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Vol. 23, No. 5 (3 parts) Part 2, May 2001 • Order # 23-12
How to Translate Project Decisions into
Business Success
By Dennis J. Cohen and
Robert J. Graham
An Entrepreneurial Approach
To Managing Projects
Pages 2, 3
Accounting and Finance:
You Must Know the Basics
Pages 3, 4
Corporate Strategy:
It’s Your Business, Too
Page 4
Increase Speed, Quality and
Value of Projects
Page 5
Understand the Customer
and the Competition
Pages 5, 6, 7
Calculate the Project Costs
Pages 7, 8
Why Finance Matters
for Project Managers
Page 8
The Project Venture
Development Process
Page 8
Finishing a project on time and on budget is no longer a project manager’s sole criteria for success, according to authors Dennis J. Cohen and
Robert J. Graham. You are also held accountable for your contributions to
the company’s financial goals. As a project manager, however, you may not
have the business knowledge necessary to make project-based decisions that
lead to bottom-line success.
This summary presents the skills and knowledge you need to link project
success to organizational success. Specifically, you will learn how to:
✓ Take an entrepreneurial approach to managing projects. You will
learn to view each project in light of its contribution to the overall profitability of the company and begin to run projects as if they were business
✓ Understand the basics of accounting and finance. You need to
understand the basics of balance sheets and profit and loss statements and
know how to adapt them to measure the impact of your project on the company’s profitability.
✓ Understand business strategy. Your projects must be compatible
with your company’s overall business strategy, whether that strategy is to
deliver world class service, provide leading-edge technology, or deliver
operational excellence.
✓ Manage projects for maximum results. You will see what methods
you should use to speed up the project.
✓ Understand the customer. Every project must be designed with
what the customer and end-user want and need to solve a problem.
✓ Calculate project costs and measure project success. You will
soon see exactly what costs must be considered when setting up a project.
You will learn to measure and apply the direct and indirect costs your company invests in your project. You will also learn how to determine the life
cycle of the end product of the project, and measure the value
created by the project against the cost of producing it.
Published by Soundview Executive Book Summaries, 10 LaCrue Avenue, Concordville, Pennsylvania 19331 USA
©2001 Soundview Executive Book Summaries • All rights reserved. Reproduction in whole or part is prohibited.
FILE: Hands-On Management
by Dennis J. Cohen and Robert J. Graham
An Entrepreneurial Approach
To Managing Projects
“Make it fast. Make it good. Make it cheap.” So goes
the project management folklore about what senior
managers always ask for. Traditionally, project managers would reply with, “Pick two.” And almost always,
“Make it cheap” is one of the two project goals chosen.
It might not be the right answer. When project management and senior management understand the wider
implications, they both realize that “make it cheap”
might not contribute to successful business results as
often as they think. More important than reducing the
costs of a project is increasing its value.
In other words, as a project manager you must develop a framework for thinking about projects based on
business concepts such as increasing economic value,
or Economic Value Added (EVA).
A successful project, for example, might mean creating a high level of customer satisfaction, which produces
more sales, which, in turn, creates enough cash flow to
cover project and operating expenses, make a profit, and
pay back the cost of the capital used to produce the product. At this point, the project begins to produce the economic value known as shareholder value.
Creating shareholder value requires project managers
to act like entrepreneurs — treating projects like businesses — and think like CEOs — viewing each project
as part of a wider organization.
Act Like an Entrepreneur and Think Like a CEO
What does it mean to act like an entrepreneur and
think like a CEO?
First and foremost, it means understanding how
organizations create value for their stakeholders —
shareholders, customers and the business team. For
shareholders, the business creates value when it provides a rate of return that meets their expectations for
the level of risk they have taken. Cash flow is the fuel
for this satisfaction. It is up to the business team to
manage projects that deliver this necessary cash flow.
The problem is that many projects won’t directly
impact a company’s bottom line. Project managers also
need to consider the project’s overall impact on the
company’s strategy to see where the project creates
Project Categories
Most organizations that engage in project planning
categorize these projects into three groups:
New product, service, or facility development
projects. These projects provide something entirely
new in the organization. These projects generate new
or greater income for the organization.
Internal projects. These projects involve infrastructure development and improvement and include
reorganizations, reengineering, and other change initiatives as well as software and hardware initiatives.
These projects generally don’t produce new income.
Rather, they produce cost savings and create operating efficiencies.
Client engagement projects. These projects benefit external customers or clients. Today, those
clients expect more than they ever expected before
and look for measures of increased economic value
as proof of success.
value. For example, new product projects often impact
profitability and create high levels of profit, while a
project that focuses on breaking into a new geographic
market might be lucky to break even. But both projects
contribute to the execution of the company’s overall
A project’s contribution to overall business success
can be diagrammed and looks something like the chart
on the next page.
At the top of the diagram is the ultimate goal: the project’s contribution to business results. The boxes below
(continued on page 3)
The authors: Dennis J. Cohen is senior vice president and managing director of the Project Management
Practice at Strategic Management Group. Robert J.
Graham has developed a consulting practice in project
management and is the author of Project Management
as if People Mattered and Creating an Environment for
Successful Projects.
Copyright© 2001 by Jossey-Bass, Inc. Summarized
by permission of the publisher, Jossey-Bass, Inc., A
Wiley Company, 605 Third Avenue, New York, NY
10158-0012. 242 pages. $34.95. 0-7879-5256-7.
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Soundview Executive Book Summaries ®
The Project Manager’s MBA — SUMMARY
Accounting and Finance:
You Must Know the Basics
An Entrepreneurial Approach
to Managing Projects
(continued from page 2)
the goal represent the business factors that go into producing economic value; the lines connecting the boxes
represent interactions among those factors. The left side
of the chart represents the strategic alignment of the project with the company’s overall strategy. The right side
side shows the project’s contribution to economic value.
As you explore the flow chart, you will see that there
is a new project management paradigm developing.
Projects are conceived and executed with an understanding of the dynamics of competition, timed for maximum
cash flow, and represent an investment in competitive
advantage. ■
In the past, when project managers were given a project and a budget, they could afford to be ignorant of
accounting and finance basics. Not today. To link project success to organizational success, project management must understand at least the basics of finance and
accounting. This article reviews some of the basics.
Cash Cycle
Each company has a cash cycle. The cycle involves
acquiring cash, using that cash to grow and to operate,
and returning any cash necessary to the creditors and
owners. For example, a company’s cycle begins with a
financing phase where the company must attract funds
from financial institutions and investors to have
the capital needed to start the business. It then
Business Systems Diagram
invests the funds in labor and equipment
required to develop the business (the investing
phase.) In the operating phase, the company
uses the funds to operate and adds funds generProject Contribution to
Project Contribution to
ated by the business to the pot. Finally, in the
Economic Value EVA
Business Strategy
returning phase, creditors and investors are
paid. This is their return on investment.
Projects are just like start-up businesses, following the same cash cycle.
Financial Reports
Cash Flow
from Project
Market Share
Project Use
of Capital
of Capital
Financial reports are required of all companies
of any significant size. A company’s financial
reports consists of at least three basic statements:
a balance sheet, an income statement and a cash
flow statement. Each serves a vital function.
A company’s balance sheet shows its assets
and its liabilities. Assets, shown on the left side
of the balance sheet, come in two kinds: current assets, which will be converted into cash
in the next year or so, and long-term assets.
The right hand side of the balance sheet tracks
short-term and long-term liabilities as well as a
liability called shareholder’s equity.
Shareholder’s equity consists of stock and
retained earnings, which are profits that could
have been distributed to shareholders as dividends but were kept by the company.
The sheet is called a balance sheet because
the left hand side always equals the right hand
side, and can be represented by the basic
accounting formula: Assets = Liabilities +
Shareholder’s Equity.
A company’s income statement attempts to
match revenues with the expenses associated
(continued on page 4)
Soundview Executive Book Summaries ®
The Project Manager’s MBA — SUMMARY
Accounting and Finance:
You Must Know the Basics
Approaches to Company Strategy
(continued from page 3)
with those revenues. A company’s revenue minus its
expenses equals its net income. If the net income is positive, the company has made a profit. If it is negative, the
company has suffered a loss. That’s why the income
statement is also referred to as a profit and loss statement. Income statements are important for project managers because they match the cost of the project with the
revenue or cost savings produced by the project.
A cash flow statement completes the basic financial
statements. It tells someone examining the company
from the outside where cash needed to run the business
has come from and where it has gone. Internally, management can use the cash flow statement to see how
much cash is free for use in the business. This free cash
flow is the net cash generated by the operations of the
business minus the cash used for investment activities.
If free cash flow is positive, the company does not need
to obtain additional investments; if it is negative, the
company must find additional investments in either
stock or bank financing to continue operations. ■
Corporate Strategy:
It’s Your Business, Too
All organizations have a strategy, explicit or implied,
that upper management uses to guide decision-making.
In the past, top management acted as if strategic planning was a ritual rain dance. Every year a strategic planning process took place, with each upper manager
Why Project Managers Need to
Understand Strategy
✓ Management is evaluating project managers on
how well they implement company strategy.
✓ Understanding company strategy will let you make
decisions during the project that match strategy. If
the strategy is to be first to market, that’s how you
will manage your project, for example.
✓ Understanding your company’s strategy will help
you develop a team with common goals.
✓ Aligning your project with company strategy will
help protect it from being canceled, since you can
demonstrate the project’s importance and relevance. And if the project does not match company
strategy, you can understand why it is cancelled.
✓ Understanding strategy lets your project stay
focused and on track.
Below are three basic approaches a company can
take to developing a sustained competitive advantage.
Choose one as your company’s strategic focus, but
make sure that your practices in the other two at least
meet the industry average.
Customer Intimacy: Companies who choose this
strategic focus aim to develop long-term relationships
with their customers. Customers expect the best service and get it. Examples of companies taking this tack
are Nordstrom’s and Home Depot.
Operational Excellence: Other companies build
their strategies around high efficiency and high volume. For example, a McDonald’s anywhere in the
world is likely to be virtually identical to other locations. Customers expect it, and McDonald’s delivers.
Product Leadership: Companies that practice product leadership must be creative because they are targeting the segment of the population that consists of
early adopters. These want the latest and best products and are willing to pay for them.
scouting out threats and opportunities. These were then
analyzed and became part of the strategic plan to be
locked in a drawer until next year.
Today, change is happening too fast to rely on old
methods of strategic planning. Now strategic plans must
change as rapidly as your company’s environment
changes — which means everyone at the company must
be aware of the strategic plan and take part in it. Project
managers must understand their company’s strategy and
how their projects fit into it.
In its most basic form, strategy is the way a company
orients itself toward the market in which it operates, and
toward other companies in that market. Strategy
answers the question of how the company will position
itself in the market over the long run to secure a sustainable competitive advantage.
Most project managers are too involved in the day-today management of their projects to pay much attention
to that strategy. This is a mistake. Project managers
need to align their projects with the strategic choices
made by the company.
For example, if the company chooses to emphasize
product leadership, projects to develop new products
will focus on innovation and speed, not customer service. If project managers don’t buy into or understand
company strategy, they might run the project with a
focus inappropriate to the company’s strategy and thus
miss making a significant contribution to the execution
of that strategy and the creation of economic value. ■
Soundview Executive Book Summaries ®
The Project Manager’s MBA — SUMMARY
Increase Speed, Quality
and Value of Projects
Project cycle time, or how long it takes a project to go
from idea to completion, is crucial. Proper project management practices will shorten that time.
The sooner the project is completed, the sooner it can
begin to produce its value and begin to pay back the
investment used to produce it. Thus, reduced cycle time
adds to cash flow, reduces the project’s capital requirements, and increases economic value. Don’t reduce
cycle time by increasing manpower and working people
overtime until they drop (a common method). A better
approach is to increase the budget for good management
The Folly of Multitasking
Multitasking, which requires people to work on
more than one project at a time, is a sure way to
decrease focus, decrease output and increase cycle
time. Despite this, many organizations have embraced
multitasking. The problem: It doesn’t work. People are
not so easily divisible. It takes time to shift from one
project to another and back again. That time quickly
adds up in a typical workweek, and can actually
increase the amount of time it takes to complete projects because the time required to switch between
projects is non-productive. If two-way multitasking is
a minor folly, asking people to work on three or more
tasks borders on absurdity.
How to Reduce Cycle Time
The following six practices will decrease the duration
of a project, increase quality and decrease total costs:
1. Have one well-trained project manager. He or
she should be enthusiastic and trained to manage projects. Don’t appoint someone just because of technical
expertise or availability. The designated project manager
is the only person the team reports to; team members
must know that he or she has the authority to make
decisions and direct the project.
2. Develop a rapid prototyping process. Prototypes
need to be developed quickly, even if they are not perfect. Presenting imperfect prototypes helps highlight
problems and facilitates solutions to those problems.
Customers have an opportunity to look at prototypes and
offer suggestions for improvement. Today, prototypes are
not specifications driven. Instead, prototypes drive specs.
3. Establish a core team for the duration of the
project. Projects need an interdisciplinary core team of
people from important departments who stick with the
Cost Overruns Aren’t Always Bad
Sometimes it makes sense to pour extra money
into a project in order to finish it on time. According
to a 1989 McKinsey and Company study, if a project
is late for an amount of time equal to 10 percent of
the projected life of the product, there will be a loss
of about 30 percent of potential profit. But if the project budget is over by 50 percent, yet the product
launched on time, there will be a loss of only about 3
percent of the potential profit. The advantage of being
first to market offsets the additional cost. In other
words, most companies will be better off pouring
additional money into the project to get it out the
door on time than they will be sticking to the old
budget and finishing later.
project from beginning to end. Core members typically
come from engineering and information technology,
marketing, production, customer and technical support,
quality assurance, and the finance department. The team
should also include customers or end users. A core team
thus has access to a range of technical expertise, and
can minimize handoff problems since every key department is involved.
4. Ensure that the team members work full time on
one project. For the sake of speed, the core team —
and other team members who join in — should work
exclusively on one project before moving on to other
5. Co-locate core team and other team members,
especially on new product development projects. The
more communication there is between team members,
the better. Communication is easier if everyone is working in the same location. Some organizations like
Chrysler and General Motors have even constructed special development centers for that purpose.
6. Develop upper management support. Project failure is often caused by lack of upper-management support. Once committed, upper management should continue to support the project through completion.
To the degree that these practices are optimized, cycle
time will be reduced. ■
Understand the Customer
and the Competition
No matter what type of project you are directing, the
project outcome will end up in the marketplace. This
holds true, obviously, for new product development
projects. It also holds true for internal projects, as they
ultimately benefit the end user. Perhaps, for example,
the project leads to more efficient operations or better
(continued on page 6)
Soundview Executive Book Summaries ®
The Project Manager’s MBA — SUMMARY
Understand the Customer and the
(continued from page 5)
trained sales and service staff.
As a project manager, you must understand the customer and deliver a result he or she wants and will buy —
thus generating revenue for the company. The key is to
understand the competitive forces at work in the market.
Build It and They Still Might Not Come
The first step to generating revenue is to design products, services and processes that help customers solve
problems and meet or exceed customer expectations.
Unfortunately, the traditional project manager’s thinking
has been that selling the product was not his problem,
but the marketing department’s. The implicit message
was that, “if we build it, they will buy it.”
That approach has proven wrong. Consider the ill-fated
Iridium project, which aimed to use satellite technology
to provide global telephone service. It turned out there
was no market for the service once it was developed.
One way to avoid this mistake is to try to get a member of the marketing department on the project team.
Most important, however, is for you as a project director
to have a clear understanding of market needs. You
should be able to identify what the customer or end-user
really wants, understand the competition, make tradeoffs between features and price or cost, and determine
the timing of the product introduction.
Understanding the Market
Project managers need to look at the market for their
end product or service. That analysis must include:
Size. How big is the market? For new product projects, the size of the market is the total annual sales of
this type of product to all market segments. For inhouse projects, it is the total number of end-users who
will be affected by the project results. For client engagement projects, it is the number of client customers who
will be affected by the project outcome.
Segmentation. What part of the market is the target?
All markets are composed of segments, which are
defined by customer attributes. For example, the clothing market is divided into male or female, young and
old, high fashion and casual, and so on. Select a segment and stick with it. Companies that try to serve every
segment tend to serve none well. Choose your customers, narrow your focus, and dominate your market
Competition: Who is in pursuit of the same segment?
The relevant competition consists of organizations that
are aiming at the same segment with a similar strategy
Pinpointing the Competition
In order to compete, you have to know who your
competitors are. That may sound obvious, but in
practice it is harder than you think. Follow these
steps to size up the competition:
1. Draw up a list of competitors in the market
you have defined for yourself. For example, Coke
could list only Pepsi as a competitor if it defined its
market as the cola drinking public. If it defined the
market as soft drink buyers, the list of competitors
grows. If that market is expanded further to include
all beverages, the list of competitors grows even
2. Next, the project team agrees on who should
be on the competitor list and then assigns team
members to monitor specific competitors. Keep up
with your assigned competitor’s technological
3. Finally, try to envision how new competitors
might look and how likely they are to appear on
the horizon. What are the barriers to entry? Are
those barriers changing? You must also think like a
new competitor. Whatever you could do to compete
is probably what a potential competitor is doing out
there right now.
and with solutions to the same problems. You must
know the competition, rate how your solution to customers’ problems compare, and figure out how to convey the superiority of your product to customers.
Understanding the Customer
Project managers and team members must take time
to understand the customer so that they can provide
what the customer wants.
A customer is the person who actually pays for the
product or service you are developing. That customer
might not be the end-user — the person who actually
benefits from the product or service. For example, mothers might buy condensed soup to be eaten by a child.
The mother is the customer, but the child ultimately benefits from the production of the soup. You must please
the end-user, not just the customer. If the child refuses to
eat the soup, the mother will not buy it again. More likely, she will buy the brand of soup the child will eat.
Both customers and end-users want you to solve problems for them with your product or service. The best
way to solve customer problems is to create a prototype
and put it into customer and end-user hands. Never rely
on market data alone.
Soundview Executive Book Summaries ®
(continued on page 7)
The Project Manager’s MBA — SUMMARY
Understand the Customer and the
(continued from page 6)
The problem, of course, is that customers don’t
always know what they want. In order to reach them,
you may have to have technical members of the team sit
down with them. Here are some practical ways to get
customer and end-user involvement:
1. Put customers and end-users on the core team.
2. Directly observe end-users’ problems. Get out in
the field and see the problems from their point of
3. Develop focus groups to explain problems.
Concept Lifecycle
Each product or service a company produces to
solve a problem has a concept lifecycle. For example, take putting words on paper. Words can be
committed to paper with a pen, a printing press, a
typewriter, a dot matrix printer, an inkjet printer and
a laser printer. Each of these concepts for committing words to paper has a lifecycle. If your company
tried producing and selling a typewriter today, you
would be too late in the product lifecycle to benefit.
If you are selling a pen, you are probably still early
enough in the lifecycle to make a profit.
Different customers will buy your product depending on where the product or service is in the cycle.
Some customers are innovators, buying up the
product very early. Others are early adopters, part of
the early majority, the late majority, or laggards. The
innovators are the first to buy a new product, while
the laggards wait until everyone else has one. The
concept adoption life cycle looks like this:
Concept Adoption Curve
4. Develop prototypes to give end-users experience.
A good understanding of the market will help the core
team set the price. For new product development projects,
that price is a reflection of the features, the competition,
and the time of market entry. Features that customers
want and need add to the price, while unwanted or
unneeded features don’t translate into a higher price. ■
Calculate the Project Costs
Cash flow, break-even analysis, and return to shareholders are important concepts for project managers.
Profit equals revenue minus costs. Thus, the revenue
from a project must exceed its development and production costs. Today, much more so than in the past, project
managers are responsible for calculating the cost of
their projects rather than being the victims of an
assigned budget that may not be in the company’s longterm interest.
There are four types of costs that project managers
need to be familiar with: variable direct costs, variable
indirect costs, fixed direct costs and fixed indirect costs.
Variable direct costs are costs for the parts used to
make a product. They are direct costs because they go
directly into the production of the product. They are
variable because they increase or decrease depending on
the volume of the product you produce.
Variable indirect costs also increase or decrease
depending on production levels, but they cannot be
attributed directly to a product. For example, the plastic
used to create a doll would be a variable direct cost, but
the electricity used in the factory that makes the doll is
a variable indirect cost because it cannot practically be
assigned to a specific doll.
Fixed direct costs are incurred to run projects or production. For example, the computer hardware needed to
work on a project is a fixed direct cost. The cost is fixed
because it does not matter whether the company is using
the computer or not.
A fixed indirect cost also does not change with production levels, but remains the same. It also cannot be directly
tied to a product. An example of a fixed indirect cost is
(continued on page 8)
Types of Costs
Direct costs
1. Variable direct costs
(example: cost of goods sold)
3. Fixed direct costs
(example: building rent)
Indirect costs
2. Variable indirect costs
(example: depreciation)
4. Fixed indirect costs
(example: SG&A)
Soundview Executive Book Summaries ®
The Project Manager’s MBA — SUMMARY
Calculate the Project Costs
(continued from page 7)
the computer center a large company might make available for its project managers. A fee is charged each month
to the project managers according to the size of their project, but the amount of use does not change the charge.
Cost of Goods Sold
One set of costs that project managers should be
familiar with are the “cost of goods sold.” To calculate
the cost of goods, you must add the cost of materials
needed to make the product, the direct manufacturing
labor costs, and the manufacturing overhead cost. These
costs could be assigned directly to a project, but it
would be too costly to break them down enough to
place with the right project. ■
Why Finance Matters
for Project Managers
Projects develop assets that produce a return to the
company and its shareholders. Unless a business
demonstrates its ability to return cash, it will not get the
cash it needs to invest in and operate the business. No
cash to invest means no new projects and no business.
If projects are investments, managers need to understand how they are financed. Unfortunately, too many
project managers ignore the cost of capital — that is, the
cost of acquiring the cash that makes the project possible.
The money to finance a project can be acquired in two
ways: through lenders or shareholders — those who buy
the company’s stocks. Neither lets companies use their
money for free. The cost of capital consists of the amount
of money that companies have to pay their lenders or
shareholders to compensate them for their investment and
satisfy their expected return on that investment.
When companies turn to lenders for capital, they
know exactly what the lender expects in return for the
loan. The interest charges can readily be added to project cost. Shareholder expectations are not so easily converted into project cost because their specific expectations are not stated. Nonetheless, managers should
Projects Make the Business
Financially, a company is a portfolio of assets produced through projects. The present operations of
any company were developed by past projects and
improved and supported by current projects. Future
projects will lead to the strategic implementation of
future operations. If project outcomes do not meet
investor expectations, then neither will the company.
attempt to estimate it when calculating project costs.
Before a project launches, there should be a careful
investment analysis made. A project must return at least
the amount of capital invested in the project plus the
cost of that capital. If it does not, it will not add value
for shareholders. ■
The Project Venture
Development Process
Good projects don’t just happen; they are well
planned and executed. If you want your project to add
economic value to the company and further its strategic
vision, you must plan accordingly. Here are the steps
you need to take for each project:
Develop a Business Case. Begin by developing a
business case for each project. The business case
process forces you to focus on the desired outcome.
State where the numbers in your projections come from,
including anticipated sales volumes, and the production
and operating costs. Make sure the assumptions that
drive the numbers are realistic. Clarify why this project
is a sound investment for the company.
Think Strategically. Consider projects in their wider
context. How does the project fit into the company’s
long-term strategy? Does it support an existing sustainable competitive advantage, or does it create a new one?
Describe the big picture and link the project to other
projects for an overall view of how it all fits together.
Create a Business Plan. Before starting the project,
develop a business plan. Do market research and scope
out the competition. Be sure to assemble the core team
and include them in this stage. Identify major milestones at which you will stop and check your assumptions and progress.
Execute and Control the Project through the
Business Plan. Don’t put away the business plan once
the project has begun. Use it all along to guide the project and check your assumptions.
Transition Smoothly to the Project Outcome
Lifecycle. The end of the project is the beginning of its
implementation. Core team members should be along as
guides. The team should also produce a final report with
numbers, projections and assumptions about the success
of the product or service the project created. These can
then be checked against what really happens as a learning experience.
Operate and Evaluate. The project isn’t over until
the end of the project outcome lifecycle. Once the lifecycle is over, evaluate how well expectations were met.
This serves as a way of celebrating success and learning
from failure. ■
Soundview Executive Book Summaries ®