EP Project

List of Cases by Chapter

Chapter 1 Development Projects that are Transforming Africa 1 President Obama Signs the Program Management

Improvement and Accountability Act 8 London’s Crossrail: Europe’s Largest Construction Project 10 MegaTech, Inc. 30 The IT Department at Hamelin Hospital 30 Disney’s Expedition Everest 31 “Throwing Good Money after Bad”: the BBC’s Digital

Media Initiative 32

Chapter 2 The Airbus A 380: A Failure of Strategy? 38 Electronic Arts and the Power of Strong Culture in Design

Teams 67 Rolls-Royce Corporation 71 Classic Case: Paradise Lost—The Xerox Alto 72 Project Task Estimation and the Culture of “Gotcha!” 73 Widgets ’R Us 73

Chapter 3 Project Selection Procedures: A Cross-Industry Sampler 80 Project Selection and Screening at GE: The Tollgate Process 100 Keflavik Paper Company 115 Project Selection at Nova Western, Inc. 116

Chapter 4 NASA Taps a Leader with the Right Stuff to Run Their Mars

2020 Project 120 Leading by Example for the London Olympics—Sir John

Armitt 131 The Challenge of Managing Internationally 138 Brazilian Construction Giant Caught in Wide-Spread

Corruption Scandal 143 In Search of Effective Project Managers 146 Finding the Emotional Intelligence to Be a Real Leader 147 Volkswagen and It’s Project to Cheat Emissions Tests 147 Problems with John 149

Chapter 5 Berlin’s Brandenburg Willy Brandt International Airport 156 Statements of Work: Then and Now 164 Defining a Project Work Package 174 Nicaragua’s Canal and Sustainability Challenges 185 Boeing’s Virtual Fence 188 California’s High-Speed Rail Project 190 Project Management at Dotcom.com 192 The Expeditionary Fighting Vehicle 193

Chapter 6 Team-Building Events – Heli-skiing and Zombie

Apocalypses 203 Tele-Immersion Technology Eases the Use of Virtual

Teams 220 Engineers Without Borders: Project Teams Impacting

Lives 225 Columbus Instruments 232 The Bean Counter and the Cowboy 233 Johnson & Rogers Software Engineering, Inc. 234

Chapter 7 Samsung’s Galaxy Note 7 – Failure to Manage a New

Product for Risk 241 Japan Decommissions a $9 Billion Nuclear Reactor That was

Hardly Used 248 Collapse of Shanghai Apartment Building 257 Classic Case: de Havilland’s Falling Comet 263 The Building that Melted Cars 266 Classic Case: Tacoma Narrows Suspension Bridge 267

Chapter 8 New York City’s Second Avenue Subway—Two Miles

Completed for Only $5 Billion Spent 274 The Hidden Costs of Infrastructure Projects—The Case of

Building Dams 303 Sochi Olympics—What’s the Cost of National Prestige? 305

Chapter 9 Preparing for a Major Golf Tournament—It’s a Long Road to

the First Tee 313 Moving the Historic Capen House 345

Chapter 10 Kiruna, Sweden—A Town on the Move! 350 Project Scheduling at Blanque Cheque Construction (A) 379 Project Scheduling at Blanque Cheque Construction (B) 380

Chapter 11 General Electric—Using Agile Methods to Speed New

Product Delivery 387 Eli Lilly Pharmaceuticals and Its Commitment to Critical

Chain Project Management 405 It’s an Agile World 416 Ramstein Products, Inc. 417

Chapter 12 Environmental Concerns and Political Leadership Impact

Fossil Fuel Project Cancellations 420 The Problems of Multitasking 446 “First Come, First Served”: Resource Challenges For Sunrise

Restoration 447

Chapter 13 U.S. Army Can’t Track Spending on its Spending Tracker

Project 452 Earned Value at Northrop Grumman 471 The IT Department at Kimble College 483 The Superconducting Supercollider 484 “Dear Mr. President—Please Cancel our Project!”: The

Honolulu Elevated Rail Project 485

Chapter 14 Amazon’s Golden Touch Fails with a High-Tech Gadget 496 Aftermath of a “Feeding Frenzy”: Dubai and Cancelled

Construction Projects 508 New Jersey Kills Hudson River Tunnel Project 516 The Project That Wouldn’t Die 517 The Navy Struggles to Avoid Cancellation of its Littoral

Combat Ship Program 518

CVR_PINT0332_06_SE_IFC copy.indd 1 11/15/17 8:38 PM

Project ManageMent achieving coMPetitive advantage

Jeffrey K. Pinto Pennsylvania State University

New York, NY

F i f t h E d i t i o n

A01_PINT0332_06_SE_FM.indd 1 11/15/17 2:47 PM

To Mary Beth, my wife and best friend, with the most profound thanks and love for her unwavering support. And, to our children, Emily, AJ, and Joseph—three “projects” that are

definitely over budget but that are performing far better than I could have hoped!

Vice President, Business, Economics, and UK Courseware: Donna Battista

Director of Portfolio Management: Stephanie Wall Director, Courseware Portfolio Management:

Ashley Dodge Senior Sponsoring Editor: Neeraj Bhalla Editorial Assistant: Linda Albeli Vice President, Product Marketing: Roxanne McCarley Product Marketer: Kaylee McCarley Product Marketing Assistant: Marianela Silvestri Manager of Field Marketing, Business Publishing:

Adam Goldstein Field Marketing Manager: Nicole Price Vice President, Production and Digital Studio,

Arts and Business: Etain O’Dea Director of Production, Business: Jeff Holcomb Managing Producer, Business: Melissa Feimer Content Producer: Sugandh Juneja Operations Specialist: Carol Melville

Design Lead: Kathryn Foot Manager, Learning Tools: Brian Surette Content Developer, Learning Tools: Lindsey Sloan Managing Producer, Digital Studio and GLP,

Media Production and Development: Ashley Santora Managing Producer, Digital Studio and GLP:

James Bateman Managing Producer, Digital Studio: Diane Lombardo Digital Studio Producer: Regina DaSilva Digital Studio Producer: Alana Coles Digital Content Project Lead: Courtney Kamauf Project Managers: Tierra Ross Elcano and Sasibalan C.,

SPi Global Interior Design: SPi Global Cover Design: SPi Global Cover Art: Benedek/E+/Getty Images Printer/Binder: LSC Communications, Inc./Kendallville Cover Printer: Phoenix Color/Hagerstown

Microsoft and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published as part of the services for any purpose. All such documents and related graphics are provided “as is” without warranty of any kind. Microsoft and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all warranties and conditions of merchantability, whether express, implied or statutory, fitness for a particular purpose, title and non-infringement. In no event shall Microsoft and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from the services. The documents and related graphics contained herein could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Microsoft and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time. Partial screen shots may be viewed in full within the software version specified.

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Library of Congress Cataloging-in-Publication Data on File

ISBN 10: 0-134-73033-X ISBN 13: 978-0-134-73033-2

1 18

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iii

BRIEF CONTENTS

Preface xiii

Chapter 1 Introduction: Why Project Management? 1 Chapter 2 The Organizational Context: Strategy, Structure, and Culture 38 Chapter 3 Project Selection and Portfolio Management 80 Chapter 4 Leadership and the Project Manager 120 Chapter 5 Scope Management 156 Chapter 6 Project Team Building, Conflict, and Negotiation 203 Chapter 7 Risk Management 241 Chapter 8 Cost Estimation and Budgeting 274 Chapter 9 Project Scheduling: Networks, Duration Estimation, and Critical

Path 313 Chapter 10 Project Scheduling: Lagging, Crashing, and Activity Networks 350 Chapter 11 Advanced Topics in Planning and Scheduling: Agile and Critical

Chain 386 Chapter 12 Resource Management 420 Chapter 13 Project Evaluation and Control 452 Chapter 14 Project Closeout and Termination 496

Appendix A The Cumulative Standard Normal Distribution 528 Appendix B Tutorial for MS Project 2016 529 Appendix C Project Plan Template 539 Glossary 543 Company Index 553 Name Index 555 Subject Index 559

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iv

CONTENTS

Preface xiii

Chapter 1 INTRODUCTION: WHY PROJECT MANAGEMENT? 1 PROJECT PROFILE: Development Projects that are Transforming Africa 1

The Need for Projects 3 What is a Project? 3

General Project Characteristics 5 PROJECT PROFILE: President Obama Signs the Program Management Improvement

and Accountability Act 8

Why are Projects Important? 9 PROJECT PROFILE: London’s Crossrail: Europe’s Largest Construction Project 10

Project Life Cycles 12 ◾ BOX 1.1: Project Managers in Practice 14

Determinants of Project Success 15

◾ BOX 1.2: Project Management Research in Brief 18

Developing Project Management Maturity 19 Employability Skills 23

Communication 23 Critical Thinking 23 Collaboration 23 Knowledge Application And Analysis 23 Business Ethics And Social Responsibility 23 Information Technology Application And Computing Skills 24 Data Literacy 24

Project Elements and Text Organization 24 Summary 28 • Key Terms 29 • Discussion Questions 29 Case Study 1.1 MegaTech, Inc. 30 • Case Study 1.2 The IT Department at Hamelin Hospital 30 • Case Study 1.3 Disney’s Expedition Everest 31 • Case Study 1.4 “Throwing Good Money after Bad”: the BBC’s Digital Media Initiative 32 • Internet Exercises 35 • PMP Certification Sample Questions 35 • Answers 35 • Notes 35

Chapter 2 THE ORGANIZATIONAL CONTEXT: STRATEGY, STRUCTURE, AND CULTURE  38

PROJECT PROFILE: The Airbus A 380: A Failure of Strategy? 38

Implementing Strategy Through Projects 40 Projects and Organizational Strategy 41 Stakeholder Management 43

Identifying Project Stakeholders 44 Managing Stakeholders 47

Organizational Structure 49 Forms of Organizational Structure 50 Functional Organizations 50 Project Organizations 53 Matrix Organizations 54 Moving to Heavyweight Project Organizations 57

◾ BOX 2.1: Project Management Research in Brief 58 Project Management Offices 59

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Contents v

Organizational Culture 62 How Do Cultures Form? 64 Organizational Culture and Project Management 66 PROJECT PROFILE: Electronic Arts and the Power of Strong Culture in Design Teams 67

Summary 68 • Key Terms 70 • Discussion Questions 70 • Case Study 2.1 Rolls-Royce Corporation 71 • Case Study 2.2 Classic Case: Paradise Lost—The Xerox Alto 72 • Case Study 2.3 Project Task Esti- mation and the Culture of “Gotcha!” 73 • Case Study 2.4 Widgets ’R Us 73 • Internet Exercises 74 • PMP Certification Sample Questions 74 • Answers 75 • Integrated Project—Building Your Project Plan 76 • Notes 78

  Chapter 3  PROJECT SELECTION AND PORTFOLIO MANAGEMENT  80 PROJECT PROFILE: Project Selection Procedures: A Cross-Industry Sampler 80

Introduction: Project Selection 81 Approaches to Project Screening and Selection 84

Method One: Checklist Model 84 Method Two: Simplified Scoring Models 85 Limitations of Scoring Models 87 Method Three: The Analytical Hierarchy Process 88 Method Four: Profile Models 91

Financial Models 93 Payback Period 94 Net Present Value 95 Discounted Payback 97 Internal Rate of Return 97 Choosing a Project Selection Approach 99 PROJECT PROFILE: Project Selection and Screening at GE: The Tollgate Process 100

Project Portfolio Management 101 Objectives and Initiatives 102 The Portfolio Selection Process 103 Developing a Proactive Portfolio 105 Keys to Successful Project Portfolio Management 108 Problems in Implementing Portfolio Management 108

Summary 110 • Key Terms 111 • Solved Problems 111 • Discussion Questions 112 • Problems 112 • Case Study 3.1 Keflavik Paper Company 115 • Case Study 3.2 Project Selection at Nova Western, Inc. 116 • Internet Exercises 118 • Notes 118

  Chapter 4  LEADERSHIP AND THE PROJECT MANAGER  120 PROJECT PROFILE: NASA Taps a Leader with the Right Stuff to Run Their Mars

2020 Project 120

Introduction: Successful Projects Need Leaders 122 Leaders Versus Managers 122 How the Project Manager Leads 124

Acquiring Project Resources 124 Motivating and Building Teams 125 Having a Vision and Fighting Fires 125 Communicating 126

◾ BOX 4.1: Project Management Research in Brief 129 Traits of Effective Project Leaders 129

Conclusions about Project Leaders 130

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vi Contents

PROJECT PROFILE: Leading by Example for the London Olympics—Sir John Armitt 131

Project Champions 132 Champions—Who Are They? 133 What Do Champions Do? 134 How to Make a Champion 135

The New Project Leadership 136

◾ BOX 4.2: Project Managers in Practice 137 PROJECT PROFILE: The Challenge of Managing Internationally 138

Project Management Professionalism 138 Project Management and Ethics 140

Unethical Behaviors in Project Management 142 PROJECT PROFILE: Brazilian Construction Giant Caught in Wide-Spread

Corruption Scandal 143 Summary 144 • Key Terms 145 • Discussion Questions 146 • Case Study 4.1 In Search of Effective Project Managers 146 • Case Study 4.2 Finding the Emotional Intelligence to Be a Real Leader 147 • Case Study 4.3 Volkswagen and Its Project to Cheat Emissions Tests 147 • Case Study 4.4 Problems with John 149 • Internet Exercises 152 • PMP Certification Sample Questions 152 • Answers 153 • Notes 153

Chapter 5 SCOPE MANAGEMENT 156 PROJECT PROFILE: Berlin’s Brandenburg Willy Brandt International Airport 156

Introduction: The Importance of Scope Management 158 Conceptual Development 158

The Statement of Work 161 The Project Charter 164 PROJECT PROFILE: Statements of Work: Then and Now 164

The Scope Statement 164 The Work Breakdown Structure 165 Purposes of the Work Breakdown Structure 165 The Organization Breakdown Structure 170 The Responsibility Assignment Matrix 173 PROJECT PROFILE: Defining a Project Work Package 174

Work Authorization 175 Scope Reporting 176

◾ BOX 5.1: Project Management Research in Brief 177 Control Systems 178

Configuration Management 179 Project Closeout 180 Project Management and Sustainability 181

Managing Projects for Sustainability 183 PROJECT PROFILE: Nicaragua’s Canal and Sustainability Challenges 185

Summary 186 • Key Terms 187 • Discussion Questions 188 • Problems 188 • Case Study 5.1 Boeing’s Virtual Fence 188 • Case Study 5.2 California’s High-Speed Rail Project 190 • Case Study 5.3 Project Management at Dotcom.com 192 • Case Study 5.4 The Expeditionary Fighting Vehicle 193 • Internet Exercises 195 • PMP Certification Sample Questions 195 • Answers 196 • MS Project Exercises 196 • Appendix 5.1: Sample Project Charter 196 • Integrated Project—Developing the Work Breakdown Structure 199 • Notes 200

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Contents vii

  Chapter 6  PROJECT TEAM BUILDING, CONFLICT, AND NEGOTIATION  203 PROJECT PROFILE: Team-Building Events – Heli-skiing and Zombie Apocalypses 203

Introduction 205 Building the Project Team 205

Identify Necessary Skill Sets 205 Identify People Who have the required Skills 206 Talk to Potential Team Members and Negotiate with Functional

Heads 207 Build in Fallback Positions 207 Assemble the Team 208

Characteristics of Effective Project Teams 208 A Clear Sense of Mission 208 A Productive Interdependency 209 Cohesiveness 209 Trust 209 Enthusiasm 210 Results Orientation 210

Reasons Why Teams Fail 210 Poorly Developed or Unclear Goals 211 Poorly Defined Project Team Roles and Interdependencies 211 Lack of Project Team Motivation 211 Poor Communication 212 Poor Leadership 212 Turnover Among Project Team Members 212 Dysfunctional Behavior 212

Stages in Group Development 213 Stage One: Forming 213 Stage Two: Storming 214 Stage Three: Norming 214 Stage Four: Performing 214 Stage Five: Adjourning 214 Punctuated Equilibrium 215

Achieving Cross-Functional Cooperation 216 Superordinate Goals 216 Rules and Procedures 217 Physical Proximity 217 Accessibility 217 Outcomes of Cooperation: Task and Psychosocial Results 218

Virtual Project Teams 218 PROJECT PROFILE: Tele-Immersion Technology Eases the Use of Virtual Teams 220

Conflict Management 221 What Is Conflict? 221 Sources of Conflict 222 Methods for Resolving Conflict 224 PROJECT PROFILE: Engineers Without Borders: Project Teams Impacting Lives 225

Negotiation 226 Questions to Ask Prior to the Negotiation 226 Principled Negotiation 227 Invent Options for Mutual Gain 229

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viii Contents

Insist on Using Objective Criteria 230 Summary 231 • Key Terms 232 • Discussion Questions 232 Case Study 6.1 Columbus Instruments 232 • Case Study 6.2 The Bean Counter and the Cowboy 233 • Case Study 6.3 Johnson & Rogers Software Engineering, Inc. 234 • Exercise in Negotiation 236 • Internet Exercises 237 • PMP Certification Sample Questions 237 • Answers 238 • Notes 238

Chapter 7 RISK MANAGEMENT 241 PROJECT PROFILE: Samsung’s Galaxy Note 7—Failure to Manage a New Product for Risk 241

Introduction: What is Project Risk? 243

◾ BOX 7.1: Project Managers in Practice 245 Risk Management: A Four-Stage Process 246

Risk Identification 246 PROJECT PROFILE: Japan Decommissions a $9 Billion Nuclear Reactor that

was Hardly Used 248

Risk Breakdown Structures 249 Analysis of Probability and Consequences 249 Risk Mitigation Strategies 252 Use of Contingency Reserves 254 Other Mitigation Strategies 255 Control and Documentation 255 PROJECT PROFILE: Collapse of Shanghai Apartment Building 257

Project Risk Management: An Integrated Approach 259 Summary 261 • Key Terms 262 • Solved Problem 262 • Discussion Questions 262 • Problems 262 • Case Study 7.1 Classic Case: de Havilland’s Falling Comet 263 • Case Study 7.2 The Building that Melted Cars 266 • Case Study 7.3 Classic Case: Tacoma Narrows Suspension Bridge 267 • Internet Exercises 269 • PMP Certification Sample Questions 269 • Answers 270 • Integrated Project—Project Risk Assessment 271 • Notes 273

Chapter 8  COST ESTIMATION AND BUDGETING  274 PROJECT PROFILE: New York City’s Second Avenue Subway – Two Miles Completed for

Only $5 Billion Spent 274

Cost Management 276 Direct Versus Indirect Costs 277 Recurring Versus Nonrecurring Costs 278 Fixed Versus Variable Costs 279 Normal Versus Expedited Costs 279

Cost Estimation 279 Learning Curves in Cost Estimation 283 Software Project Estimation—Function Points 286

◾ BOX 8.1: Project Management Research in Brief 287 Problems with Cost Estimation 289

◾ BOX 8.2: Project Management Research in Brief 290 Creating a Project Budget 291

Top-Down Budgeting 292 Bottom-Up Budgeting 293 Activity-Based Costing 293

Developing Budget Contingencies 295 Summary 297 • Key Terms 298 • Solved Problems 298 • Discussion Questions 299 • Problems 300 • Case Study 8.1 The Hidden Costs of

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Infrastructure Projects—The Case of Building Dams 303 • Case Study 8.2 Sochi Olympics—What’s the Cost of National Prestige? 305 • Internet Exercises 307 • PMP Certification Sample Questions 307 • Answers 308 • Integrated Project—Developing the Cost Estimates and Budget 309 • Notes 311

Chapter 9 PROJECT SCHEDULING: NETWORKS, DURATION ESTIMATION, AND CRITICAL PATH  313

PROJECT PROFILE: Preparing for a Major Golf Tournament – It’s a Long Road to the First Tee 313

Introduction 315 Project Scheduling 315 Key Scheduling Terminology 317 Developing A Network 319

Labeling Nodes 319 Serial Activities 320 Concurrent Activities 320 Merge Activities 321 Burst Activities 321

Duration Estimation 324 Constructing the Critical Path 328

Calculating the Network 328 The Forward Pass 329 The Backward Pass 331 Probability of Project Completion 333 Laddering Activities 335 Hammock Activities 336 Options for Reducing the Critical Path 337

◾ BOX 9.1: Project Management Research in Brief 338 Summary 339 • Key Terms 340 • Solved Problems 340 • Discussion Questions 342 • Problems 342 • Case Study 9.1 Moving the Historic Capen House 345 • Internet Exercises 347 • MS Project Exercises 347 • Answers 348 • PMP Certification Sample Questions 348 • Notes 349

Chapter 10   PROJECT SCHEDULING: LAGGING, CRASHING, AND ACTIVITY  NETWORKS  350

PROJECT PROFILE: Kiruna, Sweden – A Town on the Move! 350

Introduction 352 Lags in Precedence Relationships 352

Finish to Start 352 Finish to Finish 353 Start to Start 353 Start to Finish 354

Gantt Charts 355 Adding Resources to Gantt Charts 356 Incorporating Lags in Gantt Charts 357

◾ BOX 10.1: Project Managers in Practice 357 Crashing Projects 359

Options for Accelerating Projects 359 Crashing the Project: Budget Effects 364

Contents ix

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Activity-On-Arrow Networks 367 How Are They Different? 367 AOA Versus AON 372

Controversies in the Use of Networks 373 Conclusions 374

Summary 375 • Key Terms 375 • Solved Problems 376 • Discussion Questions 377 • Problems 377 • Case Study 10.1 Project Scheduling at Blanque Cheque Construction (A) 379 • Case Study 10.2 Project Scheduling at Blanque Cheque Construction (B) 380 • MS Project Exercises 380 • PMP Certification Sample Questions 381 • Answers 382 • Integrated Project—Developing the Project Schedule 383 • Notes 384

 Chapter 11  ADVANCED TOPICS IN PLANNING AND SCHEDULING:   AGILE AND CRITICAL CHAIN  386

PROJECT PROFILE: General Electric – Using Agile Methods to Speed New Project Delivery 387

Introduction 387 Agile Project Management 388

What Is Unique About Agile PM? 389 Tasks Versus Stories 391 Key Terms in Agile PM 391 Steps in Agile 393 Sprint Planning 393 Daily Scrums 393 The Development Work 394 Sprint Reviews 394 Sprint Retrospective 395 Keys to Success with Agile 395 Problems with Agile 396

◾ BOX 11.1: Project Management Research in Brief 397 Extreme Programming (XP) 397 Theory of Constraints and Critical Chain Project Scheduling 398

Theory of Constraints 398 The Critical Chain Solution to Project Scheduling 399

Developing the Critical Chain Activity Network 402 Critical Chain Solutions Versus Critical Path Solutions 404 PROJECT PROFILE: Eli Lilly Pharmaceuticals and Its Commitment to Critical Chain Project

Management 405

Critical Chain Solutions to Resource Conflicts 406 Critical Chain Project Portfolio Management 407

◾ BOX 11.2: Project Management Research in Brief 410 Critiques of CCPM 411

Summary 411 • Key Terms 413 • Solved Problem 413 • D iscussion Questions 414 • Problems 414 • Case Study 11.1 It’s an Agile World 416 • Case Study 11.2 Ramstein Products, Inc. 417 • Internet Exercises 418 • Notes 418

 Chapter 12  RESOURCE MANAGEMENT  420 PROJECT PROFILE: Environmental Concerns and Political Leadership Impact Fossil Fuel

Project Cancellations 420

Introduction 422 The Basics of Resource Constraints 422

Time and Resource Scarcity 423

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Resource Loading 425 Resource Leveling 426

Step One: Develop the Resource-Loading Table 430 Step Two: Determine Activity Late Finish Dates 430 Step Three: Identify Resource Overallocation 432 Step Four: Level the Resource-Loading Table 432

Resource-Loading Charts 435

◾ BOX 12.1: Project Managers in Practice 438 Managing Resources in Multiproject Environments 439

Schedule Slippage 439 Resource Utilization 439 In-Process Inventory 440 Resolving Resource Decisions in Multiproject Environments 440

Summary 442 • Key Terms 443 • Solved Problem 443 • Discussion Questions 444 • Problems 444 • Case Study 12.1 The Problems of Multitasking 446 • Case Study 12.2 “First Come, First Served”: Resource Challenges for Sunrise Restoration† 447 • Internet Exercises 448 MS Project Exercises 448 • PMP Certification Sample Questions 449 • Answers 450 • Integrated Project—Managing Your Project’s Resources 451 • Notes 451

 Chapter 13  PROJECT EVALUATION AND CONTROL  452 PROJECT PROFILE: U.S. Army Can’t Track Spending on its Spending Tracker Project 452

Introduction 453 Control Cycles—A General Model 454 Monitoring Project Performance 454

The Project S-Curve: A Basic Tool 455 S-Curve Drawbacks 457 Milestone Analysis 457 Problems with Milestones 459 The Tracking Gantt Chart 459 Benefits and Drawbacks of Tracking Gantt Charts 460

Earned Value Management 460 Terminology for Earned Value 461 Creating Project Baselines 462 Why Use Earned Value? 462 Steps in Earned Value Management 464 Assessing a Project’s Earned Value 465

Using Earned Value to Manage a Portfolio of Projects 470 Flow of Earned Value System 470 PROJECT PROFILE: Earned Value at Northrop Grumman 471

Issues in the Effective Use of Earned Value Management 472 Human Factors in Project Evaluation and Control 474

Critical Success Factor Definitions 476 Conclusions 477

Summary 478 • Key Terms 479 • Solved Problem 479 • Discussion Questions 480 • Problems 481 • Case Study 13.1 The IT Department at Kimble College 483 • Case Study 13.2 The Superconducting S upercollider 484 • Case Study 13.3 “Dear Mr. President—Please cancel our project!”: The Honolulu Elevated Rail Project 485 • Internet Exercises 487 • MS Project Exercises 487 • PMP Certification Sample Questions 488 • Answers 489 • Appendix 13.1: Earned Schedule 489 • Notes 494

Contents xi

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Chapter 14 PROJECT CLOSEOUT AND TERMINATION 496 PROJECT PROFILE: Amazon’s Golden Touch Fails with a High-Tech Gadget 496

Introduction 497 Types of Project Termination 498

◾ BOX 14.1: Project Managers in Practice 498 Natural Termination—the Closeout Process 500

Finishing the Work 500 Handing Over the Project 500 Gaining Acceptance for the Project 501 Harvesting the Benefits 501 Reviewing How It All Went 502 Putting It All to Bed 504 Disbanding the Team 504 What Prevents Effective Project Closeouts? 505

Early Termination for Projects 505 Making the Early Termination Decision 507 PROJECT PROFILE: Aftermath of a “Feeding Frenzy”: Dubai and Canceled Construction

Projects 508

Shutting Down the Project 509 Allowing for Claims and Disputes 510

◾ BOX 14.2: Project Management Research in Brief 511 Preparing the Final Project Report 513 Conclusion 514

Summary 514 • Key Terms 515 • Discussion Questions 515 • Case Study 14.1 New Jersey Kills Hudson River Tunnel Project 516 • Case Study 14.2 The Project That Wouldn’t Die 517 • Case Study 14.3 The Navy Struggles to Avoid Cancellation of its Littoral Combat Ship Program 518 • Internet Exercises 519 • PMP Certification Sample Questions 520 • Answers 521 • Appendix 14.1: Sample Pages from Project Sign-off Document 522 • Notes 526

Appendix A The Cumulative Standard Normal Distribution 528

Appendix B Tutorial for MS Project 2016 529

Appendix C Project Plan Template 539

Glossary 543

Company Index 553

Name Index 555

Subject Index 559

xii Contents

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xiii

PREFACE

Project management has become central to operations in industries as diverse as construction and information technology, architecture and hospitality, and engineering and new product devel- opment; therefore, this text simultaneously embraces the general principles of project manage- ment while addressing specific examples across the wide assortment of its applications. This text approaches each chapter from the perspective of both the material that is general to all disciplines and project types and that which is more specific to alternative forms of projects. One way this is accomplished is through the use of specific, discipline-based examples to illustrate general prin- ciples as well as the inclusion of cases and Project Profiles that focus on more specific topics, such as, Chapter 5’s treatment of IT “death march” projects (see Box 5.1 below). Scope Reporting 177

BOX 5.1

Project Management Research in Brief

Information Technology (IT) Project “Death Marches”: What Is Happening Here?

Every year, billions of dollars are spent on thousands of information technology (IT) projects worldwide. With the huge emphasis on IT products and advances in software and hardware systems, it is no surprise that interest in this field is exploding. Under the circum- stances, we would naturally expect that, given the importance of IT projects in both our corporate and everyday lives, we are doing a reasonably good job of implementing these critical projects, right? Unfortunately, the answer is a clear “no.” In fact, IT projects have a terrible track record for delivery, as numerous studies have shown. How bad? The average IT project is likely to be 6 to 12 months behind schedule and 50% to 100% over budget. Of course, the numbers vary with the size of the project, but the results still suggest that companies should expect their IT projects to lead to wasted effort, enormous delays, burnout, and many lost weekends while laboring for success with the cards stacked the other way.

What we are referring to here are “death march” projects. The death march project is typically one in which the project is set up for failure through the demands or expectations that the company places on it, leaving the intention that the project team will pull off a miracle. The term death march invokes images of team members wearily trudging along mile after mile, with no possibility of successful conclusion in sight. Death march projects are defined as projects “whose parameters exceed the norm by at least 50%.” In practical terms, this can mean:

• The schedule has been compressed to less than half the amount estimated by a rational estimating process (e.g., the schedule suggests it should take one year to complete the project, but top management shrinks the schedule to six months).

• The project team staffing has been reduced to half the number that normally would be assigned to a project of this size and scope (e.g., a project manager needing 10 resources is instead given only 5).

• The budget and other necessary resources are cut in half (e.g., as a result of downsizing and other cost-cutting exercises in the company, everyone is expected to “do more with less”, or competitive bidding to win the contract was so intense that when the smoke cleared the company that won the project did so at such a cut-rate price that it cannot possibly hire enough people to make it work).

The result of any or all of these starting conditions is a virtual guarantee that the project will fail. The prevalence of death march projects begs the question: Why are death march projects so common, and why do they continue to occur? According to the research, there are a number of reasons:

1. Politics—the project may be the result of a power struggle between two ambitious senior executives, or it may have been set up to fail as a form of revenge upon some manager. In these cases, the project manager just gets caught in the blast zone.

2. Naïve promises made by marketing executives or inexperienced project managers—inexperience can result in all sorts of prom- ises made, including those that are impossible to fulfill. In order to impress the boss, a new project manager may promise more than he can deliver. Marketing managers who are concerned with sales and how to improve them may think, “what’s a little exaggerated promise if it closes the deal?”

3. Naïve optimism of youth—a technical hotshot who is ambitious and feeling particularly cocky one day may make exaggerated promises that quickly result in the project team getting in over its head. Optimism is no substitute for careful planning.

4. The “start-up” mentality of fledgling entrepreneurial companies—start-up firms come loaded with energy, enthusiasm, and an aggressive, get-it-going attitude. When that mentality translates into projects, however, problems can occur. Entrepreneurial approaches to managing projects may ignore critical planning and detailed advance preparation that no experienced project manager would sacrifice.

5. The “Marine Corps” mentality, aka “real programmers don’t need sleep”—this attitude emphasizes bravado as a substitute for evaluation. The hyperoptimistic schedule or budget is not an accident, it is a deliberate manifestation of an aggressive attitude that says, “If you can’t handle it, you don’t belong here”.

6. Intense competition caused by globalization—the appearance of new, international competitors often comes as a rude awaken- ing when it is first experienced. Many firms respond with radical moves that push for rapid technical advances or “catching up” behaviors, resulting in numerous new death march projects.

7. Intense competition caused by the appearance of new technologies—as new opportunities emerge through new technologies, some firms jump into them eagerly without first understanding their capacities, scalability for larger projects, and limitations. The result is an endless game of exploiting “opportunities” without fully comprehending them or the learning curve for using new technologies.

8. Intense pressure caused by unexpected government regulations—government-mandated death march projects occur through a failure of top management to anticipate new regulations or mandates, or worse, to put off any efforts to comply with them until deadlines have already been set, even if they see them coming. New pollution or carbon-energy controls laws, for example, may lead to huge projects with looming deadlines because the company put off any efforts to self-regulate until the last minute.

9. Unexpected and/or unplanned crises—any number of crises can be anticipated with sufficient advance planning. Examples of crises that can severely affect project delivery are the loss of key project team personnel midway through the project’s develop- ment or the bankruptcy of a key supplier. Some crises, of course, are unpredictable by definition, but all too often the crisis that

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Students in project management classes come from a wide and diverse cross section of uni- versity majors and career tracks. Schools of health, public administration, business, architecture and the built environment, engineering, information systems, and hospitality are all adding project management courses to their catalogs in response to the demands from organizations and profes- sional groups that see their value for students’ future careers. Why has project management become a discipline of such tremendous interest and application? The simple truth is that we live in a “pro- jectized” world. Everywhere we look, we see people engaged in project management. In fact, project management has become an integral part of practically every firm’s business model.

This text takes a holistic, integrated approach to managing projects, exploring both technical and managerial challenges. It not only emphasizes individual project execution, but also provides a strategic perspective, demonstrating the means with which to manage projects at both the program and portfolio levels.

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xiv Preface

At one time, project management was almost exclusively the property of civil and construc- tion engineering programs where it was taught in a highly quantitative, technical manner. “Master the science of project management,” we once argued, “and the ‘art’ of project management will be equally clear to you.” Project management today is a complex “management” challenge requiring not only technical skills but a broad-based set of people skills as well. Project management has become the management of technology, people, culture, stakeholders, and other diverse elements necessary to successfully complete a project. It requires knowledge of leadership, team building, conflict resolution, negotiation, and influence in equal measure with the traditional, technical skill set. Thus, this textbook broadens our focus beyond the traditional project management activities of planning and scheduling, project control, and termination, to a more general, inclusive, and, hence, more valuable perspective of the project management process.

NEW TO THIS EDITION

New Features

• Sustainability in Project Management • Employability Skills • Project Management Ethics • MS Project 2016 Step-by-Step Tutorials • New Project Managers in Practice Profiles • Project Portfolio selection • Expanded discussion of Agile project management • Updated problems in chapters • Updated Internet Exercises • Expanded PMP Certification Exam sample questions • New project management cases • All MS Project examples and screen captures updated to MS Project 2016

Updated Project Profiles and Cases Chapter 1: Introduction: Why Project Management? • Development Projects that are Transforming Africa • President Obama Signs the Program Management Improvement and Accountability Act • London’s Crossrail: Europe’s Largest Construction Project

Chapter 2: The Organizational Context: Strategy, Structure, and Culture • The Airbus A-380: A Failure of Strategy? • Electronic Arts and the Power of Strong Culture in Design Teams

Chapter 3: Project Selection and Portfolio Management • Project Selection Procedures: A Cross-Industry Sampler

Chapter 4: Leadership and the Project Manager • NASA Taps a Leader with the Right Stuff to Run Their Mars 2020 Project • Leading by Example for the London Olympics—Sir John Armitt • Brazilian Construction Giant Caught in Wide-Spread Corruption Scandal

Chapter 5: Scope Management • Berlin’s Brandenburg Willy Brandt International Airport • Nicaragua’s Canal and Sustainability Challenges • Boeing’s Virtual Fence • California’s High-Speed Rail Project • The Expeditionary Fighting Vehicle

Chapter 6: Project Team Building, Conflict, and Negotiation • Team Building Events – Heli-Skiing and Zombie Apocalypses • Engineers Without Borders: Project Teams Impacting Lives

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Preface xv

Chapter 7: Risk Management • Samsung’s Galaxy Note 7 – Failure to Manage a New Product for Risk • Japan Decommissions a $9 Billion Nuclear Reactor that was Hardly Used • Collapse of Shanghai Apartment Building • The Building That Melted Cars

Chapter 8: Cost Estimation and Budgeting • New York City’s Second Avenue Subway – Two Miles Completed for Only $5 Billion Spent • Sochi Olympics—What’s the Cost of National Prestige? • The Hidden Costs of Infrastructure Projects: The Case of Building Dams

Chapter 9: Project Scheduling: Networks, Duration Estimation, and Critical Path • Preparing for a Major Golf Tournament – It’s a Long Road to the First Tee • Moving the Historic Capen House

Chapter 10: Project Scheduling: Lagging, Crashing, and Activity Networks • Kiruna, Sweden – A Town on the Move!

Chapter 11: Critical Chain Project Scheduling • General Electric – Using Agile Methods to Speed New Project Delivery • Eli Lilly Pharmaceutical’s Commitment to Critical Chain Project Scheduling

Chapter 12: Resource Management • Environmental Concerns and Political Leadership Impact Fossil Fuel Project Cancellations • “First Come, First Served”: Resource Challenges for Sunrise Restoration

Chapter 13: Project Evaluation and Control • U.S. Army Can’t Track Spending on its Spending Tracker Project • Earned Value Management at Northrop Grumman • Dear Mr. President—Please cancel our project!: The Honolulu Elevated Rail Project

Chapter 14: Project Closeout and Termination • Amazon’s Golden Touch Fails with a High-Tech Gadget • Aftermath of a “Feeding Frenzy”—Dubai and Cancelled Construction Projects • New Jersey Kills Hudson River Tunnel Project • The Navy Struggles to Avoid Cancellation of its Littoral Combat Ship Program

SOLVING TEACHING AND LEARNING CHALLENGES Projects continue to drive innovation and advances in human development globally. Evidence from businesses, government offices, public and private organizations, and volunteer groups all point to the way in which project-based work has become central to the challenges new generations of college graduates will face. Many students initially have a difficult time understanding why projects form such a central theme in their current academic undertakings and how these project challenges will continue to grow as they move into the workforce. In project management courses in business, engineering, health administration, hospitality, and science programs, the challenge faculty and students often face is to personalize these ideas to the roles their students are preparing to undertake. Moreover, one of the principal challenges of effectively teaching project management is to understand that project management duties are broad and diverse; most particularly, they require computational, software, and organizational/behavioral knowledge. Some of our students are quickly able to understand the computational elements of using mathematical models to select projects, developing schedules and networks, using Microsoft Project and other software packages, and tracking projects, while finding the “people” skills in leading a project team daunting. Alterna- tively, other students are comfortable with financial and managerial concepts but experience more difficulty in transitioning to statistical, software, or arithmetic challenges. The fascinating nature of project management is that it requires students to develop a mastery of both the “people” and “numbers” sides of the discipline. Short of the CEO’s office, in no other position in an organiza- tion are the duties as broad and diverse as those found in the project manager role—developing

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xvi Preface

• Project Profiles—Each chapter contains one or more Project Profiles that highlight current examples of proj- ect management in action. Some of the profiles reflect on significant achievements; others detail famous (and not-so-famous) examples of project failures. Because they cover diverse ground (IT projects, construction, new product development, and so forth), there should be at least one profile per chapter that is meaningful to the class’s focus. There is a deliberate effort made to offer a combination of project success stories and project failures. While successful projects can be

strategies, financing, planning, budgeting, negotiating, leading, controlling, and motivating—these are all routine responsibilities of project managers.

To illustrate the computational challenges of project management, we provide many chapters, cases, and examples of how to use financial models to select a project portfolio, how to develop project networks and identify the critical path, how to use MS Project to engage its planning and tracking tools, and how to employ earned value and other methods for accurately determining the status of projects. Managerial challenges are addressed through chapters, profiles, and cases that highlight leadership, stakeholder management, team development, conflict and negotiation, ethical challenges, and project sustainability. Project management is a dynamic undertaking. We employ a simple visual device (see Figure 1.12 below) to demonstrate the manner in which techni- cal and managerial challenges intermingle, as the project moves through its development cycle. Referring to this visual can help students understand the project life cycle and project manager duties across its development.

To support these teaching initiatives, the text employs a wide variety of pedagogical approaches, including tutorials and screen captures of Microsoft Project for scheduling and project status updating, problems, an integrated project plan to show students how to develop and plan their own projects, templates for planning and project charters, and other devices to support student learning and computational skills. Additionally, the text uses cases and profiles of current examples of projects from a wide variety of industries. Just as projects are ubiquitous across a wide variety of industries, the cases and examples in this text cover new product development, construction and infrastructure, hospitality, software and programming, as well as many other project examples. The cases and profiles were deliberately created to demonstrate the breadth of project challenges in order to reinforce for students that regardless of their undergraduate degree or career aspirations, they will be heavily involved in project-based work.

Foundation Planning Implementation Termination

FIGURE 1.12

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Preface xvii

instructive, we often learn far more from examining the variety of reasons why projects fail. As much as possible, these stories of success and failure are intended to match up with the chapters to which they are attached. For example, as we study the uses of projects to imple- ment corporate strategy, it is useful to consider the current status of Airbus’s A380, the mas- sively expensive, double-decker aircraft that appears to be ripe for early cancellation because of mediocre sales.

• Cases—At the end of each chapter are some final cases that take specific examples of the mate- rial covered in the chapter and apply them in the alternate format of case studies. Some of the cases are fictitious, but the majority of them are based on real situations, even where aliases mask the real names of organizations. These cases include discussion questions that can be used either for homework or to facilitate classroom discussions. There are several “classic” project cases as well, highlighting some famous (and infamous) examples of projects whose experiences have shaped our understanding of the discipline and its best practices.

Identi�cation of remaining

deliverables

Certi�cation needs

Identi�cation of outstanding

commitments

Control of charges to project

Screening of partially completed tasks

Closure of work orders and work

packages

Disposal of unused material

Agreement with client on remaining

deliverables

Communicating closure

Closing down facilities

Determination of requirements for audit

trail data

Agreement with suppliers on outstanding

commitments

Intellectual

Project Termination

Issues

Fear of no future work

Loss of interest in remaining tasks

Loss of project–derived motivation

Loss of team identity

Selection of personnel to be reassigned

Diversion of effort

Change in attitude

Loss of interest in project

Change in personnel dealing with project

Unavailability of key personnel

Emotional

Internal ExternalStaff Client

• Integrated Project Exercises—Many of the chapters include an end-of-chapter feature that is unique to this text: the opportunity to develop a detailed project plan. A very beneficial exercise in project management classes is to require students, either in teams or individually, to learn the mechanics of developing a detailed and comprehensive project plan, including scope, scheduling, risk assessment, budgeting, and cost estimation. The Integrated Project exercises afford students the opportunity to develop such a plan by assigning these activi- ties and illustrating a completed project (ABCups, Inc.) in each chapter. Thus, students are assigned their project planning activities and have a template that helps them complete these exercises.

Lastly, this text supports the employability skills goal that Pearson actively promotes in its publications by linking to important materials and knowledge from the Project Management Insti- tute, the world’s largest professional project management association. The text uses terminology for their Project Management Body of Knowledge (PMBoK), employs the PMBoK glossary of terms, and includes an expanded set of sample Project Management Professional (PMP) certification exam questions at the end of most chapters. Faculty can demonstrate that these chapters highlight critical

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project management duties but also point to the professionalism opportunities from project man- agement careers.

• Integration with the PMBOK—As a means to demonstrate the coverage of the critical PMBOK elements, readers will find that the chapters in this text identify and cross-list the corresponding knowledge areas from the latest, fifth edition of PMBOK. Further, all terms (including the Glossary) are taken directly from the most recent edition of the PMBOK.

195

Internet Exercises

5.12 Go to http://4pm.com/category/project-plan/wbs/ and view a short tutorial on developing an effective Work Breakdown Structure. Why does this site specifically warn against creating a laundry list of project activities? What are some of the dangers in creating poor Work Breakdown Structures and the advantages of doing them effectively?

5.13 Go to http://www.gwdc.org/docs/msesp/Technical%20 Proposal.pdf to see a process for describing and creating a Statement of Need for the Minnesota State Energy Sector Partnership. In your opinion, what are some of the criti- cal elements in this Statement of Need? Why? What would you include in the Statement of Need for those consider- ing joining in this initiative? For example, “Employment opportunities” or the “Strategy and Work Plan”.

5.14 Access https://www.mtholyoke.edu/sites/default/files/ datawarehouse/docs/dwprojectprocessanddocumenta- tion.pdf. Analyzing the comprehensive Scope Statement for the data warehousing project, what problem is this project seeking to address? What is the proposed solution?

PMP CERTIFICATION SAMPLE QUESTIONS

5.15 What is the lowest level of decomposition in the Work Breakdown Structure called? a. Work package b. Deliverable c. Subdeliverable d. Project

5.16 All of the following define a work package EXCEPT: a. A work package has a deliverable result b. It may be considered by its owner as a project in itself c. A work package may include several milestones d. A work package can be created and addressed regard-

less of other organizational procedures or cultural considerations

5.17 George has been assigned to be the new project manager for our project. He is eager to get off to a good start and wants to identify what activities he should first engage in. How would you advise him to start? a. Begin with the Work Breakdown Structure (WBS) b. Begin with a clear scope statement c. Begin with a problem statement and Statement of Work

(SOW) d. Begin with clear work authorization

5.18 The project manager wants to make sure that he is proceeding in the right order as he moves to develop a clear scope for his project. During scope definition, what should he be doing? a. Involving stakeholders and verifying that they have all

provided their input to the process b. Developing his WBS and OBS

c. Moving as quickly as possible to the determination of scope reporting methods

d. Identifying all necessary vendors for any outsourcing that must be done

5.19 A hospital expansion is being planned for a community. As part of the scope of this project, it will be necessary to close down the access routes into the emergency room for major remodeling. However, because this is the only hos- pital for trauma cases within 50 miles, it is not possible to completely shut down the emergency room. The project team will have to find a means to remodel the emergency room while allowing for continuous operation of the unit. This is an example of what? a. Negotiation points with the owner b. Constraints c. Initial assumptions d. Milestone development

5.20 A Responsibility Assignment Matrix (RAM) does NOT include: a. Who does what activity on the project b. Job roles and responsibilities for groups c. Job roles for team members d. Project reporting relationships

5.21 The work authorization system ensures that: a. All the work and only the work gets performed b. Work gets performed in the right order and at the

right time c. Work is done completely and according to specifications d. Project managers are allowed total control over project

budgets and resource assignments 5.22 The project plan should be all the following EXCEPT:

a. Approved by all stakeholders b. A formal document c. Distributed to stakeholders according to the project’s

communications plan d. Used to manage project execution

5.23 The process for reviewing and accepting project deliver- ables is called: a. Scope verification b. Scope definition c. Work Breakdown Structure (WBS) d. Scope authorization

5.24 A project charter should always include: a. The scope management plan b. Stakeholder sign-offs c. The business need behind the project d. The Work Authorization documentation

Internet Exercises 195

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DEVELOPING EMPLOYABILITY SKILLS Careers in project management are in high demand, and those numbers continue to grow dra- matically. Data collected in 2016 by the U.S. Bureau of Labor Statistics and the Anderson Economic Group assessed the popularity of jobs in project-based industries and concluded that there are outstanding opportunities for jobs and career growth in the discipline of project management. Moreover, it is expected that future demand for project managers will continue to grow faster than demand for workers in other professions. Further, this demand for trained project managers is cur- rently expected to far outstrip the current supply of qualified individuals capable of performing these roles. This information all points to one critical conclusion: project management careers are in exceptionally high demand and are expected to remain that way for the next decade (at least, through 2027). Eleven countries studied by the Anderson Economic Group, including the United States and Canada, Brazil, Germany, China, India, and Japan, are all projecting millions of project management jobs available in the next decade, spanning a diverse set of industries, including con- struction, healthcare, new product development, services and hospitality, and Information Technol- ogy (IT). Finally, two critical pieces of information highlight this accelerating demand for project management professionals: first, the percentage of those in project-oriented occupations will become a larger proportion of total employment, with anticipated growth from 5.6% in 2006 to 8.3% in 2017. Second, wages in 2017 for project management-oriented professionals reflect far higher average salaries than non-project-oriented professionals, with a premium of 82% over non-project workers. Clearly, the data make a strong case that project management skills are a critical means by which students can enhance their employability.

This text reinforces Pearson’s commitment to producing not only innovative educational con- tent but ensuring that the material covered in their products addresses the critical skills that employ- ers are looking for. As part of a recent, large-scale study, involving hundreds of respondents from universities and public and private organizations, Pearson identified a set of “employability skills,” those abilities that businesses deem crucial for their new hires. These skills include: 1) communica- tion, 2) critical thinking, 3) collaboration, 4) knowledge application and analysis, 5) business ethics and social responsibility, 6) information technology application and computer skills, and 7) data literacy. We have modeled the text material, exercises, tutorials, and case material to address each of these seven employability skills in order to provide students with the maximum advantage when transitioning from the classroom to the business enterprise. With this textbook, Project Management: Achieving Competitive Advantage, students receive the dual benefit of acquiring the latest information and employability skills in a discipline that is in extraordinarily high demand.

xviii Preface

• Inclusion of Sample PMP Certification Exam Questions—The Project Management Professional (PMP) certification represents the highest standard of professional qualification for a practic- ing project manager and is administered by the Project Manage- ment Institute. As of 2017, there were more than 775,000 PMPs worldwide. In order to attain PMP certification, it is necessary for candidates to undergo a comprehensive exam that tests their knowledge of all components of the PMBOK. This text includes an expanded set of sample PMP certification exam questions at the end of most of the chapters, in order to give readers an idea of the types of questions typically asked on the exam and how those topics are treated in this book.

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INSTRUCTOR TEACHING RESOURCES At the Instructor Resource Center, www.pearsonhighered.com/irc, instructors can easily register to gain access to a variety of instructor resources available with this text in downloadable format. If assistance is needed, our dedicated technical support team is ready to help with the media supple- ments that accompany this text. Visit https://support.pearson.com/getsupport for answers to frequently asked questions and toll-free user support phone numbers.

This program comes with the following teaching resources:

Supplements available to instructors at www.pearsonhighered.com/irc

Features of the Supplement

Instructor’s Solution Manual authored by Jeffrey Pinto

• Chapter-by-chapter summaries • Teaching outlines • Solutions to all questions and problems in the book

Test Bank authored by Jennifer Morin from University of Central Florida

1400 multiple-choice, true/false, short answer, and graphing questions with these annotations: • Difficulty level (1 for straight recall, 2 for some analysis, 3 for

complex analysis) • Section number and name • Learning outcome • Application type • AACSB learning standard (Ethical Understanding and Reasoning;

Analytical Thinking; Information Technology; Diverse and Multi- cultural Work; Reflective Thinking; Application of Knowledge)

Computerized TestGen® TestGen allows instructors to • Customize, save, and generate classroom tests • Edit, add, or delete questions from the test item files • Analyze test results • Organize a database of tests and student results.

PowerPoint Presentations authored by Jennifer Morin from University of Central Florida

Slides include all the graphs, tables, and equations in the textbook. PowerPoints meet accessibility standards for students with disabilities. Features include, but are not limited to: • Keyboard and screen reader access • Alternative text for images • High color contrast between background and foreground colors

ACKNOWLEDGMENTS In acknowledging the contributions of past and present colleagues to the creation of this text, I must first convey my deepest thanks and appreciation for the 30-year association with my origi- nal mentor, Dr. Dennis Slevin of the University of Pittsburgh’s Katz Graduate School of Business. My collaboration with Denny on numerous projects has been fruitful and extremely gratifying, both professionally and personally. In addition, Dr. David Cleland’s friendship and partnership in several ventures has been a great source of satisfaction through the years. A frequent collaborator who has had a massive influence on my thinking and approach to understanding project manage- ment is Professor Peter W. G. Morris, lately of University College London. Working with him has been a genuine joy and constant source of inspiration. Additional mentors and colleagues who have strongly influenced my thinking include Rodney Turner, Janice Thomas, David Frame, Nuno Gil, Ralf Müller, Andrew Davies, Jonas Soderlund, Young Kwak, Rolf Lundin, Lynn Crawford, Christophe Bredillet, Graham Winch, Terry Williams, Terry Cooke-Davies, and Karlos Artto. Each of these individuals has had a profound impact on the manner in which I view, study, and write about project management. I am also grateful for the collaboration with Jennifer Morin and Gada Baz, who contributed cases to this edition of the text. I have enjoyed very much working with them and appreciate their commitment to the book.

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Over the years, I have also been fortunate to develop friendships with some professional project managers whose work I admire enormously. They are genuine examples of the best type of project manager: one who makes it all seem effortless while consistently performing minor miracles. In particular, I wish to thank Mike Brown of Rolls-Royce for his friendship and example. I would also like to thank friends and colleagues from the Project Management Institute, including Lew Gedansky, Harry Stephanou, and Eva Goldman, for their support for and impact on this work.

I am indebted to the reviewers of this text whose numerous suggestions and critiques have been an invaluable aid in shaping its content. Among them, I would like to especially thank the following:

Kwasi Amoako-Gyampah— University of North Carolina, Greensboro Ravi Behara—George Mason University Jeffrey L. Brewer—Purdue University Dennis Cioffi—George Washington University David Clapp—Florida Institute of Technology Bruce DeRuntz—Southern Illinois University at Carbondale Ike Ehie—Kansas State University Michael H. Ensby—Clarkson University Lynn Fish—Canisius College Linda Fried—University of Colorado, Denver Mario Guimaraes—Kennesaw State University Richard Gunther—California State University, Northridge Brian Gurney—Montana State University, Billings Gary Hackbarth—Iowa State University Mamoon M. Hammad—George Washington University Scott Robert Homan—Purdue University John Hoxmeier—Colorado State University Alex Hutchins—ITT Technical Institute Richard Jensen—Hofstra University Robert Key—University of Phoenix Homayoun Khamooshi—George Washington University Dennis Krumwiede—Idaho State University George Mechling—Western Carolina University Julia Miyaoka—San Francisco State University LaWanda Morant—ITT Technical Institute Robert Morris—Florida State College at Jacksonville James Muller—Cleveland State University Kenneth E. Murphy—Willamette University John Nazemetz—Oklahoma State University Patrick Penfield—Syracuse University Ronald Price—ITT Technical Institute Ronny Richardson—Southern Polytechnic State University John Sherlock—Iona College Gregory Shreve—Kent State University Randall G. Sleeth—Virginia Commonwealth University Kimberlee Snyder—Winona State University Jeff Trailer—California State University, Chico Leo Trudel—University of Maine

xx Preface

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Oya Tukel—Cleveland State University Darien Unger—Howard University Amy Valente—Cayuga Community College Stephen Whitehead—Hilbert College

I would also like to thank my colleagues in the Samuel Black School of Business at Penn State, the Behrend College. Extra-special thanks go to Kerri Tomasso for her help in preparing the final manuscript and for her integral role in permissions research and acquisitions. I am especially indebted to Khurrum Bhutta, who checked this edition for accuracy. I am very grateful for his time and effort, and any errors that may remain are entirely my own.

In developing the cases for this edition of the textbook, I was truly fortunate to develop won- derful professional relationships with a number of individuals. Andrea Finger and Kathleen Pri- hoda of Disney were wonderfully helpful and made time in their busy schedules to assist me in developing the Expedition Everest case for this text. Theresa Hinkler, Bill Mowery, Mathew Paul, Christopher Fultz, Robert Tanner, and James Devine provided me with invaluable information on their job responsibilities and what it takes to be a successful project manager.

Finally, I wish to extend my sincere thanks to the people at Pearson for their support for the text during its development, including Neeraj Bhalla, editor, and Sugandh Juneja, content producer. I also would like to thank the Pearson editorial, production, and marketing staffs.

FEEDBACK The textbook team and I would appreciate hearing from you. Let us know what you think about this textbook by writing to [email protected]. Please include “Feedback about Pinto” in the subject line.

If you have questions related to this product, please contact our customer service department online at https://support.pearson.com/getsupport.

Finally, it is important to reflect on an additional salient issue as you begin your study of project management; most of you will be running a project long before you are given wider management responsibilities in your organizations. Successful project managers are the lifeblood of organizations and bear the imprint of the fast track. I wish you great success!

Jeffrey K. Pinto, Ph.D. Andrew Morrow and Elizabeth Lee Black Chair

Management of Technology Samuel Black School of Business Penn State, the Behrend College

[email protected]

Preface xxi

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xxii

ABOUT THE AUTHOR

Dr. Jeffrey K. Pinto is the Andrew Morrow and Elizabeth Lee Black chair in the Management of Technology in the Sam and Irene School of Business at Penn State, the Behrend College. Dr. Pinto held previous academic appointments at the Uni- versity of Cincinnati and the University of Maine. In 2016, he was a visiting scholar at the Kemmy School of Business, Uni- versity of Limerick, Ireland. He is the program chair for Penn State’s Master of Project Management program. The author or editor of 28 books and over 150 scientific papers that have appeared in a variety of academic and practitioner journals, books, conference proceedings, video lessons, and technical reports, Dr. Pinto’s work has been translated into nine lan- guages. He served as editor of the Project Management Journal, is past department editor for R&D and engineering projects with IEEE Transactions on Engineering Management, and serves on several other journal editorial boards. With over 30 years’

experience in the field of project management, Dr. Pinto is a two-time recipient of the Distinguished Contribution Award from the Project Management Institute for outstanding service to the project management profession. He received PMI’s Research Achievement Award in 2009 for outstand- ing contributions to project management research. In 2017, he received the Research Achievement Award from the International Project Management Association in recognition of his career research contributions to the field of project management.

Dr. Pinto has taught and consulted widely in North America, South America, and Europe on a variety of topics, including project management, new product development, supply chain management, information systems implementation, organization development, leadership, and conflict resolution.

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1

1 ■ ■ ■

Introduction Why Project Management?

Chapter Objectives After completing this chapter, you should be able to:

1.1 Understand why project management is becoming such a powerful and popular practice in business.

1.2 Recognize the basic properties of projects, including their definition. 1.3 Understand why effective project management is such a challenge. 1.4 Understand and explain the project life cycle, its stages, and the activities that typically occur

at each stage in the project. 1.5 Understand the concept of project “success,” including various definitions of success, as well

as the alternative models of success. 1.6 Understand the purpose of project management maturity models and the process of bench-

marking in organizations. 1.7 Recognize how mastery of the discipline of project management enhances critical employ-

ability skills for university graduates.

PROJECT MANAGEMENT BODY OF KNOWLEDGE CORE CONCEPTS COVERED IN THIS CHAPTER

1. Definition of a Project (PMBoK sec. 1.2) 2. Definition of Project Management (PMBoK sec. 1.3) 3. Relationship to Other Management Disciplines (PMBoK sec. 1.4) 4. Project Phases and the Project Life Cycle (PMBoK sec. 2.1)

The world acquires value only through its extremes and endures only through moderation; extremists make the world great, the moderates give it stability.1

PROJECT PROFILE

Development Projects that are Transforming Africa

The African continent is on the verge of massive changes, and projects are helping to raise the standard of living for its inhabitants. The current population of 1.2 billion is expected to double by 2050, growing at some 42 million people per year. Managing the means to accommodate this expansion is the goal of a number of governmental agencies, non-gov- ernmental organizations (NGOs), and international bodies. In order to bring prosperity to a continent that has suffered through decades of misrule, colonial exploitation, and regional conflicts, dozens of important infrastructure projects are being undertaken to improve standards of living and accommodate the needs of this rapidly-increasing population. Among the major infrastructure projects that offer great promise are:

1. The North-South Corridor – In 2009, the Common Market of Eastern and Southern Africa began work on a series of road and railways designed to link seven countries and covering more than 6,000 miles. At a cost of over $1 billion,

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2 Chapter 1 • Introduction

the North-South Corridor is expected to improve the flow of people and goods across national boundaries, generating commerce and trade.

2. Technology Hubs – A Chinese development firm, Zendai Property, announced in 2013 the investment of $8 billion to build a hub for Chinese firms investing in African infrastructure. This hub, named Modderfontein New City, is being constructed outside of Johannesburg, South Africa. Kenya is getting its own technology hub, a $14.5 billion software center named Konza Technology City, which is situated outside Nairobi, the Kenyan capital. The Kenyan government refers to Konza as the start of the “silicon savannah.”

3. Tanzania’s Bagamoyo Port is slated to become Africa’s largest port, with a capability of handling more than 20 million containers each year. The Chinese construction firm that has invested $11 billion in the project expects to have the port completed and operational by 2045.

4. Giant Dams – The Grand Ethiopian Renaissance Dam (budgeted at $4.8 billion) is intended to provide hydroelectric power to Ethiopia and several neighboring countries. Congo’s Grand Inga Dam, with its expected cost of over $100 billion, will become the largest energy-generating dam in the world and is slated for completion in 2025.

5. South Africa’s Jasper Solar Farm – Opened in 2015, the solar farm produces enough energy to power 80,000 homes. It is the largest solar power project on the African continent.

6. The “New Suez Canal” – Construction started on the expansion of the existing Suez Canal in 2014, with the goal of adding a new 22-mile shipping lane. The expansion is expected to double Egypt’s annual revenue from canal traffic.

7. Expansion of Cement Production – Dangote Cement, headquartered in Lagos, Nigeria, in 2015 signed contracts with a Chinese firm to increase its cement manufacturing capacity across 15 countries to 100 million tons by 2020. This huge increase in cement production will fuel additional infrastructure projects on the African continent for decades to come.

Raising the standard of living for an entire continent with a large expected population increase is a challenging goal. In order to accommodate the needs of these population changes, as well as improve the living standards for the entire continent, it is vital that projects be undertaken that can provide value both commercially and environmentally. Suc- cessful project management offers the means to get the best out of “good intentions” by ensuring that these and other funded projects are implemented as efficiently and effectively as possible. When development projects are viewed as the roots for future expansion, it is easy to understand their importance. Future improvements in living standards depend on the current projects being done right, as the success of these projects will spawn the need and support the willingness of firms and governments to invest in subsequent projects.2

FIGURE 1.1 South Africa’s Jasper Solar Farm

Source: Mikeledray/Shutterstock

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What is a Project? 3

The Need for Projects

LO 1.1 Understand why project management is becoming such a powerful and popular practice in business.

Projects are one of the principal means by which we change our world. Whether the goal is to split the atom, tunnel under the English Channel, introduce Windows 10, or plan the 2018 Winter Olympic Games in Pyeongchang, South Korea, the means through which to achieve these challenges remains the same: project management. Project management has become one of the most popular tools for organizations, both public and private, to improve internal operations, respond rapidly to external opportunities, achieve technological breakthroughs, streamline new product development, and more robustly manage the challenges arising from the business environment. Consider what Tom Peters, best-selling author and management consultant, has to say about project management and its place in business: “Projects, rather than repetitive tasks, are now the basis for most value- added in business.”3 Project management has become a critical component of successful business operations in worldwide organizations.

One of the key features of modern business is the nature of the opportunities and threats posed by external events. As never before, companies face international competition and the need to rapidly pursue commercial opportunities. They must modify and introduce products constantly, respond to customers as fast as possible, and maintain competitive cost and operating levels. Does performing all these tasks seem impossible? At one time, it was. Conventional wisdom held that a company could compete using a low-cost strategy or as a product innovator or with a focus on customer service. In short, companies had to pick their competitive niches and concede others their claim to market share. In the past 20 years, however, everything turned upside down. Companies such as General Electric, Apple, Ericsson, Boeing, and Oracle became increasingly effective at real- izing all of these goals rather than settling for just one. These companies seemed to be successful in every aspect of the competitive model: They were fast to market and efficient, cost-conscious, and customer-focused. How were they performing the impossible?

Obviously, there is no one answer to this complex question. There is no doubt, however, that these companies shared at least one characteristic: They had developed and committed themselves to project management as a competitive tool. Old middle managers, reported Fortune magazine,

are dinosaurs, [and] a new class of manager mammal is evolving to fill the niche they once ruled: project managers. Unlike his biological counterpart, the project manager is more agile and adaptable than the beast he’s displacing, more likely to live by his wits than throwing his weight around.4

Effective project managers will remain an indispensable commodity for successful organiza- tions in the coming years. More and more companies are coming to this conclusion and adopting project management as a way of life. Indeed, companies in such diverse industries as construction, heavy manufacturing, insurance, health care, finance, public utilities, and software are becoming project savvy and expecting their employees to do the same.

What is a Project?

LO 1.2 Recognize the basic properties of projects, including their definition.

Although there are a number of general definitions of the term project, we must recognize at the outset that projects are distinct from other organizational processes. As a rule, a process refers to ongoing, day-to-day activities in which an organization engages while producing goods or services. Processes use existing systems, properties, and capabilities in a continuous, fairly repetitive manner.5 Projects, on the other hand, take place outside the normal, process-oriented world of the firm. Certainly, in some organizations, such as construction, day-to-day processes center on the creation

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4 Chapter 1 • Introduction

and development of projects. Nevertheless, for the majority of organizations project management activities remain unique and separate from the manner in which more routine, process-driven work is performed. Project work is continuously evolving, establishes its own work rules, and is the antithesis of repetition in the workplace. As a result, it represents an exciting alternative to “business as usual” for many companies. The challenges are great, but so are the rewards of success.

First, we need a clear understanding of the properties that make projects and project manage- ment so unique. Consider the following definitions of projects:

A project is a unique venture with a beginning and end, conducted by people to meet estab- lished goals within parameters of cost, schedule, and quality.6

Projects [are] goal-oriented, involve the coordinated undertaking of interrelated activities, are of finite duration, and are all, to a degree, unique.7

A project can be considered to be any series of activities and tasks that:

• Have a specific objective to be completed within certain specifications • Have defined start and end dates • Have funding limits, if applicable • Consume human and nonhuman resources, such as money, people, equipment • Are multifunctional (i.e., cut across several functional lines)8

[A project is] [o]rganized work toward a predefined goal or objective that requires resources and effort, a unique (and therefore risky) venture having a budget and schedule.9

Probably the simplest definition is found in the Project Management Body of Knowledge (PMBoK) guide of the Project Management Institute (PMI). The PMI is the world’s largest professional project management association, with more than 475,000 members worldwide as of 2017. In the PMBoK guide, a project is defined as “a temporary endeavor undertaken to create a unique product, service, or result” (p. 553).10

Let us examine the various elements of projects, as identified by this set of definitions.

• Projects are complex, one-time processes. A project arises for a specific purpose or to meet a stated goal. It is complex because it typically requires the coordinated input of numerous members of the organization. Project members may be from different departments, other organizational units, or one functional area. For example, a project to develop a new software application for a retail company may require only the output of members of the information systems group working with the marketing staff. On the other hand, some projects, such as new product introductions, work best with representation from many functions, including marketing, engineering, production, and design. Because a project is intended to fulfill a stated goal, it is temporary. It exists only until its goal has been met, and at that point it is dissolved.

• Projects are limited by budget, schedule, and resources. Project work requires that members work with limited financial and human resources for a specified time period. They do not run indefinitely. Once the assignment is completed, the project team disbands. Until that point, all its activities are constrained by limitations on budget and personnel availability. Projects are “resource-constrained” activities.

• Projects are developed to resolve a clear goal or set of goals. There is no such thing as a project team with an ongoing, nonspecific purpose. The project’s goals, or deliverables, define the nature of both the project and its team. Projects are designed to yield a tangible result, either as a new product or service. Whether the goal is to build a bridge, implement a new accounts receivable system, or win a presidential election, the goal must be specific and the project organized to achieve a stated aim.

• Projects are customer-focused. Whether the project is responding to the needs of an internal organizational unit (e.g., accounting) or intended to exploit a market opportunity external to the organization, the underlying purpose of any project is to satisfy customer needs. In the past, this goal was sometimes overlooked. Projects were considered successful if they attained technical, budgetary, and scheduling goals. More and more, however, companies have real- ized that the primary goal of a project is customer satisfaction. If that goal is neglected, a firm runs the risk of “doing the wrong things well”—pursuing projects that may be done efficiently but that ignore customer needs or fail commercially.

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What is a Project? 5

GENERAL PROJECT CHARACTERISTICS

Using these definitional elements, we can create a sense of the key attributes that all projects share. These characteristics are not only useful for better understanding projects, but also offer the basis for seeing how project-based work differs from other activities most organizations undertake. Proj- ects represent a special type of undertaking by any organization. Not surprisingly, the challenges in performing them right are sometimes daunting. Nevertheless, given the manner in which busi- ness continues to evolve on a worldwide scale, becoming “project savvy” is no longer a luxury: it is rapidly becoming a necessity.

Projects are characterized by the following properties:11

1. Projects are ad hoc endeavors with a clear life cycle. Projects are nontraditional; they are activities that are initiated as needed, operate for a specified time period over a fairly well understood development cycle, and are then disbanded. They are temporary operations.

2. Projects are building blocks in the design and execution of organizational strategies. As we will see in later chapters, projects allow organizations to implement companywide strategies. They are the principal means by which companies operationalize corporate-level objectives. In effect, projects are the vehicles for realizing company goals. For example, Intel’s strategy for market penetration with ever newer, smaller, and faster computer chips is realized through its commitment to a steady stream of research and development projects that allows the company to continually explore the technological boundaries of electrical and computer engineering.

3. Projects are responsible for the newest and most improved products, services, and organi- zational processes. Projects are tools for innovation. Because they complement (and often transform) traditional process-oriented activities, many companies rely on projects as vehicles for going beyond conventional activities. Projects are the stepping-stones by which we move forward.

4. Projects provide a philosophy and strategy for the management of change. “Change” is an abstract concept until we establish the means by which we can make real alterations in the things we do and produce. Projects allow organizations to go beyond simple statements of intent and to achieve actual innovation. For example, whether it is Chevrolet’s Volt electric car or Samsung’s newest smartphone upgrade, successful organizations routinely ask for customers’ input and feedback to better understand their likes and dislikes. As the vehicle of change, the manner in which a company develops its projects has much to say about its ability to innovate and its commitment to change.

5. Project management entails crossing functional and organizational boundaries. Projects epitomize internal organizational collaboration by bringing together people from various functions across the company. A project aimed at new product development may require the combined work of engineering, finance, marketing, design, and so forth. Likewise, in the global business environment many companies have crossed organizational boundaries by forming long-term partnerships with other firms in order to maximize opportunities while emphasizing efficiency and keeping a lid on costs. Projects are among the most common means of promoting collaboration, both across functions and across organizations.

6. The traditional management functions of planning, organizing, motivation, directing, and control apply to project management. Project managers must be technically well versed, pro- ficient at administrative functions, willing and able to assume leadership roles, and above all, goal-oriented: The project manager is the person most responsible for keeping track of the big picture. The nature of project management responsibilities should never be underestimated, because these responsibilities are both diverse and critical to project success.

7. The principal outcomes of a project are the satisfaction of customer requirements within the constraints of technical, cost, and schedule objectives. Projects are defined by their limi- tations. They have finite budgets, definite schedules, and carefully stated specifications for completion. For example, a term paper assignment in a college class might include details regarding form, length, number of primary and secondary sources to cite, and so forth. Like- wise, in the Disney’s Expedition Everest case example at the end of this chapter the executive leading the change process established clear guidelines regarding performance expectations. All these constraints both limit and narrowly define the focus of the project and the options available to the project team. It is the very task of managing successful project development within such specific constraints that makes the field so challenging.

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6 Chapter 1 • Introduction

8. Projects are terminated upon successful completion of performance objectives or earlier in their life cycle, if results no longer promise an operational or strategic advantage. As we have seen, projects differ from conventional processes in that they are defined by limited life cycles. They are initiated, completed, and dissolved. As important alternatives to conventional orga- nizational activities, they are sometimes called “temporary organizations.”12

Projects, then, differ from better-known organizational activities, which often involve repetitive processes. The traditional model of most firms views organizational activities as consistently performing a discrete set of activities. For example, a retail-clothing establishment buys, stocks, and sells clothes in a continuous cycle. A steel plant orders raw materials, makes steel, and ships finished products, again in a recurring cycle. The nature of these operations focuses our attention on a process orientation; that is, the need to perform work as efficiently as possible in an ongoing manner. When its processes are well understood, the organization always seeks better, more efficient ways of doing the same essential tasks. Projects, because they are discrete activities, violate the idea of repetition. They are temporary activities that operate outside formal channels. They may bring together a disparate collection of team members with different kinds of functional expertise. Projects function under conditions of uncertainty, and usually have the effect of shaking up normal corporate activities. Because of their unique characteristics, they do not conform to common standards of opera- tions; they do things differently and often reveal new and better ways of doing things. Table 1.1 offers some other distinctions between project-based work and the more traditional, process-based activi- ties. Note a recurring theme: projects operate in radical ways that consistently violate the standard, process-based view of organizations.

Consider Apple’s use of projects to push the development of a constantly-changing range of product and service offerings. When it was first introduced in 2003, the iPod was Apple’s portable MP3 player that could be integrated with Apple’s popular iTunes site to record and play music downloads. From its introduction in 2003 to 2015, when Apple stopped reporting sales of the prod- uct, consumers had bought more than 400 million iPods, generating $65 billion in revenue for the firm. Customers have also purchased more than 45 billion songs through Apple’s iTunes online store. In fact, Apple’s iTunes division became the largest U.S. market for music sales; by 2015 it was accounting for 29% of all music sold in the United States and 64% of the digital music market. More recently, as steadily declining sales raised concern that the music downloads market has become saturated and less profitable, Apple introduced its Apple Music site to attract fans of music streaming, competing directly with Spotify and Pandora, among other music streaming services. By 2017 Apple Music had enrolled over 20 million subscribers, making it the second-largest streaming service in the world. Each of these steps demonstrates Apple’s commitment to using new project ventures as a means of avoiding a business as usual mentality, as it seeks to remain on the leading edge of the industry.13

TABLE 1.1 Differences Between Process and Project Management14

Process Project

Repeat process or product New process or product

Several objectives One objective

Ongoing One shot—limited life

People are homogenous More heterogeneous

Well-established systems in place to integrate efforts

Systems must be created to integrate efforts

Greater certainty of performance, cost, schedule Greater uncertainty of performance, cost, schedule

Part of line organization Outside of line organization

Bastions of established practice Violates established practice

Supports status quo Upsets status quo

Source: R. J. Graham. (1992). “A Survival Guide for the Accidental Project Manager,” Proceedings of the Annual Project Management Institute Symposium. Drexel Hill, PA: Project Management Institute, pp. 355–61. Copyright and all rights reserved. Material from this publication has been reproduced with the permission of PMI.

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What is a Project? 7

A similar set of events is currently unfolding, centered on Apple’s successive upgrades of its iPad tablet. Among the numerous features offered by the iPad is the ability to download books, including college textbooks, directly from publishers, effectively eliminating the traditional middle- men—bookstores—from the process. So radical are the implications of the iPad and competing tablets like Microsoft’s Surface Pro and Samsung’s Galaxy to capture a share of this market that large bookstores have been forced to adapt their business models to the new electronic reality of book purchases by offering their own readers; for example, Kindle for Amazon. Some experts are suggesting that within a decade tablets and other electronic readers will make traditional books obsolete, capturing the majority of the publishing market. These are just some examples of the way that project-driven technological change, such as that at Apple, is reshaping the competitive landscape.

Given the enthusiasm with which project management is being embraced by so many organi- zations, we should note that the same factors that make project management a unique undertaking are also among the main reasons why successful project management is so difficult. The track record of project management is by no means one of uninterrupted success, in part because many com- panies encounter deep-rooted resistance to the kinds of changes needed to accommodate a project philosophy. Indeed, recent research into the success rates for projects offers some grim conclusions:

• A study of more than 300 large companies conducted by the consulting firm KPMG found that software and/or hardware development projects fail at the rate of 65%. Of companies studied, 65% reported projects that went grossly over budget, fell behind schedule, did not perform as expected, or all of the above. Half of the managers responding indicated that these findings were considered “normal.”15

• A study by the META Group found that “more than half of all (information technology) IT projects become runaways—overshooting their budgets and timetables while failing to deliver fully on their goals.” According to the Gallup Business Review, the U.S. economy loses some- where between $50 and $150 billion every year because of failed IT projects.16

• Joe Harley, the Chief Information Officer at the Department for Work and Pensions for the UK government, stated that “only 30%” of technology-based projects and programs are a success—at a time when taxes are funding an annual budget of £14 billion (over $22 billion) on public sector IT, equivalent to building 7,000 new primary schools or 75 hospitals a year.17

• The United States National Nuclear Security Administration has racked up $16 billion in cost overruns on 10 major projects that are a combined 38 years behind schedule, the Government Accountability Office reports. For example, at Los Alamos National Laboratory a seven-year, $213 million upgrade to the security system that protects the lab’s most sensitive nuclear bomb-making facilities did not work. A party familiar with the organization cites a “pervasive culture of tolerating the intolerable and accepting the unacceptable.”18

• One out of six IT projects has an average cost overrun of 200% and a schedule overrun of 70%. Around 45% of companies admit that they are unclear about the business objectives of their IT projects. The Chaos Summary 2015 survey of 50,000 projects worldwide by The Standish Group reported similar findings: The majority of all projects were rated either as “challenged” due to late delivery, being over budget, or delivering less than required features, or “failed” when they were canceled prior to completion or the product developed was never used. Researchers have concluded that the average success rate of business-critical application development projects is 29%. Their statistics have remained remarkably steady since 1994.19

• The Special Inspector General for Afghanistan Reconstruction (SIGAR) reported that the U.S. spent more than $110 billion on postwar reconstruction projects, with some estimates sug- gesting that over one-third of the costs of these projects was lost due to waste, fraud, and poor planning or project execution. In a recent interview, John Sopko, the Special Investigator General, noted that because of project waste along with contracting and performance errors, “We’ve built an Afghanistan they can’t afford.” As one example, he cites the $400 million pur- chase of aircraft for an Afghanistan Air Force; aircraft the government couldn’t use that were ultimately scrapped for a near total loss.20

These findings underscore an important point: although project management is becoming popular, it is not easy to assimilate into the conventional processes of most firms. For every firm discovering the benefits of projects, many more underestimate the problems involved in becoming project savvy.

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8 Chapter 1 • Introduction

These studies also point to a core truth about project management: we should not overestimate the benefits to be gained from project management while underestimating the commitment required to make a project work. There are no magic bullets or quick fixes in the discipline. Like any other valuable activity, project management requires preparation, knowledge, training, and commitment to basic principles. Organizations wanting to make use of project-based work must recognize, as Table 1.1 demonstrates, that its very strength often causes it to operate in direct contradiction to standard, process-oriented business practices.

PROJECT PROFILE

President Obama Signs the Program Management Improvement and Accountability Act

For those who ever wondered just how seriously the U.S. federal government takes project management, it is interesting to discover that they are making a law to regulate it. In one of the final acts of President Obama’s administration, he signed into law the Program Management Improvement and Accountability Act (PMIAA) in December, 2016. This act of Congress is intended to enhance both accountability and best practices in project and program management throughout the federal government. The legislation, strongly endorsed by the Project Management Institute (PMI), was approved by both chambers of Congress with overwhelming bi-partisan support. The PMIAA reforms federal program management policy in four important ways:

1. Creating a formal job series and career path for program managers in the federal government. 2. Developing a standards-based program management policy across the federal government. 3. Recognizing the essential role of executive sponsorship and engagement by designating a senior executive in federal

agencies to be responsible for program management policy and strategy. 4. Sharing knowledge of successful approaches to program management through an interagency council on program

management.

Among the reasons cited for formalizing the importance of project/program management is that only 64 percent of government strategic initiatives ever meet their goals and business intent, while government entities waste $101 mil- lion for every $1 billion spent on project and programs. Research also shows that developing best practices can result in improved efficiency and less money being wasted. Most importantly, organizations see more projects delivering expected value to stakeholders on time and within budget.21

FIGURE 1.2 President Obama signing the PMIAA into Law

Source: REX/Shutterstock

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Why are Projects Important? 9

Why are Projects Important?

LO 1.3 Understand why effective project management is such a challenge.

There are a number of reasons why projects and project management can be crucial in helping an organization achieve its strategic goals. David Cleland, a noted project management researcher, sug- gests that many of these reasons arise from the very pressures that organizations find themselves facing.22

1. Shortened product life cycles. The days when a company could offer a new product and depend on having years of competitive domination are gone. Increasingly, the life cycle of new products is measured in terms of months or even weeks, rather than years. One has only to look at new products in electronics or computer hardware and software to observe this trend. Interestingly, we are seeing similar signs in traditional service-sector firms, which also have recognized the need for agility in offering and upgrading new services at an increasingly rapid pace.

2. Narrow product launch windows. Another time-related issue concerns the nature of opportu- nity. Organizations are aware of the dangers of missing the optimum point at which to launch a new product and must take a proactive view toward the timing of product introductions. For example, while reaping the profits from the successful sale of Product A, smart firms are already plotting the best point at which to launch Product B, either as a product upgrade or a new offering. Because of fierce competition, these optimal launch opportunities are measured in terms of months. Miss your launch window, even by a matter of weeks, and you run the risk of rolling out an also-ran.

3. Increasingly complex and technical products. It has been well-documented that the average automobile today has more computing power than the Apollo 11 space capsule that allowed astronauts to walk on the moon. This illustrates a clear point: the world today is complex. Products are complicated, technically sophisticated, and difficult to produce efficiently. The public’s appetite for the next big thing continues unabated and substantially unsatisfied. We want the new models of our consumer goods to be better, bigger (or smaller), faster, and more complex than the old ones. Firms constantly upgrade product and service lines to feed this demand. This causes multiple problems in design and production as we continually seek to push the technical limits. Furthermore, in anticipating future demand many firms embark on expensive programs of research and development while attempting to discern consumer tastes. The effect can be to erroneously create expensive and technically sophisticated projects that we assume the customer will want. For example, Rauma Corporation of Finland devel- oped a state-of-the-art loader for the logging industry. Rauma’s engineers loaded the product with the latest computerized gadgetry and technologies that gave the machine a space-age feel. Unfortunately, the chief customer for the product worked in remote regions of Indonesia, with logistics problems that made servicing and repairing the loaders impractical. Machines that broke down had to be airlifted more than 1,000 miles to service centers. Since the incep- tion of this project, sales of the logging machinery have been disappointing. The project was an expensive failure for Rauma and serves to illustrate an important point: unless companies find a way to maintain control of the process, an engineering for engineering’s sake mentality can quickly run out of control.23

4. Global markets. The early twenty-first century has seen the emergence of enormous new markets for almost every type of product and service. Former closed or socialist societies, as well as rapidly developing economies such as Brazil, China, Vietnam, and India, have added huge numbers of consumers and competitors to the global business arena. The increased globalization of the economy, coupled with enhanced methods for quickly interacting with customers and suppliers, has created a new set of challenges for business. These challenges also encompass unique opportunities for those firms that can quickly adjust to this new reality. In the global setting, project management techniques provide companies with the ability to link multiple business partners and respond quickly to market demand and supplier needs, while remaining agile enough to anticipate and respond to rapid shifts in consumer tastes. Using project management, successful organizations of the future will recognize and learn to rapidly exploit the prospects offered by a global business environment.

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10 Chapter 1 • Introduction

5. An economic period marked by low inflation. One of the key indicators of economic health is the fact that inflation has been kept under control. In most of the developed Western econo- mies, low inflation has helped to trigger a long period of economic expansion while also helping provide the impetus for emerging economies, such as those in India and China, to expand rapidly. Unfortunately, low inflation also limits the ability of businesses to maintain profitability by passing along cost increases. Companies cannot continue to increase profit margins through simply raising prices for their products or services. Successful firms in the future will be those that enhance profits by streamlining internal processes—those that save money by doing it better than the competition. As a tool designed to realize goals like internal efficiency, project management is a means by which to bolster profits.

These are just some of the more obvious challenges facing business today. The key point is that the forces giving rise to these challenges are not likely to abate in the near future. In order to meet these challenges, large, successful companies such as General Electric, 3M, Apple, Samsung, Bechtel, and Microsoft have made project management a key aspect of their operating philosophies.

PROJECT PROFILE

London’s Crossrail: Europe’s Largest Construction Project

The thought of adding another commuter rail system to the already heavily-developed London metropolitan area may seem unnecessary to those who are unfamiliar with the congestion, lost time, and travel hassles associated with using public or private means to move around Britain’s capital city. For residents and people living in the outskirts of London, however, the dream of a modern rail system that connects central London with its increasingly spread-out suburbs is a vision that goes back originally to 1948 post-war London.

The goal of the project is to build a 70-mile (100 km) rail line, including over 40 stations (10 brand new), at loca- tions across suburban and urban London, from Reading in the west to Shenfield in the east. While the majority of the outlying stations will be above ground, a number of the stations will involve refurbishment or expansion of underground facilities in the city center. The construction is further complicated by the need to find a reasonable route through the middle of the city, avoiding current underground rail lines and stations.

Although Crossrail has long been on the public’s wish list, planning for it has been a long, arduous process. Devel- oping realistic cost estimates, managing the politics of opening new stations in some districts while ignoring similar requests in other locales, finding money in the budget to support such a massive project—these have all been difficult challenges that the Crossrail organization worked to meet. After nearly 40 years of development planning, and influ- enced by economic ups and downs, Crossrail finally broke ground in 2009.

Crossrail has given engineers an opportunity to develop new and innovative methods for project planning and monitoring of progress. For example, the entire network was first designed in a 3-D virtual environment; once the railway is up and running, a version of this 3-D model will help managers monitor, from a tablet, countless electrical components and systems across the network. “We’ve built two railways—one real, one virtual reality,” says Rhys Williams, the head of mechanical, electrical, and public health for Crossrail. One of their goals is to show how transport networks can become safer, more efficient, and cheaper to maintain by using smart design coupled with the latest technology. Everything about Crossrail—the escalators and elevators, lighting, ventilation, communication, the railcars themselves—is being engineered to reduce energy use, improve safety, and streamline operations.

A critical component of the Crossrail project has been to embed the vision of sustainability through every compo- nent of the development process. Sustainability, for London’s Crossrail, comes in four dimensions: 1) environmental, 2) economic, 3) social, and 4) archaeological. As part of the sustainability vision for Crossrail, the project is committed to:

• Minimizing the environmental impact of its construction through controlling efficient energy consumption, protect- ing the environment, and factoring in climate change possibilities over the planned 120-year life cycle of the railway.

• Creating a diverse supply chain of project suppliers that benefits both Crossrail and the supply chain organizations, while ensuring that materials used on the project are sustainably sourced.

• Creating a social legacy from the project, including health and safety commitments, developing a trained workforce, and promoting art programs that encourage neighborhoods and art schools to decorate the stations, and so forth.

• Respecting the long and significant history of the London area and employing archaeology to minimize disruptions or the ruining of significant buried sites. As an example, since the development of Crossrail in 2009 over 100 archaeologists have found more than 10,000 items from 40 sites, spanning 55 million years of London’s history and pre-history. Although careful excavation of these sites slows progress on tunneling, it represents a commitment to London’s past, just as the project is intended to improve the city’s future.

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Why are Projects Important? 11

The Crossrail construction involves an incredibly busy and diverse set of operations. Eight giant tunnel boring machines have just finished a five-year operation to create the underground sections of the rail line. In the meantime, other firms have developed and are actively testing rail cars, electronic components, and computer-linked systems for directing and monitoring rail traffic (as well as monitoring the operating behavior of the railcars themselves), all in preparation for when their parts of the project are due for development. Coordinating hundreds of suppliers, junior contractors, and public oversight groups has been an enormously complicated process. It has also required compromises and a willingness to adjust project plans to economic and political realities. For example, in 2010 the Government’s Comprehensive Spending Review pushed to save on projected costs by revising the tunneling plan. In working to save over £1 billion from the budget, Crossrail services through the central section of the city are now projected to start in 2018 rather than 2017, followed by a phased introduction of services across the rest of the route. Although delaying the opening by a year, the decision allowed the Crossrail consortium (and the British government) to revise the projected project budget to £14.8 billion from £15.9 billion.

The title “Europe’s Largest Construction Project” is one that carries enormous promise but also large risks. Get- ting all the elements right—making sure that the technology is top-notch, ensuring the myriad stakeholders’ support, and pushing for sustainable operations—while keeping an eye on the project’s budget and schedule to completion is tremendously complicated. Equally fascinating have been the steps undertaken to preserve ancient sites and important archaeological finds throughout the digging process. Once completed, however, Crossrail will be a superlative example of modern infrastructure projects aimed at improving the lifestyle of millions of city-dwellers.24

FIGURE 1.3 A Crossrail station being built in central London

Source: Julius Lando/Alamy Stock Photo

Project management also serves as an excellent training ground for future senior executives in most organizations. One unique aspect of projects is how they blend technical and behavioral challenges. The technical side of project management requires managers to become skilled in project selection, budgeting and resource management, planning and scheduling, and tracking projects. Each of these skills will be discussed in subsequent chapters. At the same time, however, project managers face the equally strong challenge of managing the behavioral, or people, side of projects. Projects, being temporary endeavors, require project managers to bring together individuals from across the organization, quickly mold them into an effective team, manage conflict, provide leader- ship, and engage in negotiation and appropriate political behavior, all in the name of project success. Again, we will address these behavioral challenges in this text. One thing we know is that project managers who emphasize one challenge and ignore the other, whether they choose to focus on the technical or behavioral side of project management, are not nearly as successful as those who seek to become experts in both. Why is project management such a useful training ground for senior

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12 Chapter 1 • Introduction

executives? Because it provides the first true test of an individual’s ability to master both the techni- cal and human challenges that characterize effective leaders in business. Project managers, and their projects, create the kind of value that companies need to survive and prosper.

Project Life Cycles

LO 1.4 Understand and explain the project life cycle, its stages, and the activities that typically occur at each stage in the project.

Imagine receiving a term paper assignment in a college class. Our first step would be to develop a sense of the assignment itself—what the professor is looking for, how long the paper should be, the number of references required, stylistic expectations, and so forth. Once we have familiarized our- selves with the assignment, our next step would be to develop a plan for how we intend to proceed with the project in order to complete it by the due date. We make a rough guess about how much time will be needed for the research, writing the first draft, proofreading the paper, and completing the final draft, and we use this information to create some tentative milestones for the various com- ponents of the assignment. Next, we begin to execute our plan, doing the library or online research, creating an outline, writing a draft, and so forth. Our goal is to complete the assignment on time, doing the work to our best possible ability. Finally, after turning in the paper, we file or discard our reference materials, return any books to the library, breathe a sigh of relief, and wait for the grade.

This example represents a simplified but useful illustration of a project’s life cycle. In this case, the project consisted of completing the term paper to the standards expected of the instructor in the time allowed. A project life cycle refers to the stages in a project’s development. Life cycles are important because they demonstrate the logic that governs a project. They also help us develop our plans for carrying out the project. They help us decide, for example, when we should devote resources to the project, how we should evaluate its progress, and so forth. Consider the simplified model of the project life cycle shown in Figure 1.4, which divides the life cycle into four distinct phases: conceptualization, planning, execution, and termination.

• Conceptualization refers to the development of the initial goal and technical specifications for a project. The scope of the work is determined, necessary resources (people, money, physical plant) identified, and important organizational contributors or stakeholders signed on.

• Planning is the stage in which all detailed specifications, schematics, schedules, and other plans are developed. The individual pieces of the project, often called work packages, are broken down, individual assignments made, and the process for completion clearly delineated. For example, in planning our approach to complete the term paper we determine all the necessary steps (research, drafts, editing, etc.) in the process.

• During execution, the actual “work” of the project is performed, the system developed, or the product created and fabricated. It is during the execution phase that the bulk of project team

FIGURE 1.4 Project Life Cycle Stages

Conceptualization Planning Execution Termination

Man-hours of work

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Project Life Cycles 13

labor is performed. As Figure 1.4 shows, project costs (in man hours) ramp up rapidly during this stage.

• Termination occurs when the completed project is transferred to the customer, its resources reassigned, and the project formally closed out. As specific subactivities are completed, the project shrinks in scope and costs decline rapidly.

These stages are the waypoints at which the project team can evaluate both the project’s perfor- mance and its overall status. Remember, however, that the life cycle is relevant only after the proj- ect has actually begun. The life cycle is signaled by the actual kickoff of project development, the development of plans and schedules, the performance of necessary work, and the completion of the project and reassignment of personnel. When we evaluate projects in terms of this life cycle model, we are given some clues regarding their subsequent resource requirements; that is, we begin to ask whether we have sufficient personnel, materials, and equipment to support the project. For example, when beginning to work on our term paper project we may discover that it is necessary to purchase a PC or hire someone to help with researching the topic. Thus, as we plan the project’s life cycle we acquire important information regarding the resources that we will need. The life cycle model, then, serves the twofold function of project timing (schedule) and project requirements (resources), allowing team members to better focus on what and when resources are needed.

The project life cycle is also a useful means of visualizing the activities required and challenges to be faced during the life of a project. Figure 1.5 indicates some of these characteristics as they evolve during the course of completing a project.25 As you can see, five components of a project may change over the course of its life cycle:

• Client interest: The level of enthusiasm or concern expressed by the project’s intended cus- tomer. Clients can be either internal or external to the organization.

• Project stake: The amount of corporate investment in the project. The longer the life of the project, the greater the investment.

• Resources: The commitment of financial, human, and technical resources over the life of the project.

• Creativity: The degree of innovation required by the project, especially during certain devel- opment phases.

• Uncertainty: The degree of risk associated with the project. Riskiness here reflects the num- ber of unknowns, including technical challenges that the project is likely to face. Uncertainty is highest at the beginning because many challenges have yet to be identified, let alone addressed.

FIGURE 1.5 Project Life Cycles and Their Effects

Source: Victor Sohmen. (2002, July). “Project Termination: Why the Delay?” Paper presented at PMI Research Conference, Seattle, WA. Project Management Institute, Sohmen, Victor. “ Project termination: Why the delay?” PMI Research Conference. Proceedings, p. 467–475. Paper presented at PMI Research Conference. Project Management Institute, Inc. (2002). Copyright and all rights reserved. Material from this publication has been reproduced with the permission of PMI.

Execution Termination

Uncertainty

Creativity

Resources

Project Stake

Client Interest

Time

Intensity Level

Planning Concep- tualization

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14 Chapter 1 • Introduction

Each of these factors has its own dynamic. Client interest, for example, follows a U-shaped curve, reflecting initial enthusiasm, lower levels of interest during development phases, and renewed inter- est as the project nears completion. Project stake increases dramatically as the project moves forward because an increasing commitment of resources is needed to support ongoing activities. Creativity, often viewed as innovative thought or applying a unique perspective, is high at the beginning of a project as the team and the project’s client begin developing a shared vision of the project. As the project moves forward and uncertainty remains high, creativity also continues to be an important feature. In fact, it is not until the project is well into its execution phase, with defined goals, that creativity becomes less important. To return to our example of the term paper project, in many cases the “creativity” needed to visualize a unique or valuable approach to developing the project is needed early, as we identify our goals and plan the process of achieving them. Once identified, the execution phase, or writing the term paper, places less emphasis on creativity per se and more on the concrete steps needed to complete the project assignment.

The information simplified in Figure 1.5 is useful for developing a sense of the competing issues and challenges that a project team is likely to face over the life cycle of a project. Over time, while certain characteristics (creativity, resources, and uncertainty) begin to decrease, other elements (client interest and project stake) gain in importance. Balancing the requirements of these elements across the project life cycle is just one of the many demands placed on a project team.

BOX 1.1

Project Managers in Practice

Theresa Hinkler, R. Conrader Company

Theresa Hinkler is a Sales Manager for a small 40 + employees manufacturer of valves in Erie, PA. Her route to that position was long, with many twists and turns along the way.

Her need to be self-sufficient right out of high school, combined with a desire to obtain an education, led her through many jobs including stints as a bartender, assembler, aerobics instructor, and fitness trainer. She returned to Erie in her late 20’s, taking a job in sales at Conrader Valves, and subsequently completed her BA in Business at Penn State.

In order to sell Conrader’s products, Theresa felt she should know as much about them as possible, including how they were manufactured, the machining involved, and their assembly, testing, packaging, and shipping. Acquiring this understanding of process flow and supply chain management assisted her career greatly because it gave her a wealth of knowledge that helped hone her exper- tise about the company’s products, industry, and customers. When Conrader’s Production Manager position became available, top management found that she knew more than anyone about the manufacturing of the valves, which led to her move into this role. She remained involved in sales and customer interaction while simultaneously running the machine shop and assembly areas.

As Theresa transitioned to the production role, a large surge in new product sales and certification requirements challenged her to maintain high manufacturing volume along with efficiently bringing new products to market. Although at first not realizing it, she had begun developing and using a wide range of project management skills. Need-based methods, very much akin to formal project management, enabled her to manage in an increasingly efficient manner.

After three years, Theresa moved to Conrader’s Sales Manager position. She had already developed a rapport with customers through interactions because of production planning. She defined the goals and needs of the customer, matching them with timelines. This understanding of company capabilities enabled her to seamlessly take customers’ new product requirements through engineering, prototyping/testing, pilot runs, and final production. Once again, Theresa was utilizing project management skills that were unnamed and loosely defined.

In 2016, Theresa decided to further her education to enhance her skill sets on the job and to become more organized and project-oriented by enrolling in the Master’s degree program for Project Management (MPM) at Penn State University. The educa- tional experience not only reinforced many of the activities she was already performing, but also gave her and Conrader a solid basis to improve processes and tailor project needs to the company’s organizational strategy. Project management methodologies Theresa learned helped her match project opportunities with the company’s strategy for maximum benefits. Prior to her formal education in project management, projects were taken on ad hoc and without a formal system. As Theresa notes, “Many projects were thrown into the queue without proper prioritization. Being able to assess project opportunities from the perspective of the firm’s overall strategy has allowed us to make better new product introduction choices and has also improved customer responsiveness. That’s an advantage of a project management mindset.”

There are many types of projects with which Theresa is involved, including new product development projects, certification projects, global outreach projects, new market projects, and product extension projects. The tools and components she has learned through Penn State’s MPM program enabled her to tie essential elements of project management into Conrader’s everyday processes in a more formal fashion. The additional structured elements have helped the company at large by making the process more transparent. As Theresa observed, “Sales involves so much more than generating revenue for the company. Every new product brought to fruition

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Determinants of Project Success 15

Determinants of Project Success

LO 1.5 Understand the concept of project “success,” including various definitions of success, as well as the alternative models of success.

Definitions of successful projects can be surprisingly elusive.26 How do we know when a project is successful? When it is profitable? If it comes in on budget? On time? When the developed product works or sells? When we achieve our long-term payback goals? Generally speaking, any definition of project success must take into consideration the elements that define the very nature of a project: that is, time (schedule adherence), budget, functionality/quality, and customer satisfaction. At one time, managers normally applied three criteria of project success:

• Time. Projects are constrained by a specified period of time during which they must be com- pleted. They are not supposed to continue indefinitely. Thus, the first constraint that governs project management involves this basic requirement: The project should come in on or before its established schedule.

and every product sold to new and existing companies involves a project management approach. There is critical planning, budgeting, and scheduling involved in sales. The compressor market is a ‘dog eat dog’ global business, so competitiveness is crucial. Incorporating project management processes into the business has improved the company’s competitive advantage and focused overall business efforts on success.”

FIGURE 1.6 Theresa Hinkler – R. Conrader Company

Source: Theresa Hinkler

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16 Chapter 1 • Introduction

• Budget. A second key constraint for all projects is a limited budget. Projects must meet bud- geted allowances in order to use resources as efficiently as possible. Companies do not write blank checks and hope for the best. Thus, the second limit on a project raises the question: was the project completed within budget guidelines?

• Performance. All projects are developed in order to adhere to some initially determined tech- nical specifications. We know before we begin what the project is supposed to do or how the final product is supposed to operate. Measuring performance, then, means determining whether the finished product operates according to specifications. The project’s clients natu- rally expect that the project being developed on their behalf will work as expected. Applying this third criterion is often referred to as conducting a quality check.

This so-called triple constraint was once the standard by which project performance was routinely assessed. Today, a fourth criterion has been added to these three (see Figure 1.7):

• Client acceptance. The principle of client acceptance argues that projects are developed with customers or clients in mind, and their purpose is to satisfy customers’ needs. If client accep- tance is a key variable, then we must also ask whether the completed project is acceptable to the customer for whom it was intended. Companies that strictly evaluate project success according to the original “triple constraint” may fail to apply the most important test of all: the client’s satisfaction with the completed project.

We can also think of the criteria for project success in terms of internal versus external conditions. When project management was practiced primarily by construction and other heavy industries, its chief value was in maintaining internal organizational control over expenditures of money and time. The traditional triple-constraint model made perfect sense. It focused internally on efficiency and productivity measures. It provided a quantifiable measure of personnel evaluation, and it allowed accountants to control expenses.

More recently, however, the traditional triple-constraint model has come under increasing criticism as a measure of project success. The final product, for example, could be a failure, but if it has been delivered in time and on budget and satisfies its original specifications (however flawed), the project itself could still be declared a success. Adding the external criterion of client acceptance corrects such obvious shortcomings in the assessment process. First, it refocuses corporate attention outside the organization, toward the customer, who will probably be dissatisfied with a failed or flawed final product. Likewise, it recognizes that the final arbiter of project success is not the firm’s accountants, but rather the marketplace. A project is successful only to the extent that it benefits the client who commissioned it. Finally, the criterion of client acceptance requires project managers and teams to create an atmosphere of openness and communication throughout the development of the project.

FIGURE 1.7 The New Quadruple Constraint

Success

Client Acceptance Budget

Time Performance

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Determinants of Project Success 17

Consider one example. In his book, What Customers Really Want, author Scott McKain relates how a coach bus company that transports music stars was originally planning to spend a great deal on a project to improve the interior of its vehicles, because they believed that with these upgrades customers would be willing to pay more to lease or purchase their buses. However, prior to start- ing a full-blown overhaul of their fleet, the company’s executives decided to ask past customers what they thought about this plan. Surprisingly, the company found that while its customers did want nice interiors, the single most important factor in selecting a coach company was the bus driver, who ideally would be a “nice guy,” someone who could get the music stars to their desti- nation safely, and who would also serve as a good ambassador for the band with fans. Based on this information, the company dropped its original project and instead initiated a driver educa- tion program to teach its drivers how to communicate more effectively with customers and how to retain and grow customer goodwill. The company also started compensating drivers according to how well they served the customer and how well they cultivated long-term relationships with them. Once the company did this, it moved from fourth in the marketplace to first, and grew from 28 to 56 coaches.27

An additional approach to project assessment argues that another factor must always be taken into consideration: the promise that the delivered product can generate future opportunities, whether commercial or technical, for the organization.28 In other words, it is not enough to assess a project according to its immediate success. We must also evaluate it in terms of its commercial suc- cess as well as its potential for generating new business and new opportunities. Figure 1.8 illustrates this scheme, which proposes four relevant dimensions of success:

• Project efficiency: Meeting budget and schedule expectations. • Impact on customer: Meeting technical specifications, addressing customer needs, and creat-

ing a project that satisfies the client’s needs. • Business success: Determining whether the project achieved significant commercial success. • Preparing for the future: Determining whether the project opened new markets or new prod-

uct lines or helped to develop new technology.

This approach challenges the conventional triple-constraint principle for assessing project success. Corporations expect projects not only to be run efficiently, at the least, but also to be developed to meet customer needs, achieve commercial success, and serve as conduits to new business opportunities. Even in the case of a purely internal project (e.g., updating the software for a firm’s order-entry system), project teams need to focus both on customer needs and an assess- ment of potential commercial or technical opportunities arising from their efforts.

FIGURE 1.8 Four Dimensions of Project Success Importance

Source: A. J. Shenhar, O. Levy, and D. Dvir. (1997). “Mapping the Dimensions of Project Success,” Project Management Journal, 28(2): 12. Copyright and all rights reserved. Material from this publication has been reproduced with the permission of PMI.

Importance

Project Completion

1 Project

Ef�ciency

2 Impact on the

Customer

3 Business Success

4 Preparing for

the Future

Time

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18 Chapter 1 • Introduction

TABLE 1.2 Understanding Success Criteria

Iron Triangle Information System Benefits (Organization) Benefits (Stakeholders)

Cost Maintainability Improved efficiency Satisfied users

Quality Reliability Improved effectiveness Social and environmental impact

Time Validity Increased profits Personal development

Information quality Strategic goals Professional learning, contractors’ profits

Use Organization learning Capital suppliers, content

Reduced waste Project team, economic impact to surrounding community

BOX 1.2

Project Management Research in Brief

Assessing Information Technology (IT) Project Success

As noted earlier in this chapter, IT projects have a notoriously checkered history when it comes to successful implementation. Part of the problem has been an inability to define the characteristics of a successful IT project in concrete terms. The criteria for IT project suc- cess are often quite vague, and without clear guidelines for project success it is hardly any wonder that so many of these projects do not live up to predevelopment expectations. In 1992 and again in 2003, two researchers, W. DeLone and E. McLean, analyzed several previous studies of IT projects to identify the key indicators of success. Their findings, synthesized from previous research, suggest that, at the very least, IT projects should be evaluated according to six criteria:

• System quality. The project team supplying the system must be able to assure the client that the implemented system will perform as intended. All systems should satisfy certain criteria: They should, for example, be easy to use, and they should supply quality information.

• Information quality. The information generated by the implemented IT must be the information required by users and be of sufficient quality that it is actionable. In other words, generated information should not require additional efforts to sift or sort the data. System users can perceive quality in the information they generate.

• Use. Once installed, the IT system must be used. Obviously, the reason for any IT system is its usefulness as a problem-solving, decision-aiding, and networking mechanism. The criterion of use assesses the actual utility of a system by determining the degree to which, once implemented, it is used by the customer.

• User satisfaction. Once the IT system is complete, the project team must determine user satisfaction. One of the thorniest issues in assessing IT project success has to do with making an accurate determination of user satisfaction with the system. Yet, because the user is the client and is ultimately the arbiter of whether or not the project was effective, it is vital that we attain some measure of the client’s satisfaction with the system and its output.

• Individual impact. All systems should be easy to use and should supply quality information. But beyond satisfying these needs, is there a specific criterion for determining the usefulness of a system to the client who commissioned it? Is decision making faster or more accurate? Is information more retrievable, more affordable, or more easily assimilated? In short, does the system benefit users in the ways that are most important to those users?

• Organizational impact. Finally, the supplier of the system must be able to determine whether it has a positive impact through- out the client organization. Is there, for example, a collective or synergistic effect on the client corporation? Is there a sense of good feeling, or are there financial or operational metrics that demonstrate the effectiveness or quality of the system?

DeLone and McLean’s work provides an important framework for establishing a sense of IT project success. Companies that are designing and implementing IT systems must pay early attention to each of these criteria and take necessary steps to ensure that the systems that they deliver satisfy them.29

A final model, offered recently, also argues against the triple-constraint model as a measure of project success. According to Atkinson,30 all groups that are affected by a project (stakeholders) should have a hand in assessing its success. The context and type of a project may also be relevant in specifying the criteria that will most clearly define its success or failure. Table 1.2 shows the Atkinson model, which views the traditional “iron triangle” of cost, quality, and time as merely one set of components in a comprehensive set of measures. Of course, the means by which a project is

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Developing Project Management Maturity 19

to be measured should be decided before the project is undertaken. A corporate axiom, “What gets measured, gets managed,” suggests that when teams understand the standards to which a project is being held, they will place more appropriate emphasis on the various aspects of project perfor- mance. Consider, for example, an information system setting. If the criteria of success are improved operating efficiency and satisfied users, and if quality is clearly identified as a key benefit of the fin- ished product, the team will focus its efforts more strongly on these particular aspects of the project.

Developing Project Management Maturity

LO 1.6 Understand the purpose of project management maturity models and the process of bench- marking in organizations.

With the tremendous increase in project management practices among global organizations, a recent phenomenon has been the rise of project maturity models for project management organizations. Project management maturity models are used to allow organizations to benchmark the best prac- tices of successful project management firms. Project management maturity models recognize that different organizations are currently at different levels of sophistication in their best practices for managing projects. For example, it would be reasonable to expect organizations such as Boeing (aircraft and defense systems) or Fluor (industrial construction) to be much more advanced in how they manage projects, given their lengthy histories of project initiatives, than companies that have only recently developed an emphasis on project-based work.

The purpose of benchmarking is to systematically manage the process improvements of project delivery by a single organization over a period of time.31 Because there are many diverse dimensions of project management practice, it is common for a new organization just introducing project management to its operations to ask, “Where do we start?” That is, “Which of the mul- tiple project management processes should we investigate, model, and apply to our organization?” Maturity models provide the necessary framework to: first, analyze and critically evaluate current practices as they pertain to managing projects; second, compare those practices against those of chief competitors or some general industry standard; and, third, define a systematic route for improving these practices.

FIGURE 1.9 Spider Web Diagram for Measuring Project Maturity

Source: R. Gareis. (2001). “Competencies in the Project-Oriented Organization,” in D. Slevin, D. Cleland, and J. Pinto, The Frontiers of Project Management Research. Newtown Square, PA: Project Management Institute, pp. 213–24, figure on p. 216. Copyright and all rights reserved. Material from this publication has been reproduced with the permission of PMI.

1

2

3

Project Scheduling

Control Practices

Coaching, Auditing, and Evaluating Projects

Portfolio Management

Structural Support for Project Management

Personnel Development for Projects

Networking Between Projects

Project Stakeholder Management

0

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20 Chapter 1 • Introduction

If we accept the fact that the development of better project management practices is an evo- lutionary process, involving not a sudden leap to top performance but rather a systematic com- mitment to continuous improvement, maturity models offer the template for defining and then achieving such progressive improvement.32 As a result, most effective project maturity models chart a set of standards that are currently accepted as state-of-the-art as well as a process for achieving sig- nificant movement toward these benchmarks. Figure 1.9 illustrates one approach to defining current project management practices a firm is using.33 It employs a “spider web” methodology in which a set of significant project management practices have first been identified for organizations within a specific industry. In this example, a firm may identify eight components of project management practice that are key for success, based on an analysis of the firm’s own needs as well as through benchmarking against competing firms in the industry. Note that each of the rings in the diagram represents a critical evaluation of the manner in which the organization matches up with industry standards. Suppose we assigned the following meanings to the different ratings:

Ring Level Meaning 0 Not defined or poor 1 Defined but substandard 2 Standardized 3 Industry leader or cutting edge

Following this example, we may decide that in terms of project team personnel development or project control systems our practices are poor relative to other competitors, and rate those skills as 0. On the other hand, perhaps our scheduling processes are top-notch, enabling us to rate them as a 3. Figure 1.10 shows an example of the same spider web diagram with our relative skill levels assigned across the eight key elements of project management which we have defined. This exercise helps us to form the basis for where we currently are in terms of project management sophistication, a key stage in any maturity model in which we seek to move to a higher level.

Once we have established a sense of our present project management abilities, as well as our shortcomings, the next step in the maturity model process is to begin charting a step-by-step, incre- mental path to our desired goal. Table 1.3 highlights some of the more common project maturity

FIGURE 1.10 Spider Web Diagram with Embedded Organizational Evaluation

Source: R. Gareis. (2001). “Competencies in the Project-Oriented Organization,” in D. Slevin, D. Cleland, and J. Pinto, The Frontiers of Project Management Research. Newtown Square, PA: Project Management Institute, pp. 213–24, figure on p. 216. Copyright and all rights reserved. Material from this publication has been reproduced with the permission of PMI.

1

2

3

Project Scheduling

Control Practices

Coaching, Auditing, and Evaluating Projects

Portfolio Management

Structural Support for Project Management

Personnel Development for Projects

Networking Between Projects

Project Stakeholder Management

0

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TABLE 1.3 A Comparison of Project Maturity Models and Incremental Stages

Center for Business Practices

Level 1: Initial Process • Ad hoc process • Management awareness

Level 2: Structure, Process, and Standards • Basic processes, not standard

on all projects • Management supports use • Estimates, schedules based

on expert knowledge

Level 3: Institutionalized Project Management • All project processes are

repeatable • Estimates, schedules based

on industry standards

Level 4: Managed • Project management prac-

tices integrated with corpo- rate processes

• Solid analysis of project performance

• Estimates, schedules based on corporate specifics

Level 5: Optimizing • Processes to measure project

efficiency • Processes in place to

improve project performance • Company focuses on con-

tinuous improvement

Kerzner’s Project Management Maturity Model

Level 1: Common Language • Sporadic use of project

management • Small pockets of interest in

the firm • No investment in PM

training

Level 2: Common Processes • Tangible benefits made

apparent • PM support throughout the

firm • Development of a PM

curriculum

Level 3: Singular Methodology • Integrated processes • Cultural and management

support • Financial benefit from PM

training

Level 4: Benchmarking • Analysis and evaluation of

practices • Project office established

Level 5: Continuous Improvement • Lessons learned, files

created • Knowledge transfer

between teams • Mentorship program

ESI International’s Project Framework

Level 1: Ad Hoc • Processes ill-defined because

they are applied individually • Little support by

organization

Level 2: Consistent • Organization is well inten-

tioned in its methods • No project control processes

or lessons learned

Level 3: Integrated • Processes are tailored to

enhance all PM aspects • Common use and under-

standing of methods across the firm

Level 4: Comprehensive • PM fully implemented across

the firm • Information is used to evalu-

ate processes and reduce variation

• Advanced PM tools and techniques are developed

Level 5: Optimizing • Continual effort to improve

and innovate project capability

• Common failures are eliminated

SEI’s Capability Maturity Model Integration

Level 1: Initial • Ad hoc, chaotic processes

Level 2: Managed • Requirements management,

project planning, and control occur

• Process quality assurance occurs

• Configuration management is used

Level 3: Defined • Requirements development

and product integration occur

• Verification and validation of processes

• Risk management is emphasized

Level 4: Quantitative Management • Process performance is

gauged • Quantitative PM highlighted

Level 5: Optimizing • Innovation and deployment

accentuated • Causal analysis and resolu-

tion occur

21

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22 Chapter 1 • Introduction

models and the interim levels they have identified en route to the highest degree of organization- wide project expertise. Several of these models were developed by private project management consultancies or professional project organizations.

It is interesting to compare and contrast the four maturity models highlighted in Table 1.3. These examples of maturity models are taken from the most well-known models in the field, including Carnegie Mellon University’s Software Engineering Institute’s (SEI) Capability Matu- rity Model, Harold Kerzner’s Maturity Model, ESI International’s Project Framework, and the maturity model developed by the Center for Business Practices.34 Illustrating these dimensions in pyramid form, we can see the progression toward project management maturity (Figure 1.11). Despite some differences in terminology, a clear sense of pattern exists among these models. Typically they start with the assumption that project management practices within a firm are not planned and are not collectively employed; in fact, there is likely no common language or methods for undertaking project management. As the firm grows in project maturity, it begins to adopt common practices, starts programs to train cadres of project management profession- als, establishes procedures and processes for initiating and controlling its projects, and so forth. Finally, by the last stage not only is the organization “project-savvy,” but it also has progressed beyond simply applying project management to its processes and is now actively exploring ways to continuously improve its project management techniques and procedures. It is during the final stage that the organization can be truly considered “project mature”; it has internalized all necessary project management principles and is actively seeking to move beyond them in innovative ways.

Project maturity models have become very useful in recent years precisely because they reflect the growing interest in project management while highlighting one of its recurring problems: the lack of clear direction for companies in adopting, adapting, and improving these processes for optimal use. The key feature of these models is the important recognition that change typically does not occur abruptly; that is, companies that desire to become skilled in their project manage- ment approaches simply cannot progress in immediate steps from a lack of project management understanding to optimal project practices. Instead, the maturity models illustrate that maturity is an ongoing process based on continuous improvement through identifiable incremental steps. Once we have an accurate picture of where we fit into the maturity process, we can begin to determine a reasonable course of action to progress to our desired level. In this manner, any organization, no matter how initially unskilled in project management, can begin to chart a course toward the type of project organization it hopes to become.

FIGURE 1.11 Project Management Maturity—A Generic Model

Low Maturity

Ad hoc process, no common language, little support

Moderate Maturity

De�ned practices, training programs, organizational support

Institutionalized, seeks continuous

improvement

High Maturity

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Employability Skills 23

Employability Skills

LO 1.7 Recognize how mastery of the discipline of project management enhances critical employ- ability skills for university graduates.

Pearson is committed to not only producing innovative educational content but ensuring that the material covered in its products addresses the critical skills that employers are looking for. As part of a recent large-scale study involving hundreds of respondents from universities and public and private organizations, Pearson identified a set of “employability skills” that businesses deem crucial for their new hires. Let us consider them in turn and then briefly address how this text supports developing skills in these critical areas.

COMMUNICATION

Communication is defined as effective use of oral, written, and nonverbal communication skills for multiple purposes, such as to inform, instruct, motivate, persuade, and share ideas. It also includes effective listening, using technology to communicate, and being able to evaluate the effectiveness of communication efforts—all within diverse contexts. This text offers important principles of com- munication, such as steps needed to build a business case and project charter in Chapter 5 on scope management, negotiation skills in Chapter 6 on team building, and steps needed to work with stakeholders in closing out a finished project in Chapter 14. Effective project managers are effective communicators, and this text offers many examples and methods for improving your skills.

CRITICAL THINKING

Critical thinking involves purposeful and goal-directed thinking used to define and solve problems, make decisions, or form judgments related to a particular situation or set of circumstances. From the wide variety of critical thinking elements embedded in Internet exercises within each chapter to end-of-chapter cases and Project Management Research in Brief boxes, this text will push readers to think beyond the obvious and to recognize the challenge of open-ended problems or case examples without obvious answers. For successful project managers, critical thinking is a critical skill.

COLLABORATION

Collaborative learning is a situation in which individuals actively work together on a task, construct- ing meaning and knowledge as a group through dialogue and negotiation resulting in a final product reflective of their joint, interdependent actions. As discussed below, this text offers many opportu- nities for collaborative thinking and working in teams. The semester-long exercise on building a project plan, ABCups Inc., offers students multiple opportunities for collaborative interaction, as do case assignments and other team-based experiences such as the negotiation exercise in Chapter 6.

KNOWLEDGE APPLICATION AND ANALYSIS

Knowledge application and analysis is the ability to learn a concept and then appropriately apply that knowledge in another setting to achieve a higher level of understanding. As the previous sec- tion of the chapter indicated, this text is laid out in a dynamic format; that is, it is organized to mirror the project life cycle, establishing conceptual goals and scope development followed by planning steps, cost and risk management, project monitoring, and so forth. Each stage of the text builds upon the previous elements and requires that knowledge learned in one part of the book be transferrable and applicable as we move forward. This integrative approach to the book’s topics highlights the manner in which knowledge is applied and linked to the skills of project management.

BUSINESS ETHICS AND SOCIAL RESPONSIBILITY

Business ethics are sets of guiding principles that influence the way individuals and organizations behave within the society in which they operate. Corporate social responsibility (CSR) is a form of ethical behavior that requires that organizations understand, identify, and eliminate unethical eco- nomic, environmental, and social behaviors. In this edition of the textbook, two important elements have been added: project management and ethics—including social responsibility—in Chapter 4,

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24 Chapter 1 • Introduction

and sustainability in Chapter 5. Managers are learning that organizations “do well by doing good.” This same principle applies to the material covered in this textbook.

INFORMATION TECHNOLOGY APPLICATION AND COMPUTING SKILLS

Information technology application and computing skills are the ability to select and use appropriate technology to accomplish a given task. The individual is also able to apply computing skills to solve problems and show proficiency with computer software programs. Since the first edition of this text- book, I have worked to update technology links and computing skills, particularly in the application of critical software packages such as Microsoft Project. Now in its 2016 release, we will continue to apply MS Project through tutorials, the use of screenshots, and other references to its applicability.

DATA LITERACY

Data literacy is the ability to access, assess, interpret, manipulate, summarize, and communicate data. One of the challenges of successful project management is the need to have equal facility in soft skills of project team development and leadership as well as computational abilities that allow us to understand financial models for project selection (Chapter 3), cost accounting principles (Chapter 8), scheduling and network development (Chapters 9 through 11), resource management (Chapter 12), and evaluation and control (Chapter 13). Students who intend to succeed in their later careers must become comfortable with data, recognize and identify critical information, and manipulate this information appropriately. This text offers students the full range of employability skills that will be critical to their future success.

Project Elements and Text Organization

This text was written to provide a holistic, managerial-based approach to project management. The text is holistic in that it weaves together the wide variety of duties, responsibilities, and knowledge that successful project managers must acquire. Project management is a comprehensive and exciting undertaking. It requires us to understand aspects of management science in building schedules, assign- ing resources, monitoring and controlling our projects, and so forth. At the same time, successful project managers must also integrate fundamental issues of behavioral science, involving knowledge of human beings, leadership practices, motivation and team development, conflict resolution, and negotiation skills. Truly, a science-heavy approach to this subject will make us no more successful in our future project management responsibilities than will a focus that retains an exclusively people-based outlook. Project management is an exciting and challenging blend of the science and art of management.

Figure 1.12 offers a model for the organization of this text. The figure is a Gantt chart, a proj- ect scheduling and control device that we will become more familiar with in Chapter 10. For now, however, we can apply it to the structure of this book by focusing on some of its simpler features. First, note that all chapters in this book are listed down the left-hand column. Across the bottom and running from left to right is a simple time line that illustrates the point at which each of the chap- ters’ topics will be introduced. For simplicity’s sake, I have divided the X-axis time line into four distinct project phases that roughly follow the project life cycle discussed earlier in this chapter: (1)

FIGURE 1.12 Organization of Text

Foundation Planning Implementation Termination

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Project Elements and Text Organization 25

Foundation, (2) Planning, (3) Implementation, and (4) Termination. Notice how some of the topics we will cover are particularly relevant only during certain phases of the project while others, such as project leadership, are significant across much of the project’s life cycle. Among the benefits of setting up the text to follow this sequence are that, first, it shows the importance of blending the human-based topics (leadership and team building) directly with the more analytical or scientific elements of project management. We cannot compartmentalize our approach to project manage- ment as either exclusively technical or behavioral; the two are opposite sides of the same coin and must be appreciated jointly. Second, the structure provides a simple logic for ordering the chapters and the stage of the project at which we are most likely to concern ourselves with these topics. Some concepts, as illustrated by the figure, are more immediately concerned with project planning while others become critical at later phases in the project. Appreciating the elements of project management and their proper sequencing is an important learning guide. Finally, the figure offers an intuitively appealing method for visually highlighting the structure and flow we will follow across the topics in the text.

The foundation stage helps us with our fundamental understanding of what projects are and how they are typically managed in modern organizations. As part of that understanding, we must necessarily focus on the organizational setting within which projects are created, selected, and devel- oped. Some of the critical issues that can affect the manner in which projects are successfully imple- mented are the contextual issues of a firm’s strategy, structure, and culture. Either these elements are set up to support project-based work or they are not. In the former case, it is far easier to run projects and achieve positive results for the organization. As a result, it is extremely helpful for us to clearly understand the role that organizational setting, or context, plays in project management.

In Chapter 3 we explore the process of project screening and selection. The manner in which a firm selects the projects it chooses to undertake is often critical to its chances of successful devel- opment and commercial profitability. Chapter 4 introduces the challenges of project management from the perspective of the project leader. Project management is an extremely leader-intensive undertaking: the project manager is the focal point of the project, often functioning as a miniature CEO. The more project managers understand about project leadership and the skills required by effective project managers, the better companies can begin training project managers within their own ranks.

The second phase is related to the up-front issues of project planning. Once a decision to proceed has been made, the organization must first select a suitable project manager to oversee the development process. Immediately, this project manager is faced with a number of responsibilities, including:

1. Selecting a team—Team building and conflict management are the first challenges that project managers face.

2. Developing project objectives and a plan for execution—Identifying project requirements and a logical plan to develop the project are crucial.

3. Performing risk management activities—Projects are not developed without a clear sense of the risks involved in their planning and implementation.

4. Cost estimating and budgeting—Because projects are resource-constrained activities, careful budgeting and cost estimation are critical.

5. Scheduling—The heart of project planning revolves around the process of creating clear and aggressive, yet reasonable schedules that chart the most efficient course to project completion.

6. Managing resources—The final step in project planning is the careful management of project resources, including project team personnel, to most efficiently perform tasks.

Chapter 5, which discusses project scope management, examines the key features in the overall plan. “Project scope management” is something of an umbrella term under which we consider a number of elements in the overall project planning process. This chapter elaborates the variety of planning techniques and steps for getting a project off on the right foot.

Chapter 6 addresses some of the behavioral challenges project managers face in terms of effective team building and conflict management. This chapter looks at another key component of effective human resource management: the need to create and maintain high-performance teams. Effectively building and nurturing team members—often people from very different backgrounds— is a constant challenge and one that requires serious consideration. Conflict occurs on a number of levels, not just among team members but between the team and project stakeholders, including top

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26 Chapter 1 • Introduction

management and customers. This chapter will identify some of the principal causes of conflict and explain various methods for resolving it.

Chapter 7 deals with project risk management. In recent years, this area of project manage- ment has become increasingly important to companies that want to ensure, as far as possible, that project selection choices are appropriate, that all the risks and downside potential have been con- sidered, and that, where appropriate, contingency plans have been developed. Chapter 8 covers budgeting and cost estimation. Because project managers and teams are held to both standards of performance and standards of cost control, it is important to understand the key features of cost estimation and budgeting.

Chapters 9 and 10 focus on scheduling methodologies, which are a key feature of project management. These chapters offer an in-depth analysis of various project-scheduling tools, discuss critical software for project scheduling, and explain some recent breakthroughs in project schedul- ing. Chapter 11 covers some important recent developments in project scheduling, the Agile project planning methodology, and the development and application of Critical Chain project scheduling. Chapter 12 considers the challenges of resource allocation. Once various project activities have been identified, we must make sure they work by allocating the resources needed to support them.

The third process in project management, implementation, is most easily understood as the stage in which the actual “work” of the project is being performed. For example, engineers and other technical experts determine the series of tasks necessary to complete the overall project, including their individual responsibilities, and each of the tasks is actively managed by the manager and team to ensure that there are no significant delays that can cause the project to exceed its schedule. Chapter 13 addresses the project challenges of control and evaluation. During the implementation phase, a considerable amount of ambiguity regarding the status of the project is possible unless specific, practical steps are taken to establish a clear method for tracking and controlling the project.

Finally, the processes of project termination reflect the fact that a project is a unique organi- zational endeavor, marked by a specified beginning and ending. The process of closing down a project, whether due to the need to “kill” it because it is no longer viable or through the steps of a planned termination, offers its own set of challenges. A number of procedures have been developed to make this process as smooth and logical as possible. Chapter 14 discusses the elements in project closeout— the phase in which the project is concluded and resources (both monetary and human) are reassigned.

This book was written to help create a new generation of effective project managers. By explor- ing the various roles of project managers and addressing the challenges and opportunities they constantly face, we will offer a comprehensive and integrative approach to better understand the task of project management—one that explores the full range of strategic, technical, and behavioral challenges and duties for project managers.

This text also includes, at the end of relevant chapters, a series of activities designed to help students develop comprehensive project plans. It is absolutely essential that persons completing a course in project management carry away with them practical knowledge about the steps involved in creating a project, planning its development, and overseeing its work. Future managers need to develop the skills to convert the theories of project management into the successful practice of the craft. With this goal in mind, the text contains a series of exercises designed to help professors and students construct overall project plans. Activities involve the development, from beginning to end, of a project plan, including narrative, risk analysis, work breakdown structure, activity estimation and network diagramming, resource leveling and project budgeting, and so forth. In order to add a sense of realism to the process, later chapters in the book also include a series of hypothetical problems. By the end of the course, students should have created a comprehensive project docu- ment that details the necessary steps in converting project plans into practical accomplishments.

As a template for providing examples, this text employs a hypothetical company called ABCups Inc., which is about to initiate an important project. Chapter-ending activities, including exercises in scheduling, budgeting, risk management, and so forth, will often include examples created from the ABCups project for students to use as a model for their own work. In this way, students will be presented both with a challenge and with an example for generating their own deliverables as they progressively build their project plans.

Several software packages are available for planning and tracking the current status of a proj- ect. Some of them, such as products by SAP and Oracle, are large, quite complex, and capable of linking project management functions to other critical through-put operations of a company. Other

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desktop software packages are more readily accessible and easier to interpret for the average novice interested in improving his or her project management skills. This text uses examples throughout from Microsoft’s Project 2016, including screen captures, to illustrate how MSP 2016 can be used for a variety of planning and tracking purposes. Additionally, some simple tutorials are included in the appendices at the end of this text to give readers a feel for how the software works and some of the features it offers. As a method for learning the capabilities of the software, it’s a start. For those committed to fully learning one of these project management scheduling packages, I encourage you to investigate alternative packages and, once you have made your choice, invest in a comprehensive training manual.

An additional feature of this text is the linkage between concepts that are discussed throughout and the Project Management Body of Knowledge (PMBoK), which was developed by the Project Management Institute (PMI). As the world’s leading professional organization for project manage- ment, with nearly half a million members, PMI has been in the forefront of efforts to standardize project management practices and codify the necessary skills to be successful in this field. Now in its fifth edition (a sixth edition is scheduled for release soon), the PMBoK identifies ten critical knowl- edge areas of project management skills and activities that all practitioners need to master in order to become fully trained in their profession. These knowledge areas, which are shown in Figure 1.13, encompass a broad overview of the component processes for project management. Although it is not my intention to create a text to serve as a primer for taking a professional certification exam, it is important for us to recognize that the skills we develop through reading this work are directly applicable to the professional project management knowledge areas.

FIGURE 1.13 Overview of the Project Management Institute’s PMBoK Knowledge Areas

Source: Project Management Institute. (2013). A Guide to the Project Management Body of Knowledge (PMBoK Guide), 5th ed. Project Management Institute, Inc. Copyright and all rights reserved. Material from this publica- tion has been reproduced with the permission of PMI.

12.1 Plan Procurement Management 12.2 Conduct Procurements 12.3 Control Procurements 12.4 Close Procurements

11.1 Plan Risk Management 11.2 Identify Risks 11.3 Perform Qualitative Risk Analysis 11.4 Perform Quantitative Risk Analysis 11.5 Plan Risk Responses 11.6 Control Risks

10.1 Plan Communications Management 10.2 Manage Communications 10.3 Control Communications

8.1 Plan Quality Management 8.2 Perform Quality Assurance 8.3 Control Quality

7.1 Plan Cost Management 7.2 Estimate Costs 7.3 Determine Budget 7.4 Control Costs

6.1 Plan Schedule Management 6.2 De�ne Activities 6.3 Sequence Activities 6.4 Estimate Activity Resources 6.5 Estimate Activity Durations 6.6 Develop Schedule 6.7 Control Schedule

Project Management

4.1 Develop Project Charter 4.2 Develop Project Management Plan 4.3 Direct & Manage Project Work 4.4 Monitor & Control Project Work 4.5 Perform Integrated Change Control 4.6 Close Project or Phase

4. Integration Management

5.1 Plan Scope Management 5.2 Collect Requirements 5.3 De�ne Scope 5.4 Create WBS 5.5 Validate Scope 5.6 Control Scope

5. Scope Management 6. Time Management

9.1 Plan HR Management 9.2 Acquire Project Team 9.3 Develop Project Team 9.4 Manage Project Team

9. Human Resource Management

12. Procurement Management11. Risk Management

13. Stakeholder Management

8. Quality Management

10. Communications Management

7. Cost Management

13.1 Identify Stakeholders 13.2 Plan Stakeholder Management 13.3 Manage Stakeholder Engagement 13.4 Control Stakeholder Engagement

Project Elements and Text Organization 27

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28 Chapter 1 • Introduction

Students will find several direct links to the PMBoK in this text. First, the key terms and their definitions are intended to follow the updated, fifth edition PMBoK glossary (included as an appen- dix at the end of the text). Second, chapter introductions will also highlight references to the PMBoK as we address them in turn. We can see how each chapter not only adds to our knowledge of project management but also directly links to elements within the PMBoK. Finally, many end-of-chapter exercises and Internet references will require direct interaction with PMI through its Web site.

As an additional link to the Project Management Institute and the PMBoK, this text will include sample practice questions at the end of relevant chapters to allow students to test their in-depth knowledge of aspects of the PMBoK. Over 30 years ago, the PMI instituted its Project Management Professional (PMP) certification as a means of rewarding those with expert knowledge of project management practice. The PMP certification is the highest professional designation for project man- agement expertise in the world and requires in-depth knowledge in all ten areas of the PMBoK. To date, more than 750,000 project professionals worldwide have attained the PMP certification and the numbers are steadily growing each year. Other certifications, such as CAPM (Certified Associ- ate in Project Management) and PgMP (Program Management Professional), have been instituted by PMI to recognize those with other advanced project management skills, academic degrees, and professional experience. The inclusion of questions at the end of the relevant chapters offers stu- dents a way to assess how well they have learned the important course topics and the nature of PMP certification exam questions, and points to areas that may require additional study in order to master this material.

This text offers an opportunity for students to begin mastering a new craft—a set of skills that is becoming increasingly valued in contemporary corporations around the world. Project managers represent the new corporate elite: a corps of skilled individuals who routinely make order out of chaos, improving a firm’s bottom line and burnishing their own value in the process. With these goals in mind, let us begin.35

Summary

1.1 Understand why project management is becom- ing such a powerful and popular practice in busi- ness. Project management offers organizations a number of practical competitive advantages, including the ability to be both effective in the mar- ketplace and efficient with the use of organizational resources. It also offers the ability to achieve tech- nological breakthroughs, to streamline new-product development, and to manage the challenges arising from the business environment.

1.2 Recognize the basic properties of projects, including their definition. Projects are defined as temporary endeavors undertaken to create a unique product or service. Among their key properties are that projects are complex, one-time processes; they are limited by budget, schedule, and resources; they are developed to resolve a clear goal or set of goals; and they are customer-focused.

1.3 Understand why effective project management is such a challenge. Projects operate outside of nor- mal organizational processes, typified by the work done by functional organizational units. Because they are unique, they require a different mind-set, one that is temporary and aimed at achieving a clear goal within a limited time frame. Projects are ad hoc endeavors with a clear life cycle. They are employed as the building blocks in the design and execution of

organizational strategies, and they provide a philos- ophy and a strategy for the management of change. Other reasons why they are a challenge include the fact that project management requires the crossing of functional and organizational boundaries while try- ing to satisfy the multiple constraints of time, bud- get, functionality, and customer satisfaction.

1.4 Understand and explain the project life cycle, its stages, and the activities that typically occur at each stage in the project. The project life cycle is a mecha- nism that links time to project activities and refers to the stages in a project’s development. The common stages used to describe the life cycle for a project are (1) conceptualization, (2) planning, (3) execution, and (4) termination. A wide and diverse set of activities occurs during different life cycle stages; for example, during the conceptualization phase the basic project mission and scope are developed and the key project stakeholders are signed on to support the project’s development. During planning, myriad project plans and schedules are created to guide the development process; execution requires that the principal work of the project be performed. Finally, during the ter- mination stage the project is completed, the work finished, and the project transferred to the customer.

1.5 Understand the concept of project “success,” including various definitions of success as well

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Discussion Questions 29

as the alternative models of success. Originally, project success was predicated simply on a triple- constraint model that rewarded projects if they were completed with regard to schedule, budget, and functionality. This model ignored the emphasis that needs to be placed on project clients, however. In more accurate terms, project success involves a “quadruple constraint,” linking the basic project metrics of schedule adherence, budget adherence, project quality (functionality), and customer sat- isfaction with the finished product. Other models of success for IT projects employ the measures of (1) system quality, (2) information quality, (3) use, (4) user satisfaction, (5) individual impact, and (6) organizational impact.

1.6 Understand the purpose of project management maturity models and the process of benchmarking in organizations. Project management maturity mod- els are used to allow organizations to benchmark the best practices of successful project management firms. Project maturity models recognize that differ- ent organizations are at different levels of sophistica- tion in their best practices for managing projects. The purpose of benchmarking is to systematically man- age the process improvements of project delivery by

a single organization over a period of time. As a firm commits to implementing project management prac- tices, maturity models offer a helpful, multistage process for moving forward through increasing lev- els of sophistication of project expertise.

1.7 Recognize how mastery of the discipline of project management enhances critical employability skills for university graduates. The employability skills identified by Pearson include communication, criti- cal thinking, collaboration, knowledge application and analysis, business ethics and social responsibil- ity, information technology application and com- puting skills, and data literacy. Chapter content and numerous cases examples within this text cover this broad array of technical, interpersonal, and information-related challenges. Moreover, master- ing the science of project management will lead to a valuable skill set that directly relates to each of the critical employability skills enumerated by Pearson. In short, project management themes map closely to the variety of skills that modern businesses deem an absolute necessity for successful growth. Becoming adept at project management will provide students with numerous “resume enhancers” sought by pub- lic and private organizations.

Key Terms

Benchmarking (p. 19) Client acceptance (p. 16) Clients (p. 13) Budget (p. 16) Deliverables (p. 4)

Performance (p. 16) Process (p. 3) Project (p. 3) Project life cycle (p. 12)

Project management (p. 7) Project management

maturity models (p. 19) Project success (p. 15)

Stakeholders (p. 12) Time (p. 15) Triple constraint (p. 16)

Discussion Questions

1.1 What are some of the principal reasons why project man- agement has become such a popular business tool in recent years?

1.2 What do you see as the primary challenges to introduc- ing a project management philosophy in most organiza- tions? That is, why is it difficult to shift to a project-based approach in many companies?

1.3 What are the advantages and disadvantages of using proj- ect management?

1.4 What key characteristics do all projects possess? 1.5 Describe the basic elements of a project life cycle. Why is an

understanding of the life cycle relevant for our understand- ing of projects?

1.6 Think of both a successful project and an unsuccessful project with which you are familiar. What distinguishes the two, both in terms of the process used to develop them and their outcomes?

1.7 Consider the Expedition Everest case at the end of the chap- ter: what elements in Disney’s approach to developing its

theme rides do you find particularly impressive? How can a firm like Disney balance the need for efficiency and smooth development of projects with the desire to be innovative and creative? Based on this case, what principles appear to guide its development process?

1.8 Consider the six criteria for successful IT projects. Why is IT project success often so difficult to assess? Make a case for some factors being more important than others.

1.9 As organizations seek to become better at managing projects, they often engage in benchmarking with other companies in similar industries. Discuss the concept of benchmarking. What are its goals? How does benchmark- ing work?

1.10 Explain the concept of a project management maturity model. What purpose does it serve?

1.11 Compare and contrast the four project management matu- rity models shown in Table 1.3. What strengths and weak- nesses do you perceive in each of the models?

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30 Chapter 1 • Introduction

CASE STUDY 1.2 The IT Department at Hamelin Hospital

Hamelin Hospital is a large (700-bed) regional hospi- tal in the northeastern United States. The information technology (IT) department employs 75 people and has an operating budget of over $35 million. The depart- ment is responsible for managing 30–40 projects, rang- ing from small, such as redesigning computer screens, to very large, such as multimillion-dollar system devel- opment projects that can run for over a year. Hamelin’s IT department has been growing steadily, reflecting the hospital’s commitment to expanding its information storage and processing capacities. The two principal functions of the IT department are developing new

software applications and maintaining the current infor- mation system. Project management is a way of life for the department.

The IT department jobs fall into one of five cat- egories: (1) help-desk technician, (2) programmer, (3) senior programmer, (4) systems analyst, and (5) project manager. Help-desk technicians field queries from com- puter system users and solve a wide range of problems. Most new hires start at the help desk, where they can become familiar with the system, learn about problem areas, become sensitive to users’ frustrations and con- cerns, and understand how the IT department affects

CASE STUDY 1.1 MegaTech, Inc.

MegaTech, Inc. designs and manufactures automotive components. For years, the company enjoyed a stable marketplace, a small but loyal group of customers, and a relatively predictable environment. Though slow, annual sales continued to grow until recently hitting $300 million. MegaTech products were popular because they required little major updating or yearly redesign. The stability of its market, coupled with the consistency of its product, allowed MegaTech to forecast annual demand accurately, to rely on production runs with long lead times, and to concentrate on internal efficiency.

However, with the advent of the North American Free Trade Agreement (NAFTA) and other international trade agreements, MegaTech found itself competing with auto parts suppliers headquartered in countries around the world. The company was thrust into an unfamiliar position: it had to become customer-focused and quicker to market with innovative products. Facing these tremendous commercial challenges, top manage- ment at MegaTech decided to recreate the company as a project-based organization.

The transition, though not smooth, has nonethe- less paid big dividends. Top managers determined, for instance, that product updates had to be much more fre- quent. Achieving this goal meant yearly redesigns and new technologies, which in turn meant making innova- tive changes in the firm’s operations. In order to make these adjustments, special project teams were formed around each of the company’s product lines and given a mandate to maintain market competitiveness.

At the same time, however, MegaTech wanted to maintain its internal operating efficiencies. Thus, all project teams were given strict cost and schedule guidelines for new product introductions. Finally, the company created a sophisticated research and develop- ment team, which is responsible for locating likely new avenues for technological change 5 to 10 years down the road. Today, MegaTech operates project teams not only for managing current product lines but also for seeking longer-term payoffs through applied research.

MegaTech has found the move to project manage- ment challenging. For one thing, employees are still rethinking the ways in which they allocate their time and resources. In addition, the firm’s success rate with new projects is still less than management had hoped. Nevertheless, top managers feel that, on balance, the shift to project management has given the company the operating advantage that it needed to maintain its lead over rivals in its globally competitive industry. “Proj- ect management,” admits one MegaTech executive, “is certainly not a magic pill for success, but it has started us thinking about how we operate. As a result, we are doing smarter things in a faster way around here.”

Questions 1. What is it about project management that offers

MegaTech a competitive advantage in its industry? 2. What elements of the marketplace in which Mega-

Tech operates led the firm to believe that project management would improve its operations?

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Case Study 1.3 31

all hospital operations. As individuals move up the lad- der, they join project teams, either as programmers or systems analysts. Finally, five project managers over- see a constantly updated slate of projects. In addition, the workload is always being supplemented by new projects. Team personnel finish one assignment and then move on to a new one. The typical IT department employee is involved in seven projects, each at a differ- ent stage of completion.

The project management system in place at Hame- lin is well regarded. It has spearheaded a tremendous expansion of the hospital’s IT capabilities and thus helped the hospital to gain a competitive advantage over other regional hospitals. Recently, in fact, Hamelin began “farming out” its IT services on a fee-for-service basis to competing hospitals needing help with their records, administration, order-entry systems, and so forth. Not surprisingly, the results have improved the

hospital’s bottom line: At a time when more and more health care organizations are feeling the effects of spi- raling health care costs, Hamelin’s IT department has helped the hospital sustain continuous budget increases, additional staffing, a larger slate of projects, and a track record of success.

Questions 1. What are the benefits and drawbacks of starting

most new hires at the help-desk function? 2. What are the potential problems with requiring

project team members to be involved in multiple projects at the same time? What are the potential advantages?

3. What signals does the department send by mak- ing “project manager” the highest position in the department?

CASE STUDY 1.3 Disney’s Expedition Everest

One of the newest thrill rides to open in the Walt Dis- ney World Resort may just be the most impressive. As Disney approached its 50th anniversary, the company wanted to celebrate in a truly special way. What was its idea? Create a park attraction that would in many ways serve as the link between Disney’s amazing past and its promising future. Disney showed that it was ready to pull out all stops in order to get everything just right.

In 2006, The Walt Disney Company introduced Expedition Everest in Disney’s Animal Kingdom Park at Lake Buena Vista, Florida. Expedition Everest is more than just a roller coaster. It is the embodiment of the Disney spirit: a ride that combines Disney’s trademark thrills, unexpected twists and turns, incredible attention to detail, and impressive project management skills.

First, let’s consider some of the technical details of Expedition Everest:

• With a peak of just under 200 feet, the ride is con- tained within the tallest of 18 mountains created by Disney’s Imagineers at Disney parks worldwide.

• The ride contains nearly a mile of track, with twists, tight turns, and sudden drops.

• The Disney team created a Yeti: an enormous, fur- covered, Audio-Animatronics monster powered by a set of hydraulic cylinders whose combined thrust equals that of a Boeing 747 airliner. Through a series of sketches, computer-animated drawings,

sculptures, and tests that took more than two years to perfect, Disney created and programmed its Abominable Snowman to stand over 10 feet tall and serve as the focal point of the ride.

• More than 900 bamboo plants, 10 species of trees, and 110 species of shrubs were planted to re-create the feeling of the Himalayan lowlands surround- ing Mount Everest.

• More than 1,800 tons of steel were used to construct the mountain. The covering of the framework was done using more than 3,000 prefabricated chips created from 25,000 individual computer-molded pieces of steel.

• To create the proper color schemes, 2,000 gallons of stain and paint were used on rockwork and throughout the village Disney designed to serve as a backdrop for the ride.

• More than 2,000 handcrafted items from Asia are used as props, cabinetry, and architectural ornamentation.

Building an attraction does not come easily or quickly for Disney’s Imagineers. Expedition Everest was several years in development while Disney sent teams, including Walt Disney Imagineering’s Creative Execu- tive Joe Rohde, on repeated trips to the Himalayas in Nepal to study the lands, architecture, colors, ecology, and culture in order to create the most authentic setting

(continued)

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32 Chapter 1 • Introduction

CASE STUDY 1.4 “Throwing Good Money after Bad”: the BBC’s Digital Media Initiative

The British Broadcasting Corporation (BBC) recently announced the cancellation of a major Information Tech- nology (IT) project intended to update their vast broad- cast operations. The project, called the Digital Media Initiative (DMI), was originally budgeted at £81.7 mil- lion ($140 million) and was developed to eliminate the outdated filing systems and use of old-fashioned analog videotapes with their expensive archival storage. The BBC is one of the world’s largest and most widely rec- ognized news and media organizations; it is publicly funded and under British government oversight. The

DMI project was intended to save the organization millions annually by eliminating the cost of expensive and outdated storage facilities, while moving all media content to a modern, digital format. As an example of a large-scale IT project, the plan for the DMI involved media asset management, archive storage and retrieval systems, and media sharing capabilities.

The DMI project was begun in 2008 when the BBC contracted with technology service provider Siemens, with consulting expertise to be provided by Deloitte. Interestingly, the BBC never put the contract out for

for the new attraction. Disney’s efforts reflect a desire to do much more than provide a world-class ride experi- ence; they demonstrate the Imagineers’ eagerness to tell a story—a story that combines the mythology of the Yeti figure with the unique history of the Nepalese living in the shadow of the world’s tallest mountain. Ultimately the attraction, with all its background and thematic ele- ments, took nearly five years to complete.

Riders on Expedition Everest gain a real feel for the atmosphere that Disney has worked so hard to cre- ate. The guests’ adventure starts by entering the build- ing of the “Himalayan Escape” tour company, complete with Norbu and Bob’s booking office, to obtain permits for their trip. Overhead flutter authentic prayer flags from monasteries in Nepal. Next, guests pass through Tashi’s General Store and Bar to stock up on supplies for their journey to the peak of the mountain. Finally, guests pass through an old tea warehouse that contains a remarkable museum of artifacts reflecting Nepal’s cul- ture, a history of the Himalayas, and tales of the Yeti, which is said to inhabit the slopes of Mount Everest. It is only now that guests are permitted to board the Anan- dapur Rail Service for their trip to the peak. Each train is modeled after an aging steam-engine train, seating 34 guests per train.

Over the next several minutes, guests are trans- ported up the roller coaster track, through a series of winding turns, until their encounter with the Yeti. At this point another unique feature of the attraction emerges: The train begins rushing backward down the track, as though it were out of control. Through the balance of the ride, guests experience a landscape of sights and sounds culminating in a 50 mph final dash down the mountain and back to the safety of the Nepalese village.

Disney’s approach to the management of projects such as Expedition Everest is to combine careful plan- ning, including schedule and budget preparation, with the imagination and vision for which the company is so well known. Creativity is a critical element in the development of new projects at Disney. The company’s Imagineers include some of the most skilled artists and computer-animation experts in the world. Although it is easy to be impressed by the technical knowledge of Disney’s personnel, it is important to remember that each new project is approached with an understand- ing of the company’s underlying business and attention to market projections, cost control, and careful project management discipline. New attraction proposals are carefully screened and researched. The result is the creation of some of the most innovative and enjoyable rides in the world. Disney does not add new attractions to its theme parks frequently, but when it does, it does so with style!

Questions 1. Suppose you were a project manager for Disney.

Based on the information in this case, what critical success metrics do you think the company uses when designing a new ride? That is, how would you prioritize the needs for addressing project cost, schedule, quality, and client acceptance? What evidence supports your answer?

2. Why is Disney’s attention to detail in its rides unique? How does the company use the “atmo- sphere” discussed in the case to maximize the experience while minimizing complaints about the length of wait for the ride?

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competitive bidding, reasoning that it already had a 10-year support contract with Siemens and trusted Siemens’ judgment on project development. As part of this hands-off attitude, executives at the BBC gave Siemens full control of the project, and apparently lit- tle communication flowed back and forth between the organizations. The BBC finally grew concerned with the distant relationship that was developing between itself and the contractor when Siemens began missing impor- tant delivery milestones and encountering technical difficulties. After one year, the BBC terminated its $65 million contract with Siemens and sued the company for damages, collecting approximately $47 million in a court settlement. Still, losing nearly $20 million in tax- payer money after only one year, with nothing to show for it, did not bode well for the future.

Having been burned by this relationship with an outside contractor, the BBC next tried to move the project in house, assigning its own staff and project manager to continue developing the DMI. The project was under the overall control of the BBC’s Chief Tech- nology Officer, John Linwood. It was hoped that the lessons learned from the first-round failure of the proj- ect would help improve the technology and delivery of the system throughout the organization. Unfortunately, the project did no better under BBC control. Reports started surfacing as early as 2011 that the project was way behind schedule, was not living up to its promises, and, in fact, had been failing most testing along the way. However, although there are claims that the BBC was well aware of the flaws in the project as early as 2011, the picture it presented to the outside world, including Parliamentary oversight committees, was relentlessly upbeat. The BBC’s Director General, Mark Thompson, appeared before a committee in 2011 and told them the DMI was definitely on schedule and was actually work- ing already: “There are many programs that are already being made with DMI and some have gone to air and are going to air,” he told members of Parliament.

The trouble was, the project was not working well at all. Continual failures with the technology were widely known within the project team and company executives, but reports suggest that these concerns were buried under a flood of rosy projections. In fact, a later report on the project by an outside consulting firm suggests that throughout 2012 the deteriorating fortunes of the DMI were not accurately reported either within management or, critically, to the BBC Trust. For example, the BBC’s own internal project management office issued a “code red” warning of imminent proj- ect failure in February that was not reported to the trust until six months later. The CTO, John Linwood, maintained that the project did work and would lead to a streamlined and more cost-effective method for

producing media; he did not waver from this view throughout these years.

This rosy view hid a deeper problem: the tech- nology was just not working. Different views emerged as to why the DMI was not progressing. To the “tech- nologists,” there was nothing wrong with the system; it did deliver working technology, but the project was undermined by would-be users who never bought into the original vision and who continually changed their requirements. They believed that the DMI was failing not because it did not work, but as a result of internal politics. On the other side were those who questioned the development of the project because the technology, whether it had been “delivered” or not, never really worked, certainly not at the scale required to make it adopted across the whole organization. Furthermore, it was becoming evident that off-the-shelf technology existed in the marketplace which did some of what the DMI promised but which, critically, already worked well. Why, then, was the BBC spending so much time and money trying to create its own system out of thin air?

According to a news report, it was not until April 2013 that events demonstrated the ongoing problems with the DMI. During BBC coverage of the death and funeral of Margaret Thatcher, news staff worked fever- ishly to transfer old archived analog videotapes to a dig- ital format in order to produce footage for background on the life and career of the former Prime Minister. So poorly did the new digital archive system work that it was reported tapes had to be physically transported around London by taxi and subway system to get to their locations while video transfer work was being car- ried out by private production companies. All this after nearly four years working to develop the DMI!

The failure of the system during Thatcher’s funeral was the final straw. In May 2013 the new Director Gen- eral of the BBC, Lord Hall, announced the cancellation of the project and that the BBC’s Chief Technology Officer, John Linwood, was to be suspended pending an exter- nal investigation into the management of the DMI proj- ect. It was later revealed that a senior BBC manager had expressed grave doubts about the DMI to BBC Chairman Lord Patten one year before the project was cancelled. He had also claimed that there was a “very significant risk” that the National Audit Office had been misled about the actual progress of the DMI in 2011. Other BBC executives had also voiced similar concerns for about two years before the DMI was abandoned. The final cost of the proj- ect to the BBC and British taxpayers has been estimated at about $160 million. BBC Trust member Anthony Fry remarked that the DMI had been a “complete catastro- phe” and said that the project was “probably the most serious, embarrassing thing I have ever seen.”

(continued)

Case Study 1.4 33

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34 Chapter 1 • Introduction

Members of Parliament, looking into the failure of the DMI, also had a number of very pointed criticisms of the project, the executive oversight of the DMI, and the operations of the BBC in general. Margaret Hodge MP, Chair of the Committee of Public Accounts, summed up the project in her Parliament report:

“The BBC’s Digital Media Initiative was a com- plete failure. Licence fee payers paid nearly £100 million [$160 million] for this supposedly essential system but got virtually nothing in return. The main output from the DMI is an archive cata- logue and ordering system that is slower and more cumbersome than the 40-year-old system it was designed to replace. It has only 163 regular users and a running cost of £3 million [$5.1 million] a year, compared to £780,000 [$1.3 million] a year for the old system. When my Committee examined the DMI’s prog- ress in February 2011, the BBC told us that the DMI was “an absolutely essential have to have” and that a lot of the BBC’s future was tied up in the successful delivery of the DMI. The BBC also told us that it was using the DMI to make many programmes and was on track to com- plete the system in 2011 with no further delays. This turned out not to be the case. [. . .] The BBC was far too complacent about the high risks involved in taking it in-house. No single individual had overall responsibility or account- ability for delivering the DMI and achieving the benefits, or took ownership of problems when they arose. Lack of clearly defined responsibility and account- ability meant the Corporation failed to respond to warning signals that the programme was in trouble.”

A lengthy post-project analysis of the DMI’s fail- ure by Britain’s National Accounting Office identified a series of errors that all contributed to the fiasco. As part of its final report, the NAO noted that it was never clear where responsibility lay within the BBC for the completion of the project; in other words, when con- cerned parties asked to speak to those “in charge,” it was never clear just who those people actually were. This issue was made more significant as a result of the BBC losing a case brought against it by its former CTO John Linwood. Even though Linwood was fired by the BBC, the judge found that he was not responsible for the failure of the DMI. The NAO report stated that the BBC must make clear who is accountable for projects and define anticipated benefits at the start. Without a clear sense of benefits from a project such as the DMI, it was impossible to evaluate whether stakeholders were receiving value for the work undertaken.

Bad planning, poor corporate governance, exces- sively optimistic projections, and a cloak of secrecy regarding the real status of the Digital Media Initiative project all resulted in a very public black eye for one of the most respected broadcasting organizations in the world. It is likely that the causes of the failure of the DMI project will be debated for years to come, but at a mini- mum this story should be a cautionary tale for organiza- tions developing sophisticated IT projects.36

Questions 1. What does the story of the BBC’s failed Digital

Media Initiative suggest to you about the impor- tance of carefully managing not only the project, but the “message” of the project? That is, why is “benefits management” critical for project success?

2. Successful project management requires clear organization, careful planning, and good execu- tion. How was the absence of each of these traits shown in this example?

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Answers

Internet Exercises

1.12 The largest professional project management organization in the world is the Project Management Institute (PMI). Go to its Web site, www.pmi.org, and examine the links you find. Which links suggest that project management has become a sophisticated and vital element in corporate success? Select at least three of the related links and report briefly on the content of these links.

1.13 Go to the PMI Web site and examine the link “Member- ship.” What do you discover when you begin navigating among the various chapters and cooperative organizations associated with the PMI? How does this information cause you to rethink project management as a career option?

1.14 Go to http://www.pmi.org/business-solutions/case- studies and examine some of the cases included on the Web page. What do they suggest about the challenges of managing projects successfully? The complexity of many of today’s projects? The exciting breakthroughs or opportuni- ties that projects allow us to exploit?

1.15 Using your favorite search engine (Google, Yahoo!, etc.), type in the keywords “project” and “project management.” Randomly select three of the links that come up on the screen. Summarize what you find.

1.16 Go to the Web site for the Software Engineering Institute of Carnegie Mellon University at https://resources.sei.cmu. edu/asset_files/SpecialReport/1994_003_001_16265.pdf and access the software process maturity questionnaire. What are some of the questions that IT companies need to consider when assessing their level of project management maturity?

PMP CERTIFICATION SAMPLE QUESTIONS

1.17 The majority of the project budget is expended upon: a. Project plan development. b. Project plan execution. c. Project termination. d. Project communication.

1.18 Which of the following is the most critical component of the triple constraint?

a. Time, then cost, then quality. b. Quality, then budget, then time. c. Scope. d. They are all of equal importance unless otherwise

stated. 1.19 Which of the following best describes a project stakeholder?

a. A team member. b. The project manager. c. Someone who works in an area affected by the

project. d. All of the above are stakeholders.

1.20 All of the following are elements in the definition of a proj- ect, except:

a. A project is time-limited. b. A project is unique. c. A project is composed of unrelated activities. d. A project is undertaken for a purpose.

1.21 All of the following distinguish project management from other process activities, except:

a. There are no fundamental differences between proj- ect and process management.

b. Project management often involves greater cer- tainty of performance, cost, and schedule.

c. Process management operates outside of line organizations.

d. None of the above correctly distinguish project from process management.

1.17. b—The majority of a project budget is spent during the execution phase;

1.18. d—Unless otherwise stated, all elements in the triple-con- straint model are equally critical;

1.19. d—All of the examples listed are types of project stakeholders; 1.20. c—A project is composed of “interrelated” activities; 1.21. d—None of the answers given correctly differentiates

“ process” from “project” management.

Notes 35

Notes

1. Valery, Paul, quoted in “Extreme chaos” (Boston: Standish Group International, 2001).

2. Source: Weller, C. (2016). “11 giant infrastructure projects that are reshaping Africa,” Business Insider, Dec 18, retrieved at: http://www.businessinsider.com/ giant-infrastructure-projects-reshaping-africa-2016-12

3. Peters, Thomas. (1994). Liberation Management: Necessary Disorganization for the Nanosecond Nineties. New York: Faw- cett Books.

4. Stewart, Thomas H. (1995). “The corporate jungle spawns a new species,” Fortune, July 10, pp. 179–80.

5. Gilbreath, Robert D. (1988). “Working with pulses not streams: Using projects to capture opportunity,” in Cle- land, D., and King, W. (Eds.), Project Management Handbook. New York: Van Nostrand Reinhold, pp. 3–15.

6. Buchanan, D. A., and Boddy, D. (1992). The Expertise of the Change Agent: Public Performance and Backstage Activity. London: Prentice Hall.

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36 Chapter 1 • Introduction

7. Frame, J. D. (1995). Managing Projects in Organizations, 2nd ed. San Francisco, CA: Jossey-Bass. See also Frame, J. D. (2002). The New Project Management, 2nd ed. San Francisco, CA: Jossey-Bass.

8. Kerzner, H. (2003). Project Management, 8th ed. New York: Wiley.

9. Field, M., and Keller, L. (1998). Project Management. Lon- don: The Open University.

10. Project Management Institute. (2013). A Guide to the Project Management Body of Knowledge, 5th ed. Newtown Square, PA: PMI.

11. Cleland, D. I. (2001). “The discipline of project manage- ment,” in Knutson, J. (Ed.), Project Management for Business Professionals. New York: Wiley, pp. 3–22.

12. Lundin, R. A., and Soderholm, A. (1995). “A theory of the temporary organization,” Scandinavian Journal of Manage- ment, 11(4): 437–55.

13. Resnikoff, P. (2016), “Apple terminating music download ‘within two years’,” Digital Music News, May 11, retrieved at: http://www.digitalmusicnews.com/2016/05/11/ apple-terminating-music-downloads-two-years/; Sources: http://macs.about.com/b/a/087641.htm; Mossberg, W. S. (2004). “The music man,” Wall Street Journal, June 14, p. B1.

14. Graham, R. J. (1992). “A survival guide for the acciden- tal project manager.” Proceedings of the Annual Project Management Institute Symposium. Drexel Hill, PA: Project Management Institute, pp. 355–61.

15. Pinto, J. K., and Millet, I. (1999). Successful Information Sys- tems Implementation: The Human Side, 2nd ed. Newtown Square, PA: PMI.

16. Kapur, G. K. (1998). “Don’t look back to create the future.” Presentation at the Frontiers of Project Man- agement Conference, Boston, MA; Dey, P.C. (2016). “Complete collection of project management sta- tistics 2016,” Project Planning Pro, Sept 1, retrieved at : ht tps ://www.planningproapp.com/blog/ complete-collection-project-management-statistics-2016/

17. Collins, T. (2007, May 17). “Public sector IT projects have only 30% success rate - CIO for Department for Work and Pensions,” Retrieved at: http://www.computerweekly. com/blogs/public-sector/2007/05/public-sector-it-proj- ects-have.html

18. Clausing, J., and Daly, M. (2013, Sept 14). “US nuclear agency faulted for laxity and overspending,” Bos- ton Globe, retrieved at: www.bostonglobe.com/news/ nation/2013/09/13/nation-bloated-nuclear-spending- comes-under-fire/O2uP7gv06vTAEw0AIcCIlL/story.html

19. Dey, P. C. (2016). “Complete collection of project management statistics 2016,” Project Planning Pro, Sept. 1, retrieved at: https://www.planningproapp.com/blog/complete- collection-project-management-statistics-2016/; Hastie, S. and Wojewoda, S. (2015). “Standish Group 2015 Chaos Report: Q&A with Jennifer Lynch,” InfoQueue, Oct 4, retrieved at: https://www.infoq.com/articles/standish-chaos-2015.

20. MacVicar, S. (2015). “SIGAR: We built an Afghani- stan they can’t afford,” Al Jazeera, June 17, retrieved at: http://america.aljazeera.com/watch/shows/com- pass/articles/2015/6/17/john-sopko-sigar.html; Pager, T. (2015). “Debate over success of Afghanistan projects,” Military Times, Jan 28, retrieved at: http://www.milit- arytimes.com/story/military/pentagon/2015/01/28/ sigar-afghanistan-projects-fail/22426679/

21. Project Management Institute. (2016). President Barack Obama signs the Program Management Improvement and Accountability Act,” Dec 16. Copyright and all rights reserved. Material from this publication has been repro- duced with the permission of PMI.

22. Cleland, D. I. (1994). Project Management: Strategic Design and Implementation. New York: McGraw-Hill; Pinto, J. K., and Rouhiainen, P. (2001). Building Customer-Based Project Organizations. New York: Wiley; Gray, C. F., and Larson, E. W. (2003). Project Management, 2nd ed. Burr Ridge, IL: McGraw-Hill.

23. Petroski, H. (1985). To Engineer Is Human—The Role of Fail- ure in Successful Design. London: St. Martin’s Press.

24. Moore, M. (2016). “Here’s why Crossrail will be the FUTURE of London travel,” Express, Oct 7, retrieved at: http://www.express.co.uk/life-style/science-technol- ogy/718432/crossrail-underground-transport-london- tour-farringdon-station-elizabeth-line; http://www .crossrail.co.uk/sustainability http://www.express .co.uk/life-style/science-technology/718432/cross- rail-underground-transport-london-tour-farringdon- station-elizabeth-line; http://www.crossrail.co.uk/ sustainability; Peplow, M. (2016). “London’s Crossrail is a $21 billion test of virtual modeling,” IEEE Spec- trum, Mar 24, retrieved at: http://spectrum.ieee.org/ transportation/mass-transit/londons-crossrail-is-a- 21-billion-test-of-virtual-modeling; Moore, R. (2013). “Crossrail: Britain’s biggest archaeological dig will transform London,” The Guardian, Nov. 23, retrieved at: https://www.theguardian.com/uk-news/2013/nov/23/ crossrail-london-east-west-tunnel-railway

25. Sohmen, Victor. (2002, July). “Project termination: Why the delay?” Paper presented at PMI Research Conference, Seattle, WA.

26. Freeman, M., and Beale, P. (1992). “Measuring project suc- cess,” Project Management Journal, 23(1): 8–17.

27. Morris, P. W. G. (1997). The Management of Projects. Thomas Telford: London; McKain, S. (2005). What Customers Really Want. Thomas Nelson: Nashville, TN.

28. Shenhar, A. J., Levy, O., and Dvir, D. (1997). “Mapping the dimensions of project success,” Project Management Journal, 28(2): 5–13.

29. DeLone, W. H., and McLean, E. R. (1992). “Information systems success: The quest for the dependent variable,” Information Systems Research, 3(1): 60–95; Seddon, P. B. (1997). “A respecification and extension of the DeLone and McLean model of IS success,” Information Systems Research, 8(3): 249–53; DeLone, W. H., and McLean, E. R. (2003). “The DeLone and McLean model of information system success: A ten-year update,” Journal of Management Infor- mation Systems, 19(4): 9–30; Wang, Y-S. (2008). “Assessing e-commerce systems success: a respecification and vali- dation of the DeLone and McLean model of IS success,” Information Systems Journal, 18, 529–557.

30. Atkinson, R. (1999). “Project management: Cost, time and quality, two best guesses and a phenomenon, it’s time to accept other success criteria,” International Journal of Project Management, 17(6): 337–42; Cooke-Davies, T. (2002). “The ‘real’ success factors on projects,” International Journal of Project Management, 20(3): 185–90; Olson, D. L. (2001). Introduction to Information Systems Project Management. Burr Ridge, IL: Irwin/McGraw-Hill.

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Notes 37

31. Pennypacker, J. S., and Grant, K. P. (2003). “Project man- agement maturity: An industry benchmark,” Project Man- agement Journal, 34(1): 4–11; Ibbs, C. W., and Kwak, Y. H. (1998). “Benchmarking project management organiza- tions,” PMNetwork, 12(2): 49–53.

32. Reginato, P. E., and Ibbs, C. W. (2002). “Project manage- ment as a core competency,” Proceedings of PMI Research Conference 2002, Seattle, WA; Slevin, D., Pinto, J., and Cle- land, D. (Eds.), The Frontiers of Project Management Research. Newtown Square, PA: Project Management Institute, pp. 445–50.

33. Crawford, K. (2002). Project Management Maturity Model: Providing a Proven Path to Project Management Excellence. New York: Marcel Dekker; Foti, R. (2002). “Implement- ing maturity models,” PMNetwork, 16(9): 39–43; Gareis, R. (2001). “Competencies in the project-oriented organiza- tion,” in Slevin, D., Cleland, D., and Pinto, J. (Eds.), The Frontiers of Project Management Research. Newtown Square, PA: Project Management Institute, pp. 213–24; Gareis, R., and Huemann, M. (2000). “Project management compe- tencies in the project-oriented organization,” in Turner, J. R., and Simister, S. J. (Eds.), The Gower Handbook of Project Management, 3rd ed. Aldershot, UK: Gower, pp. 709–22; Ibbs, C. W., and Kwak, Y. H. (2000). “Assessing project management maturity,” Project Management Journal, 31(1): 32–43.

34. Humphrey, W. S. (1988). “Characterizing the software pro- cess: A maturity framework,” IEEE Software, 5(3): 73–79; Carnegie Mellon University. (1995). The Capability Maturity Model: Guidelines for Improving the Software Process. Boston, MA: Addison-Wesley; Kerzner, H. (2001). Strategic Plan- ning for Project Management Using a Project Management Maturity Model. New York: Wiley; Crawford, J. K. (2002).

Project Management Maturity Model. New York: Marcel Dekker; Pritchard, C. (1999). How to Build a Work Breakdown Structure: The Cornerstone of Project Management. Arlington, VA: ESI International.

35. Jenkins, Robert N. (2005). “A new peak for Disney,” St. Petersburg Times Online, retrieved at: www.sptimes .com/2005/12/11/news_pf/travel/A_new_peak_for_ Disney

36. Hewlett, S. (2014, February 3). “BBC’s Digital Media Ini- tiative failed because of more than poor oversight,” The Guardian, retrieved at: www.theguardian.com/media/ media-blog/2014/feb/03/bbc-digital-media-initiative- failed-mark-thompson; Conlan, T. (2013, May 24). “BBC axes £98m technology project to avoid ‘throwing good money after bad,”’ The Guardian, retrieved at: www. theguardian.com/media/2013/may/24/bbc-technol- ogy-project-digital-media-initiative; Commons Select Committee. (2014, April 10). “BBC’s Digital Media Initia- tive a complete failure,” retrieved at: www.parliament.uk/ business/committees/committees-a-z/commons-select/ public-accounts-committee/news/bbc-dmi-report-sub- stantive/; BBC. (2013, December 18). “BBC ‘not effective’ in running failed £100m IT scheme,” retrieved at: www. bbc.com/news/entertainment-arts-25433174; Daniel, E., and Ward, J. (2013, June). “BBC’s DMI project failure is a warning to all organisations,” Computer Weekly, retrieved at: www.computerweekly.com/opinion/BBCs-DMI- project-failure-is-a-warning-to-all-organisations; Shah, S. (2016). “BBC ‘has learnt’ from failure of the Digital Media Initiative, says NAO,” Computing, May 10, retrieved at: http://www.computing.co.uk/ctg/news/2457529/bbc- has-learnt-from-failure-of-the-digital-media-initiative- says-nao

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38

Chapter Objectives After completing this chapter, you should be able to:

2.1 Understand how effective project management contributes to achieving strategic objectives. 2.2 Recognize three components of the corporate strategy model: formulation, implementation,

and evaluation. 2.3 See the importance of identifying critical project stakeholders and managing them within the

context of project development. 2.4 Recognize the strengths and weaknesses of three basic forms of organizational structure and

their implications for managing projects. 2.5 Identify the characteristics of three forms of a project management office (PMO). 2.6 Understand key concepts of corporate culture and how cultures are formed.

PROJECT MANAGEMENT BODY OF KNOWLEDGE CORE CONCEPTS COVERED IN THIS CHAPTER

1. Project Procurement Management (PMBoK sec. 12) 2. Identify Stakeholders (PMBoK sec. 13.1) 3. Plan Stakeholder Management (PMBoK 13.2) 4. Manage Stakeholder Engagement (PMBoK 13.3) 5. Organizational Influences on Project Management (PMBoK sec. 2.1) 6. Organizational Structures (PMBoK sec. 2.1.3) 7. Organizational Cultures and Styles (PMBoK sec. 2.1.1) 8. Enterprise Environmental Factors (PMBoK sec. 2.1.5)

2 ■ ■ ■

The Organizational Context Strategy, Structure, and Culture

PROJECT PROFILE

The Airbus A 380: A Failure of Strategy?

Once seen as the iconic face of long-haul commercial air travel, the double-decker Airbus A 380 is staring at a different fate today. The A 380 was introduced into service in 2009 after decades of work and millions of hours of engineering design, testing, fabrication, and production innovations. Airbus predicted that the massive jet, capable of carrying as many as 850 passengers, would quickly surpass the aging Boeing 747 as the world’s top choice for long-distance travel (see Figure 2.1). Originally, Airbus projected sales of 1,200 planes over a twenty-year period. By 2017, however, the real- ity was far more modest, with only 193 planes delivered and orders for only an additional 126. In addition, the order backlog is expected to be trimmed due to airline cancellations. The result? Airbus has given up any hope of recouping its initial €25 billion ($28 billion) investment in development costs for the aircraft, let alone expecting to turn a profit.

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Project Profile 39

What went wrong with the A380? The aircraft itself features cutting edge technology, has modern conveniences (Emirates offers its first-class passengers on-board showers and a fully stocked bar and lounge area), and is popular with travelers. Unfortunately, its design has also led to several ancillary problems. For example, because the airplane is so large, it requires a longer-than-average runway for takeoffs and landings. Furthermore, the two-decker configuration requires airports to redesign and install special jet bridges and entrance/exit gates to allow for double lines of passengers boarding and leaving the aircraft. These redesigns have proven to be unpopular with many airports that refuse to make the necessary modifications. When the A380 was first introduced in the United States, only eight airports had taxiways wide enough and parking ramps large enough to accommodate the plane. Interestingly, the sheer size of the aircraft also creates operational hazards for other flights landing or taking off behind it. As one writer put it, “The A380 is basi- cally a flying weather system, with its 261-foot wings throwing off hurricane-strength winds. Under current international guidelines, smaller aircraft need a seven-mile gap between themselves and the A380.” By comparison, some airports that handle smaller jets can space them as little as 2.5 miles apart. The arrival and departure of multiple A380s can slow flight operations at some of the busiest airports in the country.

FIGURE 2.1 The Airbus A380

Source: Antony Nettle/Alamy Stock Photo

Another problem with the A380 is that it is inefficient. Its four-engine configuration is significantly more expensive to operate than Boeing’s 777 and 787 long-distance, two-engine aircraft. Airlines, always interested in economies, are ignoring the A380 and opting instead for Boeing aircraft or Air- bus’s two-engine model, the A350. For example, despite its significant technical problems when first introduced, the 787 has an order backlog of over 1,100 airplanes. Upgrading the A380’s engines to make them more efficient (lowering the per mile cost to operate the plane) is expected to take four years and also affect the current wing assemblies, which would have to be redesigned.

To say that the A380’s reception by major carriers has been lukewarm would be an under- statement. While Emirates operates some 140 A380s, based out of its headquarters in Dubai, other major carriers like British Airways and Air France have only a small handful each, using them on high-profile routes or for photo opportunities. Not a single U.S., South American, or African carrier has purchased the aircraft, and even in Japan only small numbers are in use. The A380’s list price is $436.2 million, although most carriers get steep discounts. Discounting is a common practice in the industry, but it also has the effect of pushing out the plane’s break-even point further into the future.

Demand has slowed to a trickle, leading to slashed production at Airbus factories across Europe. The build rate for 2018 is currently scheduled at just one new aircraft per month (12 air- craft to be built for the entire year). Increased efficiencies have allowed Airbus a break-even rate

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40 Chapter 2 • The Organizational Context

of 20 aircraft a year, suggesting that 2018’s catastrophic decrease will lead to large losses. Industry analysts are convinced that despite Airbus’s protests that the A380 “is safe,” its fate is rapidly being sealed and the aircraft could be off the market as early as 2020.

What ultimately went wrong for the A380? Much of the blame rests on the strategic decisions taken by Airbus and its view of the future of global aviation. At the beginning of the millennium, Airbus and Boeing executives each looked where their business was heading and saw similar facts: air traffic doubling every 15 years, including estimates that the number of travelers would hit four billion by 2020—and came to radically different conclusions about what these numbers implied for their future. Airbus executives argued that global “megacities,” increasingly crowded hubs, and Asian expansion were the wave of the future and would demand larger long-distance aircraft that could carry significantly more people while linking these future destinations together. As Airbus put it, the A380 was the “one and only solution for sustainable growth at congested airports.” Boeing’s strategic vision was different. It believed medium-sized wide-body jets best matched future global- ization pressures and anticipated higher frequency of travel among major and multiple growing cities. Boeing’s strategic response was to build the 787 Dreamliner and expand use of its best-selling 777 model. Different visions led to different strategies, which ignited very different projects.1

Implementing Strategy Through Projects

LO 2.1 Understand how effective project management contributes to achieving strategic objectives.

For successful project management, the organizational setting matters—its culture, its structure, and its strategy each play an integral part, and together they create the environment in which a project will flourish or founder. For example, a project’s connection to your organization’s overall strategy, the care with which you staff the team, and the goals you set for the project can be critical. Similarly, your organization’s policies, structure, culture, and operating systems can work to support and promote project management or can work against the ability to effectively run projects. Contextual issues provide the backdrop around which project activities must operate, so understanding what is beneath these issues truly contributes to understanding how to manage projects. Issues that affect a project can vary widely from company to company.

Before beginning a project, the project manager and team must be certain about the structure of the organization as it pertains to their project and the tasks they seek to accomplish. As clearly as possible, all reporting relationships must be specified, the rules and procedures that will govern the project must be established, and any issues of staffing the project team must be identified. For example, General Electric’s recent acquisition of French conglomerate Alstom for $14 billion has been an enormously complicated undertaking, involving the combined efforts of multiple business units, financial analysis, and constant interaction with Alstom’s principle stakeholders, especially the French government. GE believed that its power business would benefit from acquiring the French turbine maker and integrating its operations into a larger power and energy enterprise. As part of its strategy, GE identified the business groups that could be blended into the organization, being units that were redundant to GE operations, divested itself of the turbine unit per European Union requirements, and created a logical organizational structure to best link the combined orga- nization together in as efficient a manner as possible. Integrating Alstom’s nearly 85,000 employees and global business units with its own operations makes GE’s efforts a showcase in the project management of a strategic acquisition.

For many organizations, projects and project management practices are not the operating norm. In fact, as Chapter 1 discussed, projects typically exist outside of the formal, process-oriented activi- ties associated with many organizations. As a result, many companies are simply not structured to allow for the successful completion of projects in conjunction with other ongoing corporate activities. The key challenge is discovering how project management may best be employed, regardless of the structure the company has adopted. What are the strengths and weaknesses of various structural forms, and what are their implications for our ability to manage projects? This chapter will examine the concept of organizational culture and its roots, and will discuss implications for effective project management. By looking closely at three of the most important contextual issues for project man- agement—strategy, organizational structure, and culture—you will see how the variety of structural options can affect, either positively or negatively, the firm’s ability to manage projects.

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Projects and Organizational Strategy 41

Projects and Organizational Strategy

LO 2.2 Recognize three components of the corporate strategy model: formulation, implementa- tion, and evaluation.

Strategic management is the science of formulating, implementing, and evaluating cross-functional decisions that enable an organization to achieve its objectives.2 In this section we will consider the relevant components of this definition as they apply to project management. Strategic management consists of the following elements:

1. Developing vision statements and mission statements. Vision and mission statements estab- lish a sense of what the organization hopes to accomplish or what top managers hope it will become at some point in the future. Vision statements describe the organization in terms of where it would like to be in the future. Effective vision statements are both inspirational and aspirational. A corporate vision serves as a focal point for members of the organization who may find themselves pulled in different directions by competing demands. In the face of multiple expectations and even contradictory efforts, an ultimate vision can serve as a “tie breaker,” which is highly beneficial in establishing priorities. In the case at the beginning of this chapter, for example, Boeing and Airbus developed distinct visions of the future of air travel and prioritized their projects accordingly. A sense of vision is also an extremely important source of motivation and purpose. As the book of Proverbs in the Bible points out, “Where there is no vision, the people perish” (Prov. 29:18).3 Mission statements explain the company’s reason for existence and support the vision. Many firms apply their vision and mission statements to evaluating new project opportunities as a first screening device. For example, Bechtel Corporation, a large construction organization, employs as its vision the goal of being “the world’s premier engineering, construction, and project management organiza- tion.”4 For Bechtel, this means (1) customers and partners will see Bechtel as integral to their success; (2) people will be proud to work at Bechtel; and (3) communities will regard Bechtel as “responsible—and responsive.” Projects Bechtel undertakes must support this vision, and those that do not are not pursued.

2. Formulating, implementing, and evaluating. Projects, as the key ingredients in strategy implementation, play a crucial role in the basic process model of strategic management. A firm devotes significant time and resources to evaluating its business opportunities through developing a corporate vision or mission, assessing internal strengths and weaknesses as well as external opportunities and threats, establishing long-range objectives, and generating and selecting among various strategic alternatives. All these components relate to the formulation stage of strategy. Within this context, projects serve as the vehicles that enable companies to seize opportunities, capitalize on their strengths, and implement overall corporate objectives. New product development, for example, fits neatly into this framework. New products are developed and commercially introduced as a company’s response to business opportunities. Effective project management enables firms to efficiently and rapidly respond.

3. Making cross-functional decisions. Business strategy is a corporate-wide venture, requiring the commitment and shared resources of all functional areas to meet overall objectives. Cross- functional decision making is a critical feature of project management, as experts from various functional groups come together into a team of diverse personalities and backgrounds. Project management work is a natural environment in which to operationalize strategic plans.

4. Achieving objectives. Whether the organization is seeking market leadership through low pricing, innovative products, superior quality, or other means, projects are the most effec- tive tools to allow objectives to be met. A key feature of project management is that it can potentially allow firms to be effective in the external market as well as internally efficient in operations; that is, it is a great vehicle for optimizing organizational objectives, whether they incline toward efficiency of production or product or process effectiveness.

Projects have been called the stepping-stones of corporate strategy.5 This idea implies that an organization’s overall strategic vision is the driving force behind its project development. For example, 3M’s desire to be a leading innovator in business gives rise to the creation and manage- ment of hundreds of new product development projects within this multinational organization

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42 Chapter 2 • The Organizational Context

every year. Likewise, Rubbermaid Corporation is noted for its consistent pursuit of new product development and market introduction. It even has an online Innovation Center to help people with new product ideas work with the company to bring their ideas to market. The manner in which organizational strategies affect new project introductions will be addressed in greater detail in the chapter on project selection (Chapter 3). Projects are the building blocks of strategies; they put an action-oriented face on the strategic edifice. Some examples of how projects operate as strategic building blocks are shown in Table 2.1. Each of the examples illustrates the underlying theme that projects are the operational reality behind strategic vision. In other words, they serve as the building blocks to create the reality a strategy can only articulate.

The TOWS matrix (See Figure 2.2) is a useful way to see the links between projects and an organization’s strategic choices. TOWS comes from the acronym for “Threats–Opportunities–

FIGURE 2.2 TOWS Matrix

External Opportunities (O)

Internal Strengths (S)

Internal Weaknesses (W)

SO “Maxi-Maxi” Strategy

ST “Maxi-Mini” Strategy

WT “Mini-Mini” Strategy

WO “Mini-Maxi” Strategy

Develop projects that use strengths to maximize

opportunities

Develop projects that use strengths to minimize

threats

Develop projects that minimize weaknesses and

avoid threats

Develop projects that minimize weaknesses by

taking advantage of opportunities

1. 2. 3.

1. 2. 3.

1. 2. 3.

1. 2. 3.

External Threats (T)

TABLE 2.1 Projects Reflect Strategy

Strategy Project

Technical or operating initiatives (such as new distribution strategies or decentralized plant operations)

Construction of new plants or moderniza- tion of facilities

Development of products for greater market penetration and acceptance

New product development projects

New business processes for greater streamlining and efficiency

Reengineering projects

Changes in strategic direction or product portfolio reconfiguration

New product lines

Creation of new strategic alliances Negotiation with supply chain members (including suppliers and distributors)

Matching or improving on competitors’ products and services Reverse engineering projects

Improvement of cross-organizational communication and efficiency in supply chain relationships

Enterprise IT efforts

Promotion of cross-functional interaction, streamlining of new product or service introduction, and improvement of departmental coordination

Concurrent engineering projects

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Stakeholder Management 43

Weaknesses–Strengths” and refers to the challenges companies face in both their internal environment (within the organization) and their external environment (outside the company). In first identifying and then formulating strategies for addressing internal strengths and weaknesses and external oppor- tunities and threats, firms rely on projects as a device for pursuing these strategic choices. As Figure 2.2 suggests, once an organization determines the appropriate strategies to pursue (e.g., “maxi-maxi” strategy), it can then identify and undertake project choices that support this TOWS matrix. Projects offer companies the ability to create concrete means for realizing strategic goals.6

An organization’s strategic management is the first important contextual element in its project management approaches. Because projects form the building blocks that allow us to implement strategic plans, it is vital that there exists a clear sense of harmony, or complementarity, between strategy and projects that have been selected for development. In a later section of this chapter, we will add to our understanding of the importance of creating the right context for projects by adding an additional variable into the mix: the organization’s structure.

Stakeholder Management

LO 2.3 See the importance of identifying critical project stakeholders and managing them within the context of project development.

Organizational research and direct experience tell us that organizations and project teams cannot operate in ways that ignore the external effects of their decisions. One way to understand the rela- tionship of project managers and their projects to the rest of the organization is through employing stakeholder analysis. Stakeholder analysis is a useful tool for demonstrating some of the seemingly irresolvable conflicts that occur through the planned creation and introduction of any new project. Project stakeholders are defined as all individuals or groups who have an active stake in the project and can potentially impact, either positively or negatively, its development.7 Project stakeholder analysis, then, consists of formulating strategies to identify the impact of stakeholders on the project and, if necessary, manage it for positive results.

Stakeholders can affect and are affected by organizational actions to varying degrees.8 In some cases, a corporation must take serious heed of the potential influence some stakeholder groups are capable of wielding. In other situations a stakeholder group may have relatively little power to influence a company’s activities, but its presence may still require attention. Contrast, for example, the impact that the government has on regulating the tobacco industry’s activities with the relative weakness of a small subcontractor working for Oracle on new software development. In the first case, the federal government has, in recent years, strongly limited the activities and sales strategies of the tobacco companies through the threat of regulation and litigation. On the other hand, Oracle, a large organization, can easily replace one small subcontractor with another.

Stakeholder analysis is helpful to the degree that it compels firms to acknowledge the poten- tially wide-ranging effects, both intended and unintended, that their actions can have on various stakeholder groups.9 For example, the strategic decision to close an unproductive manufacturing facility may make good business sense in terms of costs versus benefits that the company derives from the manufacturing site. However, the decision to close the plant has the potential to unleash a torrent of stakeholder complaints in the form of protests and challenges from local unions, workers, community leaders in the town affected by the closing, political and legal groups, environmental concerns, and so forth. Sharp managers will consider the impact of stakeholder reaction as they weigh the possible effects of their strategic decisions.

Just as stakeholder analysis is instructive for understanding the impact of major strate- gic decisions, project stakeholder analysis is extremely important when it comes to managing projects. The project development process itself can be directly affected by stakeholders. This relationship is essentially reciprocal in that the project team’s activities can also affect external stakeholder groups.10 Some common ways the client stakeholder group has an impact on proj- ect team operations include agitating for faster development, working closely with the team to ease project transfer problems, and influencing top management in the parent organization to continue supporting the project. The project team can reciprocate this support through actions that show willingness to closely cooperate with the client in development and transition to user groups.

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44 Chapter 2 • The Organizational Context

The nature of these various demands can place them seemingly in direct conflict. That is, in responding to the concerns of one stakeholder, project managers often unwittingly find themselves having offended or angered another stakeholder who has an entirely different agenda and set of expectations. For example, a project team working to install a new software application across the organization may go to such levels to ensure customer satisfaction that it engages in countless revi- sions of the package until it has, seemingly, made the organization’s customers happy. However, in doing so, the overall project schedule may now have slipped to the point where top management is upset by the cost and schedule overruns. In managing projects, we are challenged to find ways to balance a host of demands and still maintain supportive and constructive relationships with each important stakeholder group.

IDENTIFYING PROJECT STAKEHOLDERS

Internal stakeholders are a vital component in any stakeholder analysis, and their impact is usually felt in relatively positive ways. That is, while serving as limiting and controlling influences (in the case of the company accountant, for example), most internal stakeholders want to see the project developed successfully. On the other hand, some external stakeholder groups operate in manners that are quite challenging or even hostile to project development. Consider the implications of crude oil prices. With oil prices remaining unstable, ranging from $40 to above $60 per barrel through much of 2017, the impact on the global economy, slowly emerging from the Great Recession, has been severe. Many groups in the United States have advocated taking steps to lessen the country’s dependence on foreign oil, including offshore exploration and the development of a new generation of nuclear power plants. Hydraulic fracturing (“fracking”) technology has been widely embraced as a means for developing shale deposits across the country, resulting in the United States going from being a net importer of 1.5 trillion cubic feet of natural gas in 2012 to a net exporter in late 2016. Environmental groups, however, continue to oppose these steps, vowing to use litigation, political lobbying, and other measures to resist the development of these alternative energy sources. As a recent example of the danger, they cite the Deepwater Horizon disaster that leaked thousands of barrels of oil into the Gulf of Mexico. Political efforts by environmentalists and their supporters were initially successful in halting completion of the Dakota Access Pipeline project and have delayed for years the development of the 1,700-mile-long Keystone XL oil pipeline from Canada’s oil sands region to refineries in Texas. Cleland refers to these types of external stakeholders as intervenor groups, defined as groups external to the project but possessing the power to effectively intervene and disrupt the project’s development.11

Among the set of project stakeholders that project managers must consider are:

Internal

• Top management • Accounting • Other functional managers • Project team members

External

• Clients • Competitors • Suppliers • Environmental, political, consumer, and other intervenor groups

CLIENTS Our focus throughout this entire book will be on maintaining and enhancing client rela- tionships. In most cases, for both external and internal clients a project deals with an investment. Clients are concerned with receiving the project from the team as quickly as possible because the longer the project implementation, the longer the money invested sits without generating any returns. As long as costs are not passed on to them, clients seldom are overly interested in how much expense is involved in a project’s development. The opposite is usually the case, however. Costs typically must be passed on, and customers are avidly interested in getting what they pay for. Also, many projects start before client needs are fully defined. Product concept screening and clarification are often made part of the project scope of work (see Chapter 5). These issues—costs and client needs—are two strong reasons why many customers seek the right to make suggestions

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Stakeholder Management 45

and request alterations in the project’s features and operating characteristics well into the project schedule. Customers feel, with justification, that a project is only as good as it is acceptable and useful. This sets a certain flexibility requirement and requires willingness from the project team to be amenable to specification changes.

Another important fact to remember about dealing with client groups is that the term client does not in every case refer to the entire customer organization. The reality is often far more complex. A client firm consists of a number of internal interest groups, and in many cases they have different agendas. For example, a company can probably readily identify a number of distinct clients within the customer organization, including the top management team, engineering groups, sales teams, on-site teams, manufacturing or assembly groups, and so on. Under these normal circumstances, it becomes clear that the process of formulating a stakeholder analysis of a customer organization can be a complex undertaking.

The challenge is further complicated by the need to communicate, perhaps using different business language, with the various customer stakeholder groups (see Figure 2.3). Preparing a pre- sentation to deal with the customer’s engineering staff requires mastery of technical information and solid specification details. On the other hand, the finance and contractual people are looking for tightly presented numbers. Formulating stakeholder strategies requires you first to acknowledge the existence of these various client stakeholders, and then to formulate a coordinated plan for uncover- ing and addressing each group’s specific concerns and learning how to reach them.

COMPETITORS Competitors can be an important stakeholder element because they are affected by the successful implementation of a project. Likewise, should a rival company bring a new product to market, the project team’s parent organization could be forced to alter, delay, or even abandon its project. In assessing competitors as a project stakeholder group, project managers should try to uncover any information available about the status of a competitor’s projects. Furthermore, where possible, any apparent lessons a competitor may have learned can be a source of useful informa- tion for a project manager who is initiating a similar project. If a number of severe implementation problems occurred within the competitor’s project, that information could offer valuable lessons in terms of what to avoid.

SUPPLIERS Suppliers are any group that provides the raw materials or other resources the project team needs in order to complete the project. When a project requires a significant supply of exter- nally purchased components, the project manager needs to take every step possible to ensure steady deliveries. In most cases, this is a two-way street. First, the project manager has to ensure that each supplier receives the information necessary to implement its part of the project in a timely way. Second, the project manager must monitor the deliveries so they are met according to plan. In the ideal case, the supply chain becomes a well-greased machine that automatically both draws the input information from the project team and delivers the products without excessive involvement

FIGURE 2.3 Project Stakeholder Relationships

Parent Organization

External Environment

Top Management

Accountant Project Team

Project ManagerClients

Other Functional Managers

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46 Chapter 2 • The Organizational Context

of the project manager. For example, in large-scale construction projects, project teams daily must face and satisfy an enormous number of supplier demands. The entire discipline of supply chain management is predicated on the ability to streamline logistics processes by effectively managing the project’s supply chain.12 When this process fails or is disrupted the consequences can be severe, as in the case of the catastrophic tsunami that struck the northeastern coast of Japan in March 2011. The supply chains and product development capabilities of Japanese corporations were badly dam- aged. Economists estimate that the natural disaster cost the country’s economy over $300 billion. Further, numerous corporations (both Japanese companies and those that were their supply chain partners) were affected by the disaster. Japan manufactures 20% of the world’s semiconductor products, and the disaster led to serious shortages and delivery delays for companies such as Intel, Toshiba, and Apple.

INTERVENOR GROUPS Environmental, political, social, community-activist, or consumer groups that can have a positive or negative effect on the project’s development and successful launch are referred to as intervenor groups.13 That is, they have the capacity to intervene in the project develop- ment and force their concerns to be included in the equation for project implementation. There are some classic examples of intervenor groups curtailing major construction projects, particularly in the nuclear power plant construction industry. As federal, state, and even local regulators decide to involve themselves in these construction projects, intervenors have the legal system at their disposal as a method for tying up or even curtailing projects. For example, while wind farms supply more than half of the electricity needs for the country of Denmark, the alternative energy “Cape Wind” project proposed for Nantucket Sound off the coast of Cape Cod, Massachusetts was cancelled after encountering strong resistance from local groups opposed to the threat from these farms ruining the local seascape. Litigation had tied this wind farm project up for 14 years, and the developers ultimately realized that they did not have the time, money, or political capital to continue fighting. Prudent project managers need to make a realistic assessment of the nature of their projects and the likelihood that one intervenor group or another may make an effort to impose its will on the development process.

TOP MANAGEMENT In most organizations, top management holds a great deal of control over project managers and is in the position to regulate their freedom of action. Top management is, after all, the body that authorizes the development of the project through giving the initial “go” decision, sanc- tions additional resource transfers as they are needed by the project team, and supports and protects project managers and their teams from other organizational pressures. Top management requires that the project be timely (they want it out the door quickly), cost-efficient (they do not want to pay more for it than they have to), and minimally disruptive to the rest of the functional organization.

ACCOUNTING The accountant’s raison d’être in the organization is maintaining cost efficiency of the project teams. Accountants support and actively monitor project budgets, and as such are some- times perceived as the enemy by project managers. This perception is wrong-minded. To be able to manage the project, to make the necessary decisions, and to communicate with the customer, the project manager has to stay on top of the cost of the project at all times. An efficient cost control and reporting mechanism is vital. Accountants perform an important administrative service for the project manager.

FUNCTIONAL MANAGERS Functional managers who occupy line positions within the traditional chain of command are an important stakeholder group to acknowledge. Most projects are staffed by individuals who are essentially on loan from their functional departments. In fact, in many cases project team members may only have part-time appointments to the team, and their func- tional managers may still expect a significant amount of work out of them per week in performing their functional responsibilities. This situation can create a good deal of confusion and conflict, and require negotiation between project managers and functional supervisors. This may lead to seriously divided loyalties among team members, particularly when performance evaluations are conducted by functional managers rather than the project manager. In terms of simple self-survival, team members often maintain closer allegiance to their functional group than to the project team.

Project managers need to appreciate the power of the organization’s functional managers as a stakeholder group. Functional managers are not usually out to discourage project development.

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Stakeholder Management 47

Rather, they have loyalty to their functional roles and act and use their resources accordingly, within the limits of the company’s structure. Nevertheless, as a formidable stakeholder group functional managers need to be treated with due consideration by project managers.

PROJECT TEAM MEMBERS The project team obviously has a tremendous stake in the project’s out- come. Although some may have a divided sense of loyalty between the project and their functional group, in many companies the team members volunteer to serve on projects and, hopefully, receive the kind of challenging work assignments and opportunities for growth that motivate them to perform effectively. Project managers must understand that their project’s success depends on the commitment and productivity of each member of the project team. Thus, team members’ impact on the project is, in many ways, more profound than that of any other stakeholder group.

MANAGING STAKEHOLDERS

Project managers and their companies need to recognize the importance of stakeholder groups and proactively manage with their concerns in mind. Block offers a useful framework of the political pro- cess that has application to stakeholder management.14 In his framework, Block suggests six steps:

1. Assess the environment 2. Identify the goals of the principal actors 3. Assess your own capabilities 4. Define the problem 5. Develop solutions 6. Test and refine the solutions

ASSESS THE ENVIRONMENT Is the project relatively low-key, or is it potentially so significant that it will likely excite a great deal of attention? For example, when EMC Corporation, a large computer manufacturer, began development of a new line of minicomputers and storage units with the poten- tial for either great profits or serious losses, it took great care to first determine the need for such a product. Going directly to the consumer population with market research was the key to assessing the external environment. Likewise, one of the shapers of autonomous and near-autonomous care technology (driverless cars) has been companies such as Google and Tesla working closely with consumers to determine their expectations and comfort level with the technology. In testing to date, autonomous vehicles developed by Waymo (Google’s autonomous car division) have driven over 2.5 million miles with only one accident, which was human-caused. Waymo is developing partner- ships with Chrysler, Fiat, and Honda to install self-driving technology into selected cars in their fleets. Mercedes, BMW, and Tesla have already released self-driving features that give their cars some ability to drive themselves. Meanwhile, Uber launched a pilot program in the Pittsburgh area to gauge customer reaction to being transported by self-driving cars. Current projections are that a safe and workable driverless car could be ready for release as early as 2019, with 10 million driver- less cars on the road by 2020. Ultimately, it is estimated that over 1 billion automobiles and trucks worldwide and over 450,000 civilian and military aircraft could be affected by this new technology.15

IDENTIFY THE GOALS OF THE PRINCIPAL ACTORS As a first step in fashioning a strategy to defuse negative reaction, a project manager should attempt to paint an accurate portrait of stakeholder concerns. Fisher and Ury16 have noted that the positions various parties adopt are almost invari- ably based on need. What, then, are the needs of each significant stakeholder group regarding the project? A recent example will illustrate this point. A small IT firm specializing in network solutions and software development recently contracted with a larger publishing house to develop a simula- tion for college classroom use. The software firm was willing to negotiate a lower-than-normal price for the job because the publisher suggested that excellent performance on this project would lead to future business. The software organization, interested in follow-up business, accepted the lower fee because its more immediate needs were to gain entry into publishing and develop long-term customer contacts. The publisher needed a low price; the software developer needed new market opportunities.

Project teams must look for hidden agendas in goal assessment. It is common for depart- ments and stakeholder groups to exert a set of overt goals that are relevant but often illusionary.17 In haste to satisfy these overt or espoused goals, a common mistake is to accept these goals on face

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48 Chapter 2 • The Organizational Context

value without looking into the needs that may drive them or create more compelling goals. Con- sider, for example, a project in a large, project-based manufacturing company to develop a compre- hensive project management scheduling system. The project manager in charge of the installation approached each department head and believed that he had secured their willingness to participate in creating a scheduling system centrally located within the project management division. Problems developed quickly, however, because IT department members, despite their public professions of support, began using every means possible to covertly sabotage the implementation of the sys- tem, delaying completion of assignments and refusing to respond to user requests. What was their concern? They believed that placing a computer-generated source of information anywhere but in the IT department threatened their position as the sole disseminator of information. In addition to probing the overt goals and concerns of various stakeholders, project managers must look for hid- den agendas and other sources of constraint on implementation success.

ASSESS YOUR OWN CAPABILITIES As Robert Burns said, “Oh wad some Power the giftie gie us/To see oursels as ithers see us!”18 Organizations must consider what they do well. Likewise, what are their weaknesses? Do the project manager and her team have the political savvy and a sufficiently strong bargaining position to gain support from each of the stakeholder groups? If not, do they have connections to someone who can? Each of these questions is an example of the importance of the project team understanding its own capacities and capabilities. For example, not everyone has the contacts to upper management that may be necessary for ensuring a steady flow of support and resources. If you realistically determine that political acumen is not your strong suit, then the solution may be to find someone who has these skills to help you.

DEFINE THE PROBLEM We must seek to define problems both in terms of our own perspective and in consideration of the valid concerns of the other party. The key to developing and maintaining strong stakeholder relationships lies in recognizing that different parties can have very different but equally legitimate perspectives on a problem. When we define problems not just from our viewpoint but also by trying to understand how the same issue may be perceived by stakeholders, we are operating in a “win-win” mode. Furthermore, we must be as precise as possible, staying focused on the specifics of the problem and not generalities. The more accurately and honestly we can define the problem, the better able we will be to create meaningful solution options.

DEVELOP SOLUTIONS There are two important points to note about this step. First, developing solutions means precisely that: creating an action plan to address, as much as possible, the needs of the various stakeholder groups in relation to the other stakeholder groups. This step constitutes the stage in which the project manager, together with the team, seeks to manage the political process. What will work in dealing with top management? In implementing that strategy, what reaction is likely to be elicited from the accountant? The client? The project team? Asking these questions helps the project manager develop solutions that acknowledge the interrelationships of each of the relevant stakeholder groups. The topics of power, political behavior, influence, and negotiation will be discussed in greater detail in Chapter 6.

As a second point, it is necessary that we do our political homework prior to developing solu- tions.19 Note the late stage at which this step is introduced. Project managers can fall into a trap if they attempt to manage a process with only fragmentary or inadequate information. The philoso- phy of “ready, fire, aim” is sometimes common in stakeholder management. The result is a stage of perpetual firefighting during which the project manager is a virtual pendulum, swinging from crisis to crisis. Pendulums and these project managers share one characteristic: they never reach a goal. The process of putting out one fire always seems to create a new blaze.

TEST AND REFINE THE SOLUTIONS Implementing the solutions implies acknowledging that the project manager and team are operating under imperfect information. You may assume that stake- holders will react to certain initiatives in predictable ways, but such assumptions can be errone- ous. In testing and refining solutions, the project manager and team should realize that solution implementation is an iterative process. You make your best guesses, test for stakeholder reactions, and reshape your strategies accordingly. Along the way, many of your preconceived notions about the needs and biases of various stakeholder groups must be refined as well. In some cases, you will have made accurate assessments. At other times, your suppositions may have been dangerously

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Organizational Structure 49

naive or disingenuous. Nevertheless, this final step in the stakeholder management process forces the project manager to perform a critical self-assessment. It requires the flexibility to make accurate diagnoses and appropriate midcourse corrections.

When done well, these six steps form an important method for acknowledging the role that stakeholders play in successful project implementation. They allow project managers to approach political stakeholder management much as they would any other form of problem solving, recog- nizing it as a multivariate problem as various stakeholders interact with the project and with one another. Solutions to political stakeholder management can then be richer, more comprehensive, and more accurate.

An alternative, simplified stakeholder management process consists of planning, organizing, directing, motivating, and controlling the resources necessary to deal with the various internal and external stakeholder groups. The various stakeholder management functions are interlocked and repetitive; that is, this stakeholder management process is really best understood as a cycle. As you continually assess the environment, you refine the goals of the principal stakeholders. Likewise, as you assess your own capabilities, define the problems and possible solutions, you are constantly observing the environment to make sure that your proposed solutions are still valid. Finally, in test- ing and refining these solutions it is critical to ensure that they will be the optimal alternatives, given likely changes in the environment. In the process of developing and implementing your plans, you are likely to uncover new stakeholders whose demands must also be considered. Furthermore, as the environment changes or as the project enters a new stage of its life cycle, you may be required to cycle through the stakeholder management model again to verify that your old management strategies are still effective. If, on the other hand, you deem that new circumstances make it neces- sary to alter those strategies, you must work through this stakeholder management model anew to update the relevant information.

Organizational Structure

LO 2.4 Recognize the strengths and weaknesses of three basic forms of organizational structure and their implications for managing projects.

The word structure implies organization. People who work in an organization are grouped so that their efforts can be channeled for maximum efficiency. Organizational structure consists of three key elements:20

1. Organizational structure designates formal reporting relationships, including the number of levels in the hierarchy and the span of control of managers and supervisors. Who reports to whom in the structural hierarchy? This is a key component of a firm’s structure. A span of control determines the number of subordinates directly reporting to each supervisor. In some structures a manager may have a wide span of control, suggesting a large number of subordi- nates, while other structures mandate narrow spans of control and few individuals reporting directly to any supervisor. For some companies the reporting relationship may be rigid and bureaucratic; other firms require flexibility and informality across hierarchical levels.

2. Organizational structure identifies the grouping together of individuals into departments and departments into the total organization. How are individuals collected into larger groups? Starting with the smallest, units of a structure continually recombine with other units to create larger groups, or organizations of individuals. These groups, referred to as departments, may be grouped along a variety of different logical patterns. For example, among the most com- mon reasons for creating departments are (1) function—grouping people performing similar activities into similar departments, (2) product—grouping people working on similar product lines into departments, (3) geography—grouping people within similar geographical regions or physical locations into departments, and (4) project—grouping people involved in the same project into a department. We will discuss some of these more common departmental arrange- ments in detail later in this chapter.

3. Organizational structure includes the design of systems to ensure effective communication, coordination, and integration of effort across departments. This third feature of organi- zational structure refers to the supporting mechanisms the firm relies on to reinforce and

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50 Chapter 2 • The Organizational Context

promote its structure. These supporting mechanisms may be simple or complex. In some firms, a method for ensuring effective communication is simply to mandate, through rules and procedures, the manner in which project team members must communicate with one another and the types of information they must routinely share. Other companies use more sophisticated or complex methods for promoting coordination, such as the creation of special project offices apart from the rest of the company where project team members work for the duration of the project. The key thrust behind this third element in organizational structure implies that simply creating a logical ordering or hierarchy of personnel for an organization is not sufficient unless it is also supported by systems that ensure clear communication and coordination across the departments.

It is also important to note that within the project management context two distinct structures operate simultaneously, and both affect the manner in which the project is accomplished. The first is the overall structure of the organization that is developing the project. This structure consists of the arrangement of all units or interest groups participating in the development of the project; it includes the project team, the client, top management, functional departments, and other relevant stakeholders. The second structure at work is the internal structure of the project team; it specifies the relationship between members of the project team, their roles and responsibilities, and their interaction with the project manager. The majority of this chapter examines the larger structure of the overall organization and how it pertains to project management. The implications of internal project team structure will be discussed here but explored more thoroughly in Chapter 6.

FORMS OF ORGANIZATIONAL STRUCTURE

Organizations can be structured in an infinite variety of ways, ranging from highly complex to extremely simple. What is important to understand is that typically the structure of an organization does not happen by chance; it is the result of a reasoned response to forces acting on the firm. A number of factors routinely affect the reasons why a company is structured the way it is. Operating environment is among the most important determinants or factors influencing an organization’s structure. An organization’s external environment consists of all forces or groups outside the orga- nization that have the potential to affect the organization. Some elements in a company’s external environment that can play a significant role in a firm’s activities are competitors, customers in the marketplace, the government and other legal or regulatory bodies, general economic conditions, pools of available human or financial resources, suppliers, technological trends, and so forth. In turn, these organizational structures, often created for very sound reasons in relation to the external environment, have a strong impact on the manner in which projects are best managed within the organization. As we will see, each organizational type offers its own benefits and drawbacks as a context for creating projects.

Some common structural types classify the majority of firms. These structure types include the following:

1. Functional organizations. Companies are structured by grouping people performing similar activities into departments.

2. Project organizations. Companies are structured by grouping people into project teams on temporary assignments.

3. Matrix organizations. Companies are structured by creating a dual hierarchy in which func- tions and projects have equal prominence.

FUNCTIONAL ORGANIZATIONS

The functional structure is probably the most common organizational type used in business today. The logic of the functional structure is to group people and departments performing similar activi- ties into units. In the functional structure, it is common to create departments such as accounting, marketing, or research and development. Division of labor in the functional structure is not based on the type of product or project supported, but rather according to the type of work performed. In an organization having a functional structure, members routinely work on multiple projects or support multiple product lines simultaneously.

Figure 2.4 shows an example of a functional structure. Among the clear strengths of the func- tional organization is efficiency. When every accountant is a member of the accounting department,

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it is possible to more efficiently allocate the group’s services throughout the organization, account for each accountant’s work assignments, and ensure that there is no duplication of effort or unused resources. Another advantage is that it is easier to maintain valuable intellectual capital when all expertise is consolidated under one functional department. When you need an expert on offshore tax implications for globally outsourced projects, you do not have to conduct a firmwide search but can go right to the accounting department to find a resident expert.

The most common weakness in a functional structure from a project management perspective relates to the tendency for employees organized this way to become fixated on their concerns and work assignments to the exclusion of the needs of other departments. This idea has been labeled functional siloing, named for the silos found on farms (see Figure 2.5). Siloing occurs when similar people in a work group are unwilling or unable to consider alternative viewpoints, collaborate with other groups, or work in cross-functional ways. How prevalent is the siloing phenomenon? A survey of business executives by the American Management Association found that 83% of executives said that silos existed in their companies and that 97% think they have a negative effect. For example, Liz Claiborne, at one time the largest women’s fashion brand on the market, suffered a number of downturns and business setbacks based on a combination of faulty strategic decision-making

FIGURE 2.4 Example of a Functional Organizational Structure

Board of Directors

Chief Executive

Vice President of Marketing

Vice President of Finance

Vice President of Research

New Product Development

Testing

Research Labs

Quality

Market Research

Sales

After-Market Support

Advertising

Logistics

Outsourcing

Distribution

Warehousing

Manufacturing

Accounting Services

Contracting

Investments

Employee Bene�ts

Vice President of Production

FIGURE 2.5 The Siloing Effect Found in Functional Structures

Vice President of Marketing

Vice President of Research

New Product Development

Testing

Board of Directors

Chief Executive

Research Labs

Quality

Market Research

Sales

After-Market Support

Advertising

Vice President of Production

Logistics

Outsourcing

Distribution

Warehousing

Manufacturing

Vice President of Finance

Accounting Services

Contracting

Investments

Employee Bene�ts

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52 Chapter 2 • The Organizational Context

and a corporate structure that maintained silos and poor communication among the functional groups.21 Likewise, Robert Lutz, former President of Chrysler, argued that an ongoing weakness at that automobile company was the inability of the various functional departments to cooperate with and recognize the contributions of each other. Another weakness of functional structures is a generally poor responsiveness to external opportunities and threats. Communication channels tend to run up and down the hierarchy, rather than across functional boundaries. This vertical hierarchy can overload, and decision making takes time. Functional structures also may not be very innova- tive due to the problems inherent in the design. With siloed functional groups typically having a restricted view of the overall organization and its goals, it is difficult to achieve the cross-functional coordination necessary to innovate or respond quickly to market opportunities.

For project management, an additional weakness of the functional structure is that it provides no logical location for a central project management function. Top management may assign a proj- ect and delegate various components of that project to specialists within the different functional groups. Overall coordination of the project, including combining the efforts of the different functions assigned to perform project tasks, must then occur at a higher, top management level. A serious drawback for running projects in this operating environment is that they often must be layered, or applied on top of the ongoing duties of members of functional groups. The practical effect is that individuals whose main duties remain within their functional group are assigned to staff projects, and when employees owe their primary allegiance to their own department, their frame of reference can remain functional. Projects can be temporary distractions in this sense, taking time away from “real work.” This can explain some of the behavioral problems that occur in running projects, such as low team member motivation or the need for extended negotiations between project managers and department supervisors for personnel to staff project teams.

Another project-related problem of the functional organization is the fact that it is easy to suboptimize the project’s development.22 When the project is developed as the brainchild of one department, that group’s efforts may be well considered and effective. In contrast, departments not as directly tied to or interested in the project may perform their duties to the minimum pos- sible level. A successful project-based product or service requires the fully coordinated efforts of all functional groups participating in and contributing to the project’s development.

Another problem is that customers are not the primary focus of everyone within the function- ally structured organization. The customer in this environment might be seen as someone else’s problem, particularly among personnel whose duties tend to be supportive. Customer requirements must be met, and projects must be created with the customer in mind. Any departmental representa- tives on the project team who have not adopted a customer-focused mind-set add to the possibility of the project coming up short.

To sum up the functional structure (see Table 2.2), as it relates to the external environment this structure is well suited to firms with relatively low levels of external uncertainty because their stable environments do not require rapid adaptation or responsiveness. When the environment is relatively predictable, the functional structure works well because it emphasizes efficiency. Unfortunately, project management activities within the functionally organized firm can often be

TABLE 2.2 Strengths and Weaknesses of Functional Structures

Strengths for Project Management Weaknesses for Project Management

1. Projects are developed within the basic functional structure of the organization, requiring no disrup- tion or change to the firm’s design.

1. Functional siloing makes it difficult to achieve cross-functional cooperation.

2. Enables the development of in-depth knowledge and intellectual capital.

2. Lack of customer focus.

3. Allows for standard career paths. Project team members only perform their duties as needed while maintaining maximum connection with their functional group.

3. Projects generally take longer to complete due to structural problems, slower communication, lack of direct ownership of the project, and competing priorities among the functional departments.

4. Projects may be suboptimized due to vary- ing interest or commitment across functional boundaries.

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Organizational Structure 53

problematic when they are applied in settings for which this structure’s strengths are not well suited. As the above discussion indicates, although there are some ways in which the functional structure can be advantageous to managing projects, in the main it is perhaps the poorest form of structure when it comes to getting the maximum performance out of project management assignments.23

PROJECT ORGANIZATIONS

Project organizations are those that are set up with their exclusive focus aimed at running projects. Construction companies, large manufacturers such as Boeing or Airbus, pharmaceutical firms, and many software consulting and research and development organizations are organized as pure proj- ect organizations. Within the project organization, each project is a self-contained business unit with a dedicated project team. The firm assigns resources from functional pools directly to the project for the time period they are needed. In the project organization, the project manager has sole control over the resources the unit uses. The functional departments’ chief role is to coordinate with project managers and ensure that there are sufficient resources available as they need them.

Figure 2.6 illustrates a simple form of the pure project structure. Projects Alpha and Beta have been formed and are staffed by project team members from the company’s functional groups. The project manager is the leader of the project, and the staff all report to her. The staffing decisions and duration of employees’ tenure with the project are left to the discretion of the project manager, who is the chief point of authority for the project. As the figure suggests, there are several advantages to the use of a pure project structure.

• First, the project manager does not occupy a subordinate role in this structure. All major deci- sions and authority remain under the control of the project manager.

• Second, the functional structure and its potential for siloing or communication problems are bypassed. As a result, communication improves across the organization and within the proj- ect team. Because authority remains with the project manager and the project team, decision making is sped up. Project decisions can occur quickly, without lengthy delays, as functional groups are consulted or allowed to veto project team decisions.

• Third, this organizational type promotes the expertise of a cadre of project management pro- fessionals. Because the focus for operations within the organization is project-based, everyone within the organization understands and operates with the same focus, ensuring that the organization maintains highly competent project management resources.

• Finally, the pure project structure encourages flexibility and rapid response to environmental opportunities. Projects are created, managed, and disbanded routinely; therefore, the ability to create new project teams as needed is common and team formation can be quickly undertaken.

FIGURE 2.6 Example of a Project Organizational Structure

Vice President of Projects

Vice President of Production

Vice President of Marketing

Vice President of Finance

Vice President of Research

Board of Directors

Chief Executive

Project Alpha

Project Beta

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54 Chapter 2 • The Organizational Context

Although there are a number of advantages in creating dedicated project teams using a proj- ect structure (see Table 2.3), this design does have some disadvantages that should be considered.

• First, the process of setting up and maintaining a number of self-contained project teams can be expensive. The different functional groups, rather than controlling their resources, must provide them on a full-time basis to the different projects being undertaken at any point. This can result in forcing the project organization to hire more project specialists (e.g., engineers) than they might need otherwise, with a resulting loss of economies of scale.

• Second, the potential for inefficient use of resources is a key disadvantage of the pure project organization. Organizational staffing may fluctuate up and down as the number of projects in the firm increases or decreases. Hence, it is possible to move from a state in which many projects are running and organizational resources are fully employed to one in which only a few projects are in the pipeline, with many resources underutilized. In short, manpower requirements across the organization can increase or decrease rapidly, making staffing prob- lems severe.

• Third, it is difficult to maintain a supply of technical or intellectual capital, which is one of the advantages of the functional structure. Because resources do not typically reside within the functional structure for long, it is common for them to shift from project to project, preventing the development of a pooled knowledge base. For example, many project organizations hire technically proficient contract employees for various project tasks. These employees perform their work, and once they are finished and their contract is terminated they leave the organiza- tion, taking their expertise with them. Expertise resides not within the organization but dif- ferentially within the functional members who are assigned to the projects. Hence, some team members may be highly knowledgeable while others are not sufficiently trained and capable.

• A fourth problem with the pure project form has to do with the legitimate concerns of project team members as they anticipate the completion of the project. What, they wonder, will be in their future once their project is completed? As noted above, staffing can be inconsistent, and often project team members finish a project only to discover that they are not needed for new assignments. Functional specialists in project organizations do not have the kind of permanent “home” that they would have in a functional organization, so their concerns are justified. In a similar manner, it is common in pure project organizations for project team members to iden- tify with the project as their sole source of loyalty. Their emphasis is project-based, and their interests reside not with the larger organization but within their own project. When a project is completed they may begin searching for new challenges, and may even leave the company for appealing new assignments.

MATRIX ORGANIZATIONS

One of the more innovative organization designs to emerge in the past 30 years has been the matrix structure. The matrix organization, which is a combination of functional and project activities, seeks a balance between the functional organization and the pure project form. The way it achieves this

TABLE 2.3 Strengths and Weaknesses of Project Structures

Strengths for Project Management Weaknesses for Project Management

1. Assigns authority solely to the project manager. 1. Setting up and maintaining teams can be expensive.

2. Leads to improved communication across the organization and among functional groups.

2. Potential for project team members to develop loyalty to the project rather than to the overall organization.

3. Promotes effective and speedy decision making. 3. Difficult to maintain a pooled supply of intellec- tual capital.

4. Promotes the creation of cadres of project man- agement experts.

4. Concern among project team members about their future once the project ends.

5. Encourages rapid response to market opportunities.

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Organizational Structure 55

balance is to emphasize both function and project focuses at the same time. In practical terms, the matrix structure creates a dual hierarchy in which there is a balance of authority between the project emphasis and the firm’s functional departmentalization. Figure 2.7 illustrates how a matrix organi- zation is set up. Note that the vice president of projects occupies a unique reporting relationship in that the position is not formally part of the organization’s functional department structure. The vice president is the head of the projects division and occupies one side of the dual hierarchy, a position shared with the CEO and heads of functional departments.

Figure 2.7 also provides a look at how the firm staffs project teams. The vice president of proj- ects controls the activities of the project managers under his authority. They, however, must work closely with functional departments to staff their project teams through loans of personnel from each functional group. Whereas in functional organizations project team personnel are still almost exclusively under the control of the functional departments and to some degree serve at the pleasure of their functional boss, in the matrix organizational structure these personnel are shared by both their departments and the project to which they are assigned. They remain under the authority of both the project manager and their functional department supervisor. Notice, for example, that the project manager for Project Alpha has negotiated the use of two resources (personnel) from the vice president of marketing, 1.5 resources from production, and so forth. Each project and project man- ager is responsible for working with the functional heads to determine the optimal staffing needs, how many people are required to perform necessary project activities, and when these people will be available. Questions such as “What tasks must be accomplished on this project?” are best answered by the project manager. However, other equally important questions, such as “Who will perform the tasks?” and “How long should the tasks take?” are matters that must be jointly negotiated between the project manager and the functional department head.

It is useful to distinguish between three common forms of the matrix structure: the weak matrix (sometimes called the functional matrix), the balanced matrix, and the strong matrix (some- times referred to as a project matrix). In a weak matrix, functional departments maintain control over their resources and are responsible for managing their components of the project. The project manager’s role is to coordinate the activities of the functional departments, typically as an admin- istrator. She is expected to prepare schedules, update project status, and serve as the link between the departments with their different project deliverables, but she does not have direct authority to control resources or make significant decisions on her own. The goal of the balanced matrix is to equally distribute authority and resource assignment responsibility between the project manager and the functional department head. In a strong matrix, the balance of power has further shifted in favor of the project manager. She now controls most of the project activities and functions, including the assignment and control of project resources, and has key decision-making authority. Although

FIGURE 2.7 Example of a Matrix Organizational Structure

Vice President of Projects

Project Alpha

Vice President of Production

Vice President of Marketing

Vice President of Finance

Vice President of Research

Board of Directors

Chief Executive

Project Beta

2 resources

1 resource 2 resources 2 resources 2.5 resources

3 resources1.5 resources 1 resource

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56 Chapter 2 • The Organizational Context

functional managers have some input into the assignment of personnel from their departments, their role is mostly consultative. The strong matrix is probably the closest to a project organization mentality that we can get while working within a matrix environment.

Creating an organizational structure with two bosses may seem awkward, but there are some important advantages to this approach, provided certain conditions are met. Matrix structures are useful under circumstances in which:24

1. There is pressure to share scarce resources across product or project opportunities. When an organization has scarce human resources and a number of project opportunities, it faces the challenge of using its people and material resources as efficiently as possible to support the maximum number of projects. A matrix structure provides an environment in which the company can emphasize efficient use of resources for the maximum number of projects.

2. There is a need to emphasize two or more different types of output. For example, the firm may need to promote its technical competence (using a functional structure) while continu- ally creating a series of new products (requiring a project structure). With this dual pressure for performance, there is a natural balance in a matrix organization between the functional emphasis on technical competence and efficiency and the project focus on rapid new product development.

3. The environment of the organization is complex and dynamic. When firms face the twin challenges of complexity and rapidly shifting environmental pressures, the matrix structure promotes the exchange of information and coordination across functional boundaries.

In the matrix structure, the goal is to create a simultaneous focus on the need to be quickly responsive to both external opportunities and internal operating efficiencies. In order to achieve this dual focus, equal authority must reside within both the project and the functional groups. One advantage of the matrix structure for managing projects is that it places project manage- ment parallel to functional departments in authority. This advantage highlights the enhanced status of the project manager in this structure, who is expected to hold a similar level of power and control over resources as department managers do. Another advantage is that the matrix is specifically tailored to encourage close coordination between departments, with an emphasis on producing projects quickly and efficiently while sharing resources among projects as they are needed. Unlike the functional structure, in which projects are in effect layered over a struc- ture that is not necessarily supportive of their processes, the matrix structure balances the twin demands of external responsiveness and internal efficiency, creating an environment in which projects can be performed expeditiously. Finally, because resources are shared and movable among multiple projects, there is a greater likelihood that expertise will not be hoarded or cen- tered on some limited set of personnel, as in the project organization, but will be diffused more widely across the firm.

Among the disadvantages of the matrix structure’s dual hierarchy is the potentially negative effect that creating multiple authority points has on operations. When two parts of the organiza- tion share authority, the workers caught between them can experience great frustration when they receive mixed or conflicting messages from the head of the project group and the head of their functional departments. Suppose that the vice president of projects signaled the need for workers to concentrate their efforts on a critical project with a May 1 deadline. If at the same time the head of finance were to tell his staff that with tax season imminent it was necessary for his employees to ignore projects for the time being to finish tax-related work, what might happen? From the team member’s perspective, this dual hierarchy can be very frustrating. Workers daily experience a sense of being pulled in multiple directions as they receive conflicting instructions from their bosses—both on projects and in their departments. Consequently, ordinary work often becomes a balancing act based on competing demands for their time.

Another disadvantage is the amount of time and energy required by project managers in meetings, negotiations, and other coordinative functions to get decisions made across multiple groups, often with different agendas. Table 2.4 summarizes the strengths and weaknesses of the matrix structure.

Although matrix structures seem to be a good solution for project management, they require a great deal of time to be spent coordinating the use of human resources. Many project man- agers comment that as part of the matrix they devote a large proportion of their time to meet- ings, to resolving or negotiating resource commitments, and to finding ways to share power with

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Organizational Structure 57

TABLE 2.4 Strengths and Weaknesses of Matrix Structures

Strengths for Project Management Weaknesses for Project Management

1. Suited to dynamic environments. 1. Dual hierarchies mean two bosses.

2. Emphasizes the dual importance of project man- agement and functional efficiency.

2. Requires significant time to be spent negotiating the sharing of critical resources between projects and departments.

3. Promotes coordination across functional units. 3. Can be frustrating for workers caught between competing project and functional demands.

4. Maximizes scarce resources between competing project and functional responsibilities.

department heads. The matrix structure offers some important benefits and drawbacks from the perspective of managing projects. It places project management on an equal footing with functional efficiency and promotes cross-functional coordination. At the same time, however, the dual hierar- chy results in some significant behavioral challenges as authority and control within the organiza- tion are constantly in a state of flux.25 A common complaint from project managers operating in matrix organizations is that an enormous amount of their time is taken up with “playing politics” and bargaining sessions with functional managers to get the resources and help they need. In a matrix, negotiation skills, political savvy, and networking become vital tools for project managers who want to be successful.

MOVING TO HEAVYWEIGHT PROJECT ORGANIZATIONS

The term heavyweight project organization refers to the belief that organizations can sometimes gain tremendous benefits from creating a fully dedicated project organization.26 The heavyweight project organization concept is based on the notion that successful project organizations do not happen by chance or luck. Measured steps in design and operating philosophy are needed to get to the top and remain there. Taking their formulation from the “Skunkworks” model, named after the famous Lockheed Corporation programs, autonomous project teams represent the final acknowl- edgment by the firm of the priority of project-based work in the company. In these organizations the project manager is given full authority, status, and responsibility to ensure project success. Func- tional departments are either fully subordinated to the projects or the project teams are accorded an independent resource base with which to accomplish their tasks.

In order to achieve the flexibility and responsiveness that the heavyweight organization can offer, it is important to remember some key points. First, no one goes directly to the autonomous team stage when it comes to running projects. This project organizational form represents the last transitional stage in a systematically planned shift in corporate thinking. Instead, managers gradu- ally move to this step through making conscious decisions about how they are going to improve the way they run projects. Successful project firms work to expand the authority of the project manager, often in the face of stiff resistance from functional department heads who like the power balance the way it currently exists. Part of the process of redirecting the power balance involves giving project managers high status, authority to conduct performance evaluations of team members, authority over project resources, and direct links to the customers. Project managers who are constantly forced to rely on the good graces of functional managers for their team staffing, coordination, and financial and other resources are operating with one hand tied behind their backs.

Second, heavyweight project organizations have realigned their priorities away from func- tional maintenance to market opportunism, a realignment that can occur only when the resources needed to respond rapidly to market opportunities rest with the project team rather than being controlled by higher-level bureaucracies within a company. Finally, as noted throughout this book, the shift in focus for many firms toward project-based work profoundly affects the manner in which the project organization, the manager, and the team operate. The new focus on the external customer becomes the driving force for operations, not simply one of several competing demands that the project team must satisfy as best they can.

Ultimately, the decision of which organizational structure is appropriate to use may simply come down to one of expediency. Although it may, in fact, be desirable to conduct projects within

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a structure that offers maximum flexibility and authority to the project manager (the pure project structure), the reality remains that for many project managers it will be impossible to significantly influence decisions to alter the overall organizational structure in support of their project. As a result, perhaps a more appropriate question to ask is: what issues should I be aware of, given the structure of the organization within which I will be managing projects? The previous discussion in this chapter has developed this focus as our primary concern. Given the nature of the structure within which we must operate and manage our projects, what are the strengths and weaknesses of that form as it pertains to our ability to do our job as best we can? In formulating a thoughtful answer to this question, we are perhaps best positioned to understand and adapt most effectively to finding the link between our organization’s structure and project management success.

BOX 2.1

Project Management Research in Brief

The Impact of Organizational Structure on Project Performance

It is natural to suppose that projects may run more smoothly in some types of organizational structures than in others. Increasingly, research evidence suggests that depending on the type of project being initiated some structural forms do, in fact, offer greater advantages in promoting successful completion of the project than others. The work of Gobeli and Larson, for example, is important in highlighting the fact that the type of structure a firm has when it runs projects will have either a beneficial or detrimental effect on the viability of the projects.

Larson and Gobeli compared projects that had been managed in a variety of structural types, including functional, matrix, and pure project. They differentiated among three subsets of matrix structure, labeled functional matrix, balanced matrix, and project matrix, based on their perception of whether the matrix structure of a firm leaned more heavily toward a functional approach, an evenly bal- anced style, or a more favorable outlook toward projects. After collecting data from a sample of more than 1,600 project managers, Larson and Gobeli identified those who were conducting projects in each of the five organizational types and asked them to assess the effectiveness of that particular structure in promoting or inhibiting effective project management practices. Their findings are shown in Figure 2.8, highlighting the fact that in general project organizations do promote an atmosphere more supportive of successful project management.

Interestingly, when Gobeli and Larson broke their sample up into new product development projects and those related to con- struction, their findings were largely similar, with the exception that construction projects were marginally more effective in matrix organizations. This suggests that structure plays a significant role in the creation of successful projects.27

FIGURE 2.8 Managers’ Perceptions of Effectiveness of Various Structures on Project Success

Source: D. H. Gobeli and E. W. Larson. (1987). “Relative Effectiveness of Different Project Management Structures,” Project Management Journal, 18(2): 81–85, figure on page 83. Copyright and all rights reserved. Material from this publication has been reproduced with the permission of PMI.

Very effective

Effective

Ineffective

Very ineffective

Functional organization

Functional matrix

Balanced matrix

Project matrix

Project organization

New product development

Construction

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Project Management Offices 59

Project Management Offices

LO 2.5 Identify the characteristics of three forms of a project management office (PMO).

A project management office (PMO) is defined as a centralized unit within an organization or department that oversees or improves the management of projects.28 It is seen as a center for excel- lence in project management in many organizations, existing as a separate organizational entity or subunit that assists the project manager in achieving project goals by providing direct expertise in vital project management duties such as scheduling, resource allocation, monitoring, and control- ling the project. PMOs were originally developed in recognition of the poor track record that many organizations have demonstrated in running their projects. We cited some sobering statistics on the failure rates of IT projects, for example, in Chapter 1, indicating that the majority of such projects are likely to fail.

PMOs were created in acknowledgment of the fact that a resource center for project manage- ment within a company can offer tremendous advantages. First, as we have noted, project manag- ers are called upon to engage in a wide range of duties, including everything from attending to the human side of project management to handling important technical details. In many cases, these individuals may not have the time or ability to handle all the myriad technical details—the activity scheduling, resource allocation, monitoring and control processes, and so forth. Using a PMO as a resource center shifts some of the burden for these activities from the project manager to a support staff that is dedicated to providing this assistance. Second, it is clear that although project management is emerging as a profession in its own right, there is still a wide gap in knowledge and expectations placed on project managers and their teams. Simply put, they may not have the skills or knowledge for handling a number of project support activities, such as resource leveling or variance reporting. Having trained project management professionals avail- able through a PMO creates a clearinghouse effect that allows project teams to tap into expertise when they need it.

Another benefit of the PMO is that it can serve as a central repository of all lessons learned, project documentation, and other pertinent record keeping for ongoing projects, as well as for past projects. This function allows all project managers a central access to past project records and les- sons learned materials, rather than having to engage in a haphazard search for these documents throughout the organization. A fourth benefit of the PMO is that it serves as the dedicated center for project management excellence in the company. As such, it becomes the focus for all project management process improvements that are then diffused to other organizational units. Thus, the PMO becomes the place in which new project management improvements are first identified, tested, refined, and finally passed along to the rest of the organization. Every project manager can use the PMO as a resource, trusting that they will make themselves responsible for all project management innovations.

Project management offices are designed to perform a number of different duties, depending on the purpose for which they were created. In broad terms there are three forms of PMOs, varying in the degree of control and influence they have over project delivery, including:

1. Supportive—provide a consultative role to projects by supplying templates, best practices, training, access to information, and lessons learned from past projects. This type of PMO is considered a “project repository,” and its control over how other units run their projects is low.

2. Controlling—provide support and require compliance with standards or adopted procedures. Compliance may involve adopting project management frameworks or methodologies, using specific forms and tools, or conforming to governance standards. The degree of control pro- vided by the controlling PMO is considered moderate.

3. Directive—take control by directly managing the projects of the organization. The degree of control provided by the directive PMO is high.29

A PMO can be placed in any one of several locations within a firm.30 As Figure 2.9 demon- strates, the PMO may be situated at a corporate level (Level 3), where it serves an overall corporate support function. It can be placed at a lower functional level (Level 2), where it serves the needs within a specific business unit. Finally, the PMO can be decentralized down to the actual project level (Level 1), where it offers direct support for each project. The key to understanding the function

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of the PMO is to recognize that it is designed to support the activities of the project manager and staff, not replace the manager or take responsibility for the project. Under these circumstances, we see that the PMO can take a lot of the pressure off the project manager by handling the administration duties, leaving the project manager free to focus on the equally important people issues, including leading, negotiating, customer relationship building, and so forth.

Although Figure 2.9 gives us a sense of where PMOs may be positioned in the organization and, by extension, clues to their supporting role depending on how they are structured, it is also helpful to consider some of the PMO models. PMOs have been described as operating under one of three alternative forms and purposes in companies: (1) weather station, (2) control tower, and (3) resource pool.31 Each of these models has an alternative role for the PMO.

1. Weather station. Under the weather station model, the PMO is typically used only as a tracking and monitoring device. In this approach, the assumption is often one in which top management, feeling nervous about committing money to a wide range of projects, wants a weather station as a tracking device to keep an eye on the status of the projects without directly attempting to influence or control them. The weather station PMO is intended to house inde- pendent observers who focus almost exclusively on some key questions, such as: • What’s our progress? How is the project progressing against the original plan? What key

milestones have we achieved? • How much have we paid for the project so far? How do our earned value projections look?

Are there any budgetary warning signals? • What is the status of major project risks? Have we updated our contingency planning as

needed? 2. Control tower. The control tower model treats project management as a business skill to

be protected and supported. It focuses on developing methods for continually improving project management skills by identifying what is working, where shortcomings exist, and how to resolve ongoing problems. Most importantly, unlike the weather station model which monitors project management activities only to report results to top management, the control tower is a model that is intended to directly work with and support the activities of the project manager and team. In doing so, it performs four functions:

FIGURE 2.9 Alternative Levels of Project Offices

Source: W. Casey and W. Peck. (2001). “Choosing the Right PMO Setup,” PMNetwork, 15(2): 40–47, figure on page 44. Copyright and all rights reserved. Material from this publication has been reproduced with the permission of PMI.

PO Level 3

PO Level 2

Level 1

Project A

Project B

PO Project C

Business Unit CorporateSupport

Chief Operating Of�cer

Sales Delivery Support

PO

PO

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Project Management Offices 61

• Establishes standards for managing projects—The control tower model of the PMO is de- signed to create a uniform methodology for all project management activities, including duration estimation, budgets, risk management, scope development, and so forth.

• Consults on how to follow these standards—In addition to determining the appropriate standards for running projects, the PMO is set up to help project managers meet those stan- dards through providing internal consultants or project management experts throughout the development cycle as their expertise is needed.

• Enforces the standards—Unless there is some process that allows the organization to en- force the project management standards it has developed and disseminated, it will not be taken seriously. The control tower PMO has the authority to enforce the standards it has established, either through rewards for excellent performance or sanctions for refusal to abide by the standard project management principles. For example, the PMO for Accident Fund Insurance Co. of America has full authority to stop projects that it feels are violating accepted practices or failing to bring value to the company.

• Improves the standards—The PMO is always motivated to look for ways to improve the current state of project management procedures. Once a new level of project performance has been created, under a policy of continuous improvement the PMO should already be exploring how to make good practices better.

3. Resource pool. The goal of the resource pool PMO is to maintain and provide a cadre of trained and skilled project professionals as they are needed. In essence, it becomes a clear- inghouse for continually upgrading the skills of the firm’s project managers. As the company initiates new projects, the affected departments apply to the resource pool PMO for assets to populate the project team. The resource pool PMO is responsible for supplying project man- agers and other skilled professionals to the company’s projects. In order for this model to be implemented successfully, it is important for the resource pool to be afforded sufficiently high status within the organization so that it can bargain on an equal footing with other top manag- ers who need project managers for their projects. Referring back to Figure 2.7, the resource pool model seems to work best when the PMO is generally viewed as a Level 3 support structure, giving the head of the PMO the status to maintain control of the pool of trained project man- agers and the authority to assign them as deemed appropriate.

A key to the effective use of a PMO is to recognize that its use must be consistently reassessed in order to ensure that it is continuing to perform a valuable service for the organization. For example, Siemens, the diversified German conglomerate, is heavily invested in projects and estimates that over 50% of their annual revenue is based on project business. They employ PMO support through- out the organization, but with an important proviso. Their PMOs are controlled through a unique “sunset clause,” which states that all PMOs should be regularly assessed to ensure that they are still performing their roles in the manner expected. If the perception is that the PMO in question is no longer working as intended, it is disbanded. This rule increases the likelihood that for newly- chartered PMOs there is a sense of urgency and focus to deliver benefits that are measurable and important to the sponsor. In order to be chartered, new PMOs at Siemens must demonstrate the following elements:

• Benefits to be realized from a PMO group—identify measurable benefits. • Business need for a PMO—show why the targeted business area requires the PMO’s creation. • Target areas to be initially addressed (within the next 18 months)—what are the specific duties

of the PMO and how will it achieve them? • Timeline to achieve benefits—when can Siemens expect to observe benefits from the PMO’s

operations? • PMO review and sunset agreements:

— It is common to establish a review schedule every 6 months—with a sunset review and updates to the charter tied to benefits realization, business case fulfillment (i.e., benefits versus cost), and the needs of the business. The goal is to revise the PMO’s charter every 12 months for the next planning cycle.

• Funding and resource allocation—who will fund the PMO, and what will be its annual oper- ating budget?

• Authority of the PMO—What direct authority will the PMO have over the projects run in the business group?

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• Executive sponsor of the PMO—Identify a specific senior executive who is sponsoring the PMO.

• Organizational structure and alignment of the PMO (including roles and responsibilities)— What type of PMO will be used (e.g., weather station, control tower, etc.), and who will its head report to in the organizational chart?

• Reporting requirement of the PMO to the sponsor or sponsoring group—When (how often) will the PMO make formal reports to the sponsor, and what information will the PMO provide to show its value to the organization?32

The PMO concept is rapidly being assimilated in a number of companies. However, it has some critics. For example, some argue that it is a mistake to “place all the eggs in one basket” with PMOs by concentrating all project professionals in one location. This argument suggests that PMOs actually inhibit the natural, unofficial dissemination of project skills across organizational units by maintain- ing them at one central location. Another potential pitfall is that the PMO, if its philosophy is not carefully explained, can simply become another layer of oversight and bureaucracy within the organi- zation; that in effect, rather than freeing up the project team by performing supporting functions, it actually handcuffs the project by requiring additional administrative control. This concern involves PMOs being perceived as “process police” or expensive overhead. There is also the concern among top managers that it may be difficult to justify creating a PMO because it can be hard to show the value that the company derives from creating a project management office. Another potential danger associated with the use of PMOs is that they may serve as a bottleneck for communications flow across the organization,33 particularly between the parent organization and the project’s customer.

Although some of the criticisms of PMOs contain an element of truth, they should not be used to avoid the adoption of a project office under the right circumstances. The PMO is, at its core, recognition that project management skill development must be encouraged and reinforced, that many organizations have great need of standardized project practices, and that a central, support- ing function can serve as a strong source for continuous project skill improvement. Viewed in this light, the PMO concept is likely to grow in popularity in the years to come.

Organizational Culture

LO 2.6 Understand key concepts of corporate culture and how cultures are formed.

The third key contextual variable in how projects are managed effectively is that of organizational culture. So far, we have examined the manner in which a firm’s strategy affects its project manage- ment, and how projects and portfolios are inextricably tied to a company’s vision and serve to operationalize strategic choices. Structure constitutes the second piece of the contextual puzzle, and we have demonstrated how various organizational designs can help or hinder the project management process. Now we turn to the third contextual variable: an organization’s culture and its impact on managing projects.

One of the unique characteristics of organizations is the manner in which each develops its own outlook, operating policies and procedures, patterns of thinking, attitudes, and norms of behavior. These characteristics are often as unique as an individual’s fingerprints or DNA signa- ture; in the same way no two organizations, no matter how similar in size, products, operating environment, or profitability, are the same. Each has developed its own unique method for indoc- trinating its employees, responding to environmental threats and opportunities, and supporting or discouraging operating behaviors. In other settings, such as anthropology, a culture is seen as the collective or shared learning of a group, and it influences how that group is likely to respond in different situations. These ideas are embedded in the concept of organizational culture. One of the original writers on culture defined it as “the solution to external and internal problems that has worked consistently for a group and that is therefore taught to new members as the correct way to perceive, think about, and feel in relation to these problems.”34

Travel around Europe and you will quickly become immersed in a variety of cultures. You will discern the unique cultural characteristics that distinguish nationalities, such as the Finnish and Swedish cultures. Differences in language, social behavior, family organization, and even religious beliefs clearly demonstrate these cultural differences. Even within a country, cultural attitudes and

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Organizational Culture 63

values vary dramatically. The norms, attitudes, and common behaviors of northern and southern Italians lead to differences in dress, speech patterns, and even evening dining times. One of the key elements in courses on international business identifies cultural differences as patterns of unique behavior, so that business travelers or those living in other countries will be able to recognize appropriate standards of behavior and cultural attitudes, even though these cultural patterns may be very different from those of the traveler’s country or origin.

For project team members who are called upon to work on projects overseas, or who are linked via the Internet and e-mail to other project team members from different countries, developing an appreciation for cross-border cultural differences is critical. The values and attitudes expressed by these various cultures are strong regulators of individual behavior. They define our belief systems and work dedication, as well as our ability to function on cross-cultural project teams.

Research has begun to actively explore the impact that workplace cultures have on the per- formance of projects and the manner in which individual project team members decide whether or not they will commit to its goals. Consider two contrasting examples the author has witnessed: in one Fortune 500 company, functional department heads for years have responded to all resource requests from project managers by assigning their worst, newest, or lowest-performing personnel to these teams. In effect, they have treated projects as dumping grounds for malcontents or poor performers. In this organization, project teams are commonly referred to as “leper colonies.” It is easy to imagine the response of a member of the firm to the news that he has just been assigned to a new project! On the other hand, I have worked with an IT organization where the unspoken rule is that all departmental personnel are to make themselves available as expert resources when their help is requested by a project manager. The highest priority in the company is project delivery, and all other activities are subordinated to achieving this expectation. It is common, during particularly hectic periods, for IT members to work 12-plus hours per day, assisting on 10 or more projects at any time. As one manager put it, “When we are in crunch time, titles and job descriptions don’t mean anything. If it has to get done, we are all responsible—jointly—to make sure it gets done.”

The differences in managing projects at the companies illustrated in these stories are striking, as is the culture that permeates their working environment and approach to project delivery. Our definition of culture can be directly applied in both of these cases to refer to the unwritten rules of behavior, or norms that are used to shape and guide behavior, that are shared by some subset of organizational members and that are taught to all new members of the company. This definition has some important elements that must be examined in more detail:

• Unwritten. Cultural norms guide the behavior of each member of the organization, but are often not written down. In this way, there can be a great difference between the slogans or inspirational posters found on company walls and the real, clearly understood culture that establishes standards of behavior and enforces them for all new company members. For example, Erie Insurance, annually voted one of the best companies to work for, has a strong, supportive culture that emphasizes and rewards positive collaboration between functional groups. Although the policy is not written down, it is widely held, understood by all, and taught to new organization members. When projects require the assistance of personnel from multiple departments, the support is expected to be there.

• Rules of behavior. Cultural norms guide behavior by allowing us a common language for understanding, defining, or explaining phenomena and then providing us with guidelines as to how best to react to these events. These rules of behavior can be very powerful and commonly held, and they apply equally to top management and workers on the shop floor. However, because they are unwritten we may learn them the hard way. For example, if you were newly hired as a project engineer and were working considerably slower or faster than your coworkers, it is likely that one of them would quickly clue you in on an acceptable level of speed that does not make you or anyone else look bad by comparison.

• Held by some subset of the organization. Cultural norms may or may not be companywide. In fact, it is very common to find cultural attitudes differing widely within an organization. For example, blue-collar workers may have a highly antagonistic attitude toward top manage- ment, members of the finance department may view the marketing function with hostility and vice versa, and so forth. These subcultures reflect the fact that an organization may contain a number of different cultures operating in different locations or at different levels. Pitney- Bowes, for example, is a maker of postage meters and other office equipment. Its headquarters

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unit reflects an image of stability, orderliness, and prestige. However, one of its divisions, Pitney-Bowes Credit Corporation (PBCC), headquartered in Shelton, Connecticut, has made a name for itself by purposely adopting an attitude of informality, openness, and fun. Its décor, featuring fake gas lamps, a French café, and Internet surfing booths, has been described as resembling an “indoor theme park.” PBCC has deliberately created a subculture that reflects its own approach to business, rather than adopting the general corporate vision.35 An alternative example is the more competitive (some would argue “cutthroat”) culture at Amazon. Although Amazon is a phenomenally successful company and the fastest ever to reach $100 billion in sales, its culture is known for promoting open competition among executives. The Anytime Feedback Tool, a resource that allows employees to send feedback on their co-workers to management, exemplifies this competition. Employees complain that some workers create a culture of secrecy and paranoia by using the Anytime Feedback Tool to inform on others in the hopes of torpedoing their careers. By all accounts, Amazon is an exciting but tough place to work.36

• Taught to all new members—Cultural attitudes, because they are often unwritten, may not be taught to newcomers in formal ways. New members of an organization pick up the behaviors as they observe others engaging in them. In some organizations, however, all new hires are immersed in a formal indoctrination program to ensure that they understand and appreciate the organization’s culture. The U.S. Marines, for example, take pride in the process of indoctri- nation and training for all recruits, which develops a collective, committed attitude toward the Marine Corps. Google takes its new indoctrination procedures (“onboarding”) seriously. The company, which onboarded over 5,000 new hires in 2016, has experimented with its orientation procedures to help new employees, called “Nooglers,” make more social connections and get up to speed more quickly. Their goal is to promote transparency among all employees, foster a team-based approach, and teach new hires to always “default to open.” General Electric also sends new employees away for orientation, to be “tattooed with the meatball,” as members of the company refer to the GE logo.

On the other hand, when allowed to get out of control, a culture can quickly become toxic and work against the goals of the organization. For example, the Australian Olympic swim team has histori- cally been one of the strongest competitors at the summer competition. However, the team managed to win just one gold medal at the 2012 London Summer Olympics, a stunningly poor result. An independent review commissioned in the aftermath of their performance focused the blame on a failure of leadership and culture on the team. The report cited a “toxic” culture involving “bullying, the misuse of prescription drugs, and a lack of discipline.” The worst performance in 20 years was directly attributable to a lack of moral authority and discipline among team members. In prepara- tion for the Rio Summer Olympics in 2016, the Australian national team hired Dutch coach Jacco Verhaeren, who has worked hard to repair the team's image. Fixing this negative culture has been slow in coming, as Australia initially was enthused by the team’s second place finish in the medals count at the 2015 world championships in Russia.37 However, the results from Rio were disappoint- ing, as a team projected to win anywhere from 8 to 11 gold medals had to settle for just 3. This result illustrates a fundamental truth regarding cultural change: it is easy for a toxic environment to ruin a team’s culture and very difficult, once it is affected, to positively revitalize it.

HOW DO CULTURES FORM?

When it is possible to view two organizations producing similar products within the context of very individualistic and different cultures, the question of how cultures form gets particularly interesting. General Electric’s Jet Engine Division and Rolls-Royce share many features, including product lines. Both produce jet engines for the commercial and defense aircraft industries. However, GE prides itself on its competitive, high-pressure culture that rewards aggressiveness and high commitment but also has a high burnout rate among engineers and mid-level managers. Rolls-Royce, on the other hand, represents an example of a much more paternalistic culture that rewards loyalty and long job tenure.

Researchers have examined some of the powerful forces that can influence how a company’s culture emerges. Among the key factors that affect the development of a culture are technology, environment, geographical location, reward systems, rules and procedures, key organizational members, and critical incidents.38

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TECHNOLOGY The technology of an organization refers to its conversion process whereby it trans- forms inputs into outputs. For example, the technology of many project organizations is the project development process, in which projects are developed to fill a current need or anticipate a future opportunity. The technical means for creating projects can be highly complex and automated or relatively simple and straightforward. Further, the projects may be in the form of products or ser- vices. Research suggests that the type of technology used within a project organization can influ- ence the culture that it promotes. “High-technology” organizations represent an example of how a fast-paced, technologically based culture can permeate through an organization.

ENVIRONMENT Organizations operate under distinct environmental pressures. A firm’s environ- ment may be complex and rapidly changing, or it may remain relatively simple and stable. Some firms are global, because their competition is literally worldwide, while other companies focus on regional competition. Regardless of the specific circumstances, a company’s environment affects the culture of the firm. For example, companies with simple and slow-changing environments may develop cultures that reinforce low risk taking, stability, and efficiency. Firms in highly complex environments often develop cultures aimed at promoting rapid response, external scanning for opportunities and threats, and risk taking. In this way, the firm’s operating environment affects the formation of the culture and the behaviors that are considered acceptable within it. For example, a small, regional construction firm specializing in commercial real estate development is likely to have more stable environmental concerns than a Fluor-Daniel or Bechtel, which competes for a variety of construction projects on a worldwide basis.

GEOGRAPHICAL LOCATION Different geographical regions develop their own cultural mores and attitudes. The farther south in Europe one travels, for example, the later the evening meal is typi- cally eaten; in Spain, dinner may commence after 9 pm. Likewise, in the business world, culturally based attitudes often coordinate with the geographical locations of firms or subsidiaries. It can even happen within countries: Xerox Corporation, for example, had tremendous difficulty in trying to marry the cultures of its corporate headquarters in Connecticut with the more informal and down- to-earth mentalities of its Palo Alto Research Center (PARC) personnel. Projects at one site were done much differently than those undertaken at another location. It is important not to overstate the effect that geography can play, but it certainly can result in cultural disconnects, particularly in cases where organizations have developed a number of dispersed locations both within and outside of their country of origin.

REWARD SYSTEMS The types of rewards that a firm offers to employees go a long way toward demonstrating the beliefs and actions its top management truly values, regardless of what official company policies might be. Reward systems support the view that, in effect, a company gets what it pays for. An organization that publicly espouses environmental awareness and customer service but routinely promotes project managers who violate these principles sends a loud message about its real interests. As a result, the culture quickly forms around acts that lead to pollution, dishonesty, or obfuscation. One has only to look at past business headlines regarding corporate malfeasance at Enron, WorldCom, Volkswagen, Goldman Sachs, or Adelphia Communications Corporation to see how the culture of those organizations rewarded the type of behavior that ultimately led to account- ing fraud, public exposure, and millions of dollars in fines.

RULES AND PROCEDURES One method for influencing a project management culture is to create a rulebook or system of procedures for employees to clarify acceptable behavior. The idea behind rules and procedures is to signal companywide standards of behavior to new employees. The obvi- ous problem arises when public or formal rules conflict with informal rules of behavior. At Texas Instruments headquarters in Dallas, Texas, a formal rule is that all management staff works a stan- dard 40-hour workweek. However, the informal rule is that each member of the company is really expected to work a 45-hour week, at a minimum, or as one senior manager explained to a newly hired employee, “Here, you work nine hours each day: eight for you and one for TI.” In spite of the potential for disagreements between formal and informal rules, most programs in creating support- ive project-based organizations argue that the first step toward improving patterns of behavior is to formally codify expectations in order to alter dysfunctional project cultures. Rules and procedures thus represent a good starting point for developing a strong project culture.

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KEY ORGANIZATIONAL MEMBERS Key organizational members, including the founder of the orga- nization, have a tremendous impact on the culture that emerges within the company. When the founder is a traditional entrepreneur who encourages free expression or flexibility, this attitude becomes ingrained in the organization’s culture in a powerful way. The founders of Ben and Jerry’s Ice Cream, two proud ex-hippies, created a corporate culture that was unique and expressed their desire to develop a “fun” alternative to basic capitalism. A corporate culture in which senior execu- tives routinely flaunt the rules or act contrary to stated policies demonstrates a culture in which there is one rule for the people at the top and another for everyone else.

CRITICAL INCIDENTS Critical incidents express culture because they demonstrate for all workers exactly what it takes to succeed in an organization. In other words, critical incidents are a public expression of what rules really operate, regardless of what the company formally espouses. Criti- cal incidents usually take the form of stories that are related to others, including new employees, illustrating the types of actions that are valued. They become part of the company’s lore, either for good or ill. In a recent year, General Electric’s Transportation Systems Division built up a large back- log of orders for locomotives. The company galvanized its production facilities to work overtime to complete this backlog of work. As one member of the union related, “When you see a unit vice president show up on Saturday, put on an environmental suit, and work on the line spray painting locomotives with the rest of the workers, you realize how committed the company was to getting this order completed on time.”

ORGANIZATIONAL CULTURE AND PROJECT MANAGEMENT

What are the implications of an organizational culture on the project management process? Culture can affect project management in at least four ways. First, it affects how departments are expected to interact and support each other in pursuit of project goals. Second, the culture influences the level of employee commitment to the goals of the project on balance with other, potentially competing goals. Third, the organizational culture influences project planning processes such as the way work is estimated or how resources are assigned to projects. Finally, the culture affects how managers evaluate the performance of project teams and how they view the outcomes of projects.

• Departmental interaction. Several of the examples cited in this chapter have focused on the importance of developing and maintaining a solid, supportive relationship between functional departments and project teams. In functional and matrix organizations, power either resides directly with department heads or is shared with project managers. In either case, the manner in which these department heads approach their willingness to support projects plays a hugely important role in the success or failure of new project initiatives. Not surprisingly, cultures that favor active cooperation between functional groups and new projects are much more success- ful than those that adopt a disinterested or even adversarial relationship.

• Employee commitment to goals. Projects depend on the commitment and motivation of the personnel assigned to their activities. A culture that promotes employee commitment and, when necessary, self-sacrifice through working extra hours or on multiple tasks is much more successful than a culture in which the unwritten rules seem to imply that there is nothing wrong with simply going through the motions, provided you don’t get caught. AMEC Foster Wheeler Corporation (AFWC), for example, takes its training of employees seriously when it comes to instilling a commitment to safety. AFWC is a multinational construction company, headquartered in London. With annual revenues of nearly $7 billion and 40,000 employees, AFWC is one of the largest construction firms in the world. It takes its commitment to core values extremely seriously, impressing upon all employees their responsibilities to custom- ers, business partners, each other, the company, and the wider social environment. From the moment new people enter the organization, they are made aware of the need to commit to the guiding principles of ethical behavior, fairness, commitment to quality, and safety.39

• Project planning. We will explore the process of activity duration estimation in a later chap- ter. For now, it is important just to note that the way in which employees decide to support the project planning processes is critical. Because activity estimation is often an imprecise process, it is common for some project team members to pad their estimates to give themselves as much time as possible. These people are often responding to a culture that reinforces the idea that it is better to engage in poor estimation and project planning than to be late with

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Organizational Culture 67

deliverables. Conversely, when there is a culture of trust among project team members they are more inclined to give honest assessments without fearing that if they are wrong they will be punished for these mistakes.

• Performance evaluation. Supportive cultures encourage project team members taking the initiative, even if it means taking risks to boost performance. When a culture sends the signal that the goal of the firm is to create innovative products, it reinforces a project management culture that is aggressive and offers potentially high payoffs (and the occasional significant loss!). As noted earlier, organizations get what they pay for. If the reward systems are positive and reinforce a strong project mentality, organizations will reap a whirlwind of opportunities. On the other hand, if organizations tacitly support caution and playing it safe, their project management approaches will equally reflect this principle.

A culture can powerfully affect the manner in which departments within an organization view the process of project management. The culture also influences the manner in which employees commit themselves to the goals of their projects as opposed to other, potentially competing goals. Through symbols, stories, and other signs, companies signal their commitment to project manage- ment. This message is not lost on members of project teams, who take their cues regarding expected performance from supervisors and other cultural artifacts. Visible symbols of a culture that advo- cates cross-functional cooperation will create employees who are prepared and motivated to work in harmony with other groups on project goals. Likewise, when an IT department elevates some of its members to hero status because they routinely went the extra mile to handle system user complaints or problems, the company has sent the message that these employees are all working toward the same goals and they all provide value to the organization’s operations, regardless of their functional background.

To envision how culture can influence the planning and project monitoring processes, suppose that in your organization it was clear that those involved in late projects would be severely punished for the schedule slippage. You and your fellow project team members would quickly learn that it is critical to avoid going out on a limb to promise early task completion dates. It is much safer to grossly overestimate the amount of time necessary to complete a task in order to protect yourself. The organizational culture in this case breeds deceit. Likewise, it may be safer in some organiza- tions to deliberately hide information in cases where a project is running off track, or mislead top management with optimistic and false estimates of project progress. Essentially, the issue is this: does the corporate culture encourage authentic information and truthful interactions, or is it clear that the safer route is to first protect yourself, regardless of the effect this behavior may have on the success of a project?

PROJECT PROFILE

Electronic Arts and the Power of Strong Culture in Design Teams

Electronic Arts is one of the top computer gaming companies in the world, known for perennial console and PC best- sellers like Madden NFL, FIFA, Battlefield, Need for Speed, The Sims, and more. In the computer gaming industry, speed to market for new games is critical. Making award-winning games requires a combination of talented designers, graphic artists, programmers, and testers, all working to constantly update best-selling games and introduce new choices for the gaming community. It is a fast-paced environment that thrives on a sense of chaos and disruptive new technologies and ideas.

In 2012 a gaming industry publication, Consumerist, published its annual reader survey in which it named EA the worst company in America. Consumer complaints centered on high prices, rushed development of games, unreliable technology, and poor customer support. At first Electronic Arts ignored the label, but when they were voted the worst company in America for a second year in a row, EA’s executives finally took notice. Stagnant sales had sunk EA’s share price, and in 2013 the company announced another round of layoffs.

In September 2013, EA named Andrew Wilson CEO, and quickly made clear it wanted to reform its image with customers. EA seemed to have focused so strongly on running its businesses smoothly that it lost sight of what its gaming customers wanted. Like Hollywood studios, gaming companies are only as good as their most recent hits, and gaming enthusiasts are often very passionate, vocal, and much better at making their complaints heard online. In interviews, Wilson has talked of instilling a “player-first” culture at EA, willing to delay a blockbuster title, for example, if it needs more work. In this new customer-focused setting, the former head of the EA Labels group, Frank Gibeau, has developed

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68 Chapter 2 • The Organizational Context

What are some examples of an organization’s culture influencing how project teams actually perform and how outcomes are perceived? One common situation is the phenomenon known as escalation of commitment. It is not uncommon to see this process at work in project organizations. Escalation of commitment occurs when, in spite of evidence identifying a project as failing, no lon- ger necessary, or beset by huge technical or other difficulties, organizations continue to support it past the point when an objective assessment would suggest that it should be terminated.41 Although there are a number of reasons for escalation of commitment to a failed decision, one important rea- son is the unwillingness of the organization to acknowledge failure or its culture’s working toward blinding key decision makers to the need to take corrective action.

The reverse is also true: In many organizations, projects are managed in an environment in which the culture strongly supports cross-functional cooperation, assigns sufficient resources to enable project managers to schedule aggressively, and creates an atmosphere that makes it possible to develop projects optimally. It is important to recognize that an organization’s culture can be a strong supporter of (as well as an inhibitor to) the firm’s ability to manage effective projects. Because of this impact, organizational culture must be managed, constantly assessed, and when necessary, changed in ways that promote project management rather than discouraging its efficient practice.

The context within which we manage our projects is a key determinant of the likelihood of their success or failure. Three critical contextual factors are the organization’s strategy, structure, and culture. Strategy drives projects; projects operationalize strategy. The two must work together in harmony. The key is maintaining a clear linkage between overall strategy and the firm’s portfolio of projects, ensuring that some form of alignment exists among all key elements: vision, objectives, strategies, goals, and programs. Furthermore, companies are recognizing that when they adopt a structure that supports projects, they get better results. Likewise, when the cultural ambience of the organization favors project management approaches, projects are much more likely to be successful. Some of these project management approaches are the willingness to take risks, to think creatively, to work closely with other functional departments, and so forth. More and more we are seeing successful project-based organizations recognizing the simple truth that the context in which they are trying to create projects is a critical element in seeing their projects through to commercial and technical success.

a winning formula for game design. He doesn’t believe in large teams for developing games; instead, his goal is to pre- serve each studio’s culture by supporting its existing talent.

Gibeau’s belief is that the best games come from small teams with strong cultures. One of his principles is to limit the size of project teams to promote their members’ commitment to each other and to the quality of the games they design. Gibeau notes that when too many people get involved, there is a law of diminishing returns that sets in because everything becomes too hard to manage—too many people, too many problems. In addition, it’s easier to maintain a unique culture when teams are kept small and allowed to stay in place for an extended time. As a result, EA supports the use of smaller teams over a longer period of time to get the game right. As a result, Gibeau is careful to ensure that the different studios don’t over-expand and get too big. He remains a firm believer in the “small is better” philosophy because it supports dynamic cultures and action-oriented attitudes.

Electronic Arts’ approach to game design is centered on small teams that are given the opportunity to work as freely as possible, maintain their distinctive group identities, and thereby promote a strong internal culture. EA executives have recognized that these unique team cultures are critical for encouraging the kind of creativity and commitment to the work that make for technologically advanced games, so necessary for maintaining a competitive edge in a rapidly evolving industry.40

Summary

2.1 Understand how effective project management con- tributes to achieving strategic objectives. This chapter linked projects with corporate strategy. Projects are the building blocks of strategy because they serve as the most basic tools by which firms can implement previously formulated objectives and strategies.

2.2 Recognize three components of the corporate strat- egy model: formulation, implementation, and eval- uation. The chapter explored a generic model of corporate strategic management, distinguishing between the three components of strategy formula- tion, strategy implementation, and strategy evalu- ation. Each of these components incorporates a

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number of subdimensions. For example, strategy formulation includes the stages of: • Developing a vision and mission • Performing an internal audit (assessing

strengths and weaknesses) • Performing an external audit (assessing oppor-

tunities and threats) • Establishing long-term objectives • Generating, evaluating, and selecting strategies

Strategy implementation requires the coordi- nation of managerial, technological, financial, and functional assets to reinforce and support strategies. Projects often serve as the means by which strategy implementation is actually realized. Finally, strategy evaluation requires an ability to measure results and provide feedback to all concerned parties.

2.3 See the importance of identifying critical project stakeholders and managing them within the context of project development. The chapter addresses a final strategic question: the relationship between the firm and its stakeholder groups. Project stakeholders are either internal to the firm (top management, other functional departments, support personnel, inter- nal customers) or external (suppliers, distributors, intervenors, governmental agencies and regulators, and customers). Each of these stakeholder groups must be managed in a systematic manner; the pro- cess moves from identification to needs assessment, choice of strategy, and routine evaluation and adjust- ment. Stakeholder management, in conjunction with strategic management, forms the context by which projects are first evaluated and then managed.

2.4 Recognize the strengths and weaknesses of three basic forms of organizational structure and their implications for managing projects. We examined the strengths and weaknesses of three major orga- nizational structure types, including functional, project, and matrix structures. The nature of each of the three structural types and their relationship to project management were addressed. The func- tional structure, while the most common type of organizational form, was shown to be perhaps the least effective type for managing projects due to a variety of limitations. The project structure, in which the organization uses its projects as the primary form of grouping, has several advantages for managing projects, although it has some general disadvantages as well. Finally, the matrix structure, which seeks to balance the authority and activities between projects and functions using a dual hierarchy system, dem- onstrates its own unique set of strengths and weak- nesses for project management practice.

2.5 Identify the characteristics of three forms of a project management office (PMO). Project

management offices (PMOs) are centralized units within an organization or department that oversee or improve the management of projects. There are three predominant types of PMOs in organizations. The first one, the weather station, is typically used only as a tracking and monitoring device. In this approach, the role of the PMO is to keep an eye on the status of the projects without directly attempt- ing to influence or control them. The second form of PMO is the control tower, which treats project management as a business skill to be protected and supported. It focuses on developing methods for continually improving project management skills by identifying what is working, where the short- comings exist, and what methods can resolve ongo- ing problems. Most importantly, unlike the weather station model, which only monitors project man- agement activities to report results to top manage- ment, the control tower is a model that is intended to directly work with and support the activities of the project manager and team. Finally, the resource pool model is a PMO intended to maintain and provide a cadre of trained and skilled project pro- fessionals as they are needed. It serves as a clear- inghouse for continually upgrading the skills of the firm’s project managers. As the company initiates new projects, the affected departments apply to the resource pool PMO for assets to populate the proj- ect team.

2.6 Understand key concepts of corporate culture and how cultures are formed. Another contextual fac- tor, organizational culture, plays an important role in influencing the attitudes and values shared by members of the organization, which in turn affects their commitment to project management and its practices. Culture is defined as the unwritten rules of behavior, or the norms that are used to shape and guide behavior, which are shared by some subset of organizational members and are taught to all new members of the company. When the firm has a strong culture that is supportive of project goals, members of the organization are more likely to work collaboratively, minimize departmental loyalties that could take precedence over project goals, and com- mit the necessary resources to achieve the objectives of the project.

Organizational cultures are formed as the result of a variety of factors, including technology, environ- ment, geographical location, reward systems, rules and procedures, key organizational members, and critical incidents. Each of these factors can play a role in determining whether the organization’s culture is strong, collaborative, customer-focused, project- oriented, fast-paced, and so forth.

Summary 69

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70 Chapter 2 • The Organizational Context

Key Terms Balanced matrix (p. 41) Culture (p. 41) Escalation of commitment

(p. 42) External environment

(p. 43) Functional structure (p. 43) Heavyweight project

organization (p. 44)

Intervenor groups (p. 49) Matrix organization (p. 50) Matrix structure (p. 50) Objectives (p. 53) Organizational culture

(p. 53) Organizational structure

(p. 54)

Project management office (p. 54)

Project organizations (p. 55)

Project stakeholders (p. 55) Project structure (p. 55) Resources (p. 55)

Stakeholder analysis (p. 57) Strategic management

(p. 59) Strong matrix (p. 62) Technology (p. 63) TOWS matrix (p. 65) Weak matrix (p. 68)

Discussion Questions

2.1 The chapter suggests that a definition of strategic manage- ment includes four components:

a. Devpeloping a strategic vision and sense of mission b. Formulating, implementing, and evaluating c. Making cross-functional decisions d. Achieving objectives

Discuss how each of these four elements is important in understanding the challenge of strategic project man- agement. How do projects serve to allow an organiza- tion to realize each of these four components of strategic management?

2.2 Discuss the difference between organizational objectives and strategies.

2.3 Your company is planning to construct a nuclear power plant in Oregon. Why is stakeholder analysis important as a precondition for the decision of whether or not to follow through with such a plan? Conduct a stakeholder analysis for a planned upgrade to a successful software product. Who are the key stakeholders?

2.4 Consider a medium-sized company that has decided to begin using project management in a wide variety of its operations. As part of its operational shift, it is going to adopt a project management office somewhere within the organization. Make an argument for the type of PMO it should adopt (weather station, control tower, or resource pool). What are some key decision criteria that will help it determine which model makes the most sense?

2.5 What are some of the key organizational elements that can affect the development and maintenance of a supportive organizational culture? As a consultant, what advice would you give to a functional organization that was seeking to move from an old, adversarial culture, where the vari- ous departments actively resisted helping one another, to

one that encourages project thinking and cross-functional cooperation?

2.6 Compare and contrast the organizational cultures at Ama- zon and Google. Imagine if you were in charge of a proj- ect team at both companies. How might your approach to managing a project, developing your team, and coordinat- ing with different functional departments differ at the two firms?

2.7 You are a member of the senior management staff at XYZ Corporation. You have historically been using a functional structure setup with five departments: finance, human resources, marketing, production, and engineering.

a. Create a drawing of your simplified functional structure, identifying the five departments.

b. Assume you have decided to move to a project structure. What might be some of the environmen- tal pressures that would contribute to your belief that it is necessary to alter the structure?

c. With the project structure, you have four ongoing projects: stereo equipment, instrumentation and testing equipment, optical scanners, and defense communications. Draw the new structure that cre- ates these four projects as part of the organizational chart.

2.8 Suppose you now want to convert the structure from that in Question 2.7 to a matrix structure, emphasizing dual com- mitments to function and project.

a. Re-create the structural design to show how the matrix would look.

b. What behavioral problems could you begin to anticipate through this design? That is, do you see any potential points of friction in the dual hierarchy setup?

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CASE STUDY 2.1 Rolls-Royce Corporation

Although the name Rolls-Royce is inextricably linked with its ultra-luxurious automobiles, the modern Rolls- Royce operates in an entirely different competitive envi- ronment. A leading manufacturer of power systems for aerospace, marine, and power companies, Rolls-Royce’s market is focused on developing jet engines for a vari- ety of uses, both commercial and defense-related. In this market, the company has two principal competi- tors, General Electric and Pratt & Whitney (owned by United Technologies). There are a limited number of smaller niche players in the jet engine market, but their impact from a technical and commercial perspective is minor. Rolls-Royce, GE, and Pratt & Whitney rou- tinely engage in fierce competition for sales to defense contractors and the commercial aviation industry. The two main airframe manufacturers, Boeing and Airbus, make continual multimillion-dollar purchase decisions that are vital for the ongoing success of the engine mak- ers. Airbus, a private consortium of several European partner companies, has drawn level with Boeing in sales in recent years. Because the cost of a single jet engine, including spare parts, can run to several million dollars, winning large orders from either defense or commer- cial aircraft builders represents an ongoing challenge for each of the “big three” jet engine manufacturers.

Airlines in developing countries can often be a lucrative but risky market for these firms. Because the countries do not maintain high levels of foreign exchange, it is not unknown, for example, for Rolls- Royce or its competitors to take partial payment in cash with assorted commodities to pay the balance. Hence, a contract with Turkey’s national airline may lead to some monetary payment for Rolls-Royce, along with several tons of pistachios or other trade goods! To maintain their sales and service targets, these jet engine makers routinely resort to creative financing, long-term con- tracts, or asset-based trading deals. Overall, however, the market for jet engines is projected to continue to expand at huge rates. Rolls-Royce anticipates a 20-year window with a potential market demand of 70,000 engines valued at over $400 billion in civil aerospace alone. When defense contracts are factored in as well, the revenue projections for jet engine sales are likely to be enormous. As Rolls-Royce sees the future, the single biggest market growth opportunity is in larger, greater thrust engines that are designed to be paired with larger jet aircraft.

Rolls-Royce is currently engaged in a series of strategic decisions with the potential for huge payoffs

or significant losses. It is coupling its latest engine tech- nology, the Trent series, with Boeing and Airbus’ focus on more efficient designs. Airbus’ A350 and Boeing’s 777 and 787 are highly popular and strong-selling mod- els designed to maximize the efficient transportation of air travelers at the lowest cost. To gain market share in powering these jets, Rolls-Royce developed the new Trent XWB engine – the world’s most efficient com- mercial jet engine. Development of the engine started in 2005 when Rolls-Royce’s engineers sat down with Airbus to design an engine powerful enough to ser- vice its A350 XWB (Extra Wide Body) jet, an airframe powered by only two engines. In order for Airbus and Boeing to make their aircraft attractive to airlines, these aircraft must be efficient (that is, cheap to operate) but also powerful enough to carry a large passenger load. The decision to make an initial investment in new engine technology can cost a jet engine manufacturer over $1 billion in non-recoverable costs. As a result, it is critical that Rolls-Royce and its competition make the right strategic decisions about which aircraft to sup- port. Recall from our project profile at the beginning of the chapter that Rolls-Royce invested in servicing the A380 double-decker airplane, whose disappointing sales may result in its cancellation. This potential can- cellation will have a serious impact on Rolls-Royce’s bottom line.

Rolls-Royce’s decision to pursue engine design efficiency that pairs up with the Airbus and Boeing models represents a strategic choice for the future. Rolls- Royce anticipates that the commercial passenger market will triple in the next 20 years. As a result, future oppor- tunities will involve more economically viable aircraft. Boeing, Airbus and Rolls-Royce have all collectively taken a large financial gamble that their strategic vision of the future is correct.

Questions 1. Who are Rolls-Royce’s principal project manage-

ment stakeholders? How would you design stake- holder management strategies to address their concerns?

2. Given the financial risks inherent in developing a jet engine, make an argument, either pro or con, for Rolls-Royce to develop strategic partnerships with other jet engine manufacturers in a manner similar to Airbus’s consortium arrangement. What are the benefits and drawbacks in such an arrangement?

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72 Chapter 2 • The Organizational Context

CASE STUDY 2.2 Classic Case: Paradise Lost—The Xerox Alto42

Imagine the value of cornering the technological market in personal computing. How much would a five-year window of competitive advantage be worth to a com- pany today? It could easily mean billions in revenue, a stellar industry reputation, future earnings ensured— and the list goes on. For Xerox Corporation however, something strange happened on the way to industry leadership. In 1970, Xerox was uniquely positioned to take advantage of the enormous leaps forward it had made in office automation technology. Yet the company stumbled badly through its own strategic myopia, lack of nerve, structural inadequacies, and poor choices. This is the story of the Xerox Alto, the world’s first personal computer and one of the great “what if?” stories in busi- ness history.

The Alto was not so much a step forward as it was a quantum leap. Being in place and operating at the end of 1973, it was the first stand-alone personal computer to combine bit-mapped graphics, a mouse, menu screens, icons, an Ethernet connection, a laser printer, and word processing software. As a result of the combined efforts of an impressive collection of computer science geniuses headquartered at Xerox’s Palo Alto Research Center (PARC), the Alto was breathtaking in its innovative appeal. It was the PARC’s answer to Xerox’s top man- agement command to “hit a home run.” Xerox had prof- ited earlier from just such a home run in the form of the Model 914 photocopier, a technological innovation that provided the impetus to turn Xerox into a billion-dollar company in the 1960s. The Alto represented a similar achievement.

What went wrong? What forces combined to ensure that no more than 2,000 Altos were produced and that none were ever brought to market? In the end, they were used only inside the company and at some university sites. The answer could lie in the muddled strategic thinking that took place at Xerox while the Alto was in development.

The history of Xerox during this period shows a company that stepped back from technological leader- ship into a form of incrementalism, becoming content to follow IBM’s lead in office automation. Incrementalism refers to adopting a gradualist approach that plays it safe, avoiding technological leaps and large risks, which consequently averts the possibility of large returns. In 1974, Xerox decided to launch the Model 800 magnetic tape word processor rather than the Alto because the Model 800 was perceived as the safer bet. During the next five years, a series of ill-timed acquisitions, law- suits, and reorganizations rendered the Alto a casu- alty of inattention. What division would oversee its

development and launch? Whose budget would sup- port it, and the PARC in general? By leaving such tough decisions unmade, Xerox wasted valuable time and squandered its technological window of opportunity. Even when clear indications showed that competitor Wang was about to introduce its own line of office sys- tems, Xerox could not take the step to bring the Alto to market. By 1979, Xerox’s unique opportunity was lost. The Alto was no longer a one-of-a-kind technology, and the company quietly shelved any plans for its commer- cial introduction.

Perhaps the ultimate irony is this: here was a com- pany that had made its name through the phenomenal success of a highly innovative product, the Model 914 photocopier, but it did not know how to handle the opportunities presented by the next phenomenon. The Alto was so advanced that the company seemed unable to comprehend its possibilities. Executives did not have a strategic focus that emphasized a continual progres- sion of innovation. Instead, they were directed toward remaining neck-and-neck with the competition in an incremental approach. When competitor IBM released a new electric typewriter, Xerox responded in the same incremental way. The organizational structure at Xerox did not allow any one division or key manager to become the champion for new technologies like the Alto.

In 1979 Steven Jobs, president of Apple Computer, was given a tour of the PARC complex and saw an Alto in use. He was so impressed with the machine’s fea- tures and operating capabilities that he asked when it was due to be commercially launched. When told that much of this technology had been developed in 1973, Jobs became “physically sick” he later recounted, at the thought of the opportunity Xerox had forgone.

Questions 1. Do you see a logical contradiction in Xerox’s will-

ingness to devote millions of dollars to support pure research sites like the PARC and its refusal to commercially introduce the products developed?

2. How did Xerox’s strategic vision work in favor of or against the development of radical new tech- nologies such as the Alto?

3. What other unforeseeable events contributed to making Xerox’s executives unwilling to take any new risks precisely at the time the Alto was ready to be released?

4. “Radical innovation cannot be too radical if we want it to be commercially successful.” Argue either in favor of or against this statement.

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CASE STUDY 2.3 Project Task Estimation and the Culture of “Gotcha!”

I recently worked with an organization that adopted a mind-set in which it was assumed that the best way to keep project team members working hard was to uni- laterally trim their task duration estimates by 20%. Sup- pose that you were asked to estimate the length of time necessary to write computer code for a particular soft- ware product and you determined that it should take about 80 hours. Knowing you were about to present this information to your supervisor and that she was going to immediately cut the estimate by 20%, what would be your course of action? You would probably first add a “fudge factor” to the estimate in order to protect your- self. The conversation with the boss might go something like this:

Boss “Have you had a chance to estimate that coding sequence yet?”

You Yes, it should take me 100 hours.”

Boss “That’s too long. I can only give you 80 hours, tops.” You (Theatrical sigh) “Well, if you say so, but I really don’t

know how I can pull this off.” Once you leave the office and shut the door, you

turn with a smile and whisper, “Gotcha!”

Questions 1. How does the organization’s culture support this

sort of behavior? What pressures does the man- ager face? What pressures does the subordinate face?

2. Discuss the statement, “If you don’t take my esti- mates seriously, I’m not going to give you serious estimates!” How does this statement apply to this example?

CASE STUDY 2.4 Widgets ’R Us

Widgets ’R Us (WRU) is a medium-sized firm specializ- ing in the design and manufacturing of quality widgets. The market for widgets has been stable. Historically, WRU has had a functional organization design with four departments: accounting, sales, production, and engineering. This design has served the company well, and it has been able to compete by being the low-priced company in the industry.

In the past three years, the demand for widgets has exploded. New widgets are constantly being developed to feed the public’s seemingly insatiable demand. The average life cycle of a newly released widget is 12–15 months. Unfortunately, WRU is finding itself unable to compete successfully in this new, dynamic market. The CEO has noted a number of problems. Products are slow

to market. Many new innovations have passed right by WRU because the company was slow to pick up signs from the marketplace that they were coming. Internal communication is very poor. Lots of information gets kicked upstairs, and no one seems to know what hap- pens to it. Department heads constantly blame other department heads for problems.

Questions 1. You have been called in as a consultant to analyze

the operations at WRU. What would you advise? 2. What structural design changes might be under-

taken to improve the operations at the company? 3. What are the strengths and weaknesses of the

alternative solutions the company could employ?

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Internet Exercises

2.9 Wegmans has been consistently voted one of the 100 best companies to work for in the United States by Fortune mag- azine. In fact, in 2005 it was ranked number 1, and in 2016 it was ranked number 4. Go to its Web site, www.wegmans. com, and click on “About Us.” What messages, formal and informal, are being conveyed about Wegmans through its Web site? What does the Web site imply about the culture of the organization?

2.10 Go to the Web site www.projectstakeholder.com and ana- lyze some of the case studies found on the Web site. What do these cases suggest about the importance of assessing stakeholder expectations for a project before it has begun its development process? In other words, what are the risks of waiting to address stakeholder concerns until after a project has begun?

2.11 Go to a corporate Web site of your choice and access the organizational chart. What form of organization does this chart represent: functional, project, matrix, or some other form? Based on our discussion in this chapter, what would be the likely strengths and weaknesses of this organiza- tion’s project management activities?

2.12 Access the corporate Web site for Fluor-Daniel Corpora- tion and examine its “Compliance and Ethics” section at www.fluor.com/sustainability/ethics_compliance/Pages/ default.aspx. What does the list of behaviors and features under “Fluor Ethics and Compliance” suggest about the way the company does business? What are the strategic goals and directions that naturally flow from the ethical code? In your opinion, how would the ethics statement influence the manner in which the company manages its projects?

PMP CERTIFICATION SAMPLE QUESTIONS

2.13 What is the main role of the functional manager? a. To control resources b. To manage the project when the project manager

isn’t available c. To define business processes d. To manage the project manager

2.14 What is the typical role of senior management on a project? a. Support the project b. Pay for it c. Support the project and resolve resource and other

conflicts d. Resolve resource and other conflicts

2.15 What is an organization that controls project managers, documentation, and policies called?

a. Project management office b. Strong matrix c. Functional d. Pure project

2.16 A business analyst has a career path that has been very important to her throughout the 10 years of her career. She is put on a project with a strong matrix organizational

structure. Which of the following is likely viewed as a nega- tive of being on the project?

a. Being away from the group and on a project that might make it more difficult to get promoted

b. Working with people who have similar skills c. Working long hours because the project is a high

priority d. Not being able to take her own certification tests

because she is so busy 2.17 The functional manager is planning the billing system

replacement project with the newest project manager at the company. In discussing this project, the functional manager focuses on the cost associated with running the system after it is created and the number of years the system will last before it must be replaced. What best describes what the functional manager is focusing on?

a. Project life cycle b. Product life cycle c. Project management life cycle d. Program management life cycle

2.18 In a functional organization: a. Power lies mainly with the project manager b. Power lies mainly with the functional manager c. Power is equally divided between the project and

functional managers d. Power lies with the project office

2.19 A project manager is meeting resistance from a functional manager in getting resources assigned to the project team. Which would be the most appropriate to help resolve this situation?

a. Senior management b. The customer c. Critical project stakeholders d. The project champion

2.20 In a weak matrix organization: a. More power resides with the project manager b. More power resides with the functional manager c. Power is equally divided between the project and

functional managers d. More power is given to the project’s client

2.21 A Project Management Office (PMO) that is intended to function primarily as a tracking and monitoring device is often referred to as:

a. A resource pool b. A control tower c. A weather station d. A matrix

2.22 An organization in which project managers have ulti- mate  responsibility for their projects and control of all resources is:

a. Functional b. Balanced matrix c. Hierarchical d. Heavyweight project (projectized) organization

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Answers

2.13. a—The functional manager runs the day-to-day operations of his department and controls the resources.

2.14. c—Because senior managers usually outrank the project manager, they can help with resolving any resource or other conflicts as they arise.

2.15. a—The project management office (PMO) typically has all of these responsibilities.

2.16. a—Being away from her functional group may cause her to feel that her efforts on behalf of the project are not being recognized by her functional manager, since the project employs a strong matrix structure.

2.17. b—The functional manager is focusing on the product life cycle, which is developed based on an example of a

successful project and encompasses the range of use for the product.

2.18. b—in functional structures, power lies with the functional manager.

2.19. a—senior management is the best mediator of resource con- flicts between a project manager and a functional manager.

2.20. b—in a weak matrix, more power resides with the func- tional manager.

2.21. c—a weather station is the name for a PMO that functions as a monitoring device.

2.22. d—heavyweight project organizations are sometimes referred to as “projectized” and represent the highest level of commitment to project-based work.

Answers 75

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76 Chapter 2 • The Organizational Context

INTEGRATED PROJECT Building Your Project Plan

EXERCISE 1—DEVELOPING THE PROJECT NARRATIVE AND GOALS You have been assigned to a project team to develop a new product or service for your organization. Your challenge is to first decide on the type of product or service you wish to develop. The project choices can be flexible, consisting of options as diverse as construction, new product development, IT implementation, and so forth.

Develop a project scope write-up on the project you have selected. Your team is expected to create a project history, complete with an overview of the project, an identifiable goal or goals (including project targets), the general project management approach to be undertaken, and signifi- cant project constraints or potential limiting effects. Additionally if appropriate, identify any basic resource requirements such as personnel or specialized equipment that are needed to complete the project. What is most important at this stage is creating a history or narrative of the project you have come up with, including a specific statement of purpose or intent (i.e., why the project is being developed, what it is, and what niche or opportunity it is aimed to address).

The write-up should fully explain your project concept, constraints, and expectations. It is not necessary to go into minute detail regarding the various subactivities or subcomponents of the project; it is more important to concentrate on the bigger picture for now.

SAMPLE BACKGROUND ANALYSIS AND PROJECT NARRATIVE FOR ABCUPS, INC. Founded in 1990, ABCups, Inc., owns and operates 10 injection-molding machines that produce plastic drinkware. ABCups’s product line consists of travel mugs, thermal mugs, steins, and sports tumblers. The travel mugs, thermal mugs, and steins come in two sizes: 14 and 22 ounces. The sports tumblers are offered only in the 32-ounce size. All products except the steins have lids. The travel and thermal mugs consist of a liner, body, and lid. The steins and sports tumblers have no lining. There are 15 colors offered, and any combination of colors can be used. The travel and thermal mugs have a liner that needs to be welded to the outer body; subcontractors and screen printers weld the parts together. ABCups does no welding, but it attaches the lid to the mug. ABCups’s customer base consists primarily of distributors and promotional organizations. Annual sales growth has remained steady, averaging 2%–3% each year. Last year’s revenues from sales were $70 million.

CURRENT PROCESS ABCups’ current method for producing its product is as follows:

1. Quote job 2. Receive/process order 3. Schedule order into production 4. Mold parts 5. Issue purchase order to screen printer with product specifications 6. Ship parts to screen printer for welding and artwork 7. Receive returned product from screen printer for final assembly and quality control 8. Ship product to customer

At current processing levels, the entire process can take from two to four weeks, depending on order size, complexity, and the nature of current production activity.

OVERVIEW OF THE PROJECT Because of numerous complaints and quality rejects from customers, ABCups has determined to proactively resolve outstanding quality issues. The firm has determined that by bringing welding and screen printing functions in-house, it will be able to address the current quality problems, expand its market, maintain better control over delivery and order output, and be more responsive to customers. The project consists of adding three new processes (welding, screen printing, and improved quality control) to company operations.

ABCups has no experience in or equipment for welding and screen printing. The organization needs to educate itself, investigate leasing or purchasing space and equipment, hire trained workers,

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and create a transition from subcontractors to in-house operators. The project needs a specified date of completion so that the transition from outsourcing to company production will be smooth and products can be delivered to customers with as little disruption to shipping as possible.

Management’s strategy is to vertically integrate the organization to reduce costs, increase mar- ket share, and improve product quality. ABCups is currently experiencing problems with its vendor base, ranging from poor quality to ineffectual scheduling, causing ABCups to miss almost 20% of its customers’ desired ship dates. Maintaining complete control over the product’s development cycle should improve the quality and on-time delivery of ABCups’s product line.

OBJECTIVES

Goals Targets

1. Meet all project deadlines within a one-year time frame without jeopardizing customer satisfaction.

Excellent = 0 missed deadlines Good = 195 missed deadlines Acceptable = 6 8 missed deadlines

2. Deplete dependence on subcontracted screen printing by 100% within six months without increasing customer’s price or decreasing product quality.

Excellent = 100% independence Good = 80999% independence Acceptable = 60979% independence

3. Perform all process changes without affecting current customer delivery schedules for the one-year project time frame.

Excellent = 0% delivery delays Good = 6 5% delivery delays Acceptable = 5910% delivery delays

4. Decrease customer wait time over current wait time within one year without decreasing quality or increasing price.

Excellent = 2/3 decrease in wait time Good = 1/2 decrease in wait time Acceptable = 1/3 decrease in wait time

5. Stay within 10% of capital budget without exceeding 20% within the project baseline schedule.

Excellent = 1% variance Good = 5% variance Acceptable = 10% variance

6. Decrease customer rejections by 25% within one year. Excellent = 45% reduction Good = 35% reduction Acceptable = 25% reduction

General Approach

1. Managerial approach. The equipment will be purchased from outside vendors; however, ABCups’s internal employees will perform the assembly work. Given the type of equipment that is required, outside contractors will not be needed because the company’s facility employs the necessary maintenance staff to set up the equipment and troubleshoot as required, once the initial training has been supplied by the vendor.

2. Technical approach. The equipment manufacturers will utilize CAD to design the equipment. Initially, the firm will require a bank of parts to be available once the equipment arrives in order to fine-tune the machinery. Fixtures will be designed as required, but will be supplied by the machine manufacturer.

Constraints

1. Budget constraints. This project must ultimately increase profitability for the company. In addition, the project will have a constraining budget. It must be shown that any additional expense for both the conversion and producing finished cups on-site will result in increased profitability.

2. Limited plant space. ABCups is assuming this conversion does not involve building a new plant or significantly increasing facility size. Space for new machinery, new employees, and storage for dyes and inventory must be created through conversion of existing floor space. If additional floor space is required, leasing or purchasing options will need to be investigated.

3. Time. Since this project will require the company to break existing contracts with vendors, any missed milestones or other delays will cause an unacceptable delay to customers. A backup plan must be in place to avoid losing customers to competitors in case the time frame is not

Integrated Project 77

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78 Chapter 2 • The Organizational Context

strictly met. The conversion must be undertaken with a comprehensive project scheduling system developed and adhered to.

4. Safety regulations. The installation and conversion activities must be in accordance with several agencies’ specifications, including but not limited to guidelines from the Occupational Safety and Health Administration (OSHA), the insurance carrier, and the financing agency.

5. Current orders must be filled on time. All activities must be designed to avoid any delay in current orders. The transition should appear seamless to customers to avoid losing any part of the extant customer base.

Notes

1. Yousef, D. K. (2015). “How to squeeze the biggest jet into the busiest airport,” Bloomberg, May 26, retrieved at: https://www.bloomberg.com/graphics/2015-dubai- a380-vortex/; Jasper, C. and Rothman, A. (2016). “The Air- bus A380 cut may mark beginning of end for superjumbo,” Bloomberg, July 13, retrieved at: https://www.bloomberg. com/news/articles/2016-07-12/airbus-plans-to-cut- annual-a380-deliveries-to-12-as-of-2018; Rothman, A. (2014). “Airbus's Big Plane Has a Small (Order) Problem,” Bloomberg, Dec 18, Retrieved at: http://www.bloomberg .com/news/articles/2014-12-18/airbus-a380-big-plane- small-sales; Mouawad, J. (2014). “Oversize expectations for the Airbus A380,” New York Times, Aug 9, retrieved at: https://www.nytimes.com/2014/08/10/business/over- size-expectations-for-the-airbus-a380.html?_r=0.

2. David, F. R. (2001). Strategic Management, 8th ed. Upper Saddle River, NJ: Prentice Hall.

3. The Holy Bible, King James Version. Cambridge Edition: 1769 (Prov. 29:18).

4. Vision Statement of Bechtel Corporation. Retrieved at: http:// www.bechtel.com/about-us/vision-values-covenants/

5. Cleland, D. I. (1998). “Strategic project management,” in Pinto, J. K. (Ed.), Project Management Handbook. San Fran- cisco, CA: Jossey-Bass, pp. 27–40.

6. Weihrich, H. (1982). “The TOWS matrix—A tool for situa- tional analysis,” Long Range Planning, 15: 54–66; Hillson, D. (2002). “Extending the risk process to manage opportuni- ties,” International Journal of Project Management, 20: 235–40.

7. Wheelen, T. L., and Hunger, J. D. (1992). Strategic Man- agement and Business Policy, 4th ed. Reading, MA: Addison-Wesley.

8. Wiener, E., and Brown, A. (1986). “Stakeholder analysis for effective issues management,” Planning Review, 36: 27–31.

9. Mendelow, A. (1986). “Stakeholder analysis for strategic planning and implementation,” in King, W. R., and Cle- land, D. I. (Eds.), Strategic Planning and Management Hand- book. New York: Van Nostrand Reinhold, pp. 67–81; Winch, G. M. (2002). Managing Construction Projects. Oxford: Blackwell; Winch, G. M., and Bonke, S. (2001). “Project stakeholder mapping: Analyzing the interest of project stakeholders,” in Slevin, D. P., Cleland, D. I., and Pinto, J. K. (Eds.), The Frontiers of Project Management Research. Newtown Square, PA: PMI, pp. 385–404.

10. Wideman, R. M. (1998). “How to motivate all stakeholders to work together,” in Cleland, D. I. (Ed.), Project Manage- ment Field Guide. New York: Van Nostrand Reinhold, pp. 212–26; Hartman, F. T. (2000). Don’t Park Your Brain Outside. Newtown Square, PA: PMI.

11. Cleland, D. I. (1988). “Project stakeholder management,” in Cleland, D. I., and King, W. R. (Eds.), Project Management Hand- book, 2nd ed. New York: Van Nostrand Reinhold, pp. 275–301.

12. Vrijhoef, R., and Koskela, L. (2000). “The four roles of sup- ply chain management in construction,” European Journal of Purchasing and Supply Management, 6: 169–78.

13. Cleland, D. I. (1988), as cited in note 12. 14. Block, R. (1983). The Politics of Projects. New York: Yourdon

Press. 15. Manyika, J., Chui, M., Bughin, J., Dobbs, R., Bisson, P.,

and Marrs, A. (2013). Disruptive technologies: Advances that will transform life, business, and the global economy. McK- insey Global Institute, retrieved at: file:///C:/Users/ jkp4/Downloads/MGI_Disruptive_technologies_Execu- tive_summary_May2013.pdf; BI Intelligence. (2016). “10 million self-driving cars will be on the road by 2020,” Business Insider, June 15, retrieved at: http://www.busi- nessinsider.com/report-10-million-self-driving-cars- will-be-on-the-road-by-2020-2015-5-6; Muoio, D. (2017). “Google made a brilliant pivot to turn around its self- driving-car struggles,” Yahoo Finance, Jan 17, retrieved at: http://finance.yahoo.com/news/google-made-brilliant- pivot-turn-181754136.html.

16. Fisher, R., and Ury, W. (1981). Getting to Yes: Negotiating Agreement Without Giving In. New York: Houghton Mifflin.

17. Frame, J. D. (1987). Managing Projects in Organizations. San Francisco, CA: Jossey-Bass.

18. Sherman, M. (2013, Dec 4). As others see us. Psychology Today, retrieved from https://www.psychologytoday.com/ blog/real-men-dont-write-blogs/201312/others-see-us

19. Grundy, T. (1998). “Strategy implementation and project management,” International Journal of Project Management, 16(1): 43–50.

20. Daft, R. L. (2001). Organization Theory and Design, 7th ed. Mason, OH: Southwestern; Moore, D. (2002). Project Man- agement: Designing Effective Organizational Structures in Construction. Oxford: Blackwell; Yourker, R. (1977). “Orga- nizational alternatives for project management,” Project Management Quarterly, 8(1): 24–33.

21. American Management Association. (2012). Survey on Internal Collaboration; Minato, C. (2012). “The Liz Clai- borne disaster timeline: How one bad decision destroyed the largest women’s apparel brand,” Business Insider, July 15, retrieved at: http://www.businessinsider.com/liz- claiborne-disaster-timeline--fortune-500-to-failure-2012-7; Agins, T. (2006). “Fashion redesigner,” Wall Street Jour- nal, Feb 6, retrieved at: http://www.wsj.com/articles/ SB113918991918565666.

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Notes 79

22. Meredith, J. R., and Mantel, Jr., S. J. (2003). Project Manage- ment, 5th ed. New York: Wiley.

23. Larson, E. W., and Gobeli, D. H. (1987). “Matrix manage- ment: Contradictions and insights,” California Manage- ment Review, 29(4): 126–37; Larson, E. W., and Gobeli, D. H. (1988). “Organizing for product development projects,” Journal of Product Innovation Management, 5: 180–90.

24. Daft, R. L. (2001). Organization Theory and Design, 7th ed. Mason, OH: Southwestern; Anderson, C. C., and Fleming, M. M. K. (1990). “Management control in an engineering matrix organization: A project engineer’s perspective,” Industrial Management, 32(2): 8–13; Ford, R. C., and Ran- dolph, W. A. (1992). “Cross-functional structures: A review and integration of matrix organization and project man- agement,” Journal of Management, 18: 267–94.

25. Larson, E. W., and Gobeli, D. H. (1987). “Matrix manage- ment: Contradictions and insights,” California Manage- ment Review, 29(4): 126–37; Larson, E. W., and Gobeli, D. H. (1988). “Organizing for product development proj- ects,” Journal of Product Innovation Management, 5: 180–90; Engwall, M., and Kallqvist, A. S. (2000). “Dynamics of a multi-project matrix: Conflicts and coordination,” work- ing paper, Chalmers University, retrieved at: www.fenix. chalmers.se/publications/ 2001/pdf/WP%202001-07.pdf.

26. Wheelwright, S. C., and Clark, K. (1992). “Creating proj- ect plans to focus product development,” Harvard Business Review, 70(2): 70–82.

27. Gobeli, D. H., and Larson, E. W. (1987). “Relative effective- ness of different project management structures,” Project Management Journal, 18(2): 81–85; Gray, C., Dworatschek, S., Gobeli, D. H., Knoepfel, H., and Larson, E. W. (1990). “Inter- national comparison of project organization structures,” International Journal of Project Management, 8: 26–32.

28. Gray, C. F., and Larson, E. W. (2003). Project Management, 2nd ed. Burr Ridge, IL: McGraw-Hill; Dai, C. (2000). “The Role of the Project Management Office in Achieving Proj- ect Success” PhD Dissertation, The George Washington University, Washington, DC.

29. Project Management Institute. (2013). Project Management Body of Knowledge, 5th Edition. Newtown Square, PA: PMI.

30. Block, T. (1998). “The project office phenomenon,” PMNet- work, 12(3): 25–32; Block, T. (1999). “The seven secrets of a successful project office,” PMNetwork, 13(4): 43–48; Block, T., and Frame, J. D. (1998). The Project Office. Menlo Park, CA: Crisp Publications; Eidsmoe, N. (2000). “The strategic project management office,” PMNetwork, 14(12): 39–46; Ker- zner, H. (2003). “Strategic planning for the project office,” Project Management Journal, 34(2): 13–25; Dai, C. X., and Wells, W. G. (2004). “An exploration of project manage- ment office features and their relationship to project per- formance,” International Journal of Project Management, 22: 523–32; Aubry, M., Müller, R., Hobbs, B., and Blomquist, T. (2010). “Project management offices in transition,” Interna- tional Journal of Project Management, 28(8): 766–78.

31. Casey, W., and Peck, W. (2001). “Choosing the right PMO setup,” PMNetwork, 15(2): 40–47; Gale, S. (2009). “Deliver- ing the goods,” PMNetwork, 23(7): 34–39.

32. Strausser, G., and Sopko, J. A. (2008). “Improv- ing organizational project management maturity,” Project Management Institute Annual Symposium, retrieved at: https://www.pmi.org/learning/library/ improving-siemens-maturity-project-management-6936.

33. Kerzner, H. (2003). Project Management, 8th ed. New York: Wiley; Englund, R. L., and Graham, R. J. (2001). “Imple- menting a project office for organizational change,” PMNetwork, 15(2): 48–52; Fleming, Q., and Koppelman, J. (1998). “Project teams: The role of the project office,” Cost Engineering, 40: 33–36.

34. Schein, E. (1985). Organizational Culture and Leadership: A Dynamic View. San Francisco, CA: Jossey-Bass, pp. 19–21; Schein, E. H. (1985). “How culture forms, develops and changes,” in Kilmann, R. H., Saxton, M. J., and Serpa, R. (Eds.), Gaining Control of the Corporate Culture. San Fran- cisco, CA: Jossey-Bass, pp. 17–43; Elmes, M., and Wilemon, D. (1989). “Organizational culture and project leader effec- tiveness,” Project Management Journal, 19(4): 54–63.

35. Kirsner, S. (1998, November). “Designed for innovation,” Fast Company, pp. 54, 56; Daft, R. L. (2001). Organization Theory and Design, 7th ed. Mason, OH: Southwestern.

36. Myers, C. (2016). “Three reasons why Amazon’s culture won’t work for you, according to Jeff Bezos,” Inc., Apr 7, retrieved at: http://www.inc.com/chris-myers/jeff- bezos-just-revealed-the-secret-to-amazons-culture-heres- why-you-shouldnt-tr.html; Kantor, J. and Streitfeld, D. (2015). “Inside Amazon: Wrestling big ideas in a bruis- ing workplace,” New York Times, Aug 15, retrieved at: https://www.nytimes.com/2015/08/16/technology/ inside-amazon-wrestling-big-ideas-in-a-bruising-work- place.html?_r=1; Pfeffer, J. (2016). “Why the assholes are winning: money trumps all,” Journal of Management Stud- ies, 53, 663–669.

37. “Australian London 2012 Olympic swim team ‘toxic’.” (2013, February 19). BBC News Asia, retrieved at: www.bbc. com/news/world-asia-21501881; Ransom, I. (2016). “Rio redemption beckons for Australian swimmers,” Reuters, Apr 14, retrieved at: .; Schipp, D., (2016), “How to fix the swim team: first ditch the medal forecasts,” New.com.au, Aug 15, retrieved at: http://www.news.com.au/sport/ olympics/swimming/how-to-fix-the-swim-team-first- ditch-the-medal-forecasts/news-story/2db3ca94ffa077f3 c1396b76edfe5dca.

38. Kilmann, R. H., Saxton, M. J., and Serpa, R. (1985). Gain- ing Control of the Corporate Culture. San Francisco, CA: Jossey-Bass.

39. “The US must do as GM has done.” (1989). Fortune, 124(2): 70–79.

40. Hillier, B. (2013, July 24). “Gibeau: ‘You get the best games from small teams with strong cultures,’” VG 24/7, retrieved at: www.vg247.com/2013/07/24/gibeau-you-get-the- best-games-from-small-teams-with-strong-cultures/; Takahashi, D. (2013, July 23). “EA exec Frank Gibeau: Betting on next-gen consoles, mobile, and doing right by consumers,” Venture Beat, retrieved at: http://venturebeat. com/2013/07/23/eas-frank-gibeau-on-interview-part-1; Kelleher, K. (2014). “Why Electronic Arts is suddenly roar- ing back to life,” Time, Dec 4, retrieved at: http://time. com/3616882/electronic-arts-ea/.

41. Staw, B. M., and Ross, J. (1987, March–April). “Knowing when to pull the plug,” Harvard Business Review, 65: 68–74.

42. Smith, D. K., and Alexander, R. C. (1988). Fumbling the Future: How Xerox Invented, Then Ignored, the First Personal Computer. New York: Macmillan; Kharbanda, O. P., and Pinto, J. K. (1996). What Made Gertie Galdop? New York: Van Nostrand Reinhold.

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3 ■ ■ ■

Project Selection and Portfolio Management

Chapter Objectives After completing this chapter, you should be able to:

3.1 Explain six criteria for a useful project selection/screening model. 3.2 Understand how to employ a variety of screening and selection models to select projects. 3.3 Learn how to use financial concepts, such as the efficient frontier and risk/return models. 3.4 Identify the elements in the project portfolio selection process and discuss how they work in

a logical sequence to maximize a portfolio.

PROJECT MANAGEMENT BODY OF KNOWLEDGE CORE CONCEPTS COVERED IN THIS CHAPTER:

1. Portfolio Management (PMBoK sec. 1.4.2)

PROJECT PROFILE

Project Selection Procedures: A Cross-Industry Sampler

The art and science of selecting projects is one that organizations take extremely seriously. Firms in a variety of indus- tries have developed highly sophisticated methods for project screening and selection to ensure that the projects they choose to fund offer the best promise of success. As part of this screening process, organizations often evolve their own particular methods based on technical concerns, available data, and corporate culture and preferences. The following list gives you a sense of the lengths to which some organizations go with project selection:

• Hoechst AG, a pharmaceutical firm, uses a scoring portfolio model with 19 questions in five major categories when rating project opportunities. The five categories include probability of technical success, probability of commercial success, reward to the company, business strategy fit, and strategic leverage (that is, the ability of the project to employ and elevate company resources and skills). Within each of these factors are several specific questions, which are scored on a 1 to 10 scale by management.

• At German industrial giant Siemens, every business unit in each of the 190 countries in which the company operates uses a system entitled “PM@Siemens” for categorizing projects that employs a two-digit code. Each project is award- ed a letter from A to F, indicating its significance to the company, and a number from 0 to 3, indicating its overall risk level. Larger or riskier projects (e.g., an “A0”) require approval from Siemens’ main board in Germany, but many of the lesser projects (e.g., an “F3”) can be approved by local business units. Too many A0s in the portfolio can indicate mounting risks while too many F3 projects may signal a lack of economic value overall.

• The Royal Bank of Canada has developed a scoring model to rate its project opportunities. The criteria for the portfo- lio scoring include project importance (strategic importance, magnitude of impact, and economic benefits) and ease of doing (cost of development, project complexity, and resource availability). Expected annual expenditure and total project spending are then added to this rank-ordered list to prioritize the project options. Decision rules are used, e.g., projects of low importance that are difficult to execute get a “no-go” rating.

• The Weyerhaeuser corporate research and development (R&D) program has put processes in place to align and priori- tize R&D projects. The program has three types of activities: technology assessment (changes in external environment

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Introduction: Project Selection 81

Introduction: Project Selection

LO 3.1 Explain six criteria for a useful project selection/screening model.

All organizations select projects they decide to pursue from among numerous opportunities. What criteria determine which projects should be supported? Obviously, this is no simple decision. The consequences of poor decisions can be enormously expensive. Recent research suggests that in the realm of information technology (IT), companies squander nearly $100 billion a year on projects that are created but never used by their intended clients. How do we make the most reasonable choices in selecting projects? What kind of information should we collect? Should decisions be based strictly on financial analysis, or should other criteria be considered? In this chapter, we will try to answer such questions as we take a closer look at the process of project selection.

We will examine several different approaches for evaluating and selecting potential projects. The various methods for project selection run along a continuum from highly qualitative, or judgment-based approaches to those that rely on quantitative analysis. Of course, each approach has its benefits and drawbacks, which must be considered in turn.

We will also discuss several issues related to the management of a project portfolio—the set of projects that an organization is considering/undertaking at any given time. For example, Rubbermaid, Inc., routinely undertakes hundreds of new product development projects simul- taneously, always searching for opportunities with strong commercial prospects. When a firm is pursuing multiple projects, the challenges of strategic decision making, resource management, scheduling, and operational control are magnified.

Firms are bombarded with opportunities, but no organization enjoys infinite resources with which to pursue every opportunity that presents itself. Choices must be made, and to best ensure that they select the most viable projects, many managers develop priority systems—guidelines for balancing the opportunities and costs entailed by each alternative. The goal is to balance the compet- ing demands of time and advantage.3 The pressures of time and money affect most major decisions, and decisions are usually more successful when they are made in a timely and efficient manner. For example, if your firm’s sales department recognizes a commercial opportunity it can exploit, you need to generate alternative approaches to the project quickly to capitalize on the prospect.

and impact to the company), research (building knowledge bases and competencies in core technical areas), and development (development of specific commercial opportunities). Four key inputs are considered when establishing priorities: significant changes in the external environment, long-term future needs of lead customers, business strate- gies, priorities, and technology needs, and corporate strategic direction.

• Mobil Chemical uses six categories of projects to determine the right balance of projects that will enter its portfo- lio: (1) cost reductions and process improvements, (2) product improvements, product modifications, and customer satisfaction, (3) new products, (4) new platform projects and fundamental/breakthrough research projects, (5) plant support, and (6) technical support for customers. Senior management reviews all project proposals and determines the division of capital funding across these six project types. One of the key decision variables involves a comparison of “what is” with “what should be.”

• The Texas Department of Transportation identifies several criteria in its project selection process. Infrastructure and building projects are selected by the Texas Transportation Commission based on the following criteria: safety, main- tenance and preservation of the existing system, congestion relief, access and mobility, economic vitality, efficient system management and operations, and any additional transportation goals identified in the statewide long-range transportation plans. These projects must adhere to all department design standards as well as applicable state and federal regulations.1

• At 3M’s Traffic Safety Systems Division during project screening and selection, management uses a project viability chart to score project alternatives. As part of the profile and scoring exercise, personnel must address how the project accomplishes strategic project objectives and critical business issues affecting a specific group within the target mar- ket. Projected return on investment is always counterbalanced with riskiness of the project option.

• Exxon Chemical’s management begins evaluating all new project proposals in light of the business unit’s strategy and strategic priorities. Target spending is decided according to the overall project mix portfolio. As the year progresses, all projects are reprioritized using a scoring model. As significant differences between projected and actual spending are uncovered, the top management group adjusts for the next year’s portfolio.2

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82 Chapter 3 • Project Selection and Portfolio Management

Time wasted is generally opportunity lost. On the other hand, you need to be careful: you want to be sure that, at least as far as possible, you are making the best choice among your options. Thus, organizational decision makers develop guidelines—selection models—that permit them to save time and money while maximizing the likelihood of success.

Several decision models are available to managers responsible for evaluating and selecting potential projects. As you will see, they run the gamut from qualitative to quantitative and simple to complex. All firms, however, try to develop a screening model (or set of models) that will allow them to make the best choices among alternatives within the usual constraints of time and money.

Suppose you were interested in developing a model that allowed you to effectively screen project alternatives. How might you ensure that the model was capable of picking potential winners from the large set of possible project choices? After much consideration, you decide to narrow the focus for your screening model and create one that will allow you to select only projects that have high potential payoffs. All other issues are ignored in favor of the sole criterion of commercial profit- ability. The question is, would such a screening model be useful? Souder4 identifies five important issues that managers should consider when evaluating screening models:

1. Realism. An effective model must reflect organizational objectives, including a firm’s strategic goals and mission. Criteria must also be reasonable in light of such constraints on resources as money and personnel. Finally, the model must consider both commercial risks and technical risks, including performance, cost, and time. That is, will the project work as intended? Can we keep to the original budget or is there a high potential for escalating costs? Is there a strong risk of significant schedule slippage?

2. Capability. A model should be flexible enough to respond to changes in the conditions under which projects are carried out. For example, the model should allow the company to compare different types of projects (long-term versus short-term projects, projects with different technol- ogies or capabilities, projects with different commercial objectives). It should be robust enough to accommodate new criteria and constraints, suggesting that the screening model must allow the company to use it as widely as possible to cover the greatest possible range of project types.

3. Flexibility. The model should be easily modified if trial applications require changes. It must, for example, allow for adjustments due to changes in exchange rates, tax laws, building codes, and so forth.

4. Ease of use. A model must be simple enough to be used by people in all areas of the organization, both those in specific project roles and those in related functional positions. Further, the screening model that is applied, the choices made for project selection, and the reasons for those choices should be clear and easily understood by organizational members. The model should also be timely: it should generate the screening information rapidly, and people should be able to assimilate that information without any special training or skills.

5. Cost. The screening model should be cost-effective. A selection approach that is expensive to use in terms of either time or money is likely to have the worst possible effect, causing orga- nizational members to avoid using it because of the excessive cost of employing it. The cost of obtaining selection information and generating optimal results should be low enough to encourage use of the models rather than diminish their applicability.

Let’s add a sixth criterion for a successful selection model:

6. Comparability. The model must be broad enough to be applied to multiple projects. If a model is too narrowly focused it may be useless in comparing potential projects, or foster biases toward some over others. A useful model must support general comparisons of project alternatives.

Project selection models come in two general classes: numeric and nonnumeric.5 Numeric models seek to use numbers as inputs for the decision process involved in selecting projects. These values can be derived either objectively or subjectively; that is, we may employ objective, external values (“The bridge’s construction will require 800 cubic yards of cement”) or subjective, internal values (“We will need to hire two code checkers to finish the software development within eight weeks”). Neither of these two input alternatives is necessarily wrong; an expert’s opinion on an issue may be subjective but very accurate. On the other hand, an incorrectly calibrated surveyor’s level can give objective but wrong data. The key is to remember that most selection processes for

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Introduction: Project Selection 83

TABLE 3.1 Issues in Project Screening and Selection

1. Risk—Factors that reflect elements of unpredictability to the firm, including: a. Technical risk—risks due to the development of new or untested technologies b. Financial risk—risks from the financial exposure caused by investing in the project c. Safety risk—risks to the well-being of users or developers of the project d. Quality risk—risks to the firm’s goodwill or reputation due to the quality of the completed project e. Legal exposure—potential for lawsuits or legal obligation

2. Commercial—Factors that reflect the market potential of the project, including: a. Expected return on investment b. Payback period c. Potential market share d. Long-term market dominance e. Initial cash outlay f. Ability to generate future business/new markets

3. Internal operating issues—Factors that have an impact on internal operations of the firm, including: a. Need to develop/train employees b. Change in workforce size or composition c. Change in physical environment d. Change in manufacturing or service operations resulting from the project

4. Additional factors, including: a. Patent protection b. Impact on company’s image c. Strategic fit

project screening involve a combination of subjective and objective data assessment and decision- making. Nonnumeric models, on the other hand, do not employ numbers as decision inputs, rely- ing instead on other data.

Companies spend great amounts of time and effort trying to make the best project selection decisions possible. These decisions are typically made with regard for the overall objectives that the company’s senior management staff have developed and promoted based on their strategic plan. Such objectives can be quite complex and may reflect several external factors that can affect a firm’s operations. For example, suppose the new head of Sylvania’s Lighting Division mandated that the strategic objective of the organization was to be sales growth at all costs. Any new project opportu- nity would be evaluated against this key strategic imperative. Thus, a project offering the potential for opening new markets might be viewed more favorably than a competing project promising a higher potential rate of return.

The list of factors that can be considered when evaluating project alternatives is enormous. Table 3.1 provides only a partial list of the various elements that a company must address, organized into the general categories of risk and commercial factors, internal operating issues, and other fac- tors. Although such a list can be long, in reality the strategic direction emphasized by top manage- ment often highlights certain criteria over others. In fact, if we apply Pareto’s 80/20 principle, which states that a few issues (20%) are vital and many (80%) are trivial, it may be fairly argued that, for many projects, less than 20% of all possible decision criteria account for over 80% of the decision about whether to pursue the project.

This being said, we should reflect on two final points regarding the use of any decision- making approach to project selection. First, the most complete model in the world is still only a partial reflection of organizational reality. The potential list of inputs into any project selec- tion decision is virtually limitless—so much so, in fact, that we must recognize this truth before exploring project selection lest we erroneously assume that it is possible, given enough time and effort, to identify all relevant issues that play a role. Second, embedded in every decision model are both objective and subjective factors. We may form opinions based on objective data, and we also may derive complex decision models from subjective inputs. Acknowledging that there exists a place for both subjective and objective inputs and decisions in any useful screening model is worthwhile.

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84 Chapter 3 • Project Selection and Portfolio Management

Approaches to Project Screening and Selection

LO 3.2 Understand how to employ a variety of screening and selection models to select projects.

A project screening model that generates useful information for project choices in a timely and useful fashion at an acceptable cost can serve as a valuable tool in helping an organization make optimal choices among numerous alternatives.6 With these criteria in mind, let’s consider some of the more common project selection techniques.

METHOD ONE: CHECKLIST MODEL

The simplest method of project screening and selection is developing a checklist, or a list of criteria that pertain to our choice of projects, and then applying them to different possible projects. Let’s say, for example, that in our company, the key selection criteria are cost and speed to market. Because of our strategic competitive model and the industry we are in, we favor low-cost projects that can be brought to the marketplace within one year. We would screen each possible project against these two criteria and select the project that best satisfies them. But depending on the type and size of our possible projects, we may have to consider literally dozens of relevant criteria. In deciding among several new product development opportunities, a firm must weigh a variety of issues, including the following:

• Cost of development. What is a reasonable cost estimate? • Potential return on investment. What kind of return can we expect? What is the likely pay-

back period? • Riskiness of the new venture. Does the project entail the need to create new-generation tech-

nology? How risky is the venture in terms of achieving our anticipated specifications? • Stability of the development process. Are both the parent organization and the project team

stable? Can we expect this project to face funding cuts or the loss of key personnel, including senior management sponsors?

• Governmental or stakeholder interference. Is the project subject to levels of governmental oversight that could potentially interfere with its development? Might other stakeholders oppose the project and attempt to block completion? For example, environmental groups, one of the “intervenor” stakeholders, have a long history of opposing natural resource develop- ment projects and may work in opposition to our project objectives.7

• Product durability and future market potential. Is this project a one-shot opportunity, or could it be the forerunner of future opportunities? A software development firm may, for example, develop an application for a client in hopes that successful performance on this project will lead to future business. On the other hand, the project may be simply a one-time opportunity with little potential for future work with the customer.

This is just a partial list of criteria that may be relevant when we are selecting among proj- ect alternatives. A checklist approach to the evaluation of project opportunities is a fairly simple device for recording opinions and encouraging discussion. Thus, checklists may be best used in a consensus-group setting, as a method for initiating conversation, stimulating discussion and the exchange of opinions, and highlighting the group’s priorities.

EXAMPLE 3.1 Checklist

Let’s assume that SAP Corporation, a leader in the business applications software industry, is interested in developing a new application package for inventory management and shipping control. It is trying to decide which project to select from a set of four potential alternatives. Based on past commercial experiences, the company feels that the most important selection criteria for its choice are cost, profit potential, time to market, and development risks. Table 3.2 shows a simple check- list model with only four project choices and the four decision criteria. In addition to developing the decision criteria, we create evaluative descriptors that reflect how well the project alternatives correspond to our key selection criteria. We evaluate each criterion (which is rated high, medium, or low) to see which project accumulates the highest checks—and thus may be regarded as the optimal choice.

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Approaches to Project Screening and Selection 85

TABLE 3.2 Simplified Checklist Model for Project Selection

Performance on Criteria

Project Criteria High Medium Low

Project Alpha Cost X

Profit potential X

Time to market X

Development risks X

Project Beta Cost X

Profit potential X

Time to market X

Development risks X

Project Gamma Cost X

Profit potential X

Time to market X

Development risks X

Project Delta Cost X

Profit potential X

Time to market X

Development risks X

SOLUTION Based on this analysis, Project Gamma is the best alternative in terms of maximizing our key criteria—cost, profit potential, time to market, and development risks.

The flaws in a model such as that shown in Table 3.2 include the subjective nature of the high, medium, and low ratings. These terms are inexact and subject to misinterpretation or misunder- standing. Checklist screening models also fail to resolve trade-off issues. What if our criteria are differentially weighted—that is, what if some criteria are more important than others? How will rela- tive, or weighted, importance affect our final decision? Let’s say, for instance, that we regard time to market as our paramount criterion. Is Project Gamma, which is rated low on this criterion, still better than Project Beta or Delta, both of which are rated high on time to market though lower on other, less important criteria? Are we willing to make a trade-off, accepting low time to market to get the highest benefits in cost, profit potential, and development risks?

Because the simple checklist model does not deal satisfactorily with such questions, let’s turn next to a more complex screening model in which we distinguish more important from less impor- tant criteria by assigning each criterion a simple weight.

METHOD TWO: SIMPLIFIED SCORING MODELS

In the simplified scoring model, each criterion is ranked according to its relative importance. Our choice of projects will thus reflect our desire to maximize the impact of certain criteria on our deci- sion. To score our simplified checklist, we assign a specific weight to each of our four criteria:

Criterion Importance Weight

Time to market 3

Profit potential 2

Development risks 2

Cost 1

Now let’s reconsider the decision that we made using the basic checklist approach illustrated in Table 3.2.

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86 Chapter 3 • Project Selection and Portfolio Management

EXAMPLE 3.2 Scoring Models

SAP Corporation is attempting to determine the optimal project to fund using the criterion weighting values we previously developed. As you can see in Table 3.3, although adding a scoring component to our simple checklist complicates our decision, it also gives us a more precise screen- ing model—one that more closely reflects our desire to emphasize certain criteria over others.

SOLUTION In Table 3.3, the numbers in the column labeled Importance Weight specify the numerical values that we have assigned to each criterion: Time to market always receives a value of 3, profit potential a value of 2, development risk a value of 2, and cost a value of 1. We then assign relative values to each of our four dimensions.

The numbers in the column labeled Score replace the Xs of Table 3.2 with their assigned score values:

High = 3 Medium = 2 Low = 1

TABLE 3.3 Simple Scoring Model

(A) (B) (A) * (B)

Project Criteria Importance

Weight Score Weighted

Score

Project Alpha

Cost 1 3 3

Profit potential 2 1 2

Development risk 2 1 2

Time to market 3 2 6

Total Score 13

Project Beta

Cost 1 2 2

Profit potential 2 2 4

Development risk 2 2 4

Time to market 3 3 9

Total Score 19

Project Gamma

Cost 1 3 3

Profit potential 2 3 6

Development risk 2 3 6

Time to market 3 1 3

Total Score 18

Project Delta

Cost 1 1 1

Profit potential 2 1 2

Development risk 2 2 4

Time to market 3 3 9

Total Score 16

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Approaches to Project Screening and Selection 87

In Project Alpha, for example, the High rating given Cost becomes a 3 in Table 3.3 because High is here valued at 3. Likewise, the Medium rating given Time to market in Table 3.2 becomes a 2. But notice what happens when we calculate the numbers in the column labeled Weighted Score. When we multiply the numerical value of Cost (1) by its rating of High (3), we get a Weighted Score of 3. But when we multiply the numerical value of Time to market (3) by its rating of Medium (2), we get a Weighted Score of 6. Once we add the numbers in the Weighted Score column for each project in Table 3.3 and examine the totals, Project Beta (with a total score of 19) is the best alternative, com- pared to the other options: Project Alpha (with a total score of 13), Project Gamma (with a total score of 18), and Project Delta (with a total score of 16).

Thus, the simple scoring model consists of the following steps:

• Assign importance weights to each criterion. The first step is to develop logic for differenti- ating among various levels of importance and to devise a system for assigning appropriate weights to each criterion. Relying on collective group judgment may help to validate the reasons for determining importance levels. The team may also designate some criteria as “must” items. Safety concerns, for example, may be stipulated as nonnegotiable. In other words, all projects must achieve an acceptable safety level or they will not be considered further.

• Assign score values to each criterion in terms of its rating (High ∙ 3, Medium ∙ 2, Low ∙ 1). The logic of assigning score values is often an issue of scoring sensitivity—of making dif- ferences in scores distinct. Some teams, for example, prefer to widen the range of possible values—say, by using a 1-to-7 scale instead of a 1-to-3 scale—to ensure a clearer distinction among scores and therefore among project choices. Such decisions will vary according to the number of criteria being applied, and perhaps the team members’ experience with the accu- racy of outcomes produced by a given approach to screening and selection.

• Multiply importance weights by scores to arrive at a weighted score for each criterion. The weighted score reflects both the value that the team assigns to each criterion and the ratings that the team gives each criterion for the project.

• Add the weighted scores to arrive at an overall project score. The final score for each project represents the sum of all its weighted criteria.

The pharmaceutical company Hoechst Marion Roussel uses a scoring model for selecting projects that identifies not only five main criteria—reward, business strategy fit, strategic leverage, probability of commercial success, and probability of technical success—but also several more spe- cific subcriteria. Each of these 19 subcriteria is scored on a scale of 1 to 10. The score for each criterion is then calculated by averaging the scores for each criterion. The final project score is determined by adding the average score of each of the five subcategories. Hoechst has had great success with this scoring model, both in setting project priorities and in making go/no-go decisions.8

The simple scoring model has some useful advantages as a project selection device. First, it is easy to use in tying critical strategic goals for the company to various project alternatives. In the case of the pharmaceutical company Hoechst, the company has assigned several categories to strategic goals for its project options, including business strategy fit and strategic leverage. These strategic goals become a critical hurdle for all new project alternatives. Second, the simple scoring model is easy to comprehend and use. With a checklist of key criteria, evaluation options (high, medium, and low), and attendant scores, top managers can quickly grasp how to employ this technique.

LIMITATIONS OF SCORING MODELS

The simple scoring model illustrated here is an abbreviated and unsophisticated version of the weighted-scoring approach. In general, scoring models try to impose some structure on the decision-making process while, at the same time, combining multiple criteria.

Most scoring models, however, share some important limitations. A scale from 1 to 3 may be intuitively appealing and easy to apply and understand, but it is not very accurate. From the perspective of mathematical scaling, it is simply wrong to treat evaluations on such a scale as real numbers that can be multiplied and summed. If 3 means High and 2 means Medium, we know that 3 is better than 2, but we do not know by how much. Furthermore, we cannot assume that the differ- ence between 3 and 2 is the same as the difference between 2 and 1. Thus, in Table 3.3, if the score for

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88 Chapter 3 • Project Selection and Portfolio Management

Project Alpha is 13 and the score for Project Beta is 19, may we assume that Beta is 46% better than Alpha? Unfortunately, no. Critics of scoring models argue that their ease of use may blind novice users to the false assumptions that sometimes underlie them.

From a managerial perspective, another drawback of scoring models is the fact that they depend on the relevance of the selected criteria and the accuracy of the weight given them. In other words, they do not ensure that there is a reasonable link between the selected and weighted criteria and the business objectives that prompted the project in the first place.

For example, as a means of selecting projects, the Information Systems steering committee of a large bank has adopted three criteria: contribution to quality, financial performance, and service. The bank’s strategy is focused on customer retention, but the criteria selected by the committee do not reflect this fact. As a result, a project aimed at improving service to potential new markets might score high on service even though it would not serve existing customers (the people whose business the bank wants to retain). Note too that the criteria of quality and service may overlap, leading managers to double-count and overestimate the value of some factors.9 Thus, the bank has employed a project selection approach that neither achieves its desired ends nor matches its overall strategic goals.

METHOD THREE: THE ANALYTICAL HIERARCHY PROCESS

The Analytical Hierarchy Process (AHP) was developed by Dr. Thomas Saaty10 to address many of the technical and managerial problems frequently associated with decision-making through scoring models. An increasingly popular method for effective project selection, the AHP is a four-step process.

STRUCTURING THE HIERARCHY OF CRITERIA The first step consists of constructing a hierarchy of criteria and subcriteria. Let’s assume, for example, that a firm’s IT steering committee has selected three criteria for evaluating project alternatives: (1) financial benefits, (2) contribution to strategy, and (3) contribution to IT infrastructure. The financial benefits criterion, which focuses on the tangible benefits of the project, is further subdivided into long-term and short-term benefits. Contribution to strategy, an intangible factor, is subdivided into three subcriteria: (a) increasing market share for product X, (b) retaining existing customers for product Y, and (c) improving cost management.

Table 3.4 is a representational breakdown of all these criteria. Note that subdividing relevant criteria into a meaningful hierarchy gives managers a rational method for sorting among and order- ing priorities. Higher-order challenges, such as contribution to strategy, can be broken down into discrete sets of supporting requirements, including market share, customer retention, and cost manage- ment, thus building a hierarchy of alternatives that simplifies matters. Because the hierarchy can reflect the structure of organizational strategy and critical success factors, it also provides a way to select and justify projects according to their consistency with business objectives.11 This illustrates how we can use meaningful strategic issues and critical factors to establish logic for both the types of selection criteria and their relative weighting.

Recently, a large U.S. company used the AHP to rank more than a hundred project propos- als worth millions of dollars. Because the first step in using the AHP is to establish clear criteria for selection, 10 managers from assorted disciplines, including finance, marketing, management information systems, and operations, spent a full day establishing the hierarchy of criteria. Their challenge was to determine the key success criteria that should be used to guide project selection, particularly as these diverse criteria related to each other (relative weighting). They found that, in addition to clearly defining and developing the criteria for evaluating projects, the process also produced a more coherent and unified vision of organizational strategy.

TABLE 3.4 Hierarchy of Selection Criteria Choices

First Level Second Level

1. Financial benefits 1A: Short-term

1B: Long-term

2. Contribution to strategy 2A: Increasing market share for product X;

2B: Retaining existing customers for product Y;

2C: Improving cost management

3. Contribution to IT infrastructure

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Approaches to Project Screening and Selection 89

FIGURE 3.1 Sample AHP with Rankings for Salient Selection Criteria

Source: J. K. Pinto and I. Millet. (1999). Successful Information System Implementation: The Human Side, 2nd ed., figure on page 76. Newtown Square, PA: Project Management Institute. Copyright and all rights reserved. Material from this publication has been reproduced with the permission of PMI.

Rank Information Systems Project Proposals

Goal (1.000)

Information Technology

(0.140)

Poor

Fair

Good

Very Good

Excellent

Strategy

(0.340)

Market Share

Retention

Cost Mgmt.

Short-term

Long-term

Finance

(0.520)

ALLOCATING WEIGHTS TO CRITERIA The second step in applying AHP consists of allocating weights to previously developed criteria and, where necessary, splitting overall criterion weight among subcriteria. Mian and Dai12 and others have recommended the so-called pairwise comparison approach to weighting, in which every criterion is compared with every other criterion. This pro- cedure, argue the researchers, permits more accurate weighting because it allows managers to focus on a series of relatively simple exchanges—namely, two criteria at a time.

The simplified hierarchy in Figure 3.1 shows the breakdown of criterion weights across the same three major criteria that we used in Table 3.4. As Figure 3.1 shows, Finance (that is, financial benefits) received a weighting value of 52%, which was split between Short-term benefits (30%) and Long-term benefits (70%). This configuration means that long-term financial benefits receives an overall weighting of (0 .5 2 ) * (0 .7 ) = 3 6 .4 %.

The hierarchical allocation of criteria and splitting of weights resolves the problem of double counting in scoring models. In those models, criteria such as service, quality, and customer satisfac- tion may be either separate or overlapping factors, depending on the objectives of the organization. As a result, too little or too much weight may be assigned to a given criterion. With AHP, however, these factors are grouped as subcriteria and share the weight of a common higher-level criterion.

ASSIGNING NUMERICAL VALUES TO EVALUATION DIMENSIONS For the third step, once the hierarchy is established, we can use the pair-wise comparison process to assign numerical values to the dimen- sions of our evaluation scale. Figure 3.2 is an evaluation scale with five dimensions: Poor, Fair, Good, Very Good, and Excellent. In this figure, for purposes of illustration, we have assigned the values of 0.0, 0.10, 0.30, 0.60, and 1.00, respectively, to these dimensions. Naturally, we can change these values as necessary. For example, if a company wants to indicate a greater discrepancy between Poor and Fair, managers may increase the range between these two dimensions. By adjusting values to suit specific purposes, managers avoid the fallacy of assuming that the differences between numbers on a scale of, say, 1 to 5 are equal—that is, assuming that the difference between 4 and 5 is the same as the difference between 3 and 4. With the AHP approach, the “best” outcome receives a perfect score of 1.00 and all other values represent some proportion relative to that score.

When necessary, project managers are encouraged to apply different scales for each criterion. Note, for example, that Figure 3.2 uses scale points ranging from Poor to Excellent. Suppose, however, that we were interviewing a candidate for our project team and one of the criterion items was “Educa- tion level.” Clearly, using a scale ranging from Poor to Excellent makes no sense, so we would adjust the scales to make them meaningful, perhaps using levels such as “High School,” “Some College,” “College Graduate,” and so forth. Allocating weights across dimensions gives us a firmer understanding of both our goals and the methods by which we are comparing opportunities to achieve them.

EVALUATING PROJECT PROPOSALS In the final step, we multiply the numeric evaluation of the project by the weights assigned to the evaluation criteria and then add the results for all criteria. Figure 3.3 shows how five potential projects might be evaluated by an AHP program offered by Expert Choice, a maker of decision software.13 Here’s how to read the key features of the spreadsheet:

• The second row specifies the value assigned to each of five possible ratings (from Poor = 1 = .000 to Excellent = 5 = 1.000).

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90 Chapter 3 • Project Selection and Portfolio Management

• The fourth row specifies the five decision criteria and their relative weights (Finance/ Short@Term = .1560, Strate gy/Co s t Manage m e nt = .0 8 1 6 , and so forth). (Note that three criteria have been broken down into six subcriteria).

• The second column lists the five projects (Perfect Project, Aligned, etc.). • The third column labeled “Total” gives a value for each alternative. This number is found by

multiplying each evaluation by the appropriate criterion weight and summing the results across all criteria evaluations.

To illustrate how the calculations are derived, let us take the Aligned project as an example. Remember that each rating (Excellent, Very Good, Good, etc.) carries with it a numerical score, Figure 3.2. These scores, when multiplied by the evaluation criteria and then added together, yield:

(.1560)(.3) + (.3640)(1.0) + (.1020)(.3) + (.1564)(1.0) + (.0816)(.3) + (.1400)(1.0) = .762

The Perfect Project, as another example, was rated Excellent on all six dimensions and thus received a total score of 1.000. Also, compare the evaluations of the Aligned and Not Aligned project choices. Although both projects received an equal number of Excellent and Good rankings, the Aligned project was clearly preferable because it was rated higher on criteria viewed as more important and thus more heavily weighted.

Unlike the results of typical scoring models, the AHP scores are significant. The Aligned project, for example, which scored 0.762, is almost three times better than the Mixed project, with its score of 0.284. This feature—the ability to quantify superior project alternatives—allows project managers to use AHP scores as input to other calculations. We might, for example, sort projects by the ratios of AHP scores to total their development costs. Let’s say that based on this ratio, we find that the Not Aligned project is much cheaper to initiate than the Aligned project. This finding may suggest that from a cost/benefit perspective, the Not Aligned project offers a better alternative than the Aligned project.

FIGURE 3.3 The Project Rating Spreadsheet

Source: J. K. Pinto and I. Millet. (1999). Successful Information System Imple- mentation: The Human Side, 2nd ed., figure on page 78. Newtown Square, PA: Project Management Institute. Copyright and all rights reserved. Material from this publication has been reproduced with the permission of PMI.

Finance

Poor 1 (.000)

Fair 2 (.100)

Alternatives

1 Perfect Project 1.000 Excellent Excellent Excellent Excellent Excellent Excellent

Excellent

Excellent

Excellent

Excellent

Excellent

Excellent

Excellent

Very Good Very Good Very Good Very Good Very Good Very Good

Very GoodFairPoor

Good

Good

Good

Good

Good

Good

Good

Good

0.762

0.538

0.284

0.600

Aligned

Not Aligned

All Very Good

Mixed

2

3

4

5

6

7

8 9

10

Total

Finance

Short-Term Long-Term

Strategy

Market Share Retention Cost Management

Technology

.1400.0816.1564.1020.3640.1560

Good 3 (.300)

Very Good 4 (.600)

Excellent 5 (1.000)

Short-term

FIGURE 3.2 Assigning Numerical Values to Labels

Source: J. K. Pinto and I. Millet. (1999). Successful Information System Imple- mentation: The Human Side, 2nd ed., figure on page 77. Newtown Square, PA: Project Management Institute. Copyright and all rights reserved. Material from this publication has been reproduced with the permission of PMI.

Nominal

Poor 0.00000 0.000

0.050

1.000

0.500

0.300

0.150

2.00000

1.00000

0.60000

0.30000

0.10000Fair

Excellent

Total

Very Good

Good

Priority Bar Graph

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Approaches to Project Screening and Selection 91

The AHP methodology can dramatically improve the process of developing project proposals. In firms that have incorporated AHP analysis, new project proposals must contain, as part of their core information, a sophisticated AHP breakdown listing the proposed project, alternatives, and projected outcomes. The Analytical Hierarchy Process offers a true advantage over traditional scoring models, pri- marily because it reduces many of the technical and managerial problems that plague such approaches.

The AHP does have some limitations, however. First, current research suggests that the model does not adequately account for negative utility; that is, the fact that certain choice options do not con- tribute positively to the decision goals but actually lead to negative results. For example, suppose that your company identified a strong project option that carried a prohibitively expensive price tag. As a result, selecting this project is really not an option because it would be just too high an investment. However, using the AHP, you would first need to weigh all positive elements, develop your screening score, and then compare this score against negative aspects, such as cost. The result can lead to bias in the project scoring calculations.14 A second limitation is that the AHP requires that all criteria be fully exposed and accounted for at the beginning of the selection process. Powerful members of the organiza- tion with political agendas or pet projects they wish to pursue may resist such an open selection process.

METHOD FOUR: PROFILE MODELS

Profile models allow managers to plot risk/return options for various alternatives and then select the project that maximizes return while staying within a certain range of minimum acceptable risk. “Risk,” of course, is a subjective assessment: it may be difficult to reach overall agreement on the level of risk associated with a given project. Nevertheless, the profile model offers another way of evaluating, screening, and comparing projects.15

Let’s return to our example of project screening at SAP Corporation. Suppose that instead of the four project alternatives for the new software project we discussed earlier, the firm had identified six candidates for development. For simplicity’s sake, managers chose to focus on the two criteria of risk and reward.

In Figure 3.4, the six project alternatives are plotted on a graph showing perceived Risk on the y-axis and potential Return on the x-axis. Because of the cost of capital to the firm, we will specify some minimum desired rate of return. All projects will be assigned some risk factor value and be plotted relative to the maximum risk that the firm is willing to assume. Figure 3.4, therefore, graphi- cally represents each of our six alternatives on a profile model. (Risk values have been created here simply for illustrative purposes.) In our example, SAP can employ a variety of measures to assess the likely return offered by this project, including discounted cash flow analysis and internal rate of return expectations. Likewise, it is increasingly common for firms to quantify their risk assessment of various projects, enabling us to plot them along the y-axis. The key lies in employing identical

FIGURE 3.4 Profile Model

R is

k

Return

Maximum Desired Risk

Minimum Desired Return

X6

X2

X4 X5

X3

X1

Ef�cient Frontier

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92 Chapter 3 • Project Selection and Portfolio Management

evaluation criteria and quantification approaches across all projects to be profiled on the graph. Clearly, when project risks are unique or we have no way of comparing the relative risks from project to project, it is impossible to accurately plot project alternatives.

In Figure 3.4, we see that Project X2 and Project X3 have similar expected rates of return. Project X3 , however, represents a better selection choice. Why? Because SAP can achieve the same rate of return with Project X3 as it can with Project X2 but with less risk. Likewise, Project X5 is a superior choice to X4, because although they have similar risk levels, X5 offers greater return as an invest- ment. Finally, while Project X6 offers the most potential return, it does so at the highest level of risk.

The profile model makes use of a concept most widely associated with financial management and investment analysis—the efficient frontier. In project management, the efficient frontier is the set of project portfolio options that offers either a maximum return for every given level of risk or the minimum risk for every level of return.16 When we look at the profile model in Figure 3.4, we note that certain options (X1 , X3 , X5 , X6) lie along an imaginary line balancing optimal risk and return combinations. Others (X2 and X4), however, are less desirable alternatives and would therefore be considered inferior choices. The efficient frontier serves as a decision-making guide by establishing the threshold level of risk/return options that all future project choices must be evaluated against.

One advantage of the profile model is that it offers another method by which to compare proj- ect alternatives, this time in terms of the risk/return trade-off. Sometimes it is difficult to evaluate and compare projects based on scoring models or other qualitative approaches. The profile model, however, gives managers a chance to map out potential returns while considering the risk that accompanies each choice. Thus, profile models give us a method for eliminating alternatives that either carry too much risk or promise too little return.

On the other hand, profile models also have disadvantages:

1. They limit decision criteria to just two—risk and return. Although an array of issues, including safety, quality, and reliability can come under the heading of risk, the approach still necessarily limits the decision-maker to a small set of criteria.

2. To be evaluated in terms of an efficient frontier, some value must be attached to risk. Expected return is a measure that is naturally given to numerical estimate. But because risk may not be readily quantified, it may be misleading to designate “risk” artificially as a value for compari- son among project choices.

EXAMPLE 3.3 Profile Model

Let’s consider a simple example. Suppose that our company has identified two new project alter- natives and we wish to use risk/return analysis to determine which of the two projects would fit best with our current project portfolio. We assess return in terms of the profit margin we expect to achieve on the projects. Risk is evaluated at our company in terms of four elements: (1) technical risk—the technical challenge of the project, (2) capital risk—the amount invested in the project, (3) safety risk—the risk of accidents or employee safety, and (4) goodwill risk—the risk of losing customers or diminishing our company’s image. The magnitude of each of these types of risk is determined by applying a “low, medium, high” risk scale where 1 = low, 2 = medium, and 3 = high.

After conducting a review of the likely profitability for both of the projects and evaluating their riskiness, we conclude the following:

Risk Return Potential

Project Saturn 10 23%

Project Mercury 6 16%

Figure 3.5 shows our firm’s efficient frontier for the current portfolio of projects. How would we evaluate the attractiveness of either Project Saturn or Project Mercury?

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FIGURE 3.5 Efficient Frontier for Our Firm

Risk

12

10

8

6

4

2

8%6% 10% 12% 16% 20% 24% 28% 32%

Return

Maximum Allowable Risk

Ef�cient Frontier

Saturn

Mercury

Minimum Desired Return

X2

X3

X1

X4

SOLUTION When we consider the two choices, Projects Saturn and Mercury, in terms of their projected risk and return, we can chart them on our profile model relative to other projects that we are undertaking. Figure 3.5 illustrates the placement of the two new project options. Note that Project Saturn, although within our maximum risk limit, does not perform as well as the other projects in our current portfolio (it has a higher risk rating for its projected return than other comparable projects). On the other hand, Project Mercury offers us a 16% rate of return for a lower level of risk than the current efficient frontier, suggesting that this project is an attractive option and a better alternative than Project Saturn.

Financial Models

LO 3.3 Learn how to use financial concepts, such as the efficient frontier and risk/return models.

Another important series of models rely on financial analysis to make project selection decisions. In this section, we will examine three commonly used financial models: discounted cash flow analysis, net present value, and internal rate of return.

Financial models are all predicated on the time value of money principle. The time value of money suggests that money earned today is worth more than money we expect to earn in the future. In other words, $100 that I receive four years from now is worth significantly less to me than if I were to receive that money today. In the simplest example, we can see that putting $100 in a bank account at 3% interest will grow the money at a compounded rate each year. Hence, at the end of year 1, the initial investment will be worth $103. After two years, it will have grown to $106.09, and so on. The principle also works in reverse: to calculate the present value of $100 that I expect to have in the bank in four years’ time, I must first discount the amount by the same interest rate. Hence, assuming an interest rate of 3%, I need only invest $88.85 today to yield $100 in four years.

We expect future money to be worth less for two reasons: (1) the impact of inflation, and (2) the inability to invest the money. Inflation, as we know, causes prices to rise and hence erodes consumers’ spending power. In 1900, for example, the average house may have cost a few thou- sand dollars to build. Today housing costs have soared. As a result, if I am to receive $100 in four years, its value will have decreased due to the negative effects of inflation. Further, not having that $100 today means that I cannot invest it and earn a return on my money for the next four years. Money that we cannot invest is money that earns no interest. In real terms, therefore, the

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present value of money must be discounted by some factor the farther out into the future I expect to receive it. When deciding among nearly identical project alternatives, if Project A will earn our firm $50,000 in two years and Project B will earn our company $50,000 in four years, Project A is the best choice because we will receive the money sooner.

PAYBACK PERIOD

The project payback period is the estimated amount of time that will be necessary to recoup the investment in a project, that is, how long will it take for the project to pay back its initial investment and begin to generate positive cash flow for the company. In determining the payback period for a project, we employ a discounted cash flow analysis, based on the principle of the time value of money. The goal of the discounted cash flow (DCF) method is to estimate cash outlays and expected cash inflows resulting from investment in a project. All potential costs of development (most of which are contained in the project budget) are assessed and projected prior to the decision to initi- ate the project. They are then compared with all expected sources of revenue from the project. For example, if the project is a new chemical plant, projected revenue streams will be based on expected capacity, production levels, sales volume, and so forth.

We then apply to this calculation a discount rate based on the firm’s cost of capital. The value of that rate is weighted across each source of capital to which the firm has access (typically, debt and equity markets). In this way, we weight the cost of capital, which can be calculated as follows:

Kfirm = (wd)(k d)(1 - t) + (we )(k e )

The weighted cost of capital is the percentage of capital derived from either debt (wd) or equity (we ) multiplied by the percentage costs of debt and equity (k d and k e , respectively). (The value t refers to the company’s marginal tax rate: because interest payments are tax deductible, we calculate the cost of debt after taxes.)

There is a standard formula for payback calculations:

Payback period = investment/annual cash savings

The reciprocal of this formula can be used to calculate the average rate of return for the project. However, note that this formula only works in simple circumstances when cash flows (or annual cash savings) are the same for each year. So for example, if we invest $150,000 and receive $30,000 a year in annual savings, the payback period is straightforward:

Payback period = $150,000/$30,000 = 5 years

On the other hand, when projected cash flows from annual savings are not equal, you must determine at what point the cumulative cash flow becomes positive. Thus:

Cumulative cashflow (CF) = (Initial investment) + CF(year 1) + CF(year 2) + c

Once cost of capital has been calculated, we can set up a table projecting costs and revenue streams that are discounted at the calculated rate. The key is to determine how long it will take the firm to reach the breakeven point on a new project. Breakeven point represents the amount of time necessary to recover the initial investment of capital in the project. Shorter paybacks are more desirable than longer paybacks, primarily because the farther we must project payback into the future, the greater the potential for additional risk.

EXAMPLE 3.4 Payback Period

Our company wants to determine which of two project alternatives is the more attractive invest- ment opportunity by using a payback period approach. We have calculated the initial investment cost of the two projects and the expected revenues they should generate for us (see Table 3.5). Which project should we invest in?

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Financial Models 95

TABLE 3.5 Initial Outlay and Projected Revenues for Two Project Options

Project A Project B

Revenues Outlays Revenues Outlays

Year 0 $500,000 $500,000

Year 1 $ 50,000 $ 75,000

Year 2 150,000 100,000

Year 3 350,000 150,000

Year 4 600,000 150,000

Year 5 500,000 900,000

SOLUTION For our example, the payback for the two projects can be calculated as in Table 3.6. These results suggest that Project A is a superior choice over Project B, based on a shorter projected payback pe- riod (2.857 years versus 4.028 years) and a higher rate of return (35% versus 24.8%).

TABLE 3.6 Comparison of Payback for Projects A and B

Project A Year Cash Flow Cum. Cash Flow

0 ($500,000) ($ 500,000)

1 50,000 (450,000)

2 150,000 (300,000)

3 350,000 50,000

4 600,000 650,000

5 500,000 1,150,000

Payback = 2.857 years Rate of Return = 35%

Project B Year Cash Flow Cum. Cash Flow

0 ($500,000) ($ 500,000)

1 75,000 (425,000)

2 100,000 (325,000)

3 150,000 (175,000)

4 150,000 (25,000)

5 900,000 875,000

Payback = 4.028 years

Rate of Return = 24.8%

NET PRESENT VALUE

The most popular financial decision-making approach in project selection, the net present value (NPV) method, projects the change in the firm’s value if a project is undertaken. Thus, a positive NPV indicates that the firm will make money—and its value will rise—as a result of the project. Net present value employs discounted cash flow analysis, discounting future streams of income to estimate the present value of money.

The simplified formula for NPV is as follows:

NPV(project) = I0 + a t

n=1 Ft/(1 + r + pt)t

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96 Chapter 3 • Project Selection and Portfolio Management

where

Ft = net cash flow for period t r = required rate of return I = initial cash investment (cash outlay at time 0) pt = inflation rate during period

The optimal procedure for developing an NPV calculation consists of several steps, including the construction of a table listing the outflows, inflows, discount rate, and discounted cash flows across the relevant time periods. We construct such a table in Example 3.5 (see Table 3.7).

EXAMPLE 3.5 Net Present Value

Assume that you are considering whether to invest in a project that will cost $100,000 in initial investment. Your company requires a rate of return of 10%, and you expect inflation to remain relatively constant at 4%. You anticipate a useful life of four years for the project and have projected future cash flows as follows:

• Year 1: $20,000 • Year 2: $50,000 • Year 3: $50,000 • Year 4: $25,000

SOLUTION We know the formula for determining NPV:

NPV = I0 + a t

n=1 Ft/(1 + r + p)t

We can now construct a simple table to keep a running score on discounted cash flows (both inflows and outflows) to see if the project is worth its initial investment. We already know that we will need the following categories: Year, Inflows, Outflows, and NPV. We will also need two more categories:

• Net flows: the difference between inflows and outflows • Discount factor: the reciprocal of the discount rate (1 /(1 + r + p )t)

In Table 3.7, if we fill in the Discount Factor column assuming that r = 1 0 % and p = 4 %, we can begin work on the NPV. Note that Year 0 means the present time, and Year 1 the first year of operation.

How did we arrive at the Discount Factor for Year 3? Using the formula we previously set, we calculated the appropriate data:

Discount factor = (1/(1 + .10 + .04)3) = .6749 Now we can supply the data for the Inflows, Outflows, and Net Flow columns.

Finally, we complete the table by multiplying the Net Flow amount by the Discount Factor. The results give us the data for the NPV column of our table. The sum of the discounted cash flows (their net present value) shown in Table 3.8 gives us the NPV of the project. The total is a positive number, indicating that the investment is worthwhile and should be pursued.

Net present value is one of the most common project selection methods in use today. Its prin- cipal advantage is that it allows firms to link project alternatives to financial performance, better

TABLE 3.7 Simple Scoring Model

Year Inflows Outflows Net Flow Discount Factor NPV

0 $100,000 $(100,000) 1.0000

1 $20,000 20,000 0.8772

2 50,000 50,000 0.7695

3 50,000 50,000 0.6749

4 25,000 25,000 0.5921

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ensuring that the projects a company chooses to invest its resources in are likely to generate profit. Among its disadvantages is the difficulty in using NPV to make accurate long-term predictions. For example, suppose that we were considering investing in a project with an expectation that it would continue to generate returns during the next 10 years. In choosing whether to invest in the project today, we must make some assumptions about future interest rates, inflation, and our required rate of return (RRR) for the next 10 years. In uncertain financial or economic times, it can be risky to make long-term investment decisions when discount rates may fluctuate.

DISCOUNTED PAYBACK

Now that we have considered the time value of money, as shown in the NPV method, we can apply this logic to the simple payback model to create a screening and selection model with a bit more power. Remember that with NPV, we use discounted cash flow as our means to decide whether to invest in a project opportunity. Now, let’s apply that same principle to the discounted payback method. With this method, the period in which we are interested is the length of time until the sum of the discounted cash flows is equal to the initial investment.

A simple example will illustrate the difference between straight payback and discounted pay- back methods. Suppose we require a 12.5% return on new investments, and we have a project opportunity that will cost an initial investment of $30,000 with a promised return per year of $10,000. Under the simple payback model, the initial investment should be paid off in only three years. However, as Table 3.9 demonstrates, when we discount our cash flows at 12.5% and start adding them, it actually takes four years to pay back the initial project investment.

The advantage of the discounted payback method is that it allows us to make a more intel- ligent determination of the length of time needed to satisfy the initial project investment. That is, while simple payback is useful for accounting purposes, discounted payback is actually more repre- sentative of the financial realities that all organizations must consider when pursuing projects. The effects of inflation and future investment opportunities matter with individual investment decisions, hence these factors should also matter when evaluating project opportunities.

INTERNAL RATE OF RETURN

Internal rate of return (IRR) is an alternative method for evaluating the expected outlays and income associated with a new project investment opportunity. The IRR method asks the simple question, what rate of return will this project earn? Under this model, the project must meet some

TABLE 3.8 Discounted Cash Flows and NPV (I)

Year Inflows Outflows Net Flow Discount Factor NPV

0 $100,000 $(100,000) 1.0000 $(100,000) 1 $20,000 20,000 0.8772 17,544 2 50,000 50,000 0.7695 38,475 3 50,000 50,000 0.6749 33,745 4 25,000 25,000 0.5921 14,803

Total $ 4,567

TABLE 3.9 Discounted Payback Method

Project Cash Flow* Year Discounted Undiscounted

1 $8,900 $10,000

2 7,900 10,000

3 7,000 10,000

4 6,200 10,000

5 5,500 10,000

Payback Period 4 Years 3 Years

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98 Chapter 3 • Project Selection and Portfolio Management

required “hurdle” rate applied to all projects under consideration. Without detailing the math- ematics of the process, we will say that IRR is the discount rate that equates the present values of a project’s revenue and expense streams. If a project has a life of time t, the IRR is defined as:

IO = a t

n=1

ACFt

(1 + IRR)t where

ACFt = annual after-tax cash flow for time period t IO = initial cash outlay n = project’s expected life IRR = project’s internal rate of return

The IRR is found through a straightforward process, although it requires tables representing present value of an annuity to determine the project’s rate of return. Alternatively, many pocket calculators can determine IRR quickly. Without tables or access to a calculator, it is necessary to employ an iterative process to identify the approximate IRR for the project.

EXAMPLE 3.6 Internal Rate of Return

Let’s take a simple example. Suppose that a project required an initial cash investment of $5,000 and was expected to generate inflows of $2,500, $2,000, and $2,000 for the next three years. Further, assume that our company’s required rate of return for new projects is 10%. The question is, is this project worth funding?

SOLUTION Answering this question requires four steps:

1. Pick an arbitrary discount rate and use it to determine the net present value of the stream of cash inflows.

2. Compare the present value of the inflows with the initial investment; if they are equal, you have found the IRR.

3. If the present value is larger (or smaller) than the initial investment, select a higher (or lower) discount rate for the computation.

4. Determine the present value of the inflows and compare it with the initial investment. Continue to repeat steps 2–4 until you have determined the IRR. Using our example, we know:

Cash investment = $5,000 Year 1 inflow = $2,500 Year 2 inflow = $2,000 Year 3 inflow = $2,000 Required rate of return = 10%

Step One: Try 12%.

Discount Factor

Year Inflows at 12% NPV

1 $2,500 .893 $2,233

2 2,000 .797 1,594

3 2,000 .712 1,424

Present value of inflows 5,251

Cash investment -5,000 Difference $ 251

Decision: Present value difference at 12% is 250.50, which is too high. Try a higher discount rate.

Step Two: Try 15%.

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Discount Factor

Year Inflows at 15% NPV

1 $2,500 .870 $2,175

2 2,000 .756 1,512

3 2,000 .658 1,316

Present value of inflows 5,003

Cash investment 5,000

Difference $ 3

Decision: Present value difference at 15% is $3, which suggests that 15% is a close approximation of the IRR.

If the IRR is greater than or equal to the company’s required rate of return, the project is worth funding. In Example 3.6, we found that the IRR is 15% for the project, making it higher than the hurdle rate of 10% and a good candidate for investment. The advantage of using IRR analysis lies in its ability to compare alternative projects from the perspective of expected return on investment (ROI). Projects having higher IRR are generally superior to those having lower IRR.

The IRR method, however, does have some disadvantages. First, it is not the rate of return for a project. In fact, the IRR equals the project’s rate of return only when project-generated cash inflows can be reinvested in new projects at similar rates of return. If the firm can reinvest revenues only on lower-return projects, the real return on the project will be less than the calculated IRR. Several other problems with the IRR method make NPV a more robust determinant of project viability:17

• IRR and NPV calculations typically agree (that is, make the same investment recommendations) only when projects are independent of each other. If projects are not mutually exclusive, IRR and NPV may rank them differently. The reason is that NPV employs a weighted average cost of capital discount rate that reflects potential reinvestment, while IRR does not. Because of this distinction, NPV is generally preferred as a more realistic measure of investment opportunity.

• If cash flows are not normal, IRR may arrive at multiple solutions. For example, if net cash outflows follow a period of net cash inflows, IRR may give conflicting results. If, following the completion of plant construction, it is necessary to invest in land reclamation or other incidental but significant expenses, an IRR calculation may result in multiple return rates, only one of which is correct.

CHOOSING A PROJECT SELECTION APPROACH

What can we conclude from our discussion of project selection methods? First and foremost, we have learned to focus on the method that we use in making selection decisions. Have we been consistent and objective in considering our alternatives? The author has worked in a consult- ing and training capacity with several firms that have experienced recurrent problems in their project selections—they kept picking losers. Why? One reason was their failure to even attempt objectivity in their selection methods. Proposed projects, often the pet ideas of senior managers, were pushed to the head of the line or worse, financially tweaked until they yielded satisfactory conclusions. Team members knew in advance that such projects would fail because the projects had been massaged to the point at which they seemingly optimized the selection criteria. The key to project selection lies in being objective about the process. If you operate according to the “GIGO” principle—garbage in/garbage out—you’ll soon be up to your knees in garbage.

A second conclusion we can draw is that although a wide variety of selection methods exist, certain ones may be more appropriate for specific companies and project circumstances. Some projects require sophisticated financial evidence of their viability. Others may only need to dem- onstrate no more than an acceptable profile when compared to other options. In other words, any of the previously discussed selection methods may be appropriate under certain situations. Some experts, for example, favor weighted scoring models because they offer a more accurate reflec- tion of a firm’s strategic goals without sacrificing long-term effectiveness for short-term financial gains.18 They argue that such important nonfinancial criteria should not be excluded from the decision-making process. In fact, research suggests that although very popular, financial selection

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100 Chapter 3 • Project Selection and Portfolio Management

PROJECT PROFILE

Project Selection and Screening at GE: The Tollgate Process

General Electric has developed a highly sophisticated approach to project screening and selection that the company calls the Tollgate Process. As you can see from Figure 3.6, Tollgate involves a series of seven formal procedural checkpoints (labeled 100 to 700) established along the project development time line. Therefore, Tollgate is more than just a project selection methodology; it involves controlling the selection and development of the project as it moves through its life cycle. Each stage in this control process is carefully monitored.

Each of the seven Tollgate stages can be broken down into a so-called process map that guides managers and teams in addressing specific necessary elements in the completion of a stage. These elements are the substeps that guide project screening to ensure that all projects conform to the same set of internal GE standards.

Figure 3.7 lays out the process flow map that is used to evaluate the progress each project makes at the various stages to final completion. Note that teams must complete all action substeps at each Tollgate stage. Once they have completed a given stage, a cross-functional management review team provides oversight at a review conference. Approval at this stage permits the team to proceed to the next stage. Rejection means that the team must back up and deal with any issues that the review team feels it has not addressed adequately. For example, suppose that the project fails a technical conformance test during field testing at the system verification stage. The technical failure would require the team to cycle back to the appropriate point to analyze the cause for the field test failure and begin remedial steps to correct it. After a project team has received approval from the review team, it needs the approval of senior management before moving on to the next Tollgate stage. Rejection at this point by senior management often effectively kills the project.

FIGURE 3.6 GE’s Tollgate Process

Source: Used with permission of General Electric Company.

New Product Introduction Process Seven Stages

Identify Customer Require- ments

Proposal Negotiation/ Resource Planning

Systems Design

Detailed Design

System Veri�cation

Production/ Release

100 200 300 400 500 600 700

models, when used exclusively, do not yield optimal portfolios.19 On the other hand, when they are combined with scoring models into a more comprehensive selection procedure, they can be highly effective. It is also critical to match the types of projects we are selecting from to the appro- priate screening method. Is it possible to estimate future return on investment? Potential risk? These issues should be carefully thought through when developing a suitable screening model. Perhaps the key lies in choosing a selection algorithm broad enough to encompass both financial and nonfinancial considerations. Regardless of the approach that a company selects, we can be sure of one thing: making good project choices is a crucial step in ensuring good project manage- ment downstream.

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Project Portfolio Management 101

Some critics argue that formalized and sophisticated review processes such as Tollgate add excessive layers of bureaucratic oversight to the project screening process. In fact, the sheer number of actions, steps, checklists, and mana- gerial reviews stipulated by the Tollgate process can add significant delays to projects—a critical concern if a project is needed to address an immediate problem. On the other hand, proponents of such techniques argue that the benefits— standardization across business units, comprehensive step-by-step risk analysis, clear links to top management—more than compensate for potential problems. At GE, the company credits Tollgate with promoting significant improvements in early problem discovery and real-time risk management.

FIGURE 3.7 The GE Tollgate Review Process Flow Map

Source: Used with permission of General Electric Company.

Cross-Functional Section Management

Review Team

Senior Leadership Team (SLT)

Senior Mgmt. Review or

CEO Override

Tollgate Review

Tollgate Stage

Project Team

Review, Cost, Schedule,