project selection
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The document discusses various models and methods used for project selection. It begins by describing non-numeric models such as sacred cow, operating necessity, competitive necessity, and product line extension. It then discusses numeric scoring models including unweighted 0-1 factor model, unweighted factor scoring model, and weighted factor scoring model. Finally, it discusses financial models used for project selection, focusing on models that evaluate profitability. The document provides an overview of different approaches organizations can take when selecting projects.
project selection
- 1. Project Selection •Pest Analysis, Swot Analysis, Porter’s Five Force Model •Non-numeric Models •Numeric Models Chapter 2
- 2. Challenges of Contemporary Organizations 02/22/15Yu-Lin Huang Project selection is the process of evaluating individual projects or groups of projects, and then choosing to implement some set of them so that the objectives of the parent organization will be achieved How to tie their projects more closely with the organization’s goals and objectives? How to handle the growing number of ongoing projects? How to make these projects more successful?
- 3. Strategic Planning Process Strategic Analysis Guiding Principles Vision Mission Statement Strategic Objectives
- 4. Strategic Planning and Portfolio Alignment
- 5. Strategic Analysis: PEST Analysis PEST analysis is a business measurement tool An acronym for Political, Economic, Social and Technological factors Used to assess the market for a business or organizational unit Measures the market potential and situation, particularly indicating growth or decline, and thereby market attractiveness, business potential, and suitability of access 02/22/15Yu-Lin Huang
- 6. The PEST subject should be a clear definition of the market being addressed, which might be from any of the following standpoints: a company looking at its market a product looking at its market a brand in relation to its market a local business unit a strategic option, such as entering a new market or launching a new product a potential acquisition a potential partnership an investment opportunity 02/22/15Yu-Lin Huang
- 7. 02/22/15Yu-Lin Huang 7 Political Ecological/environmental issues Current legislation Home market Future legislation International legislation Regulatory bodies and processes Government policies Government term and change Trading policies Funding, grants and initiatives Home market lobbying/pressure groups International pressure groups Wars and conflicts Economic Home economy situation Home economy trends Overseas economies and trends General taxation issues Taxation specific to product/services Seasonality/weather issues Market and trade cycles Specific industry factors Market routes and distribution trends Customer/end-user drivers Interest and exchange rates International trade/monetary issues Social Life style trends Demographics Consumer attitudes and opinions Media views Law changes affecting social factors Brand, company, technology image Consumer buying patterns Fashion and role models Major events and influences Buying access and trends Ethnic/religious factors Advertising and publicity Ethical issues Technological Competing technology development Research funding Associated/dependent technologies Replacement technology/solutions Maturity of technology Manufacturing maturity and capacity Information and communications Consumer buying mechanisms/technology Technology legislation Innovation potential Technology access, licencing, patents Intellectual property issues Global communications
- 8. SWOT Analysis SWOT is an acronym for Strengths, Weaknesses, Opportunities, Threats Provides a good framework for reviewing strategy, position and direction of a company or business proposition, or any other idea. SWOT analysis is used for business planning, strategic planning, competitor evaluation, marketing, business and product development and research reports. 02/22/15Yu-Lin Huang
- 9. Strengths are positive internal factors that a company can use to accomplish its mission, goals, and objectives. e.g., brand image, experienced sales force, patents, special knowledge Weaknesses are negative internal factors that inhibit a company’s ability to accomplish its mission, goals, and objectives. e.g., lack of capital, inferior location Opportunities are positive external options that a firm can exploit to accomplish its mission, goals and objectives. Threats are negative external forces that inhibit a company’s ability to achieve its mission, goals and objectives. SWOT Analysis
- 10. SWOT ANALYSIS OF WAL-MART Strength Powerful retail brand Exponential growth Information technology and international logistics system Focus on HRD and retention of employees Weakness Huge span of control Less focus on specific sectors Presence limited to only a few countries Opportunity Strategic alliances Future business by expansion New locations and store types Threat Target of competition Exposed to political problems Price competition
- 11. PORTER’S FIVE FORCES MODEL Porter five forces analysis is a framework for industry analysis and business strategy development. It draws upon industrial organization economics to derive five forces that determine the competitive intensity and therefore attractiveness of a market. Attractiveness in this context refers to the overall industry profitability. Supplier Power Buyer Power Competitive Rivalry Threat of Substitution Threat of New Entry
- 12. The Five Forces Threat of New Entrants/ Barriers to Entry Bargaining Power of Customers Threat of Substitutes Bargaining Power of Suppliers Sources for this section: Michael E. Porter, Understanding Industry Structure, Revised 2007 and How Competitive Forces Shape Strategy, Harvard Business Review, 1979 Rivalry Among Existing Competitors
- 13. Background of Smartphones Simon designed by IBM in 1992 Palm started the concept/evolved from PDAs Advanced productivity tools (calendars, emails, etc.) High cost/high end devices Look and feel of a mini PC Perceived sense of increased efficiency Ability to expand and add-on to augment the user experience Started primarily for business- expanded to consumers/entertainment
- 14. Smartphone Competitors Smartphone Definition: Many functions other than a regular cellular phone Mini computer inside a “normal” cell phone Can upload applications Revolutionary phone, media flare and internet access Competitors: RIM Apple LG Samsung Motorola HTC Nokia Operating systems: Apple Android Microsoft Windows Phone 7
- 15. BARRIERS TO ENTRY Knowledge barrier; Brand recognition Carrier relationship; Highly fragmented; Exclusive technology CUSTOMER POWER • Consumer • Trend seekers • Enterprise • Carriers SUBSTITUTES Email; Skype/Gizmo/VoIP; iPad – notebook/computer; Regular old cell phone; Landlines; Visit in person; No mobile device SUPPLIER POWER •Chip mfrs, circuit boards, cameras, touch screen (raw materials) •Carriers •Distribution channels •Software/operati ng system RIVALRY Huge Very fast moving phones beco- ming obsolete
- 16. Conclusions Very strong, but lots of competition Quickly changing Innovation is key Huge opportunity for growth – upside Carrier dependent
- 17. Guiding Principles The vision describes the future of the organization “vivid description of a preferred future” Require extra effort to be achieved Often multiyear goals that end in suggesting the need for a new vision The mission statement provides a mechanism for achieving the vision “organization’s core purpose, core values”, beliefs, culture, primary business, primary customers
- 18. Mission Statement Considerations Purpose – communicates why an organization exists Beliefs – what the leaders of an organization stand for Core values – how decisions will be made and how people will be treated Culture – how members should act Primary business areas – what business the organization engages in Primary customers – which groups of people need to be satisfied
- 19. Cincinnati Children’s Hospital Medical Center Vision and Mission Vision
- 20. Strategic Objectives Means of achieving the vision and mission Objective setting occurs annually Describe short term and long term results Describe measures of achievement Effective objectives are SMART Specific Measurable Achievable Results-based Time-specific
- 21. Midland Insurance Company Strategic Objectives
- 22. Portfolio Alignment Assess organization’s ability to perform projects Portfolios Programs Projects and subprojects
- 23. Portfolios Organizations require work activities including ongoing operational work and temporary project work Try to achieve a sense of balance in portfolios Some large and some small projects Some high-risk, high-reward projects and some low-risk projects Some projects that can be completed quickly and some that take substantial time portfolio – “a collection of projects or programs and other work that are grouped together to facilitate effective management of that work to meet strategic business objectives. The projects or programs of the portfolio may not necessarily be interdependent or directly related.” PMBOK® portfolio – “a collection of projects or programs and other work that are grouped together to facilitate effective management of that work to meet strategic business objectives. The projects or programs of the portfolio may not necessarily be interdependent or directly related.” PMBOK®
- 24. Programs Programs last as long as the organization lasts Specific projects within a program are of limited duration Portfolios and programs are managed at a level above the typical project manager program – “a group of related projects managed in a coordinated way to obtain benefits and control not available from managing them individually. Programs may include elements of work outside of the scope of discrete projects in the program.” PMBOK® Guide program – “a group of related projects managed in a coordinated way to obtain benefits and control not available from managing them individually. Programs may include elements of work outside of the scope of discrete projects in the program.” PMBOK® Guide
- 25. Projects and Subprojects A large project may be composed of multiple subprojects The project manager coordinates subprojects and make decisions that are best for the overall project subproject – “a smaller portion of the overall project created when a project is subdivided into more manageable components or pieces.” PMBOK® Guide subproject – “a smaller portion of the overall project created when a project is subdivided into more manageable components or pieces.” PMBOK® Guide
- 26. Portfolio of Projects and Operational Work Processes
- 27. Reasons for Project Failure Not enough resources Not enough time Unclear expectations Changes to the project Disagreement about expectations
- 28. The Project Portfolio A collection of projects grouped to be collectively managed Projects are selected to contribute to the organization’s goals Portfolio alignment identifies, selects, and prioritizes projects to help achieve an organization’s strategic goals
- 29. Assess Organization’s Ability to Perform Projects Do we have a teamwork attitude, free and open communication, creativity, and empowered decision-making? Do we have a clearly defined project management process? Do our associates have the right attitudes, skills, and competencies to use the project management process? Are our leaders at each level willing to take appropriate personal risk?
- 30. Assess Organization’s Ability to Perform Projects Does senior leadership establish a strong leadership foundation? Do individuals and teams exhibit leadership at their respective levels? Do we monitor and understand our external environment?
- 31. Identifying Potential Projects People from all levels and all functional areas should participate Identify twice as many potential projects as the organization has time and resources to perform Develop a brief description of all potential projects The “elevator speech” business case – “provides the information needed from a business standpoint to determine if the project is worth the investment.” PMBOK® Guide business case – “provides the information needed from a business standpoint to determine if the project is worth the investment.” PMBOK® Guide statement of work – “narrative description of products or services to be provided by the project.” PMBOK® Guide statement of work – “narrative description of products or services to be provided by the project.” PMBOK® Guide
- 32. Project Selection Procedure: A Cross- Industry Sampler Hoechst AG, a pharmaceutical firm uses a scoring portfolio model with 119 questions in five major categories i.e.: business strategy fit, probability of technical success, commercial success, strategic leverage and reward to the company. Within each of these factors there are specific questions which are scored on a 1-10 by the management. The Royal Bank of Canada uses the following criteria for portfolio scoring: Project importance( strategic importance, magnitude of impact and economic benefits) ease of doing (cost of development, project complexity and resource availability) Expected annual expenditure and total project spending are then added to this rank ordered list to prioritize project options.
- 33. Project selection is the process of evaluating individual projects or groups of projects, and then choosing to implement some set of them so that the objectives of the parent organization will be achieved Managers often use decision-aiding models to extract the relevant issues of a problem from the details in which the problem is embedded Models represent the problem’s structure and can be useful in selecting and evaluating projects Project Selection
- 34. Realism - reality of manager’s decision Capability- able to simulate different scenarios and optimize the decision Flexibility - provide valid results within the range of conditions Ease of Use - reasonably convenient, easy execution, and easily understood Cost - Data gathering and modeling costs should be low relative to the cost of the project Easy Computerization - must be easy and convenient to gather, store and manipulate data in the model Criteria for Project Selection Models (By Souder)
- 35. Market analysis Production Factors /Technical analysis Financial analysis Economic analysis Ecological analysis Personnel factors Key Issues in Project Analysis
- 36. Marketing Factors Size of potential market for output Probable market share of output Time until market share is acquired Impact on current product line Consumer acceptance Impact on consumer safety Estimated life of output Spin-off project possibilities
- 37. Production factors • Time until ready to install • Length of disruption during installation • Learning curve-time until operating as desired. • Effects on waste & rejects • Energy requirements • Facility & other equipment requirements • Safety of process • Other applications of technology • Changes in cost to produce a unit output • Change in raw material usage • Availability of raw materials • Required development time & cost • Impact on current suppliers • Change in quality of output
- 38. Financial Factors • Profitability • Impact on cash flows • Payout period • Cash requirements • Time until break-even • Size of investment required • Impact on seasonal &cyclic fluctuations
- 39. Personnel factors • Training requirements • Labour skill requirements • Availability of required labour skill • Level of resistance from current work force • Change in size of labour force • Inter & intra group communication requirements • Impact on working conditions
- 40. Administrative & Miscellaneous factors • Meet govt. safety, environmental standards • Impact on information system • Reaction of stock holders & securities market • Patent & trade secret protection • Impact of image with customers, suppliers & competitors • Degree to which we understand new technology • Managerial capacity to direct & control new process
- 41. Nature of Project Selection Models 2 Basic Types of Models Non-numeric Numeric Two Critical Facts: Models do not make decisions - People do! All models, however sophisticated, are only partial representations of the reality the are meant to reflect
- 42. Nonnumeric Models Sacred Cow - project is suggested by a senior and powerful official in the organization Operating Necessity - the project is required to keep the system running Competitive Necessity - project is necessary to sustain a competitive position 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
- 43. Numeric Models: Scoring Models Financial Models (Profit/Profitability)
- 44. Numeric Models: Scoring Unweighted 0-1 Factor Model Unweighted Factor Scoring Model Weighted Factor Scoring Model Constrained Weighted Factor Scoring Model Goal Programming with Multiple Objectives
- 45. NUMERIC MODELS – SCORING UNWEIGHTED 0-1 FACTOR MODEL - A set of relevant factors is selected by management & then listed in a preprinted form. One or more raters score the project on each factor, whether or not it qualifies for an individual criterion.
- 46. Qualify Does not qualify Potential market size * Time to break-even less than 3 years * No quality compromise * Need for external consultants * Impact on work force safety * Estimated annual profits $250,000 * Total 4 2 Project________ Rater_________ Date__________
- 47. UNWEIGHTED FACTOR SCORING MODEL-the earlier model had the drawback of considering all criteria equally important & involves no gradation of the degree to which a specific project meets the various criteria. This model addresses the second drawback by constructing a simple linear measure of the degree to which the project being evaluated meets each of the criteria contained in the list
- 48. Unweighted Factor Scoring Model Score Performance level 5 Very good Grows by 40% 4 Good Grows by 25% 3 Fair Grows by 10% 2 Poor Not affected at all 1 Very Poor Negatively affected Eg: Potential market size: Total score should exceed some set critical value
- 49. WEIGHTED FACTOR SCORING MODEL Numeric weights reflecting the relative importance of each individual factor are added. It is the sum of products of scores and weights on each criterion. It is also useful for improvement of the project. The weight may be generated by any of the following techniques: 1. Delphi technique (developing numerical values which are equivalent to subjective , verbal measures of relative value.) 2. Analytical hierarchy process 3. Successive comparison / pair wise comparisons
- 50. Exercise Use a weighted scoring model to chose an automobile. The performance measures and scores, as also the relative weights of each criterion are shown in the following table.
- 51. Performance measures and scores for automobile selection Criteria 1 2 3 4 5 Appearance Ugh Poor Adequate Good Wow Braking >165 165-150 150-140 140-130 <130 Comfort Bad Poor Adequate Good Excellent Cost (Operating) >$2.5 2.1-2.5$ 1.9-2.1$ 1.6- 1.9$ <1.6$ Cost (Original) >$32.5 26-32.5$ 21-26$ 17-21$ <$17 Handling <45 45-49.5 49.5-55 55-59 >59 Reliability Worst Poor Adequate Good Excellent
- 52. The criteria and weights for automobile purchase are given below. --------------------------------------------------------------------------------- Criteria Weight A B C D --------------------------------------------------------------------------------- Appearance .1 3 3 2 5 Braking .07 1 3 1 4 Comfort .17 4 2 4 3 Cost, operating .12 2 5 4 2 Cost, original .24 1 4 3 2 Handling .17 2 2 1 5 Reliability .12 3 4 3 2 ------------------------------------------------------------------------ Develop a weighted scoring model for making an automobile choice.
- 53. Scores for automobiles A=2.23 B=3.23 C=2.68 D=3.10 B is the best option
- 54. Sensitivity analysis A weighted scoring model can also be used for project improvement. For any given criterion, the difference between the criterion’s score and the highest possible score on that criterion, multiplied by the weight of the criterion, is a measure of the potential improvement in the project score that would result, were the project’s performance on the specific criterion sufficiently improved. It may be that such an improvement is not feasible. Such an analysis yields valuable statement of comparative benefits of project improvements. By adding resources we can study the degree to which a project’s score is sensitive to attempts for improvement.
- 55. • Involves constraints representing project characteristics that must be present or absent in order for the project to be acceptable. •It is the sum of products of scores and weights on each criterion, multiplied by a value of 1, if the ith project satisfies the kth constraint & 0 if it does not • Other elements in this model are the same as in the previous model. A company may have decided that they would not undertake any project that would significantly lower the quality of the final product. CONSTRAINED WEIGHTED FACTOR SCORING MODEL
- 56. Financial models Profit / profitability Pay back period Average Rate of return Discounted cash flow Internal rate of return Profitability Index
- 57. Payback period Payback Period = Initial fixed investment Estimated annual net cash inflow It is the no. of years required for the project to repay the initial fixed investment. The faster the investment recovered, the less the risk.
- 58. Average Rate of Return Average rate of return = Average Annual Profit Initial or avg. investment Does not take into account the time value of money
- 59. Let us practise: Initial fixed investment=$5,00,000 Annual net cash inflow=$1,00,000 Average annual profits=$70,000 Calculate the payback period & Average Rate of return.
- 60. NPVNPV = - I= - IOO FFtt (1 + k)(1 + k) tt nn t=1t=1 Σ Discounted Cash flow/NPV Determines the NPV of all cash flows by discounting them by required rate of return. Ft=net cash flow in period t k=required rate of return I0=Initial cash investment
- 61. n t=1 ΣΣIRR: = IO CFt (1 + IRR)t Internal Rate of Return (IRR) IRR=discount rate that equates the present values of the cash inflows and outflows. IRR is simply the rate of return that the firm earns on its capital budgeting projects.
- 62. Profitability index Profitability Index = Present value of expected cash flows Initial investment Profitability index is the ratio of payoff to investment of a proposed project.
- 63. Question Consider the following 2 projects- Project A Project B Initial value of investment Rs. 5,00,000 Rs.11,00,000 Present value of cash inflows Rs.6,00,000 Rs. 12,50,000 NPV Rs.1,00,000 Rs. 1, 50,000 Which model will you chose to evaluate the 2 projects. Why
- 64. Solution Comparing NPV, project B will score high. However, NPV is only an absolute figure. For an investment of 5Lakh, Project A offers NPV of Rs. 1 lakh, whereas for investment of 11 lakh, B offers NPV of 1.5 lakh. In such a situation, PI is a better indicator. PI=PV of cash flow/Initial cash outflow. PI for A=1.200 and PI for B=1.136 Since PI of A is more than that of B, A is a better project.
- 65. Advantages of Numeric Model Simple to use and understand. Readily available accounting data to determine cash flow. Direct reflection of managerial policy. Easily altered to accommodate changes in environment or managerial policy. Can assess project risk. Weighted scoring models allow for the fact that some criteria are more important than the others. Allow sensitivity analysis. The tradeoffs between different criteria are readily available.
- 66. Disadvantages It ignores qualitative aspects The output of a scoring model is strictly a relative measure. Project scores do not represent the value or utility associated with a project and thus do not indicate whether or not the project should be supported Biased Other limitations of individual profitability models
- 67. The Project Portfolio A collection of projects grouped to be collectively managed Projects are selected to contribute to the organization’s goals Portfolio alignment identifies, selects, and prioritizes projects to help achieve an organization’s strategic goals
- 68. Assess Organization’s Ability to Perform Projects Do we have a teamwork attitude, free and open communication, creativity, and empowered decision-making? Do we have a clearly defined project management process? Do our associates have the right attitudes, skills, and competencies to use the project management process? Are our leaders at each level willing to take appropriate personal risk?
- 69. Assess Organization’s Ability to Perform Projects Does senior leadership establish a strong leadership foundation? Do individuals and teams exhibit leadership at their respective levels? Do we monitor and understand our external environment?
- 70. Project Portfolio Process 1. Establish a project council 2. Identify project categories and criteria Based on the extent of product and process change: Derivative projects –are projects with objectives or deliverables that are only incrementally different in both product and process from existing offerings. Platform projects –The planned outputs of these projects represent major departures from existing offerings in terms of either the product/service itself or the process used to make and deliver it or both. Breakthrough projects –These projects typically involve a newer technology than platform projects. It may be a “disruptive” technology that is known to the industry or something proprietary that the organization has been developing over R&D Projects –are visionary endeavors oriented toward using newly developed technologies, or existing technologies in a new manner.
- 71. 3. Collect Project Data 4. Assess Resource Availability 5. Reduce the project and criteria set 6. Prioritize the projects within categories 7. Select the projects to be funded and held in reserve. 8. Implement the process.
- 72. Project Proposals Which projects should be bid on How should the proposal-preparation process be organized and staffed How much should be spent on preparing proposals for bids How should the bid prices be set What is the bidding strategy Is it ethical
- 73. Project Proposal Contents Executive Summary Cover Letter Nature of the technical problem Plan for Implementation of Project Plan for Logistic Support & Administration of the project Description of group proposing to do the work Any relevant past experience that can be applied