TM 745 Forecasting for Business and Technology Dr. Frank Joseph Matejcik

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TM 665Project Planning Control Dr. Frank
Joseph Matejcik
2nd Session Project Selection

• South Dakota School of Mines and Technology
• Rapid City

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Agenda

• Attendance
• Assignments
• Syllabus comments
• Answer Link is given
• M M (2 Project Selection)

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First and 2nd Assignment

• Problems 3-7 page 93 (page 7576 4th ed)
• Questions page 24

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Tentative Schedule
Chapters Assigned Chapters 17-Jan Holiday
28-Mar Holiday 4 24-Jan 1 p24 questions
04-Apr 4 31-Jan 2 Prob 3-7 p93
11-Apr 5,6(start) 07-Feb 8 18-Apr 6, 7
14-Feb 9 25-Apr 11-13 21-Feb Holiday
02-May Final 28-Feb Test 07-Mar Break 1
4-Mar 10 21-Mar 3
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Syllabus (regulated document)

• Much more information than I would like.
• Objectives are rather general. Not Stu Kelloggs
  exam study guide. I will do a study guide for
  the exams.
• Must be kept up to date. A regulation.
  Annually, when minor details change.
• Last year the conversion to DVDs was made.
• Last Fall we had streaming video of the sessions.
• Also, I will upload the answers.
• Give the Username and Password

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Ch. 2 Strategic Managementand Project Selection

• Maturity of Project Management
• Criteria for PS Models
• Nature of PS Models
• Types of PS Models
• Uncertainty Analysis and Risk Management
• Information Base for PS Models
• Project Portfolio Process (PPP)
• Project Proposal
• Strategic Selection of Projects(Added)

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Project Management Maturity

• (Fincher Levin, 1997) Measured by
• PMIs PMBOK Guide
• ISO 9001 standards
• Carnegie Mellon Universitys PM3
• Ibbs and Kwak, 2000
• Multiple levels such as ad-hoc, abbreviated,
  organized, managed,and adaptive

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Ch. 2.0 Overview of PS Process

• Project Management Office (PMO) Aligning
  corporate needs and project goals
• Project Selection Chose candidate project using
  Evaluation Criteria
• Dealing with Uncertainty Risk Analysis
• Strategically selecting best Projects Project
  Portfolio Process (PPP)
• Locking up the deal Writing a Project Proposal

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Project Selection

• M M hear management by projects
  project management maturity
• Common problems with projects (Cleland King)
• they fall outside the organization's stated
  mission
• they completely unrelated to the strategy and
  goals of the organization
• they have funding levels that are excessive
  relative to their expected benefits.

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Project Selection

• Problems in organizations with many projects
• 1. Delays in one project delay other projects
  because of common resource needs technological
  dependencies.
• 2. The inefficient use of corporate resources
  results in peaks and valleys of resource
  utilization.
• 3. Bottlenecks in resource availability or lack
  of required technological inputs rest in project
  delays that depend on those scarce resources or
  technology.

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Project Selection

• 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 problems structure and can
  be useful in selecting and evaluating projects

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Project Selection and Criteria of Choice
Realists cant solve problems, only Idealists
can do that.

• Realism - reality of managers decision situation
  (common measurement)
• 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. Standard programs help.

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Nature of Project Selection Models

• 2 Basic Types of Models
• Numeric (Financial, Scoring)
• Nonnumeric
• 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 reflectThere is a need for buy in.

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Ch 2.3 Project Evaluation Factors (PEFs)

• Production Factors
• Marketing Factors
• Financial Factors
• Personnel Factors
• Administrative and Misc. Factors

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Project Evaluation Factors
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Nonnumeric Models

• Sacred Cow - project is suggested by a senior and
  powerful official in the organization. RCS
  literacy program. Get the intern to do the
  analysis.
• Operating Necessity - the project is required to
  keep the system running. The system may become
  illegal without it! Go directly to jail!
• Competitive Necessity - project is necessary to
  sustain a competitive position. Necessity
  projects bypass usual evaluations. ABET.
• 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 Q-sort on page 47 is one
  such method

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Numeric Models Profit/Profitability Engineering
Economics

• Payback period - initial fixed investment/estimate
  d annual cash inflows from the project.
  Discounted method.
• Average Rate of Return - average annual
  profit/average investment

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Numeric Models Profit/Profitability Engineering
Economics

• Discounted Cash Flow - Present Value Method

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Numeric Models Profit/Profitability Engineering
Economics

• Internal Rate of Return - Finds rate of return
  that equates present value of inflows and
  outflows
• Or Solve NPV(k) 0. With an assumed rate of
  return. Compare the project with other
  investments such as those available at a bank.
• Profitability Index - NPV of all future expected
  cash flows/initial cash investment

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Comments on Profitability Models

• 1. The undiscounted models are simple to use and
  understand.
• 2. All use readily available accounting data to
  determine the cash flows.
• 3. Model output is in terms familiar to business
  decision makers.
• 4. With a few exceptions, model output is on an
  "absolute" profit/profitability scale allows
  "absolute" go/no-go decisions.
• 5. Some profit models include risk.

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Disadvantages of these Models

• 1. These models ignore all nonmonetary factors
  except risk.
• 2. Models that do not include discounting ignore
  the timing of the cash flows and the time-value
  of money.
• 3. Models that reduce cash flows to their present
  value are strongly biased toward the short run.
• 4. Payback-type models ignore affects beyond the
  payback period.

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Disadvantages of these Models

• 5. The internal rate of return model can result
  in multiple solutions.
• 6. All are sensitive to errors in the input data
  for the early years of the project.
• 7. The effects of changes discounting models are
  generally not obvious.
• 8. All these models depend on a determination of
  cash flows for input, but it isnt clear how to
  properly define them for projects.

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Scoring Models Simple EX
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Numeric Models Scoring

• Unweighted 0-1 Factor Model
• Unweighted Factor Scoring Model
• Weighted Factor Scoring Model
• Resist using marginally relevant factors
• Constrained Weighted Factor Scoring Model
• Includes 0-1 criteria
• Goal Programming with Multiple Objectives

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Advantages of Scoring Models

• 1. These models allow multiple criteria to be
  used for evaluation and decision making,
  including profit/profitability models and both
  tangible and intangible criteria.
• 2. They are structurally simple and therefore
  easy to understand and use.
• 3. They reflect managerial policy.
• 4. They are easily altered for changes in
  environment or policy.
• 5. Weights importance.
• 6. Easy sensitivity analysis.

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Disadvantages of Scoring Models

• 1. The output of a scoring model is strictly a
  relative measure. No value nor "utility"
• 2. In general, scoring models are linear in form
  and the elements of such models are assumed to be
  independent.
• 3. Can easily include marginal criteria.
• 4. Unweighted scoring models assume all criteria
  are of equal importance.
• 5. Profit/profitability portions have
  disadvantages noted earlier.

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Ch 2.4 Choosing the PS Model

• Dependent on wishes and philosophy of management
• 80 of Fortune 500 firms choose nonnumeric PS
  models
• Firms with outside funding often chose scoring PS
  models
• Firms without outside funding often chose profit
  / profitability PS models

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Risk Versus Uncertainty

• Analysis Under Uncertainty - The Management of
  Risk
• The difference between risk and uncertainty
• Risk - when the decision maker knows the
  probability of each and every state of nature and
  thus each and every outcome. An expected value
  of each alternative action can be determined
• Uncertainty - when a decision maker has
  information that is not complete and therefore
  cannot determine the expected value of each
  alternative

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Risk Analysis

• Principal contribution of risk analysis is to
  focus the attention on understanding the nature
  and extent of the uncertainty associated with
  some variables used in a decision making process
• Usually understood to use financial measures in
  determining the desirability of an investment
  project

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Risk Analysis

• Probability distributions are determined or
  subjectively estimated for each of the
  uncertain variables
• The probability distribution for the rate of
  return (or net present value) is then found by
  simulation
• Both the expectation and its variability are
  important criteria in the evaluation of a project

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Risk Analysis
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Risk Analysis
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Risk Analysis
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Risk Analysis
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Information Base for Selections

• Accounting Data
• Often linear assumptions
• Standardized assumptions may be off
• May neglect overhead
• Measurements
• Subjective vs. Objective
• Quantitative vs. Qualitative
• Reliable vs. Unreliable
• Valid vs. Invalid
• Models for Tech Forecasting, too

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Project Portfolio Process (PPP)

• After a SWOT (strengths, weaknesses,
  opportunities, threats) analysis
• Purposes include
• To identify proposed projects that are not really
  projects and should be handled through other
  processes
• To prioritize the list of available projects
• To intentionally limit the number of overall
  projects being managed so the important projects
  get the resources and attention they need

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Project Portfolio Process (PPP)

• Purposes include
• To identify projects that best fit the
  organization's goals and strategy
• To identify projects that support multiple
  organizational goals and cross-reim force other
  important projects
• To eliminate projects that incur excessive risk
  and/or cost
• To eliminate projects that bypassed a formal
  selection process and may not provide benefits
  corresponding to their risks and/or costs

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Project Portfolio Process (PPP)

• Purposes include
• To keep from overloading the organization's
  resource availability
• To balance the resources with the needs
• To balance short, medium, and long term returns

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Project Portfolio Process (PPP)

• Step 1 Establish a Project Council (Strategic)
• senior management
• project managers of major projects
• head of the Project Management Office
• particularly relevant general managers
• those who can identify key opportunities and
  risks
• anyone who can derail the progress of the PPP
  later on in the process

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Project Portfolio Process (PPP)

• Step 2 Identify Categories and Criteria
• Categories of process change
• 1. Derivative projects. These are projects with
  objectives that are only incrementally different
  from existing offerings. (lower priced version).
• 2. Platform projects. The planned outputs of
  these projects represent major departures in
  terms of either the product/service itself or
  the process used to make and deliver it, or
  both. They become "platforms" for the next
  generation, such as a new model of auto

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Project Portfolio Process (PPP)

• Categories of process change
• 3. Breakthrough projects. Breakthrough projects
  typically involve a newer technology than
  platform projects. It may be a 'disruptive"
  technology. Examples here include the use of
  fiber-optic cables for data transmission,
  cash-balance pension plans, and hybrid
  gasoline-electric automobiles.
• 4. RD projects. "blue-sky," visionary newly
  developed technologies

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Project Portfolio Process (PPP)

• We plot also against a time frame
• The purposes of an aggregate plan include
• To view the mix of projects within each
  illustrated aspect (shape)
• To analyze and adjust the mix of projects within
  each category or aspect
• To assess the resource demands on the
  organization, indicated by the size, timing, and
  number of projects shown

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Project Portfolio Process (PPP)

• The purposes of an aggregate plan include
• To identify and adjust the gaps in the
  categories, aspects, sizes, and timing the
  projects
• To identify potential career paths for developing
  project managers, such as team member of a
  derivative project, then team member of a
  platform project, manager of a derivative
  project, member of a breakthrough project, and
  so on

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Project Portfolio Process (PPP)

• Step 3 Collect Project Data
• Step 4 Assess Resource Availability (labor)
• Step 5 Reduce Project and Criteria Set
• Whether the competence is in the organization
• Whether there is a market for the offering
• How profitable the offering is likely to be
• How risky the project is
• If there is a potential partner to help with the
  project
• If the right resources are available at the
  right times

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Project Portfolio Process (PPP)

• Step 5 Reduce Project Criteria Set (cont.)
• If the project is a good technological/knowledge
  fit with the organization
• If the project uses the organizations strengths,
  or depends on its weaknesses
• If the project is synergistic with other
  important projects
• If the project is dominated by another existing
  or proposed project
• If the project has slipped in its desirability
  since the last evaluation

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Project Portfolio Process (PPP)

• Step 6 Prioritize the Projects within Categories
• Step 7 Select the Projects to be Funded and Held
  in Reserve (save some resources)
• Step 8 Implement the Process
• Senior Management Task

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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?

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Project ProposalContents

• Executive Summary
• Cover Letter
• Nature of the technical problem
• Plan for Implementation of Project
• Plan for Logistic Support Administration of the
  project (change orders)
• Description of group proposing to do the work
• Any relevant past experience that can be applied

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Ch 2.8 Project ProposalCover letter
Executive summary

• Compose a cover letter as key marketing
  instrument
• Explain fundamental nature and general benefits
  of project
• Minimally technical language

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Ch 2.8 Project ProposalPast Experience of
Project Team

• List all key project personnel with titles and
  qualifications
• Include full resume of each principal
• Provide all pertinent references

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Ch 2.8 Project ProposalTechnical Approach

• General description of problem to be addressed or
  project to be undertaken
• Major subsystems of problem or project
• Methodology of solving the problem
• Special client requirements
• Test and inspection procedures

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Ch 2.8 Project ProposalImplementation Plan

• Estimates of time, cost and materials for each
  subsystem and the whole project
• Establish major milestones to break project into
  phases
• List equipment, overhead and administrative cost
• Develop contingency plans (incl. slack time)

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Ch 2.8 Project ProposalPlan for Administration
and Logistic Support

• Control over subcontractors
• Nature and Timing of all reports (progress,
  budget, audits)
• Change management
• Termination Procedures
• touch of class capabilities (artists
  renderings, meeting facilities,video
  conferencing, computer graphics)

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Strategic Selection of Projects

• Portfolio Classification Matrix
• Characteristics of Benefits
• Quality of Resources

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Strategic Selection of Projects
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Summary

• Primary selection criteria are realism,
  capability,flexibility, ease of use, and cost
• In preparing to use a model, a firm must identify
  its objectives, weighting them relative to each
  other, and determining the probable impacts of
  the project on the firms competitive abilities.
• Models can be numeric or nonnumeric

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Summary

• Numeric Models can be subdivided into
  profitability and scoring models
• To handle uncertainty, pro forma documents, risk
  analysis, and simulation with sensitivity
  analysis are helpful
• Special care should be given to data in project
  selection models. Of concern are data taken
  from accounting data base and the effect of
  technological shock

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Summary

• Project proposals generally consist of several
  sections the technical approach, the
  implementation plan, the plan for logistics
  support and administration, and past experience.
• The history of project selection models has shown
  an increase in the use of formal models,
  particularly profitability models.
• Project Selection may also be viewedas strategic
  activity.
• Setting Objectives
• Appropriately using resources

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