Copyright 2009 John Wiley & Sons, Inc. Chapter 2 Selecting Projects Strategically Dr. Ayham...

Copyright 2009 John Wiley & Sons, Inc.

Chapter 2

Selecting Projects StrategicallyDr. Ayham Jaaron

Problems With Multiple Projects

1. Delays in one project delays others

2. Inefficient use of resources

3. Bottlenecks in resource availability

Project Results

According to a global study by Thomas et al., 2001):

30 Percent of projects are canceled midstream.

Over half of completed projects are 190 percent over budget

Over half of completed projects are 220 percent late

Challenges

Making sure projects closely tied to goals and strategy

How to handle growing number of projects

How to make projects successful

Project Management Maturity

Project management maturity refers to mastery of skills required to manage project competently.

Number of ways to measure maturity is developed based on five stages: ad-hoc, planned, managed, integrated, sustained.

Most organizations do not do well

Class Task: Group Discussion (10 minutes)

If you were a company CEO. What would you do to select your company’s projects? What criteria you would use to make sure that these projects is a necessity for the company?

Please list all of the possible factors.

Project Selection and Criteria of Choice

Same process as other business decisions

Project selection: is the process of evaluating individual projects or groups of projects and then choosing to implement some set of them so that the objectives of the parent organization will be achieved.

Types of Companies

Companies considering projects fall into two broad categories:

1. Companies whose core business is completing projects

2. Companies whose core business is something else

They can also be broken down as:1. Companies looking at projects to do for others2. Companies looking at projects to do for

themselves

Project Companies

Must select which projects they will bid on Generally based on…

– Their expertise– Resource they have availability– Their chance of winning bid

Preparing a bid is expensive They do not want to waste that effort on bids

where they are unlikely to be successful

Non-Project Companies

Must decide which potential projects they will pursue

Available capital is the major constraintProfitability is often the major criteriaMust evaluate approaches when there

is more than one project that can accomplish a goal

Different Factors Affecting Outcome of a project.

Many factors affect the outcome of a project– Some are one-time factors

The cost of an item

– Others are reoccurring Maintenance

Not all factors are equally important Critical factors on one project may be trivial

on another project

Types of Project Selection Models

Nonnumeric modelsNumeric models

Nonnumeric Models

Models that do not return a numeric value for a project that can 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– A project, often suggested by top management, that has

taken on a life of its own. It continues, not due to any justification, but “just because.” Example: new product.

Operating Necessity– A project that is required in order to protect lives or

property or to keep the company in operation. Example: a project to build a protective dam.

Competitive Necessity– A project that is required in order to maintain the

company’s position in the marketplace. Example: building new plant to enhance competitiveness.

Types of Nonnumeric Models Continued

Product Line Extension– Often, projects to expand a product line are

evaluated and judged 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.

Numeric Models

Models that return a numeric value for a project that can be easily compared with other projects

Two major categories:1. Profit/profitability

2. Scoring

Profit/Profitability Models

Models that look at costs and revenues– Payback period– Profitability

Other engineering economy methods are used here to evaluate profitability of different projects.

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

4000,25$

000,100$PeriodPayback

FlowCash Annual

CostProject PeriodPayback

Advantages of Profitability Models

Easy to use and understandBased on accounting data and

forecastsFamiliar and well understoodGive a go/no-go indication

Disadvantages of Profitability Models

Ignore non-monetary factorsSome ignore time value of moneyPayback models ignore cash flow after

payback

Scoring Models

Unweighted factor modelWeighted factor model

Unweighted Factor Model

Each factor is weighted the sameLess important factors are weighted the

same as important onesEasy to computeJust total or average the scores

Unweighted Factor Model Example

Figure 2-2

Weighted Factor Model

Each factor is weighted relative to its importance– Weighting allows important factors to stand out

A good way to include non-numeric 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 Model Example

Assume that we have the following criterion for purchasing automobile:

Purchase Relative importance (1-10)

weights

appearance 4 .10

braking 3 0.07

Comfort 7 0.17

Cost, operating 5 0.12

Cost, original 10 0.24

Handling 7 0.17

reliability 5 0.12

Total 41 1.00

Weighted Factor Model Example

There are 5 types of cars (projects) that we can choose from. We can estimate performance measures for each car/project on the criterion chosen on scale of (1-5) as shown in the table below:

Weighted Factor Model Example

Figure B

Project Portfolio Process (PPP)

Links projects directly to the goals and strategy of the organization. This occurs throughout the life of a project; from initiation to termination.

Means for monitoring and controlling projects. When a project becomes a burden, then it

deflects from the strategy.

PPP Steps

1. Establish a project council: who is responsible for arranging funds for strategy supporting projects. Usually joint venture/inter departmental projects.

2. Identify project categories and criteria3. Collect project data4. Assess resource availability5. Reduce the project and criteria set: reduce competing

projects.6. Prioritize the projects within categories7. Select projects to be funded and held in reserve8. Implement the process

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

Step 2: Identify Project Categories and Criteria

1. Derivative projects: add extension to current offerings. e.g. lower priced product.

2. Platform projects: major offerings. e.g. new type of automobile.

3. Breakthrough projects: newer technology. e.g. new technology use (fiber-optics for data)

4. R&D projects: e.g. using existing technologies in new manner.

Step 3: Collect Project Data

Assemble the data for proposed projects.

Document assumptionsScreen out weaker projectsThe fewer projects that need to be

compared and analyzed, the easier the work

Step 4: Assess Resource Availability

Assess both internal and external resources

Assess labor conservativelyTiming is particularly important

Step 5: Reduce the Project and Criteria Set

Market for offeringPotential partnerResourcesGood tech./knowledge fit

Narrow down the number of competing projects. Possible screens might be:

Step 6: Prioritize the Projects Within Categories

Apply the scores and criterion weights (numeric, non-numeric)

Consider in terms of benefits first, resource costs second

Summarize the returns from the projects

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

Step 8: Implement the Process

Communicate resultsRepeat regularly Improve process

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

Project Proposal Contents

Cover letterExecutive summaryThe technical approachThe implementation planThe plan for logistic support and

administrationPast experience