Finding opportunities in problems

Introduction

In the United States in 1953, President Eisenhower secured Congressional approval of the Interstate Highway Act. At about the same time, the Civil Aviation Board granted airworthiness certification for the Boeing 707 commercial airliner. American railroads took interest in asking Congress to levy fees on trucking companies using the Interstate Highways sufficient to offset the costs of maintaining the highways. Congress recognized that free use of the roads would give truckers unfair economic advantage and granted the railroad request. By 1958, many American railroads were in bankruptcy.

In the United States, in 1984, Michael Dell entered the personal computer business. He was late in joining the market already populated by several giants: Apple, IBM. Texas Instruments, Sony, and Compaq. He had little capital and no distribution network. In 2003, Compaq was acquired by Hewlett Packard and, in 2004, IBM sold its unprofitable PC business to Lenovo.

Airline and trucking companies faced an entrenched set of competitors in the transportation industry. Dell computer faced an entrenched set of competitors in the personal computer industry. The opportunity that the new companies found was precisely that their competitors were entrenched not only in their industries, but also in their ways of doing business. Because they were unable to adapt to new technologies and new ways of serving customers, they were vulnerable to innovation. The airline and trucking companies that took the transportation industry away from the railroads were innovators. The small Texas company that has become the dominant personal computer company is an innovator. Innovation, in the face of problems, is the key to success.

To be successful in innovation management, any company must establish a corporate culture that motivates project teams to maximize potential business benefits of the project success and minimize potential negative impacts of the project failure. Managing innovation is inherently risky. Many uncertainties about future events arise from both internal and external sources. Active Risk Management (ARM) recognizes that these uncertainties can be either threats or opportunities, ARM endeavours to position the enterprise so that it enjoys most of the benefits of opportunity while avoiding most of the pain associated with threats.

This new culture has several differences compared with the traditional approach:

If we are to incorporate additional value in our innovations, where might we look for these opportunities? Published in 1999, the Ten-P Paradigm™ (Fern, 1999) provides a comprehensive enumeration of the sources of value that have been used to enhance the customer appeal of innovative products. The ten sources are summarized in words that start with P:

• Positioning - how to identify and distinguish the new product from those of competitors
• Planning - how to organize the product development activity into development stages
• Partnering - how to identify and enlist the support of strategic partners who can make the new offering attractive to the market
• Producing - how to identify and secure capabilities that will be required to successfully penetrate the market
• Processing - how to identify and develop ancillary processes required to achieve success in the market
• Packaging - how to determine the extent and nature of bundling that is appropriate for the market
• Pricing - how to determine a pricing structure that will maximize revenues and profits
• Promoting - how to identify and implement an appropriate means of making the market aware of the new offerings
• Placing - how to identify, enlist, and train appropriate marketing channels
• Pleasing - how to identify and support customer service requirements of the targeted segment and delight the customers

Because each of these elements contribute much to the marketability of new products, to the efficiency of the product development activity, and to the profits earned by new products, they are the Ten-P Paradigm™ sources of value.

Many of these elements have customarily been the sole responsibility of the marketing product manager. The time to profit race requires a new approach. Product managers and project managers must now collaborate. Both must bring their best efforts, attention, and disciplined approach, to every available source of value.

Traditionally, the project manager has played a role in the producing element and that role has often been confined to the product development segment of that element. The recent popularity of Design for Manufacturing (DFM) techniques has extended the project manager's scope into the production segment by integrating design and production. Delivering a quality product on time and within budget is no longer enough. Delivering a design that can be efficiently manufactured isn't enough. Because the finished product must generate revenues in excess of its development and manufacturing costs, the project manager must be concerned with all of the elements that contribute to marketing success.

Winning the time to profit race means perfecting all of the activities that are the new product. The role of the project manager in ensuring integration and coordination can shave crucial days, weeks, and months from the total elapsed time required to bring a new offering to the market.

Conclusions

The time to profit approach to project management means that

Active Risk Management

Innovations mean a lot of uncertainties and risks. Companies that are involved in innovation management choose to accept a high level of risk. They are successful not because they get lucky, but because they actively manage the risks they take. Threats, opportunities, and uncertainty are assessed and thoroughly planned. Our research showed that projects that were planned based on the most probable estimates of the project parameters had low probability of being on time and within budget. In our experiments with real projects the probabilities of achieving project performance goals based on most probable estimates never exceeded 38% and usually were even lower. So it is natural that most projects are late and over budget because they were poorly planned.

Active Risk Management (ARM) deals with future uncertainties that may be either opportunities or threats. To use ARM effectively, project managers ask a series of questions, first focused on opportunities and then focused on threats. The ARM questions are:

For Opportunities

• What events might occur that would speed our time to profit?
• Can we do anything to increase the likelihood of their occurrence?
• What would we do if they did occur?
• Will anything alert us that they are about to occur?
• What must we do before they occur if we are to take advantage of them?

For Threats

• What events might occur that would delay our time to profit?
• Can we do anything to decrease the likelihood of them occurring?
• What would we do if they did occur?
• Will anything warn us that they are about to occur?
• What must we do before they occur if we are to avoid the damage?

Very often, it is worth noting, opportunities come to us disguised as threats or problems. New trucking companies recognized that railroads enjoyed immense economies of scale but that customers lost much of the benefit of that because of delay. They overcame that advantage by abandoning a schedule in favour of customizing pick-up and delivery to the needs of shippers. New airlines, faced with the same economies of scale problem, once again offset it with economy of speed. Dell Computer recognized that, if it produced a quantity of personal computers in a rapidly evolving technology arena, they might well become obsolete before they could be sold. Faced with this huge problem, Dell concluded that it must find a way to produce computers only after they had been sold. That, in turn, allowed Dell to offer customers computers customized to their individual desires.

It is usual for most future events to be treated as both opportunities and threats. For example, in a new product development project, it is always possible for a competitor to get a product to market before us, particularly if we are using the time to profit strategy. While this event brings the threat that our competitor will gather many of the potential customers before we have a competing product ready to sell, it also offers substantial opportunity. We can now study what our competitor has done in detail, identify its strengths and weaknesses, and modify our own project plan to ensure we have strengths to match our competitor while also ensuring that we are strong where our competitor is weak.

ARM helps to establish right business goals and risk management strategy. It should be practiced through the project life using powerful tools and techniques that measure project performance and show

• if the results that were planned have good chances to be successfully achieved,
• if it is time to consider project performance termination because its success is unlikely,
• if corrective actions are necessary because our chances for future project success have negative trends.

Success Driven Project Management

Risks and uncertainties should be simulated with the purpose of obtaining probability curves for schedule, cost, profit and other project parameters. It may be done using Monte Carlo simulation or three scenarios approach. Monte Carlo simulation is feasible only for small projects because it produces reliable estimates only if the number of trials is very large – too large if the number of project activities exceeds several hundreds.

We will describe the three scenarios approach and methodology of Success Driven Project Management (SDPM) that is widely used in Russia and Ukraine. This methodology is supported by the Russian project management software called Spider Project.

Project Planning

The project planner obtains three estimates (optimistic, most probable and pessimistic) for all initial project data. These data are used to calculate optimistic, most probable and pessimistic project parameters (schedule, budget, profit). The most reliable and pessimistic project versions may contain additional activities and costs and employ other resources and different calendars than the optimistic schedule due to the risk events that were identified and included in the corresponding project scenarios. In these versions, resources may have different cost and productivity, activities may have different work volumes and duration, financing and supply schedules may be different, etc. All project data including the Work Breakdown Structure can be different. All project constraints should be taken into consideration when the three project versions are scheduled. These schedules show project boundaries (optimistic and pessimistic duration, budget, profit estimates) and are used for the reconstruction of the project probability curves for time, cost, profit, material requirements and other project parameters that are important for the project success. These curves are created taking into account the total number of project activities and the number of activities on the resource critical path. Our research for small projects (with hundreds of project activities) where the results of this approximation were compared with the results of Monte Carlo simulation showed that the difference in the estimates of the results probabilities did not exceed 5%.

The next step is to establish rational project goals and conditions under which the project will be terminated. These goals include project profit (or loss) at specified points in time. These goals should be achievable with a reasonable probability of success (70-80% are the usual figures).

Along with the project goals the minimum acceptable values should be established for the same parameters. If the probability of meeting these values becomes less than some specified level (50% as an example) then the project manager should request project termination. In this way, the organization avoids pouring additional resources into projects that have poor chances of success.

We recommend using the optimistic project version for setting task objectives for project implementers. The calculated contingency reserves should be retained by the project management team and allocated in response to events that occur or fail to occur as the project plan is executed.

Project Control

During project execution, the project management team that practices Active Risk Management controls project risks, regularly reconsiders all three-project scenarios, and recalculates current probabilities to meet project goals. Both the real progress of the project, and the new information developed within and external to project activities, must be considered. Failure to exceed worst case expectations is an indication that the plan is flawed, either as a result of poor estimating, or failure to recognize or correctly estimate the impact of risk events.

An example of success probability trends for a sample project profit after 200 work days is shown in Exhibit 1.

You may notice that though achievement of target profit is not yet obvious, the project team may be optimistic about achievement of the minimal profit that was defined for this project. It is natural that, in successful projects, the probability of meeting targets will move toward 100% gradually and achieve it before the point at which the project is finished.

Success probability trends are the best performance management indicators that take into account project performance results, network logic and risk estimations. They may change due to:

• Performance results
• Scope changes
• Cost changes
• Risk changes
• Resource changes

Even if everything is fine with project performance but new threat events are identified and included in the pessimistic project scenario, then success probability trends may show that corrective action is necessary. Similarly, new opportunity events may arise that should be incorporated in both the project plan and the probability analysis. Negative success probability trends show that project contingency reserves are spent faster than expected and corrective actions are necessary, positive trends show that the project management team has increased the chances of meeting project targets.

Project managers are encouraged to resolve uncertainties as quickly as possible because this can increase success probabilities in spite of activity finish delays and cost overruns. Postponing problem resolution leads to negative trends in success probabilities. This attribute of success probability trends is especially useful in new product development project management.

Exhibit 1- Success Probability Trends for Sample Project

Conclusions

Active risk management and success driven project management technique add the following rules to the list in time to profit project management

• 7) Establish risk thresholds indicating that the project should be terminated,
• 8) Continuously monitor and re-estimate project risks, calculate project success and failure probability trends,
• 9) Take corrective actions if success probability trends are negative, consider project termination if the probability of project failure became high.

Summary

The combination of time to profit project management, active risk management and success driven project management, provides the following benefits:

• Avoids continued investment in projects that will ultimately fail to provide a return of investment.
• Incorporates sources of value that will increase the profitability of the product of projects.
• Supports realistic decision making for project initiation and continuation.
• Increases profits/savings to sustain the organization and fund future projects.

Organizations should carefully study potential threats from this point of view, establish goals to take advantage of identified opportunities, and establish thresholds for timely termination of weak projects. Project schedules should reflect your plans to achieve established goals. Setting the proper goals can convert threats into opportunities.