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Term
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Explanation
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strategic alignment
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The extent to which an organization's operational decisions are consistent with and implement its strategy. The concept is that organizations define strategies for
achieving their fundamental goals. Success then requires two things. First, the strategy must provide the organization with the right plan, one that makes sense given the organization's
resources, strengths, and the business environment. Second, the day-to-day decisions that are made within the organization must successfully implement the strategy. Strategic alignment
deals with the second issue. If the organization is not choosing projects that are consistent with its strategy, the likelihood that its strategy will allow it to achieve its goals is
reduced considerably.
Strategic alignment seems intuitively to be a good thing, and this, no doubt, is one of the reasons that it is so often talked about in the context of project portfolio management (PPM). However, as often happens with fuzzy concepts, the logic fails when we try to apply it in the real world. How do we measure
how well projects align with strategy? Even more importantly, why would having a portfolio of projects aligned with strategy necessarily create the
greatest value for the organization? Projects should contribute to the implementation of effective strategy. However, just because a set of projects is consistent with strategy does not
mean that those specific projects will create the greatest value for the organization.
The approach most often used to quantify strategic alignment involves creating a balanced scorecard composed of metrics linked to elements of the organization's stated strategy. For example, if policy makers have declared that one component of the strategy is to
"become the low-cost provider," projects would be scored on, among other things, the degree to which they would permit price reductions. If another
element of the firm's strategy is to "be acquired by a larger firm," projects would be scored based on whether they would make the firm appear more or less attractive to other
companies. The scores indicate the scorers sense of the degree to which proposed projects are consistent with the various elements of strategy.
By itself, the balanced scorecard doesn't provide an overall measure of strategic alignment, only numbers that reflect judged alignment with different elements of
strategy. Therefore, weights are assigned to the strategy elements to allow the scores to be aggregated. The weights typically reflect some judged assessment of the relative importance
of the various strategy elements, for example, how critical each element is to achieving the organization's stated vision. (See the paper chapter for more on the typical strategic alignment process.)
Although the above application of the balanced scorecard approach might provide useful insights on projects, it would be of no use for project prioritization. The main goal of PPM is to identify the portfolio of projects that creates maximum value. Just because a project achieves a high
aggregate score because it reflects numerous elements of the corporate strategy does not mean it will create more value. Strategic alignment is not a surrogate for value, so
prioritizing projects based on strategic alignment does not make sense.
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strategic business unit (SBU)
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A company division or product line, or single product, or company brand that has a mission separate from other company businesses and that can be planned independently
from the other businesses. The concept is that strategic business units, when managed autonomously, are small and flexible enough to respond quickly to changing market and economic
conditions.
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swing weight method
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One of the available methods for eliciting weights for the various criteria defined for multi-criteria analysis. The swing weight method requires specifying hypothetical changes (swings) in the level of performance against different objectives and
then obtaining judgments of the relative preferences for obtaining those swings, typically using a 0-to-100 scale. For example, if the most desirable swing is given a swing weight of
100 points, how many points would be assigned to obtaining the next most desirable swing? Although the swing weight method is not necessarily the most accurate method for eliciting
weights, it provides much more reliable results than assigning weights based on abstract "importance" of each criterion. The advantage of the swing weight method is that most people
find it relatively quick and easy. Some project portfolio management tools include routines and aids for applying the swing weight method.
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SWOT analysis
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A decision aid wherein the strengths, weaknesses, opportunities, and threats associated with a proposed project or other business
decision are systematically identified and examined.
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T
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theory of constraints (TOC)
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A popular management approach originally developed in the 1980s in a series of books and articles by Eliyahu M. Goldratt . TOC promotes a "thinking process" and
various "solutions" based on the idea of identifying and relaxing the constraints that limit an organization's ability to achieve its goals. TOC advocates have argued that the approach
is applicable to project portfolio management. Although TOC does not dictate a specific model or logic for selecting projects, its perspective and
techniques are most certainly useful for project portfolio management in some situations.
According TOC, every organization has at least one factor that inhibits its ability to meet its objectives. The constraining
factors can be broadly classified as internal resource constraints, market constraints, and policy constraints. To better achieve its goals (e.g., profit maximization), the organization
must increase throughput at the bottleneck process.
According to Goldratt and others, the steps are: (1) identify the active constraint, (2) decide how to exploit the active constraint (how to increase its throughput
utilization), (3) subordinate all other processes (manage all other processes to exploit the active constraint), (4) elevate the system's constraint (increase capacity, find
alternatives to the constraint, etc.) and (5) repeat and continue for the next constraint that becomes active.
In addition to being useful for project planning, TOC's various "problem-solving tools" can assist project selection as well. The TOC thinking process is aimed at
answering three questions central to designing and choosing projects: What to change?, What to change to?, and How to cause the change? Project communication and management tools are
provided to promote agreement. The loosely affiliated consulting organizations dedicated to applying TOC market numerous application-specific "solutions" for areas such as production,
supply chain management, technology development, and sales and marketing.
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time preference
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A measure of the preference a decision maker has for obtaining desired outcomes sooner rather than later. Time preference is captured mathematically using a discount function, such as
net present value, characterized by a discount rate that reflects the degree to which near-term enjoyment is preferred.
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tornado diagram
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A type of chart used to display the results of a sensitivity analysis. It is bar chart showing the sensitivity of a
model output to each of several model inputs or parameters. A tornado diagram, also called a tornado chart, supports understanding by displaying the "drivers" of a quantity of
interest.
The figure below provides an example. In this case, the quantity of interest is the value of a proposed project. To construct the
diagram, each of several inputs to the project decision model is individually varied over some range (e.g., its range of uncertainty). The corresponding
range over which the output varies is displayed as a horizontal bar. The bars are sorted by the length of the bar and stacked vertically, with the result that the shape of the diagram
resembles that of a tornado.
A sample tornado diagram
By identifying variables that result in the widest swings, a tornado diagram helps identify specific areas where effort should be spent to reduce uncertainty or to
improve performance. Many decision analysis tools, including some tools for project and project portfolio management, provide capability to generate tornado diagrams.
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total cost of ownership (TCO)
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All of the costs associated with a project, including those associated with deploying, managing, and ultimately disposing of any assets produced by that project. For
example, the total cost of ownership of a car is not just the purchase price, but also expenses incurred through its lifetime of use, such as repairs, insurance, and fuel. Sometimes,
TCO is expressed as an average annual cost figure.
TCO is a useful management tool for uncovering what might otherwise be overlooked costs. It's major disadvantage from the perspective of project prioritization is that it fails to address project benefits.
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tradeoffs
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The process of giving up or exchanging one benefit in order to obtain another. Tradeoffs (also called value tradeoffs) are
required in decision situations whenever there are multiple objectives and not all can be achieved together. A decision maker's preferences
regarding tradeoffs are a key input to project prioritization, as projects are typically proposed to
achieve different objectives or achieve different objectives to different degrees. Tradeoff preferences are typically expressed in a decision model via weights. The swing-weight method is one technique for assessing willingness to make tradeoffs.
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U
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utility function
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A mathematical function, often denoted as U(x) (i.e., a relationship that assigns to every x-value a specific U-value) that represents a decision maker's preferences
over alternatives characterized by x (x may consist of several, rather than a single measure). Decision theory shows that such a utility
function exists provided that the decision maker accepts certain assumptions that define "rationality." The assumptions are easy for most people to accept (e.g., if there are 3 possible
outcomes A, B and C and you prefer A to B and B to C, you must then prefer A to C). Assessment methods are available for encoding a person's utility function. The utility function has
the important property that the most preferred alternative will be that which produces the highest value for U, or, if there is uncertainty, that which maximizes the expected value of U.
Among other things that affect preferences, the utility function accounts for the decision maker's willingness to accept risk. This
can be seen most clearly if the utility function is expressed in a form that relates utility to the monetary value of the decision outcome (so that x is the amount the decision maker
would be willing to pay to obtain that outcome). Since utility functions, by definition, are determined empirically, there is not necessarily any reason to expect that a particular
mathematical relationship would emerge. However, it has been shown that an exponential equation often provides a good approximation:
In this equation, x is value expressed in monetary terms. (The equation is often alternatively written with constants added so that U goes from zero to one when x goes
from the minimum to maximum values assigned to the decision outcomes.) It can be shown, in fact, that if a condition known as the delta property holds, then the utility function
must have either this exponential form (or a linear form). The delta property holds if the following is true: whenever there is uncertainty over the outcome of some uncertain choice, if
the value of every possible outcome were increased by the same amount (delta), then the value of the uncertainty (its certain equivalent) would be
increased by the same amount (delta).
The utility function scales the possible outcomes to a decision in a way that accounts for willingness to accept risk, and the coefficient R in the exponent determines
the amount of scaling. R is termed the risk tolerance, and the lower the risk tolerance the less desirable the utility function will show
outcomes that involve uncertainty to be. A method for assessing risk tolerance (and therefore, for estimating the utility function) is provided in the section of the paper chapter on
risk tolerance, where there is also an example illustrating how to use a utility function to value uncertain project outcomes.
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V
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valuation
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The process of determining the value of something, such as a project or asset. In a business
context, valuations typically seek to determine the monetary worth of something, however, this may not be the case when the term is used in project
portfolio management. Regardless, various theories and techniques are available for conducting valuations, and the methods typically involve both objective and subjective
components.
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value
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A term frequently used in project portfolio management (PPM) to denote some measure intended to represent the attractiveness of
proposed and/or ongoing projects. The concept of project value is important to PPM because the goal is to select projects and manage the project
portfolio so as to create maximum value. Ideally, the value of a project should be defined as a quantitative measure of the logical worth of the project to the organization based on the
degree to which the project enables the organization to achieve its fundamental objectives. However, outside this website, the term is often used without providing a precise definition or with a
definition unrelated to the concept of worth or utility to the organization. Furthermore, PPM tools that assign or compute something referred to as project value do so in
different ways, and the resulting number likewise may be used in different ways to rank or recommend projects. Thus, when purchasing a PPM tool, it is important to obtain a clear and
precise explanation from the provider whether and how the tool computes project value and how the quantity is used to recommend project portfolios.
Within the field of management science, the value of an investment is generally defined as its worth—the amount of money considered to be a fair equivalent for
the investment. As explained in our paper chapter on defining metrics, I define the value of a project to be the maximum amount that the organization's
decision makers should logically be willing to pay to obtain the consequences of doing the project. With this definition, Project A is preferred to Project B if and only if the value of
Project A is greater than the value of project B.
There are various ways to calculate the value of a project according to the above definition. In particular, real options
analysis may be used to compute a market value, what the price of an asset or project would be if it were traded in the marketplace. Decision theory and the special case of mutli-attribute utility analysis (MUA) provide a method for computing
project value based on consideration of business objectives, what the project consequences might be and the uncertainties, and the willingness of the organization to accept risks and
make tradeoffs. Some PPM tools use real options analysis or MUA to compute project value, but most do not.
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value at risk (VaR)
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A metric that describes the potential for loss, typically the potential for loss from a portfolio of financial investments. The
term is sometimes similarly applied in the context of project portfolio management to describe the risk associated with a portfolio of projects. Typically, VaR is defined as the amount or percentage of available portfolio value such that there is a 95% (or 99%) probability of the portfolio
losing less than that amount over a certain time horizon.
VaR is popular because it addresses the concept of "maximum potential loss." A major weakness is that it is not additive; that is, the VaR for a set of portfolios is
not the sum of the VaR's of the individual portfolios.
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value of information (VoI)
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A term used in decision analysis to describe the maximum amount a decision maker should be willing to pay for
information prior to making a decision. The VoI is defined as the monetary amount that makes the value of the existing decision situation equal to the value of the decision situation
with information and with the added cost of paying VoI for the information. Decision trees are often used to compute VoI.
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W
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work breakdown structure (WBS)
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The tasks or activities required to complete a project, organized into a hierarchical structure. A WBS typically shows who is
responsible for each activity and identifies costs, resources and time required. The WBS is a useful aid for planning the work scope for a project and assists in cost estimating and
project monitoring and control. WBS capability is typically provided in project management tools and in some project portfolio management tools.
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Z
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zero-based budgeting
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A philosophy for capital budgeting wherein the funding for every activity or cost element must be specifically
justified, not just increments to previous funding levels. Without approval, the budget allowance is zero. In other words, zero-based budgeting makes no implicit commitment to sustain
past levels of funding.
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