PM 2 Vorlesung 5 Teil 2

Investment calculation

Strategic criteria

Risk assessment

• Return on Investment (ROI)

• Net Present Value (NPV)

• Costs

• Strategy conformity

• Customer

• Technology

• Technical risk

• Scheduling risk

• Economic risk

A too strong focus on financial indicators such as net present value (NPV) can put highly innovative innovations at a disadvantage:

1. Future cash flows are much more uncertain and also strongly discounted by NPV approaches

2. NPV assesses the benefit compared to the basic scenario of ”doing nothing", with the incorrect assumption that the current health of the company continues

Reliance on financial metrics (NPV) can drive out radical innovation in favor of incremental innovation

The scoring procedure offers the possibility of weighted evaluation according to several criteria.

▪ Evaluation criteria are clustered and weighted, then each project is scored using defined grades on a scale.

▪ The sum of all scores results in the „utility value” of the project with regard to the criteria used.

The Dynamic Rank Ordered List method provides a ranking order by comparing the projects in pairs.

▪ Projects are ranked according to several criteria, the average of the individual ranks is used to determine the overall ranking.

▪ The ranking is calculated by a pairwise comparison.

▪ Valuation results are presented in a diagram for qualitative assessment of the portfolio composition.

▪ The portfolio serves as a discussion basis for the portfolio board to prioritize projects

IT simplifies the decision-making process

A ranking list of the projects can be derived from the evaluation procedures.

Decision of a project priority list by the management.

Project ideas are then loaded against scarce personnel capacity and overall project budget.

Possible display formats are the ABC cluster or ranked lists.

Challenges in dependency management are...

... providing information on dependencies

... identifying the extent and type of dependencies

... and visualizing dependencies.

Benefit (utility) itnerdependencies

Risk interdependencies

Financial interdependencies

Outcome interdependencies

Schedule interdependencies

Resources

This refers to a) Schmidt’s notion of benefit interdependency, and b) the potential to gain benefits greater than the sum of single projects’ benefits

whether risks of different projects can be compensated or amplified by one another

The execution of a project can result in financial gains or losses by other projects

The achievement of a desired outcome of a project is required to achieve the outcome of another

Similar to the task interdependencies between projects, this refers to how projects are interrelated in terms of time, for example, it would be advantageous to conduct Project 1 and Project 2 simultaneously

Projects’ dependency on the same resources

Successful companies have a transparent, fair, and well-accepted project evaluation process.

Willingness to cannibalize also means supporting especially those projects that make previous investments obsolete or jeopardise sales.

Strategic buckets support the strategic decision-making process for a balanced and strategy-compliant portfolio by creating project categories within which projects are comparable

A roadmap can visualize the comprehensive time and capacity.

Project priorities and dependencies as well as time and capacity planning at a higher level.

Maximization of average project score and average economic benefits.

Serves as a decision template for portfolio approval.

(x-Axis = time)

If the planned costs for all projects exceed the available overall project budget, a budget reserve may be used as part of project portfolio formation.

Assignment of optional projects according to the priority list until the budget limit is reached.

Direct budget allocation for new mandatory projects.

Projects from the previous year are examined on the basis of demolition criteria.

Capacities and a budget are kept free for projects that are not terminated.

Finishing the portfolio:

▪ Approval of project proposals according to capacity and budget constraints

▪ Last adjustments and, if necessary, re-prioritization of the project portfolio

▪ Freeze project portfolio

Communication of the portfolio

▪ Announce official project portfolio (e.g. in management meetings, intranet, etc.)

▪ Nominate project managers and teams

▪ Handover to the line departments for detailed planning and implementation of the projects

Road-mapping is the conscious, future-oriented planning of sequences of projects that build on each other to implement long-term goals and strategies.

Companies that follow a real options reasoning approach invest sequentially, with initially small amounts in several projects, and reprioritise rigorously.