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3. 4KF3 Ch. 2 Organization Strategy and Project Selection.docx

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McMaster University
Steve Way

Chapter 2: Organization Strategy and Project Selection 4KF3 Lecture Notes Essence of Problem***  Problem: “A discrepancy (or gap) between some current state of affairs and some desired state of affairs.”  Where you are vs. where you want to be Problem Solving Process***  The rational decision making process 1. Define the Problem 2. Identify the decision criteria 3. Allocate weights to the criteria 4. Develop the alternatives 5. Evaluate the alternatives 6. Select the best alternative Problem of Strategy***  Strategic thinking involves three steps; 1. Where are we now? 2. Where do we want to be? 3. How do we get there? (De Culver, 2000, page 7) Importance of Strategy  Focus on wrong priorities  Focus on customer instead of market o Strategy highlights what is really important for an organization  Overemphasizing technology o Technology is a tool but it is not a solution  Focusing on wrong customers o Apple vs. RIM  Searching for perfection o Avoid losing sight of goals Page 1 of 14 Chapter 2: Organization Strategy and Project Selection 4KF3 Strategic Management Process Review and Define  PEST Analysis o Political, Economic, Social, Technological  Industry Analysis o No specific process o Newspapers, financial reports and strategic statements, Bloomberg, corporate websites o See what your competitors are doing  Company Analysis o Financial health and social health o Market research and surveys  SWOT Analysis o S,W – internal. What are the company’s competencies and what are the issues? o O,T – external. What are the areas of improvement and what might hurt us? Set Long‐Range Goals and Objectives  Specific  Measurable  Assignable  Realistic  Timely Examples  Goal: – Improve financial condition (profitability, liquidity, solvency) Page 2 of 14 Chapter 2: Organization Strategy and Project Selection 4KF3 – Improve customer service * These goals provide some strategic direction but they are not SMART. We wouldn’t know if we achieved these goals.  Objective: – Increase revenues in the Canadian market to $420 million per annum by January 2015. * This is an example of a strong SMART objective. Analyze and Formulate Strategies  Evaluate past and current situation  Utilize SWOT information  Identify strategies and figure how to accomplish goals/objectives Implement Strategies through Projects  Allocate resources  Support strategy and projects  Plan and control projects Understanding Scenarios  Scenario planning process o What-if analysis  Assessing Core Business and Industry  Potential Scenarios and Impact  Potential Strategies  Examples  Triggers Why Project Portfolio Management?  Projects are how organizations change.  Whoever selects projects decides – how your organization will change – what it will become  Implementation gap  Organizational politics  Resource conflicts and multi-tasking Project Portfolio Process*** 1. Establish a project portfolio authority 2. Identify the selection criteria 3. Allocate weights to the criteria 4. Gather information about the projects 5. Categorize and rank projects 6. Screen and Evaluate the alternatives 7. Select the best portfolio of projects Project Portfolio Management***  Project selection decision outcomes include; – Go – No Go Page 3 of 14 Chapter 2: Organization Strategy and Project Selection 4KF3 – Wait  Project continuation decision outcomes include; – Continue – Terminate Project Selection Models  Heuristic models*** o Common sense models  Checklist model o List of criteria to measure project against o Most checkmarks wins  Simplified scoring models o See film prioritization case  Analytic hierarchy process  Profile models*** o Where the projects line up – which ones are best?  Financial models Criteria for Selection Models*** (According to Souder, 1973)  Realistic  Capable  Flexible  Easy to use  Cost effective  Comparable Heuristic Models***  The Sacred Cow o Somebody has placed political stake on a project whether it is good or bad o If this project fails, they will be out or they will try to divert blame  Operating Necessity o Legislated requirements (i.e. environmental or health and safety) o No choice  Competitive Necessity o Not codified, but you need to do it because everyone else is  Product Line Extension  Comparative Benefit Model o Choose product based on which is the least damaging or harmful  Compliance (Must do projects) o Similar to operating necessity – you have to do it or you will be shut down, fined, etc. Ex. Clean up yard or receive $50,000 fine from City of Hamilton Checklist Model – Develop a list of criteria – Score each project on each criteria (low, medium, high) Simplified Scoring Model (Film prioritization)  Develop a list of criteria  Rank each criterion Page 4 of 14 Chapter 2: Organization Strategy and Project Selection 4KF3  Rate each project on each criteria  Multiply weights by scores to get weighted score on each criterion  Add weighted score to get project scores Project Categories***  Projects can be categorized according to their strategic benefits – New project development, – Expand into new markets, etc.  Give each category a weight based on the importance of each benefit (based on current priorities) Analytical Hierarchy Process*** 1. Structure the hierarchy of criteria – Subdivide criteria 2. Allocate weights to criteria – Split criteria weights among subcriteria 3. Assign numerical values to dimensions – E.g., poor = 0.0, fair = 0.10, good = 0.30. 4. Evaluate proposals Financial Models  Payback Period  Net Present Value  Discounted Payback  Internal Rate of Return Payback Period  Calculate the initial cash outlay  Calculate the yearly cash inflows (must be the same every year)  Payback = cost of project / annual cash inflows Example Page 5 of 14 Chapter 2: Organization Strategy and Project Selection 4KF3 Time Value of Money***  $10,000 three years from now will buy less than $10,000 today  The key issue: – What is the current value of future cash received? Calculations  FV = PV * (1 + i)n  FV = PV (1+interest rate per period)  Divide both sides by (1 + i)n to get  PV = FV / (1 + i)n – “i” is the interest rate – “n” is the number of interest periods (years) – FV is the future value – PV is the present value Net Present Value  Projects the change in the firm’s stock value if a project is undertaken. NPV: Problems – Project A cost $50 million; Project B, $5 million. – Both have the same NPV. – Which is better?  Two projects that have the same NPV may differ in other ways (ex. risk) Page 6 of 14 Chapter 2: Organization Strategy and Project Selection 4KF3 Discounted Payback Internal of Rate Return  The interest rate at which the NPV of costs equal the NPV of benefits. – rate of return at which NPV = 0.  Used to measure and compare the profitability of investments.  Higher IRRs are better than lower IRRs. Page 7 of 14 Chapter 2: Organization Strategy and Project Selection 4KF3 Profile Models*** *Anything to left/top of minimum boundaries must be excluded. Project Priority Matrix Reading Notes Strategy is implemented through projects. Every project should have a clear link to the organization’s strategy.  Strategy is fundamentally deciding how the organization will compete  Use projects to convert strategy into new products, services, and processes for success  Alignment is crucial because of today’s economic climate (rapid changes in technology, global competition, financial uncertainty)  Difficult task to create strong linkage – the larger the more difficult  A crucial factor of integration is that the creation of the process is open and transparent for all participants to review Page 8 of 14 Chapter 2: Organization Strategy and Project Selection 4KF3 Why Project Managers Need to Understand Strategy  Old school thinking: strategy and projects as separate  New school thinking: project management is at the apex of strategy and operation  Two main reasons why project managers must understand mission/strategy: 1. So they can make appropriate decisions and adjustments  Else project managers will make the following mistakes:  Focusing on low priority problems  Focusing on immediate customer only and not entire value chain  Overemphasizing technology  Forgetting Pareto’s Law  Getting caught up in perfection 2. So they can be effective project advocates (explain why the project is necessary) The Strategic Management: 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: 1. Responding to changes in the external environment and allocating scarce resources to the firm to improve competitive position  Constant scanning of environment 2. Internal responses to new action programs aimed at enhancing the competitive position of the firm  Continuous, iterative process aimed at developing an integrated and coordinated long- term plan of action  Most organizations are successful at planning, but many fail at implementing Four Activities of the Strategic Management Process: 1) Review and define the organizational mission o Defining “what we want to become” o Defined by major products and services, target market, geographical area, etc. o Should be written and communicated to everyone o Can be used to evaluate performance o Change infrequently o The more specif
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