QUẢN LÝ DỰ ÁN
(PROJECT MANAGEMENT)
Dr. TRAN QUYNH LE
Industrial Systems Engineering Department
Mechanical Engineering Faculty
Ho Chi Minh City University of Technology (HCMUT)–VNUHCM
Chapter 3
Organization Strategy and Project Selection
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LEARNING OUTCOME
• Explain why it is important for project managers to understand their
organization’s strategy.
• Understand the need for a project priority system.
• Distinguish among three kinds of projects.
• 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.
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Why Project Managers Need to Understand the
Strategic Management Process
▪ Changes in the organization’s mission and strategy
• Project managers must respond to changes with appropriate decisions
about future projects and adjustments to current projects.
• Project managers who understand their organization’s strategy can
become effective advocates of projects aligned with the firm’s mission.
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The Strategic Management Process: An
Overview
▪ Strategic Management
• Provides the theme and focus of the future direction for the firm.
➢ Responding to changes in the external environment—
environmental scanning
➢ Allocating scarce resources of the firm to improve its competitive
position—internal responses to new action programs
• Requires strong links among mission, goals, objectives, strategy, and
implementation.
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Strategic Management Process (cont’d)
▪ Four of Activities of the Strategic Management Process
1. Review and define the organizational mission.
2. Analyze and formulate strategies.
3. Set long-range goals and objectives to achieve strategies.
4. Implement strategies through projects
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Strategic Management Process
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Characteristics of Objectives
S Specific Be specific in targeting an objective
M Measurable Establish a measurable indicator(s) of progress
A Assignable Make the objective assignable to one person for completion
R Realistic State what can realistically be done with available resources
T Time related State when the objective can be achieved, that is, duration
EXHIBIT 2.1
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Example of S.M.A.R.T objective
▪ Example 1: Produce 5 high-quality blog posts every month
• Specific: Schedule compelling posts on the editorial calendar and
publish them regularly.
• Measurable: How many visitors is a post getting? Are they being
converted into customers?
• Attainable: We produced four monthly posts for the past year and have
onboarded a new, experienced blog editor.
• Relevant: 10% of visitors to our blog are converted to paying
customers.
• Time-bound: 30 days is enough to perform keyword research and
publish the content.
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Example of S.M.A.R.T objective
▪ Example 2: Our quality team will increase output by 10 percent this
year by reducing the time spent in checking and streamlining existing
processes.
• Specific: The goal is to increase the number of quality product by 10
percent over the previous year by reducing checking time and making
processes more efficient.
• Measurable: The goal is measurable because the total output of each
year is measurable.
• Achievable: This goal is achievable as long as we can redirect the
team’s time from checking and inefficient processes.
• Relevant: This goal is relevant as a 10 percent increase in output
translates directly to increased profits for the company
• Time-Bound: This goal will be measured at the end of the year.
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The Need for a Project Priority System
▪ The Implementation Gap
• The lack of understanding and consensus on strategy among top
management and middle-level (functional) managers who
independently implement the strategy.
▪ Organization Politics
• Project selection is based on the persuasiveness and power of people
advocating the projects.
▪ Resource Conflicts and Multitasking
• The multiproject environment creates interdependency relationships of
shared resources which results in the starting, stopping, and restarting
projects.
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Benefits of Project Portfolio Management
▪ 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.
▪ Justifies killing projects that do not support organization strategy.
▪ Improves communication and supports agreement on project goals.
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A Portfolio Management System
▪ Design of a project portfolio system:
• Classification of a project
• Selection criteria depending upon classification
• Sources of proposals
• Evaluating proposals
• Managing the portfolio of projects.
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Project Classification
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Selection Criteria
▪ Selection Criteria
• Financial: payback, net present value (NPV), internal rate of return
(IRR)
• Non-financial: projects of strategic importance to the firm.
▪ Two Multi-Criteria Selection Models
• Checklist Models: uses a list of questions to review potential projects and to
determine their acceptance or rejection
• Multi-Weighted Scoring Models: Use several weighted selection criteria
to evaluate project proposals.
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Financial Criteria
▪ The Payback Model
• Measures the time it will take to recover the
project investment.
• Shorter paybacks are more desirable.
• Emphasizes cash flows, a key factor in
business.
• Limitations of payback:
➢ Ignores the time value of money.
➢ Assumes cash inflows for the investment
period (and not beyond).
➢ Does not consider profitability.
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Financial Criteria
▪ Example 1:
• 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.
• The payback for project A is 3.1 years and for project B is 3.6 years.
• Using the payback method, both projects are acceptable, since both
return the initial investment in less than five years and have returns on
the investment of 32.1 and 27.5 percent.
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Financial Criteria
Two new software projects are proposed to a young, start-up company.*
The Alpha project will cost $150,000 to develop and is expected to have
an annual net cash flow of $40,000. The Beta project will cost $200,000 to
develop and is expected to have an annual net cash flow of $50,000. The
company is very concerned about their cash flow. Using the payback
period, which project is better from a cash flow standpoint? Why
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Financial Criteria
▪ The Net Present Value (NPV) model
• Uses management’s minimum desired rate-of-return (discount rate) to compute
the present value of all net cash inflows.
➢ Positive NPV: the project meets the minimum desired rate of return and is eligible
for further consideration.
➢ Negative NPV: project is rejected.
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
n = number of years
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Financial Criteria
▪ The Net Present Value (NPV) model
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Financial Criteria
Rate of return (ROR), Internal rate of return (IRR): The rate of return is the
interest rate that makes the present worth or annual worth of a cash flow series
exactly equal to 0.
To determine ROR, find the i* value in the relation:
PW=0 or AW=0 or FW=0
0=-700,000+ 225,000(P/A,i*,5)
0 = -700,000 + 225,000 x (1+i*)5 -1 / [i* x (1+i*)5 ]
=> i*=18
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Net Present Value (NPV) and Internal Rate of Return (IRR):
Example Comparing Two Projects
Project A Year 0 Year 1 Year 2 Year 3 Year 4 Year 5 Total
MARR 15%
Outflows (700,000.00) - - - - - (700,000.00)
Inflows 225,000.00 225,000.00 225,000.00 225,000.00 225,000.00 1,125,000.00
Net Inflows (700,000.00) 225,000.00 225,000.00 225,000.00 225,000.00 225,000.00 425,000.00
IRR 18%
Payback 3.11
Project A 54,234.90
Project B Year 0 Year 1 Year 2 Year 3 Year 4 Year 5 Total
MARR 15%
Outflows (400,000.00) - - - - - (400,000.00)
Inflows 110,000.00 110,000.00 110,000.00 110,000.00 110,000.00 550,000.00
Net Inflows (400,000.00) 110,000.00 110,000.00 110,000.00 110,000.00 110,000.00 150,000.00
IRR 12%
Payback 3.64
Project B (31,262.94)
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Financial Criteria
• Example 2
Applications of green, lean manufacturing techniques coupled with value stream
mapping can make large financial differences over future years while placing
greater emphasis on environmental factors. Engineers with Monarch Paints have
recommended to management an investment of $200,000 now in novel methods
that will reduce the amount of wastewater, packaging materials, and other solid
waste in their consumer paint manufacturing facility. Estimated savings are
$15,000 per year for each of the next 10 years and an additional savings of
$300,000 at the end of 10 years in facility and equipment upgrade costs.
Determine the rate of return
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AIC
• Example 3 As an analyst for an investment firm, you are considering two
alternatives that have the same initial cost and economic life but different
cash flows, as indicated in the table below. Both are affected by uncertainty to
some degree; however, alternative P is thought to be more uncertain than
alternative Q. If the firm’s risk-free MARR is 10%, then which is the better
investment?
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AIC
• Example 4
The government wants to decide whether to give a $5,000,000 subsidy to a
chemical manufacturer who is interested in opening a new factory in a depressed
area. The factory is expected to generate jobs for 200 people and further
stimulate the local economy through commercial ventures and tourist trade. The
benefits as a result of jobs created and improved trade in the area are estimated
at $1,000,000 per year. Six percent is considered to be a fair discount rate. The
study period is 20 years. Calculate the B/C ratio to determine whether the project
is worthwhile.
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Nonfinancial Criteria
▪ Financial return. while important, does not always reflect strategic importance
▪ Focus on core competencies & long-term survival
▪ Projects may be chosen to:
• Capture market share
• Block competitors
• Develop enabler products
• Build core technology
• Reduce supplier dependency
• Avoid government intervention
▪ Also include intangible goals: Enhance brand image & Support corporate
citizenship & community
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Multi-Criteria Selection Models
▪ Checklist Models: uses a list of questions to review potential projects and
to determine their acceptance or rejection
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Multi-Criteria Selection Models
▪ Checklist Models
• Advantages:
➢ Simple & flexible for many project types
➢ Easy to apply across divisions/locations
• Shortcomings:
➢ Measure relative importance/value of projects
➢ Difficult to compare & prioritize projects
➢ Vulnerable to politics, manipulation, power plays
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Multi-Criteria Selection Models
▪ Checklist Models
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Two Multi-Criteria Selection Models
▪ Checklist Models
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Two Multi-Criteria Selection Models
▪ Checklist Models
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Multi-Criteria Selection Models
▪ Multi-Weighted Scoring Models: uses several weighted selection criteria to
evaluate project proposals
• Each criterion assigned a weight + project gets a score
• Weighted score = weight × score, total score ranks projects
• Projects with higher total scores => higher priority
• Criteria must reflect organization’s critical success factors
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Multi-Criteria Selection Models
▪ Multi-Weighted Scoring Models:
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Multi-Criteria Selection Models
▪ Multi-Weighted Scoring Models:
▪ Advantages
• It is easy to use in tying critical strategic goals for the company to various project
alternatives.
• The simple scoring model is easy to comprehend and use.
▪ Disadvantages
• A scale from 1to 3 is not very accurate.
• Dependence on the relevance of the selected criteria and the accuracy of the
weight given them.
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Multi-Criteria Selection Models
▪ AHP Models:
First Step: Structuring the
Hierarchy of Criteria.
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Multi-Criteria Selection Models
▪ AHP Models:
First Step: Structuring the
Hierarchy of Criteria.
Note: Subdividing relevant
criteria into a meaningful
hierarchy gives managers a
rational method for sorting
among and ordering
priorities.
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Multi-Criteria Selection Models
▪ AHP Models:
Determining Local Priorities.
Decision-makers compare each criterion against every other criterion, and each
alternative against other alternatives, for a given criterion, using a relative scale of
importance
These comparisons are used to create a pairwise comparison matrix from which local
priority weights for each criterion and alternative are calculated.
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Multi-Criteria Selection Models
▪ AHP Models:
Determining Local Priorities.
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Multi-Criteria Selection Models
▪ AHP Models:
Determining Local Priorities.
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Multi-Criteria Selection Models
▪ AHP Models:
Determining Local Priorities
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Multi-Criteria Selection Models
▪ AHP Models:
Determining Local Priorities.
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Multi-Criteria Selection Models
▪ AHP Models:
Checking for Consistency
The AHP includes a method to check the consistency of the judgments made by
decision-makers to ensure the results are reliable.
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Multi-Criteria Selection Models
▪ AHP Models:
Checking for Consistency
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Multi-Criteria Selection Models
▪ AHP Models:
Checking for Consistency.
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Multi-Criteria Selection Models
▪ AHP Models:
Determining Global Priorities.
▪ The local priorities are then combined, or aggregated, throughout the hierarchy to
determine global priorities for the final options, resulting in a ranked list of the best
compromise solutions.
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Multi-Criteria Selection Models
▪ AHP Models:
Determining Global Priorities.
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Multi-Criteria Selection Models
▪ AHP Models:
Example: Selecting a new hub airport
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Multi-Criteria Selection Models
▪ AHP Models:
Example: Selecting a new hub airport
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Multi-Criteria Selection Models
▪ AHP Models:
Example: Selecting a new hub airport
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Multi-Criteria Selection Models
▪ AHP Models:
Example: Selecting a new hub airport
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Multi-Criteria Selection Models
▪ AHP Models:
Example: Selecting a new hub airport
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Multi-Criteria Selection Models
▪ AHP Models:
Example: Selecting a new hub airport
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Multi-Criteria Selection Models
▪ AHP Models:
Example: Selecting a new hub airport
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Applying a Selection Model
▪ Project Classification
• Deciding how well a strategic or operations project fits the
organization’s strategy.
▪ Selecting a Model
• Applying a weighted scoring model to bring projects to closer with the
organization’s strategic goals.
➢ Reduces the number of wasteful projects
➢ Helps identify proper goals for projects
➢ Helps everyone involved understand how and why a project is
selected
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Applying a Selection Model
▪ Sources and Solicitation of Project Proposals
• Within the organization
• Request for proposal (RFP) from external sources (contractors and
vendors)
▪ Ranking Proposals and Selection of Projects
• Prioritizing requires discipline, accountability, responsibility, constraints,
reduced flexibility, and loss of power.
▪ Managing the Portfolio
• Senior management input
• The priority team (project office) responsibilities
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Major Project Proposal
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Risk Analysis
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Managing the Portfolio
▪ Senior Management Input
• Provide guidance in selecting criteria that are aligned with the
organization’s goals
• Decide how to balance available resources among current projects
▪ The Priority Team Responsibilities
• Publish the priority of every project
• Ensure that the project selection process is open and free of power
politics.
• Reassess the organization’s goals and priorities
• Evaluate the progress of current projects
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Project Screening Process
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Priority Analysis
FIGURE 2.6
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Project Portfolio Matrix
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Project Portfolio Matrix Dimensions
▪ Bread-and-butter projects
• Involve evolutionary improvements to current products and services.
▪ Pearls
• Represent revolutionary commercial advances using proven
technical advances.
▪ Oysters
• Involve technological breakthroughs with high commercial payoffs.
▪ White elephants
• Projects that at one time showed promise but are no longer viable.
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Exercises
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Key Terms
▪ Balanced scorecard
▪ Implementation gap
▪ Net present value
▪ Payback
▪ Organizational politics
▪ Priority system
▪ Priority team
▪ Project portfolio
▪ Project screening matrix
▪ Sacred cow
▪ Strategic management process
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