds enough of the project to determine if the initial assumptions were accurate
Used to learn more about the project, rather than necessarily implement it
15. Choosing a Project Selection Model
- Weighted scoring models are favored:
a. Allow multiple objectives to be considered
b. Easily adapted
c. Not biased toward short run like the profitability models
Risk Versus Uncertainty

The difference between risk and uncertainty
1. Risk - When the decision maker is aware of the probability of every possible state of
nature as well as every possible outcome.
- An expected value of each alternative action can be determined.
2. Uncertainty - when a decision maker has information that is not complete and therefore
cannot determine the expected value of each alternative.
Risk Considerations in Project Selection

1. Both costs and benefits are uncertain
Benefits are more uncertain
2. There are many ways of dealing with risk
- Classic risk management as seen in Enterprise-wide Risk
Management (DeLoach, 2003) acknowledges 4 ways of dealing with risk:
a. Avoid
b. Reduce
c. Transfer
d. Retain or Accept
3. Can make estimates about the probability of outcomes
Subjective probabilities
4. Uncertainty about:
Timing
What will be accomplished?
Side effects
5. Pro forma documents think about amount of risk in
- Pro forma means "for the sake of form" or "as a matter of form" When it appears in
financial statements, it indicates that a method of calculating financial results using
certain projections or presumptions has been used.
- Pro forma financials are not computed using generally accepted accounting
principles (GAAP) and usually leave out one-time expenses that are not part of
normal company operations, such as restructuring costs following a merger.
- Essentially, a pro forma financial statement can exclude anything a company believes
obscures the accuracy of its financial outlook and can be a useful piece of information
to help assess a company's future prospects.
- A Pro forma document is a financial document that outlines a company's projected
financial performance over a given period of time. It includes estimates of income,
expenses, and cash flow. The goal of creating a Pro forma document is to give investors
and lenders an idea of how the company will fare financially in the future.
Characteristics of Highly Successful Projects
Project Portfolio Management (PPM)
Project Portfolio Management (PPM) Project Portfolio Management is used to
consistently and transparently select projects that match the organization's goals.
a. Organizations should maintain portfolios of projects

b. Links projects directly to the goals and strategy of the organization
c. Means for monitoring and controlling projects
The process has eight steps:
1. Step 1: Establish a Project Council The council is established to articulate strategic

direction and allocate funds to projects it selects.
2. Step 2: Identify Project Categories and Criteria Categories are established by the
Council to ensure that a variety of projects are pursued. Criteria for measuring prospective
projects are established to form the framework for the selection process. Common
categories used for classifying projects are:
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.
3. Step 3: Collect Project Data Collect relevant data and assign scores to prospective
projects.
4. Step 4: Assess Resource Availability Analyze the availability of resources to execute
the prospective projects.
5. Step 5: Reduce the Project and Criteria Set Use multiple screens to narrow down the
number of projects under consideration.
6. Step 6: Prioritize the Projects within Categories Using the analysis developed, prioritize
the projects within the previously identified categories.
7. Step 7: Select the Projects to be Funded and Held in Reserve The first task in this step
is determination of the mix of projects across the various categories and time periods. The
next task is to leave some percent of the organization's resource capacity free for new
opportunities, crises in existing projects, errors in estimates, and so on. Then allocate the
categorized projects in rank order to the categories according to the mix desired.
8. Step 8: Implement the Process The results of the process must be recorded, and then
widely communicated within the organization.
Symptoms of a Misaligned Portfolio (or Bad Projects)
a. More projects than company capability (ENRON is it a good example )
b. Inconsistent determination of benefits
c. Projects that don't contribute to the strategy
d. Competing projects
e. Costs exceed benefits
f. No risk analysis of projects
g. Lack of tracking against the plan
h. No client for project
Project Portfolio Process

Project portfolio management is the process of selecting the projects that best meet the
organization's goals with the resources available to perform these projects. A successful project
portfolio management process must be described very well so that everyone in the organization
understands the process.
Purpose of Project Portfolio Process

a. Identify non-projects
b. Prioritize list of projects
c. Limit number of projects
d. Identify the Real Options for each project
e. Identify projects with good fit
f. Identify co-dependent projects
g. Eliminate risky projects
h. Eliminate projects that skip the formal selection process
i. Keep from overloading the organization
j. To balance the resources with needs
k. To balance returns
l. To balance short-, medium-, and long-term returns
Project Portfolio Process Steps (In details)
1. Step 1: Establish a project council
2. Step 2: Identify project categories and criteria
3. Step 3: Collect project data
4. Step 4: Assess resource availability
5. Step 5: Reduce the project and criteria set
6. Step 6: Prioritize the projects within categories
7. Step 7: Select the projects to be funded and held in reserve
Step 1: Establish a Project Council : A Project Council is a group of people who are
responsible for overseeing the progress of the project and making sure that it is meeting the
desired goals and objectives. They are responsible for ensuring that the project is completed on
time, within budget, and with the desired quality. They also provide guidance and advice to the
project team and stakeholders.
a. Senior management
b. The project managers of major projects
c. The head of the Project Management Office
d. Particularly relevant general managers
e. Those who can identify key opportunities and risks facing the organization
f. Anyone who can derail the PPP later on
Step 2: Identify Project Categories and Criteria

a. Derivate projects
b. Platform projects
c. Breakthrough projects
d. Research & Development projects
Step 3: Collect Project Data
a. Assemble the data
b. Document assumptions
c. Screen out weaker projects
d. The fewer projects that need to be compared and analyzed, the easier the work of the
council
Step 4: Assess Resource Availability

a. Assess both internal and external resources
b. Assess labor conservatively
c. Timing is particularly important
Step 5: Reduce the Project and Criteria Set

a. Organization's goals
b. Have competence
c. Market for offering
d. How risky the project is
e. Potential partner
f. Right resources
g. Good fit
h. Use strengths
i. Synergistic
j. Dominated by another
k. Has slipped in desirability
Step 6: Prioritize the Projects Within Categories

a. Apply the scores and criterion weights
b. Consider in terms of benefits first and resource costs second
c. Summarize the returns from the projects
Step 7: Select the Projects to be Funded and Held in Reserve
a. Determine the mix of projects across the categories
b. Leave some resources free for new opportunities
c. Allocate the categorized projects in rank order
Step 8: Implement the Process

a. Communicate results
b. Repeat regularly
c. Improve process

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V.

Under Project Purpose and Area of Focus to improve Project Results

Challenges in Project Management

Table 2 strategic vs. tactical element

c. Streamlining decision making

3. Both of these theories embedded in organizational project management (OPM)

Organizational Project Management (OPM)

3. Incorporated into (PMI) and OPM Maturity Model

Characteristics of Business Case

Types of Nonnumeric Models

e. Comparative Benefit Model (comparing and contrasting alternatives, as in Q-sort)

Types of Numeric Models

5. Types of Numerical Models

2. Discounted Cash Flow (Net Present Value method - NPV)

3. Average Rate of Return (estimation of average rate of return: initial or average

B. Scoring (Criteria Scoring Models)

2. Criteria scoring models:

- Window-of-opportunity Analysis is a type of management technique which looks at a

1. Payback Period Example 1

3. Payback Period Drawbacks or disadvantages?

4. Discounted Cash Flow Important Issues

7. Weighted Factor Scoring Model (MY NOTES)

10. Weighted Factor Scoring Model: Formula Example

Table 1: Weighted Factors Examples

Risk Versus Uncertainty

Risk Considerations in Project Selection

Characteristics of Highly Successful Projects

a. Organizations should maintain portfolios of projects

The process has eight steps:

1. Step 1: Establish a Project Council The council is established to articulate strategic

Breakthrough projects Projects that involve implementing new, sometimes "disruptive"

b. Inconsistent determination of benefits

c. Projects that don't contribute to the strategy

e. Costs exceed benefits

f. No risk analysis of projects

g. Lack of tracking against the plan

h. No client for project

Project Portfolio Process

Purpose of Project Portfolio Process

b. Prioritize list of projects

c. Limit number of projects

d. Identify the Real Options for each project

e. Identify projects with good fit

f. Identify co-dependent projects

g. Eliminate risky projects

h. Eliminate projects that skip the formal selection process

i. Keep from overloading the organization

j. To balance the resources with needs

l. To balance short-, medium-, and long-term returns

1. Step 1: Establish a project council

2. Step 2: Identify project categories and criteria

3. Step 3: Collect project data

4. Step 4: Assess resource availability

5. Step 5: Reduce the project and criteria set

6. Step 6: Prioritize the projects within categories

7. Step 7: Select the projects to be funded and held in reserve

b. The project managers of major projects

c. The head of the Project Management Office

d. Particularly relevant general managers