Organization Strategy and

Project Selection
CHAPTER TWO

1
 Learning Objectives
• Explain why it is important for project managers to understand their organization’s strategy.
• Identify the significant role projects contribute to the strategic direction of the organization.
• Understand the need for a project priority system.
• Distinguish among three kinds of projects.
• Describe how the phase gate model applies to project management.
• Apply financial and nonfinancial criteria to assess the value of projects.
• Understand how multi-criteria models can be used to select projects.
• Apply an objective priority system to project selection.
• Understand the need to manage the project portfolio.
2
 OUTLINE
• Why Project Managers Need to Understand Strategy
• The Strategic Management Process: An Overview
• The Need for a Project Priority System
• Project Classification
• Phase Gate Model
• Selection Criteria
• Applying a Selection Model
• Managing the Portfolio System
• Assignment
3
A vision without a strategy remains an illusion.

4
Why Project Managers Need to
Understand Strategy

5
 Why Project Managers Need to Understand
Strategy
• Strategy is fundamentally deciding how the organization will compete.
• Organizations use projects to convert strategy into new products, services,
and processes needed for success.
• Aligning projects with the strategic goals of the organization is crucial for
business success.
• Ensuring a strong link between the strategic plan and projects is a difficult
task that demands constant attention from top and middle management.

6
The Strategic Management Process:
An Overview

7
 The Strategic Management Process: An
Overview
• 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.”
• Two major dimensions of strategic management are responding to changes
in the external environment and allocating scarce resources of the firm to
improve its competitive position.

8
Why

9
The Need for a Project Priority
System

10
 The Need for a Project Priority System
• Implementation of projects without a strong priority system linked to strategy
creates problems. Three of the most obvious problems are:
1. The Implementation Gap – refers to the lack of understanding and consensus of
organization strategy among top and middle-level managers.
2. Organization Politics – Politics exist in every organization and can have a significant
influence on which projects receive funding and high priority.
3. Resource Conflicts and Multitasking – The organization environment creates the
problems of project interdependency and the need to share resources.
• A priority driven project portfolio system can go a long way to reduce, or even
eliminate, the impact of these problems.

11
Project Classification

12
 Project Classification
• Compliance projects are typically those
needed to meet regulatory conditions
required to operate in a region; hence,
they are called “must do” projects.
• Operational projects are those that are
needed to support current operations.
• Strategic projects are those that
directly support the organization’s
long-run mission.

13
Phase Gate Model

14
 Phase Gate Model
• The selection process is the first part of the management system that spans
the lifetime of the project – This system has been described as a series of gates that a
project must pass through in order to be completed.
• The purpose is to ensure that the organization is investing time and
resources on worthwhile projects that contribute to its mission and strategy.
• Each gate is associated with a project phase and represents a decision point.
• A gate can lead to three possible outcomes: go (proceed), kill (cancel), or
recycle (revise and resubmit).
15
Phase Gate Process
Diagram

16
Selection Criteria

17
 Selection Criteria – Financial Criteria
• For most managers, financial criteria are the preferred method to evaluate projects
through using financial models – These models are appropriate when there is a high level of
confidence associated with estimates of future cash flows.
• Two models and examples are demonstrated here—payback and net present value
(NPV).
• Project A has an initial investment of $700,000 and projected cash inflows of
$225,000 for 5 years.
• Project B has an initial investment of $400,000 and projected cash inflows of
$110,000 for 5 years.
18
 Selection Criteria – Financial Criteria
• Payback period (yrs) = Estimated Project Cost/Annual Savings
• The net present value (NPV) model uses management’s minimum desired rate-of-return (discount rate, for
example, 20 percent) to compute the present value of all net cash inflows.
• If the result is positive (the project meets the minimum desired rate of return), it is eligible for further consideration; if the
result is negative, the project is rejected; thus, higher positive NPVs are desirable.
• Excel uses this formula:

• where
• I0 = Initial investment (since it is an outflow, the number will be negative)
• Ft = Net cash inflow for period t
• k = Required rate of return

19
 Selection Criteria – Nonfinancial Criteria
• Financial return, while important, does not always reflect strategic importance.
• Companies have to be disciplined in saying no to potentially profitable projects that are
outside the realm of their core mission.
• For example, a firm may support projects that do not have high profit margins for other
strategic reasons including:
• 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 next-generation products
• To reduce dependency on unreliable suppliers
20
 21
Checklist Models
 22
Multi-Weighted Scoring Models
Applying a Selection Model

23
 Project
Screening
Process

24
 Priority
Screening
Analysis

25
Managing the Portfolio System

26
 Managing the Portfolio System
• Managing the portfolio takes the selection system one step higher in that the merits
of a particular project are assessed within the context of existing projects.
• At the same time it involves monitoring and adjusting selection criteria to reflect
the strategic focus of the organization.
• The priority system can be managed by a small group of key employees in a small
organization.
• Or, in larger organizations, the priority system can be managed by the project office
or a governance team of senior managers.
27
 Balancing the Portfolio for Risks and Types of
Projects
• A classification scheme that could be used for assessing a project portfolio in terms
of degree of difficulty and commercial value yields four basic types of projects:
1. Bread-and-butter projects are relatively easy to accomplish and produce modest
commercial value. They typically involve evolutionary improvements to current products
and services. Examples include software upgrades and manufacturing cost reduction
efforts.
2. Pearls are low risk development projects with high commercial payoffs. They represent
revolutionary commercial advances using proven technology. Examples include next-
generation integrated circuit chip and subsurface imaging to locate oil and gas.

28
 Balancing the Portfolio for Risks and Types of
Projects
• A classification scheme that could be used for assessing a project portfolio in
terms of degree of difficulty and commercial value yields four basic types of
projects:
3. Oysters are high risk, high value projects. These projects involve technological
breakthroughs with tremendous commercial potential. Examples include embryonic
DNA treatments and new kinds of metal alloys.
4. White elephants are projects that at one time showed promise but are no longer
viable. Examples include products for a saturated market or a potent energy source
with toxic side-effects.
29
Balancing the
Portfolio for
Risks and
Types of
Projects

30
Balancing the Portfolio for Risks and Types of
Projects
• Organizations often have too many white elephants and too few pearls and
oysters.
• To maintain strategic advantage it is recommended that organizations
capitalize on pearls, eliminate or reposition white elephants, and balance
resources devoted to bread-and-butter and oyster projects to achieve
alignment with overall strategy.

31
Assignment

32
 Assignment
• Case 2.1 – Hector Gaming Company
• Case 2.2 – Film Prioritization
• Case 2.3 – Fund Raising Project Selection

33
Thank You

34