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Part I Project Initiation © 2012 John Wiley & Sons Inc.

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Presentation on theme: "Part I Project Initiation © 2012 John Wiley & Sons Inc."— Presentation transcript:

1 Part I Project Initiation © 2012 John Wiley & Sons Inc.

2 2-2 Project Management

3 Chapter 2 Strategic Management and Project Selection © 2012 John Wiley & Sons Inc.

4 2-4 Problems With Multiple Projects Delays in one project delays others Inefficient use of resources Bottlenecks in resource availability

5 2-5 Project Results 30 Percent canceled midstream Over half of completed projects came in up to190 percent over budget Over half of completed projects came in up to 220 percent late

6 2-6 Challenges Making sure projects are closely tied to goals and strategy How to handle the growing number of projects? How to make these projects successful?

7 2-7 Project Management Maturity Project management maturity refers to the mastery of skills required to manage projects competently Number of ways to measure Most organizations do not do well

8 2-8 Project Selection and Criteria of Choice Project selection… – Evaluating – Choosing – Implementing Same process as other business decisions

9 2-9 Types of Companies Companies considering projects fall into two broad categories: – Companies whose core business is completing projects – Companies whose core business is something else They can also be broken down as: – Companies looking at projects to do for others – Companies looking at projects to do for themselves

10 2-10 Model Criteria Realism Capability Flexibility Ease of use Cost Easy computerization

11 2-11 The Nature of Project Selection Models Models turn inputs into outputs Managers decide on the values for the inputs and evaluate the outputs The inputs never fully describe the situation The outputs never fully describe the expected results Models are tools Managers are the decision makers

12 2-12 Types of Project Selection Models Nonnumeric models Numeric models

13 2-13 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”

14 2-14 Types of Nonnumeric Models Sacred Cow – A project, often suggested by the top management, that has taken on a life of its own 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

15 2-15 Types of Nonnumeric Models Continued Product Line Extension – Often, projects to expand a product line are evaluated on how well the new product meshes with the existing product line rather than on overall benefits Comparative Benefit – Projects are subjectively rank ordered based on their perceived benefit to the company

16 2-16 Numeric Models Models that return a numeric value for a project that can be easily compared with other projects Two major categories: – Profit/profitability – Scoring

17 2-17 Profit/Profitability Models Models that look at costs and revenues – Payback period – Discounted cash flow (NPV) – Internal rate of return (IRR) – Profitability index NPV and IRR are the more common methods

18 2-18 Payback Period The length of time until the original investment has been recouped by the project A shorter payback period is better

19 2-19 Payback Period Example

20 2-20 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)

21 2-21 Discounted Cash Flow The value of a stream of cash inflows and outflows in today’s dollars 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

22 2-22 Discounted Cash Flow Continued Requires a percentage to use to reduce future cash flows – This is known as the 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

23 2-23 NPV Formula

24 2-24 NPV Formula Terms A 0 Initial cash investment F t Cash flow in time period t (negative for outflows) kThe discount rate tThe number of years of life A higher NPV is better Higher the discount rate lower the NPV

25 2-25 NPV Example

26 2-26 Internal Rate of Return [IRR] The discount rate (k) that causes the NPV to be equal to zero The higher the IRR, the better – While it is technically possible for a series to have multiple IRR’s, this is not a practical issue Finding the IRR requires a financial calculator or computer In Excel “=IRR(Series,Guess)”

27 2-27 Profitability Index a k a Benefit cost ratio NPV divided by initial cash investment Ratios greater than 1.0 are good

28 2-28 Advantages of Profitability Models Easy to use and understand Based on accounting data and forecasts Familiar and well understood Gives a go/no-go indication Can be modified to include risk

29 2-29 Disadvantages of Profitability Models Ignore nonmonetary factors Some ignore time-value of money Biased toward the short-term Payback ignores cash flow after payback IRR can have multiple solutions All are sensitive to errors Nonlinear Dependent on determination of cash flows

30 2-30 Scoring Models Unweighted 0–1 factor model Unweighted factor model Weighted factor model

31 2-31 Unweighted 0-1 Factor Model Factors selected – Listed on a preprinted form Raters score the project on each factor Each project gets a total score Main advantage is that the model uses multiple criteria Major disadvantages are that it assumes all criteria are of equal importance

32 2-32 Unweighted 0-1 Factor Model Example Figure 2-2

33 2-33 Unweighted Factor Scoring Model Replaces X’s with factor score – Typically a 1-5 scale Column of scores is summed Projects with high scores are selected

34 2-34 Unweighted Weighted Factor Model Each factor is weighted the same Less important factors are weighted the same as important ones Easy to compute Just total or average the scores

35 2-35 Weighted Factor 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

36 2-36 Weighted Factor Model Example Figure B Page 60

37 2-37 Advantages of Scoring Models Allow multiple criteria Structurally simple Direct reflection of managerial policy Easily altered Allow for more important factors Allow easy sensitivity analysis

38 2-38 Disadvantages of Scoring Models Relative measure Linear in form Can have large number of criteria Unweighted models assume equal importance

39 2-39 Risk Considerations in Project Selection Both costs and benefits are uncertain – Benefits are more uncertain There are many ways of dealing with risk Can make estimates about the probability of outcomes – Subjective probabilities Uncertainty about: – Timing – What will be accomplished? – Side effects Pro forma documents

40 2-40 The Project Portfolio Process (PPP) Links projects directly to the goals and strategy of the organization Means for monitoring and controlling projects

41 2-41 Symptoms of a Misaligned Portfolio More projects Inconsistent determination of benefits Projects that don’t contribute to the strategy Competing projects Costs exceed benefits No risk analysis of projects Lack of tracking against the plan No client for project

42 2-42 Purpose of Project Portfolio Process Identify nonprojects Prioritize list of projects Limit number of projects Identify the real options for each project Identify projects with good fit Identify co-dependent projects

43 2-43 Purpose of Project Portfolio Process Continued Eliminate risky projects Eliminate projects that skip the formal selection process Keep from overloading the organization To balance the resources with needs To balance returns To balance short-, medium-, and long- term returns

44 2-44 Project Portfolio Process Steps 1. Establish a project council 2. Identify project categories and criteria 3. Collect project data 4. Assess resource availability 5. Reduce the project and criteria set 6. Prioritize the projects within categories 7. Select the projects to be funded and held in reserve 8. Implement the process

45 2-45 Step 1: Establish a Project Council Senior management The project managers of major projects The head of the Project Management Office Particularly relevant general managers Those who can identify key opportunities and risks facing the organization Anyone who can derail the PPP later on

46 2-46 Step 2: Identify Project Categories and Criteria Derivate projects Platform projects Breakthrough projects R&D projects

47 2-47 Step 3: Collect Project Data Assemble the data Document assumptions Screen out weaker projects The fewer projects that need to be compared and analyzed, the easier the work of the council

48 2-48 Step 4: Assess Resource Availability Assess both internal and external resources Assess labor conservatively Timing is particularly important

49 2-49 Step 5: Reduce the Project and Criteria Set Organization’s goals Have competence Market for offering How risky the project is Potential partner Right resources Good fit Use strengths Synergistic Dominated by another Has slipped in desirability

50 2-50 Step 6: Prioritize the Projects Within Categories Apply the scores and criterion weights Consider in terms of benefits first and resource costs second Summarize the returns from the projects

51 2-51 Step 7: Select the Projects to be Funded and Held in Reserve Determine the mix of projects across the categories Leave some resources free for new opportunities Allocate the categorized projects in rank order

52 2-52 Step 8: Implement the Process Communicate results Repeat regularly Improve process

53 2-53 Project Proposals The project proposal is essentially a project bid Putting together a project proposal requires a detailed analysis of the project Project proposals can take weeks or months to complete A more detailed analysis may result in not bidding on the project

54 2-54 Project Proposal Contents Cover letter Executive summary The technical approach The implementation plan The plan for logistic support and administration Past experience

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