Copyright 2009 John Wiley & Sons, nc.

Project Management
SeIecting Projects
StrategicaIIy
Ch # Ch #- -2 2
ProbIems With MuItipIe Projects
. Delays in one project delays others
because of common resource needs
or technological dependencies
2. nefficient use of resources
3. Bottlenecks in resource availability
Ch # Ch #- -3 3
Project ResuIts
30 Percent canceled
Over half 90 percent over budget
Over half 220 percent late
Ch # Ch #- -4 4
haIIenges
aking sure projects closely tied to
goals and strategy
How to handle growing number of
projects
How to make projects successful
Ch # Ch #- -5 5
Project Management Maturity
Project management maturity refers to
mastery of skills required to manage
project competently
Number of ways to measure
ost organizations do not do well
Ch # Ch #- -6 6
Project SeIection and riteria of
hoice
Project selection.
Evaluating
Choosing
mplementing
Same process as other business decisions
Projects that are consistent with the strategic
goals of the organization should be selected
Ch # Ch #- -7 7
ampIes of Project SeIection
manufacturing firm chooses which
machine to adopt in a process
TV station selects which comedy show to
run
construction firm selects the best subset of
potential projects
hospital finds the best mix of beds for a
new wing
Ch # Ch #- -8 8
%ypes of ompanies
Companies considering projects fall into
two broad categories:
. Companies whose core business is completing
projects
2. Companies whose core business is something
else
They can also be broken down as:
. Companies looking at projects to do for others
2. Companies looking at projects to do for
themselves
Ch # Ch #- -9 9
Project ompanies
ust 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
Ch # Ch #- -10 10
on-Project ompanies
ust decide which potential projects
they will pursue
vailable capital is the major constraint
Profitability is often the major criteria
ust evaluate approaches when there
is more than one project that can
accomplish a goal
Ch # Ch #- -11 11
ModeIs
odels are used to select projects
ll models simplify reality
That is, they only look at the key
variables involved in a decision
The more variables included in a
model, the more complex it becomes
Simpler models usually work better
Ch # Ch #- -12 12
%ypes of ModeIs
Stochastic/Probabilistic odel
model that includes the probabilities of events
occurring within the model. n other words, the
same inputs might yield different outputs at
different runs.
Deterministic odel
model that does not include probabilities. Given
the same inputs, the outputs will always be the
same.
Ch # Ch #- -13 13
riteria For Project SeIection
ModeIs
Companies only want to undertake successful
projects
Projects that fail waste resources and hurt
profitability and competitiveness
Projects that succeed improve profitability and
competitiveness
t is not possible to know ahead of time if a project
will succeed or fail
n fact, there is a continuum of possible results from
total success through absolute failure
Ch # Ch #- -14 14
riteria (ontinued)
Companies need a way of weeding out the
bad projects while keeping the good ones
No model can predict with absolute certainty
What we want is a model with a "good batting
average
Ch # Ch #- -15 15
ModeI riteria
Realism
Capability
Flexibility
Easy to use
nexpensive
Easy to implement
Ch # Ch #- -16 16
ReaIism
Needs to include all objectives of the firm
Needs to include the firms expertise as well
as its limitations
Needs to report results in a fashion that
allows different projects to be compared, e.g.
how do we compare a project to lower
production cost and one to raise market
share
Ch # Ch #- -17 17
apabiIity
odel needs to be sophisticated
enough to deal with all projects
Varying resource requirements
Varying time periods
Varying probabilities of success
Needs to be able to select the optimum
projects among all contenders
Ch # Ch #- -18 18
FIeibiIity
Needs to be able to work with all
projects
Needs to be updated as the firm and its
environment evolves
Ch # Ch #- -19 19
asy to Use
Needs to be quick to gather the data
and easy to use and understand
Easy to be able to "fit the project in the
model
Ch # Ch #- -20 20
nepensive
Do not want the model to eat up all the
savings that result from using the
model
Expenses include the cost of writing
and maintaining the model
lso includes the expense of gathering
the data needed by the model
Ch # Ch #- -21 21
asy to mpIement
This is less of an issue with modern
spreadsheets
However, a model to be used to
evaluate all the firm's projects should
be centrally maintained
Ch # Ch #- -22 22
%he ature of Project SeIection ModeIs
odels turn inputs into outputs
anagers 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
odels are tools
anagers are the decision makers
Ch # Ch #- -23 23
ifferent Factors Affecting
Outcome
any factors affect the outcome of a project
Some are one-time factors
The cost of an item
Others are reoccurring
aintenance
Not all factors are equally important
Critical factors on one project may be trivial
on another project
Ch # Ch #- -24 24
Predictors of Project Success
Expected profitability
Technological opportunity
Development risk
ppropriateness of the project for the
organization
Ch # Ch #- -25 25
tabIe_02_01
Project vaIuation Factors
Ch # Ch #- -26 26
%ypes of Project SeIection ModeIs
Nonnumeric models
Numeric models
Ch # Ch #- -27 27
onnumeric ModeIs
odels 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
Ch # Ch #- -28 28
%ypes of onnumeric ModeIs
Sacred Cow
project, often suggested by top management,
that has taken on a life of its own. t continues, not
due to any justification, but "just because.
Operating Necessity
project that is required in order to protect lives
or property or to keep the company in operation.
Competitive Necessity
project that is required in order to maintain the
company's position in the marketplace.
Ch # Ch #- -29 29
%ypes of onnumeric ModeIs ontinued
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.
Ch # Ch #- -30 30
umeric ModeIs
odels that return a numeric value for
a project that can be easily compared
with other projects
Two major categories:
. Profit/profitability
2. Scoring
Ch # Ch #- -31 31
Profit/ProfitabiIity ModeIs
odels that look at costs and revenues
Payback period
Discounted cash flow (NPV)
nternal rate of return (RR)
Profitability index
NPV and RR are more common
Ch # Ch #- -32 32
Payback Period
The length of time until the original
investment has been repaid by the
project
shorter payback period is better
Ch # Ch #- -33 33
Payback Period ampIe
4
000 , 25 $
000 , 100 $
Period Payback
Flow Cash Annual
Cost Project
Period Payback

Ch # Ch #- -34 34
Payback Period rawbacks
. Does not consider time value of
money
2. ore difficult to use when cash flows
change over time
3. Less meaningful over longer periods
of time (due to time value of money)
4. gnores cash flows beyond payback
period
Ch # Ch #- -35 35
iscounted ash FIow
The value of a stream of cash inflows and
outflows in today's dollars
lso known as net present value (NPV) or
just discounting
Widely used to evaluate projects
ncludes the time value of money
ncludes all inflows and outflows, not just the
ones through payback point
Ch # Ch #- -36 36
iscounted ash FIow ontinued
Requires a percentage to use to reduce
future cash flows
This is known as the discount rate or
hurdle rate or cutoff rate
There will usually be one overall
discount rate for the company
Ch # Ch #- -37 37
PV FormuIa

n
t
t
t
k
F
A
1
0
1
(project) NPV

0
nitial cash investment
F
t
The cash flow in time period t (negative for
outflows)
k The discount rate
n The number of years of life
Ch # Ch #- -38 38
PV FormuIa %erms
project is acceptable if NPV is positive
higher NPV is better
The higher the discount rate, the lower the
NPV
Ch # Ch #- -39 39
PV FormuIa ncIuding nfIation

0
1
NPV (project)
1
n
t
t
t
t
F
A
k p

p
t
Predicted rate of inflation during period t
Ch # Ch #- -40 40
PV ampIe
project requires $00,000 investment with a
net cash inflow of $25,000 per year for a
period of eight years, a required rate of
return of 5% and an inflation rate of 3%
per year.
Ch # Ch #- -41 41
PV ampIe

939 , 1 $
03 . 0 15 . 0 1
000 , 25 $
000 , 100 $ (project) NPV
8
1

t
t
Ch # Ch #- -42 42
tabIe_02_02
PV ampIe
Ch # Ch #- -43 43
nternaI Rate of Return (RR)
The discount rate (k) that causes the NPV to
be equal to zero
The higher the RR, the better
While it is technically possible for a series to have
multiple RR's, this is not a practical issue
Finding the RR requires a financial
calculator or computer
RR can also be found by trial and error
n Excel "=RR(Series,Guess)
Ch # Ch #- -44 44
ProfitabiIity nde
a.k.a. Benefit cost ratio
NPV of all future cash flows divided by
initial cash investment
Ratios greater than .0 are good
Ch # Ch #- -45 45
Advantages of ProfitabiIity ModeIs
Easy to use and understand
Based on accounting data and
forecasts
Familiar and well understood
Give a go/no-go indication
Can be modified to include risk
Ch # Ch #- -46 46
isadvantages of ProfitabiIity
ModeIs
gnore non-monetary factors
Some ignore time value of money
Discounting models (NPV, RR) are
biased to the short-term
Payback models ignore cash flow after
payback
Sensitive to error in data
Ch # Ch #- -47 47
Scoring ModeIs
&nweighted factor model
Weighted factor model
Ch # Ch #- -48 48
Unweighted Factor ModeIs
Each factor is weighted the same
Easy to compute
Just total or average the scores
Ch # Ch #- -49 49
Unweighted 0-1 Factor ModeI ampIe
Figure 2-2
Ch # Ch #- -50 50
Unweighted Factor Scoring ModeI
Give a score (point) to each criterion
and sum them up
Select the project with the highest total
score
Generally a five-point scale is used
Ch # Ch #- -51 51
Unweighted Factor Scoring ModeI
ampIe
Criterion: estimated annual profits
Score Performance level
5 bove $,00,000
4 $750,00 to $,00,000
3 $500,00 to $750,000
2 $200,000 to $500,000
Less than $200,000
Ch # Ch #- -52 52
Unweighted Factor Scoring ModeI
ampIe
Criterion: no decrease in quality of the final product
Score Performance level
The quality of the final product is
5 significantly and visibly improved
4 significantly improved but not visible to buyer
3 not significantly changed
2 significantly lowered but not visible to buyer
significantly and visibly lowered
Ch # Ch #- -53 53
Weighted Factor (Scoring) ModeI
Each factor is weighted relative to its
importance
Weighting allows important factors to stand out
good way to include non-numeric data in
the analysis
Factors need to sum to one
ll weights must be set up so higher values
mean more desirable
Small differences in totals are not meaningful
Ch # Ch #- -54 54
Weighted Factor ModeI
1
n
i if f
f
S s w

S
i
Total score of the i
th
project
s
ij
Score of the i
th
project on the j
th
criterion
w
j
Weight of the j
th
criterion
0 1 and 1
f f
f
w w A A

Ch # Ch #- -55 55
Weighted Factor ModeI ampIe
AutomobiIe SeIection
Table
Ch # Ch #- -56 56
Weighted Factor ModeI ampIe
AutomobiIe SeIection
Table B
Ch # Ch #- -57 57
Weighted Factor ModeI ampIe
AutomobiIe SeIection
Figure
Ch # Ch #- -58 58
Weighted Factor ModeI ampIe
AutomobiIe SeIection
Figure B
Ch # Ch #- -59 59
Advantages of Scoring ModeIs
ultiple criteria can be used
Simple and easy to understand
Direct reflection of managerial policy
Easily altered to accommodate
changes
Weights of criteria
Easy sensitivity analysis
Ch # Ch #- -60 60
isadvantages of Scoring ModeIs
Scores may not directly represent the
value or utility
Elements are assumed to be
independent
&nweighted models assume equal
importance of all criteria
Ch # Ch #- -61 61
AnaIysis Under Uncertainty-%he
Management of Risk
Everything to do with projects is risky
Some projects, like R&D, are more risky than
others, like construction
Risks include.
The timing of the project and its associated cash
flow
Risk regarding the outcome of the project
Risk about the side effects
Ch # Ch #- -62 62
Uncertainty
. Pro forma financial statements, break-
even charts
2. Risk analysis
3. Simulation (requires detailed
probability information)
Ch # Ch #- -63 63
omments on the nformation Base for
SeIection
database must be created and
maintained to furnish input data
ccounting data
easurements
&ncertain information
Ch # Ch #- -64 64
Accounting ata
. Cost and revenue are linear
2. Cost-revenue data derived using
standard cost standardized revenue
assumptions
3. Costs may include overhead
Ch # Ch #- -65 65
Measurements
. Subjective versus objective
2. Quantitative versus qualitative
3. Reliable versus unreliable
4. Valid versus invalid
Ch # Ch #- -66 66
Uncertain nformation
ust estimate inputs for risk analysis
These inputs cannot be known exactly
nputs must be adjusted over time
Ch # Ch #- -67 67
Project PortfoIio Process (PPP)
Links projects directly to the goals and
strategy of the organization
eans for monitoring and controlling
projects
Ch # Ch #- -68 68
Project PortfoIio Process (PPP)
dentify non-projects
Prioritize the available projects
Limit the number of projects
dentify the projects that best fit the
organization's strategy
Eliminate projects that incur high cost/risk
Keep from overloading the resource
availability
Balance resources with needs
Ch # Ch #- -69 69
PPP Steps
. Establish a project council
2. dentify project categories and criteria
3. Collect project data
4. ssess resource availability
5. Reduce the project and criteria set
6. Prioritize the projects within categories
7. Select projects to be funded and held in reserve
8. mplement the process
Ch # Ch #- -70 70
Step 1: stabIish a Project ounciI
Senior management
The project managers of major projects
The head of the Project anagement Office
Particularly relevant general managers
Those who can identify key opportunities and
risks facing the organization
nyone who can derail the PPP later on
Ch # Ch #- -71 71
Step 2: dentify Project ategories and
riteria
. Derivative projects: incrementally different in
product and process from existing offerings
2. Platform projects: major departures from existing
offerings (ex: a new model of automobile, a new
type of insurance plan)
3. Breakthrough projects: newer technology than
platform projects (ex: use of fiber optic cables for
data transmission, hybrid automobiles)
4. R&D projects: develop new technologies
Ch # Ch #- -72 72
fig_02_10
Ch # Ch #- -73 73
Step 3: oIIect Project ata
ssemble the data
&pdate previous data
Document assumptions
Screen out weaker projects
The fewer projects that need to be
compared and analyzed, the easier the
work
Ch # Ch #- -74 74
Step 4: Assess Resource AvaiIabiIity
ssess both internal and external
resources
ssess labor conservatively
Timing is particularly important
Ch # Ch #- -75 75
Step 5: Reduce the Project and riteria
Set
Organization's goals
Have competence
arket for offering
How risky
Potential partner
Right resources
Good fit
&se strengths
Synergistic with
other projects
Dominated by
another
Has slipped in
desirability
Ch # Ch #- -76 76
Step 6: Prioritize the Projects Within
ategories
pply the scores and criterion weights
Consider in terms of benefits first,
resource costs second
Summarize the returns from the
projects
Ch # Ch #- -77 77
Step 7: SeIect the Projects to be
Funded and HeId in Reserve
Determine the mix of projects across
the categories
Leave some resources free for new
opportunities
llocate the categorized projects in
rank order
Ch # Ch #- -78 78
fig_02_11
Ch # Ch #- -79 79
Step 8: mpIement the Process
Communicate results
Repeat regularly
mprove process
Ch # Ch #- -80 80
Project ProposaIs
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
more detailed analysis may result in not
bidding on the project
Ch # Ch #- -81 81
Project ProposaI ontents
Cover letter
Executive summary
The technical approach
The implementation plan
The plan for logistic support and
administration
Past experience