...International Journal of Project Management Vol. 17, No. 4, pp. 207±216, 1999 # 1999 Published by Elsevier Science Ltd and IPMA. All rights reserved Printed in Great Britain 0263-7863/99 $ - see front matter PII: S0263-7863(98)00032-5 An integrated framework for project portfolio selection NP Archer* and F Ghasemzadeh Michael G. DeGroote School of Business, McMaster University, Hamilton, Ontario, Canada L8S 4M4 The task of selecting project portfolios is an important and recurring activity in many organizations. There are many techniques available to assist in this process, but no integrated framework for carrying it out. This paper simpli®es the project portfolio selection process by developing a framework which separates the work into distinct stages. Each stage accomplishes a particular objective and creates inputs to the next stage. At the same time, users are free to choose the techniques they ®nd the most suitable for each stage, or in some cases to omit or modify a stage if this will simplify and expedite the process. The framework may be implemented in the form of a decision support system, and a prototype system is described which supports many of the related decision making activities. # 1999 Published by Elsevier Science Ltd and IPMA. All rights reserved Keywords: Project portfolio selection, project management, integrated framework, decision support Introduction Project portfolio selection and the associated activity of managing selected projects throughout their...
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...rate is the opportunity cost of capital. • Net Present Value: The net present value of a stream of yearly cash flows is N P V = C0 + C1 C2 Cn + + ··· + , 2 1 + r1 (1 + r2 ) (1 + rn )n where rn is the n year discount rate. • Monthly Rate: The monthly rate, x, is x = (1 + EAR) 12 − 1, where EAR is the effective annual rate. The EAR is EAR = (1 + x)12 − 1. • APR: Rates are quoted as annual percentage rates (APR’s) and not as EAR’s. If the APR is monthly compounded, the monthly rate is x= AP R . 12 1 • Perpetuities: The present value of a perpetuity is PV = C1 , r where C1 is the cash flow and r the discount rate. This formula assumes that the first payment is after one period. 1 • Annuities: The present value of an annuity is P V = C1 1 1 − r r(1 + r)t , where C1 is the cash flow, r the discount rate, and t the number of periods. This formula assumes that the first payment is after one period. Capital Budgeting Under Certainty • The NPV Rule: We should accept a project if its NPV is positive. If there are many mutually exclusive projects with positive NPV, we should accept the project with highest NPV. The NPV rule is the right rule to use. • The Payback Rule: We should accept a project if its payback period is below a given cutoff. If there are many mutually exclusive projects below the cutoff, we should accept the project with shortest payback period. There are two problems with the payback rule. First, it does not take into account cash flows after the cutoff. Second, it does...
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...Stremersch Editors Innovation and Marketing in the Pharmaceutical Industry Emerging Practices, Research, and Policies Chapter 3 Portfolio Management in New Drug Development Min Ding, Songting Dong, Jehoshua Eliashberg, and Arun Gopalakrishnan Abstract The pharmaceutical industry leads all industries in terms of R&D spend. Portfolio management in new drug development is extremely challenging due to long drug development cycles and high probabilities of failure. In 2010, a pharmaceutical company like GlaxoSmithKline (GSK) spent over USD 6 billion in R&D expenditure and managed a total of 147 R&D projects across 13 therapeutic areas in different stages of development. There are a lot of challenges in deciding on how to allocate resources to these projects in order to achieve the maximum returns. For example, how to evaluate the value and risk of each project, how to choose new projects for both short-term cash flow and long-term development, how to decide which projects to prioritize and which projects to remove from the portfolio, how to design drug development unit and incentive schemes to maximize the likelihood of success, and so forth. This chapter reviews both practice and the state-of-the-art research and summarizes the latest insights from both industry and academia. For a manager, it provides a guide to the tools they need in portfolio management in the new drug development context. For an academic, it provides a quick overview of the extant research and points out...
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...Management Control of Project Portfolio Uncertainty: A Managerial Role Perspective Tuomas Korhonen, Cost Management Center (CMC), Department of Industrial Management, Tampere University of Technology, Tampere, Finland Teemu Laine, Cost Management Center (CMC), Department of Industrial Management, Tampere University of Technology, Tampere, Finland Miia Martinsuo, Department of Industrial Management, Tampere University of Technology, Tampere, Finland PAPERS ABSTRACT ■ This article presents empirical results on different managers’ viewpoints regarding the sources and management of project portfolio uncertainty. As a key result, this study demonstrates the versatility of uncertainties experienced by managers, the limited degree of perceived control over them, the use of an almost complete management control package in managing uncertainties, and the necessity of managers’ cooperation in the skilled use of the management control package when managing uncertainties. In addition, a further research agenda is proposed. KEYWORDS: project portfolio management; uncertainty; managerial roles; management control systems; product development INTRODUCTION ■ n their product development, large companies have adopted project portfolio management (PPM) as a means for prioritizing and selecting product development projects among various options as well as allocating resources with the value maximization, balance, and strategic alignment of the portfolio in mind (Cooper, Edgett, & Kleinschmidt...
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...NPV>0, accept the project [which are expected to add value to the firm], otherwise don’t bother. Reminders Rule 1: Only cash flow is relevant Cash flow ≠ accounting income •In an income statement, profit is shown as it is earned rather than when the company and its customers get around to paying their bills. •Cash outflows are sorted into two categories: 1) current expenses, deducted when calculating income; and 2) capital expenses, depreciated over several years. •Always estimate cash flows on an after-tax basis; taxes should be discounted from their actual payment date Rule2: Estimate cash flows on an incremental basis Do not confuse average with incremental pay offs: Sometimes throwing good money after bad results in a large pay off. •Include all incidental effects: PS4 will cause sales of PS3 to decline. •Forecast sales today and recognize after-sales cash flows to come later: GE’s revenue from both sales of engines and from service and spare parts. •Include opportunity costs: For example, a new manufacturing operation uses land that could otherwise be sold for$100,000. •Forget sunk costs: Sunk costs are like spilled milk. •Remember salvage value: Don’t forget taxes you have to pay on the sales of plants and equipment Rule3: Treat inflation consistently PBP: The payback period of a project is the number of years it takes before the cumulative forecasted cash flow equals the initial outlay. •The payback rule says only accept projects that “payback”...
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...FFinance: principles of Finance (part 1) Financial markets and management Valuation of investment Value of investment = value of investment’s cash flows * Concept of present value: value of investment = PV(CF°, CF1, CF2…) Important characteristics of cash flows: * Time: for the same amount of money, now is preferred to tomorrow * Uncertainty: risk and return (1 for sure is preferred to half a chance to get 2) Opportunity cost of capital: Definition: opportunity cost of capital is the expected rate of return offered by equivalent investments in financial markets Net present value (investment rule) Definition: NPV of an investment is the current market value of its cash flows * accept project if its NPV is positive Arbitrage pricing An arbitrage is an investment opportunity such that: * It requires no positive investment today but yields positive payoffs in the future (type 1) * Yields positive payoff today without requiring positive payment in the future (type 2) Present value Valuing cash flows The future value of a cash flow of C dollars in T years when invested at a rate-of-return r is: FV(C) = $C * (1+ r)T We can deduce of this the present value of an amount of money received in T years: PV(C) = $C(1+r)T=$C*[discount factor at r, maturity T] Discount factor at r, maturity T = 1(1+r)T Project evaluation {Cfi, I ϵ [0;T]}: NPV = ∑ Cfi(1+r)i * Positive (<0) NPV projects increases (decrease) the value of a firm by the amount...
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...The Impact of Project Portfolio Management on Information Technology Projects Sergio Ricardo Calderini London Business School Regent’s Park, London NW1 4SA, United Kingdom e-mail: scalderini.mba2004@london.edu Bert De Reyck London Business School Regent’s Park, London NW1 4SA, United Kingdom Tel. +44 20 7706 6884; Fax. +44 20 7724 7875; e-mail: bdereyck@london.edu Yael Grushka-Cockayne London Business School Regent’s Park, London NW1 4SA, United Kingdom Tel. +44 20 7262 5050; Fax. +44 20 7724 7875; e-mail: ygrushka.phd2003@london.edu Martin Lockett Ashridge Berkhamsted, Hertfordshire, HP4 1NS, United Kingdom Tel. +44 1442 841025; e-mail: martin@mlockett.com Marcio Moura London Business School Regent’s Park, London NW1 4SA, United Kingdom e-mail: mmoura.mba2004@london.edu Andrew Sloper CVC The Customer Value Company 48 St Mary's Road, Long Ditton, Surrey KT6 5EY, United Kingdom Tel. +44 7768 861920; e-mail: andrew.sloper@customervalue.co.uk February 2005 Ashridge Business School UK - http://www.ashridge.org.uk The Impact of Project Portfolio Management on Information Technology Projects Abstract The ever-increasing penetration of projects as a way to organise work in many organisations necessitates effective management of multiple projects. This has resulted in a greater interest in the processes of project portfolio management (PPM), with more and more software tools being developed to assist and automate the process....
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...H A P T E R 3 Project Selection and Portfolio Management Chapter Outline 70 Project Management: Achieving Competitive Advantage, Second Edition, by Jeffrey K. Pinto. Published by Prentice Hall. Copyright © 2010 by Pearson Education, Inc. 000200010270649984 PROJECT PROFILE Project Selection Procedures: A Cross-Industry Sampler INTRODUCTION 3.1 PROJECT SELECTION 3.2 APPROACHES TO PROJECT SCREENING AND SELECTION Method One: Checklist Model Method Two: Simplified Scoring Models Limitations of Scoring Models Method Three: The Analytical Hierarchy Process Method Four: Profile Models 3.3 FINANCIAL MODELS Payback Period Net Present Value Discounted Payback Internal Rate of Return Options Models Choosing a Project Selection Approach PROJECT PROFILE Project Selection and Screening at GE: The Tollgate Process 3.4 PROJECT PORTFOLIO MANAGEMENT Objectives and Initiatives Developing a Proactive Portfolio Keys to Successful Project Portfolio Management Problems in Implementing Portfolio Management Summary Key Terms Solved Problems Discussion Questions Problems Case Study 3.1 Keflavik Paper Company Project Profile Case Study 3.2 Project Selection at Nova Western, Inc. Internet Exercises Notes Chapter Objectives After completing this chapter you should be able to: 1. Explain six criteria for a useful project-selection/screening model. 2. Understand how to employ checklists and simple scoring models to select projects. 3. Use more sophisticated...
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... * * Chapter 1 Discussion Questions 1.) Many people and organizations today have a new or renewed interest in project management. In the past, project management primarily focused on providing schedule and resource data to top management in just a few industries, such as the military and construction industries. Today’s project management involves much more, and people in every industry and every country manage projects. New technologies have become a significant factor in many businesses, and the use of interdisciplinary and global work teams has radically changed the work environment. 2.) A project is a temporary endeavor undertaken to create a unique product, service, or result. a. The attributes of a project are unique purpose, temporary, developed using progressive elaboration or in an iterative fashion, requires resources, often from various areas, should have a primary customer or sponsor, involves uncertainty. b. A project is different from what most people do day to day in that a project has a beginning and an end. c. The triple constraints are scope, time and cost. d. Other factors might include quality, risk and resources. 3.) Project management is “the application of knowledge, skills, tools and techniques to project activities to meet the project requirements. a. Framework is to help you understand project management. Key elements of this framework include the project stakeholders, project management process groups...
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...required rate of return caters for the costs to both shareholders and debt holders for funds committed to the project. Therefore, using the required rate of return involves the financing charges being incorporated into the discount rate NOT the Net Cash Flows. • Fishers Separation Theorem states: Two time points: present and future No uncertainty, outcome of all decisions is known now No imperfections in the capital market All decision makers are rational Companies managers use resources according to shareholders o The theorem assumes that there is certainty and a frictionless capital market in which the interest rates for borrowers equals interest rate for lenders. o Shows a company can make a dividend/investment decision that is in the best interest of all shareholders. o Using ROR it is possible to show that the viability of project will depend on the ROR in respect to interest rate introduced through the capital market o If the interest rate is lower than both projects, then the combination of both projects is best accepted and if no combination is possible (i.e. an upgrade and another project) then both projects are accepted. o NPV calculates the projects REQUIRED RATE OF RETURN to convert future cash flows to their equivalent values today. Capital rationing describes the situation where firms have limited resources and independent projects Therefore, IF A CAPITAL MARKET EXSISTS...
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...September 2005 Project Portfolio Management at XYZ Pharma Early morning, Monday 29th August 2005. John Smith, head of portfolio management and strategic planning, was paging through the slides he had prepared for the Portfolio Management Board (PMB) meeting which would start at 9 am, and which was scheduled to last until Friday. “We have been preparing this meeting for weeks”, he thought, “and it seems the PMB has some tough decisions to make”. The PMB of XYZ Pharma, the pharmaceutical division of XYZ, one of the world’s leading companies in the life science sector, convenes yearly in August to review the composition of the research and development (R&D) project portfolio. It also meets on a monthly basis to monitor the project portfolio and make decisions regarding new developments. According to John Smith, “The PMB is an important decision making body because it shapes the future of the company by determining its product pipeline”. The PMB members include the CEO of XYZ, the CEO of XYZ Pharma, the heads of the different business units, the heads of Development, Research, Global Marketing and Strategic Planning, the regional heads for the US, Europe and Japan and the functional managers for Regulation, Clinical, Licensing, Technical Research and Development, and Patents. The portfolio group, led by John Smith, had analysed the project portfolio carefully and had highlighted several potential threats that required action. According to John, “There will be an indepth discussion...
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...September 2005 Project Portfolio Management at XYZ Pharma Early morning, Monday 29th August 2005. John Smith, head of portfolio management and strategic planning, was paging through the slides he had prepared for the Portfolio Management Board (PMB) meeting which would start at 9 am, and which was scheduled to last until Friday. “We have been preparing this meeting for weeks”, he thought, “and it seems the PMB has some tough decisions to make”. The PMB of XYZ Pharma, the pharmaceutical division of XYZ, one of the world’s leading companies in the life science sector, convenes yearly in August to review the composition of the research and development (R&D) project portfolio. It also meets on a monthly basis to monitor the project portfolio and make decisions regarding new developments. According to John Smith, “The PMB is an important decision making body because it shapes the future of the company by determining its product pipeline”. The PMB members include the CEO of XYZ, the CEO of XYZ Pharma, the heads of the different business units, the heads of Development, Research, Global Marketing and Strategic Planning, the regional heads for the US, Europe and Japan and the functional managers for Regulation, Clinical, Licensing, Technical Research and Development, and Patents. The portfolio group, led by John Smith, had analysed the project portfolio carefully and had highlighted several potential threats that required action. According to John, “There will be an indepth discussion...
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...September 2005 Project Portfolio Management at XYZ Pharma Early morning, Monday 29th August 2005. John Smith, head of portfolio management and strategic planning, was paging through the slides he had prepared for the Portfolio Management Board (PMB) meeting which would start at 9 am, and which was scheduled to last until Friday. “We have been preparing this meeting for weeks”, he thought, “and it seems the PMB has some tough decisions to make”. The PMB of XYZ Pharma, the pharmaceutical division of XYZ, one of the world’s leading companies in the life science sector, convenes yearly in August to review the composition of the research and development (R&D) project portfolio. It also meets on a monthly basis to monitor the project portfolio and make decisions regarding new developments. According to John Smith, “The PMB is an important decision making body because it shapes the future of the company by determining its product pipeline”. The PMB members include the CEO of XYZ, the CEO of XYZ Pharma, the heads of the different business units, the heads of Development, Research, Global Marketing and Strategic Planning, the regional heads for the US, Europe and Japan and the functional managers for Regulation, Clinical, Licensing, Technical Research and Development, and Patents. The portfolio group, led by John Smith, had analysed the project portfolio carefully and had highlighted several potential threats that required action. According to John, “There will be...
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...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...
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...Return on Investment Analysis for E-business Projects Mark Jeffery, Northwestern University Introduction The Information Paradox Review of Basic Finance The Time Value of Money ROI, Internal Rate of Return (IRR), and Payback Period Calculating ROI for an E-business Project Base Case Incorporating the E-business Project Incremental Cash Flows and IRR Uncertainty, Risk, and ROI Uncertainty Sensitivity Analysis 1 2 4 4 6 6 7 8 10 11 11 11 Project and Technology Risks Monte Carlo Analysis Applied to ROI Executive Insights The Important Questions to Ask When Reviewing an ROI Analysis A Framework for Synchronizing e-Business Investments With Corporate Strategy Beyond ROI: Trends for the Future Acknowledgments Glossary Cross References References 12 13 14 14 14 16 17 17 17 17 INTRODUCTION As the late 1990s came to a close, many companies had invested heavily in Internet, e-business, and information technology. As the technology bubble burst in 2000 many executives were asking “Where is the return on investment?” When capital to invest is scarce new e-business and information technology (IT) projects must show a good return on investment (ROI) in order to be funded. This chapter will give the reader the key concepts necessary to understand and calculate ROI for e-business and IT projects. In addition, the limitations of calculating ROI, best practices for incorporating uncertainty and risk into ROI analysis, and the role ROI plays in synchronizing IT investments with corporate strategy...
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