Ch 2 Strategic Management and Project Selection n

Ch. 2 Strategic Management and Project Selection n n n n Maturity of Project Management Criteria for PS Models Nature of PS Models Types of PS Models Uncertainty Analysis and Risk Management Information Base for PS Models Project Portfolio Process (PPP) Project Proposal

Ch. 2. 0: Overview of PS Process n n n Project Management Office (PMO): Aligning corporate needs and project goals Project selection: Choose candidate projects using evaluation criteria Dealing with uncertainty: Risk analysis Strategically selecting best projects: Project Portfolio Process (PPP) Locking up the deal: Writing a project proposal

Ch. 2. 1: Project Management Maturity Levels n n n Ad-hoc (essentially disorganized) Abbreviated (some processes exist) Organized (standardized processes) Managed (measured processes) Adaptive (continuous improvement)

Ch 2. 2: PS Models n n n Idealized view of reality Representing the STRUCTURE of the problem, not the detail Deterministic or stochastic

Ch. 2. 2: Criteria for Project Selection Models n n n Realism (technical-, resource-, market-risk) Capability (adequately sophisticated) Flexibility (valid results over large domain) Ease of Use (no expert needed to run model) Cost (much less than project benefit) Easy Computerization (use standard software)

Ch. 2. 3: Nature of PS models: Caveats n n Project decisions are made by PM --NOT by PS model! A PS model APPROXIMATES, but does NOT DUPLICATE reality!

Ch. 2. 3: Nature of PS Models: Methodology n n n Start with detailed list of firm’s goals Create list of project evaluation factors (PEF’s) Weigh every element in PEF list Compute an overall score for project based on weighted PEF’s Select project that has the closest alignment with firm’s goals

Ch 2. 3: Project Evaluation Factors (PEFs) n n n Production Factors Marketing Factors Financial Factors Personnel Factors Administrative and Misc. Factors

Ch 2. 4: Types of PS Models: Nonnumeric n n n Sacred Cow Operating Necessity Competitive Necessity Product Line Extension Comparative Benefit Model

Ch 2. 4: Numeric PS Models: Profit / Profitability n n n Payback Period (PB) Average Rate of Return Discounted Cash Flow (NPV) Internal Rate of Return Profitability Index Other Profitability Models

Ch 2. 4: Numeric PS Models: Scoring n n Unweighted 0 -1 Factor Model Unweighted Factor Scoring Model Weighted Factor Scoring Model Constrained Weighted Factor Scoring Model n S = ∑(x) n S = ∑(s·w) ∏(c)

Ch 2. 4: Choosing the PS Model n n Dependent on wishes and philosophy of management 80% of Fortune 500 firms choose “nonnumeric” PS models Firms with outside funding often choose scoring PS models Firms without outside funding often choose profit / profitability PS models

Ch 2. 5: Management of Risk: Terminology n Risk: Decision based on complete information about the probability of each possible outcome. n Uncertainty: Decision based on incomplete or insufficient data. n Game: Decision based under conditions of conflict.

Ch 2. 5: Areas of Uncertainty n n n Project timing & expected cash flow. Direct outcome of project, i. e. what exactly will the project accomplish Side effects and unforeseen consequences of project

Ch 2. 6: Risk Analysis Crystal Ball® 2000 Software 1) 2) 3) Start with estimated risk profile for all key parameters of project Use Crystal Ball®, an EXCEL® plug in, to represent decision by statistical model Repeat many times to get a statistical distribution of all possible outcomes

Ch 2. 6: Risk Analysis: Crystal Ball® 2000 Software 1) Input of Cash Flow parameter from Psycho Ceramic example

Ch 2. 6: Risk Analysis: Crystal Ball® 2000 Software 2) Select distribution parameter (Triangular for this example)

Ch 2. 6: Risk Analysis: Crystal Ball® 2000 Software 3) Output, 1000 Monte Carlo Runs (example: Average Project NPV $10, 821)

Ch. 2. 6: Window-of. Opportunity Analysis n n n Estimate in advance economic impact of innovation before R&D is undertaken Set up a baseline of current process as the sum of all current subprocesses Compute cost/performance of new innovation as a multiple of each subprocess in the baseline system

Ch. 2. 6: Problems Affecting Data Used in PS Models n Accounting: arbitrary assignment of overhead costs, linear cost and revenue forecasts n Measurements: subjective vs. objective, quantitative vs. qualitative, reliable vs. unreliable, valid vs. invalid n Technology shock: New technology has to overcome initial resistance threshold.

Ch 2. 7: Project Portfolio Process (PPP) n n n n Step Step 1: 2: 3: 4: 5: 6: 7: 8: Establish a Project Council Identify project categories & criteria Collect project data Assess resource availability Reduce project and criteria Set Prioritize projects within categories Prioritize the projects within categories Implement the Process

Step 1: Establish a Project Council Includes: n Senior Management n Project Managers of major projects n Relevant general managers n Those who identify key risks n Those who could derail PPP later

Step 2: Identify Project Categories and Criteria n Derivative Projects n Platform Projects n Breakthrough Projects n R & D Projects

Step 3: Collect Project Data n n Use “activity based costs” Verify all data Include timing for benefits and resource needs Document assumptions for future checking

Step 4: Access Resource Availability Access availability of Internal and External Resources by: n n n Type Department Timing: can vary 100% over project life cycle

Step 5: Reduce the Project and Criteria Set Narrow down existing projects n n n n n required competence exists in organization Market for offering Profitability Risk Potential partner to assist with project Right resources available at the right times Good technological fit with organization Uses organization’s strengths Synergetic with other important projects Slipped in desirability

Step 6: Prioritize Projects within Categories n n Rank projects within each category Measure by n n Risk Development of new knowledge Consider benefits first Consider cost second

Step 7: Select the projects to be Funded and Held in Reserve n n n Determine the mix of projects across various categories and time periods Leave 10 -15 % of organization’s resources free Focus on committing to FEWER projects

Step 8: Implement the Process n Make results of the PPP widely known n Senior management must fully fund n Process will be repeated on a regular basis

Ch 2. 8: Project Proposal: Content n n n n Cover letter Executive summary Description and past experience of project team Nature of technical problem to be solved How to approach solution of technical problem Plan for implementation of project Plan for logistic support and administration

Ch 2. 8: Project Proposal: Cover Letter & Executive Summary n Compose a cover letter as key marketing instrument n Explain fundamental nature and general benefits of project n Minimally technical language

Ch 2. 8: Project Proposal: Past Experience of Project Team n List all key project personnel with titles and qualifications Include full resume of each principal n Provide all pertinent references n

Ch 2. 8: Project Proposal: Technical Approach n General description of problem to be addressed or project to be undertaken n n Major subsystems of problem or project Methodology of solving the problem Special client requirements Test and inspection procedures

Ch 2. 8: Project Proposal: Implementation Plan n Estimates of time, cost and materials for each subsystem and the whole project n Establish major milestones to break project into phases n List equipment, overhead and administrative cost n Develop contingency plans (including slack time)

Ch 2. 8: Project Proposal: Plan for Administration and Logistic Support n n n Control over subcontractors Nature and Timing of all reports (progress, budget, audits) Change management Termination Procedures “Touch of class” capabilities (artist’s renderings, meeting facilities, video conferencing, computer graphics)