MGMT 6084 PROJECT MANAGEMENT

ORGANIZATIONAL STRATEGY AND PROJECT SELECTION

MODULE
TWO

Prof. Mohamed Soliman

Project Management by Nick Youngson CC BY-SA 3.0 Alpha Stock Images

The following content was prepared by Prof Robert Brookes and reproduced
from Larson, Gray (2018) Project Management: The Managerial Process.
ORGANIZATIONAL STRATEGY AND
PROJECT SELECTION
 WHAT ARE WE GOING TO DO TODAY?

 Learn about the key components of strategic management and how it relates to
project management.
 You will form your project teams for the term.
 You will learn how to conduct Payback Period and Net Present Value calculations.
 You will be learn how to use non-financial metrics to help rank projects.
 TIME TO FORM YOUR TEAMS

 Get your stuff together as you will be moving to different parts of the room:
 Do you want to form groups by ease of meeting up?
 Do you live in residence at Fanshawe?
 Do you live within 5-10 minutes walking distance from Fanshawe (N/S/E/W)?
 Do you commute to Fanshawe?

 Are there people you are already working with in other courses?
 Is there a good mix of skills and experience?
 TEAM INFORMATION

 Need to know:
 Team name!
 Who is on your team.
 Set a proposed weekly meeting
schedule for 1-2 hours per
week.

 Select someone to submit this

information using FanshaweOnline
prior to next class.
 GROUP EXPECTATIONS

 There is a form that needs to be

submitted with each project that
details each team member’s
contribution and role. This will be
covered next class.
 If a team member is not
contributing or if there are any
other issues – let me know as soon
as possible.
ORGANIZATIONAL STRATEGIES

On a piece of paper, fill out the following table according to what you think the organizational strategy
is and what the resulting project management focus will be. (3 minutes)

Connect with a partner and share your ideas (4 minutes)

Selected reporting out (3 minutes)

Company Strategy Project Focus?

Walmart
Apple
Fanshawe College
Tesla
Uber
ORGANIZATIONAL STRATEGIES

Company Strategy Project Focus?

Efficiencies, reducing
Walmart Low Prices
costs.
Apple New Products Product development.
Fanshawe College Practical Education Improving quality.
Manufacturing
Tesla Energy Technology
processes.
Software: use and
Uber Ease of Use
efficiency.
PROJECT MANAGEMENT

You are here!

TALKING THE TALK

There are two major benefits of

understanding your organization’s
Strategic Management View
strategy:
1. Allocating scarce resources.
2. Scanning external environment to
respond to market changes.
1. Prioritization: know what to
focus on (remember your
Practical View
brand is tied to the success of
your projects) 1. Implementing strategies.
2. Formulating strategies.
2. Speaking the language of the
executives means they will be Temporal View
more confident and 1. Short term.
comfortable with you (political 2. Long term.
power)
STRATEGIC MANAGEMENT

Strategic
PM View Management Practical View Temporal View
View
Project Strategy Tends to be shorter
Resource allocation
prioritization implementation term

Effective External market Tends to be longer

Strategy formulation
communication opportunities term
 Competing
resources

Strategic alignment
STRATEGIC MANAGEMENT PROCESS

Review and Define the Organizational Mission

 Activity: pick a favourite company. Go online and try and find the
mission statement. Read a few aloud and get comments / feedback.
 Does it ring true?
 How do they differ?
 Are some more clearly articulated than others?
 STRATEGIC MANAGEMENT PROCESS

Analyze and Formulate Strategies

Assessment of
Who are the
the internal Critical
customers? What are our
and external evaluation of
What are their options?
environments options.
needs?
(SWOT)

Program
Management

Project A Project B Project C

STRATEGIC MANAGEMENT PROCESS

Set Objectives to Achieve Strategies – Be SMART!

S M A R T
Specific Measurable Assignable Realistic Time related
Meaningful Achievable Reasonable Timely
Attainable Relevant Time-bound
Action oriented Time-based
Actionable Time limit
Action Plan
Agreed Upon
Accountable
 STRATEGIC MANAGEMENT PROCESS

Projects!
Implement Strategies Through _______________

Formal and Planning and

Allocation of Team
informal Control
Resources Management
organization Systems

Funding, people, Relates to authority, Are the project Team motivation. Team
management support, responsibility, and activities being management is a
technical skills, and performance. performed effectively? critical differentiating
equipment. Organizational Time / Cost / Quality. factor in successful
structure and culture. projects.

Context of Portfolio / Program Management and Prioritization.

BUT, WHAT’S PORTFOLIO

 A project portfolio is a collection of projects and programs that are

managed as a group to achieve strategic objectives. An organization may have
one portfolio, which would then consist of all projects, programs, and
operational work within the company.
BREAK TIME

 10 minutes

Licenced under CC
3.0
WHY DO WE NEED TO PRIORITIZE?
WHY DO WE NEED TO PRIORITIZE?

1. The Implementation Gap

i. Decisions are made independently at each organizational level – how to implement
and what to prioritize, and this prioritization may vary between departments (e.g. a
project may be high or low priority depending on who you talk to).
2. Organizational Politics
i. Decisions may be made subjectively, with bias.
ii. Personal ambitions.
3. Resource Conflicts and Multitasking
i. Interdependencies and shared resources.
ii. Increasing complexity of projects makes this an increasingly difficult problem.
TYPES OF PRODUCTS (BROAD CLASSIFICATION)
A PORTFOLIO MANAGEMENT SYSTEM

 Selection Criteria
 Financial models: payback, net present value (NPV)
 Non-financial models: projects of strategic importance to the firm
 Multi-Criteria Selection Models
 Use several weighted selection criteria to evaluate project proposals.

2–22
FINANCIAL MODELS
 The Payback Model
 Measures the time the project will take to recover
the project investment.
 Uses more desirable shorter paybacks.
 Emphasizes cash flows, a key factor in business.
 Limitations of Payback:
 Ignores the time value of money.
 Assumes cash inflows for the investment period
(and not beyond).
 Does not consider profitability.

2–23
FINANCIAL MODELS (CONT’D)
 The Net Present Value (NPV) Model

 Uses management’s minimum desired rate-of-return (discount rate) to compute the

present value of all net cash inflows.

 Positive NPV: project meets minimum desired rate

of return and is eligible for further consideration.
 Negative NPV: project is rejected.

2–24
PORTFOLIO MANAGEMENT

Financial Metrics – Payback Period

Payback Period (years) = Estimated Project Cost
Cash Inflow per year

Example:
Initial investment: $850,000
Projected cash inflows: $250,000 for [9 years?]

Payback Period = 850,000

250,000

= 3.4 years
Rate of return = 29.4 %
PAYBACK PERIOD PRACTICE

Financial Metrics – Payback Period

Payback Period (years) = Estimated Project Cost
Cash Inflow per year

Example:
Initial investment: $340,560
Projected cash inflows: $430,866 for 2 years

Payback Period = 340,560

150,866

= 2.3 years
Rate of return = 44.3 %
PROJECT SELECTION – NET PRESENT VALUE

Benefits of NPV:
 It is a much more useful calculation than payback period.
 Uses the ‘time value of money’ to standardize project outcomes.
 Allows for the application of risk measures directly to the calculation.
 Projects can be compared (ranked) directly, even with differing investment
patterns and project length.
NPV – INTRODUCTION
NPV = - Initial Investment + Year 1 cash flow + Year 2 cash flow + Year n cash flow
(1 + minimum ROI)1 (1 + minimum ROI)2 (1 + minimum ROI)n

NPV: Net (cash – investment) Present (what money is worth today) Value
(quantitative)

Initial investment: this is the initial cost of the project start up. It is always a negative
number.

Yearly cash flow: the estimated amount of cash coming in minus costs (including
ongoing project costs)

Minimum ROI: a percentage used that indicates the minimum required return on the
investment. This could be due to borrowing costs, amount of risk etc. For our
purposes:
• Low risk project: discount rate = 5% The higher the discount
rate, the HIGHER the
• Medium risk project: discount rate = 15% return on the project will
• High risk project: discount rate = 25% need to be!
NPV –
NPV –
NPV –
NPV –
NPV –
NPV –
SOLVING THE NPV EQUATION

You have a project with an initial investment of $800k. It is expected to provide a

payback over 3 years, and will contribute an additional $450k in cash flow per
year. As a medium risk project, it must achieve at least 15% ROI.

a : what is the initial investment?

b : for how many years will the project have an impact?
c : how much will the cash flow increase per year?
d : what rate should I use?
 NPV – WORKED EXAMPLE

New equipment costs $250k.

NPV = (250) + 275-100 + 275 – 50
Two years to implement the project,
costing $100k the first year, $50k the (1+0.05)1 (1+0.05)2
second year.
Estimated net cash flow return is $275k
= -250 + 175 + 225
over two years. 1.05 1.1025
It is considered a low risk (5%) project.
= -250 + 166.67 + 204.08

What is the NPV for this project? = 120.75

High risk (25%) = -250 + 140 + 144

What if this were a high risk project? = 34
 NPV – PRACTICE

Software Implementation
A project has been proposed that
would implement a new software
package. It is anticipated that through NPV = (1,200) + 475-150 + 475 + 475 + 475
increase sales revenue and efficiencies, (1+0.25)1 (1+0.25)2 (1+0.25)3 (1+0.25)4
the software would increase cash
flows by $475K per year for the next = -1,200 + 325 + 475 + 475 + 475
4 years. 1.25 1.56 1.95 2.44

= -1,200 + 260 + 304.49 + 243.59 + 194.67

The software package costs $1.2m and
the first year project costs are = - 197.25
budgeted to be $150k.
Low risk (5%) = -1,200 + 309.52 + 431.82 + 409.48 + 389.34
= 340.16
This is a high risk project.
What is the NPV of this project?
What if it was a low risk project?
 ACTIVITY – RECORDING PROJECT!

A number will be assigned to you:

1 2 3

Time Fades Away On the Beach Tonight’s the Night

Year Outflow Inflow Year Outflow Inflow Year Outflow Inflow

0 600,000 0 0 400,000 0 0 200,000 0

1 50,000 600,000 1 50,000 400,000 1 10,000 200,000

2 75,000 2 100,000 2 125,000

3 20,000 3 25,000 3 75,000

4 15,000 4 20,000 4 20,000

5 10,000 5 10,000 5 10,000

Image source: pngimg.com

RANKING PROJECTS USING NPV

Project Low Risk NPV High Risk NPV

New equipment 120.75 34
Software 340.16 -197.25

Rank Project
1 Software (low)
2 New equipment (low)
3 New equipment (high)
4 Software (high)
 NON-FINANCIAL CRITERIA
Checklists
 Especially useful for must have / nice to have.
 Binary (does the criterion exist or not?).
 Does not differentiate between value of individual
criteria.

Multi-weighted scoring models

 Assigns a relative value, the basis can be binary or
continuous.
 Simply multiply the values and sum them.
Can tune the weighting according to projects, including
Source: Open Clipart
 library

using a risk rating etc.

 Need to be able to justify your choices. Don’t be
tempted to ‘tune’ the model to your expectations!
EXAMPLES OF NON-FINANCIAL CRITERIA

 To capture larger market share

 To make it difficult for competitors to enter the market

 To develop an enabler product, which by its introduction will increase sales in more
profitable products
 To develop core technology that will be used in next-generation products

 To reduce dependency on unreliable suppliers

 To prevent government intervention and regulation

 To restore corporate image or enhance brand recognition

 To demonstrate its commitment to corporate citizenship and support for community

development
PROJECT SCREENING
 BALANCING PROJECTS

Bread-and-butter Projects
 Involve evolutionary improvements
to current products and services.
Pearls
 Represent revolutionary commercial
opportunities using proven technical
advances.
Oysters
 Involve technological breakthroughs
with high commercial payoffs.
White Elephants
 Showed promise at one time
but are no longer viable.
PROJECT SCREENING PROCESS
PROJECT SCREENING ANALYSIS

Previously, each project was

given a score. This would
mean the project made the
‘cut’. For example, in the
sales department projects
would be assigned scores
and are prioritized based on
alignment and resources.

At this level, projects from

multiple sources are
compared against broader
strategic objectives.
SUMMARY

 Why it is important to be connected to the organizational strategic views.

 Project prioritization and communication.
 The strategic management process.
 How to use NPV and Payback calculations to quantify project outcomes.
 Also, how to use NPV to rank projects that have different time spans and risks.
 How to incorporate non-financial criteria into the project selection process.
 Using appropriate methods to screen and classify projects.
THINGS TO DO BETWEEN NOW AND THE NEXT CLASS

 At your scheduled time, meet up with your team.

 Fill out the team information sheet and submit it on the course website.
 Complete case study 2.3. Complete the ranking and pick your favourite. Be prepared to discuss
your pick next class.
 Don’t forget to submit the team minutes document and team members sheet!
 Instructions for the assignment are online.
 If you do not submit the assignment, or it is not to a pass/fail standard, the MAXIMUM
marks you will get on the next case assignment (Module 3) is 5/10.
 Remember this is a project management course. Most assignments involve using your TEAM.
What may seem overwhelming at first will seem less so when you realize you are not on your
own!

 READ Chapter 3, Project Management 7E – Larson and Gray.

CASE STUDY SUBMISSION