Chapter 2

Organizing Strategy and Project Selection

Why project managers need to understand strategy
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So they can make appropriate decisions and adjustments to current

project(s)
So they can be effective project advocates
o Able to demonstrate to senior management how the project
contributes to the organizations mission
o Able to explain to project team members critical project
objectives and priorities
Mistakes caused by not understanding the role of projects in
accomplishing strategy:
o Focusing on problems or solutions with low strategic priority
o Focusing on the immediate customer rather than the whole
market place and value chain
o Overemphasizing technology that results in projects that pursue
exotic technology that does not fit the strategy or customer need
o Trying to solve customer issues with a product or service rather
than focusing on the 20% with 80% of the value (paretos law)
o Engaging in a never-ending search for perfection only the project
team really cares about

The strategic management process

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Strategic management is the process of assessing what we are and

deciding and implementing what we intend to be and how we are
going to get there
Strategy describes how an organization intends to compete with the
resources available in the existing and perceived future environment

Strategic Management
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Requires every project to be clearly linked to strategy

Provides theme and focus of firms future direction
o Responding to changes in the external environment constant
environmental scanning
o Allocating scarce resources of the organization to improve its
competitive position internal responses to new programs

Requires strong links among mission, goals, objectives, strategy, and

implementation

Strategic Management process activities

1. Define the organizational mission
o Analyze the external and internal environments
2. Set long-term objectives (Analyze and formulate strategies)
o SMART
3. Formulate Strategies to reach objectives
4. Implement Strategies through projects
Characteristics of Objectives (S M A R T)
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Specific
o Be specific in targeting an objective
Measurable
o Establish a measurable indicator of progress
Assignable
o Make the objective assignable to one person for completion
Realistic
o State what can realistically be done with available resources
Time related
o State when the objective can be achieved; that is, duration

Portfolio Management System Problems

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Implementation of projects without a strong priority system linked to

strategy creates problems
Symptoms of organizations struggling with strategy and priorities:
o Conflicts among functional managers; causes lack of trust
o Frequent meetings to renegotiate priorities
o People shift from one project to another; not sure which is more
important
o People work on multiple projects; feel inefficient
o Resources are not adequate
The Implementation gap

o The lack of understanding and consensus on strategy among top

management and middle-level (functional) managers who
independently implement strategy
Organization Politics
o Project selection is based on the persuasiveness and power of
people advocating the projects
o Sacred Cow: A project that a powerful, high-ranking official is
advocating
Resource conflicts and Multitasking
o A multi-project environment creates interdependency,
relationships of shared resources, which results in the starting,
stopping, and restarting of projects

A portfolio management system

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Design of a portfolio management system

o Classification of projects
o Selection criteria
o Sources of project proposals
o Evaluation of project proposals
o Management of the portfolio of projects

Classification of projects
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Compliance (must do) projects

Strategic Projects
Operational Projects

Selection criteria
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Financial criteria
o Payback, net present value (NPV), internal rate of return (IRR)

Payback Model
o Measures the time the project will take to recover the project
investment
o Uses more desirable shorter paybacks
o Emphasizes cash flows, a key factor is business
o Payback period (years) = Est. project cost / Annual savings
o Limitations
Ignores the time value of money
Assumes cash inflows for the investment period
Does not consider profitability
Net Present Value model

o Uses the rate of return (discount rate) to compute the present

value of all net cash inflows
o Takes into consideration the time value of money and internal
profitability
o NPV = I + Ft / (1+k) t
o I = Initial investment, Ft = Net cash inflow for period t, K =
required rate or return
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Nonfinancial strategic criteria

o Strategic reasons for supporting projects:
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 nextgeneration products
To reduce dependency on unreliable suppliers
To prevent government intervention and regulation
- Multi-criteria selection models
o Checklist model
Uses a list of questions to review potential projects and to
determine their acceptance or rejection
Fails to answer the relative importance or value of a
potential project
Does not allow for comparison with other potential projects
o Multi-weighted scoring model
Uses several weighted qualitative and quantitative criteria
to evaluate project proposals
Allows for comparison of projects with other potential
projects
- Applying a selection model
o Project Classification
Deciding how well a strategic or operations project fits the
organizations strategy
o Selecting a Model
Applying a weighted scoring model to bring projects closer
to the organizations strategic goals
Reduces the number of wasteful projects
Helps identify proper goals for projects
Helps everyone involved understand how and why a
project is selected
Project proposals
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Sources and solicitation of project proposals

o Within the organization

o Request for Proposal (RFP) from external sources (contractors
and vendors)
Ranking Proposals and selection of projects
o Prioritizing requires discipline, accountability, responsibility,
constraints, reduced flexibility, and loss of power
Managing the portfolio system
o Senior management input
Provide guidance in selecting criteria that are aligned with
the organizations goals
Decide how to balance available resources among current
projects
o The Priority Team Responsibilities
Publish the priority of every project
Ensure that the project selection process is open and free
of power politics
Reassess the organizations goals and priorities
Evaluate the progress of current projects
o The Governance team
Responsible for publishing the priority of every project and
ensuring the process is open and free of politics
Evaluates the progress of the projects in the portfolio

Project Portfolio Matrix Dimensions

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Bread-and-butter Projects
o Involve evolutionary improvements to current products and
services
o Easy to accomplish
Pearls
o Low risk development projects with high commercial payoffs
o Represent revolutionary commercial opportunities using proven
technical advances
Oysters
o High risk, high value projects
o Involve technological breakthroughs with high commercial
payoffs
White Elephants
o Projects that showed promise at one time but are no longer
viable