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Portfolio and Project Selection: PROJ587 Case

Portfolio and Project Selection: PROJ587 Case 

The Case Study for PROJ587 will place the student in the role of a senior manager in charge of one of your company’s Strategic Business Units (SBU). Your first task in this new position is to develop a project portfolio management process and then use this process to select projects for your SBUs portfolio. The Case Study will involve the application of the tools and techniques of multi-project/program management and will deal with the analysis and establishment of project management systems based on the structure of the project.

The expected outputs from this Case Study will be in the form of a two part written report due week five.

Background

The senior management of your company has already made the strategic decisions to allocate annual funding to each of the Strategic Business Units (SBU) within the company. You have been hired to manage one of the companies SBUs.

Your new company is a mid cap company with revenues of approximately $350 million dollars a year. This company, like many others, is struggling in today’s economy. It realizes in order to survive it needs to both expand and control costs at the same time. You are new to this industry. This company’s vision is to become the “go to” support or the “provider of choice” for the cruise ship industry throughout the world.

This company currently is in the travel and hotel support industry. As such, you supply support services to the travel and hotel industry such as linen services to cruise ships and major hotel chains in the Southeastern United States. Most of your new company’s revenues are derived for the cruise ship industry versus the hotel industry. This company is home based in Tampa, Florida, as most of your business is in that geographic area.

You are in charge of the Operations SBU and responsible for the management of a product portfolio in this strategic business unit. The Operations SBU is the SBU that provides all the company’s services to its clients. There are a number of projects already in progress, but there has not been a good portfolio management process in place.

The parent company has set the following strategic goals for the entire company:

  • Expansion goals are to grow the company 10% per year, specifically to include the following:
    • Expand into new markets in Alaska and Europe
    • Expand services provided to current customers
    • Increase revenues by 10%
    • Increase customer satisfaction by 15%
  • Cost Control goals include the following
    • Reduce operating costs by 10%
    • Reduce overhead and warehousing costs by 5%

Assignment: Due Week 5

This is a two part assignment.

Part 1

First, develop project selection criteria and a high level process for applying the criteria and managing the portfolio. The criteria should be consistent with the business environment for the industry, consistent with your company’s overall mission/strategies, and consistent with the mission and strategies of your strategic business unit. You are proposing a process, not individual projects.

The deliverable for Part 1 is a written proposal for the project selection criteria and a high level description of a proposed portfolio management process. You may also be expected to make an informal presentation of the report in class.

The proposal should be in the form of a memorandum to your Vice President (your instructor) outlining your proposal. The memorandum should be no more than 10 pages, including any figures and tables. It should be double-spaced, 10 or 12 point font with one-inch margins. This is a summary for an executive, so be concise, to the point, and leave out the fluff. If you don’t need 10 pages to document your proposal fully, I am sure that your Vice President will be happy with less as long as it is complete. Using appropriate grammar, spelling, punctuation, and sentence structure will be part of your grade.

The actual proposal should include the following:

  1. A description of the proposed portfolio process. You are explaining it to the executives.
  2. The reasons it was selected (tie to strategies as appropriate.)
  3. A description of the proposed selection criteria. How will the process be applied in your SBU?
  4. The method for applying the selection criteria, and the justification for both. How are you going to score the projects and evaluate the scores?

Executive Summary

This memo proposal is designed for a mid-cap company management an organization anticipating to increase its revenues, improve customer satisfaction and control costs. The company vision is to be a “provider of the best” or “got to” either in the cruise ship or hotel industry. The company will achieve its goals by offering support services to cruise ships and hotels. A lot of revenues will be realized from cruise ship industry compared to the hotel industry. The company has a budget of $24 million that can be divided into four quarters within a year to execute on all possible projects. Each quarter can be allocated a maximum of $6 million. The budget constraints do not allow the execution of all possible projects. Therefore, this memo recommends that only three projects should be implemented in the first year. These projects are Rocky Project, Project ordering upgrade, and Project Tableware. The analysis of these projects shows that they help in meeting all the target objectives of the company. blank

1.0 Introduction

The goal of every business is to grow and expand its operations to wider markets that will contribute to increased sales and in return realize higher profit margins. It will be difficult for the business to achieve this goal if it does not have in place viable projects that will contribute to its continuous revenue growth. Alternatively, the business is endowed with limited resources and therefore, making it impossible to implement all the viable projects (Ribeiro & Alves, 2014). This calls for effective project selection criteria of all the possible business projects to ensure the best project is chosen and implemented. This proposal analyzes the best project selection criteria applicable to the mid-cap company which intends to realize 10 percent company growth annually. This growth will comprise of expanding business operations to new markets in Europe and Alaska, expanding the current customers’ services, increasing its revenue by ten percent as well as increasing the satisfactory client level by fifteen percent. Secondly, the company aims to control its cost by reducing operating costs by ten percent as well as reduce maintenance costs by five percent.

2.0 Proposed Portfolio Process Descriptions

As noted above, the company has certain specific goals to achieve. Therefore, the project selection criteria will be based on the company’s goals to grow by ten percent per year and control its costs. Besides, the selected criteria should facilitate the achievement of the company’s overall mission and vision as suggested by (Bender, 2010). This will be essential to ensure that the company is not limited to one project, but it can also allow the addition of other projects. This proposal finds that performance and expected values from the projects should be used as the basis for selecting the best project to be implemented. This project selection process will help the company meet its core goals, growth and cost control. To determine each project expected value the project can apply basic accounting tools comprising of benefits/cost ratio, NPV, and IRR.

3.0 Portfolio Process Justification

The portfolio management process will employ the above-suggested strategies to ensure the realization of the company goals. The benefit/cost ratio depicts the relationship between cash inflow and cash outflow resulting from the project’s net present value. Bearing in mind that the major goals of the company are to grow and reduce costs, this process will ensure that projects with high benefits cost ratio or with low cost-benefit ratio are given priority over the others. The benefit-cost ratio is arrived at by dividing the anticipated project cash inflow by the initial project cost. The tool has proven to be useful in the cases where direct financial returns are hard to compute, or they are not important (Bender, 2010). Unlike, IRR, this method can identify and reduce the project risk. This tool aids the project portfolio manager to select the project that contributes to the higher benefits at the lowest project cost as possible. However, the project will be the most suitable for non-profit oriented projects, but for this mid-cap company case, it can be used to reduce the project risks.
The Net Present Value is another accounting tool that is widely used in project selection process. The project portfolio manager is required to create a table that will help him in sorting out different projects based on the one with the highest NPV to the one with the lowermost NVP. The portfolio manager will create an extra column that shows the project total cash inflows. Upon accomplishing this step, the portfolio manager will go ahead to select all the projects with cash inflows exceeding the project capital employed. This technique has some weaknesses because the project manager may reject the best projects based on the budget constraints. However, this may be not an issue for the company because one goal of its major goals is to control costs.
The IRR is almost similar to NPV. The only major difference is that projects are selected based on the decreasing internal rate of return. Ideally, the organization will have the minimum project value that it will accept (Bender, 2010). Therefore, it is advisable to apply this technique to the company that wants to determine the expected value of the project. This method has been found to have benefits over Net Present Value because it expected returns could be used as justification to secure loans from lenders. However, the technique has some shortcomings because it does not show risks that may be associated with portfolio projects. Secondly, the projects evaluated through this approach compete for other investment options of which could be more viable.
The suggested company goals and objectives can be achieved by employing the above-proposed strategies. Provided that certain tools may not help in evaluating some project objectives based on the company goals, combing two or three tools per project will help evaluate each project fully. Secondly, proposed criteria process will enable the implementation of the projects based on the available resources as well as the viability of the project. For example, projects with high returns will be given the priority. Thirdly, the process facilitates the identification some of the risks that may accrue different projects. For example, Internal Rate of Return is very effective in identifying and reducing the risk projects.

4.0 Process Management Methods

The selection of the project is followed by imperative measures meant for managing portfolio processes. The management of the portfolio process calls for the portfolio balance that will facilitate the searching of the new strategies to enable the company to realize its stated goals (Oktavera & Saraswati, 2012). Several tools have proved appropriate in balancing the portfolio. For example, the weighted scoring model and balance scorecard will aid in eliminating the continuous reprioritization of project needs. With weight scoring model and balance scorecard in place it will be easier for the company to manage its portfolio process appropriately and as a result, achieve its goals.
The Weighted Scoring method will be suitable for the portfolio management process bearing in mind that the company has several objects to achieve. According to Bender (2010), weighted scorecard serves best when the company has a variety of objectives to attain. With the weighted scoring model, the project portfolio manager will design a matrix showing the company benefits attributable to each project. Then the project manager will assign different weights to different projects based on the project importance. This approach will offer the portfolio project manager with the desired information required in the determination of each project contribution towards the achievement of the company set goals (Gurný & Gurný, 2013).
The application of weighted scoring technique may look complicated. Therefore, this proposal notes that it is important to provide a simplified scenario on how it can be applied. For example, a buyer who has an option to buy car brands X, Y and Z will have to decide on which brand to purchase. It will be difficult for the buyer to choose the desirable brand before having in place the features that he or she anticipate the car to have. The buyer will list the features that he wants the car has and the features that other car brands do not have. Then the buyer will go ahead the select the car brand that matches his desires the best. This is usually made mentally. Ideally, the buyer is weighing the important features of the car brand that makes it more desirable than the other brands. Similarly, the weighted technique will be applied in the same manner to select the project that matches the desired company goals and objectives. However, it is important to note that despite the company having a lot of resources to implement, a wrong decision during the weighting of the project benefits may lead to severe consequences.
Apart from the weighted model, the balanced scorecard can also help the portfolio manager in the project management process. Ideally, the balanced scorecard is very helpful in ensuring that the company achieves its strategic goals and objectives (Zizlavsky, 2014). The reliance on the balanced scorecard in portfolio process will provide the project manager with the whole set of all measurable project objectives. The project manager will then use the project objectives to establish whether they match with the company stated goals. Besides, the balanced scorecard perspectives that comprise of customer satisfaction, internal processes and financial performance conforms to the company target goals.
The balanced scorecard method will help the company to focus selected projects on the achievement of the established goals. Secondly, it facilitates the integration of different programs that may be crucial in making sure the desired goals are achieved. Thirdly, it will help in elaborating to the mid-level managers and lower level employees on what is supposed to be done to achieve the project objectives in line with the company set goals. However, just like any other project management process technique, the method has some disadvantages (Salem & Hasnan, 2012). For example, the distribution resources among different projects may be a challenge. This is because certain minor project objectives may demand a lot of resources at the expense of the major project objectives. Therefore, the company should also consider this demerit, but with the balanced scorecard numerous benefits, this disadvantage to doing not disqualify it from being considered as effective in the management of the project processes.

5.0 Application of the Proposed Process in SBU

After the project manager has decided which projects have the high probability of helping the company to achieve its set goals, the selected projects will be passed be evaluated. This first step in this phase will involve allocating the appropriate risk level percentages to the desired projects. Ideally, risks tolerances are estimated as low, medium or high percentages that when summed together they must total to 100 percent (Oktavera & Saraswati, 2012). In the proposed prosed portfolio high project risks may have 18 percent risk level, medium-risk projects will have 62 percent risk level while the low-risk projects will have 20 percent risk level. Having planned, identified and analyzed the possible risks associated with each project, the next step of the project manager will be to put in place measures to control risks.
In the process of establishing risk control measures, the projects with the highest risks will be identified first and then determine the risk factors that may cause them to fail. It usually advisable that if the project manager is unable to eliminate the risks, he or she should forgo the project. The project manager will do this early enough to avoid committing resources in the projects that may end failing and as a result cause the company to incur extra resources. The resources that were meant for the highly risky projects will be allocated to other projects that may be more viable and less risky. The project manager will also explore the medium risk projects to determine their viability and the consequences they may have to the company resources in the event they fail. Finally, the manager will review all the low-risk projects to establish whether their returns will be good enough despite them having the least risk levels.
Upon finishing the review of the project risks, the project manager will determine the time-phase project objectives. These are usually clear phases that show that all risks have been eliminated and the selected projects are worth implementing. However, there will be still a need for the project manager to review all projects again and get rid of the risky projects that do not meet the criteria of the time-phased objectives. The projects that pass this step are proven to have very low risks and more viable and therefore, they are worth to be implemented. The process employed will make sure only the less-risky and more productive projects are implemented.

6.0 Selection Criteria Method

In the earlier analysis, it was observed that several techniques could be applied in the selection project portfolio. The Cost/benefit ratio, IRR, and NPV all proved that they could be useful in the selection of all the available projects. It would be difficult to use the three methods, and therefore, this proposal opts for the Net Present Value technique only. One major goal of the company is to realize an increase in profit margins. This means that the company should invest in the projects that will bring value to the company. The NVP will help the company to establish whether a project will bring revenue to the company. Secondly, the use of NVP as the project selection criteria it will be appropriate because it puts into consideration the fact that money loses value with time. This means that the worthiness of a certain amount of money today will be less compared to its future value. Thirdly, the NVP will be best when used in the selection of these projects because it puts into consideration the initial project cost employed as well as the inherent risks attributable to each project through future cash inflow projections (Selvam, Punitavati, & Nadu, 2012).
Due to the limited information about the projects, the NVP becomes simpler to use than any other tools suggested earlier in the proposal. For example, in the projects to be selected the cost involved while obtaining the capital has not been revealed, hence making it difficult to suggest any other tool rather than the NVP. In the management of the portfolio process, the weighted scoring model will be used. The two methods will be helpful in selecting and evaluating the projects that match with the company cores strategic goals. The Weighted scoring model will help the company to control the costs that may be involved in the implementation and running of the projects. Additionally, the weighted scoring model will monitor all the projects to make sure they are executed in line with the desired company goals and objects. Ideally, the weighted scoring model helps the manager to minimize the risks and the costs that may accrue to projects during the execution phase (Bender, 2010). The method will ensure that all projects are executed at the lowest cost possible, and all risky projects are avoided.
The company stated goals would be achieved by reviewing all the available projects and selecting the one that matches the with its target objectives. As seen in the proposal analysis there are several approaches that the company can employ to select the best project that will help it to achieve its goals. The project selection criteria should be based on the project performance and the expected value each project will have towards the increase in the company revenue. Secondly, the proposal offers several selection criteria that the company can use to select the best project. The proposed project selection methods comprise of cost/benefit ratio, IRR, and NPV. Upon analyzing the three methods, the NPV comes out as the best method to be used in the selection of projects due to its associable benefits. Thirdly, in the management of the project process two methods, weighted scoring model, and the balanced scorecard have been proposed as the best. However, the weighted scoring method supersedes that of the balanced scorecard hence emerging as the best technique to be applied in the project management processes. The application of NVP will make sure the best project is selected. On the other hand, the weighted scoring model will make sure the project’s risks and costs are minimized to the lowest level as possible.

Part 2: Project Recommendation

There are several projects that a company implement to achieve its target goals. However, the project manager will have to use the possible projects based on the available resources and their contribution the company objectives. This will be achieved by analyzing the chosen projects and selecting the best ones based on the NVP method. This memo recommends project ordering upgrade, project rocky, and project tableware.

Project NPV ($) Budget ($) Cumulative Cost ($)
Project Ordering Upgrade 245, 000 = (7 x 35, 000) 2.5 million (One off cost) 2.5 million annually

2.5 million in a quarter

Project Rocky 19 million within five years. 13 million within a year

3.25 million within a quarter.

Less: 400,000 (operational cost)

3.4 million Annually.

15.5 million in a year

5.75 million in a quarter

Project Tableware 1 million within five years.

Less: 300,000 (operational costs)

700,000 annually

5.5 million to be spread between the two quarters.

 

2.75 million in each quarter. (5.5/2)

21 million annually

6 million to be used in the two quarters.

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