Project Management PM 816
Project Selection
Professor: Professor Taryn Bond-Barnard
Email: tarynbarnard@[Link]
Lecture 2
Lecture 2: Learning Objectives
During this lecture you will learn about:
• The project hierarchy
• Organisational structures and the authority of the
PM
• Strategic management & assessing the impact of
the internal & external business environment
• Business value
• Methods for assessing individual projects
Portfolio of projects
Programmes
• A programme is a group of related (and sometimes interactive) projects that are
managed in a coordinated way.
• Unlike a project, the work done within a programme is typically of an ongoing
nature.
• Programmes normally aim towards some strategic objective and projects within
a programme are often performed for the same client.
Projects, Programmes, Portfolios
Collection of projects, programs, subsidiary
Portfolio Aligns with business
portfolios and operations managed in a group to
Management strategies
achieve strategic objectives
Group of related projects, subsidiary programs
Controls components and
Program and program activities managed in a
interdependencies to
Management coordinated manner to obtain benefits not
realize benefits
available from managing them individually
Enables achievement of
Project
Part of a broader program, portfolio or both organizational goals and
Management
objectives
Interactions
Organisational
Strategy
An organization’s
strategy creates a
portfolio
Portfolio
A portfolio can have both
Projects and Programmes
Projects Programme
A Programme can
have many Projects
Example
• Portfolio: NDPW Public Infrastructure Portfolio
• Programme: Repair and Maintenance Programme (RAMP)
• Project: Repair and Maintenance of Diepkloof Prison
• Sub-project: Repair and Maintenance of Mess Kitchen
• Work Package (cost account): Acquisition and installation of new
oven
• Activity: Commission the ovens
Organisational Structures
Organizational structure and
governance affects/determines:
• How organizational groups and
individuals interrelate
• How much authority the project
manager has
• What resources will be available
• How the project will be conducted
Functional Structure
CEO
HR
Marketing Finances R&D Operations
Management
Functional organisations | Silos
Functional organisations | Silos
Project-Oriented Structure
CEO
Project 1 Project 2 Project 3 Project 4
Marketing Marketing Marketing Marketing
Finances Finances Finances Finances
Design Design Design Design
Construction Construction Construction Construction
Matrix Structure
Types of Matrix Structures
• Strong matrix: More power to project | Manager
of Projects
• Balanced matrix: Balance of power | Project
managers report to functional manager
• Weak matrix: More power to functional |
Committee of staff in function manage projects
Relative Authority in
Organisational Structures
Functional Matrix Project-oriented
Functional
Team member loyalty Conflicted loyalty Project
department
Both functional
Team member
Functional manager manager and project Project manager
reporting
manager
Coordinator to full Full-time and
Project manager role Seldom identified
project manager responsible
Full-time on project
Team member role Part-time on project Part-time on project
(preferred)
Control of project Nonexistent Medium – shared with
manager over team (functional manager functional High
members controls) manager/sponsor
Pros & Cons of Organisational
Structures
Steyn et al, 2017 . pg 50
Organisational Structures |
Conclusion
P. Bannerman, 2010
Strategic Alignment & Business
Management Skills
Do you:
• Know your organization’s strategic plan?
• Understand how project goals matter to an
STRATEGIC PLAN organization's long-term vision and mission?
A high-level business • See a high-level overview of the organization?
document that explains an • Have a working knowledge of business functions?
organization’s vision and • Have pertinent product and industry expertise?
mission plus the approach
that will be adopted to Can you:
achieve this mission and
vision, including the specific
• Explain the essential business aspects of a project?
goals and objectives to be
achieved during the period
• Work with SMEs and a sponsor to develop an
covered by the document. appropriate project delivery strategy?
• Implement strategy to maximize the business value
of project?
Strategic Management Elements
and Frameworks
ongoing
Note: From PMI’s Standard for Portfolio Management
Get to Know the External
Business Environment
Use frameworks or prompts to understand external factors that can
introduce risk, uncertainty, or provide opportunities and affect the value and
desired outcomes of a project:
• PESTLE: Political, economic, socio-cultural, technical, legal,
environmental
• TECOP: Technical, environmental, commercial, operational, political
• VUCA: Volatility, uncertainty, complexity, ambiguity
Internal Business
Environment Factors
• Organizational changes can
dramatically impact scope
• The project manager and project
sponsor need to be familiar with
business plans, reorganizations, process
changes and other internal activities
• Internal business changes might cause:
• Need for new deliverables
• Reprioritization of value, including
removal of existing deliverables 21
Business Value
• The net quantifiable
benefit (tangible and/or
intangible) identified
from a business
endeavor
• Part of the objectives
or description of the
project in the initiating
agreements
• Benefits realization is
based on declared
business value
Types of Business Value
Financial New Social Benefit
Gain Customers
First to Improvement Regularization
Market Technological, Alignment or
process, etc. compliance with
standards and
regulations
Business Documents
• Are developed prior to project start (usually by a
business analyst or key project stakeholder)
• Contain information about the project’s objectives
and contribution to the business goals
• Help the business to determine whether a project
is worth the required investment of time, money,
and resources
Review the business documents periodically
Business Case and Benefits
Management Plan
Business case: justifies project and establishes boundaries
BENEFITS MANAGEMENT PLAN • Cost-benefit analysis
The documented explanation defining the • Business need
processes for creating, maximizing, and • Quality specifications
sustaining the benefits provided by a project or • Schedule or cost constraints
program. It also describes how and when the
benefits of a project will be derived and
measured. Both the business case and the Acceptance of the business case usually leads to creation of the
benefits management plan are developed with project charter.
the benefits owner prior to the project being
initiated. Additionally, both documents are
Benefits management plan should include:
referenced after the project has been completed.
Therefore, they are considered business
• Processes for creating, maximizing and sustaining project
documents rather than project documents or benefits
components of the project management plan. • Time frame for short- and long-term benefits realization
• Benefits owner or accountable person
• Metrics
• Assumptions, constraints and risks
This is a business document, not part of the project management
plan.
Project Selection
Benefit Measurement Methods
COST-BENEFIT opportunity
ANALYSIS (potential return)
that will not be Cost-benefit analysis: How businesses justify the selection
Is one method of
measuring or
realized when one
project is selected
(authorization) of a project
evaluating a over another.
project’s benefit
and value. INTERNAL RATE Business - “smaller is better”
OPPORTUNITY
OF RETURN (IRR) • Estimate payback period — Smallest number (duration)
COST The interest rate chosen
that makes the
A concept applied net present value • Assess opportunity cost — What if we didn’t undertake the
to quantify the of all cash flow project?
missed equal to zero. This
opportunity when rate is a function
deciding to use a
resource (e.g.,
of the cost of Financial - largest number (profit) chosen - “bigger is better”
capital for project
investment implementation. • Time value of money
dollars) for one
purpose versus RETURN ON • Present value (PV)
another. INVESTMENT
Alternately (ROI) • Future value (FV)
opportunity cost
is the loss of A financial metric • Net present value (NPV)
of profitability that
potential future
return from the measures the gain • Internal rate of return (IRR)
or loss from an
second-best
investment
• Return on investment (ROI)
unselected
project. In other relative to the
words, it is the amount of money
invested.
Project Selection Using Present Value
(PV) and Net Present Value (NPV)
PV applies to projects that span several time periods when the value of money
might change – e.g., inflation
Present Value PV =𝐹𝑉/((1+𝑟)𝑛) FV = future value, r = interest rate, n = no. of time
periods
Net present value (NPV):
• Is used for capital budgeting
• Accounts for inflation and macro-economic change (discount rate)
• Compares the value of a currency unit today to the value of the same currency
unit in the future
Year 0 1 2 3 4
Net Cash
-1200 +400 +800 +600 +1200
Flows
Factor 1 .91 .83 .75 .68
Net Present
-1200 +364 +664 +450 +816
Value
Financial Model: Expected
Commercial Value (ECV)
Example:
Consider the costs, earnings, and success likelihood of the development
and launch of a new product. Suppose the product's development cost is
$10M, launch cost is $1.5M, NPV for the future stream of earnings is $50M,
and probabilities for success are 80 percent in development and 60
percent in the market.
Then
ECV=[($50M)0.6 - $1.5M] 0.80 - $10M = $12.8M
Generally, the higher the ECV, the more preferred the project.
Financial Model: Benefit/Cost
Ratio (B/C)
Another financial model is benefit/cost (B/C) ratio, which weighs the benefits of a
project against
its costs.
Example:
If estimated annual revenue of the project is $100,000, estimated annual cost is
$25,000, and probability of success is 50 percent, the resulting ratio is 2.0.
Thus, for each dollar spent on the project, two dollars in benefit would be expected
in return. B/C can also be computed for other forms of benefits. For instance, in the
ratio
the "value" can be cost savings. Suppose, for example, renovation of a factory and
installation of new equipment will provide an expected present worth savings of $6M
for a present worth cost (facility renovation, equipment installation, and annual
operating and maintenance expenses) of $3M. The B/C ratio for the project is 2.0
Financial Model: Benefit/Cost
Ratio (B/C)
Model for computing expected commercial value
Main weaknesses of financial models:
• Overreliance on estimates
• Lack of data to estimate these values during project conception
• Project supporters' tendency to understate costs and overstate benefits.
• sole reliance on one (financial) criterion and neglect of other criteria of equal or
more importance; NPV, does not measure the strategic project or the extent to
which, say, a project would contribute to the goal of ‘expanding market into Europe’.
Scoring Models
Main weaknesses of scoring models:
• It ignores the resources needed to implement projects.
• Big projects tend to get more attention and score higher even though
they consume more resources and shut out other projects = Address
this by considering a project’s required funds/resources and its score
or rating
Incremental Value Delivery
An incremental development approach can:
• Enable value delivery sooner
• Attain higher customer value and increased market share
• Allow partial delivery (or previews) to customers
• Enable early feedback, allowing for adjustments to the direction,
priorities and quality of the product
Readings
Reflection:
• Answer all 8 questions that follow as part of your reflection
Example
Question 1: Answer……
Question 2: ….
Reflection: Question 1
• Think of a current or recent
project. Can you identify the
organisational structure type
and describe how it affects
your project in the following
ways?
• How organisational groups and
individuals interrelate
• The project manager’s authority
• Resource availability
• How the project is conducted
Project Selection | Exercises
2. What is the present value of $300 000 received 3 years from now if we expect the interest
rate to be 10 percent? Should the answer be more or less than $300 000?
3. An organisation has two projects to choose from. Project A will take 3 years to complete &
has an NPV of $45 000. Project B will take 6 years to complete & has an NPV of $85 000.
Which one is a better investment?
4. An organisation has two projects from which to choose: Project A with an IRR of 21% and
Project B with an IRR of 15%. Which one is a better option?
Project Selection | Exercises
5. There are two projects from which to choose: Project A with a payback period of 6 months
or Project B with a payback period of 18 months. Which one should the organisation
select?
6. What does a benefit-cost ratio of 1.7 mean?
A. The costs are greater than the benefits
B. Revenue is 1.7 times the costs
C. Profit is 1.7 times the costs
D. Costs are 1.7 times the profit
7. An organisation has two projects to choose from: Project A with an NPV of $45 000 or
Project B with an NPV of $85 000. What is the opportunity cost of selecting Project B?
8. An organisation has a project with an initial budget of $1 000 000. the project is half
complete & it has spent $2 000 000. Should the organisation consider the fact that it is
already $1 mil over budget when determining whether to continue with the project?
Summary
• We unpacked the project hierarchy ito a Portfolio, Programme and
Project
• Investigated the path from organisational strategy through the project
hierarchy
• Distiguished between the different organisational structures and the
role of the PM
• Explored the impact of strategic management and the external &
internal business environment on project business case
• Discussed different types of business value that is realised through the
vehicle of a project
• Examined different methods for assessing individual projects: NPV, IRR,
ROI, Opportunity cost, Payback period, ECV, B/C Ratio, scoring models