Effects of excess reliance on one project screening method
The problems identified in the ABC case study are not only limited to the discounted cash flow method, but also to the scoring method. The right selection of new projects is determined by the experience and judgement of all managers involved in the selection process. Just like the ABC Company, many organizations have limited experience on new projects. This implies that managers are likely to leave projects with important values when selecting new projects.
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Furthermore, the input in project screening and selection may not be reliable. This can lead to some projects overrunning budgets, mismatching with the current portfolio, or getting completed after the deadline.
The Analytical Hierarchy Process (AHP) is the second screening and selection model that can lead to problems, similar to the ones identified in the case study. This model addresses the technical and management problems that are inherent in the scoring model. It supports managers in the rational selection of the best project alternatives, basing on both qualitative and quantitative criteria. The criteria and sub-criteria are hierarchically structured and ranked in the order of scores.
The AHP model helps in selecting the best alternatives and reducing new project risks. However, this model suffers from a number of drawbacks that can lead to problems, similar to the ones identified in the case study. First, a manager can end up selecting a strong project with a prohibitively high cost tag due to a bias in calculating the scores. Second, the AHP method requires full exposure of the criteria before the process begins. This implies that a potential company may prefer pursuing certain projects over others, basing on different agendas, rather than the projects’ viability or feasibility.
New projects evaluation criteria
The addition of new projects affects the project portfolio of a company. No universal criterion is used to evaluate these projects. However, the following criteria are critical for the ABC Company in adding new projects to its current portfolio. These criteria will help solve the current problems that the company is experiencing.
The first criterion is to determine the relationship between the new project and the existing project portfolio. The portfolio Matrices, scoring, and AHP, are used to evaluate this relationship.
Market penetration is the second criterion in developing new projects. These projects are evaluated, basing on their capability of attracting and maintaining customers. They can also be evaluated, basing on their increase in market penetration. In addition, the time to market the new projects or products is evaluated to measure its impact on the current marketing strategies.
Technological feasibility is the third criterion of the new project development. It involves determining the technological capabilities of a company to sustain new projects. The company should possess or have access to technological skills required in innovating and designing new products. In addition, an organization should have technological resources to help it push the new products along with the existing portfolio.
The last criterion is to evaluate the costs of developing new products or projects. Project managers should be aware of these costs. This can help in reducing costs and preventing delays due to funding constraints. The actual cost of selecting projects and opportunity costs of the foregone projects should be considered. This requires a cost-benefit analysis of the alternatives to new projects.
All these criteria should be integrated to ensure a successful project development process of an organization.
Case study demonstrated effects of poor project screening methods of project management
The ABC case study demonstrates several impacts of poor project screening methods on an organization’s ability to manage projects efficiently. The case study demonstrates that projects with strong estimated cash flows can be injurious to any company. If a company fails to manage new high cash flow projects well, the projects can turn out to be too costly and inconsistent to the existing portfolio. In addition, the ABC case study exposes dangers of excessive reliance on a single criterion, during the process of project selection. Furthermore, it shows that a successful project portfolio should be coherently constructed and managed as a whole.
In addition to the above factors, the case study shows that although financial screen models are non-subjective, they have several shortcomings. If a company excessively relies on one model, let’s say such NPV OR IRR, it will be difficult to make accurate long term estimates of new projects. The economic conditions such as inflation, interest rates, and recession may be unknown and unstable. Therefore overreliance on discounted cash flow methods may turn out to be invalid in the future, leading to problems in the ABC Case study.
The case study also demonstrates the impacts of lack of evaluation of new projects. As earlier mentioned, when new projects are added or introduced to the current portfolio without drawing their complementarity, the projects are likely to be inconsistent and mismatched. This creates project incoherence between current portfolio and the new projects. The ultimate outcome is negative project results as demonstrated in the case study. In other words, the ABC case study confirms and demonstrates the impacts of poor screening methods of management in an organization.