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ISQA 450/510

Project Management-

Project, Program, Portfolio Selection

Ken Houseman

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Selection Process Strategic Planning

SWOT Long-term business strategy alignment

Business area analysis What areas of the business can be utilized to meet objectives Begin financial analysis information

Project Planning Identify and select projects to meet strategic goals Analyze financial benefit analysis and strategic fit

Resource Allocation Determine resources to allocate to selected projects Level resources for effective implementation Monitor and control bottlenecks

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SWOT Analysis

Threat

Weakness

Opportunity

StrengthInternal Factors

External Factors

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SWOT Analysis A SWOT analysis generates information that is

helpful in matching an organization or group’s goals, programs, and capacities to the social environment in which it operates.

Factors internal to the firm usually can be classified as strengths (S) or weaknesses (W), and those external to the firm can be classified as opportunities (O) or threats (T).

It is an instrument within strategic planning. When combined with dialogue it is a

participatory process

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SWOT: Internal Factors

StrengthsPositive tangible and intangible attributes,

internal to an organization. They are within the organization’s control.

WeaknessFactors that are within an organization's

control that detract from its ability to attain the core goal. Which areas might the organization improve?

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SWOT: External Factors Opportunities

External attractive factors that represent the reason for an organization to exist and develop. What opportunities exist in the environment, which will propel the organization?

Identify them by their “time frames”

Threats External factors, beyond an organization’s conrol,

which coul place the organization’s mission or operation at risk. The organization may benefit by having contingency plans to address them if they should occur.

Classify them by their “seriousness” and “probability of occurrence”.

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Example: Zara Fashion

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SWOT Strategy Matrix

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SWOT Concerns

SWOT analysis can be very subjective. Do not rely on it too much. Two people rarely come-up with the same final version of SWOT.

Use it as a guide and not a prescription.

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Exercise1. List the 3 main strategic objectives of your

company. If you don’t work for a current company, select one that you can adequately hypothesize about.

2. Develop a SWOT analysis for the company.3. Compare your SWOT to the strategic

objectives.4. List 2 or 3 possible projects that you could

potentially implement.

Work in pairs.

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Profitable Projects

Business is about finding projects that will make money, i.e., that will increase firm value.

The project has two parts:The expenses The money received from the project

Given a set of cash flows, how do we decide if the project is profitable?

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NPV

< 0 <

NPV < 0 NPV < 0 NPV < 0

The investment's return is less

than the discounted

cash threshold.

The investment's return meets

the discounted cash threshold

The investment's

return exceeds the discounted cash threshold.

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Net Present Value (NPV)

NPV = ΣN

t=0

Ct

(1 + r)t

Net Present Value

Net Present Value (NPV) is a standard method for the financial appraisal of long-term projects.

Present Value of Net Cash Flows, discounted back to present value (PV).

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Simple?

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2010 2011 2012

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NPV

NPV = ΣN

t=0

Ct

(1 + r)t

1. Each cash inflow/outflow is discounted back to its present value (PV).

Year 1’s value in today’s terms,Year 2’s value in today’s terms,Year 3’s value in today’s terms,Year 4’s value in today’s terms,

etc.

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NPV

NPV = ΣN

t=0

Ct

(1 + r)t

2. Then they are summed.

Year 1 +Year 2 +Year 3 +Year 4 +

Etc

= Sum

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NPV

NPV = ΣN

t=0

Ct

(1 + r)t

t – the time of the cash flow

N – the total time of the project

r – the discount rate ( the rate of return that could be earned on an investment in the financial markets with similar risk.)

Ct – the net cash flow (the amount of cash) at time t

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NPV

Estimated Costs/Benefits: Input costs and benefits in the year they will be realized and present day values.

Discount Rate (r): the rate used in discounting futur cash flows; the capitalization rate or opportunity cost of capital

Discount factor = 1/(1 + r)t

ROI = ($Benefits - $Costs) / $Costs

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NPV: Payback Analysis

Payback Period: the amount of time it will take to recoup – in the form of net cash inflows – the totla dollars invested in a project.

Chart cumulative discounted costs and cumulative discounted benefitsCross point is payback point

o Net profit from that point forward

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NPV

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NPV Exercise You’ve been selected to manage a new IT infrastructure

install project to improve efficiency. The operations VP has asked you to determine whether this project is a viable project and what the ROI will be as well as when the company will start returning a profit. In addition, the IT director wants to know what the total benefit will be across the 5 year depreciation period of purchases of equipment that is mandated by company asset management in order to budget for the depreciation.

The initial cost to start up the project is $40k with $10k per year of overhead costs estimated. The project is estimated to last 3 years. There are 2 systems that will come online during the project, each resulting in $20k benefits for the company. One will come online in year 2 and one in year 3.

The current market depreciation rate is 8% per year. Calculate the NPV, ROI, and date of break even.

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Weighted Scoring Model

Systemic way of selecting projects based on multiple criteria of importance to the company, weighted by importance level of each criteria.

Comparative approach for multiple projectsCreates “apples to apples” comparison

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Weighted Scoring Method Determine key criteria

Assign importance weights to each in percento Total weight for all criteria must equal 100%

Assign scores for each project in that area based on SWOT and other analysis into these areasCollective, subjective review required

Multiply each projects criteria score by the weight of that criteria and sum the results

Graph all project results

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Weighted Scoring Model ExampleCriteria Weight Project 1 Project 2 Project 3 Project 4Supports key business objectives 25% 90 90 50 20Has a strong internal sponsor 15% 70 90 50 20Has a strong customer support 15% 50 90 50 20Uses a realistic level of technology 10% 25 90 50 70Can be implemented in one year or less 5% 20 20 50 90Provides a positive NPV 20% 50 70 50 50Has low risk in meeting scope, time, and cost goals 10% 20 50 50 90

Weighted Project Scores 100% 56.0 78.5 50.0 41.5

0 10 20 30 40 50 60 70 80 90

Criteria

Project 1

Project 2

Project 3

Project 4

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Weighted Scoring Model Exercise With your partner, define 5-7 critical

evaluation criteria for the company you evaluated in the first exercise for SWOT analysis.

Weight the criteria as you see them based on the company obejectives.

For each of the projects you identified in the SWOT exercise, grade them on a 0-100 scale.

Determine which projects are a “best fit”.

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Balanced Scorecards Converts company objectives into goals and

measurable metrics for determining success Based on the company mission and objectives,

goals are defined and metrics implemented at appropriate processes and projects to ensure that tactical implementation aligns to strategic goals

Using the objectives from the SWOT analysis, develop a few metrics for the company you chose.

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Project Timing Ideally you plan based on resources available

and needed man hours to complete a project. Finish date is determined from resource available and manhours required.

If a project must be finished by a specific date, plan backwards using resources and manhour requirements to determine needed start date. May determine project is behind schedule before it

has even started.

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Homework

Start reading Case 1. May work in groups up to 4 people.

Complete all 4 Exercises at the end of the chapter.