Criteria For Project Selection Models

We live in the midst of what has been called the "knowledge explosion." We frequently hear such comments as "90 percent of all we know about physics has been discovered since Albert Einstein published his original work on special relativity"; and "80 percent of what we know about the human body has been discovered in the past 50 years." In addition, evidence is cited to show that knowledge is growing exponentially. Such statements emphasize the importance of the management of change. To survive, firms must develop strategies for assessing and reassessing the use of their resources. Every allocation of resources is an investment in the future. Because of the complex nature of most strategies, many of these investments are in projects.

To cite one of many possible examples, special visual effects accomplished through computer animation are common in the movies and television shows we watch daily. A few years ago they were unknown. When the capability was in its idea stage, computer companies as well as the firms producing movies and TV shows faced the decision whether or not to invest in the development of these techniques. Obviously valuable as the idea seems today, the choice was not quite so clear a decade ago when an entertainment company compared investment in computer animation to alternative investments in a new star, a new rock group, or a new theme park—or when the computer firm considered alternative investments in a new business software package, a higher resolution color monitor, or a faster processor.

The proper choice of investment projects is crucial to the long-run survival of every firm. Daily we witness the results of both good and bad investment choices. In our daily newspapers we read of Ashland Oil's decision to reformulate its automotive fuel in order to lower pollution at a cost of $0.03 to $0.05 per gallon—at the same time that British Petroleum decides to lower the volatility of its automotive fuel to lower pollution at a cost of $0.01 per gallon. We read of Chrysler's decision to make a major alteration in its passenger car line, of IBM's decision to make significant cuts in the prices of its personal computers, and of the United States congressional decision to withdraw funding from the Super Conducting Super Collider project. But can such important choices be made rationally? Once made, do they ever change, and if so, how? These questions reflect the need for effective selection models.

Within the limits of their capabilities, such models can be used to increase profits, to select investments for limited capital resources, or to Improve the competitive position of the organization. They can be used for ongoing evaluation as well as initial selection, and thus are a key to the allocation and reallocation of the organization's scarce resources.

When a firm chooses a project selection model, the following criteria, based on Souder |60|, are most important.

1. Realism The model should reflect the reality of the manager's decision situation, including the multiple objectives of both the firm and its managers. Without a common measurement system, direct comparison of different projects is impossible. For example, Project A may strengthen a firm's market share by extending its facilities, and Project B might improve its competitive position by strengthening its technical staff. Other things being equal, which is better? The model should take into account the realities of the firm's limitations on facilities, capital, personnel, etc. The model should also include factors for risk— both the technical risks of performance, cost, and time and the market risk of customer rejection.

2. Capability The model should be sophisticated enough to deal with multiple time periods, simulate various situations both internal and external to the project (e.g., strikes, interest rate changes, etc.), and optimize the decision. An optimizing model will make the comparisons that management deems important, consider major risks and constraints on the projects, and then select the best overall project or set of projects.

3. Flexibility The model should give valid results within the range of conditions that the firm might experience. It should have the ability to be easily modified, or to be self-adjusting in response to changes in the firm's environment; for example, tax laws change, new technological advancements alter risk levels, and, above all, the organization's goals change.

4. Ease of Use The model should be reasonably convenient, not take a long time to execute, and be easy to use and understand. It should not require special in terpretation. data that are hard to acquire, excessive personnel, or unavailable equipment. The model's variables should also relate one to one with those real-world parameters the managers believe significant to the project. Finally, it should be easy to simulate the expected outcomes associated with investments in different project portfolios.

Project Management Made Easy

Project Management Made Easy

What you need to know about… Project Management Made Easy! Project management consists of more than just a large building project and can encompass small projects as well. No matter what the size of your project, you need to have some sort of project management. How you manage your project has everything to do with its outcome.

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