Objectives in Project Selection
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OPSM 639, C. Akkan 1
Objectives in Project Selection
• Value maximization• Balance• Strategic direction/fit
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OPSM 639, C. Akkan 2
Prioritizing and Selecting Projects
• If there is a lack of consensus and understanding of organizational strategy among top and middle-level managers– Some projects would not contribute to the main
objectives and strategies of the firm.
– Many projects would not be complete on time or within budget.
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OPSM 639, C. Akkan 3
Strategy and Project Management
Review/revise mission
Internal environment:strengths & weaknesses
External environment:opportunities & threats
New goals & objectives
Portfolio of strategic choices
Strategy formulation
Strategy implementation
ProjectsI II
III
IV
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OPSM 639, C. Akkan 4
Prioritizing and Selecting Projects
• Power politics in an organization can have a significant influence on whether a project receives funding and high priority.
• Political behaviour is more likely to occur when:– Decision-making procedures are uncertain.
– Performance measures are uncertain.
– Competition among people for scarce resources is high.
• So, politics might have a role in project selection.
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OPSM 639, C. Akkan 5
Prioritizing and Selecting Projects
• A project sponsor is typically a high-ranking manager who endorses and lends political support for the completion of a specific project.
• A typical result of a survey of projects in process and proposed projects accepted:1) Repetitive operations that are not projects (e.g. quarterly financial
reports) ………………………………………………... …. 90
2) Projects less than $40,000 or less than 500 labor hours.…..50
3) “real” projects …………………………………………25
Total …….165
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OPSM 639, C. Akkan 6
Prioritizing and Selecting Projects
• There are potentially a large variety of models for prioritizing and selecting projects.
• In the past these were exclusively financial models, but now multi-objective models are widely used as well.– Some factors /objectives
• new technology
• core competencies
• public image
• improving customer loyalty
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OPSM 639, C. Akkan 7
Prioritizing and Selecting Projects
– Some financial models:• IRR (internal rate of return) model
• The net present value model
• Real options approach.
• A project priority team (or project office) selects and prioritizes projects.– Priority must be published and the process must be
open and free of power politics.• A intranet web site could publish priority, current status and
issues relating to projects.
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OPSM 639, C. Akkan 8
Prioritizing and Selecting Projects
• A very important question with no universal answer:– How many projects can an organization undertake at
any one time?
• From queuing theory we know that if we push for more utilization the waiting time in queues increases exponentially!
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OPSM 639, C. Akkan 9
Prioritizing and Selecting Projects
Project proposal idea
Data collection
Self-evaluation of project
Priority team evaluates proposal & reviews portfolio for risk balance
Reject
AbandonHold for resources
Assign priorityAssign resourcesAssign project managerEvaluate progress
Periodic reassessment of priorities
Project Project Screening Screening ProcessProcess
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OPSM 639, C. Akkan 10
Prioritizing and Selecting Projects
Vertical axis:Nbr of projectsHorizontal axis :Time
a: preliminary evaluationb: design & economic analysisc: development & testd: final planninge: productionf: survival in the marketg: success
Mortality of New Product Development Project: (Vonderembose
& White p. 175)
a b c d e f g
60
0
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OPSM 639, C. Akkan 11
Funnels not Tunnels
• Companies use a “gate” system, where projects are allowed to pass, delayed, revised or killed.
• In many companies, people tend not to kill projects, although they are going nowhere!
projects
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OPSM 639, C. Akkan 12
Prioritizing and Selecting Projects
• A key concern of the priority team is the risk associated with the portfolio of projects.
• A project might be rejected just because the current project portfolio has too many projects with the same characteristics, such as– risk level
– use of key resources
– non-revenue producing
– long duration
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OPSM 639, C. Akkan 13
Prioritizing and Selecting Projects
• Use of project scoring matrix:
Criteria RO
I >=
15%
Impr
ove
Cus
tom
er
Loya
lty
Sta
y w
ithin
co
re
com
pete
ncie
s
Ach
ieve
six
-si
gma
qual
ity
Urg
ency
Sta
tegi
c fit
Wei
ghte
d sc
ore
Weight 2 3 2 2 3 2Project 1 1 2 7 4 2 7 50Project 2 8 3 3 9 1 6 64Project 3 0 9 4 5 10 4 83Project 4 4 5 6 6 6 3 71
Project n 2 1 3 8 9 7 70
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OPSM 639, C. Akkan 14
A Project Prioritizing Example
• Determining weights of objectives
Analyze objective independently in three dimensions
2. Urgency - Time factor. What will be the relative consequences of not taking action over the next 12 months?
0 10Can defer Must take action
3. Future seriousness - What is the chance of the objectives seriousness changing over time?
0 10Decrease orremain same
Dramaticallyincrease
1. Seriousness - What is the current impact of the results of the objective on the organization?
0 10Small impact Large impact
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OPSM 639, C. Akkan 15
A Project Prioritizing Example
Improve external customerservice
5 4 6 15
10% decrease in productioncosts
7 6 4 17
All activities meet currentlegal, safety, andenvironmental standards
MUST
Create $5 million in neewsales
8 4 6 18
Provide immediate responseto field problems
10 10 10 30
Develop/document policies,systems, procedures
7 10 6 23
Seriousness Urgency Future Seriousness
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OPSM 639, C. Akkan 16
Must meet if impacts …26 27 28 29
Yes-Meets objectiveNo-Does not meet ofjN/A-No impact
n/a
Yes-Meets objectiveNo-Does not meet ofjN/A-No impact
yes
Want objectivesRelative
importance1-100
Single projectimpact definitions
Weightedscore
Weightedscore
Weightedscore
Weightedscore
Provides immediateresponse to fieldproblems
990 < Does not address1 = Opportunity to fix2 > Urgent problem
99
Create $5 million innew slaes by 199x
880 < $100,0001 = $500,0002 > $500,000
0
Improve externalcustomer service
830 < Minor impact1 = Significant impact2 > Major impact
166
Total weighted score
Priority
Must objectives
All activities meet currentlegal, safety, andenvironmental standards
All new products will havea complete marketanalysis
30
15
18
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OPSM 639, C. Akkan 17
Project Title ______________________________________________________
Responsible Manager ________________Project Manager _______________
� _______ General Support Quality Legal New product _______ _____________ Cost reduction Replacement Capacity _______ _____________ ___________ __________ __________YES NO The project will take more than 500 labor hours?YES NO The project is a one-time effort? (will not occur on a regular basis)YES NO The project proposal was reviewed by the product manager?
Problem definitionDescribe the problem/opportunity.
Goal definitionDescribe the project goal.
Objective definitionPerformance: Quantify the savings/benefits you expect from the project.
Cost: Labor hours, materials, methods, equipment?
Schedule: Overall duration in months
Date _______ Number _______Project Proposal
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OPSM 639, C. Akkan 18
What are the three major risks for this project?
1.
2.
3.
Risk1 above
Risk2 above
What is the probabilityof the above risks
occurring?
0 to 1.0none high
Risk3 above
Risk1 above
Risk2 above
What is the impact onproject success if these
risks do occur?
0 to 1.0none high
Risk3 above
Resources available? ____________ Yes _______________ No
Current project status
Start date ____________ Estimated finish date __________________
Status: Active On-hold
Update:
Priority team action: Accepted Returned
Discovery--project not defined Duplicate to: ____________
Operational--proposal not a project Project #
Need more information--to prioritize project Completed project
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OPSM 639, C. Akkan 19
Managing New Product Development Project Portfolios
• Idea similar to business portfolio planning.• It is about
– Resource allocation• Which project will get funding?
– Corporate strategy• Future products/markets depend on current projects
– Balance• Risk vs return, maintenance vs growth, short-term vs long-
term.
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OPSM 639, C. Akkan 20
Balanced Portfolio
• Most common tool:– Risk-reward bubble diagram– One axis: a measure of reward
• Qualitative or quantitative– The other axis: a measure of risk
• E.g. Probability of success (technical and/or commercial).– Size of the bubble: annual resources spent on each
project• E.g. Dollars, person-hours etc.
– Shading: product line– Color: timing (hot red: imminent launch; dark blue: an
early-stage project)
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OPSM 639, C. Akkan 21
Risk-Reward Bubble Diagram
NPVlowhigh
high
low
Prob. Tech. success
Bread and butter
White elephantsOysters
Pearls
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OPSM 639, C. Akkan 22
Risk-Reward Bubble Diagram
• Pearls: Potential star products• Oysters: Long-shot projects; technical
breakthroughs will give solid payoffs.• Bread and Butter: small, “no-brainer” project• White Elephants: difficult to kill
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OPSM 639, C. Akkan 23
Risk-Reward Bubble Diagram
• In the previous example, the business risk is accounted for by using risk-adjusted discount rates in calculating NPV.
• What if reward is just evaluated qualitatively as excellent, modest, low etc?
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OPSM 639, C. Akkan 24
Risk-Reward Bubble Diagram
• 3M uses a variation of the diagram where ellipses are used instead of circles:– Each project as low, likely and high estimates are given
for NPV and technical success probability.
NPV
P(success)
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OPSM 639, C. Akkan 25
Other Portfolio Balancing Approaches
• P&G uses Monte Carlo simulation and a three dimensional model where the axes are – NPV
– Time-to-launch
– Probability of success
• Simulation gives a distribution of NPVs, showing projects as spheres in this three dimensional graph.