Case 1.1 ocean manufacturing inc

PROJECT MANAGEMENT

THE MANAGERIAL PROCESS 7E

ERIK W. LARSON CLIFFORD F. GRAY

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Project Management:

The Managerial Process Seventh Edition

Erik W. Larson

Clifford F. Gray Oregon State University

PROJECT MANAGEMENT: THE MANAGERIAL PROCESS, SEVENTH EDITION

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Names: Gray, Clifford F., author. | Larson, Erik W., 1952 author. Title: Project management : the managerial process / Erik W. Larson, Oregon State University, Clifford F. Gray, Oregon State University. Description: Seventh edition. | New York, NY : McGraw-Hill Education, [2018] | Clifford F. Gray is the first named author on the earlier editions. Identifiers: LCCN 2016040029 | ISBN 9781259666094 | ISBN 1259666093 (alk. paper) Subjects: LCSH: Project management. | Time management. | Risk management. Classification: LCC HD69.P75 G72 2018 | DDC 658.4/04—dc23 LC record available at https://lccn.loc.gov/

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Erik W. Larson ERIK W. LARSON is professor of project management at the College of Business, Oregon State University. He teaches executive, graduate, and undergraduate courses on project management and leadership. His research and consulting activities focus on project management. He has published numerous articles on matrix management, product development, and project partnering. He has been honored with teaching awards from both the Oregon State University MBA program and the University of Oregon Executive MBA program. He has been a member of the Portland, Oregon, chapter of the Project Management Institute since 1984. In 1995 he worked as a Ful- bright scholar with faculty at the Krakow Academy of Economics on modernizing Polish business education. He was a visiting professor at Chulalongkorn University in Bangkok, Thailand, and at Baden-Wuerttemberg Cooperative State University in Bad Mergentheim, Germany. He received a B.A. in psychology from Claremont McKenna College and a Ph.D. in management from State University of New York at Buffalo. He is a certified project management professional (PMP) and Scrum Master.

Clifford F. Gray CLIFFORD F. GRAY is professor emeritus of management at the College of Busi- ness, Oregon State University. He has personally taught more than 100 executive development seminars and workshops. Cliff has been a member of the Project Man- agement Institute since 1976 and was one of the founders of the Portland, Oregon, chapter. He was a visiting professor at Kasetsart University in Bangkok, Thailand, in 2005. He was the president of Project Management International, Inc. (a training and consulting firm specializing in project management) 1977–2005. He received his B.A. in economics and management from Millikin University, M.B.A. from Indiana Univer- sity, and doctorate in operations management from the College of Business, University of Oregon. He is certified Scrum Master.

About the Authors

vii

“Man’s mind, once stretched by a new idea, never regains its original dimensions.”

Oliver Wendell Holmes, Jr.

To my family, who have always encircled me with love and encouragement—my parents (Samuel and Charlotte), my wife (Mary), my sons and their wives (Kevin and Dawn, Robert and Sally) and their children (Ryan, Carly, Connor and Lauren).

C.F.G.

“We must not cease from exploration and the end of all exploring will be to arrive where we began and to know the place for the first time.”

T. S. Eliot

To Ann, whose love and support have brought out the best in me. To our girls Mary, Rachel, and Tor-Tor for the joy and pride they give me. And to our grandkids, Mr. B, Livvy, and Xmo, whose future depends upon effective project management. Finally, to my muse, Neil—Walk on!

E.W.L

viii

Our motivation in writing this text continues to be to provide a realistic, socio-technical view of project management. In the past, textbooks on project management focused almost exclusively on the tools and processes used to manage projects and not the human dimension. This baffled us since people not tools complete projects! While we firmly believe that mastering tools and processes is essential to successful project management, we also believe that the effectiveness of these tools and methods is shaped and determined by the prevailing culture of the organization and interpersonal dynamics of the people involved. Thus, we try to provide a holistic view that focuses on both of these dimensions and how they interact to determine the fate of projects. The role of projects in organizations is receiving increasing attention. Projects are the major tool for implementing and achieving the strategic goals of the organization. In the face of intense, worldwide competition, many organizations have reorganized around a philosophy of innovation, renewal, and organizational learning to survive. This philosophy suggests an organization that is flexible and project driven. Project management has developed to the point where it is a professional discipline having its own body of knowledge and skills. Today it is nearly impossible to imagine anyone at any level in the organization who would not benefit from some degree of expertise in the process of managing projects.

Audience

This text is written for a wide audience. It covers concepts and skills that are used by managers to propose, plan, secure resources, budget, and lead project teams to suc- cessful completions of their projects. The text should prove useful to students and prospective project managers in helping them understand why organizations have developed a formal project management process to gain a competitive advantage. Readers will find the concepts and techniques discussed in enough detail to be imme- diately useful in new-project situations. Practicing project managers will find the text to be a valuable guide and reference when dealing with typical problems that arise in the course of a project. Managers will also find the text useful in understanding the role of projects in the missions of their organizations. Analysts will find the text useful in helping to explain the data needed for project implementation as well as the opera- tions of inherited or purchased software. Members of the Project Management Insti- tute will find the text is well structured to meet the needs of those wishing to prepare for PMP (Project Management Professional) or CAPM (Certified Associate in Project Management) certification exams. The text has in-depth coverage of the most critical topics found in PMI’s Project Management Body of Knowledge (PMBOK). People at all levels in the organization assigned to work on projects will find the text useful not only in providing them with a rationale for the use of project management processes but also because of the insights they will gain on how to enhance their contributions to project success. Our emphasis is not only on how the management process works, but more impor- tantly, on why it works. The concepts, principles, and techniques are universally

Preface

ix

x Preface

applicable. That is, the text does not specialize by industry type or project scope. Instead, the text is written for the individual who will be required to manage a variety of projects in a variety of different organizational settings. In the case of some small projects, a few of the steps of the techniques can be omitted, but the conceptual frame- work applies to all organizations in which projects are important to survival. The approach can be used in pure project organizations such as construction, research orga- nizations, and engineering consultancy firms. At the same time, this approach will benefit organizations that carry out many small projects while the daily effort of deliv- ering products or services continues.

Content

In this and other editions we continue to try to resist the forces that engender scope creep and focus only on essential tools and concepts that are being used in the real world. We have been guided by feedback from practitioners, teachers, and students. Some changes are minor and incremental, designed to clarify and reduce confusion. Other changes are significant. They represent new developments in the field or better ways of teaching project management principles. Below are major changes to the seventh edition. ∙ Learning objectives have been established for each chapter and the corresponding

segment has been marked in the text. ∙ Chapter 16 Oversight has been eliminated and critical information on project matu-

rity models is now part of Chapter 14. ∙ Chapter 18 Project Management Career Paths has been eliminated and essential

information from this chapter is now in Chapter 1. ∙ A new set of network exercises have been developed for Chapter 6. ∙ A new set of crashing exercises have been developed for Chapter 9 which introduce

crashing concepts in a developmental way. ∙ The Chapter 2 Appendix on Request for Proposal is now part of Chapter 12. ∙ Terms and concepts have been updated to be consistent with the sixth edition of the

Project Management Body of Knowledge (2015). ∙ New student exercises and cases have been added to chapters. ∙ The Snapshot from Practice boxes feature a number of new examples of project

management in action as well as new Research Highlights that continue to promote practical application of project management.

∙ The Instructor’s Manual contains a listing of current YouTube videos that corre- spond to key concepts and Snapshots from Practice.

Overall the text addresses the major questions and challenges the authors have encountered over their 60 combined years of teaching project management and con- sulting with practicing project managers in domestic and foreign environments. These questions include: What is the strategic role of projects in contemporary organiza- tions? How are projects prioritized? What organizational and managerial styles will improve chances of project success? How do project managers orchestrate the complex network of relationships involving vendors, subcontractors, project team members, senior management, functional managers, and customers that affect project success? What factors contribute to the development of a high-performance project team? What project management system can be set up to gain some measure of control? How do managers prepare for a new international project in a foreign culture?

Preface xi

Project managers must deal with all these concerns to be effective. All of these issues and problems represent linkages to an integrative project management view. The chapter content of the text has been placed within an overall framework that inte- grates these topics in a holistic manner. Cases and snapshots are included from the experiences of practicing managers. The future for project managers appears to be promising. Careers will be determined by success in managing projects.

Student Learning Aids

Student resources include study outlines, online quizzes, PowerPoint slides, videos, Microsoft Project Video Tutorials and web links. These can be found in Connect.

Acknowledgments

We would like to thank Scott Bailey for building the end-of-chapter exercises for Connect and Tracie Lee for reviewing them; Pinyarat Sirisomboonsuk for revising the PowerPoint slides; Oliver F. Lehmann for providing access to PMBOK study questions; Ronny Richardson for updating the Instructor’s Manual; Angelo Serra for updating the Test Bank; and Pinyarat Sirisomboonsuk for providing new Snapshot from Practice questions. Next, it is important to note that the text includes contributions from numerous stu- dents, colleagues, friends, and managers gleaned from professional conversations. We want them to know we sincerely appreciate their counsel and suggestions. Almost every exercise, case, and example in the text is drawn from a real-world project. Special thanks to managers who graciously shared their current project as ideas for exercises, subjects for cases, and examples for the text. Shlomo Cohen, John A. Drexler, Jim Moran, John Sloan, Pat Taylor, and John Wold, whose work is printed, are gratefully acknowledged. Special gratitude is due Robert Breitbarth of Interact Management, who shared invaluable insights on prioritizing projects. University stu- dents and managers deserve special accolades for identifying problems with earlier drafts of the text and exercises. We are indebted to the reviewers of past editions who shared our commitment to elevating the instruction of project management. The reviewers include Paul S. Allen, Rice University; Denis F. Cioffi, George Washington University; Joseph D. DeVoss, DeVry University; Edward J. Glantz, Pennsylvania State University; Michael Godfrey, University of Wisconsin–Oshkosh; Robert Key, University of Phoenix; Dennis Krum- wiede, Idaho State University; Nicholas C. Petruzzi, University of Illinois–Urbana/ Champaign; William R. Sherrard, San Diego State University; S. Narayan Bodapati, Southern Illinois University at Edwardsville; Warren J. Boe, University of Iowa; Burton Dean, San Jose State University; Kwasi Amoako-Gyampah, University of North Carolina–Greensboro; Owen P. Hall, Pepperdine University; Bruce C. Hartman, University of Arizona; Richard Irving, York University; Robert T. Jones, DePaul University; Richard L. Luebbe, Miami University of Ohio; William Moylan, Lawrence Technological College of Business; Edward Pascal, University of Ottawa; James H. Patterson, Indiana University; Art Rogers, City University; Christy Strbiak, U.S. Air Force Academy; David A. Vaughan, City University; and Ronald W. Witzel, Keller Graduate School of Management. Nabil Bedewi, Georgetown University; Scott Bailey, Troy University; Michael Ensby, Clarkson University; Eldon Larsen, Marshall University; Steve Machon, DeVry University–Tinley Park; William Matthews, William Patterson

xii Preface

University; Erin Sims, DeVry University–Pomona; Kenneth Solheim, DeVry University–Federal Way; and Oya Tukel, Cleveland State University. Gregory Anderson, Weber State University; Dana Bachman, Colorado Christian University; Alan Cannon, University of Texas, Arlington; Susan Cholette, San Francisco State; Michael Ensby, Clarkson University; Charles Franz, University of Missouri, Columbia; Raouf Ghattas, DeVry University; Robert Groff, Westwood College; Raffael Guidone, New York City College of Technology; George Kenyon, Lamar University; Elias Konwufine, Keiser University; Rafael Landaeta, Old Dominion University; Muhammad Obeidat, Southern Polytechnic State University; Linda Rose, Westwood College; Oya Tukel, Cleveland State University; and Mahmoud Watad, William Paterson University. Victor Allen, Lawrence Technological University; Mark Angolia, East Carolina University; Alan Cannon, University of Texas at Arlington; Robert Cope, Southeastern Louisiana University; Kenneth DaRin, Clarkson University; Ron Darnell, Amberton University; Jay Goldberg, Marquette University; Mark Huber, University of Georgia; Marshall Issen, Clarkson University; Charles Lesko, East Carolina University; Lacey McNeely, Oregon State University; Donald Smith, Texas A&M University; Peter Sutanto, Prairie View A&M University; Jon Tomlinson, University of Northwestern Ohio. We thank you for your many thoughtful suggestions and for making our book better. Of course we accept responsibility for the final version of the text. In addition, we would like to thank our colleagues in the College of Business at Oregon State University for their support and help in completing this project. In par- ticular, we recognize Lacey McNeely, Prem Mathew, Keith Leavitt and Pauline Schlip- zand for their helpful advice and suggestions. We also wish to thank the many students who helped us at different stages of this project, most notably Neil Young, Saajan Patel, Katherine Knox, Dat Nguyen, and David Dempsey. Mary Gray deserves special credit for editing and working under tight deadlines on earlier editions. Special thanks go to Pinyarat (“Minkster”) Sirisomboonsuk for her help in preparing the last four editions. Finally, we want to extend our thanks to all the people at McGraw-Hill Education for their efforts and support. First, we would like to thank Dolly Womack, and Christina Holt, for providing editorial direction, guidance, and management of the book’s devel- opment for the seventh edition. And we would also like to thank Melissa Leick, Jennifer Pickel, Egzon Shaqiri, Bruce Gin, and Karen Jozefowicz for managing the final production, design, supplement, and media phases of the seventh edition.

Erik W. Larson

Clifford F. Gray

xiii

Guided Tour Established Learning Objectives Learning objectives have been added to this edition to help stu- dents target key areas of learning. Learning objectives are listed both at the beginning of each chapter and are called out as mar- ginal elements throughout the narrative in each chapter.

End-of-Chapter Content Both static and algorithmic end-of-chapter content, including Review Questions and Exercises, are now assignable in Connect.

SmartBook The SmartBook has been updated with new highlights and probes for optimal student learning.

Snapshots The Snapshot from Practice boxes have been updated to include a number of new exam- ples of project management in action. New questions based on the Snapshots are also now assignable in Connect.

New and Updated Cases Included at the end of each chapter are between one and five cases which demonstrate key ideas from the text and help students understand how Project Management comes into play in the real world. New cases have been added across several chapters in the 7th edition.

26

Organization Strategy and Project Selection2

LEARNING OBJECTIVES After reading this chapter you should be able to:

2-1 Explain why it is important for project managers to understand their organization’s strategy.

2-2 Identify the significant role projects contribute to the strategic direction of the organization.

2-3 Understand the need for a project priority system.

2-4 Apply financial and nonfinancial criteria to assess the value of projects.

2-5 Understand how multi-criteria models can be used to select projects.

2-6 Apply an objective priority system to project selection.

2-7 Understand the need to manage the project portfolio.

OUTLINE 2.1 The Strategic Management Process: An

Overview

2.2 The Need for a Project Priority System

2.3 A Portfolio Management System

2.4 Selection Criteria

2.5 Applying a Selection Model

2.6 Managing the Portfolio System

Summary

C H A P T E R T W O

Lar66093_ch02_026-065.indd 26 10/4/16 4:52 PM

28 Chapter 2 Organization Strategy and Project Selection

alignment even more essential for success. Ensuring a strong link between the strategic plan and projects is a difficult task that demands constant attention from top and mid- dle management. The larger and more diverse an organization, the more difficult it is to create and maintain this strong link. Companies today are under enormous pressure to manage a process that clearly aligns projects to organization strategy. Ample evidence still sug- gests that many organizations have not developed a process that clearly aligns project selection to the strategic plan. The result is poor utilization of the organization’s resources—people, money, equipment, and core competencies. Conversely, organiza- tions that have a coherent link of projects to strategy have more cooperation across the organization, perform better on projects, and have fewer projects. How can an organization ensure this link and alignment? The answer requires inte- gration of projects with the strategic plan. Integration assumes the existence of a stra- tegic plan and a process for prioritizing projects by their contribution to the plan. A crucial factor to ensure the success of integrating the plan with projects lies in the creation of a process that is open and transparent for all participants to review. This chapter presents an overview of the importance of strategic planning and the process for developing a strategic plan. Typical problems encountered when strategy and proj- ects are not linked are noted. A generic methodology that ensures integration by creat- ing very strong linkages of project selection and priority to the strategic plan is then discussed. The intended outcomes are clear organization focus, best use of scarce orga- nization resources (people, equipment, capital), and improved communication across projects and departments.

Why Project Managers Need to Understand Strategy Project management historically has been preoccupied solely with the planning and exe- cution of projects. Strategy was considered to be under the purview of senior manage- ment. This is old-school thinking. New-school thinking recognizes that project management is at the apex of strategy and operations. Aaron Shenhar speaks to this issue when he states, “. . . it is time to expand the traditional role of the project manager from an operational to a more strategic perspective. In the modern evolving organization, proj- ect managers will be focused on business aspects, and their role will expand from getting the job done to achieving the business results and winning in the marketplace.”1 There are two main reasons why project managers need to understand their organiza- tion’s mission and strategy. The first reason is so they can make appropriate decisions and adjustments. For example, how a project manager would respond to a suggestion to modify the design of a product to enhance performance will vary depending upon whether his company strives to be a product leader through innovation or to achieve operational excellence through low cost solutions. Similarly, how a project manager would respond to delays may vary depending upon strategic concerns. A project man- ager will authorize overtime if her firm places a premium on getting to the market first. Another project manager will accept the delay if speed is not essential.