OPERATIONS STRATEGY

KRUPANIDHI SCHOOL OF MANAGEMENT

INTRODUCTION TO PROJECT MANAGEMENT

CHAPTER 1

Syllabus for Chapter 1

Project Management: concepts and key terms, evolution of
integrated project management system, aligning projects with
organization strategy, effective project portfolio management
system, project life cycle, feasibilities of projects- different
forms of project contracting.

1. What is a project?
A project, therefore, is not a physical objective, nor is it the end-resultit has
something to do with the goings-on in between.

2. Define a project?
It starts from scratch with a definite mission, generates activities involving a
variety of human and non-human resources all directed towards fulfilment of
the mission and stops once the mission is fulfilled.

3. What is the importance of project management?

Project management is fast becoming an exciting new profession. Project
managers are in great demand. They may be required for a publishing house, a
university, agricultural rural development social work or industrial
construction projects. It appears they are required wherever there is work.
Project management seems to have captured the attention of all those who are
looking for results. The prospects were not so bright some years ago. For that
matter, even now, none of the universities in India offer a full-fledged degree
course in project management. This necessarily poses a problem. What a
project manager does, in Company X is not the same as what another does in
Company Y. Today anyone holding a responsible position in a project is a
Project Managerand if he pursues his own style in discharging his so-called
project management responsibilities, he can hardly be blamed.

4. What are the characteristics of a project?

A project is typified by its various characteristics. To start with, a project is a
big workbut it is basically a workone whole thing. This means that while
PROF. KERENA ANAND

Page 1

OPERATIONS STRATEGY

KRUPANIDHI SCHOOL OF MANAGEMENT

there may be contributions from many different people, it can still be

recognised as one whole thing. A comparison can be made with a book to fully
understand it. While there may be many chapters in the book, sometimes
written by different authors, the book is a single entity and is supposed to serve
a single purpose. The various works that constitute the whole are inter-related
and together they tell the whole story.

S. No.

Characteristic Features

Objectives

A project has a fixed set of objectives. Once the objectives have been achieved, the project
ceases to exist.

2.

Life span

A project cannot continue endlessly. It has to come to an end. What represents the end would
normally be spelt out in the set of objectives.

3.

Single entity

A project is one entity and is normally entrusted to one responsibility centre while the
participants in the project are many.

4.

Team work

A project calls for team workthe team again is constituted of members belonging to
different disciplines, organisations and even countries.

5.

' Life cycle

A project has a life cycle reflected by growth, maturity and decay. It has, naturally, a
learning component.

6.

Uniqueness

No two projects are exactly similar even if the plants are exactly identical or are merely
duplicated. The location, the infrastructure, the agencies and the people make each project
unique.

7.

Change

A project sees many changes throughout its life. While some of these changes may not have
any major impact, there can be some changes which will change the entire character or
course of the project.

8.

Successive principle

What is going to happen during the life cycle of a project is not fully known at any stage.
The details get finalised successively with the passage of time. More is known about a
project when it enters the construction phase than what was known, say, during the detailed
engineering phase.

9.

Made to order

A project is always made to the order of its customer. The customer stipulates various
requirements and puts constraints within which the project must be executed.

10.

Unity in diversity

A project is a complex set of thousands of varieties. The varieties are in terms of technology,
equipment and materials, machinery and people, work culture and ethics. But they remain
inter-related and unless this is so they either do not belong to the project or will never allow
the project to be completed.

11.

High level of subcontrasting

A high percentage of the work in a project is done through contractors. The more the
complexity of the project, the more will be the extent of contracting. Normally around 80%
of the work in a project is done through sub-contractors.

12

Risk and uncertainty

Every project has risk and uncertainty associated with it. The degree of risk and uncertainty
will depend on how a project has passed through its various life-cycle phases. An ill-defined
project will have extremely high degree of risk and uncertainty. Risk and uncertainty are not
part and parcel of only R & D projectsthere simply cannot be a project without any risk
aftd uncertainty.

1.

PROF. KERENA ANAND

Page 2

OPERATIONS STRATEGY

KRUPANIDHI SCHOOL OF MANAGEMENT

5. What is a project family tree?

A project normally originates from a plannational plan or corporate plan. In
the normal scheme of things, the family tree for a project would be. Sometimes,
however, the term project may be used for what should be termed as
programme or work package. This is not quite unexpected in view of their
closeness in the hierarchy. A programme is not the same thing as a project; for
one thing, it is not time limited like a project and also its scope and boundaries
are not so well delineated. It is, however, another thing that the approach for
management of programmes may be the same as that for a project.
Plan: National/Corporate plan with targets for growth.
Programme: Health programme, educational programme, science and
technology programme. Power plants, schools, hospitals, housing projects.
Project: Power plants, schools, hospitals, housing projects.
Work Package: Water supply and distribution package, power supply and
distribution package
Task: Award of water supply contract, construction of foundations.
Activity: Excavation, laying of cable, preparation of drawings, preparation of
specifications
Similarly, a work package is not a project though it may be so treated for the
purpose of its management. Several work packages will constitute a project. A
work package, however, has to be time limited as there is absolutely no
ambiguity regarding its scope and boundaries.

6. What are the categories of project?

Normal Projects In this category of projects adequate time is allowed for
implementation of the project. All the phases in a project are allowed to take
the time they should normally take. This type of project will require minimum
capital cost and no sacrifice in terms of quality.
Crash Projects In this category of projects additional capital costs are incurred
to gain time. Maximum overlapping of phases is encouraged and compromises
in terms of quality are also not ruled out. Savings in time are normally achieved
in procurement and construction where time is bought from the vendors and
contractors by paying extra money to them.
Disaster Projects Anything needed to gain time is allowed in these projects.
Engineering is limited to make them work. Vendors who can supply yesterday
are selectedirrespective of the cost. Quality short of failure level is accepted .
No competitive bidding is resorted to. Round-the-clock work is done at the
construction site. Naturally, capital cost will go up very high, but project time
will get drastically reduced.
PROF. KERENA ANAND

Page 3

OPERATIONS STRATEGY

KRUPANIDHI SCHOOL OF MANAGEMENT

7. Explain the project life cycle phases. (Exam QP -December

2011)
The attention that a particular project receives is again not uniformly
distributed throughout its life span, but varies from phase to phase. At a
particular phase of project life, depending on the requirement of that phase,
appropriate attention has to be paid. We, therefore, need to know the various
phases in the life of a project. By and large, all projects have to pass through
the following five phases:

Conception phase
Definition phase
Planning and organising phase
Implementation phase
Project clean-up phase

While ideally these phases should follow one another in sequence, this rarely
happens in real life. Not only do the succeeding phases overlap with the
preceding ones, it is also not too uncommon to find complete overlap of all the
phases. Sometimes this overlapping is deliberately in the interest of
compressing the overall project schedule. There are others who would
encourage natural growth. To understand this aspect fully, we need to discuss
the life cycle phases in a little more detail.
Conception Phase
This is the phase during which the project idea germinates. The idea may first
come to the mind when one is seriously trying to overcome certain problems.
The problems may be non utilisation of the available funds, plant capacity,
expertise or simply unfulfilled aspirations. When one is seized with the
PROF. KERENA ANAND

Page 4

OPERATIONS STRATEGY

KRUPANIDHI SCHOOL OF MANAGEMENT

problems, he looks in and around to find out ways of overcoming them. It may
so happen that an idea will suddenly come to his mind as he surveys the
environment. It is also possible that ideas will be put to him by his well wishers
or those working on the problems for him. Whatever may be the case, the ideas
need to be put in black and white and given some shape before they can be
considered and compared with competitive ideas.
Definition Phase
The definition phase of the project will develop the idea generated during the
conception phase and produce a document describing the project in sufficient
details covering all aspects necessary for the customer and/or financial
institutions to make up their minds on the project idea. The areas to be
examined during this phase, say for a cement plant, may be as follows:
Raw materials: Qualitative and quantitative evaluation of limestone reserves.
Plant size/capacity: Enumeration of plant capacity for the entire plant and for
the main departments.
Location and site: Description of location supported by a map.
Technology & process selection: Selection of optimum technology, reasons for
selection and description of the selected technology.
Project layout: Selection of optimum layout, reasons for selection and
appropriate drawings.
Plant and Machinery: Selection of optimum equipment, reasons for selection,
description of selected 'equipment and machinery, stating number, type,
specifications, capacity, source and cost.
Electrical and instrumentation works: Listing the broad features of the major
electrical and instrumentation items, suggesting a broad scheme for power
distribution and power grid map.
Civil engineering works: Selection of optimum civil works, reasons for selection,
description of selected civil work and cost estimates.
Utilitiesfuel, power and water: Selection and description of utilities stating
qualitative properties, quantities, source, availability and unit costs.
Manpower and organisational pattern: Selection of labour and staff considering
organisational structure/layout, skill requirement and level of training,
availability and cost estimates.
Financial analysis: Total investment costs, sources of finance, total production
costs and evaluation of financial viability.

PROF. KERENA ANAND

Page 5

OPERATIONS STRATEGY

KRUPANIDHI SCHOOL OF MANAGEMENT

Implementation schedule: This phase, therefore, clears some of the ambiguities

and uncertainties associated with the formation made during the conceptual
phase. This phase also establishes the risk involved in going ahead with the
project in clear terms. A project can either be accepted or get dropped at this
stage itself.
Planning and Organising Phase
This phase can effectively start only after definition phase but in practice it
starts much earlier, almost immediately after the conception phase. This phase
overlaps so much with the definition and also with implementation phases that
no formal recognition is given to this by most organisations. Some
organisations, however, prepare documents such as Project Execution Plan to
mark this phase.
By and large, organisations, during this phase, deal with the following, and in
most eases take necessary action for realisation of the same.
Project infrastructure and enabling services
System design and basic engineering package
Organisation and manpower
Schedules and- budgets
Licensing and governmental clearances
Finance
Systems and procedure
Identification of project manager
Implementation Phase
This is a period of hectic activity for the project. It is during this period that
something starts growing in the field and people for the first time can see the
project. Preparation of specifications for equipment and machinery, ordering of
equipment, lining up construction contractors, issue of Construction drawings,
civil construction and construction of equipment foundations, equipment and
machinery erection, plant electricals, piping, instrumentation, testing,
checking, trial run and commissioning of the plant take place during this
phase. As far as the volume of work is concerned, 80-85% of project work is
done in this phase only. Naturally, therefore, people want to start this phase as
early as they can. Since the bulk of the work in a project is done during this
phase only, people will always want this phase to be completed in as short a
time as possible. All techniques of project management, therefore, are applied
to this area essentially.
PROF. KERENA ANAND

Page 6

OPERATIONS STRATEGY

KRUPANIDHI SCHOOL OF MANAGEMENT

Project Clean-up Phase

This is a transition phase in which the hardware built with the active
involvement of various agencies is physically handed over for production to a
different agency who was not so involved earlier. For project personnel this
phase is basically a clean-up task. Drawing, documents, files, operation and
maintenance manuals are catalogued and handed over to the customer. The
customer has to be satisfied with guarantee-test runs. Any change required at
the last minute for fulfilment of contractual obligations in respect of performance has, therefore, to be completed during this phase to the satisfaction of the
customer. Project accounts are closed, materials reconciliation carried out,
outstanding payments made, and dues collected during this phase.
The most important issue during this phase is planning of the staff and
workers involved in execution of the project. All project personnel cannot be
suddenly asked to go. Preparation for project clean-up has, therefore, to start a
long time before actual physical handover. The first to go are design engineers
and in their place few design engineers may be posted at field for residual
engineering. This will be followed by other engineersmost of the time in the
order in which they came in. Their places will be taken by customers engineers
who may be either for production or maintenance. The same people will never
be required again at that site till a new project comes.

8. What is project visibility?

A project cannot be seen for most of its life time. It starts with everything vague
and fluid and for almost half of its life span it shows no concrete benefits. Only
towards the end of the project people seem to be seeing the project. Though we
have made it clear at the beginning that a project is not a plant, people seem to
have problems in accepting the fact. Accountants, in particular, want solid
proof of progress before they release payment. While proof of progress can be
given, it may riot be possible to produce solid evidence for verification.
This non-visibility of a project also causes problems for its management ~How
to grapple with a thing which is yet to come and be seen? A project becomes
visible slowly as it grows. Initially, one can only imagine what it would
eventually be, but only the passage of time can give it a concrete shape. At any
point in the life cycle something will be clearly visible, something nearly visible,
but the rest will still have to be imagined. Figure shows the conceptual model
explaining this phenomenon. At t1, visibility is zeroit requires total,
projection. At t2 time, part of the project preceding time t2 becomes visible, and
something upto t3 may become nearly visiblethe rest will still have to be a
projection. One who wants to' know a project has, therefore, to go on projecting
all the lime to get an idea of the realitysince there is simply no other way.
Perhaps this aspect of the project life would justify the term project being used
PROF. KERENA ANAND

Page 7

OPERATIONS STRATEGY

KRUPANIDHI SCHOOL OF MANAGEMENT

to describe the efforts of multitudes of men and machines engaged in the

conversion of an idea into reality.

While visibility demonstrates progress, it may not mean much to some people.
To the user, project value may remain near zero not only at h but throughout
the project life. A project abandoned in-between has zero value; the full value of
the project is realised only at the end.

9. What is strategic management?

Strategic management is the process of assessing what we are and deciding
and implementing what we intend to be and how we are going to get there.
Strategy describes how an organization intends to compete with the resources
available in the existing and perceived future environment.

10.

Explain in detail the strategic management process.

Two major dimensions of strategic management are responding to changes in

the external environment and allocating scarce resources of the firm to improve
its competitive position. Constant scanning of the external environment for
changes is a major requirement for survival in a dynamic competitive
environment. The second dimension is the internal responses to new action
programs aimed at enhancing the competitive position of the firm. The nature
of the responses depends on the type of business, environment volatility,
competition, and the organizational culture.
PROF. KERENA ANAND

Page 8

OPERATIONS STRATEGY

KRUPANIDHI SCHOOL OF MANAGEMENT

Strategic management provides the theme and focus of the future direction of
the organization. It supports consistency of action at every level of the
organization. It encourages integration because effort and resources are
committed to common goals and strategies.
It is a continuous, iterative process aimed at developing an integrated and
coordinated longterm plan of action. Strategic management positions the
organization to meet the needs and requirements of its customers for the long
term. With the long-term position identified, objectives are set, and strategies
are developed to achieve objectives and then translated into actions by
implementing projects. Strategy can decide the survival of an organization.
Most organizations are successful in formulating strategies for what course(s)
they should pursue. However, the problem in many organizations is
implementing strategiesthat is, making them happen. Integration of strategy
formulation and implementation often does not exist.
The components of strategic management are closely linked, and all are
directed toward the future success of the organization. Strategic management
requires strong links among mission, goals, objectives, strategy, and
implementation. The mission gives the general purpose of the organization.
Goals give global targets within the mission. Objectives give specific targets to
goals. Objectives give rise to formulation of strategies to reach objectives.
Finally, strategies require actions and tasks to be implemented. In most cases
the actions to be taken represent projects.
Review or revise mission

External environmental
opportunities or threats

Internal environmental
strengths and weaknesses

New goals and objectives

Portfolio of strategic
choices

Strategy implementation

Project selection

Projects

PROF. KERENA ANAND

Page 9

OPERATIONS STRATEGY

11.
What are the four
Management Process

KRUPANIDHI SCHOOL OF MANAGEMENT

Activities

of

the

Strategic

The typical sequence of activities of the strategic management process is

outlined here; a description of each activity then follows:

Review and define the organizational mission.

Set long-range goals and objectives.
Analyze and formulate strategies to reach objectives.
Implement strategies through projects.

Review and Define the Organizational Mission

The mission identifies what we want to become, or the raison detre. Mission
statements identify the scope of the organization in terms of its product or
service. A written mission statement provides focus for decision making when
shared by organizational managers and employees. Everyone in the
organization should be keenly aware of the organizations mission.
Traditional components found in mission statements are major products and
services, target customers and markets, and geographical domain. In addition,
statements frequently include organizational philosophy, key technologies,
public image, and contribution to society. Including such factors in mission
statements relates directly to business success.
Mission statements change infrequently. However, when the nature of the
business changes or shifts, a revised mission statement may be required. For
example, Steve Jobs of Apple Computer envisioned the use of computer
technology beyond the PC desktop. His mission was to look at computer
technology as the vehicle for work and entertainment. As a result he developed
the iPod for selling music and masterminded the development of animated
movies such as Finding Nemo through the Pixar organization
Long-Range Goals and Objectives
Objectives translate the organization mission into specific, concrete,
measurable terms. Organizational objectives set targets for all levels of the
organization. Objectives pinpoint the direction managers believe the
organization should move toward. Objectives answer in detail where a firm is
headed and when it is going to get there. Typically, objectives for the
organization cover markets, products, innovation, productivity, quality, finance,
profitability, employees, and consumers. In every case, objectives should be as
operational as possible. Thatis, objectives should include a time frame, be
measurable, be an identifiable state, and be realistic.
Analyze and Formulate Strategies to Reach Objectives

PROF. KERENA ANAND

Page 10

OPERATIONS STRATEGY

KRUPANIDHI SCHOOL OF MANAGEMENT

Formulating strategy answers the question of what needs to be done to reach

objectives. Strategy formulation includes determining and evaluating
alternatives that support the organizations objectives and selecting the best
alternative. The first step is a realistic evaluation of the past and current
position of the enterprise. This step typically includes an analysis of who are
the customers and *what are their needs as they (the customers) see them.
The next step is an assessment of the internal and external environments.
What are the internal strengths and weaknesses of the enterprise? Examples of
internal strengths or weaknesses could be core competencies, such as
technology, product quality, management talent, low debt, and dealer networks.
Managers can alter internal strengths and weaknesses. Opportunities and
threats usually represent external forces for change such as technology,
industry structure, and competition. Competitive benchmarking tools are
sometimes used here to assess current and future directions. Opportunities
and threats are the flip sides of each other. That is, a threat can be perceived as
an opportunity, or vice versa. Examples of perceived external threats could be a
slowing of the economy, a maturing life cycle, exchange rates, or government
regulation. Typical opportunities are increasing demand, emerging markets,
and demographics. Managers or individual firms have limited opportunities to
influence such external environmental factors; however, in recent years notable
exceptions have been new technologies such as Apple using the iPod to create a
market to sell music. The keys are to attempt to forecast fundamental industry
changes and stay in a proactive mode rather than a reactive one. This
assessment of the external and internal environments is known as the SWOT
analysis (strengths, weaknesses, opportunities, and threats).
Implement Strategies through Projects
Implementation answers the question of how strategies will be realized, given
available resources. The conceptual framework for strategy implementation
lacks the structure and discipline found in strategy formulation.
Implementation requires action and completing tasks; the latter frequently
means mission-critical projects. Therefore, implementation must include
attention to several key areas.
First, completing tasks requires allocation of resources. Resources typically
represent funds, people, management talents, technological skills, and
equipment. Frequently, implementation of projects is treated as an addendum
rather than an integral part of the strategic management process. However,
multiple objectives place conflicting demands on organizational resources.
Second, implementation requires a formal and informal organization that
complements and supports strategy and projects. Authority, responsibility, and
performance all depend on organization structure and culture. Third, planning
and control systems must be in place to be certain project activities necessary
to ensure strategies are effectively performed. Fourth, motivating project
contributors will be a major factor for achieving project success. Finally, an
area receiving more attention in recent years is prioritizing projects. Although
the strategy implementation process is not as clear as strategy formulation, all
managers realize that, without implementation, success is impossible.
PROF. KERENA ANAND

Page 11

OPERATIONS STRATEGY

12.

KRUPANIDHI SCHOOL OF MANAGEMENT

Explain the Portfolio Management System in detail.

Succinctly put, the aim of portfolio management is to ensure that projects are
aligned with strategic goals and prioritized appropriately. Portfolio management
provides information that allows people to make better business decisions.
Since projects clamoring for funding and people usually outnumber available
resources, it is important to follow a logical and defined process for selecting
the projects to implement.
Design of a project portfolio system should include classification of a project,
selection criteria depending upon classification, Selection criteria, ranking
proposals, and managing the portfolio of projects.
a. Classification of the Project
Many organizations find they have three different kinds of projects in their
portfolio: compliance and emergency (must do), operational, and strategic
projects. Compliance projects are typically those needed to meet regulatory
conditions required to operate in a region; hence, they are called must do
projects. Emergency projects, such as rebuilding a soybean factory destroyed
by fire, meet the must do criterion. Compliance and emergency projects usually
have penalties if they are not implemented. Operational projects are those that
are needed to support current operations. These projects are designed to
improve efficiency of delivery systems, reduce product costs, and improve
performance. TQM projects are examples of operational projects. Finally,
strategic projects are those that directly support the organizations long-run
mission. They frequently are directed toward increasing revenue or market
share. Examples of strategic projects are new products, research and
development.
b. Selection Criteria
Although there are many criteria for selecting projects, selection criteria are
typically identified as financial and nonfinancial. A short description of each is
given next, followed by a discussion of their use in practice.
Financial Models For most managers financial criteria are the preferred method
to evaluate projects. These models are appropriate when there is a high level of
confidence associated with estimates of future cash flows. Two models and
examples are demonstrated herepayback and net present value (NPV).
Project A has an initial investment of $700,000 and projected cash inflows of
$225,000 for 5 years. Project B has an initial investment of $400,000 and
projected cash inflows of $ 110,00 for 5 years.

The payback model measures the time it will take to recover the project
investment. Shorter paybacks are more desirable. Payback is the
simplest and most widely used model. Payback emphasizes cash flows, a

PROF. KERENA ANAND

Page 12

OPERATIONS STRATEGY

KRUPANIDHI SCHOOL OF MANAGEMENT

key factor in business. Some managers use the payback model to

eliminate unusually risky projects (those with lengthy payback periods).
The major limitations of payback are that it ignores the time value of
money, assumes cash inflows for the investment period (and not beyond),
and does not consider profitability. The payback formula is
Payback period (yrs) = Estimated Project Cost/Annual Savings
The payback for Project A is 3.1 years
and for Project B is 3.6 years. Using
the payback method both projects are acceptable since both return the initial
investment in less than five years and have returns on the investment of 32.1
and 27.5 percent.

The net present value (NPV) model uses managements minimum desired
rate-of-retum (discount rate, for example, 20 percent) to compute the
present value of all net cash inflows. If the result is positive (the project
meets the minimum desired rate of return), it is eligible for further
consideration. If the result is negative, the project is rejected. Thus,
higher positive NPVs are desirable.

Nonfinancial Criteria
Financial return, while important, does not always reflect strategic importance.
The sixties and seventies saw firms become overextended by diversifying too
much. Now the prevailing thinking is that long term survival is dependent upon
developing and maintaining core competencies.
Here the strategic reasons include:

To capture larger market share

To make it difficult for competitors to enter the market
To develop core technology

Sources and Solicitation of Project Proposals

Projects should come from anyone who believes his or her project will add value
to the organization. However, many organizations restrict proposals from
specific levels or groups within the organization. This could be an opportunity
lost. Good ideas are not limited to certain types or classes of organization
stakeholders. Encourage and keep solicitations open to all sourcesinternal
and external sponsors.
An example of a proposal form for major projects. Note that this form includes a
preliminary risk assessment as well as problem definition and project
objectives.

PROF. KERENA ANAND

Page 13

OPERATIONS STRATEGY

KRUPANIDHI SCHOOL OF MANAGEMENT

The project will take more than 500 labor hours?

The project is a one-time effort? (will not occur on a regular basis)
The project proposal was reviewed by the product manager?
Problem definition
Describe the problem/opportunity.

Goal definition

Describe the project goal.

Objective definition

Performance: Quantify the savings/benefits you expect from the project.

c. Ranking Proposals and Selection of Projects

Data and information are collected to assess the value of the proposed project
to the organization and for future backup. If the sponsor decides to pursue the
project on the basis of the collected data, it is forwarded to the project priority
team (or the project office). Note that the sponsor knows which criteria will be
used to accept or reject the project. Given the selection criteria and current
portfolio of projects, the priority team rejects or accepts the project. If the
project is accepted, the priority team sets implementation in motion
d. Managing the Portfolio System
Managing the portfolio takes the selection system one step higher in that the
merits of a particular project are assessed within the context of existing
projects. At the same time it involves monitoring and adjusting selection criteria
to reflect the strategic focus of the organization. This requires constant effort.
The priority system can be managed by a small group of key employees in a
small organization. Or, in larger organizations, the priority system can be
managed by the project office or the enterprise management group.

Senior Management Input

Management of a portfolio system requires two major inputs from senior

management. First, senior management must provide guidance in establishing
selection criteria that strongly align with the current organization strategies.
Second, senior management must annually decide how they wish to balance
the available organizational resources (people and capital) among the different
types of projects.

The Priority Team Responsibilities

The priority team, or project office, is responsible for publishing the priority of
every project and ensuring the process is open and free of power politics. For
example, most organizations using a priority team or project office use an
PROF. KERENA ANAND

Page 14

OPERATIONS STRATEGY

KRUPANIDHI SCHOOL OF MANAGEMENT

electronic bulletin board to disperse the current portfolio of projects, the

current status of each project, and current issues. This open communication
discourages power plays. Over time the priority team evaluates the progress of
the projects in the portfolio. If this whole process is managed well, it can have a
profound impact on the success of an organization.

Balancing the Portfolio for Risks and Types of Projects

A major responsibility of the priority team is to balance projects by type, risk,

and resource demand. This requires a total organization perspective. Hence, a
proposed project that ranks high on most criteria may not be selected because
the organization portfolio already includes too many projects with the same
characteristicse.g., project risk level, use of key resources, high cost,
nonrevenue producing, long durations.

13.
What is the Need for an Effective Project Portfolio
Management System?
Implementation of projects without a strong priority system linked to strategy
creates problems. Three of the most obvious problems are discussed below. A
project portfolio system can go a long way to reduce, or even eliminate, the
impact of these problems.
Problem I: The Implementation Gap
In organizations with short product life cycles, it is interesting to note that
frequently participation in strategic planning and implementation includes
participants from all levels within the organization. However, in perhaps 80
percent of the remaining product and service organizations, top management
pretty much formulates strategy and leaves strategy implementation to
functional managers. Within these broad constraints, more detailed strategies
and objectives are developed by the functional managers. The fact that these
objectives and strategies are made independently at different levels by
functional groups within the organization hierarchy causes manifold problems.
Some symptoms of organizations struggling with strategy disconnect and
unclear priorities are presented here.

Conflicts frequently occur among functional managers and cause lack of

trust.
Frequent meetings are called to establish or renegotiate priorities.
People frequently shift from one project to another, depending on current
priority. Employees are confused about which projects are important.
People are working on multiple projects and feel inefficient.
Resources are not adequate.

Because clear linkages do not exist, the organizational environment becomes

dysfunctional, confused, and ripe for ineffective implementation of organization
strategy and, thus, of projects. The implementation gap refers to the lack of
PROF. KERENA ANAND

Page 15

OPERATIONS STRATEGY

KRUPANIDHI SCHOOL OF MANAGEMENT

understanding and consensus of organization strategy among top and middlelevel managers.
Problem 2: Organization Politics
Politics exist in every organization and can have a significant influence on
which projects receive funding and high priority. This is especially true when
the criteria and process for selecting projects are ill-defined and not aligned
with the mission of the firm. Project selection may be based not so much on
facts and sound reasoning, but rather on the persuasiveness and power of
people advocating projects.
The term sacred cow is often used to denote a project that a powerful, highranking official is advocating. Case in point, a marketing consultant confided
that he was once hired by the marketing director of a large firm to conduct an
independent, external market analysis for a new product the firm wras
interested in developing. His extensive research indicated that there was
insufficient demand to warrant the financing of this new product. The
marketing director chose to bury the report and made the consultant promise
never to share this information with anyone. The director explained that this
new product was the pet idea of the new CEO, who saw it as his legacy to the
firm. He went on to describe the CEOs irrational obsession with the project and
how he referred to it as his new baby. Like a parent fiercely protecting his
child, the marketing director believed that he would lose his job if such critical
information ever became known.
Problem 3: Resource Conflicts and Multitasking
Most project organizations exist in a multiproject environment. This
environment creates the problems of project interdependency and the need to
share resources. For example, what would be the impact on the labor resource
pool of a construction company if it should win a contract it would like to bid
on? Will existing labor be adequate to deal with the new projectgiven the
completion date? Will current projects be delayed? Will subcontracting help?
Which projects will have priority? Competition among project managers can be
contentious. All project managers seek to have the best people for their
projects. The problems of sharing resources and scheduling resources across
projects grow exponentially as the number of projects rises. In multiproject
environments the stakes are higher and the benefits or penalties for good or
bad resource scheduling become even more significant than in most single
projects.

14.
Explain the benefits of project portfolio Management.
(Exam QP- December 2011)

Following are some of the benefits of PPM

PROF. KERENA ANAND

Page 16

OPERATIONS STRATEGY

KRUPANIDHI SCHOOL OF MANAGEMENT

Prioritize the right projects and programs: PPM can guide decision-makers to
strategically prioritize, plan, and control enterprise portfolios. It also ensures
the organization continues to increase productivity and on-time delivery adding value, strengthening performance, and ultimately improving bottom-line
results.
Eliminates surprises: Formal portfolio project oversight provides managers and
executives with a process to identify potential problems earlier in the project
lifecycle, and the visibility to take corrective action before they impact financial
results.
Build contingencies into the overall portfolio: Flexibility often exists within
individual projects but, by integrating contingency planning across the entire
portfolio of investments, organizations can have greater flexibility around how,
where, and when they need to allocate resources, alongside the flexibility to
adjust those resources in response to a crisis.
Maintain response flexibility: with in-depth visibility into resource allocation,
organizations can quickly respond to escalating emergencies by maneuvering
resources from other activities, while calculating the impact this will have on
the wider business.
Do more with less: For organisations to systematically review project
management processes while cutting out inefficiencies and automating those
workflows and to ensure a consistent approach to all projects, programs, and
portfolios while reducing costs.
Ensure informed decisions and governance: By bringing together all project
collaborators, data points, and processes in a single, integrated solution, a
unified view of project, program, and portfolio status can be achieved within a
framework of rigorous control and governance to ensure all projects
consistently adhere to business objectives.
Extend best practice enterprise-wide: organizations can continuously vet
project management processes and capture best practices, providing
exponential degrees of efficiency as a result.
Understand future resource needs: by aligning the right resources to the right
projects at the right time, organizations can ensure individual resources are
fully leveraged and requirements are clearly understood. PPM also allows an
organization to establish complete project capacity at any point in time.

15.

What is a feasibility report?

A feasibility report is prepared to present an in-depth techno- commercial

analysis carried out on the project idea for consideration of the financial
institutions and other authorities empowered to take the investment decision.
PROF. KERENA ANAND

Page 17

OPERATIONS STRATEGY

KRUPANIDHI SCHOOL OF MANAGEMENT

According to the guidelines published by the Planning Commission a feasibility

report should include:

Raw material survey

Demand study
Technical study Product pattern Process selection
Plant size
Raw material requirements
Location study
Project capital cost estimates and source of finance
Profitability and cash flow analysis
Cost benefit analysis

We will scan through the contents of a feasibility report in some detail to enable
us to uptake the same.
Raw Material Survey
The raw materials may belong to any of the following categories:
Available in natural form as deposit, either on the surface or underground, in
one part or different parts of the country. Necessary arrangements in that case
are to be made for extracting the same from the main raw material body and
transport it to the processing centre. Studies would look into not only the
quality of the raw material to assess its suitability for the manufacturing
process, but also the quantity to decide on the size and life of the plant it would
support. The study would also take into consideration the quantity of - material
already committed for different plants in operation or in the pipeline.
Available as finished product or by-product from some operating plants or likely
to be available in the near future from some plant or plants under construction.
Not available in the country but to be imported. This could either be in natural
form or as finished product or by-product of some existing plants. The survey
would again be made through desk study of literature available from different
foreign trade missions followed by questionnaires issued to various companies
known to supply or manufacture these materials.
Demand Study
A demand study normally would establish the following:
Demand Covering uses of the product proposed to be manufactured, the
prospective consumers, present consumption, expected consumption in future
including possibility of exports.

PROF. KERENA ANAND

Page 18

OPERATIONS STRATEGY

KRUPANIDHI SCHOOL OF MANAGEMENT

Supply Covering assessment of existing capacity, present level of production,

capacity utilization, extent of import and projected supply considering the
plants under construction.
Distribution Covering channels of distribution, mode of transport, mode of
packing and cost of distribution, Government policies, etc.
Prices Covering both domestic and international price trends, control on price
as imposed by the Government, prevailing duties and taxes.
Most of the information is available from published literature. In special cases,
however, an independent survey may be needed. Some of the documents that
are usually referred to for this purpose are as follows:
Plan documents Issued by the Planning Commission, provides information on
plan proposals and growth targets that are both physical and fiscal.
Guidelines to industries Published by the Department of Industrial
Development, Ministry of Industry. It provides information about licensed and
installed capacity, present production, imports and exports, indigenous
capability regarding knowhow, design and fabrication, future scope, etc.
Economic survey Published by the Ministry of Finance, it provides data on
industrial production, prices, exports, etc.
Annual survey of industries Published by the Central Statistical Organisation, it
provides data on production, number of units installed, capacity, etc. for
several industries.
Import and export statistics Published by the Ministry of Commerce, it provides
data on imports and exports of a very large number of items.
Monthly bulletin of Reserve Bank of India Provides information on production
and cost indices for various industrial items.
Survey reports of various institutions Publications of the Industrial Development
Bank of India, National Council of Applied Economic Research, Times of India
Economic Division, etc. These documents provide information relating to
production, consumption, import, export and prices.
Technical Study

Product Pattern The demand survey projects an estimate of potential

sales and the raw material survey confirms if adequate material will be
available to support the project. These two data and a consideration of
economy of scale should be sufficient to select the plant capacity. But a
final decision in this regard can be made only after the financial
resources required and the available alternative technologies are also
evaluated.

PROF. KERENA ANAND

Page 19

OPERATIONS STRATEGY

KRUPANIDHI SCHOOL OF MANAGEMENT

Process Selection The product pattern so selected and the raw material
availability will govern the selection of the processing scheme. But
detailed evaluation including the economics of operation of alternative
processing schemes is necessary for selecting an optimum process.
Usually a processing scheme is developed by an operating company
through its own R and D effort and is protected by patents. The company
is then said to possess know-how.

Location Study
To meet their targets relating to time and cost, it is necessary that the site has
been properly selected and possession taken of before the zero date. Normally,
the financial institutions will depute a team of experts to inspect the site before
they sanction any loan. Uncertainties associated with the site and particularly
that of sub-soil conditions must also be removed before the zero date. If the
plant site has to be relocated at a later date, not only will the targets be missed
but even the viability of the project may also be lost.
Project sites are selected on several considerations. The basic considerations
are:
Availability of land, soil characteristics and cost of the land

Source of raw material and transportation requirement .

Approach to site
Transportation and marketing of finished product
Source and availability of water
Availability of power and source
Availability of skilled manpower
Social amenities in the area
Availability of tax incentives, if any
Facilities for drainage and effluent disposal
Availability of engineering and maintenance facilities
Acceptance of the project by the local bodies

FINANCING ARRANGEMENTS
For the zero date of the project to become effective, it is essential that funds
required for the project are arranged. The fund requirement for a project is to
meet the capital expenditure for purchasing plant and machinery, initial
working capital and pre-operating expenses. Though the entire fund is not
required on the zero date, nevertheless, suitable arrangement will have to be
made in advance so that funds do not pose a constraint for meeting the project
targets once the project starts.
To be able to assess correctly the fund requirement and plan for the same, the
first step would be to identify what are the various capital, working and
operating costs that are to be financed for a project. Decisions will have to be
taken thereafter about the financial structure of the project identifying the
PROF. KERENA ANAND

Page 20

OPERATIONS STRATEGY

KRUPANIDHI SCHOOL OF MANAGEMENT

portion of debt and equity of the total investment. Only thereafter the various
financial institutions can be approached for funding the project.
The financial institutions providing funds to finance the projects are as follows:
1. Industrial Development Bank of India (IDBI): This is the principal
financial institution of India. It coordinates the activities of other financial
institutions, supplements their resources to plan and promote industries.
2. Industrial Finance Corporation of India ( IFCI): It provides long term
loans under various schemes to industrial concerns both in the public
and the private concerns.
3. Industrial Credit and Investment Corporation of India (ICICI): This is a
financial institution which is mainly concerned with providing foreign
currency loans to industrial concerns in the private sector.
4. Industrial Reconstruction Corporation of India (IRCI): It mainly provides
soft loans for revival and revitilization of industrial units which are closed
down or are facing closure.
5. State Financial Corporations (SFC): These institutions provide loans to
small and medium industrial units within their respective states. They
also grant loans in foreign exchange for import of plant and machinery.
6. Unit Trust of India (UTI): This institution mobilizes the savings of the
general public and invests them in various industrial units.
7. Life Insurance Corporation (LIC): It has now acquired the status of a
development financial institution. It provides long term finances to
industrial units.
8. The Export Import Bank of India (Exim Bank): The Exim bank provides
funds for promotion of exports of engineering and capital goods and
related services from India.
9. The State Industrial Development Corporation (SIDC) : The functions of
SIDC are:
a. Industrial promotion activities such as project identification,
preparation of feasibility reports, identifying entrepreneurs and
assisting them in project implementation.
b. Setting up if industrial projects as sole owners or in the joint
sector.
c. Creation of infrastructural facilities
d. Providing term loans
e. Acting as agent of State/Central Government in respect of grant of
subsidies.
Profitability ,cash flow analysis & Cost benefit analysis
A project cost estimate is required not only for assessing fund requirement but
also for ascertaining the economic viability of the project.

16.

What is Contract?

A contract is an exchange of promises between two or more parties to do, or

refrain from doing an act, which resulting contract is enforceable in a court of
PROF. KERENA ANAND

Page 21

OPERATIONS STRATEGY

KRUPANIDHI SCHOOL OF MANAGEMENT

law. In the project or program context, contracts typically involve the exchange
of money in return for goods or services

17.
What are
management?

the

types

of

contract

in

project

Types of Contract in Project Management

Whether youre managing a small project or a large complex program you need
a basic understanding of the different types of contract youre likely to
encounter when buying from external organizations and 3rd parties.
.
Types of Contracts
There are three basic types of contract youre likely to come across in
managing your projects and programs:
1. Fixed price or lump sum contacts
2. Cost reimbursable contracts
3. Time and materials (T&M) contracts
Fixed Price or Lump Sum Contracts
In this type of contract a specific price is agreed for the good or service being
sold. In project terms, the buyer and seller will agree on a well-defined
deliverable for a specific price. In this type of contract the bigger risk is borne
by the seller. They must make sure they make a profit even given some
unknowns such as increasing costs or delays in creation of the deliverable.
Fixed price contracts can be catastrophic for both buyer and seller if there isnt
a well defined deliverable. Firstly, often the sellers profit is eroded as they
compromise to meet the buyers demands. Secondly, the buyer may have to
pay more for change requests when the supplier is no longer willing to
compromise around what, in their eyes, appear to be changing requirements.
Another type of contract you might encounter is the fixed-price plus incentive
contract. Here the contract includes an incentive or bonus, typically for the
early or on-time completion of the deliverable.
Cost-Reimbursable Contracts
In this type of contract all the costs that the seller incurs during the project are
charged back to the buyer, and thus the seller is reimbursed costs. The costs
which are allowable will be defined in the contract. In this type of contract
more risk is carried by the buyer as the final cost is uncertain. If problems arise
during the execution of the project then the buyer will have to spend more.
PROF. KERENA ANAND

Page 22

OPERATIONS STRATEGY

KRUPANIDHI SCHOOL OF MANAGEMENT

The advantage of this type of contract to the buyer is that obviously scope
changes can be easily made to the work being done. One problem with this
type of contract is that the seller has very little incentive to be efficient and
productive and complete the work quickly. It should come as no surprise that
this type of contract is most often used when there is a lot of uncertainty
associated with the final deliverable.
Kinds of cost-reimbursable contracts
There are three kinds of cost-reimbursable contracts you should understand:
1. Cost plus fee (CPF) or cost plus percentage of cost (CPPC)
2. Cost plus fixed fee (CPFF)
3. Cost plus incentive fee (CPIF)
Cost plus fee (CPF) orcost plus percentage of cost (CPPC) Here the seller is
reimbursed for allowable costs plus a fee thats calculated as a percentage of
costs. Obviously, there is no incentive for the seller to complete the work
quickly with this type of contract.
Cost plus fixed fee (CPFF) Here all allowable expenses are charged back plus a
fixed fee at the end of the contract. The fixed fee is how the seller makes their
profit. The aim of the fixed fee is to encourage the seller to complete the work
as quickly as possible.
Cost plus incentive fee (CPIF) Here all allowable expenses are charged back
and in addition an incentive fee for exceeding the performance criteria specified
in the contract. The incentive fee is designed to encourage increased cost
performance by the seller. There is the potential of both buyer and seller saving
if the performance criteria is exceeded.
Time and Material (T&M) Contracts
This type of contract is a cross between fixed-price and cost-reimbursable
contracts. This is opposed to a fixed-price contract in which the buyer agrees
to pay the contractor a lump sum for construction no matter what the
contractors pay their employees, sub-contractors and suppliers.
Time and materials is a standard phrase in a contract for construction in which
the buyer agrees to pay the contractor based upon the work performed by the
contractors employees and subcontractors, and for materials used in the
construction (plus the contractors mark up), no matter how much work is
required to complete construction.
Time and materials contracts are not common because of the lack of an upper
limit for the price paid by the buyer. However, if there is no time to send the
job out for bids and complete construction, a time and materials arrangement
can save time. It is also a common arrangement where the original fixed price
PROF. KERENA ANAND

Page 23

OPERATIONS STRATEGY

KRUPANIDHI SCHOOL OF MANAGEMENT

contractor abandons the work and another contractor must repair any damage
caused by the first contractor and complete the work.
Many time and materials contracts also carry a guaranteed maximum price,
which puts an upper limit on what the contractor may charge.

PROF. KERENA ANAND

Page 24