Lecture 04 : Project Selection Models

Summary

This lecture covers project selection methods, focusing on two key techniques: non-numeric (qualitative) and numeric (quantitative) models. Non-numeric methods include approaches like sacred cow, operating necessity, and product line extension, which rely on qualitative factors for decision-making. Numeric methods, such as payback period, net present value (NPV), and scoring models, use quantitative analysis to evaluate projects. The lecture emphasizes the weighted scoring model as a versatile method for project selection, allowing multiple criteria to be considered, while also discussing the importance of managing risk and uncertainty in project planning.

Takeaways

• 📊 Project selection methods can be divided into non-numeric (qualitative) and numeric (quantitative) models.
• 🐮 The 'sacred cow' method involves a project suggested by senior management, which continues until the boss terminates it.
• 🚨 'Operating necessity' refers to projects required to protect lives, property, or maintain operations.
• 🏆 'Competitive necessity' is selecting a project to maintain a company's market position.
• 📦 'Product line extension' evaluates a project based on its fit with existing products.
• 💡 Non-numeric models, though qualitative, are important for strategic projects that cannot be quantified.
• 💰 Numeric models like payback period and net present value (NPV) help compare projects based on financial returns.
• 📈 The 'weighted scoring model' is favored for its ability to consider multiple criteria and balance subjectivity.
• ⏳ 'Window of opportunity' analysis focuses on pursuing projects during specific favorable time frames.
• 🔍 'Discovery driven planning' emphasizes testing assumptions and adapting strategies, especially for high-uncertainty projects.

Q & A

What are the two main categories of project selection methods discussed in the lecture?

The two main categories of project selection methods are non-numeric methods and numeric methods.

What is the key difference between non-numeric and numeric methods for project selection?

Non-numeric methods are qualitative and do not return a numeric value for comparison, while numeric methods are quantitative and return a numerical value that can be compared across projects.

What is the 'Sacred Cow' method in non-numeric project selection?

The 'Sacred Cow' method refers to a project suggested by top management that must be adopted and continued until the boss terminates it or leaves the organization.

How does the 'Operating Necessity' method work in project selection?

The 'Operating Necessity' method is used to choose projects required to protect lives or property or to keep the company operational, focusing on essential operations.

Can you explain the 'Competitive Necessity' project selection method?

The 'Competitive Necessity' method is used when a project is needed to maintain or improve the company’s position in the market, even if it may not provide immediate benefits.

What are some examples of numeric project selection methods?

Examples of numeric project selection methods include the payback period method, net present value (NPV) method, scoring method, window of opportunity analysis, and discovery-driven planning.

What is the key consideration in the payback period method?

In the payback period method, the key consideration is the length of time it takes to recover the original investment. Shorter payback periods are preferred.

What is the net present value (NPV) method, and why is it important?

The NPV method calculates the value of cash inflows and outflows in today’s terms by considering the time value of money. It helps determine which project has the highest profitability over time.

What is the advantage of the scoring method in project selection?

The scoring method allows for the use of multiple criteria, both qualitative and quantitative, to evaluate projects. It is flexible, intuitive, and closely aligns with managerial decision-making processes.

How does 'Window of Opportunity Analysis' differ from 'Discovery Driven Planning'?

The 'Window of Opportunity Analysis' focuses on identifying and acting on time-bound opportunities, while 'Discovery Driven Planning' is a broader approach that focuses on continuously testing and refining assumptions in situations of high uncertainty.