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MANAGEMENT OF ENGINEERING PROJECT MANAGEMENT
Chapter-2Strategies of Organization and Project selection
Why Project Managers Need to Understand the Strategic Management Process
Project managers who understand their organization’s strategy can become effective advocates of projects aligned with the firm’s mission.
Project managers must respond to changes with appropriate decisions about future projects and adjustments to current projects.
Objective Objectives translate the organization mission
into specific, concrete, measurable terms.
Objective Where the firm is headed When it is going to get there
Characteristic of Objective: SMART S- Specific M- Measurable A- Assignable R- Realistic T- Time related
Objectives S Specific :Be specific in targeting an
objective M Measurable Establish a measurable
indicator(s) of progress A Assignable Make the objective assignable
to one person for completion R Realistic State what can realistically be
done with available resources T Time related State when the objective can
be achieved, that is, duration
Project Selection
Project selection is the process of evaluating individual projects or groups of projects, and then choosing to implement selected criteria so that the objectives of the organization will be achieved
Project Selection Selection Criteria Although there are many criteria for selecting
projects, selection criteria are typically identified as financial and nonfinancial.
Nature of Project Selection Models
2 Basic Types of Models Numeric (or financial models) Nonnumeric (or nonfinancial
models)
Nature of Project Selection Models
Two Critical Facts: Models do not make decisions - People do!
All models, however sophisticated, are only partial representations of the reality they are meant to reflect
Numeric Models: Profit/Profitability
Payback period - NPV-Method –
Financial Models
The Payback Model Measures the time it will take to recover the
project investment. Shorter paybacks are more desirable. Emphasizes cash flows, a key factor in business.
Payback Period The payback period for a project is the initial fixed investment in the project divided by the estimated annual net cash inflows from the project.
The ratio of these quantities is the number of years required for the project to repay its initial fixed investment.
For example, assume a project costs $100,000 to implement and has annual net cash inflows of $25,000.
Then
Payback period $100,000/$25,000 = 4 years
Financial Models (cont’d) -see page-37 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: the project meets the minimum desired
rate of return and is eligible for further consideration. Negative NPV: project is rejected.
Net Present Value (NPV): Example page-38Statement 1- Project-A has initial investment of
$700,000 and projected cash inflows of $225,000 for 5 years
Statement 2- Project-B has initial investment of $400,000 and projected cash inflows of $110,000 for 5 years – Desired rate of return is 15% for both projects compare project A & B using payback period method (project cost/annual saving) and NPV method. Which project can be selected?
Inflows- Outflows=Net flow
Payback periodExample Comparing Two Projects (see page 38)
Payback period :Project A: Payback period $700,000/$225,000 = 3.1 years
Project B: Payback period $400,000/$110,000 = 3.6 years
Payback periodExample Comparing Two Projects (see page 38)
Payback period :Project A: Payback period $700,000/$225,000 = 3.1 years
Project B: Payback period $400,000/$110,000 = 3.6 years
The payback for Project A is 3.1 years and for Project B is 3.6 years. Using the payback method both projects are acceptable since both return the initial investment in less than five years and have returns on the investment (reciprocal of payback period) of 32.1 and 27.5 percent and exceeds 15% desired rate
Net Present Value (NPV): Example Comparing Two Projects (see page 38)Project A: can also be solved as:
Net Present Value (NPV): Example Comparing Two Projects (see page 38)Project B: can also be solved as:
Net Present Value (NPV): Example Comparing Two Projects (see page 38)
Based on NPV calculation:Accept Project A: NPV positive
Reject Project B : NPV negative
Exercise Problem-5 ( see page 52)
Problems - 5
See page 52
Financial Models (cont’d) The Net Present Value (NPV) Model
If in the questions they have given inflation rate as well then you need to add it in calculations as follows:
pt --- is inflation rate
Problem - 5
Rate of return = 20% and Inflation =3%
Problem - 5
Project. Ospory
Problems - 5Project: Voyagers
Problems - 5
The only project SIMSOX should consider is Voyagers.
The other two projects have NPV negative
Strategic Importance Nonnumeric or nonfinancial criteria
Financial return, while important, does not always reflect strategic importance.
Now the prevailing thinking is that long-term survival is dependent upon developing and maintaining core competencies.
For example
Strategic thinking Nonfinancial Criteria
To capture larger market share To make it difficult for competitors to enter the
market To develop an enabler product To develop core technology that will be used
in next-generation products To reduce dependency on unreliable
suppliers To prevent government intervention and
regulation
Nonfinancial criteria
Operating Necessity - the project is required to keep the system running
Competitive Necessity - project is necessary to sustain a competitive position
Nonnumeric criteria Product Line Extension - projects are judged on how
they fit with current product line, fill a gap, strengthen a weak link, or extend the line in a new desirable way.
Comparative Benefit Model - several projects are considered and the one with the most benefit to the firm is selected
Multi-Weighted Scoring Model
Multi-Weighted Scoring Model A weighted scoring model typically uses several
weighted selection criteria to evaluate project proposals.
Scores are assigned to each criterion for the project, based on its importance to the project being evaluated.
Using these multiple screening criteria, projects can then be compared using the weighted score. Projects with higher weighted scores are considered better.
Project Screening Matrix
FIGURE 2.3
Project Portfolio
Benefits of Project Portfolio Management Builds discipline into project selection process. Links project selection to strategic requirements of
organization. Prioritizes project Allocates resources to projects that align with strategic
direction. Balances risk across all projects. Justifies killing projects that do not support organization
strategy. Improves communication and supports agreement on
project goals.
Project Portfolio Matrix
Weight method
Project Portfolio Matrix Dimensions
Bread-and-Butter Projects Involve evolutionary improvements to current products
and services. Pearls
Represent revolutionary commercial advances using proven technical advances.
Oysters Involve technological breakthroughs with high
commercial payoffs. White Elephants
Projects that at one time showed promise but are no longer viable.