Business environment appraisal methods successfully enable an organisation to understand their position in the commercial marketplace

Topic 2: Commercial Context Awareness and The Project Business Environment

Projects need to consider the commercial context of the project throughout the project’s life cycle. Traditional project constraints such as the iron triangle need to be further expanded to consider financial, contractual and legal contexts to ensure effective decision-making. An awareness of these streams (financial, contractual and legal) will ensure all potential exposures are considered well in advance of, and during project implementation. Project Investment appraisal techniques, non-financial accounting methods, procurement route, contract and pricing strategies and dispute resolution methods are essential components of project management practices.

Now thinking time:

Why is commercial context awareness is important for Projects and Project Management practices?

What do Project Manager and Project Team need to know in relation to Commercial context in Projects and Project Management practices?

What are the range of Commercial context methods, routes, techniques and tools?

What is the new Project Business Environment?

Why commercial context awareness is important for Projects and Project Management practices?

It has becoming increasingly important for Project Manager to be aware of the business environment impact to a project’s financial, contractual and legal context. Macro, meso and micro factors will cause different level of impact to a project’s continuing progress. The Project Manager and his/her Project Team must be competent to appraise the financial contractual and legal exposures well in advance before deciding a project’s viability. All project terms and conditions must be appropriately assessed before any decision is made to award and continue with the project. These terms and conditions are contractually and legally binding. Once approved, it can become more difficult to manage risk as the project progresses.

Today’s Project Manager also needs to explore the changing requirements of project management in the current business climate. The traditional project manager role focused on the processes and tools needed to complete a project within a set budget and time frame. It no longer makes best business sense to develop a long-term plan and stick to it at all costs. Factors such as globalization, stricter accountability, employee development, change and risk management and unstable economic conditions all require that companies today are able to adapt to quickly in order to succeed in tough economic climate.

What is the new Project Business Environment for Commercial Context consideration?

· New global political and economic order

· Wars on terrorism

· Demographic changes (aging) and education

· The opening and development of new markets – New emerging economies (e.g., India, China, Brazil)

· Off-shoring and outsourcing

· Globalisation and localization

· New pressure on public sector organizations

· European integration and enlargement

· Lowering of trade barriers (e.g., WTO, EU, APEC)

· Environmental concerns

· The ‘ICTs Revolution’ and the information economy

· Internet and e-Business

· New Trade blocs

· New legislation

· Value chain

· Tax incentives, subsidies, capital cost versus labour cost

· Commodity price (e.g., oil and gas, metal price fluctuation)

· Share market volatility (e.g., FTSE, Nikkei, Dow Jones)

· Climate change and disaster (e.g., Recent Japanese disaster, Australian Flooding and New Zealand Earthquake)

· Emphasis on local content in projects

Project management professionals need to consider a mix of the above business environment events and think about its impact to the initial strategic decision making for a project. Any business case needs to consider the impact of business environment before deciding the viability of the project. Project environmental analysis—sometimes referred to as environmental scanning—is one of the initial steps taken to appraise a project’s viability and its strategic impact to an organisation and its stakeholders.

What do Project Managers need to know about the business environment?

Components of the business environment

(Refer to the following figure 1)

Figure 1: Components of the Business Environment

(Lysons and Farrington, 2006)

From figure 1, the business environment is divided into three main business spheres, internal (micro environment – internal to the organisation), immediate suppliers and customers (meso environment) and external (macro environment – external to the organisation). Projects sits in a business environment (open system). Project Managers need to know the types of markets in the market environment, types of tools that needed to be used to scan the business environment, identifying the variables in the business environment in order to make an analysis of that business environment.

Environmental appraisal (Environmental scanning)

Identification and forecasting phenomena in the environment, through environmental scanning is essential for strategy formulation. Enterprises need to continuously engage in identifying and forecasting opportunities and threats, enterprises need to be able to proactively or reactively respond to changing conditions in the environment. Various sources of information are available to assist with scanning. Figure 2 shows some techniques used to appraise (scan) and monitor the business environmental impact on the project.

Figure 2: Environmental Scanning and Monitoring Techniques

(Bailey et al., 2008)

Tools and techniques for Environmental Scanning and monitoring:

· SWOT

· Porter’s 5 Force

· Boston Matrix

· PEST

· STEEPLE

· PESTEL

· 7 McKinsey

The above tools and techniques are not exhaustive list; however they are amongst the most popular system-based tools and techniques used to provide initial assessment of the business environmental impact to the project—as well as being used for continuous monitoring

Environmental scanning and monitoring

Environment scanning and monitoring is a concept from business management by which businesses gather information from the environment, to better achieve a sustainable competitive advantage for projects. To sustain competitive advantage the company must also respond to the information gathered from environmental scanning by altering its strategies and plans when the need arises when making decisions for projects.

Analysis of the Business Environment

SWOTs analysis

Figure 3: Definitions of SWOTs

Strength-Weakness-Opportunity-Threat

Identification of threats and opportunities in the environment (external) and strengths and weaknesses of the firm (internal) is the foundation of business policy formulation; it is these factors which determine the course of action to ensure the survival, sustainability and growth of the firm including when deciding which projects to select from a diverse portfolio of projects.

SWOT: Studying Internal and External Environment for Projects

The aim of any SWOT analysis is to identify the key internal and external factors that are important to achieving the project objectives. Internal and external environmental conditions may be favourable or unfavourable.

SWOT analysis groups key pieces of information into two main categories:

Internal factors – The strengths and weaknesses internal to the organisation’s projects.

External factors – The opportunities and threats presented by the external environment to the project

Strengths and Weaknesses (e.g.,)

Resources: Financial, location, skills, competence, knowledge

Cost advantages from proprietary know-how

Creativity/ability/capacity to develop new projects (and products)

Valuable intangible assets: intellectual capital

Competitive capabilities

Opportunities and Threats (e.g.,)

Opportunity: Represents favourable (positive) conditions in micro, market, macro environments – advantageous to firm

Threat: Represents unfavourable (negative) conditions in micro, market, macro environments – detrimental to firm

Takeovers, market trends, economic condition, mergers, joint ventures, strategic alliances, expectations of stakeholders, technology, public expectations, competitors and competitive actions, poor public relations development, criticism, global markets, environmental conditions

SWOT will be often used in the options appraisal section of a business case and the business case of many projects will use SWOT as an environmental scanning and monitoring tool to measure the project’s initial strategic viability. This is essential when there are multiple projects, and one project needs to be prioritised for selection. Apart from project selection, SWOT also has some other essential strategic applications as following:

· Corporate Planning

· Set Objectives – defining what the organisaton intends to do

· Environmental scanning – Internal appraisals of the organisations SWOT, this needs to include an assessment of the present situation as well as a portfolio of projects/products/services and an analysis of the projects/product/service life cycle

· Analysis of existing strategies, this should determine relevance from the results of an internal/external appraisal. This may include gap analysis (compare with its potential performance which will look at environmental factors)

· Strategic issues defined – key factors in the development of a corporate plan that needs to be addressed by the organisation.

· Develop new/revised strategies – revised analysis of strategic issues may mean the objectives need to change

· Establish critical success factors – the achievement of objectives and strategy implementation

· Preparation of operational, resource, project plans for strategy implementation

· Monitoring results – mapping against plans, taking corrective action which may mean amending objective/strategies (an area where projects need to address significantly)

· Also use SWOT analysis for business planning, strategic planning, competitive evaluation, marketing, business and product development and research reports.

Some other tools that organisations, project managers and stakeholders can use to appraise a project’s initial strategic viability are as following:

Porter’s 5 Force

Figure 4: Porter’s 5 Force (Baily, et al., 2008)

Boston Consulting Group Matrix

Figure 5: Boston’s Matrix

(Lysons and Farrington, 2006)

Task for you:

Please explore further the two tools above (Figures 4 and 5) and also explore the four tools and techniques below and how they are used to appraise the project’s business environment:

· PEST

· STEEPLE

· PESTEL

· 7 McKinsey

How project respond to changes in the business environment

Today’s New Business Environment results in increased complexity of the projects being developed, supplies and services produced and purchased. Increased complexity in the processes used to produce and procure supplies and services for projects, provides the need for sophisticated systems to control contract management processes and outputs. Traditional management systems are not suitable for procurement, production and distribution of complex supplies and services for projects. Effective project management processes are needed to manage the procurement, purchasing, supply chain and contract aspects of today’s new business environment. Today’s project managers need a knowledge of the internal and external business environment in supplier analysis, total cost analysis, pricing, purchasing strategies, supplier relationship, commodity management and supplier evaluation; project managers need to have knowledge about outsourcing, make versus buy, procurement process type, contracting strategy and pricing strategy.

Project Managers need to think about how the business environment plays a vital role – they need to use project management processes and knowledge areas to manage critical and complex project contracts.

Figure 6: How Strategic Planning is being converted to Project Success

Organisations need to carefully appraise current and future business environment impact on their strategic planning of their portfolio of projects, so as to ensure the most viable projects are taken on-board. Consistent review of this initial strategic assessment must be carried out throughout the project life cycle to ensure project success, as shown in Figure 6.

(a) www.pmi.org – refer to Project Management Journal

(b) Lysons, K., and Farrington, B., (2005), Purchasing and Supply Chain Management, 7th Edition, Prentice Hall (Financial Times), CIPS - ISBN: 9786610601882

(c) www.emeraldinsight.com – International Journal of Managing Projects in Business (ISSN: 1753-8378)

After completing this topic, you will understand the nature of new business environment and also how to appraise the business environment. You will also understand how projects need to cope with growing demand for complex, sophisticated, customised supplies and services. Also an increased reliance on external providers e.g., contractors, vendors, suppliers, consultants for performance of mission-critical functions (work packages) and evolution of worldwide competitive markets reinforced the need for business environmental appraisal integration with projects selection criteria.

APM’s definition on Project Context

( http://www.apm.org.uk/content/project-context )

Project context refers to the environment within which a project is undertaken. Projects do not exist in a vacuum and an appreciation of the context within which the project is being performed will assist those involved in project management to deliver a project.

Apart from the above tools and techniques to appraise the Project Business Environment, there are some other additional tools and techniques you may want to explore further:

ETPS, PESTLEE, PESTLIED, SLEPT, STEP, STEPE, PEST-G, PEST-E

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