ET ZC423 /PE ZC423 /POWTP ZC423

ESSENTIALS OF PROJECT MANAGEMENT

I Semester 2019-20
BITS Pilani M K Hamirwasia
Pilani Campus
 BITS Pilani
Pilani Campus

PROJECT PORTFOLIO MANAGEMENT

(Organization Strategy and Project Selection)

Lecture No. 3
Quick Recap

Organization: Structure and Culture

 Project Management Structures
 Functional Organization
 Dedicated Teams
 Matrix Arrangement: Weak, Balanced and Strong Matrix
• Right Project Mgmt Structure!
 Organization Culture
• Identifying Cultural Characteristics
• Implications of Organizational Culture on
Projects
BITS Pilani, Pilani Campus
Case 3.1
Moss and McAdams Accounting Firm

1. If you were Palmer at the end of the case, how would

you respond?

2. What, if anything, could Palmer have done to avoid

losing Olds?

3. What advantages and disadvantages of a matrix type

organization are apparent from this case?

4. What could the management at M&M do to more

effectively manage situations like this?

BITS Pilani, Pilani Campus

Organization Strategy and
Project Selection
Importance of Strategic Planning
• Aligning projects with the strategic goals of the Org’n is crucial for
project success, esp. in today’s economic climate which is marked
by rapid changes in technology, global competition and financial
uncertainty.
• Ensuring a strong link b/n strategy and projects is crucial to success.
• More difficult to create and maintain this strong link in larger and
more diverse organizations. Lack of a process that clearly aligns
project selection to the strategic plan results in poor utilization of
the Orgn’s resources.
• An Org’n can ensure this link and alignment thro’ integration of
projects with the strategic plan.
• Integration assumes the existence of a strategic plan and a process
for prioritizing projects by their contribution to the plan.

BITS Pilani, Pilani Campus

Why PM’s Need to Understand
Strategy
• It is time to expand the traditional role of the PM from an
operational to a more strategic perspective.
• Why PM’s need to understand their Organization’s
mission and strategy:
1. So that they can make appropriate decisions and adjustments. Eg.
How to respond to suggestions to modify the design of a product to
enhance performance! How to respond to delays!
2. So that they can be effective project advocates:
• Demonstrate to senior management how the Project contributes to
the firm’s mission. Protection and support come from being aligned
with corporate objectives.
• Explain to team members and other stake holders why certain
objectives and priorities are critical – essential for getting buy-in on
contentious trade-off decisions.
BITS Pilani, Pilani Campus
THE STRATEGIC MANAGEMENT PROCESS

• It is the process of evaluating “what we are” and deciding

and implementing “what we intend to be and how we are
going to get there”.
• Strategy describes how an Org’n intends to compete
with the resources available in the existing and
perceived future envn.
• SM provides the theme and focus of the future direction
of the Org’n.
• SM positions the Org’n to meet the needs and
requirements of its customers for the long term.
• SM requires strong links among mission, goals,
objectives, strategy and implementation.

BITS Pilani, Pilani Campus

THE STRATEGIC MANAGEMENT PROCESS

• The mission gives the general purpose of the Org’n.

• Goals give global targets within the mission.
• Objectives give specific targets to goals.
• Objectives give rise to formulation of strategies to reach
objectives.
• Finally, strategies require actions and tasks to be
implemented. In most cases the actions to be taken
represent projects.

BITS Pilani, Pilani Campus

Four Activities of the Strategic
Mgmt Process
• Review and Define the Organizational
Mission
• Analyze and Formulate Strategies
• Set Objectives to Achieve Strategy
• Implement Strategies Through Projects

BITS Pilani, Pilani Campus

Review and Define the
Organizational Mission
• Mission Statements Identify the Scope of the
Organization in Terms of its Product or Service.
• The mission statement communicates and identifies the
purpose of the Org’n to all stakeholders.
• Traditional components found in MS’s are: major
products and services, target customers and markets,
and geographical domain.
• Frequently include Organizational Philosophy, Key
Technologies, Public Image and Contribution to Society.
Examples
• Provide Cloud Computing Services
• Provide Data Mining Services
• Provide Information Technology Services
• Increase Shareholder Value
• Provide High-value Products to Our Customer. BITS Pilani, Pilani Campus
Analyze and Formulate
Strategies
• What needs to be done to reach objectives.
• SF includes determining and evaluating alternatives that
support the Orgn’s objectives and selecting the best
alternative.
• The first step is an evaluation of the past and current
position of the enterprise – an analysis of who are the
customers and what are their needs as they see them.
• The next step is an assessment of the Internal and
External Environments.
• SWOT Analysis
• Formulating strategy might range around 20 percent of
management’s effort.
BITS Pilani, Pilani Campus
Set Objectives to Achieve
Strategies
• Objectives Translate Org’n Strategy into Specific,
Concrete, Measurable Terms
• Typically, Objectives Cover Markets, Products,
Innovation, Productivity, Quality, Finance, Profitability,
Employees and Consumers
• Objectives should be as operational as possible, i.e.
objectives should include a time frame, be measurable,
be in an identifiable state, and be realistic.
• SMART Goals (Specific, Measurable, Assignable,
Realistic and Time Bound)

BITS Pilani, Pilani Campus

SMART (Objectives)

• Specific : Be Specific in Targeting an Objective

• Measurable: Establish a Measurable Indicator of
Progress
• Assignable: Make the Objective Assignable to One
Person for Completion
• Realistic: State What can Realistically be Done with
Available Resources
• Time Related: State When the Objective can be
Achieved

BITS Pilani, Pilani Campus

Implement Strategies through
Projects
• Implementation Requires Action and Completing Tasks:
• First, completing tasks requires allocation of resources:
Funds, People, Technological Skills, Management
Talents And Equipment. Multiple objectives place
conflicting demands on resources.
• Second, implementation requires a Formal and Informal
Organization that Complements and Supports Strategy
and Projects.
• Third, Planning and Control Systems must be in place.
• Fourth, Motivating Project Contributors.
• Finally, portfolio mgmt and prioritizing projects.

BITS Pilani, Pilani Campus

THE NEED FOR A PROJECT
PORTFOLIO MANAGEMENT SYSTEM

1. THE IMPLEMENTATION GAP

– Conflicts Frequently Occur Amongst Functional

Managers And Cause Lack Of Trust
– Frequent Meetings Are Called To Establish Or Re-
negotiate Priorities
– People Frequently Shift From One Project To Another
– People Are Working On Multiple Projects And Feel In-
efficient
– Resources Are Not Adequate

BITS Pilani, Pilani Campus

THE NEED FOR A PROJECT PORTFOLIO
MANAGEMENT SYSTEM

2. ORGANIZATION POLITICS

• Politics can influence which projects receive funding and high

priority
• Project Selection may not be on Facts and Sound Reasoning but on
Persuasiveness and Power of People Advocating Projects
• Sacred Cow Project: Project that a powerful, high ranking official
advocates
• New Baby: Irrational Obsession with a Project
• Project Sponsors’ Role
• Top Management should develop a System for Identifying and
Selecting Projects that Reduce the Impact of Internal Politics and
Fosters the Selection of the Best Projects

BITS Pilani, Pilani Campus

THE NEED FOR A PROJECT PORTFOLIO
MANAGEMENT SYSTEM

3. RESOURCE CONFLICTS AND MULTI-TASKING

• Problem of Sharing and Scheduling Resources across

Projects
• Multitasking Involves Starting and Stopping Work on one
Task to go and work on another Project and then Return
to work on the Original Task
• Less Efficient People

BITS Pilani, Pilani Campus

Benefits of Project Portfolio
Mgmt
• Builds Discipline into Project Selection Process
• Links Project Selection to Strategic Metrics
• Prioritizes Project Proposals across a common set of
criteria, rather than on politics or emotion
• Allocates Resources to Projects that Align with Strategic
Direction
• Balances Risk across all Projects
• Improves Communication and supports Agreement on
Project Goals
• Justifies killing Projects that do not support Organization
Strategy

BITS Pilani, Pilani Campus

A PORTFOLIO
MANAGEMENT SYSTEM
• The aim of portfolio mgmt is to ensure that Projects are
aligned with Strategic Goals and prioritized appropriately.
• Since projects vying for funding and personnel usually
outnumber available resources, it is imp to follow a
logical and defined process for selecting the projects to
implement.

• Design of a Portfolio Management System should

include:
– Classification of a Project
– Selection Criteria
– Sources of Proposals
– Evaluating Proposals
– Managing the Portfolio of Projects
BITS Pilani, Pilani Campus
CLASSIFICATION OF THE
PROJECT
 COMPLIANCE or EMERGENCY: “MUST DO PROJECTS” TO
MEET REGULATORY CONDITIONS REQUIRED TO OPERATE
IN A REGION

 OPERATIONAL / Infrastructure: TO SUPPORT CURRENT

OPERATIONS e.g. REDUCE DOWNTIME, IMPROVE
EFFICIENCY, ENHANCE QUALITY ETC.

 STRATEGIC: DIRECTLY SUPPORT LONG RUN MISSION e.g.

NEW PRODUCT, RESEARCH & DEVELOPMENT PROJECTS
ETC.

BITS Pilani, Pilani Campus

SOURCES OF PROPOSALS

• Encourage and Keep Solicitation Open to all Sources:

Internal Sources
External Sources
• Solicit Ideas for Projects when the knowledge
requirements are not available in the organization
• Request for Proposal
• Bid to design and build a new operating room that uses latest technology

BITS Pilani, Pilani Campus

Ranking Proposals and
Selection of Projects
• Follow a screening process.
• Data and info are collected to assess the Value of the
Proposed Project to the Organization and for future
backup. If the sponsor decides to pursue the project on
the basis of collected data, it is forwarded to the project
priority team or the PO. Given the selection criteria and
current portfolio of projects, the priority team rejects or
accepts the project. If accepted, sets implementation in
motion.
• Use Evaluation Form to Prioritize and Select New
Projects.
• Consider Impact of Project on Meeting a Particular
Objective.
BITS Pilani, Pilani Campus
CRITERIA FOR PROJECT
SELECTION
Financial Models: Preferred Method To Evaluate Projects
– PAY BACK PERIOD (in Years) : ESTIMATED PROJECT COST / ANNUAL
SAVINGS
– RETURN ON INVESTMENT (in %)
– NET PRESENT VALUE (NPV) : Uses Time Value of Money, Cash Flows and
Profitability

Non-financial Criteria: Long-term Survival (developing and

maintaining core competencies); Less Tangible Criteria -
Restore Corporate Image, Enhance Brand Recognition,
CSR initiatives

BITS Pilani, Pilani Campus

TWO MULTI-CRITERIA
SELECTION MODELS
Checklist Models
– List of Questions to Review Potential Projects
– Determine Acceptance or Rejection

– Flexibility in Selecting Different Projects With Some Variations in Questions

– Fails to Answer the Relative Importance or Value of Potential Projects
– Fails to Allow Comparison With Other Potential Projects
– Room for Power Play, Politics, Manipulation

Multi-Weighted Scoring Models

BITS Pilani, Pilani Campus

EXAMPLE

CRITERION WEIGHTAGE
A. STAY WITH CORE COMPETENCIES 2.0
B. STRATEGIC FIT 3.0
C. URGENCY 2.0
D. 25% OF SALES FROM NEW PRODUCTS 2.5
E. REDUCE DEFECTS TO LESS THAN 1% 1.0
F. IMPROVE CUSTOMER LOYALTY 1.0
G. ROI OF 18% + 3.0

BITS Pilani, Pilani Campus

CONTRIBUTION VALUES TO EACH
CRITERION FOR EACH PROJECT
PROJECT A B C D E F G WT. TOTAL
1 1 8 2 6 0 6 5 66
2 3 3 2 0 0 5 1 27
3 3 0 10 0 0 6 0 32
4 1 10 5 10 0 8 9 102

• Highest Priority: Project 4, then Project 1.

• Projects Screened Out : Projects 2 and 3,
If criterion is; weighted total should be > 50.

BITS Pilani, Pilani Campus

APPLYING A SELECTION
MODEL
• Project Classification: Project’s Fit to the Organization’s
Strategy
• Selecting a Model: Multiple Criteria to Select the Project
• Best Use of Human and Capital Resources to Maximize
Return on Investment in the Long Run
• Researching New Technologies, Public Image, Ethical
Position, Protection of Environment, Core
Competencies, Strategic Fit

BITS Pilani, Pilani Campus

MANAGING THE PORTFOLIO
SYSTEM
• Senior Management Input
– Guidance in Establishing Selection Criteria
– Balance Available Resources Among Different Types of Projects

• The Governance Team Responsibilities

– Responsible for Publishing the Priority of Every Project
– Periodic Priority Review

• Balancing the Portfolio for Risks and Types of

Projects

BITS Pilani, Pilani Campus

Project Selection Methods
Based on Financial Criteria
• Discounting Criteria
– Net Present Value (NPV)
– Benefit Cost Ratio (BCR)
– Internal Rate of Return Method

• Non-discounting Criteria
– Return on Investment (ROI)
– Payback Period

BITS Pilani, Pilani Campus

NET PRESENT VALUE (NPV)

• NPV is the Sum of the Present Values of all the Cash

Flows – Positive as well as Negative - that are expected
to occur over the Life of the Project.
NPV = ∑ Ct / (1 + r ) n – Investment
for the period t=1 to t=n
where Ct = cash flow at the end of year t
n = life of the project
r = discount rate

• It is the Net Benefit over and above the Compensation

for Time and Risk.

BITS Pilani, Pilani Campus

Project Selection Methods
Based on Financial Criteria
• Accept the Project if the NPV is Positive
• Reject the Project if the NPV is Negative

• Value of Firm = ∑ Present Value of Projects + ∑ Net

Present Value of Prospective Projects
• When a Firm Terminates an Existing Project Which has
Negative NPV Based on its Expected Future Cash
Flows, the Value of the Firm Increases by that Amount.

BITS Pilani, Pilani Campus

CALCULATING THE COST OF
CAPITAL

• Weighted Average Cost of Capital

• It is the Weighted Average Cost of Various Sources of
Finance for the Enterprise
Example:
Cost Of Equity = 16% Proportion = 50%
Cost Of Preference = 12% Proportion= 40%
Cost Of Debt = 8% Proportion = 10%
Cost Of Capital = (16x0.5) + (12x0.4) + (8x0.1)=13.6 % per
annum

BITS Pilani, Pilani Campus

EXAMPLE 1

YEAR CASH FLOW

0 (-1,000,000)*
1 200,000
2 200,000
3 300,000
4 300,000
5 350,000
Discounting Rate = r = 10%
* Initial Investment (outflow)

BITS Pilani, Pilani Campus

Organization Strategy and
Project Selection
NPV = - 1,000,000 + 200,000 + 200,000 +
(1.10)0 (1.10)1 (1.10)2
(Initial Investment)
300,000 + 300,000 + 350,000
(1.10)3 (1.10)4 (1.10)5
_

[(-1000000) + (181818.18 + 165289.2562 + 225394.44

+ 204904.04 + 217322.46)]
= - Rs. 5271.26

BITS Pilani, Pilani Campus

BENEFIT COST RATIO

BENEFIT COST RATIO (BCR) = (PVB) / I

PVB = PRESENT VALUE OF BENEFITS
I = INITIAL INVESTMENT

NET BENEFIT COST RATIO (NBCR) = BCR – 1 (NPV / I)

BCR NBCR RULE

>1 >0 ACCEPT
=1 =0 INDIFFERENT
<1 <0 REJECT

BITS Pilani, Pilani Campus

EXAMPLE 2

INITIAL INVESTMENT (I) : 100,000

Year Cashflow
YEAR 1 25,000
YEAR 2 40,000
YEAR 3 40,000 {25000 / (1.12)1} {40000 / (1.12)3}
YEAR 4 50,000 {40000 / (1.12)2}
BCR = PVB / I r = 12% {50000 / (1.12)4}
PVB = 22,321.43+31,887.76+28,471.21+31,775.90
= 1,14,456.30
BCR = PVB / I = 114456.30 / 100000 = 1.14456 = 1.145
NBCR = BCR – 1 = 0.145 {(114456.30–100000)/100000}

BITS Pilani, Pilani Campus

IRR Method

IRR is defined as that value of discount rate, which would

make the NPV of the project equal to zero.

If the value of IRR is higher than a certain rate specified by

the Organization (often called “hurdle rate”), the project
is accepted and if it is lower, the project is rejected.

The hurdle rate is usually based on the WACC.

BITS Pilani, Pilani Campus

Undiscounted Future Cash
Flows
RETURN ON INVESTMENT

INVESTMENT = 1MILLION (10 Lacs)

PROFIT BEFORE INTEREST AND TAXES = 2,00,000

ROI = 2,00,000/10,00,000 * 100 = 20%

1. Average Return on Investment Method

2. Accounting Rate of Return Method

BITS Pilani, Pilani Campus

PAYBACK PERIOD

• Length Of Time Required To Recover The Initial Cash

Outlay On The Project
• Shorter The Payback Period, More Desirable Is The
Project

Advantages
• It Is Simple Both In Concept And Application
• It Favors Projects Which Generate Substantial Cash
Inflows In Earlier Years And Discriminates Against
Projects Which Bring Cash Inflows In Later Years
• It Is Useful When Company Is Pressed With Problems
Of Liquidity
BITS Pilani, Pilani Campus
LIMITATIONS

• It Fails To Consider The Time Value Of Money

• It Ignores Cash Flows Beyond The Payback Period
• It Is A Measure Of Project’s Capital Recovery, Not
Profitability
• It Measures A Project’s Liquidity But Does Not Indicate
Liquidity Position Of The Firm As A Whole

BITS Pilani, Pilani Campus

DISCOUNTED PAYBACK
PERIOD
• It Takes Into Account Time Value Of Money
• Cash Flows Are Converted To Their Present Values By
Applying Discounting Factors
• Find The Cumulative Net Cash Flow After Discounting
Till We Get Positive Value
• The Corresponding Period Shows The Discounted
Payback Period

BITS Pilani, Pilani Campus

EXAMPLE 3: DISCOUNTED
PAYBACK PERIOD
YEAR CASH FLOW PRESENT VALUE CUM.
0 -10000 -10000 -10000
1 3000 2727 -7273
2 3000 2479 -4794
3 4000 3005 -1789
4 4000 2732 943
5 5000 3105
6 2000 1129
Assuming r = 10% Discounted Payback Period = 3.6548
years (Gives the actual / real picture of recovery)
Undiscounted Payback Period = 3 years

BITS Pilani, Pilani Campus

Organization Strategy and
Project Selection

Thank You!

BITS Pilani, Pilani Campus