P2M - A guidebook of program & project management for enterprise innovation [International ed.] 9784908520204

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P2M - A guidebook of program & project management for enterprise innovation [International ed.]
 9784908520204

Table of contents :
Contents
Part 1 Overviw and Characteristics of P2M
Chapter1 Introduction
Chapter2 Structure of the P2M Guidebook
Chapter3 Bussiness,Program and Project
Chapter4 Characteristics of P2M Program Management
Chapter5 Capabilities for P2M
Part 2 Program Management
Introduction Outline
Chapter1 Programs and Program Management
Chapter2 Program Integration Management
Chapter3 Program Strategy and Risk Management
Chapter4 Value Assessment Management
Part 3 Project Management
Chapter1 Project and Project Management
Chapter2 Integration Management
Chapter3 Stakeholder Management
Chapter4 Scope Management
Chapter5 Resource Management
Chapter6 Time Management
Chapter7 Cost Management
Chapter8 Risk Management
Chapter9 Quality Management
Chapter10 Procurement Management
Chapter11 Communication Management
Part4 Business Management Foundation
Introduction Strategy Formulation
Chapter1 Business Enterprises and Program
Chapter2 Program strategy method
Chapter3 Project Organization Management
Chapter4 Project Finance Management
Part5 Knowledge Foundation
Chapter1 Systems Approach
Part6 Human Capability Foundation
Introduction What is Human Capability Foundation?
Chapter1 Capability of Manager for Practicing P2M

Citation preview

Third Edition

P2M A Guidebook of Program & Project Management for Enterprise Innovation [ International Edition ] June 2017 Project Management Association of Japan

[PMAJ]

Third Edition

P2M A Guidebook of Program & Project Management for Enterprise Innovation

[ International Edition] July 2017 Project Management Association of Japan [ PMAJ ]

Cyber Publishing Center Cyber Creative Institute Co. Ltd. 5th Floor, Gotanda First Bldg. 2-8-1, Nishi-Gotanda, Shinagawa-ku, Tokyo, 141-0031, JAPAN ©2017 by Project Management Association of Japan[PMAJ] 1-5-2, Higashi-Azabu Minato-ku, Tokyo Japan 106-0044 This book is in copyright. Subject to statutory exception and to the provision of relevant collective licensing agreements, no reproduction of any part may take place without the written permission of PMAJ. First published 2017 ISBN 978-4-908520-20-4

Preface

Preface Publication of ‘Project & Program Management for Enterprise Innovation’ (P2M) and its Features and Impact The first edition of P2M was published by ENAA, or Engineering Advancement Association of Japan, in 2001. MITI, or the Ministry of International Trade and Industry, established a committee within ENAA in 1999. The purpose of MITI was to transform individual enterprises and to realize value creation by developing methodology, cultivating professional personnel and implementing change. MITI changed to METI, or the Ministry of Economy, Trade and Industry, in 2001. The features of P2M are: 1) To create a single body of knowledge by linking the formerly individualized areas of project management and program management with the aim of overall optimization. 2) To incorporate the strengths of Japan’s industries into this body of knowledge. After the first publication, P2M became highly rated in Europe where the study and research of project management (PM) was further advanced. P2M research began to be carried out at many major universities in Europe with P2M-related courses being established at more than 25 institutions. The degree to which P2M impacted Europe can be seen when the link between project management and program management was adopted by national PM associations in Europe.

Impact of the Knowledge Society American sociologist Daniel Bell advocated the "post-industrial society" in 1962. The “industrialized society,” which centered on the production of goods, had been shifting its center of economic activity to knowledge-centered services, or a “knowledge society.” Along with that, the role of the "working class" was being reduced and the "knowledge class,” that of professionals and technological experts, was becoming larger. Furthermore, organizational management greatly changed, too. As the core of the economy and society changed from primary industry to secondary industry through the "industrial revolution," it was said that the transition to tertiary industry, or a knowledge society, was happening through the "information revolution." (The Coming of Post-Industrial Society: A Venture in Social Forecasting, Basic Books, 1973)

Knowledge Society and the Necessity of Professionals The root cause of various issues in Japan such as globalization, low economic growth, declining birthrate, aging society, financial crisis and so on is due to the deep progression of this industrial structural transformation. In 2000, when Project & Program Management for Enterprise Innovation or P2M was first conceived, Japan as well as other industrialized countries began to be impacted by this knowledge society. In order to continue to be prosperous in a new society where the rules of the game have changed, it became necessary to acquire strategies and capabilities in line with the new rules. For example, "open innovation" and "cloud computing" are not just new techniques but basic strategies that match with the times. However, in less than 10 years, these may be just common industry knowledge. New knowledge and strategies will be required depending on the times. In this

Preface new era, professionals with a bold viewpoint and broad perspective are needed. The purpose of P2M is to train such professionals to realize new value creation by bringing together leaders who have achieved innovative changes with specialists and experts from the various fields of science, technology and business.

Applications of P2M and Prospective Readers As the title shows, just as a standard guidebook does, this is a guide for obtaining and utilizing basic knowledge. The knowledge system should be modified and expanded in accordance with the development of science and technology as well as societal trends. It is with this view that we seek to build sound cooperative and collaborative relationships with relevant universities, academic societies, associations, industries, etc., and to adapt to environmental changes. Professionals practicing project management and program management can also refine their knowledge and experiences accumulated throughout their careers to enhance their own capabilities and achieve their goals. The prospective readers of this guidebook are executives, managers, professionals, students, and so on. The scope of utilization is not limited to social infrastructure, natural resources development, production facility, product development, general engineering and construction, ICT system development, etc. A major feature of P2M is that it can be applied not only to businesses but also to social fields including public administration, education, medicine, and the local community.

P2M 3rd Edition English Version Both the first and the second editions were translated into English, but they were not released to the public because they were limited to specific readers. Recently, there have been many requests to publish an English version so the 3rd edition is being published in English. Only the main features of P2M were included in the book and the remaining features, i.e. general management theory, were not. In the 3rd edition, the chapter on “Project Finance” was reprinted from the 1st Edition English version, since that part of the 3rd Edition Japanese version was simplified and did not contain enough detail for readers outside of Japan. Please refer to the Table of Contents for further details.

Acknowledgement To conclude, I would like to thank Professor Motoh Shimizu, the chairperson of the Revision 3 Committee and its members, Mr. Toru Kato, Dr. Ichiro Koshijima, Dr. Yoshiaki Shibao, Mr. Hisashi Hama, and Mr. Fumihiro Miyamoto. Furthermore, my gratitude to the many authors and reviewers whose names are listed in this book as well as our technical adviser, Dr. Hiroshi Tanaka and our editors, Mr. Yutaka Furuzono and Mr. Susumu Miura.

July 2017 Non-Profit Organization PMAJ Project Management Association of Japan Akio Mitsufuji, President

Revised 3rd Edition P2M Standard Guide Book Member List of Revision Committee & Writing Committee

Revision Committee Member (and Writing) Motoh Shimizu (Chairman) Hisato Hama Yoshiaki Shibao Toru Kato

Fumihiro Miyamoto Ichiro Koshijima

Writing Committee Member Hiromi Sugiura Hisakazu Nishiguchi

Hiroki Ono Kenichi Suzuki

Kentarou Hayashi Kotaro Shimizu Masanobu Nakamura Takatoshi Imaoka Nobuaki Ishii Taeko Inoue Takeshi Matsumoto Tetsuya Yonezawa Tsutomu Furumoto Yoshio Satoh

Kentaro Ito Kouji Iwasaki Masao Watabe Naoki Kasahara Makoto Kuribayashi Takashi Kagawa Takeshi Saito Tomoichi Sato Yasunari Kitamura Yukio Momomura

Reviewer Hiroshi Tanaka Kaoru Nakamura

Junichi Koizumi Katsuo Tsuchide

Kenji Hatsuda Kumiko Shirai Naoki Oshima Tadaaki Kougo Tomio Umeda Toshiyuki Kuroyanagi Yutaka Utashiro

Kosei Watanabe Masao Motegi Shoei Komatsu Takayuki Asada Toru Mihara Yasuko Kaminuma

Secretariat (and Writing) Akio Mitsufuji

Yutaka Furuzono

CONTENTS Part 1 Outline Overview and Characteristics of P2M

1

Chapter 1 Introduction

2

1. What Is P2M?

2

2. P2M Program Management

5

3. Professionals Human Resources Who Aim to Solve Complicated Complex Problems 6 4. Innovation and Human Development through P2M

7

5. Fields Where P2M Can Be Used

9

Chapter 2 Structure of the P2M Guidebook

10

Chapter 3 Business, Program ,and Project

12

1. Business Managemen

12

2. Hierarchy of Business Activities

13

3. Program Management and Project Management

14

Chapter 4 Characteristics of P2M Program Management

21

1. Multiplicity of Contexts of a Program

21

2. Sense of the Knowledge Necessary for Managers

21

3. Essentials of Program Management

22

Chapter 5 Capabilities for P2M

24

1. Qualifications for Program Managers and Project Managers

24

2. Manager’s Work

25

3. Capability

25

Part 2 Program Management

27

Introduction Outline

28

Chapter 1 Program and Program Management

30

1. Organization’s Strategy and Program

30

2. Definition and Classification of Programs

33

3. Program Management

36

4. Lifecycle

39

5. Program Organization

40

Chapter 2 Program Integration Management

43

1. Mission ProfilingProfiling

44

2. Program Design

54

3. Integration Management of Program Implementation

70

4.Relationship Management

79

5.Multi-project Management

81

Chapter 3 Program Strategy and Risk Management

84

1.Program Strategies and Risks

85

2.Program Strategy Management

87

3.Pgram Risk Management

96

Chapter 4 Value Assessment Management

104

1.Value Assessment Management

105

2.Process of Value Assessment

110

3.Value Assessment Indices

127



Part 3 Project Management

131

Chapter 1 Project and Project Management

132

1. Definition of Project

132

2. Basic Attributes of Project

132

3. Stepwise Refinement and Rolling Wave Planning

133

4. Definition of Project Management

133

5.Requirements of Project Managementt.

133

6.Concepts Related to Project Management

134

7.Project Activities

138

Chapter 2 Integration management

141

1. Overview

141

2. Developing a Project Charter

143

3. Develop Project Plan

145

4. Execute Project

148

5. Project Operation Management

149

6. Change Control

151

7. Closing Project Phase or Project

153

Chapter 3 Stakeholder Management

155

1. Outline

155

2. Identify Stakeholders

157

3. Stakeholder Management

159

Chapter 4 Scope Management

162

1. Overview

162

2. Scope Plan

163

3. Definition of Scope

164

4. Preparation of WBS

165

5. Scope Change Control

170

Chapter 5 Resource Management

171

1. Outline

171

2. Identification of Resources

173

3. Development of a Resource Plan

175

4. Implementation of the Resource Plan

178

5. Monitoring and Control of Resources

179

6. Improvement/Correction Plan

180

7. Accumulation of Resources

182

Chapter 6 Time Management

188

1. Outline

188

2. Develop Schedule

190

3. Project Progress Control

196

4. Progress Trend Analysis and Forecasting

196

5. Adjustment to Achieve the Goal

197

6. Relevant Knowledge for Critical Chain Management

197



Chapter 7 Cost Management

201

1. Outline

201

2. Cost Estimation

204

3. Budget Compilation

208

4. Cost Management

213

Chapter 8: Risk Management

219

1. Overview

219

2. Development of Policy

228

3. Risk Identification

231

4. Risk Analysis and Evaluation

232

5 Preparation of Risk Countermeasures

235

6. Implementation, Monitoring, and Evaluation of Countermeasures

238

7. Compilation of Lessons Learned from Risk Management

238

Chapter 9: Quality Management

239

1. Overview

239

2. Quality Plan

242

3. Quality Assurance

242

4. Quality Control

244

Chapter 10: Procurement Management

248

1. Overview

248

2. Procurement Planning

249

3. Procurement Execution

253

4. Procurement Control

255

5. Delivery of Procured Products

258

Chapter 11: Communication Management

261

1. Overview

261

2. Communication Planning

263

3. Information Distribution

267

4. Communication Management

268

Part 4 Business Management Foundation

275

Introduction: Strategy Formulation

276

1. Strategies

276

2. Strategy Formulation

278

3. Forms of Strategy Formulation

279

4. Programs and Strategies

281

Chapter 1: Business Enterprises and Programs

282

1. Business Management Foundation

282

2. Business Strategies and Programs

285

3. Program and Project Governance

288

4. CSR and Programs/Projects

291



Part 4 Business Management Foundation Chapter 2 Program Strategy Method

296

1. Need for Program Strategy Method

296

2. Methods for Implementing Strategy

296

3. Customer Relation Strategy

303

4. Process of Decision Making

306

5. Open Innovation

310

Chapter 3. Project Organization Management

318

1. Overview

318

2. An organization and Project

318

3. Management of a Batrix-based Organization Model

323

4. Project Management Office

325

5. Project Teams

328

6.Maturity of Organization

332

7. Strategic Alliance

337

8. Design and Application of a Community

343

350

Chapter4 Project Finance Management 1. Overview

350

2. Basics of Project Finance Management

351

3. Basic Concept of Finance for a Project

356

4. Selection and Specification of Fund Elements

360

5. Creation of Feasible and Optimum Structure (Structuring)

362

6. Optimum Risk Allocation in Project Materialization

368

7. Evaluation of Financial Viability and Economic Efficency

372

Chapter5 Information Management and Infrastructure

Part 5 Knowledge Fundation

379

Chapter 1 Systems approach

380

1. Overview

380

2. The Systems Approach

383

3. Systems Engineering

392

4. Systems Management

399

Chapter 2 Knowledge and information asseta, Chapter 3 Value and value assessment

Part 6 Human Capability Foundation

405

Introduction: What is human capability foundation?

406

Chapter 1 : Capability of Manager for Practicing P2M

407

1. Capability Required for a Manager

407

2. Ability Elements and Evaluation Criteria in Capability

413

3. P2M Capability

416

4. Experiential Learning Process for Honing Capability

420



Chapter 2 : Human Capability Foundation on Program/Project Chapter 3 : Leadership Chapter 4 : Communication Skill and Creation of Community Chapter 5 : Multicultural Correspondence

Index

422

 : Shaded areas are not translated



Program & Project Management for Enterprise Innovation

Part 1 Overview and Characteristics of P2M Chapter 1 Introduction Chapter 2 Structure of the P2M Guidebook (3rd Revised Edition) Chapter 3 Business, Program and Project Chapter 4 Characteristics of P2M Program Management Chapter 5 Capabilities for P2M

Copyright © 2017 Project Management Association of Japan

1

Part 1 Overview and Characteristics of P2M Chapter1 Introduction

Chapter 1 Introduction 1. What Is P2M? 1-1. What Is P2M? P2M is the abbreviated name for “Program & Project Management,*1 and this guidebook provides a body of systematic knowledge about P2M. The first edition of the P2M Guidebook was published in 2001, a time when there was rapid progress in globalization, the expansion of the digital information industry, the growth of emerging countries, and other social and economic changes. The first edition’s subtitle was “Project & Program Management for Enterprise Innovation,” which reflected the understanding that Japanese companies and Japan as a whole were in a phase of major changes. Therefore, a strong sense of innovation or renovation has been engraved in the knowledge system of P2M, concerning not only knowledge on the management process of programs and projects but also the mode of conducting business of project performing organizations, the business enterprises or public agencies and other not-for-project bodies. We often solve large and complicated problems by combining two or more projects. Integrated activities for appropriately combined projects to achieve given objectives are what we call a program traditionally. To aim for the achievement of better results, P2M synthetically deals with program management, which consists of conceiving, planning and implementing a program, methods of project management for carrying out each of the component projects of the program more effectively and efficiently, as well as other related knowledge.

1-2. The Rapidly Changing Society Companies receive compensations from customers for the provision of products and services. Government and other public agencies also provide services to citizens as customers. In the globalized and complicated modern society, products and services needed by customers and the society change rapidly. This change necessarily affects large and small companies and central and local government agencies. The Japanese society has changed greatly over the past decade. The world has also greatly moved. In particular, the Chinese society has completely changed within a decade, becoming one of the world’s leaders. Although how change occurs differs from country to country, this situation is similar to that of other Asian countries, the US, European countries, Latin American countries, and African countries. With global progress in the information revolution, such social change has been accelerated further and we may predict that the world will become totally different in the next decade. Even in the so-called knowledge economy or post-industrial society, where knowledge and information have greater value than before, the demand for products and services will not decrease, but increase even more. ------------------------------

*1 Since the revised third edition, the book title has been changed to “Program & Project Management Guidebook” to place more importance on program management.

2

Part 1 Overview and Characteristics of P2M Chapter1 Introduction However, the dimensions of products and services, ways of providing them, and the resources they require change rapidly. Companies and other organizations need to discover the new values that customers hope to acquire and become the first to create “mechanisms” to provide these values widely throughout the society. This requires reconsideration and the conversion of everything, including their own organizational structure and business processes. The key words for adaptation to the times are “value creation” and “innovation.” This guidebook systematically provides the core knowledge for using P2M to solve complicated modern issues, such as value creation and innovation, dividing the knowledge into the following three types: 1) 2) 3)

Knowledge on program management that systematizes the processes of conception and behavior concerning innovation and value creation Knowledge on project management as a process system for steadily carrying out the projects that constitute a program. Knowledge of other relevant business administration that constitutes the grounds for the implementation of programs and projects in the course of business management.

1-3. Programs and Projects It is appropriate to start with simple explanations about the concepts of program and project for the purpose of this guidebook. A project consists of activities characterized by non-repetitive tasks and timelines for completion, which means that there is a mandated or agreed due date for completion. On the other hand, as described above, a program is a series of activities into which plural component projects are systematically integrated to achieve the super-objectives, such as the materialization of organizational strategies. Generally, when the management of a stand-alone project officially begins, the goal of the project has been set up concretely in the form of a “project charter”. Project management involves the processes for achieving the goal efficiently without fail. On the other hand, programs can be classified into two typical types. The first type is applicable to the construction of a large plant, the development of an IT solution system, and social infrastructure that have a goal specified in a contract or the like in the beginning, but these are so large in scale as to be divided into plural component projects and are managed by integrating all of them. Because the scale is large, however, although the goal has been firmly set, usually uncertain factors remain or various examinations are needed for a program before the goal is specified in a contract or a program concept plan. This type of program is often handled by a company specialized in the implementation of the program itself. Because such a company regards the implementation as if it is a daily operation, this type of program is called an “operational program” for the purpose of P2M. The second type of program starts only with the conceptual strategic purpose of “what value to aim at” – for example, the creation of a new market by development of a totally new product or the creation of a mechanism that improves the efficiency of the production to surpass rival companies. In this case, because any concrete goal is unclear at first, it is important to develop a

3

Part 1 Overview and Characteristics of P2M Chapter1 Introduction process for establishing an appropriate strategic goal. Although this type of program varies depending on the concept of its purpose, such as creation or innovation, it is possible to collectively call them “strategic programs.”

Exhibit 1-1-1 Typical types of programs A project or program falls under the general definition of “system,” which is defined as “something that systematically consists of several elements and performs some functions as a whole.” Therefore, a project or program can be regarded as a “process-type system.”*2 If a program is regarded as a system, a project can be regarded as a subsystem. Generally, the entire structure of a complicated system can be understood as an integration of subsystems, each of which can be understood after the system is divided hierarchically into the subsystems to limit the scope. If interfaces are established appropriately for the projects (subsystems) of a program (system), it is possible to carry out a project (subsystem) autonomously without being affected by the other projects. If a project is regarded as a module subordinate to a program, this is an advantage of modularization. * 3 Operational programs can enjoy this advantage of modularization if subordinate projects can be established appropriately.1) In the case of a strategic program, there is a vague strategic concept at first. To carry out a program practically, the process of mission profiling is extremely important to redefine the vague strategic concept as a group of concrete objectives. (Part 2, Chapter 2) Subordinate projects cannot be established like an operational program until a group of objectives is clarified.

-----------------------------*2 For example, if operational elements – design, manufacture, assembly, and inspection – are systematically combined for mechanical equipment, this results in a production process – that is, “something that performs some functions” as a whole. This production process can be regarded as a kind of system. What is generally called a system, such as a mechanical product, is an expression of a snapshot of elements at a point of time. If needed, this is called a “product system” to be distinguished from a “process system.” *3 Modularization divides a system into modules (subsystems) highly independent of each other. In the case also of a single system that is not mass-produced, one of the advantages of modularization is to enable each module to be made highly independent through the appropriate division and establishment of interfaces. Concretely, this enables the following: simultaneous development of modules; improvement of efficiency and shortening of the schedule through the concentration of technologies in each module and the use of specialized human resources and organizations for each module; reduction in the complexity of the system; and changes in the system by using each module as a unit.

4

Part 1 Overview and Characteristics of P2M Chapter1 Introduction

In addition, because a strategic program is usually greatly affected by the circumstances, such as the market and competitive trends, and takes a long time to complete, it is ordinarily designed on the assumption that there will be considerable changes in the circumstances. One of the methods for coping with this is to set up options, such as postponement, suspension, and addition, regarding each project as a module unit. Moreover, in most cases, the results of a strategy can be gained as a result of the use of a certain system created by a program. Under P2M, this stage of program product use is regarded as a service model project, which is a part of the program for realizing the strategy. When designing an operational program, it may be necessary to pay a consideration as in the case of designing a strategic program. Because an operational program is highly complicated, has many elements to be developed, or takes a long time to complete, it is highly likely to be affected by external environmental changes. With regard to the irregular operations among the organizational activities, P2M explains the three typical types of project described herein, operational programs, and strategic programs. In reality, project activities are complicated and are not necessarily carried out as described in a textbook. For example, even a project may have some strategic elements. In many cases, a certain activity cannot be explained only by one of the types. It is also necessary to select appropriate processes and techniques in the course of program/project management, depending on the situation.

2. P2M Program Management Project management has been developed to carry out a planned business with “one theme,” and project management professionals have been recognized widely in the world mainly in such industries as engineering, construction, and IT. On the other hand, the problems in today’s knowledge society require the simultaneous solution of a complication of “several themes”. Although project management provides basic knowledge for solving each of them, it is insufficient to deal with complicated problems with “several themes” from a holistic perspective. So, to deal with such complicated problems, program management treats them by combining several projects systematically, and in addition, P2M Guidebook organizes program management as a way to implement enterprise innovation in order to deal with not only complicated projects but also complicated management complex systems. The first edition of P2M Guidebook is one of the earliest efforts clearly presented this way of thinking to the world in advance of other program management in a form. After the P2M Guidebook (first edition), several knowledge systems concerning program management have been published overseas. In this guidebook, the contents peculiar to P2M concerning program management knowledge will be called “P2M Program Management.” P2M Program Management aims to cope with not only complicated problems but also “rapidly changing and complicated problems.” This requires the assumption that great environmental changes may occur during the implementation of a project. Ordinary project

5

Part 1 Overview and Characteristics of P2M Chapter1 Introduction management is based on the assumption that the goal and conditions of the project is made clear beforehand and there are no or few environmental changes. On this assumption, the scope of the project is clarified – that is, subdivided – and is finally developed into each of its concrete activities. Subdivision makes it possible to reduce complexity to a level that makes an easy solution possible. Similarly, a typical large project is divided into a number of small projects, which are carried out step-by-step to reduce the complexity. This is a program in the traditional sense. On the other hand, today’s programs have to deal with complexity caused by uncontrollable environmental changes, such as changes in customers’ needs, the new entrance of rivals with unforeseeable techniques, rapid changes in resource supply markets, and rapid changes in political and economic circumstances.*4 From the viewpoint of complexity, project management is, so to speak, a chess problem. The conditions of the board surface have been fixed beforehand and the usable resources (chess pieces) have also been fixed. However, in today’s global economy and society, there is an increase in the number of the opponent’s pieces, a change in the position of the king, and an increase or decrease in the number of squares without notice. Your rook may also change into a pawn without notice. This is dynamic complexity. P2M Program Management tries to adapt itself to such environmental changes. It copes with each situation by dividing it into elements manageable by established projects, while it copes with a great change by dealing with the entire structure of the program. Among others, P2M places importance on “value creation.” From the perspective described above, activities for creating a new value earlier than rivals also create a new environment for the market (customers and other companies). This can be said to be the best defense against changes in the market environment. Finding the essentials of the program mission (mission profiling) is important for P2M Program Management, which places importance on the relationship between the strategy and the program. This is a process that is indispensable for identifying the potential for environmental changes instead of merely following environmental changes and preparing a plan that makes it difficult for environmental changes to have an effect.

3. Professionals Who Aim to Solve Complex Problems P2M is mainly characterized by its viewpoint of developing not only processes and knowledge for innovation and value creation, but also excellent professionals for this purpose. The sustainable development of a company requires growth. Although the improvement of efficiency and the acquisition of synergy by M&A are important strategic methods for growth; mere merger does not lead to growth. Organic growth is important in order to improve the capabilities of human resources of the organization sustainedly and develop the organization. For this purpose, it is necessary to find problems in its growth and develop the human resources and organizational climate necessary for correct interpretation and problem solution. According to P2M, the most essential strategy for an organization to enable it to realize innovation and value creation is the “development of professionals who have a broad outlook

------------------------------

*4 Such complexity that is hard to understand for the parties concerned is called “dynamic complexity.” On the other hand, complexity that makes it possible to expect planned outputs to be gained from complicated but stable inputs is called “technical complexity.”

6

Part 1 Overview and Characteristics of P2M Chapter1 Introduction and an elevated viewpoint.” Solutions to today’s issues require management human resources that can freely use broad and deep knowledge, especially through the accumulation of various human resources not by individuals, but by the organization. Today’s world can change significantly over a short period of time span. The P2M Guidebook has focused on and systematized the essential ways of thinking that will not change substantially with the passage of time. True success requires the sustained learning and growth of the organization and each manager, using knowledge on P2M as the basis and responding to business requirement and the market environment. In the past century, professionals have typically focused on narrow and specialised expertise, for example, lawyers, accountants, engineers and doctors. There are qualification systems for these experts. However, the number of complex problems has been increasing in various fields, such as the political, social, and industrial fields. Coping with complex problems across two or more fields – for example, the “creation of a new business” and the “solution of an environmental problem – requires broader knowledge, across engineering, finance, management, legal, and other fields. Such human resources are typified by owners and entrepreneurs. However, when the economy and society are becoming considerably more complex and rapidly changing, the human resources necessary for coping with this situation include not only the owners, but also the cross-discipline professionals who can understand the essentials of complex problems and initiate actions to solve the problems from a standpoint of the workplace. P2M calls such human resources “mission-performing professionals.” They can provide the image of complex problems as a whole in an easy-to-understand way for experts in each field, write highly feasible scenarios, create various mechanisms for gaining success, and producing values by the use of them. Based on their expertise and practical experience in related fields, they have both the ability to “see from a higher position” and the ability to organize people with various special capabilities to meet the challenges. As one of its activities, P2M appropriately evaluates the capabilities of such human resources and certifies their qualifications.

4. Innovation and Human Development through P2M Because technologies are rapidly advancing and markets are quickly shifting, any business soon slackens if it lacks innovation. However, as in the high-growth era, if new technologies are developed only from the current ones, this may result in wasting time, capabilities, and funds. In advanced economies, customers do not merely want to possess things. The requirements for new large markets are efficiency, effectiveness, satisfaction, a pleasant experience, convenience, and other aspects that match the prices. Of course, because many companies give customer satisfaction through concrete products, this does not mean a decrease in the importance of the products themselves and innovations in the ways of manufacturing them. However, as before, if the existing performance is simply improved on, if a function that is a little more convenient is added, or if the cost is lowered a little, it is difficult to continue to satisfy customers. Partial optimization of the technologies and products does not work. It is necessary to create true value for customers as a form of total optimization.

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Part 1 Overview and Characteristics of P2M Chapter1 Introduction (1) Essential Innovation In the Japanese society, human mobility is relatively low. This has a significant impact on the effective management and unification of an organization through the sharing of implicit knowledge. On the other hand, the sharing of “common knowledge” and a uniform sense of values within an organization gives stability, but decreases ability to respond to change. Although there are exceptions, this tendency becomes stronger as the size of an organization becomes larger. What innovations should be made by increasing sensitivity to changes? How should innovation occur? What value should be provided to customers by such innovation? The first issue is to find out the nature and goal of each innovation. (2) Business Model and the Creation of Systems How does a company gain results from a realized customer value? This requires the establishment of ingenious systems for gaining profits (a business model) at an earlier stage and the rapidly repeated innovation of the mechanism. Rival companies think in the same way and knowledge is highly fluid. If a company is behind its rivals, it will lose the market and waste innovations made through considerable effort. This does not mean gaining no profit, but means losing the amount of the investments and great opportunities. It is essential not only to innovate regarding products, but also to create various systems for supporting the business model and opening up a market, such as the production process, supply chains, distribution channels, and service networks. Public organizations also need to create various systems for carrying out policies. The processes for creating each system are usually carried out as a project. (3) Development of Human Resources (Mission-performing Professionals) The most important element of the prosperity of a company or organization is human beings all through the ages. From the ages of Henry Ford and Konosuke Matsushita to the age of Steve Jobs, many famous industrialists themselves illustrate the importance of human beings as management resources. In the case of Japanese-style organizations, what is highly important as management resources is the power of their human networks, including not only top executives, but also senior and middle managers. To adapt themselves to the changing times, companies need to ensure that these people understand strategic issues designed by industrialists and improve their practical ability to understand innovations and create systems as described in (1) and (2) above. An operational project, which repeatedly manufactures a certain product or provides a certain service every day, is important as the basis for production activities. With regard to such business activities, the importance of the “administrator” who controls deviation from standard procedures and norms is clear. If business activities center on a project, although such administrative work is important in a sense, mission-oriented professional managers are essential to preparing a zero-based plan from no standards and to change the policy flexibly if needed during the processes of carrying out the plan. The original meaning of “innovation” is not so much “producing something new (object)” as “making myself (subject) new.”2) In other words, “creation is nothing other than self-transformation.” In this sense also, P2M’s viewpoint on the development of human resources-that is, requesting program managers to assume an attitude of study for improving themselves-is important.

8

Part 1 Overview and Characteristics of P2M Chapter1 Introduction P2M translated a program mission indicated by an organization’s strategy into a guide to establishing guidelines for developing processes for essential innovation, a way of thinking and method for creating systems, and methods for developing the human resources necessary for current business performance.

5. Fields Where P2M Can Be Used P2M can be used for not only traditional infrastructure and the construction of facilities, but also industries and public services. Exhibit 1-1-2 summarizes the main fields. Field

Main concrete examples

Classification by industry National traffic and transport systems; lifeline (electricity, water, gas, telecommunications) systems; national safety and defense facilities; public and social service facilities; urban and regional development; flood control, disaster prevention, and environmental conservation systems; reconstruction from disasters

1

Infrastructure

2

Resources and energy

3

Manufacturing

Machinery manufacture; electronic equipment manufacture; steel and metal manufacture; chemical manufacture; food manufacture; medicinal chemical manufacture

4

Selling, distribution, services

Retailing; transport and distribution; Internet shopping services; telecommunication network services; various online services; games and electronic books; entertainment and sports events; various charge systems; new business models

5

Social and industrial engineering

Social development; energy and resources development; planning, design, construction, operation, maintenance of production facilities

6

Administration

Government agencies; local government policies, development strategies, and industrial strategies that require high mobility; multiple issues across government agencies, etc.

7

International cooperation

Official development assistance; technology transfer; economic and social development of developing countries through international cooperative development; development of human resources; organization reinforcement, etc.

8

Education, medical care

University reform; educational reform; medical care and hospital systems

Oil, natural gas, electric power development; mineral resources development; oil refining, petrochemical, chemical, metal refining, electric power, nuclear power plants; storage and distribution systems; renewable energy plants; seabed resources development; energy saving

Classification by program mission (or issue) 9

Management reform; organization reform; reengineering; corporate merger; Business creation, business separation/combination; creation of new businesses; creation of new management reform markets; PFI; ventures

10

Product development, production reform

Product development; drug development; materials development; open-modular production; supply chain reform

11

Production facilities

Various production plants/facilities; distribution system; production system reform (automation/intelligence systems, virtual factory)

12

Research and development

Advanced research (e.g. supercomputers, use of super conductivity, iPS cell research/application, driverless driving); space exploration; nuclear fusion, etc.

13

Community

Various events; life support projects; management of volunteer groups; regional development/revitalization; disaster prevention security systems

14

Digital information

Systems development; systems integration; creation of IT solutions; various financial systems

Exhibit 1-1-2 Main fields where P2M can be used

9

Part 1 Overview and Characteristics of P2M Chapter 2 Structure of the P2M Guidebook (3rd Edition)

Chapter 2 Structure of the P2M Guidebook The P2M tree in Exhibit 1-2-1 shows the structure of the P2M Guidebook. Compared with the last edition, this version has updated the knowledge domains to make some domains clear and increase domains and to make the structure easier-to-understand. (1) Part 2, Program Management, more clearly explains the processes for integration management (such as mission profiling) and the mutual relationships among strategic management, risk management, and value assessment management, all of which are closely related to integration management. (2) The structure of Part 3, Project Management, has been considerably revised by reference to trends in ISO’s international standardization.*5 This makes it easier for project managers who want to study P2M Project Management to understand the relationship between programs and projects. (3) The P2M Guidebook further provides three domains of knowledge to support the planning and management of program management and project management. They are: Part 4, Business Management Base, explains strategies, organization, funds, and information systems as business management infrastructures. Part 5, Knowledge Base, explains the basic knowledge that project or program managers need to know to achieve their mission based on the knowledge described in Parts 2, 3, and 4, professional knowledge, and practical experience. (4) Moreover, project/program managers are high-tier professionals who have practical abilities supported not only by knowledge, but also by behavior. Programs and projects can be carried out only if they are based on such management talents. Part 6, Competence Bases of Human Resources, explains the concept of practical management ability, the most basic leadership and communication ability for supporting excellent organizational activities, and the basic attitude that managers should assume when confronted with business issues.

-----------------------------*5 ISO21500 “Guidance on Project Management”

10

Part 1 Overview and Characteristics of P2M Chapter 2 Structure of the P2M Guidebook (3rd Edition)

Exhibit 1-2-1 P2M tree

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Part 1 Overview and Characteristics of P2M Chapter 3 Business, Program, Project

Chapter 3 Business, Program and Project Because programs and projects correspond to business as not usual parts – that is, strategic or transformative parts – of business activities, it is important to understand them in relation to the whole business context. This chapter explains the relations among business, programs, projects, and operations. Business, programs, and projects each have a hierarchy and are activities that have missions and strategies. In addition, this chapter elaborates roles and characteristics of the management of programs and projects.

1. Business Management Whether private or public, any company has the mission of the foundation such as founder’s belief non-profit organizations and government agencies also declare the mission to be carried out. That is, a mission is a declaration of the functions to be performed of that particular organization in the society. With a business company, its mission is to become useful in society directly through the creation of customer value and indirectly through securing the work and welfare of the employees, the payment of dividends to shareholders and taxes from profits, and other social and environmental contributions. Of course, what customer value is to be created varies among companies and reflects each company’s uniqueness. The direct mission of not-for-profit bodies and other non-profit organizations (NPOs) is to create value and provide it to the members, while their indirect mission is to make a contribution to the society and the environment. The central mission of government agencies is to protect the life of its nationals, enhance economic growth, and all in all support the maintenance and development of the society. They construct and provide the infrastructure through public investment and provide education, welfare and other social maintenance services through public consumption. Organizations that have not concretely clarified any mission should have a certain role in society. If not, it is difficult for them to continue to exist. Conversely, it can be said that an organization is a means to achieve a mission. Generally, companies achieve their mission on the assumption that they can continue to exist and grow. This is the reason why they are called “ongoing concerns.” As part of this sustainable existence and growth, companies start, carry out, or discontinue each business in accordance with their mission. This is also true for nonprofit organizations and government agencies. Business refers to a group of activities that produce tangible or intangible value by inputting funds and labor. Types of business include: for-profit, not-for-profit, governmental, public-private partnerships and NGOs. The following are examples of a business:

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Part 1 Overview and Characteristics of P2M Chapter 3 Business, Program, Project ● Manufacturing and selling a group of products (profit-making) ● Building a bridge and having the users pass over it free of charge (public) ● The cooperation of several companies in developing a new market or technology (joint) Among the activities that constitute a business, those that should be repeated stably are called operations. For example, the production, distribution, and sales carried out by manufacturers are operations. If operations are repeated, resulting in the accumulation of learning effects and knowledge, the efficiency and performance of the business will be improved. Therefore, the sustainability and stability of the business are most important. It can be considered that operations are “work in which efforts are made that do not finish.” There are three main factors that directly surround a business. ● Target demand (market) ● Available resources and capabilities ● Rivals To make business sustainable in constantly changing circumstances, it is necessary to be able to accurately assess the state of the above-described three factors at any one time and carry out measures to ensure they are advantageous for the business. Concretely, such measures include the development of new demand, the acquisition of resources and capabilities, and the establishment of a competitive advantage. Such activities require characteristics that are not repetitive but innovative – that is, unprecedented and creative. Business strategies give these activities guidelines and direction (for details, see Part 4). Activities that greatly change the business situation and solve issues are temporary in principle. They themselves end when the goal is achieved. Such a type of activity is called a “program” or a “project.” It can be said that a program or project is “a group of activities undertaken to achieve set results.” Of course, when a program is completed, new issue or goals may arise. However, each activity ends and the temporary organization established for the activity is disorganized. Although small improvement activities are incorporated into an operation, the operation itself cannot achieve great innovation to solve issues. Innovation requires temporary enterprise called a program. However, the operation department can temporally take charge of a certain part of program implementation. In this way, a business can continue to exist and grow through the combination of operations and programs/projects for dealing with changes.

2. Hierarchy of Business Activities Companies, nonprofit organizations, and government agencies (hereinafter collectively referred to as “business entities”) carry out various businesses to realize their mission. Business entities classify their businesses into certain groups and manage them. For example, for the purpose of management, a manufacturer classifies its businesses into machinery manufacturing, electrical manufacturing, and raw materials manufacturing and further

13

Part 1 Overview and Characteristics of P2M Chapter 3 Business, Program, Project classifies machinery manufacturing into transport machinery manufacturing and construction machinery manufacturing. The whole image of a company’s businesses can be expressed in the form of a tree (tree diagram). However, because the classification or the hierarchy of the businesses is not equivalent to the company’s division of departments and ranks, such as department chiefs, division chiefs, and section chief, one must not be confused with the other. Each business has a mission and management issues, depending on the hierarchical level. Management problems mean the gaps between “to-be” and “as-is.” A program involves activities carried out positively for the solution of problems and innovation to achieve the mission of the business. A company plans a program according to the overall strategy and clarifies its mission through the program activities (mission profiling; see Part 2, Chapter 2). In addition, if needed, subordinate programs and projects are produced from the scenario for realizing the mission. Each subordinate program or project also has a mission. In this way, missions have a hierarchy. The expression of something using a tree diagram makes it possible to indicate the position by number. In the case of the example above, machinery manufacturing can be indicated as its level-1 business, and transport machinery manufacturing can be indicated as a level-2 business. In the same way, the whole business entity’s common management issues can be called level-1 issues, subordinate issues can be called level-2 issues, further subordinate issues can be called level-3 issues, and so forth.*6 When discussing a business or a program, it is important to discern at what level it is being discussed. For example, when discussing a level-1 problem, such as the establishment of an overseas plant, it is managerially unreasonable to be particular about a level-4 problem, such as how large the plant manager’s office should be. Some readers may feel that such a hierarchy is similar to WBS for a project (see Part 3, Chapter 4). This is because both adopt a structured approach whereby a huge object is hierarchically divided into easy-to-understand and controllable small parts.

3. Program Management and Project Management 3-1. Definition of Program and Project As described above, a program involves temporary activities produced positively according to a business strategy to support the sustainability of the business. The purpose of a program is to produce a certain business value in a complexly changing environment, adjusting the expectations and demands of many stakeholders. This is like a challenge aimed at a “moving target” and its governing properties are complexity, ambiguity, and difficult-to-measure uncertainty. Project management requires a style that is flexibly adaptive to changes in the situation and is innovative. The effectiveness that produces valuable results and the sustainability of the results is most important for program management. -----------------------------*6 To express levels, some debaters use not numbers but such terms as policy, strategy, tactics, etc. According to

14

Part 1 Overview and Characteristics of P2M Chapter 3 Business, Program, Project P2M, strategies have various hierarchies.

A project is work that extracts deliverables from a program and carries them out somewhat autonomously. A project clarifies the mission and the scope more than a program does. Because of this, it is easy to outsource it and measure risks. In addition, management skills have been sufficiently established to control the cost, quality, and time. Therefore, not only effectiveness, but also the efficiency and fairness of the implementation are important for project management. From the viewpoint of the projects it produces, a program has a lifecycle that contains the following three modes along the time axis. The created project model differs according to the mode. (See Part 2, Chapter 2, Paragraph 2-2-2) ● Definition project (scheme model) ● Implementation project (system model) ● Result (resources, capabilities, market) materialization project (service model)*7 The methods whereby a program puts the subordinate projects in motion can be roughly divided into the sequential type and simultaneous type.*8 The sequential type puts projects in motion one after another and aims to improve adaptability to uncertainty and minimize losses in the case of a failure. This type is suitable for emergent strategy realization. The simultaneous type carries out two or more projects in line with each other at the same time and aims at faster decision-making and the dispersion of risks through the division and empowerment of large-scale business. This type is suitable for deliberative strategy realization.

3-2. Purpose of Program Management and the Characteristics of P2M The purpose of program management under P2M is to realize useful and stable results efficiently and fairly through a combination of the autonomy of the subordinate projects, also calls component projects, and their organic integration with the whole. There are also several program management standards in the world. However, thus, too much importance is attached to simultaneous-type programs. While some standards regard a program as a “huge project” that has high affinity with a top-down organizational and deliberative strategy, other standards center on sequential-type programs and place importance on the “acquisition of capabilities” and change management.

-----------------------------*7 There are two types of service models. In the first model, when the service model project ends, all the businesses substantially end. Typical examples are the Olympics and other large-scale events, temporary business activities accompanying management innovation, and large-scale R&D programs, such as space development. This type also includes cases where it is necessary to shift to new systems one after another in a short time due to rapid changes in IT technology. On the other hand, there are many programs where, after the completion of a system model, a service model project, such as a trial run, training, or test marketing, is carried out for a certain period and then the business is transferred to the operational system. *8 In Part 2, the “cycle type” method is mentioned in addition to the “sequential type” and “parllel type.” The “cycle type” method can be thought as a kind of sequential type. After the completion of a series of the sequential type (first), they are shifted to a new series of the sequential type (second) in the same field.

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Part 1 Overview and Characteristics of P2M Chapter 3 Business, Program, Project The key points of P2M are to balance between the autonomy of projects and their organic integration through the inheritance of the characteristics of Japan’s business culture, where middle management is highly autonomous, and to be conscious of the lifecycle for their balancing from the viewpoint of a project model. According to P2M, the following equation holds here:

Value of program > ∑ (sum values of component projects) This means “the whole exceeds the sum total of the parts.” If the whole shows a new property that is unpredictable from its elements, this is called “emergence.” By accurately combining several projects, a program makes it possible to create a value that cannot be realized by each of the projects. Projects can be classified into two types: “internal projects,” that are devised and carried out by the performing organization itself, and “external projects,” that are carried out at the request of a customer. There are many companies that do not carry out any projects until they receive an order. This classification exists because projects (especially, system model projects) are suitable for outsourcing. In the case of an external project, if the results are accomplished according to the contract, and the project is completed, no work is left to the contractor. If something is left, the project management should be criticized as being “inefficient,” and the client will be dissatisfied. On the other hand, in the case of an internal project, when the project is completed, it ends with the delivery of the realized results to the operation. If the operations “after the project” are entirely the same as before, the project will be criticized as a failure. The contractor monetarily evaluates an external project by the profit, which is calculated by deducting the cost from the contract amount (total sales until completion). That is, it is possible to evaluate the project within the project period. This is not true in the case of an internal project. To evaluate an internal project, it is necessary to take into consideration the profits from the operations after the service model project. The monetary value of an internal project cannot be measured unless consideration is given not only to the project itself, but also the whole lifecycle of the program. Even in the case of an external project, however, if the developmental element is substantial, or if it is a non-physical project that cannot clarify the effects and contents of the results beforehand, customer satisfaction is based on the effects or value of the results. To put it the other way around, because an external project is an internal project for the business entity, collaboration between the business entity and the contractor is important for making efforts to acquire the final results all through the lifecycle. Generally, a program is a broader concept of a project and is understood as having two or more subordinate projects. However, if an external project does not have the three modes of lifecycle (definition, implementation, result), no superior program*9 exists in principle from the standpoint of the contractor. On the contrary, even if a program does not have any subordinate project, adaptive and innovative value-creation activities should be considered to be the same as a program.

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Part 1 Overview and Characteristics of P2M Chapter 3 Business, Program, Project

[ External Projects ] ************************************************************* Constructors, plant and heavy machinery manufacturers, space development equipment manufacturers, and ICT system architects run their businesses by concluding project contracts. These companies have technical knowledge and experience in various specialized fields and project management capabilities to carry out projects without fail. If a company plans to construct a plant, equipment, and an ICT system and, by using them gains profits from the mass production and selling of a product or provides a service to the customers, the company usually outsources the construction of the facilities and systems to external professional companies without constructing them by itself due to a lack of technical capabilities and experience. Such a project or program is called an external project (program) from the viewpoint of the contractor. On the other hand, from the viewpoint of a company that outsources the construction of systems, the outsourced portions are system model projects in the strategic program, and the completed systems are used for operations that create the values planned in the program through the company’s service model project or operations. In such a case, the ordering company’s program or project may be distinguished from the contractor’s and called “the owner’s program (project).” In the case of an internal program (project), because it may be completed in-house, it does not necessarily always include outsourced projects. ****************************************************************************************

3-3. Scope and Hierarchy of Project Management There is a relationship between the above-described hierarchy of activities and the scope of management. For example, although the project manager is responsible for the whole project, he or she does not give instructions about the internal process of the work package located at the lowest level of WBS (see Part 3, Chapter 4). How to carry out each work package is the duty of the department in charge of expertise in principle. Only if the problem to be solved occurs at the project level, does the project manager intervene. In contrast, project managers ordinarily do not have the power to decide whether the mission given to each project from the superior program is appropriate and whether to discontinue the project. Therefore, the direct scope of project management is between the mission and work package of each project. In many large-scale projects, the project manager appoints mid-level managers (such as the engineering manager) and transfers subordinate management to them. In the same way, the scope of program management is between the project problem (goal of change) and the subordinate projects. The inside of each project is left to the autonomy of the project. The program side only establishes, monitors, and ends the projects through integrated governance. Only when a problem occurs and affects the program level, does the program side intervene in the project to solve the problem. ------------------------------

*9 However, there are many cases where, because of a company’s superior strategy about the direction in which the company should develop as a project contractor, a superior program exists to judge whether to conclude a contract about the project and what technology to use for carrying out the project. In addition, such a project often becomes an object of multi-project management

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Part 1 Overview and Characteristics of P2M Chapter 3 Business, Program, Project

Exhibit 1-3-1 Scope of project management and levels of activities

3-4. Goals of Program Management and Project Management Although both programs and projects aim to create values, the two differ in their management goal. Exhibit 1-3-2 explains a conceptual model of the difference between them. In the case of a program, a program mission is materialized and detailed first to clarify how to realize what value in what timeline. This is carried out at the stage of a scheme model project in the Exhibit. Next, the plan is put into practice and a system is created to realize the mission through system model projects. This is usually carried out by combining plural projects. When the system is completed, the created system is used for production, sales, or service and finally realizes value through the service model projects (and operations). At the stage of program design, such a target value to be realized is specified and makes it possible to establish a program goal baseline. Because the initial stage of this curve is investment, the value to be realized (cash flow) is negative. Program management consists of activities that, at the planning stage, aim to draw up a plan as to how to make this baseline curve higher and feasible and, at the implementation stage, aim to maintain this curve by appropriately coping with great environmental changes and improve it whenever the occasion arises. On the other hand, at the actual stage of implementation, for many various reasons, such as environmental changes, schedule delay, or increasing costs, the value to be realized usually does not reach the goal baseline as shown by the dashed line. (If the value can be realized without any effort, it can be said that the object baseline was set optimistically.) In this situation, project management activities are carried out for the principal goal of matching each project’s outputs with the planned program goal baseline.

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Part 1 Overview and Characteristics of P2M Chapter 3 Business, Program, Project

Exhibit 1-3-2 Program management and project management

Exhibit 1-3-3 Continuous value realization by programs

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Part 1 Overview and Characteristics of P2M Chapter 3 Business, Program, Project Next, because the value that can be realized by a program decreases with the passage of time, it will be necessary to take measures (a program) for creating new value. Exhibit 1-3-3 shows the relationships required for realizing values continuously. An investment is made in Program 2 at the stage where Program 1 actively produces value (T in the Exhibit), and Program 1 is shifted to Program 2 before the value produced by Program 1 decreases. This Exhibit indicates a case where a product or service is renewed to become a more competitive one, such as a car model change or a series of Windows, a personal computer OS. When a product or service of a related but different type is inputted to sustain or expand the realized value, such as a complementary relationship between the sales of mobile digital music equipment and the provision of an online music sale service, the programs progress in line with each other without being replaced and aim to achieve both results and synergistic effects between the programs.

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Part 1 Overview and Characteristics of P2M Chapter 4 Characteristics of P2M Program Management

Chapter 4 Characteristics of P2M Program Management The main characteristic of P2M Program Management is to clarify the strategy proposition at the initial stage of a program under the leadership of not the top executive but the program manager.

1. Multiplicity of Contexts of a Program P2M specified four basic attributes of a program: multiplicity of context, scalability, complexity, and uncertainty (Part 2, Charter 2). In many cases, organizations (such as companies and government agencies) carry out programs to implement strategies aiming at their medium- to long-term success. Organizations also use programs to carry out large-scale project-type business that has a great influence on their fate. As described above, P2M calls the former strategic programs and the latter operational programs. For example, consider a strategic program that aims to realize the strategy proposition of “a new product A’s big success in the market.” The concrete form of the success varies. Various approaches can be adopted, such as the acquisition of a market share at a considerable low price, the acquisition of a high-end market share by offering high quality, the achievement of supremacy by the establishment of sales bases, the attraction of customers in cooperation with excellent manufacturers of supplementary products, and the conclusion of special relationships with manufacturers of key components. The above-described multiplicity of context of a program means that, in this way, a program includes various different contents at the initial stage. Under P2M, the program manager plays the leading role in finding out the essentials of success from among the various possibilities, such as what is and should be success in the program.*10 Of course, the principle is to understand from the viewpoint of the organization that this behavior is based on instructions or delegation from an executive or other superior, who has the official decision-making authority.

2. Sense of the Knowledge Necessary for Managers In Japanese organizations, it can be often seen that executives (such as the president and directors) direct subordinate managers to commercialize an innovative product or reform the organization as a multiple and ambiguous concept, such as problem consciousness, an ideal, a desire, or a “wish.”

-----------------------------*10 From the viewpoint of top-down program management, which differs from P2M, the program manager does not participate in decision-making on the concrete purpose and goal of the program, but is responsible for realizing the purpose and goal determined by the top executive and other top-level executives of the organization.

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Part 1 Overview and Characteristics of P2M Chapter 4 Characteristics of P2M Program Management

Managers think how to interpret the ambiguous directions and what concrete measures to carry out to achieve the mission. Nonaka et al. 3) assert that Japanese people’s traditional sense of knowledge places emphasis on the “whole personality” and that knowledge means wisdom that cannot be separated from an individual as a part of the whole personality. Western science has been developed with clearly defined conceptual knowledge – that is, formal knowledge and systematic logic separated from individuals. Both business economics and management exist in this tradition. On the other hand, Japanese management emphasizes “field sites” because it places importance on the direct experience and implicit knowledge of the individual concerning the recognition of knowledge. In this case, to establish a strategy, the top executive him- or herself selects one from among various possible strategic measures and directs a manager familiar with field sites to establish the strategic measure by the use of the manager’s wisdom. This is because the top executive thinks it difficult to know the situation of the field sites as clearly defined knowledge. The role of managers is to show the concrete direction of and carry out the strategic measure to realize the top executive’s ambiguous wish and produce valuable results, watching various complicated matters (such as the market, customers, competition, technology, risks, and the organization) that are difficult to use to create formal knowledge at the field sites and putting various first-rate types of wisdom together. Nonaka et al. have named such a management style “middle-up-down management” 4), which is different from typical top-down or bottom-up styles.*11

3. Essentials of Program Management This way of thinking is the basis for the Processes of P2M Program Management. However, P2M is a program management method that is not the same as middle-up-down management, which has a general management style. Although P2M Program Management has been explained as a series of processes that begins with the top executive’s multiple and value strategic mission concept, it is applicable to processes whereby an entrepreneur or the top executive of a small organization develops or carries out concrete strategic measures from the standpoint of program manager to realize his or her own vague ideal, idea, or other concept. Such cases may often seem top-down activities from their outward appearance. The essentials of P2M Program Management are not strategic purposes or goals clearly defined but the program organization’s setting up of strategic objectives and goals from a multiple mission concept under the leadership of the program manager and designing and carrying out a concrete program.

------------------------------

*11 Within the scope of P2M Program Management, a “middle” manager is not an executive, but is usually a top-class manager with a high level of authority in the workplaces that are familiar with the object of the program (such as the operations department).

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Part 1 Overview and Characteristics of P2M Chapter 4 Characteristics of P2M Program Management Needless to say, some Japanese companies have adopted a middle-up-down management style, while others have adopted a top-down management style. In the case of P2M, the concept of top-down program management is to begin program management at the stage of “program design” by omitting the upstream processes. On the other hand, some foreign organizations have adopted a program management style similar to P2M.

[ Case: Southwest Airlines ] *********************************************** Southwest Airlines (SWA) is a large US airline that has about 550 airplanes and runs 3,300 flights a day. The company is one of the first low-cost carriers (LCC). The soundness of its management is outstanding in the US and has been adopted as an excellent strategic case according to many business books. The company’s strategy has been explained as strategic measures that are excellent in terms of various methods, such as the following: its direct routes are point-to-point, not hub-and-spoke, which has been adopted by other large airlines; the costs are reduced by the use of a single type of airplane – Boeing 737; and the operating rate of the airplanes is greatly increased by a substantial reduction in the time between landing and takeoff, which is sometimes exaggeratedly called the ten-minute turn around. However, this is second guessing made after the company’s success. In reality, around 1967, when SWA was inaugurated, airplanes were regarded as “vehicles only for people who could pay high airfares.” At that time, three executives, including Mr. H. Kelleher (now CEO), had the idea of providing airline services that the general public could use at ease and purchased three B737 airplanes left unsold, and founded an airline business with three routes within the State of Texas. Therefore, SWA did not establish its strategy in a top-down way and started the business based on the strategy as told now. At first, there was nothing but a considerably uncertain dream at that time – that is, the provision of airline serviced with low airfares. To fulfill the mission that SWA itself established to realize the dream, the founding executives and the field workers practically developed essential measures for solving challenges at various stages, putting their wisdom and eagerness together. Today’s so-called “SEA’s strategy” was the total of the measures put together afterwards. Although many airlines were founded by imitating this strategy, the number of successful airlines is not so high. This is because they imitated the strategy only superficially. SWA is famous also as an extremely rare company that has publicly declared “the employees are the most important component.”

****************************************************************************

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Part 1 Overview and Characteristics of P2M Chapter 5 Capabilities for P2M

Chapter 5 Capabilities for P2M 1. Qualifications for Program Managers and Project Managers A program manager and a project manager formulate an appropriate project organization and accomplish the mission by the full use of expertise in program and project management. For this purpose, as shown in Exhibit 1-5-1, the manager needs to have the capability to carry out the program/project effectively and efficiently and achieve results without fail, using fair means.

(1) Due Diligence Due diligence refer to the program/project performing organization’s implementation of the program/project, taking into consideration conventional wisdom, ethical standards, and social receptivity, complying with the laws, regulations, and professional standards, and carrying out procedures that conform to international norms and standards. This makes it possible to fulfill social accountability. (2) Effective Performance*12 Effectiveness is related to the benefits or results gained from a program/project. In the case of a company, a result means an increase in sales, the performance of a newly developed product, the production capacity of a constructed plant, etc. At the stage of planning, what matters is how to plan feasible and high target results by devices made during the process of designing the program/project. At the stage of implementation, what matters is the ratio of achieved results to the planned results. (3) Efficient Performance Efficiency is related to the ratio of the resources inputs to the outputs. The main issue of a program/project is how to achieve the defined mission through the input of fewer resources. It is important to determine how to reduce unreasonableness, waste, and unevenness concerning various resources and time.

Exhibit 1-5-1 Qualifications for program/project managers -----------------------------*12 Drucker explains the relationship between effectiveness and efficiency using the following famous words: “Efficiency is concerned with doing things right. Effectiveness is doing the right things.” (P. F. Drucker, “Management: Tasks, Responsibilities, Practices,” Harper & Row, 1974, pp45)

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Part 1 Overview and Characteristics of P2M Chapter 5 Capabilities for P2M

2. Manager’s Work Professionals necessary for P2M as described in the preceding section are high-caliber managers who challenge the solution of multiple disciplinary and complex problems, responding to the demands of the present age. This requires the recognition of new values demanded by the customers and society, the planning of measures for realizing them, and moving the organization to realize them as real values. In many cases, it is necessary to move many related people directly or indirectly and carry out the measures efficiently and effectively in a short period. Therefore, the contents of a manager’s work can be summarized as shown in the following page. Among others, program managers are expected to have both broad background knowledge and deep expert knowledge about their work. ●

Determine and indicate the direction of the organization.



Make and carry out a plan to move the organization



Utilize people and their abilities.

Exhibit 1-5-2

Manager’s Work

A program/project manager’s work is to have experts in various fields carry out activities in the same direction. These experts are sometimes not included in the system under the direct command of the manager. In this sense, it is especially important not only to make and carry out a plan, but also have the wisdom and skills to utilize various people’s abilities.

3. Capability For the purpose of P2M, capability is an individual’s ability necessary for satisfying the qualifications for program/project managers shown in Exhibit 1-5-1 and the above-described work of a manager. The most fundamental basics are “systemic domains of systematic knowledge,” such as expert knowledge in the business domain and basic knowledge on program/project management, and “critical thinking ability,” which makes various inferences and judgments based on systematic knowledge. At the same time, important abilities are “skill in management activities” to move the organization – that is, many people – by the use of knowledge and the “basic attitude” of the individual concerning responsibility for the results and strongly-motivated activities. To make full use of these abilities, it is important to have experience in carrying out activities by using them and gaining the predicted results. It is the repeat of higher-level experience that brings about confidence in the manager’s own judgment and leads to the acquisition of high-level abilities. The objectives of P2M are innovation and the creation of new value. Therefore, abilities related to creativity and the ability to deal with implicit knowledge and formal knowledge are included extensively in the framework of the above-described capabilities. For the details of these capabilities, see Part 6.

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[ Ethical Guidelines for P2M Professionals ] ********************************************** Program managers and project managers are responsible for not only grappling with operations from a high viewpoint and a wide perspective but also achieving results for society and customers and acting according to ethical norms. The Project Management Association of Japan (PMAJ) has specified “Professionals’ Ethics and Responsibilities” (improvement of trustworthiness, ethical responsibility, accountability, and responsibility for achievement) in its “Capability-based Professional Certification Guidelines (CPC Guidelines),” which concern the qualifications for project managers registered (PMR) (established in 2004). Ethical responsibility especially includes conscientiousness, fairness, maintenance of expertise, duty of due care, and duty of secrecy. Although the rules govern persons certified as PMR, these are program managers, project managers, and persons engaged in the practical affairs of a program/project. PMAJ continuingly reviews and revises the ethical guidelines, monitoring the changing social and global situation. Check for more information on the homepage of “Project Management Association of Japan(PMAJ)” **********************************************************************************

[ References ] 1) Carliss Baldwin and Kim Clark. (2004). Dezain Ruuru [Design Rules]. Tokyo Japan. Toyo Keizai. 2) Yamaguchi. (2013) Sekaide Mottomo Inobeitibu na Soshiki no Tukurikata. [How to Form the Most Innovative Organization in the World]. Tokyo, Japan: Kobunsha. p. 296 3) Nonaka & Takeuchi. (1996) Chishiki Souzou Kigyou [The Knowledge Creating Company]. Tokyo, Japan: Toyo Keizai. p. 8 4) ditto., p. 24

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Program & Project Management for Enterprise Innovation

Part 2 Program Management Introduction Outline Chapter 1 Programs and Program Management Chapter 2 Program Integration Management Chapter 3 Program Strategy and Risk Management Chapter 4 Value Assessment Management

Copyright © 2017 Project Management Association of Japan

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Part 2 Program Management Introduction

Introduction Outline Part 2, Program Management, discusses program integration management, which is carried out according to the program mission*1 established by the corporate strategy or the business strategy. Program integration management is a series of management processes that are carried out one after another in chronological order. It consists of three processes: mission profiling,*2 program design,*3 and program execution integration management. The processes of program integration management require appropriate decision-making by the program manager in various situations. Regarding this decision-making as core knowledge and skills that support the program throughout the program period, this part describes strategies, risks, and value assessment in relation to the processes of program integration management. Chapter 1, Program and Program Management, discusses the relationship between the program and the management and business strategies and the outline corporate strategy, program mission, and program execution. After describing basic items, such as the definition and classification of programs, basic attributes, and the definition of program management, program management attributes, such as lifecycle,*4 phases,*5 phase gates,*6 and program organization are given.

Exhibit 2-0-1 Structure of program management -----------------------------*1 Program mission: what should be realized by the program *2 Mission profiling: creation of a scenario to clarify the program mission, describe what the program should be, and specify how to reach there from what it is now. *3 Program design: the process where the program architecture (structure of a group of projects) is designed based on the results of the mission profiling *4 Program lifecycle: the whole set of phases that constitute the entire process of conceiving, planning, designing and carrying out the program

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Chapter 2, Program Integration Management, discusses the processes of program management by dividing the whole into three sections: mission profiling, program design, and the integration management of program execution. The first section outlines mission profiling and describe the mission statement, an analysis of relations among values, and the scenario statement. The next section profiles program design and explains the program architecture*7 and the program plan that combines the design and the architecture. The basic process is explained using cases about the processes of creating two types of programs: strategic and operational ones. The third section describes the process of the integration management of program implementation. What have been mentioned heretofore are the basic processes of program integration management. In addition, the key points of multi-project management will be described by its comparison with program management. Chapter 3, Program Strategy and Risk Management, explains program strategic management and program risk management among the common elements that support the process of program management. Program strategic management deals with how to incorporate the program strategy into the program goal and how to carry out the program strategically. In program risk management, the characteristics of program risks and risk management are summarized. Chapter 4, Management of Value Assessment, discusses program values: ways of thinking about program values, corporate accounting, present values, the process of evaluating intangible assets, and value assessment indicators to deepen your understanding of values and value assessment.

------------------------------

*5 Phases: periods divided by milestones at the stage of carrying out the program *6 Phase gate: a checkpoint that enables the program to pass on to the next phase if the prescribed conditions are fulfilled, or an official decision-making process that the organization carries out to check whether it is appropriate to advance to the next phase *7 Program architecture: structural form allotted to two or more projects to carry out the process of achieving the mission

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Programs and Program Management

Chapter 1 Programs and Program Management This chapter describes the basics of programs and program management. A business strategy is an expression of what value an organization provides to society and how the organization provides it according to its philosophy. A program is established to carry out the business strategy. Therefore, this chapter will begin with a description of the relationship between an organization’s strategy and its programs. Then, the definition and classification of programs, an outline of program management, program lifecycle, and the concept of program organization will be described. Although there are several patterns of program creation processes, depending on each organization’s role and type of industry, the most ordinary pattern will be described.

Exhibit 2-0-1 Structure of program management (redisplay)

1. Organization’s Strategy and Program 1-1. Toward the Presistent Growth of the Organization Whether profit-making or not-for-profit, any organization has a certain raison d’être. In the case of a company, the organization’s reason for or purpose of its existence is called the corporate philosophy or management philosophy (hereinafter referred to as “philosophy”). Philosophy is an expression of the founder’s long-range plan, which incorporates the organization’s wish for a semi-permanent contribution and growth in society. The top executive carries out programs to put the philosophy into practice, using the organization’s advantages and devising strategies for keeping with up or being ahead of occasional environmental changes. Therefore, the organization, mechanism, and systems for putting strategies into practice also need to be newly created according to changes in the times and be developed and revised.

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Like corporate organizations, non-profit-making organizations also carry out their strategies according to their circumstances as programs, based on their philosophies. If the results create social value, it can be said that organizations have continuous existential value.

Exhibit 2-1-1 Corporate strategy, environment, and strategy

1-2. Relationship between the Strategy and the Program A program is a set of several projects organically combined to realize the program mission. To realize the business strategy, it is necessary to appropriately carry out a program that consists of several projects, identifying the program mission from the coporate strategy and the business strategy. Programs carried out by companies can be largely classified into two types: projects whose concept gradually becomes clear from an ambiguous and abstract initial concept of corporate strategy and projects whose concept is clearly shared among the stakeholders from the outset. Under P2M, the former type is called a strategic program, while the latter type is called an operational program. Generally, a company’s strategies can be divided into a coporate strategy and a business strategy. The coporate strategy concerns how to allocate the management resources into the business fields. The top executive determines how to input resources to realize the philosophy, considering total optimization. If a business is regarded as a combination of a market (or customers) and the product/service provided, many companies simultaneously manage several businesses and always need to decide how to allocate limited management resources. In addition, if a company is carrying out many businesses, it may have established a headquarters and branches as subordinate bodies. In such a case, a strategy is needed to allocate the management resources to relevant executives of the headquarters and the branches.

Exhibit 2-1-2 Relationship between the coporate strategy and the programs

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After management resources are allocated to the headquarters and the branches through these processes, each business department develops a business strategy. Generally, to put the whole corpoate strategy into practice, the business departments plan and carry out strategies for carrying out the businesses on the assumption that it is possible to use the management resources allocated by the superior management. What are concretely put into practice are the selection and creation of markets and customers, the ensuring of the superiority of the product or service provided, and improvement in the excellence of the operational processes and in the levels of the organization, the staff, and the resources. That is, strategies are carried out after the establishment of the most appropriate measures from the limited available resources. After program mission is gained from the business strategy as a concept, a program is created to carry out the program strategy. A program is a large group of innovative enabling mechanisms and means composed as a concrete and practical process to realize the program mission.

1-3. Relationship between the Program and the Projects The other side of the coin is that the strategy is the most basic plan of an organization whose purpose is to optimize long-term success. The essence of a strategy is to narrow down what should be done, inputting its own limited resources most effectively and making efforts to achieve the management purpose through their efficient use. In addition, a strategy needs to change flexibly to keep up with environmental changes, such as these on customers and competition. The program encourages the program stakeholders to participate in the implementation of the strategy, clarifying a group of projects as mechanisms to be carried out according to the essence of the strategy through program design and visualizing their architecture. In this process, the necessary management resources must be examined carefully and inputted effectively and efficiently.

Exhibit 2-1-3 Process image of a strategic program

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Exhibit 2-1-3 shows a series of processes based on the corporate strategy, including the business strategy, the program mission, the programs, the architecture for the formation of a group of projects, the creation of programs to be executed, program execution, and the results and the evaluation of them. The implementation of these processes requires organizational ability, including governance. A program is a set consisting of several projects organically combined to realize the program mission. Although the organization’s management philosophy is not changed, the management environment changes. Therefore, the corporate strategy should always keep up with the changes. Programs can be classified into the operational type, whose concept is clearly shared among the stakeholders from the outset, and the strategic type, whose concept is made clear gradually from the ambiguous and abstract initial corporate strategy. A strategy creates programs, deriving an intended concept as several program missions. A program is a large group of measures visualized as a concrete and practical process to realize the program mission.

2. Definition and Classification of Programs 2-1. Definition of a Program A program is a set of several projects organically combined to realize the program mission. A program consists of activities whose mission is the creation of values and requires management that includes not only the construction or development of complicated or huge systems but also the total evaluation of even the values realized during the process of using these systems regularly. In other words, although a program necessarily includes several project operations, it may also include operations regarded as regular operations instead of projects from the viewpoint of the traditional project management. Under P2M, the operations are modeled as a service model project, and a form that combines the preceding scheme model project for establishing a concrete project plan with the system model project for developing and constructing systems is defined as a typical model of program. For example, a product or service should always be most appropriate through management evaluation in relation to changes in customer needs and competition instead of being developed and completed according to the initial plan. In addition, continuous innovation is necessary for organizational power, including operational processes, systems, human resources, and other aspects necessary for producing a product or service and providing it to customers. In this way, it is necessary to carry out the scheme model project and the system model project to create new value continuously from the value found through the regular operations – that is, the service model project.

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Although leads to concern that a program must have a certain scale, this is not necessarily true. Although the business strategy often takes environmental changes into consideration and has the organization participate in the achievement of the assumed ideal according to plan, as shown in the initial stage for the creation of a new business for example, there is a “creative” type that starts with noticing something at a workplace or a customer finding small needs and then develops it into the creation of a large business. Even if this creative activity is small in scale, but has a mission that greatly affects management activities and consists of several projects, management is necessary as a program.

2-2. Classification of Programs As described in 1-2, Relation between the Strategy and the Program, programs can be classified into a strategic program and an operational program. “Exhibit 2-1-4 Types and Examples of Programs” shows concrete examples. As a strategic program can be called a creative or reformative program, the program has to start from situation in which there is no experience in carrying out similar programs. Therefore, it is often necessary to elucidate the program in accordance with the business strategy at an earlier stage. On the other hand, in the case of an operational program, the parties concerned often have experience in carrying out similar programs and generally have a common understanding.

Exhibit 2-1-4 Types and examples of programs

2-3. Basic Attributes of a Program A program aims to solve problems by developing several projects from the program mission about which the top executive has complicatedly intertwined interests and demands. Such a program has the following four basic attributes:

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Exhibit 2-1-5 Basic attributes of a program The multiplicity of contexts of a program means that the mission concept of the initial program includes variously intertwined ideas. Political, economic, social, technological, ethical, and various other elements are integrated into a program, reflecting the complicated social environment in which the organization exists. Because of the combination of these elements, programs usually have their scale, domain, and structural scalability. Although a program starts with an abstract concept of the program mission, the concept gradually become concrete with the progress of the program lifecycle. At the same time, because of the combination of many projects, the program internally has highly detailed complexity. On the other hand, during the long-term process of execution, the program is greatly influenced by dynamic complexity caused by the interaction between the program and external environments, such as the market and competition. Moreover, the program becomes highly uncertain because the program is planned to bring about some changes in the current situation and is exposed to environmental changes for a long time. A program is a set of several projects combined organically. A program may include operations. A program has four basic attributes: “multiplicity of contexts,” “scalability,” “complexity,” and “uncertainty.” Multiplicity of contexts means that the concept of the program mission is complicated and includes various ideas and demands. Scalability refers to the possibility that the scale, domain, and structure of the program will expand or may shrink. Complexity refers to the structure’s becoming complicated because of the combination of and interaction among many projects or the behavior’s becoming complicated because of the effects of external environments, such as the market and competition, during the long-term process of program execution. Uncertainty is caused by the planning of the program mission (changes) and the long-term effects of environmental changes.

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3. Program Management 3-1. What is Program Management? Program management aims at achieving the program mission for the implementation of the business strategy. Because of this, program management consists of a series of processes to define and carry out several relevant projects and achieve the creation of value. First, the program mission is multiple and ambiguous and it is uncertain as to what should be concretely achieved. In addition, it is unclear how to deal with environmental changes. Program management starts with such an initial stage, constructs a program, which is a mechanism for autonomous decentralization and integration, defines projects as concrete enabling units based on the program, and draws up and carries out an implementation plan for each project and the whole program. In the case of a strategic program, program management starts with the derivation of the program mission through the analysis of the external macro-environments in which the program exists (such as political, economic, social, and technological environments), the market environment, and the competition environment as well as the inspection of the compatibility with the company’s internal governance (including product or service power, sales power, production power, organizational power, mechanisms, and systems).

3-2. Program Integration Management Program integration management is to plan and design projects and control their implementation so that each of them can be managed autonomously and be put together to achieve the program mission. Program integration management can be divided into three stages: the stage of identifying the program mission clearly to deal with the external environments; the stage of establishing the structure and encouraging the participation of the parties concerned to carry out the program; and the stage of carrying out the program. These processes are greatly influenced by the internal environment, such as the organization’s management resources. In addition, a strategic approach is necessary for adaptation to external environments.

Exhibit 2-1-6 Concept of program integration management

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In P2M, as shown in Exhibit 2-1-6, the concept of program integration management consists of three processes: 1) mission profiling for the concrete identification of the program mission; 2) program design for the clarification of the program structure; and 3) integration management of program implementation for the implementation of the program. Details of the program integration management processes are given in Chapter 2. 3-2-1. Mission Profiling Mission profiling is a process that is carried out at an earlier stage of a program and consists of the following: analyzing the business strategy; clarifying the program mission to carry out the strategy; and developing a scenario as to how to reach “what the program should be” from “what it is” now. At this stage, the concept of value to be created by the program gradually becomes concrete from the abstract concept at the initial stage. In the case of a strategic program, the program mission starts with an extremely abstract expression, such as the “reform of XX business” or the “creation of a new business.” Based on this, “an image of the reformed business” or “an image of the created business” is produced and develops into a concrete scenario that reflects the strategy. If mission profiling is revised due to an environmental change during the progress of the program, it should be repeated to maintain the program mission. 3-2-2. Program Design Program design is the design of program architecture (structure of projects) based on the results of the mission profiling. Each of the component projects and the relationships among them are designed so that the program mission can be achieved, taking also into consideration the uncertainty likely to be caused by structural or situational changes in the program environments. The program design starts with the definition of the period and processes of the final scenario developed and examined through the mission profiling. Thereafter, a group of necessary projects is created and structured so that the whole structure of the program becomes visible. Subsequently, the feasibility of the program is examined and a program plan is compiled. The program plan clarifies the concrete goal of the program and the necessary activities. In addition, the plan enables the participants in each project and the surrounding participants to understand their roles, their positions in the program, and the relationships with the others. 3-2-3. Integration Management of Program Implementation The integration management of program implementation is planned during the mission profiling. It is a process that aims to ensure the realization of the value planned during the program design. Because a program takes a longer time than a project, it is accompanied by environmental changes. Therefore, it is necessary to incorporate a strategic approach in the program itself. The results of program implementation should be confirmed in comparison with the initial plan at the end of the program.

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3-3. Guidelines for Program Integration Management Activities Effective performance of program integration management requires the strategic management, risk management, and evaluation management of the program. This will be described in Chapters 3 and 4. Program integration management activities are based on the following four basic guidelines: (1) Zero-Base Idea Program integration management often requires the construction of a framework based on new ideas to solve complicated problems. For example, the idea of what the program should be requires a discontinuous approach that is not a mere expansion of the present condition, and necessitates a zero-base idea. (2) Flexibility toward Changes Program integration management requires a rapid and timely response to changes by shifting to alternatives and making a decision about suspension or discontinuance through quick responses to environmental changes.

Exhibit 2-1-7 Guidelines for program integration management activities (3) Sharing of Knowledge and Information Program integration management needs to enable the stakeholders to communicate with each other openly and share knowledge and information so that the program staff members can improve their practical abilities. For this purpose, it is also important to understand the differences in organizational culture among the stakeholders. (4) Confirmation of Values Program integration management needs to evaluate timely how the needed program values are created while responding to environmental changes, and take appropriate measures based on the assessment results. Therefore, it is necessary to construct systems for such evaluation and measures.

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Program management aims at achieving the program mission elicited to carry out the business strategy. Program integration management has three processes: 1) mission profiling for the identification of the program mission; 2) program design for the clarification of the program structure; and 3) program implementation management for the implementation of the program. Four guidelines for program integration management are; 1) zero-base idea; 2) flexibility toward changes; 3) sharing of knowledge/information; and 4) confirmation of the value.

4. Lifecycle 4-1. Program Lifecycle Even though it looks that the way of thinking considering about the program lifecycle and its management is similar with that of project in case catch the program as "concept - plan execution", however, the life cycle of the program is not a mere bottom-up combination of project lifecycles, and set the life cycle of the project according to the life cycle of the program. A program has the mission of creating value directly connected with the business strategy and is a long-term activity on a comparatively large scale, it requires the following device: The lifecycle of a program in progress exists as a combination of the lifecycles of the constituent component projects, and established to achieve the program mission exists beforehand, the lifecycle of each project is planned in accordance with the lifecycle of the program.

4-2. Phases and Phase Gates The lifecycle of a program is appropriately divided into phases from the viewpoint of organizational management. A phase gate is established for each phase to examine and approve the consistency with the business strategy. The program is approved if it passes all the phase gates. Because there are various kinds of programs, the phases of the lifecycle of a program cannot be defined uniformly.

A phase gate is a separation between phases and a “checkpoint” that the program cannot pass unless it fulfills the prescribed conditions. Such checkpoints include the top executive’s approval, a financial judgment, and a design review, which should be set up in accordance with the actual situation of each program.

Although it looks like similar the lifecycle of a program and the management of the lifecycle that about project management, however, the life cycle of the program is not a mere bottom-up combination of project lifecycles and the devices are necessary for examining and confirming the consistency with the business strategy from the managerial viewpoint. A phase gate plays the role of a “checkpoint” that the program cannot pass unless it fulfills the prescribed conditions.

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5. Program Organization 5-1. Establishment of the Program Organization A program organization is established to carry out a program. Although the organization consists of a small number of selected members initially, members are added whenever needed. As a result, the number of members is usually large at the stage of carrying out several projects. A program is closely related to project-type operations with a time limit and regular operations. Therefore, the organization that carries out the program contains the characteristics of both types of operations. In addition, because the completion of the program mission takes a certain period, it is necessary to restructure the organization as stages advance to make it sustainable for the medium or long term. The program organization does not exist in a clear form from the outset. Consideration cannot be given to what the organization should be until the program design makes the whole structure of the program visible after mission profiling. The program organization consists of the organization in charge of the projects that serve as the main activities for the implementation of the program and the organization that carries out personnel, accounting, and other logistic activities. The operating mode of the program organization is essentially the same as the project organization. However, because programs are characterized by a close connection to the business strategy, it is necessary to pay attention to the fact that the program organization frequently has contacts with the management organization. The program manager monitors whether the organization appropriately carries out activities for realizing the business strategy, which is superior to the program, and revises the direction of the program whenever needed. For this purpose, the program organization needs to arrange the authority of the organization members and establish a system for communicating information mutually among the members and with the upper organizations. The program organization also needs to establish a system that makes it possible to make strategic decisions according to the progress of the program.

Exhibit 2-1-8 Example of the program organization

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5-2. Role of the Program Manager A program has the function of interfacing with the upper organization’s strategy and the function of managing the subordinate projects. Therefore, the program manager’s role is to guide the direction of the strategic measures concretely and carry out the program steadily (see Part 1, Chapter 4). In other words, the program manager needs to derive the program mission from the level of the requirements for the upper organization’s strategy, integrate the various discipline organizations and persons participating in the program, and motivate them to respond to rapid environmental changes in a timely and appropriate way. On the other hand, with regard to projects, because their goals are usually specified clearly, the program manager needs to make a highly reliable plan and budget, select the most suitable organizations and human resources for carrying them out, and manage the projects closely without fail.

5-3. Common View of a Program The common view of a program means the common understanding about a program to be shared among the members of the program organization and the relevant stakeholders. When stakeholders participate in a program, they need to understand the total optimization of the program mission and the background and have a common understanding of how the program architecture and the program implementation are evaluated. In addition, the common understanding is promoted through a free exchange of information in a common place (community) that includes the program implementing body. A common view of a program consists of three types of common understanding: The first type consists of understanding the process of mission profiling from which the program mission has been elicited and a deep common understanding of the mission that the program should achieve. The second type is a common understanding of the program architecture created through the process of program design. To understand the program architecture is to recognize one’s own role in the program implementation and understand the total optimization. The third type is a common understanding of how an evaluation is conducted during program implementation, including evaluation indicators and timing. This gives a certain direction to the behavior of the stakeholders. A program requires the autonomous decentralized behavior of each terminal organization, which has the risk of specific optimization. Although the risk can be treated by the governance system, such systems cannot cover all possible cases, which may decrease the organizational efficiency. The sharing of a common view makes it possible to give a uniform direction to each organization’s decision-making and increases the rate of keeping up with changes.

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The important role of the program organization is to monitor whether organizational activities are being appropriately carried out to realize the business strategy, which is superior to the program, and to revise the direction of the program whenever needed. The program manager needs to play the role of guiding the direction of strategic measures concretely and carrying out them steadily. A common view of a program means the common understanding about a program to be shared among the members of the program organization and the relevant stakeholders.

[References ] 1) Mikio Shimizu. (2010) Jitusen Purojekuto & Puroguramu Manejimento [Practical Project and Program Management]. Toyo Japan: JMA Management Center. 2) Ikujiro Nonaka (editor). Recruit Management Solutions Institute for Organizational Behavior Research (author), (2010) Nippon no Jizokuteki Seichou Kigyou. [Sustainably Growing Companies in Japan]. Toyo, Japan: Toyo Keizai. 3) Hiroyuki Itami. (2012) Keiei Senrayaku no Riron. [Logic of Corporate Strategy]. Toyo, Japan: Nippon Keizai. 4) Nomura Research Institute (author and editor). (2011) Toppu ga Kataru Jisedai Keieisha

Ikuseihou [ Interviews with Top Executives about Methods for Training Next-Generation Executives]. Tokyo, Japan: Nomura School of Advanced Management. 5) Hiroyuki Itami. (2005) Ba no Riron to Manejimento [Logic of “Ba” and Management] Toyo, Japan: Toyo Keizai.

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Program Integration Management

Chapter 2 Program Integration Management Program integration management is a series of management processes to carry out organizational activities for realizing the defined program objectives and goals. Program integration management defines the initial multiple and complex program mission as a group of concrete objectives and goals. Then, a group of projects is constructed as concrete business activities for realizing the purposes and goals, and a scenario is created to achieve the program mission. Next, program design is carried out to establish the program architecture as the blueprint for carrying out the program mission. This is a process of structuring the program with several projects and clarifying the mutual relationships and interfaces among the projects.

Exhibit 2-0-1 Structure of program management (redisplay) The integration management of program implementation, a process of integrating and carrying out several projects, has the function of achieving the program mission, although each of the component projects is carried out and updated autonomously under the program governance. All these processes manage the program strategy, the risks, and the evaluation assessment.

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Program Integration Management

1. Mission Profiling 1-1. What is Mission Profiling? Mission profiling is a core process of creating value through the program. It is a process of materializing and visualizing the initial abstract and multiple concept of program mission, taking into consideration the complexity of the environment, the constraints of the organization, etc. Mission profiling includes the development and creation of projects combined to create value peculiar to the program, deeply understanding the nature of the project strategy. Mission profiling interprets the purpose of the program mission and describes it as a “mission statement.” Based on this mission statement, what values are created and realized is described as a “To-Be” model. (For values, see Chapter 4.) After this, compared with the current “As-Is,”, problems in achieving “To-Be” are identified, consideration is given to what group of projects and what promotion system are most effective and efficient, and the results are stated in a scenario. “To-Be” is the objective as to what something should be, while “As-Is” is the present situation. If To-Be and As-Is are clarified, the gap between both will become clear, remedies can be found, and it will be clear what to do next. This way of thinking and method are used widely for organizational management and QC circles. For example, they can be applied to the reform of a business structure that requires company-wide management reform, the formation of a business model or a value chain, the development of a single product or service, and the solution of a problem in familiar daily work.

Exhibit 2-2-1 Concept of mission profiling

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Mission profiling consists of a mission statement, relationship analysis, and scenario statement. A mission statement is a description of the program mission and the program value. Relationship analysis of values consists of the relation analysis between the program value (entire value) and the group of projects (partial values) and the analysis of the stakeholders’ way of participating in the program and the creation of values. Finally, a scenario statement involves the preparation of several scenario alternatives and the selection of a scenario from among them with consideration for the feasibility review and program implementation.

Exhibit 2-2-2 Mission profiling Mission profiling is a core process of creating value through the program and is a process of materializing and visualizing the initial abstract and multiple concept of program mission, taking into consideration the complexity of the environment, the constraints of the organization, etc. Mission profiling consists of mission statement, relationship analysis, and scenario statement.

1-2. Mission Expression Program mission established from the strategy of a company or any other organization is often multiple even if it appears to be concrete. To express a mission, it is necessary to appropriately assess the nature of the mission, based on the initial multiple and value statements of the mission. 1-2-1. Mission Description The mission description is the whole image of the expectations of the program owner and the source of the program value. The mission shows a “future wish” after overcoming the current problems. The mission description requires efforts to respect the value imagined by the program owner, make the value communicable, and request confirmation from time to time concerning whether there is an addition or discovery. In the process of formulating the mission description, after several objectives and more concrete sub-purposes are set, the goals are established as indicators for the achievement of the purposes. The various objectives are classified into those on which management resources are strategically concentrated and those to which a low priority is given. Because the latter are not

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adopted, it becomes clearer which objectives are necessary for realizing the initial program mission. As a result, the program mission becomes more concrete than the initial abstract statement and grows into the mission statement that can be said to be what the organization or the business should be.

Exhibit 2-2-3 Linkage among objectives and goals One of the roles of mission profiling is to prevent the gap or bias between the mission and the objectives, between the objectives and the goals, and between the goals and the methods and plan, maintain, and adjust the consistency between them. The mission description is required to be consistent with the superior organization’s purposes, to be attainable and concrete, and to define the results to be achieved. It is also important for the goals to be measurable. 1-2-2. Value Description The process of formulating the mission statement identifies the nature of the value to be created. The mission statement consists of the creation of customer value, the development of uniqueness, and the clarification of the target domain. Value originally means the creation of customers and must lead to customer value. Because this brings about competition, one of the two important themes is the pursuit of uniqueness, such as what a company should do and what kind of business an organization wants to do. Whether or not a discriminative element that serves as a source of its uniqueness exists determines the competitiveness of an organization or a business and sometimes becomes an important factor for the organization or business’s continuation of existence. In this sense, it is necessary for an organization to have its advantages and disadvantages reflected in the mission statement, taking environmental trends into consideration. The pursuit of uniqueness requires consideration of the contents of the mission and how to carry them out. The other important theme is what domain should be focused on to realize the value – that is, how to assess the market and customer needs and what part of the value chain an organization should take charge of for meeting these needs. Various cases can be imagined, depending on the organization’s advantages and long-term strategy.

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In the manufacturing industry for example, there are various methods of realizing values, depending on whether to select the B-to-C business model or the B-to-B business model, whether to take a vertically integrated strategy, whereby the processes from raw materials to assembly are integrated within the company or its group, or a strategy whereby the company manufactures the core parts and outsources the other parts to realize value. The problem is to what market the company should apply its core competence – that is, its unique capabilities, such as technical capacity, production equipment, brands, and distribution channels. In other words, it is s marketing problem as to what market segmentation should serve as the axis for market division and what targets should be aimed at. In addition, it is necessary to examine whether the current business model – that is, the system for providing value to the customers – is suitable for this, design a new value chain, and review the market in which the company participates. In the other industries and non-profit-making organizations also, it is necessary to identify the nature of the value to be realized. This means that the problem is how the organization should interpret its long-term strategy.

1-3. Relationship Analysis of Value The relationship analysis of value consists of the analysis of the relationship between the whole and the parts of the program values to be created as described in the mission statement and the analysis of the cooperation of the stakeholders participating in value creation and the interests of the stakeholders. 1-3-1. Entire Value and Partial Value The value of a program must exceed the total sum of the value created by the various component projects. For example, in the case of the manufacturing industry in 1-2-2. Value Description, the value of the materials and parts created by the R&D project are incorporated in the product by the product development project so that they can be realized as the customer values assessed by the market research project. Moreover, the values are delivered to customers through production and distribution. The new product produces a profit by carrying out this whole process as a new product development program to combine the value produced in the various projects and create a value higher than the total sum value of all the projects. It can be said that this profit is a new value produced by the program. 1-3-2. Stakeholder Value Stakeholders are the parties concerned with a program. Stakeholders include the players directly or indirectly participating in the value activities under the program and local governments and residents influenced by the implementation of the program. Stakeholder value can be classified into tangible and intangible value: the former include financial profits and tangible assets gained by the stakeholders’ position and role in the participation in the program; the latter are typified by intellectual assets, such as the improvement of the efficiency of process management, the improvement of convenience, and know-how.

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At the stage of program implementation, stakeholders’ participation, cooperation, adjustment, negotiations, etc., greatly affect each stakeholder’s acquisition of value. Because of this, it is important to assess at the stage of mission profiling how the stakeholders participate in the program.

1-4. Scenario Statement In the process of formulating the scenario statement, a method is devised to consider how to analyze the gap between “To-Be” and “As-Is” in Exhibit 2-2-1 and what means to carry out. Several scenarios are used for selecting the most suitable one. Concretely, because the program mission is materialized as a result of the mission statement, it becomes possible to draw the whole image of the program as to what to carry out. However, before the actual implementation, it is necessary to clarify some uncertain elements and make the policy more concrete. This requires the examination of several concrete scenario alternatives and the selection of a scenario from among them. Because both the mission statement and scenario statement are processes for materialization and refinement, they are sometimes examined together. In either case, however, the implementation scenario, the final output, serves as the framework for program design, the next stage for materialization. 1-4-1. Preparation of Scenario Alternatives (1) Implementation Scenario and Environment Scenario As a result of the mission description, the goal of the program becomes clear in the form of mission statement. Scenario statement is the process of preparing program implementation scenarios between the current situation and the goal. There are two types of scenarios. One of them is a scenario that predicts the organization’s activities toward the future and their results. The other is a scenario about changes in the business environment, such as the society and the market to which the organization belongs. For the purpose hereof, the former is called an “implementation scenario,” while the latter is called an “environment scenario.” Internal environment analysis

Strengths

Weaknesses

External environment analysis

Opportunities

Threats

Environment scenario

Utilize opportunities according to strengths

Do not miss opportunities due to weaknesses

Change threats into opportunities using strengths

Prevent the worst case

(Program) implementation scenario

Exhibit 2-2-4 From SWOT analysis to scenarios

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In many cases, it is impossible or difficult for the organization to control the environment. Therefore, it is necessary to separate the environment scenario from the controllable implementation scenario. As shown in Exhibit 2-2-4, the SWOT analysis tool can be used for clarifying the relationship between the two scenarios. For the purpose of prediction and analysis, the environment scenario divides the external environments related to the program into those offering opportunities and those posing a threat. The implementation scenario specifies environmental trends and the organization’s strong and weak points in a matrix and describes supposed concrete measures in the four boxes. As a result of these processes, it is possible to develop the environment scenario and the implementation scenario. (2) Framework for the Preparation of Scenarios Although some programs can predict external environments sufficiently accurately, experience no effects from changes in the external environments, or work irrespective of the external environments, none of these applies to many programs. Because large-scale programs in particular involve complicated relationships with external environments and take a lot of time to carry out, various types of effects apply to them. The extent to which the program is affected by external environments is important for developing the implementation scenario. The program should be designed so as to absorb external environments well. As described above, the implementation scenario consists of individual elements particular to the program. The following elements are common to any program: the goal element, constraint element, and stakeholder element. 1) Goal element: The initial conceptual program mission is divided into several concrete goals at the stage of the mission statement. Such goals are further divided into more concrete ones, whose feasibility is then examined. The goal element is important for the scenario, because the goals are examined as to whether the program mission can be achieved in reality – in other words, whether the program can create value. 2)Constraint element: The program can use limited internal resources (such as human resources, physical resources, money, technology, and information). In addition, the scenario may have to be revised due to changes in external elements (such as the market, customers, competition, and legal regulations). The scenario requires several preparatory ones into which such limited resources and environmental changes have been incorporated beforehand. 3) Stakeholder element: Consideration as to what roles should be allocated to whom and what kinds of profits should be distributed in what way is important for the program scenario. With regard to customers, it is necessary to recognize who are the true customers for whom the program is intended to create value. In many cases, there are direct customers and indirect end users. Although, of course, the program should give satisfaction to the direct customers, how to give satisfaction to the end users is also an important issue.

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On the other hand, the stakeholders who share the program implementation include the relevant departments in the organization, the consortium partners, and the main contractors that receive resources. With regard to each of them, it is necessary to examine how to share the investments in the achievement of the goals and what contribution should be received concerning resolving the constraints.

1-4-2. Examination of the Feasibility and Selection of Implementation Scenarios (1) Examination of Feasibility of Scenarios Persuading the program stakeholders to understand that a scenario will achieve the mission is important for the examination of a scenario’s feasibility. In this sense, the scenario must be visible to the stakeholders. The tools for the visualization include the business model described below and the canvas of a balanced scorecard strategic map. These tools can be used to predict the future of an uncertain program and ensure that the scenario is feasible. With regard to the main issues, the feasibility of some possible scenario alternatives is confirmed beforehand by the following methods for example: interviews with a wide range of experts; technical and economic feasibility studies (FS)*8; and examination through a pilot project. Moreover, whether the elements expressed in the business model canvas are connected to the value proposition is checked. The relationships among the strategic objectives in the strategic map are checked (check of the causal chain). Examination of the relationship among the key performance indicators (KPIs), which are used for measuring the achievement level of the strategic objectives, makes it possible to check the certainty of the feasibility. Scenario statement requires various examinations, depending on the uniqueness of the program. It is necessary to carry out the following examinations: 1)Overcoming Points of Discontinuity Although the future of an organization is the accumulation of various decisions made so far, major points of discontinuity sometimes arise on the way towards the future. In addition, the organization may have to make discontinuous reforms intentionally. In such a case, it is necessary to introduce reform-related technology or empirical knowledge or incorporate the double operation of old and new systems into the program scenario. 2) Approach from the Future Image What is important for the examination is a scenario statement that sees the present from an ideal future image instead of predicting the future from the present. With regard to the constraint elements, it is necessary to identify it as a prediction, a hypothesis, or a wish. With regard to the goal elements, it is necessary to separate the parts that can be discussed based on prediction results from the parts that require measures based on the assumption that prediction is uncertain. -----------------------------*8 Feasibility study: Check and examination of the feasibility of a program or project before its implementation.

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3) Business Model Simply stated, a business model shows “what value” is provided “to whom” by “whom “and who benefits. It has high affinity with mission profiling and scenario development. A “business model canvas” is a tool for analyzing and designing a business model. A business model canvas is a flexible template for planning, completing, and evaluating a business model. When devising a business model, it is necessary to comprehensively consider some elements, such as the customers, the provided value, infrastructure, and financial affairs. A business model canvas examines a business model from the mutual relationships among nine elements that cover four domains: customers, value propositions, infrastructure, and funds. (See Business Model Canvas in p. 92.) 4) Service Business The object of a program or project is not limited to the construction of hardware. The importance of service businesses for value creation seems to increase further in the future. Therefore, to develop a scenario for a service business project, it is necessary to understand the characteristics of the service business well. Service businesses are characterized by intangibility (no shape and untouchable), simultaneity (production and consumption occur at the same time), consumptiveness (consumption disappears simultaneously with production; impossible to store), and foreignness (the value differs depending on the situation of the provider or the beneficiary). 5) Combination and Alliance between Companies Corporate merger (M&A) and alliances for corporate activities belong to an important field for program management. They tend to be formed positively and strategically as the globalization of competition progresses, and should be incorporated into the program scenario as a constituent.

[ Business Model Canvas ]***************************************************************** A “business model canvas” is a flexible and very powerful tool for planning, completing, and evaluating a business model.※1 A business model canvas is based on the basic view that a company or organization necessarily has a business model, and consists of nine elements (building blocks) that cover four domains: “customers,” “value propositions,” “infrastructure,” and “funds.”

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Exhibit 2-2-5 Outline of business model canvas Source: Prepared based on Alexander Osterwalder and Yves Pigneur, “Business Model Generation,” Shoeisha, 2012

The following is an example of a canvas of a low cost carrier (LCC) that has adopted a business model different from that of general carriers (see Exhibit 2-2-6):

Exhibit 2-2-6 Example of LCC’s canvas ※1 “Business Model Generation – Business Model Design” Alexander Osterwalder (author) and Yves Pigneur (author), Ryusuke Koyama (translator), Shoeisha (Feb. 10, 2012) Reference and source: “Business Model Generation WORKBOOK,” Miki Imazu (author), Shoeisha (Apr. 8, 2013)

***************************************************************************************

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(2) Selection of the Implementation Scenario The scenario statement is a process whereby the program to be carried out at the next stage is designed – in other words, a process whereby an implementation scenario is determined as a starting point for the program architecture and the design of each project. Several scenario alternatives are prepared, compared, and evaluated so that one of them can be selected. The selected scenario draft needs to be detailed to some extent and include a time axis. Even if the direction of value creation, a basis for the implementation scenario, is fixed, there are various approaches to materialize it. It is important to prepare various scenario drafts and compare them to select the scenario most suitable for the predicted environments. It is necessary to devise various scenarios that are highly likely to be successful from the viewpoint of the business strategy and the external environments. Moreover, with regard to each scenario, it is possible to prepare three versions (standard, optimistic, and pessimistic) so that the selection can be carried out by setting points of time for evaluation at the beginning, intermediate, and completion times. This always requires fixing a tolerable level of the value to be realized finally beforehand. A mission statement is appropriate to grasp an accurate expression of what the program mission really means and what is the nature of the mission, based on the multiple and vague initial statement of the mission. The mission statement consists of a mission description and value description. Relationship analysis of the values is an analysis of the relationship between the entire value of a program and the value of the parts and the cooperative actions and interests of the stakeholders engaged in value creation. Scenario development is the selection and determination of an implementation scenario through the examination of several concrete scenario drafts to clarify uncertain elements and materialize the policy before carrying out the program Exhibit 2-2-7 Example of a scenario statement

Scenario A Scenario B

Tolerable level

Value

Scenario C

Beginning time

*1) *2) *3)

Intermediate time

Completion time

Scenarios A, B, and C indicate that they are different from each other. The beginning time is the point of time when the program begins. The intermediate time is the point of time where environmental changes are assumed and the prepared options are selected. This makes it possible to assume several results from a scenario.

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2. Program Design 2-1. Program Design 2-1-1. What is Program Design? Program design is a process of designing program architecture based on the mission statement and the implementation scenario. The purposes of program design are to structure a group of goals so that the program missions can be achieved (design of the program architecture) and to design a system for carrying out the designed program and each of the constituent projects. 2-1-2. Processes of the Program Design The processes of program design after the scenario statement during the mission profiling are as follows: 1) establishment of the program lifecycle; 2) design of projects necessary for the program implementation; 3) structuring of the projects; and 4) allocation of a role for each project; and 5) inspection of the operability and feasibility of the program. Selection of implementation scenario

Establishment of lifecycle (Initiation and completion phases)

Appraisal of operability and feasibility of program

Establishment of scenario implementation measures (Design of project group)

Allocation of functions to each project (Role of each project)

Structuring of project group

Exhibit 2-2-8 Processes of the program design The design of program architecture is the definition of the group of projects sharing the necessary roles for the program implementation and the definition of the interfaces among them. The following are important for the design of the program architecture: incorporation of the strategic goals; the implementation strategy system for carrying out the program efficiently and surely; the design of the program lifecycle that makes it possible to control the program implementation appropriately; and designing with consideration for the uncertainty (risk) of the program based on the environment scenario of the program. Next, the design of the systems for the program and the program implementation requires the establishment of a program implementing body and the infrastructure for carrying out the program, including an evaluation system.

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2-2. Program Architecture 2-2-1. What is the Program Architecture? The program architecture refers to a structural form in which the processes of mission achievement described in the implementation scenario are allocated to several projects. From the viewpoint of the systems approach (see Part 5, Chapter 1), the process of mission profiling mainly focuses on “what is necessary?”, while program design is the process of making sure of “what is feasible” while satisfying the “necessities.” From the purpose-oriented viewpoint, mission filing is the process of clarifying the objective of the whole program and dividing the objective into some goals. Program design aims to create an architecture to realize the goals and, as a result, achieve the overall goal. The role of modelization includes the promotion of the stakeholders’ common understanding of the program and the integration of the separate goals and the overall goals. 2-2-2. Basic Project Combination Form and Project Model If a program is regarded as a structure that combines several projects, the architecture becomes a basic combination form of sequential, parallel, or cycle type or a combination of these. The sequential-type project combination progresses in chronological order while several projects have relationships with each other. The parallel-type project combination advance several sequential projects simultaneously to achieve development, shortening of the lead time of production, cost cutting, etc. The cycle-type project combination combines a scheme model, a system model, and a service model in a cycle way and cycles as the next program. In the case of a software development project, an example of the cycle-type project combination is the spiral model whereby phase units form a spiral.

Exhibit 2-2-9 Sequential-type project combination

Exhibit 2-2-10 Parallel-type project combination

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Exhibit 2-2-11 Cycle-type project combination The program recognizes the system planning scheme and the system uses the scheme as projects, comprehensively collects, stores, and processes knowledge, know-how, data, and systems, and reflects the improvement of intelligent production through knowledge management in the design. What is important for program design is the viewpoint of seeking values in a chain reaction form by the use of knowledge and know-how gained through the program. If the projects of a program are modelized according to each own role, they can be classified into three types: scheme model project that plans the program; system model projects that create and build a value-creating system; and service model projects that realize values through the use of the system. (1) Scheme Model Project In a large-scale program, the scheme model project profiles the program and develops the basic design. In the case of a program for newly starting a business, the scheme model project plans the overall framework and establishes the basic plan. In the case of a large-scale program, it carries out the processes until the selection of the contractor, including the preparation of the RFP (Request For a Proposal) by the government agency and the owner company. In addition, there are cases where the framework of a resource development program by a combination of the resources-possessing country, the resources-developing company, the resources-using company, and the investment institutions. (2) System Model Project System model projects create concrete systems. Typical projects are the design, construction, and installation of plants, office buildings, production equipment, IT solution systems, information network systems, or a combination of these. System model projects also include the development of new projects, the construction of overseas production systems, the construction of new distribution channels, and the establishment of a nationwide customer distribution network. (3)

Service Model Project The service model project provides customer values by the regular use of the systems created by the system model project after the completion of the system model project. In the case of a profit-making business, the company gains profits through this process. The quality, safety, brands, technology, know-how, and data gained by the system management are necessary for

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creating new value and can be fed back to the system model and be fed forward to a new scheme model. In other words, the service model has characteristics similar to those of the operation project development and is based on knowledge management whereby project service experience, information, and data that elicit values from the system management to the full are used for new business opportunities. 2-2-3. Process of Architecture Design The process of architecture design of a program consists of the establishment of program lifecycle, the design of projects for putting the scenario into practice, the structuring of the projects, the allocation of the roles to the projects, and the inspection of the operability and feasibility of the program. (1) Establishment of a Program Lifecycle It is necessary to arrange a concrete schedule for the scenario, fix the first and last dates of the program, and establish the program phases. Although the schedule and the milestones can be determined voluntarily in some cases, it may be impossible for the program implementing body to determine these, depending on the market or customer conditions or the situation of the partners. In addition, it is necessary to be consistent with the lifecycle of each project. The program lifecycle is finally determined after temporal establishment of a schedule based on these tradeoffs and coordination with the relevant stakeholders. Exhibit 2-2-12 summarizes the appraisal items for each viewpoint about the lifecycles of the project models.

Exhibit 2-2-12 Viewpoints about the lifecycles of the project models (2) Design of the Projects for Putting the Scenario into Practice Program lifecycle is established and projects are designed to achieve the purpose of each phase. Concretely, at the stage of program mission description, projects are designed to establish each project’s mission of achieving the final program goal into which the program’s overall goal is classified by the chain of objectives/goals at the stage of program mission description.

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After the projects are designed temporarily, the necessary projects are established with consideration for the realization of the program mission, the effectiveness, total optimization, and efficiency of investment resources, the integration of the projects, and the division or suspension of a project. (3) Program Structuring Program structuring is design of the architecture of the component projects. If projects necessary for the program implementation are determined, the projects to be carried out simultaneously, sequential relationships, and cycling relationships are determined with consideration for the dependency and influences (effects and risks) among the projects and in relation to the available resources. Efficient and assured implementation of the program requires optimum structuring of the projects. Concretely, it is necessary to secure the independence of each project for the creation of a distributed autonomous system, make the project scale and the management span appropriate, form a highly expert project organization, and create a system for controlling the whole program appropriately. It is also necessary to contrive devices so that each project’s independence will become higher and the projects’ interference with each other will occur as little as possible. This makes it possible to shorten the program period and prevent trouble in a project from influencing another project. (4) Allocation of a Role to Each Project After the structuring of the projects, a concrete role and necessary resources are allocated to each project. The program manager checks the feasibility of each project together with the project manager. (5) Inspection of the Operability and Feasibility of the Program After the confirmation of the feasibility of each project, a roadmap and management rules are prepared with consideration for the operability of the whole program. The effects of changes in the preconditions for the program scenario and the environment are simulated and the possibility of creating program values is assessed. If uncertainty is predicted, it is necessary to prepare program options.

2-3. Program Concept Plan The final result of program design is the program concept plan in which the total image of the program is clearly described, including the program mission and the scenario. The values that the program aims to create are assessed and the feasibility of the program is assessed from the viewpoint of a flexible program structure suitable for environmental changes. After that, the objectives, goals, basic policy, and constraints of each project are specified. Although the program concept plan includes the contents displayed in Exhibit 2-2-13, the contents vary from program to program in reality.

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Exhibit 2-2-13 Example of a concept plan Source: Motoh Shimizu “Practical Project and Program Management,” JMA Management Center, 2010, p. 205, Exhibit 4-4-13

The established program concept plan should be approved by the program owner*9 and the officers in charge of the related departments. Concrete approval is given after the confirmation of the validity of the established program by the program review conference, the board of directors, the finance department, or a combination of them. After the program concept plan is approved in this way, the program is carried out concretely. Because the program is relatively large in scale and is carried out for a long period, it receives environmental changes. This requires a strategy for the program itself and risk management. These are described in [Chapter 2-3] Integration Management of Program Implementation, Chapter 3, Program Strategy and Risk Management, and Chapter 4, Management of Value Assessment.

-----------------------------*9 Program owner: the person who releases and is responsible for the program. If the program is related to a business, the owner is the officer responsible for the business, such as the business manager or a department chief.

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Program design carries out the following in this order after the scenario statement by mission profiling: 1) Establishment of the program lifecycle 2) Design of projects necessary for program implementation 3) Structuring of the projects 4) Allocation of the role to each project 5) Verification of the operability and the feasibility of the program The purpose of program design is to give structure to the group of goals so that the program mission can be achieved (design of program architecture). Program design also includes the design of a system for carrying out the designed program and the constituent projects. Program architecture means a structural form where the mission achievement processes described in the implementation scenario are allocated to several projects. There are three types of component projects: scheme model projects that plan the program; system model projects that create and build a value-creating system; and service model projects that realize values through the use of the system. The final result of program design is the program concept plan in which the whole image of the program is clearly described, including the program mission and the scenario.

[ Points of Attention Concerning Corporate strategy ] *************************** What is a good corporate strategy? From what viewpoint should the current management be reshaped? As changes in the external environments become rapid, it is more necessary to always think calmly about whether the corporate strategy is consistent with the internal and external environments at a satisfactory level. To elicit a program from the strategy, it is important first to understand “what it is” correctly, finding problems in the current” strategy. Gaining good results from everything is not a good strategy. The important point is to understand “whether our company can be aware of itself” and “whether our company can be convinced of itself” in the light of your organization’s abilities and background. (1) Organization’s Mission and Nision If the current management condition is unsatisfactory, it is necessary to review the basic vision of the organizational management. Even if it is satisfactory, it is necessary to review it from the viewpoint of “Do not forget to prepare for a war even if you are living in peace.” (2) Way of Thinking Towards the Market and Customers To achieve the mission, it is necessary to consider what contribution to make to what customers and society, whether this is shared by yourself and the other organization members with firm faith, or whether it is developed as concrete measures.

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(3) Management in Keeping with Aptitude and Ability It is necessary to evaluate your organization’s characteristics and ability and consider whether the management is in accordance with social justice, whether your organization has fallen into excessive competition, and whether the organization members have united to progress along a well-developed roadmap towards success. (4) Work Processes Aiming at Value Creation It is necessary to examine weather full consideration has been given to the division between internal and external operations and the alliance strategy, whether they have displayed effects, whether the work processes have always been improved to increase efficiency, and whether business models have been examined for the future. (5) “How to Improve Skills and Products and/or Services Skills and products and/or services are organizations’ messages to customers and society and always need to be kept up to date and in a strong condition. Therefore, it is necessary to consider whether they have become across-the-board and uncharacteristic, whether they are far apart from the market or customer needs, and whether your organization can anticipate the needs. (6) Appropriate Communication and the Maintenance of Information Consideration should be given to whether the necessary information has been timely, appropriately, and speedily distributed to the persons in need of the information, whether unnecessary information has been disposed of timely and appropriately, and whether the flow of information is efficient and effective for the management. (7) Accumulation of Necessary Resources It is necessary to consider whether management resources needed for the mission achievement have been identified and accumulated for the future, whether an inventory of these has been taken frequently to be kept up to date, whether resources have been wasted for useless accumulation, and whether similar consideration has been given to management resources procured from the outside. (8) Organization that Develops and Utilizes Human Resources Whether the organization members have united to achieve the mission in the spirit of independence? Whether the organization has developed human resources who have long-term ideals to sustain the growth of the business and itself? Whether a strategic culture has been established? (Prepared by reference to the “Logic of the Corporate strategy 3rd Edition” by Hiroyuki Itami in 2003) **************************************************************************************

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[ Case Study: Practical Cases of Program Management ] ************************** As practical cases of program management, a new business creation program (strategic program) and a grout system construction program (operational program) are studied herein. Because there are various forms of programs, the cases cannot be applied to your program management as it is. However, their basic processes can serve as useful references.

[ Case I ] ************************************************************************************** New Business Creation Program (Strategic Program Case) As described above, there are various forms of practical program management. The following is an example of processes for creating a new business: Based on the top executive’s wish about the creation of a new business and the organization’s business strategy, a theme for the new business (program mission) is elaborated after the analysis of the macro environment in the target field, the industry, competition, and the organization’s strong and weak points. First, analyses are carried out concerning the internal and external environments of the business. Such analyses are carried out if needed. It is unnecessary to analyze all environments. The following analyses should be carried out simultaneously rather than in this order. (a) 5-Force Analysis of Relationships with Industry and Competition The analysis starts with reviewing the following: the position in the industry to which the company belongs; the existence of newly entering companies and companies trying to enter the market by an alternative product; and power relationships with materials suppliers and customer companies. Check whether the company’s current management is satisfactory. If so, identify the factors. If not, consider what factors prevent the management from becoming satisfactory. When a company creates a new business, it must have an approximate direction as to what skills and organizational power should be used for what market (or customers). (b) Development of a Competition Strategy Based on the Company’s Strengths It is necessary for a company to understand what strengths makes it possible to survive in today’s competitive environment and what form of relationship with the customers makes it possible to display the strengths to the maximum. For example, if the strength is technical power, the key to the relationship with customers is always providing the latest products. If the strength is solution power, the relationship with the customers should be fully close to them. If the strength is low cost as a result of the improvements, reform, and mastering of the work processes, the key to the relationship is providing the strongest cost performance.

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Exhibit 2-2-14 Example of program management processes for the creation of a new business (1) Source:

George S. Day, “Is It Real? Can We Win? Is It Worth Doing?,” Harvard Business Review, Sep. 2008

(c) Macro Environment Analysis It is necessary to overlook these macro environments from the viewpoint of what is the most suitable environment for success in the new business. Analysis is carried out about political and legal trends related to the new business, trends in the economic environment, social trends, and technological trends. (d) SWOT and Cross-SWOT Analysis Consider what the new business should be – concretely, what strengths should be provided to what customers under what environment. Apply SWOT analysis to the matters researched and examined so far. For example, SWOT analysis can be used to find factors for success, such as the creation of a business model for incorporating the company’s strength into the new system to be provided in an emerging country’s market three years later. In the light of P2M, it can be said that the processes described so far are preparatory stages for elaborating a program of the creation of a new business from the company’s strategy or earlier stages of mission profiling.

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(e) Framework of What it Should Be (Business Model) Judgment about the Commercial Viability Evaluation and Constructing of the Business Model ⅰ. What it Should Be (Planning of a Model of the New Business) The analysis starts with a wish that we want to have such a new business. Gradually describe and visualize processes for materializing the wishes as a business model. It can be said that this is a process corresponding to the “mission description” in P2M. ⅱ. Judgment about the Commercial Viability Next, assess and judge the following: whether the target market and product are realistic; whether the company and the product are competitive; whether the product has profitability suitable for the risks even if the above conditions are satisfied; and whether it is appropriate to input valuable management resources from the viewpoint of the company’s future direction of management. This process corresponds to the relationship analysis of values in P2M. ⅲ. Hypothesis and Validation of the Business Model If the possibility of commercialization is identified, concretely design and repeatedly assess the hypothetical model (outline design) on the assumption that the new business has been created. This also corresponds to the relationship analysis of values in P2M.

Exhibit 2-2-15 Example of program management processes for the creation of a new business (2)

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(f) Preparation of Scenarios Prepare scenarios for the creation of a business model. Draw up alternative scenarios, dividing them into controllable implementation scenarios and uncontrollable environment scenarios. This process corresponds to the scenario statement in P2M. (g) Establishment of a Value Chain Planning of Investment Recovery and the Investigation of Profitability Consider what kind of value chain the business model will become, plan the investment recovery, and investigate the profitability using numerical values. This process corresponds to the scenario statement in P2M. (h) Identification of the Market and then Customers Identify the Customer Needs: Marketing Strategy It is necessary to determine the target market or customers. This requires the following: segmentation of the market and customers that have relatively similar needs; a decision as to what segment should be targeted; and clarification of the company’s positioning. Then, target the market or customers’ needs are closely analyzed and the marketing mix (4P) suitable for the needs are prepared. This process corresponds to the scenario statement (assessment of the feasibility) in P2M. (i) Compilation of the Gathered Information into a Business Model Canvas All the information gained so far is described in a business model canvas to visualize the business model of the new business. The scenarios are integrated into one scenario. (j) Description in BSC for Strategy Visualization and Project Structuring For the visualization of the strategy for the new business, the strategy is described in the strategy map*10 of the BSC (balanced scorecard), which has been proposed by Kaplan and Norton. After this, the strategy is developed on the scorecard to devise measures (projects) for carrying out the strategy. This process corresponds to the architecture design in P2M. Through these processes, the abstract wish of “We must start a new business” leads to the clarification of the mission and the concrete structuring of what to do. As described at the beginning, however, there is no established process for the examination of the theme “creation of a new business.” It is of course possible to put an idea or inspiration into practice immediately, placing importance on speed. This may produce an exceptional new business. ********************************************************************:*****************

-----------------------------*10 Kaplan and Norton proposed this in “The Strategy-Focused Organization.” A strategy is devised with consideration for four viewpoints.

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[ Case II ] ************************************************************************************* Cloud System Construction Program (Example of an Operational Program) In this case, the IT development and management costs were able to be reduced by the introduction of a hybrid cloud (mixing of two cloud models – public and private models) for the development of a next-generation information system. (a) Background to the Introduction of a Hybrid Cloud A major life insurance company A’s maintenance and operation cost has accounted for 70% of the IT budget in these three years. The cost is expected to increase mainly due to software maintenance. In April 2011, the company A discussed as follows when devising a business strategy (a new midterm management plan). Profits have remained at the same level due to fierce competition with major non-life insurance companies. Although the company wants to limit the increase of IT investments, the maintenance and operation costs (especially, the soft maintenance costs) has been increasing. Is it possible to reduce the lifecycle costs? The satisfaction of customer needs and the input of new products should be made through the over-the-counter insurance sales at banks. For this purpose, “the promotion of proper IT development and management costs” was proposed as a medium-term management issue that the company wants to solve by IT investments. As a result, the executives gave instructions to reduce the lifecycle costs. The company will use cloud services to put together its 200 servers at a data center and reduced them to 50 servers. It is planning to reduce the system maintenance and operation costs from four billion yen in FY2011 to 3.2 billion yen. (b) Program Initiation Mr. T of the Information Planning Department was appointed as supervisor manager for this “Next-Generation Information System Development Project.” Mr. T first began to make preparations for developing a more concrete mission, purpose, and goal from the abstract “management’s wishes.” (c) Approach to Planning Mr. T understood that the improvement of the IT governance (system for ascertaining IT investments from the viewpoint of corporate governance) would require an organizational ability to clarify the purpose of introducing IT systems, establish an IT strategy and a realization method, and keep control in the aimed direction, always feeding back the results. Because of this, consideration was given to the following:

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Consistency with the organizational strategy (Is it consistent with the business purpose?) Division of cloud services (such as existing IT service and private cloud service) Evaluation and selection of introduced software (SaaS*11, PaaS*12) Total optimization (improvement of efficiency of IT)

ⅰ.Consistency with the Organizational Strategy To improve results, Company A carried out the following corporate strategy establishment approach as a series of activities for analyzing the business, consider what the business should be, and giving direction to the business:

Exhibit 2-2-16 Processes for establishing the organizational strategy

Herein, the procedures for establishing the organizational strategy are compared with UISS (Users' Information Systems Skill Standards), where the skills and knowledge necessary for user companies are arranged systematically.1) -----------------------------*11 SaaS: Software as a Service *12 PaaS: Platform as Service

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ⅱ.Setting of the Mission, Objective, Goal (Mission Profiling) Recognition of the Management offer Mr. T analyzed the executives’ wish so that this wish will be incorporated into the goal without fail. The content of the offer was visualized. Management Environment Analysis Next, market environment analysis (identification of the business growth potential) and a customer satisfaction survey (business innovation foresight) were carried out as external environment analyses. As internal environment analyses, benchmark (business competitiveness prediction) and the SWOT analysis method were carried out. Ideal Image and Management Issues The following strategic goals were set up for the medium-term plan: “reducing the IT construction costs by shortening periods and making the construction flexible,” “reducing the operational management costs by improving the efficiency of systems management and extending the life of systems.” After that, target values were set up to achieve the reduction of the lifecycle cost through the introduction of cloud services. Establishment of Business Strategy and Preparation of a Business Strategy Plan Based on the analyses so far, the program mission and the vision were established as program pillars. Moreover, definition of the purpose and setting up of the goal were carried out. Program mission: to realize a great reduction in the system lifecycle costs and enable the company to provide new values in the life insurance industry Vision : to join the winning side in the life insurance industry Purpose : to restrain IT investments and improve the sales force of the new product Goals : Reduction in the lifecycle cost *Systems construction investments (center equipment: HW/SW procurement): reduction by 20% *Management/maintenance costs: reduction by 20% per year ⅲ. Establishment of a Strategy (Program Strategy Management) Mr. T prepared a business strategy plan, entering the value of the results expected from the cloud introduction program and outlining the follow-up method, and received approval for the plan. The use of KGI (Key Goal Indicators) and KPI (Key Performance Indicators) enables the measurement of the degree of each component’s contribution to the strategic goals and the follow-up study about the degree of contribution to the value of results. This will result in the construction of a bridge between the strategic goals and project success. Next, to prepare an IT strategic plan, the goals of the cloud introduction were set up as follows: Cost reduction: 20% per year for operational management; 10% per year for center equipment: 20% per year for HW/NW Investments: up to 2 billion yen Estimated date of project completion: end of March 2013

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Moreover, the gist of the strategy was summarized as follows: Selection of business for which the cloud service is used, and inspection of validity Selection and maintenance of applications for core business Realization of additional business functions Improvement of BCP External sales of internal SaaS applications In addition, Mr. T carried out IT portfolio analysis for consistency with the organizational strategy (the value of IT investments was optimized from the viewpoint of fitness for strategic purpose, ROI, and risks). As a result, it was decided that the following measures would constitute the scope and be materialized as a project: Selection of business for which cloud service is used, and inspection of the validity Selection and maintenance of applications for the core business Realization of additional business functions ⅳ. Program Architecture Design (Architecture Management) Based on the results of the considerations so far, efforts began to be made to further understand the entire architecture of the program. With regard to the cloud introduction program for the achievement of the strategic goals and KPI and the projects for realizing the program, the business application inspection project, the private cloud construction project, and the new application development project were clarified with consideration for the size and contents of the realizing function and the possibility of allocating human resources. (d) Establishment of the Cloud Installation Program Plan Based on the IT strategic plan, Mr. T prepared the cloud installation program plan (program concept plan), including the following items, and received approval from the CIO (Chief Information Officer). ID

Tas k

0

Cloud ins tallation program

Period

2012

Start date Jan.

1 2 3 4 5

1 Miles tone 1.1 PJ plan approval 1.2 Operation test completion 2 Private cloud installation

12/01/05 (Thu)

303 days

12/01/19 (Thu)

0

12/01/19 (Thu)

0

13/03/20 (Wed)

190 days

12/01/05 (Thu)

130 days

12/01/05 (Thu)

11

2.2 Exis ting sys tem integration

22 days

12/05/14 (Mon)

15

2.3 System combination

20 days

12/07/09 (Mon)

16

2.4 Production environment cons truction

20 days

12/08/06 (Mon)

19

2.5 Private operation tes t

20 days

12/09/03 (Mon)

20

2.1 Virtualization integration

317 days

3 Public cloud installation

65 days

12/01/05 (Thu)

21

3.1 Evaluation/selection of introduced software

10 days

12/01/05 (Thu)

22

3.2 Definition of requirements

10 days

12/01/20 (Fri)

23

3.3 Cus tomization/additional function des ign

10 days

12/02/03 (Fri)

24

3.4 Detailed des ign/development

10 days

12/02/17 (Fri)

25

3.5 PUB cloud manual preparation

2 days

12/02/29 (Wed)

26

3.6 System integration

10 days

12/03/02 (Fri)

27

3.7 Exis ting sys tem date trans fer

28

3.8 Public operation test

29

4 Education of the users

30

5 Sys tem tes t

5 days

12/03/16 (Fri)

10 days

12/03/26 (Mon)

2 days

12/10/01 (Mon)

65 days

12/10/03 (Wed)

2 days

12/10/03 (Wed)

60 days

12/10/05 (Fri)

31

5.1 System test preparation

32

5.2 System test implementation

33

5.3 System test results report preparation

2 days

12/12/28 (Fri)

34

5.4 System test results review

1 day

13/01/01 (Tue)

65 days

13/01/02 (Wed)

2 days

13/01/02 (Wed)

35 36

6 Operation test 6.1 Operation test plan preparation

Feb.

Mar.

Apr.

May

Jun.

Jul.

Aug.

Sep.

Oct.

Nov.

Dec.

Jan.

1/19

SE3, SE4 Takaharu Yamas hina Egawa, Kato, Tokunaga

Niizaki, Sato, Ueishi, Hayama, Yabuki,

Imai Imai SEA SEA Takagi SEA SEA Imai

Exhibit 2-2-17 Installation schedule

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(e) Approach to Design and Implementation ⅰ. Establishment of Policies Based on the “division of cloud services,” Mr. T established the following policies to be carried out in the form of hybrid cloud. Installation of virtualization system Installation of software (such as SaaS) Integration of existing systems As the customer, Mr. T unified several projects (development of a new application by an IT vendor; implementation of a private cloud by a service integrator; and inspection of the application by the department in charge of the users) for the overall management of the cloud installation. The following are the efforts made by the contractors that participated in this program and provide cloud solutions: ⅱ.Cloud Implementation (Contractor) Through a cloud solution, the service integrator gave total support to the processes from planning to management and operation. The procedures for the cloud implementation were as follows: The service integrator concluded a contract on the cloud service with Company A. The service integrator requested an IT consultant (who is called a “software sommelier”) to carry out a survey about the application of software and received a report that Salesforce.com’s customer management software (Saas) would be applicable in light of function and data consistency. Given the survey results, the service integrator outsourced the development of an application to Company X, an IT vendor. Server integration through virtualization was carried out by the service integrator. Company C realized the collaboration of core business applications and the transfer of business applications. The service integrator inspected and integrated these subsystems. (Reference: Project Management Association of Japan (editor), “Handbook on Utilization of P2M Project and Program Management in IT industry,” JMA Management Center, 2012) ***************************************************************************************

3. Integration Management of Program Implementation The integration management at the stage of program implementation is a management activity that aims to realize the values specified in the program concept plan without fail. The creation of excellent values is possible if the plan for creating high values is fulfilled by the implementation of the plan without fail. Because the program is planned to make changes from the current situation, it essentially involves high risks. In addition, because many resources are invested at the stage of implementation, whether or not the stage is successful directly influences the creation of values. The program manager may be replaced at this stage. Because the purpose of the management greatly changes from seeking the possibility of value creation at

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the stage of program planning to seeking the certainty of value realization at the stage of program implementation, the program manager needs different ability. At the stage of program implementation, the program manager needs to have a strong will to complete the plan, assessing the risks and the possibility of realizing the values and coordinating with many stakeholders, and have an ability to deal with the plan flexibly, including revising the plan.

3-1. Processes for the Integration Management of Program Implementation After receiving approval for the program concept plan, the program manager begins to make preparations for advancing to the stage of implementation. This is called the launching of the program implementation. The launching consists of the following five items:

Exhibit 2-2-18 Summary example of processes for integration management of program implementation Source: Additions were made to Motoh Shimizu, “Practical Project & Program Management,” JMA Management Center, 2010, p. 207, Exhibit 4-5-1.

1) 2) 3) 4) 5)

Overall Assessment of the Operations at the Stage of Program Implementation Determination of the organization that carries out each operation Launching of each of the projects that constitute the program Review of the implementation plan System for total optimization

After the completion of the launching of theprogram implementation, the progress of the program is managed and the goal management is carried out to achieve the goals. If the program implementation is completed and the expected results are gained, or if it is judged that the expected results cannot be gained by further continuation of the program, the program ends officially. This is called the termination of the program. Exhibit 2-2-18 shows a series of processes for program integration management.

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Outside of program Superior stakeholder (Program owner)

External stakeholders 3) Acquisition of financial and other resources

1) Response to superior stakeholder (report, approval, coordination, etc.)

2) Response to external stakeholders (negotiations, public relations, etc.)

Program manager 1) Launching of program implementation 2) Goal management 3) Closing

Project manager 1) Launching of each project (Establishment/ selection of organization, authorization/contract, setting of mission/goal) 2) Goal management (Monitoring, control, promotion, support) 3) Closing

Each project Program

Exhibit 2-2-19 Objects and main operations of integration management of program implementation Source: Motoh Shimizu, “Practical Project & Program Management,” JMA Management Center, 2010, p. 207, Exhibit 4-5-2

3-1-1. Launching of Program Implementation (1) Overall Assessment of Operations To grasp the operations carried out at the stage of program implementation, the program is divided into external and internal operations from the viewpoint of the implementing body. The internal operations are further divided into operations for the whole program and those for each project. Exhibit 2-2-19 shows these main operations. The program involves practical activities for the strategy. As the representative for the activities, the program manager is entirely responsible for negotiations with the parties outside of the program implementing body. First, the program manager has to carry out various kinds of coordination, such as reporting the status of progress and acquiring necessary approval. Second, the program manager carries out public relations and necessary negotiations to explain the values to be created by the program to the users of the values, the parties receiving benefits, and other external stakeholders. Thirdly, the program manager conducts negotiations to gain the financial and other resources necessary for the implementation of the program. These are operations necessary for the program manager to gain power necessary for the implementation and be able to use resources (human, physical, monetary, and informational) officially. Exhibit 2-2-20 shows the main program stakeholders.

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Part 2 Program Management Chapter 2 Program type Strategic implementation within the company

Contracted programs

Superior stakeholder

Program Integration Management External stakeholders

Organization reform

Board of directors

Stockholders et al.

Product development

Director of operating department

Other operating departments, sales department, research department, etc.

Built environments, or IT

The owner’s program executive in charge

The owner’s users, main subsystem suppliers, etc.

Financial department, director of higher-tier departments

Related administrative agencies, local residents, news media, universities, etc.

Administration’s policy implementation

Exhibit 2-2-20 Objects and main operations of integration management of program implementation (2) Establishment of the Implementing Body System After the overall assessment of operations at the stage of program implementation, the program manager first organizes core members in charge of the integrated management of program implementation based on the results of the assessment. Next, the program manager appoints a project manager in charge of each of the projects that constitute the program, and instructs him or her to launch the project. It is necessary to consider an appropriate organizational form, depending on the mission and scale of the mission and the initial organizational form (see Part 4, Chapter 3). Exhibit 2-2-21 shows the relationships between the program implementing body and the project implementing bodies. Program implementing body

Program manager

Member

Project manager

Member

Member

Project implementing body

Member

Member

Project manager

Member

Member

Project implementing body

Project manager

Member

Member

Project implementing body

Exhibit 2-2-21 Example of the relationships between the program implementing body and the project implementing bodies If the organization lacks the human resources necessary for the program implementing body and the project implementing bodies, it should acquire external cooperation. After the clarification of technical capabilities and the various kinds of management power necessary for the completion of the project, resources can be acquired through the selection of contractors by bidding, the establishment of alliances and other cooperative relationships, the formation of

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consortiums and joint ventures, and M&A. In each case, it is important to clarify the governance rules for the program implementing body and have common understanding of risks and evaluation. (3) Launching of Each Project Each project manager assesses all the project activities based on the project basics specified in the program concept plan, establishes the organizational system for carrying out the activities, and clarifies the rules on the management of coordination activities, such as giving reports to the program implementing body, exchanging information with it, conducting negotiations, and making decisions. (4) Review of the Implementation Plan After the establishment of the system for the program and project implementing bodies, each body is recommended to review the coordination activities to make the implementation plan more reliable, considering concrete methods and processes most suitable for its experience and risks. Even if full examination is conducted at the stage of making the program concept plan, it is essential to review the implementation plan after the selection of the project managers and the establishment of the system for the project implementing bodies. The program manager reviews details of the program implementation plan, assessing the characteristics of the project managers and taking into consideration the uniqueness of each project and opinions formed mainly by the project managers. (5) System for Total Optimization Each of the component projects is structured to realize the success of the whole program – that is, total optimization. However, there are cases where a project implementing body sets its own objective or goal in addition to the project mission, and the body’s placing priority on the achievement of its own purpose or goal is contradictory to the realization of the program’s total optimization. If the program is carried out within an organization, it is relatively easy to deal with this situation. However, this may become a major problem if a part of the program is outsourced. There are some systems for dealing with this problem: 1) shared vision; 2) community of practice; and 3) combination of an incentive and a penalty under a contract. 1) Development of a Shared Vision What is important for the program implementing body, which consists of many members, is the shared program vision explained in Part 2, Chapter 1, Section 5 Program Organization. It is important for all the members of the program implementing body and the project implementing bodies to understand the essentials of the program and tackle each of its own duties with a sense of unity. The members who will participate in the program implementing body or a project implementing body receives training from the program manager to share the program objectives and goals and enhance their motivation to participate in each program team. It is important to evaluate the project and show the degree of the project’s contribution to the program even at the stage of program implementation. This makes it possible to enhance the program manager’s motivation to contribute to the program.

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2) Utilization of Community of Practice With regard to the operations carried out under both the program and the projects, power and responsibility is clearly allocated to specific functional organizations and individuals. However, if the relationships among the projects are complicated or if it is difficult to achieve the goals, it is necessary for the parties concerned to exchange wisdom beyond their scopes of responsibility or their positions. A community of practice is used as a system for promoting collaboration beyond such an official organizational system. Community of practice (unofficial group) Information exchange

Issues

Intelligence creation

Application/ practice

Value creation

Program implementing body / project implementing bodies

Exhibit 2-2-22 Concept of the relationship between the program/project implementing bodies and the community of practice Source: Motoh Shimizu, “Practical Project & Program Management,” JMA Management Center, 2010, p. 335, Exhibit 7-1-12

A community originally means a locally-rooted communal society. In a community, individuals are expected to give some contributions, such as mutual help according to each own ability and participation in official events. Although such contributions were compulsory in the eras when it was difficult to live without any relationship with the community, recently, many individuals can live without assuming such duties, separating from any community, except in the case of an emergency, such as a natural disaster. If a program is carried out in an organization, the responsibilities specified as a system for the program implementing body must be performed as duties, it is important for a wide range of experts to encourage voluntary contributions to use various types of first-rate wisdom that exists in workplaces. If an organization recognizes that having a place where each individual’s wisdom and skills can be sublimated into organizational power is a part of the organization’s nature and culture, this has a great effect in the development of the organization power to survive in the modern world where the environment changes rapidly. Such a place is called a community of practice. Exhibit 2-2-22 shows the concept of the relationships between the program and project implementing bodies and the community of practice. 3) Combination of an Incentive and a Penalty under a Contract If two or more organizations form program and project implementing bodies, a contract is concluded to carry out the operations. It can be agreed that, if the goals (about performance, costs, delivery date, etc.) are set for the whole program, and the program owner’s profits are expected to increase, for example, because of an improvement in the performance or an advancement in the delivery date, some benefits should be returned to

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each project implementing body. This agreement is called an incentive. There is also a penalty agreement whereby if the goal is not achieved, such as a delay in the delivery date, the project implementing body should pay compensation to the program owner at a prescribed rate. The combination of these agreements makes it possible for the project implementing bodies to justify cooperation in the achievement of the program goals, being aware of the program’s total optimization.

3-1-2. Goal Management of Program Implementation After the completion of the program launching, the program implementing body starts the program implementation. The program implementing body monitors progress in the achievement of the goals of the whole program (about performance, cost, delivery date, etc.), receiving reports on the goals specified for each project (about performance, cost, delivery date, etc.) regularly from the project implementing bodies. The control of the whole program by considering and instructing the necessary measures for each project is called the goal management of the program. (1) Monitoring and Control The program manager collects information about environmental changes in the program and information about the status of the progress in each project. This is called monitoring. The program manager comprehensively examines the collected information as past data to predict progress in the program up to the time of completion, considers and plans measures necessary at that time, and has the project implementing bodies to carry out the measures or carries out them him or herself. This is called control. When carrying out them, it is important to consider the risks described in Chapter 3

Exhibit 2-2-23 Main program monitoring targets Source: Adapted to Motoh Shimizu, “Practical Project & Program Management,” JMA Management Center, 2010, p. 215, Exhibit 4-5-5. * Critical project, critical item: If a critical project or item is delayed, the delay necessarily effects the overall progress. * Key success factor: task or event is to focus on achieving a purpose or goal

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1) Monitoring The purpose of the monitoring centers on the assessment of external environmental changes, internal environmental changes in the projects and the program, and the status of progress in the projects (the gap between the plan and the implementation and arising problems that arise). The indicators that are used to measure and assess the status the progress the projects are planned beforehand. Although many indicators are collected and assessed through information networks, it sometimes takes a lot of time to detect a problem and it may be difficult to recover a project when the problem appears more clearly. This is because a project implementing body tends to make efforts to solve a problem by itself to fulfill its responsibility and is delayed in reporting the problem to the program implementing body or conceals negative information even without doing so for malicious reasons. To prevent this, it is important to identify highly risky operations and pay special attention to the status of progress in them and to collect a wide range of information, including not only information reported from the project managers but also information gained from main project members at the actual project sites. Exhibit 2-2-23 shows the main program monitoring items. 2) Acceleration of Implementation If the project schedule is delayed or the project cost exceeds the planned costs, the program implementing body urges the project manager to improve the situation. This is called the acceleration of implementation. If the schedule delay or the cost excess is beyond the tolerance level, the program implementing body demands that the project implementing body should report a summary of the problem, an analysis of the cause, and the method of solving the problem. If the project implementing body cannot devise a concrete and effective remedy, the program implementing body sometimes provides support. For example, the program implementing body carries out the following: the provision of advice from experts or experienced persons; the supply of various kinds of information; the provision of physical support, such as the lending of equipment; the establishment of environments for the project implementation and the removal of obstacles; and coordination with other projects and stakeholders. Moreover, personnel systems are usually reinforced by some measures, such as an increase in the project personnel, support in reducing the burden on key members, and the placement of full-time members for the solution of the problem. (2) Information Communication To monitor and control the program accurately, it is important to establish information communication in a broad sense to handle program reports, instructions, and information in a unified way according to the prescribed management rules on programs and projects. It is necessary to establish not only a network of information systems, but also a conference body and standard report forms and deepen the common understanding of the terms and indicators used for the program.

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If a project is especially important for the program, members of the program implementing body are dispatched to the project implementing body whenever needed and promote monitoring and control as liaison staff. (3) Program Change Management The purpose of program management is to achieve the prescribed mission. For this purpose, efforts should be made to carry out the program with firm conviction and eagerness. However, if it is difficult to carry out the program according to the initial plan due to rapid changes in the external environment or if an intolerable risk is likely to become latent, changes may be made in the basics of the program concept plan, such as the goal, schedule, or cost of a project. Although such changes should not be made easily, hesitation in making changes may be contrary to total optimization. Therefore, the program manager is responsible for asking the program owner for a decision from time to time. It is important for the program manager to have the ability to carry out the plan strictly while dealing with it flexibly by appropriate timing. On the other hand, at an earlier stage of program implementation, it is necessary to check what degree of change needs the program owner’s approval. To the extent to which the achievement of the program mission has no effect, the program manager can make a rapid response according to his or her own judgment. Exhibit 2-2-24 shows examples of factors causing program changes and the contents of the program changes. The procedures for the management of project changes are applied to the official procedures necessary for the management of changes. Type of factor

Examples

Change in the management system

Change in the parent organization’s business system (such as M&A), change in the business strategy Change of the program owner Main stakeholder’s policy changeover, bankruptcy, conflict, etc.

Discovery of unsuitability of purpose or goal for the market (or a change in the market)

Discovery of inappropriateness of a program goal Discovery of difficulties in realizing a program goal Difficulty in achieving the goals of some projects or a serious delay in some projects Discovery of an implementing body’s lack of ability

Considerable change in the business environment

Rapid reduction or expansion in the market size Emergence of a strong rival A change in the legal system, policy changeover, war/turbulence

Considerable change in the core technology

Rapid spread of a new technology Conspicuous change in technology in use

Exhibit 2-2-24 Examples of factors for program changes Source: Motoh Shimizu, “Practical Project and Program Management,” JMA Management Center, 2010, p. 218, Exhibit 4-5-6

3-1-3. Program Closing If the goal management of the program completes and the planned results are achieved or if it is judged that the planned results cannot be achieved if the program is continued, the program ends officially. This is called program closing. 78

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In some cases, program termination cannot be clearly declared because new projects are planned and carried out one after another. At the end of a program, the program manager evaluates the results and the processes, arranges he lessons learned, and reports them to the superior program stakeholder. After receiving approval from the program owner, the program manager instructs the project managers to dissolve the project implementing bodies and dissolves the program implementing body to terminate the program.

The integration management of program implementation is a management activity that aims to realize the values specified in the program concept plan without fail. Because a program essentially contains high risks, and many resources are invested at the stage of implementation, whether or not the stage is successful directly influences the creation of values. The program manager needs to have a strong will to complete the plan, assessing the risks and the possibility of realizing the values and coordinating with many stakeholders, and have an ability to deal with the plan flexibly, including necessary changes in the plan. The integration management of program implementation consists of the following: 1) launching of program implementation; 2) goal management of program implementation; and 3) program closing. The launching of program implementation consists of the following: 1) overall grasp of operations at the stage of program implementation; 2) determination of the organization that carries out each operation; 3) launching of each of the projects that constitute the program; 4) review of the implementation plan; and 5) a system for total optimization.

4.Relationship Management (1)

Need for Relationship Management in the Program Achieving program missions requires managing with a clear understanding of stakeholders at the program level. Stakeholders at the program level include those involved in the whole program, those involved in multiple projects, and those involved only in individual projects. The scope of their interests is broader and more complicated than that at the project level. Stakeholders in individual projects within a program are not always connected through shared interests. Therefore, the program manager needs to manage relationships while overseeing the whole program. Changes such as downsizing, extension, or cancellation of individual projects may be needed in the course of achieving program missions. These changes may sometimes conflict with the interests of the stakeholders in each project. The program manager needs to satisfy all stakeholders through comprehensive coordination while understanding the relationships between program missions and individual project missions as well as the positioning of each stakeholder. Since relationships at the program level are more diverse and complicated than at the project level, it is even more important to discuss program-level relationships at the concept planning stage (scheme model). Accurate understanding of stakeholders as well as establishment and maintenance of necessary relationships at an early stage is vital for program management and its success.

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Recently, some relatively large-scale projects of a public nature have introduced strategic environmental assessment (SEA). In SEA, assessment is performed prior to the implementation of each project where feedback from stakeholders is collected and reflected in decision-making in order to reduce unnecessary investment and accumulative environmental impact. SEA includes a process necessary for designing program-level relationships with stakeholders. Many Western countries already have legislation in place for SEA. Some international organizations and major bilateral aid agencies mention, in their guidelines for loans and assistance, the need for implementing SEA. (2) Establishment of Multi-tier Customer Relationships Projects are performed over a limited period of time. In an order-based project, relationships with the customer or ordered terminate when the contract expires. However, it is important that the program continues and that the customer chooses the products or services that the company offers. When a project completes, related maintenance services or new projects often start instead. In some cases, a brand-new service scheme that is different from the typical model arises as a project, and is then proposed to and accepted by the customer. If a company wants to continually provide good products and services in its B-to-B relationships, it comes down to the challenge of maintaining product and service quality as well as long-lasting amicable relations with customers. While maintaining an amicable relationship, it is also necessary to encourage customers to continually choose the company’s products or services and to satisfy them. To that end, it is effective to build multi-tier customer relationships so as to facilitate and expand the business. Close-knit multi-tier channels determine the tightness of the B-to-B relationship and the capability of the company, which in turn affects sales and customer satisfaction. For instance, channels can be established at each level, such as executives (CEOs or directors), middle management, and employees. There may be channels between purchase and sales personnel, engineers, and other experts. Creation of these channels leads to closer B-to-B relationships. Program managers need to encourage the company to create lasting relationships with customers while each project is underway. The more multi-tier the relationship is, the more difficult it will be for the company to maintain consistency in their interactions. For example, it is often the case that even though working-level personnel establish very good relationships with their counterparts at another company and nearly win a contract, they end up letting the competitor snatch the contract because the presidents of the two companies fail to establish ties. Deals often break off because the client gets angry with a new salesperson who says something different from his/her predecessor or because an engineer and salesperson take different approaches. Needless to say, making sure that everyone in the company takes the same approach to the same client based on the same information is more efficient and increases the chance of business. Even when taking a multi-tier approach, it is naturally more efficient to take a strategically consistent approach. These days, the notion of customer relationship management (CRM) has led an increasing number of companies to take advantage of advanced information technology to centrally manage customer information and establish a system for ensuring a consistent approach towards a given customer throughout the company. Such companies implement CRM on their intranet with the aim of offering speedy customer services.

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Achieving program missions requires managing with a clear understanding of stakeholders at the program level. Program managers need to manage relationships while overseeing the whole program. Program managers need to encourage the company to create lasting relationships with customers while each project is underway.

5.Multi-project Management 5-1. What is a Multi-project? When the missions of more than one project that an organization is carrying out are not interrelated, that group of projects is not called a program but a multi-project. Both programs and multi-projects rely on the same management resources (manpower, goods, capital, and information). However, their management is different. Program management is intent on the achievement of program missions and seeks out effective and efficient ways of implementing the program. The value generated by the program has to be larger than the sum of the values generated by each project. On the other hand, multi-project management focuses on the sum of the outputs of each project and effective and efficient ways of implementing the projects. It is not rare for companies in particular fields to perform both program management and multi-project management. Since these two management types have much in common in terms of required management skills and knowledge, they are often carried out in an integrated manner. Some companies (plant construction, IT solutions, etc.) regularly handle multi-projects. For these companies (1) receiving orders for more than one project continually and reliably as well as (2) completing the projects in accordance with their performance, cost, and delivery plans while leveling out the operating ratios of the required professional human resources contributes to the stability, continuation, and growth of their businesses. In addition, maintaining and enhancing human and other resources can be a source of competitiveness. Exhibit 2-2-25 summaries the major perspectives in multi-project management. Management elements

Description

Optimize project portfolio

Soundness Profitability Growth potential Efficient use of human resources

Maximize organizational productivity

Planning and management of efficient use of human resources

Minimize business risks

Cross-organizational monitoring and control

Improve professional skills in each field

Foundation of competitiveness and growth

Exhibit 2-2-25 Major Perspectives in of Multi-project Management Source: Project Management Committee Independent Study Report "A Study on Multi-project Management" (The Engineering Advancement Association of Japan, March 2005), pp5

5-2. Key points in Multi-project Management 5-2-1. Project management Culture and Business Management Standards Project management culture is a type of corporate culture that can be used as a standard to measure an organization's awareness of achievement-oriented project implementation. The project management culture of the organization determines the perspective from which to set

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the standards for its business management. Those standards need to be defined clearly in the organization. They are reflected in the project portfolio. Exhibit 2-2-26 lists some of the standards generally applied by companies handling order-based projects so as to make reasonable decisions on which candidate projects to choose and how to allocate limited resources. No.

Standards

Focal points

1

Order value

2

Expected profit

・Ensure an appropriate profit

3

Personnel input efficiency

・Reasonable use of human resources

4

Risk level

・Impact on business continuation

5

Market share

・Ensure growth through market extension

・Ensure an appropriate order value ・Maintain the operating rate of management resources

・Enhance general technological capability 6

Technology enhancement

・Create new technologies ・Enhance project implementation capability through participation in overseas and joint venture projects

Exhibit 2-2-26 Evaluation Standards for Project Choice Source: Project Management Committee Independent Study Report "A Study on Multi-project Management" (The Engineering Advancement Association of Japan, March 2005), pp5 5-2-2. Organization Types and Authority Standards Organization types vary from a complete task force to a matrix or functional department-focused according to the level of project management culture that is developed to fit the market the organization is faced with. The level of authority of the project manager depends on the organization type. Whatever the organization type is, the responsibilities and authority given to the person in each position should be clearly and plainly defined based on definite standards. Otherwise, it will be hard to manage the organization. When the missions of more than one project that an organization is carrying out are not interrelated, that group of projects is called a multi-project. Multi-project management focuses on the sum of the outputs of each project and effective and efficient ways of implementing the projects. 5-2-3. Project Manager Appraisal System For the management of multi-projects, it is critical to properly define the fair appraisal system for project managers who have a significant impact on the project success. This holds true in program management as well. It is necessary to keep motivating them as well as presenting career paths for them through incentives commensurate with their heavy responsibilities.

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[ References ] 1) 2) 3) 4) 5) 6) 7) 8) 9) 10) 11) 12) 13) 14) 15) 16) 17)

Mikio Shimizu. (2010) Jitusen Purojekuto & Puroguramu Manejimento [Practical Project and Program Management]. Toyo Japan: JMA Management Center. Akio Kameoka. ed..(2007) Saabisu Saiensu [Service Science]. NTS. Hiroyuki Itami. (2012). Keiei Senryaku no Ronri [The Logic of Corporate strategy]. Tokyo, Japan:Nikkei Publishing. Tsuyoshi Numagami. (2009) Keiei Senryaku no Shikou-hou [A Thinking Method for Strategy]. Tokyo, Japan:Nikkei Publishing. Tsuyoshi Numagami (2008). Wakariyasui Maaketingu Senryaku [Plain Marketing Strategy]. Tokyo, Japan: Yuhikaku Arma. Yaichi Aoshima & Toshihiko Kato. (2012) Kyosou Senryaku-ron [Competition Strategy Theory]. Tokyo, Japan:Toyo Keizai, 2012 Seihin Kaihatsu to Jigyo Moderu no Sai-kouchiku [Product Development and Restructuring of Business Model] Harvard Business Review, April 2009 Kentaro Nobeoka. (2011). Kachi-zukuri-keiei no Riron [The Theory of Value Creating Management]. Tokyo, Japan: Nikkei Publishing. Alexander Osterwalder & Yves Pigneur, Ryusuke Koyama, trans. (2012). Business Model Generation. Tokyo, Japan: Shoeisha Miki Imazu. (2013). Business Model Generation WORKBOOK . Tokyo, Japan:Shoeisha. Robert S. Kaplan & David P. Norton, Michiharu Sakurai, trans. (2001) Kaplan to Norton no Baransudo Sukoa Kaado. [The Strategy-Focused Organization]. Tokyo, Japan: Toyo Keizai. Information-Technology Promotion Agency, Japan. (2011) Johou Shisutemu Uuzaa Sukiru Hyoujun Ver2.2 . [Information System User Skill Standards Ver. 2.2] Yoshio Sato. Kuraudo Jidai no Purojekuto & Puroguramu Management. [Project & Program Management with Cloud Computing] Tokyo, Japan:PM Alignment PMI®. (2009). A Guide to the Project Management Body of Knowledge (PMBO®Guide) Fourth Edition Japan Users Association of Information Systems. Kigyou IT Doukou Chousa Houkokusho 2012 [The Report on the Survey of Trends in Infomration Technology in Enterprises 2012] Ohara, Asada & Suzuki. (2004) Purojekuto・Baransu・Sukoakaado. [Project & Program Balanced Scorecard]. Tokyo, Japan:Seisansei Shuppan. ENAA Project Management Committee. (2005) Maruchipurojekuto Manegemento no Kenkyu. [A Study on Multiproject Management]. Tokyo, Japan:ENAA Project Management Committee Independent Study Report.

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Chapter 3 Program Strategy and Risk Management Chapter 3 discusses the relationship between risks and the program strategy management, which is utilized throughout the process from mission profiling to managing the integration of program implementation. The owner's thought or idea combined with his/her passion creates a mission, which then forms into a program and projects. Outcomes are obtained as a result of implementing these programs and projects. Within this process, there are great uncertainties (risks) in the upstream process where the program mission is visualized through mission profiling.

Exhibit 2-0-1Program Management Structure The purpose of this chapter is to explain 1) the process of designing a strategic program and 2) the process of maximizing the effect of the strategy as much as possible with an accurate understanding of the risks. Program mission, which embodies the strategy of changes and value creation, itself is a great uncertainty called speculative risk*13. In order to obtain considerable output from the program, it is necessary to have ambitious purposes or goals (missions); at the same time, the risks that they entail should be within acceptable limits (in other words, at a manageable level). In program management, both strategic factors and risk management have to be considered within a single large framework. -----------------------------*13 Speculative risk: Uncertainty that could bring about either loss or profit. Risk that can only lead to loss is called pure risk.

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1. Program Strategies and Risks 1-1. Strategies in the Program The program mission that the proprietor or owner of the business presents pursues the implementation of business strategy with an eye towards widespread, long-term business development. In a program, the essence of the strategy that meets the demands of the program mission has to be adequately defined in the form of strategic goals. At the same time, a program implementation strategy, which is the policy for ensuring the implementation of the strategy, needs to be developed. These strategies and policies are plotted along with the mission profiling process in program implementation management and are incorporated in the implementation scenario. Then, they are later mapped out in detail in the program design process.

1-2. Risks in the Program Risk means uncertainty in doing some form of business or taking some kind of action. Programs seek out changes and the creation of value that has never existed in accordance with the business strategy that the upper levels of the organization have drawn up. Therefore, uncertainty is an inevitable aspect of programs; in other words, programs, by their nature, entail speculative risks. In projects, goals are usually already set from the beginning, and risk management is mainly directed at pure risks. In programs, on the other hand, strategic goals to be attained are selected in the upstream process. Conceptually, this process defines the upper limit of the value obtained through the program. In other words, it determines the possible scope of value obtained as a result of the success or failure of the implementation management that follows. Since a program, which is a combination of more than one project, has a long life cycle, it is vulnerable to various changes in the external environment. Preparedness for such impacts is needed. That is also what makes program risk management different from typical project risk management.

1-3. Strategic Approach in Japanese-style Organizations and Japanese-style Program Management In Western-style organizations, the organizational structure and reporting line are clearly defined and incentives that help them work are set. Since the definitions are so rigid, it is unlikely that flexible actions beyond the scope of defined responsibilities are taken. Such organizational characteristics work effectively to ensure the implementation of the project where the purposes and the division of roles are clearly specified. Meanwhile, Japanese-style organizations are characterized by their stable employment, sangen-shugi (which focuses on looking at the actual site, actual thing, and actual situation), and consensus-oriented decision-making style. They define the responsibilities of each job in job descriptions like Western-style organizations do. However, they are loosely defined; thus, individuals’ capabilities and mutual cooperation fill the gaps where there is an absence of definition. This makes it possible for an organization to work autonomously without rigid job descriptions as well as to flexibly change responsibilities to cope with changes in the environment. Japanese organizations also have a culture of appreciating achievements that rely on individual capabilities or cooperation among each other. Such characteristics of Japanese-style organizations help overcome flaws in the business process through cooperation, and they work effectively especially in projects where the purposes, division of roles¸ and details of tasks are clearly defined. At the same time, they have negative effects as well. For example, in Japanese-style organizations, the smooth implementation of top-down approaches is difficult or depends heavily on the abilities of middle management. However, autonomous and cooperative behavior among middle

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managers who are closer to the workplace may be helpful in programs where there is multiplicity, scalability, complexity, and uncertainty. It goes without saying that the middle managers who constitute the core of the workplace are vital to the characteristics of Japanese-style organizations working effectively in the program. As one of the characteristics of Japanese-style organizations, Ikujiro Nonaka 5) cites middle-up-down management, where middle managers function as "a bridge that connects the vision or ideal of the executives with the complicated business realities that front-line workers are often faced with." Instead of executing strategy through a top-down approach, Japanese-style organizations commonly adopt the middle-management-lead approach where middle managers, with the whole picture of the company in mind, understand the strategic mission presented by the top management and implement the program in accordance with the reality of the workplace and other circumstances. Of course, many Japanese companies practice top-down management. At the same time, many Western companies take the management style of embracing sangen-shugi (the principle of focusing of the actual site, actual thing, and actual situation) like Japanese companies do. The middle-up-down approach that is implemented at the initiative of the workplace is applicable not only to Japanese-style organizations but also to various programs. Strategies are designed by middle managers who know the workplace take the reality of the business into careful consideration. In addition, risks predicted from the perspectives of the workplace (which is actually involved in the project or program) are more specific and clear than risks predicted through the top-down approach. However, strategies designed from the perspectives of the workplace also tend to be short-term and locally focused. Attention should be paid not to succumb to these weaknesses of middle-up-down management.

In a program, the essence of the strategy that meets the demand of the program mission has to be adequately defined in the form of strategic goals. At the same time, a program implementation strategy, which is the policy for ensuring the implementation of the strategy, needs to be developed. Risk means uncertainty in doing some form of business or taking some kind of action. Programs seek out changes and the creation of value that has never existed in accordance with the business strategy that the upper levels of the organization have drawn up. Therefore, uncertainty is an inevitable aspect of programs; in other words, programs, by their nature, entail speculative risks. Risks may bring about not only negative outcomes or impacts but also favorable outcomes. The former is called "pure risk" while the latter is called "speculative risk." Source: Ikujiro Nonaka & Hirotaka Takeuchi, Chishiki Souzou Kigyou (Knowledge Creating Company) (Toyo Keizai, 1996), pp.191

[ The Relationship betweenSstrategies and Risks ] ******************************** Apple's iPod and iTunes are good examples that explain the relationship between strategy and risk. The iPod, launched in 2001, is a digital music player with a hard disk drive or large storage memory in it. Outstanding in its novel design and excellent usability, it enjoyed explosive sales primarily among the younger generation. Together with iPod, iTunes—a music player and management software—started distribution in January 2001. (The iTunes Music Store opened in April 2003). A scheme that forces iPod owners into using iTunes to store and organize music was created. Apple outdistanced SONY and other competitors that provided similar digital music players and music download services. That was because Apple

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built an environment called the iTunes Music Store by involving the music industry. By using the iTunes Music Store, users could easily access abundant music data without having to digitize music on their own. The strategy Apple employed was to provide the iPod hardware and iTunes software as a set, as well as to create the iTunes Music Store—a musical environment that involves many stakeholders. The risk Apple took, on the other hand, was to build up a new revenue model where iPod users keep purchasing and storing music using iTunes and the iTunes Music Store. It was a strategy for overcoming the risk that the competitors had experienced—namely, the opposition of the music industry—by creating an ecosystem based on an extensive look at the music industry as a whole. Following the iPod Classic, various other models, including the Shuffle, Nano, and Touch, were developed and put on the market so that people could choose the one that best fit their lifestyle. The iPod has become part of our daily life. Users of iPod have established a brand new way of enjoying music where they purchase music online at the iTunes Music Store and store and organize it using iTunes. It is completely different from the conventional style of buying musical CDs at a physical store. And by supporting the music industry, Apple brought benefits to many companies involved in that industry. At the same time, Apple gained much not only from its product line including the iPod, iPhone, and iPad, but also from the music distribution system it established on its own. ***********************************************************************************

[ Ecosystems ] ************************************************************* The term ecosystem originally comes from biology. It is a system of living creatures and the components of their environment (e.g. flowers and the butterflies or bees that carry their pollen). Recently, it has started to refer to new industrial systems of coexistence and co-prosperity, where companies rely on or cooperate with one another in the fields of management or IT. These ecosystems transcend the borders of individual industries or countries. In the IT industry, peripheral devices and software manufacturers formed an aggregate called WINTEL, which is centered on Microsoft Windows and Intel processors. Usually, such an ecosystem needs a core company. It is Microsoft and Intel that served as the core companies of WINTEL. In today’s gas-powered vehicles, fuel supply networks made up of gas stations are in place. Car dealers and repair centers are easily accessible from anywhere in case of trouble. Many stores deal with replacement parts. All of these constitute the ecosystem for gas-powered vehicles. On the other hand, few charging stations for electric vehicles have been installed because of their high construction costs and the low prevalence of electric vehicles. Insufficient charging facilities, in turn, are putting a brake on the ownership of electric vehicles, causing a vicious spiral. In other words, the immaturity of the ecosystem for electric vehicles is considered to be a reason for the low popularity of electric vehicles. ************************************************************************************

2. Program Strategy Management In a program, the essence of the strategy that meets the demand of the program mission has to be adequately defined in the form of strategic goals and properly implemented. Programs entail uncertainties in the program itself, which arise when the environment changes or multiple projects are related to one another. Also, there are uncertainties in the individual projects that constitute the program. In order to complete a program successfully, strategic management is required. It is necessary to monitor the program, while it is underway, for any changes in the value creation that the program aims at. If there are any

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changes, the program has to be modified. Programs should be managed strategically in this way.

2-1. What is Program Strategy Management? Program strategy management adequately interprets the essence of the program mission while identifying the interrelationships between the objectives, goals, and methods. Further, it establishes the basic framework and determines important constraints as well as implementing the integration management that is needed to accomplish the program mission. Program strategy management has two phases: strategic goal management, which develops the program mission derived from the strategy of the upper organization into specific goals; and implementation strategy management, which is a method of successfully implementing the program. (Exhibit 2-3-1)

Exhibit 2-3-1 The Structure of Program Strategy Management Source: Motoh Shimizu, "P2M ni okeru senryaku to risk no ichi-kousatsu (A study on strategies and risks in P2M)," The Journal of the International Association of Project and Program Management Vol.5, No.1 (2010), pp129

Since programs entail uncertainties in the individual projects that constitute the program as well as in the program itself (which arise when the environment changes or multiple projects are related to each other), there are many risks in a program. Ways to cope with those risks are analyzed and assessed through the implementation of strategic goal management and are reflected in the program scenario. ●Program strategy management adequately interprets the essence of the program mission while

identifying the interrelationships between the objectives, goals, and methods. Further, it establishes the basic framework and determines important constraints as well as implementing the integration management that is needed to accomplish the program mission. ●Program strategy management has two phases: strategic goal management, which develops the program mission into specific goals; and implementation strategy management, which is a method of successfully implementing the program. ●Ways to cope with risks are analyzed and assessed through the implementation of strategic goal management and are reflected in the program scenario.

2-2. Strategic Goal Management The strategic goals of a program are the goals that have to be attained to accomplish the program mission. They specify what to do and the level of achievement that will result. Suppose the program mission states that global sales should be tripled within three years. Such a statement is not a strategy but rather an aspiration, because the desired outcome is presented only vaguely. For the strategic goals of the program, specific actions to be taken should be clearly defined, such as: "increase target countries so as to triple market size”,

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“establish a global sales and service network that enables the sales to increase to more than three times the current level”, or “at least triple the number of varieties of products or services the global market." It is only after this process that the action to be taken in the program is made clear. However, clarifying goals is not enough. In strategic goal management of the program goals, it is important to evaluate the following points: effectiveness (Value of the plan: Does it really work?), feasibility (Value of achievement: Can the plan be achieved?), and (especially in the case of companies and businesses) expandability (Value of application: Is it possible to continue and develop it?). After going through this evaluation process, it is also important to develop a series of even more detailed program goals. When setting program goals, various factors must be taken into consideration. These include the relationship between the external and internal environments, changes in the external environment, and the relationship to the missions of companies or businesses positioned at the upper levels of the program mission as well as their potentials and uncertainties. However, it is difficult to cope with all of these factors; trade-offs between complicated factors are therefore required. Sometimes, it is necessary to substitute one thing for another, give up something, or not do something. The above three viewpoints are important as criteria in deciding what should or should not be done.

Exhibit 2-3-2 Major Perspectives in Program Goal Management 2-2-1. Effectiveness of Program Goals When evaluating the effectiveness of goals ("Does it really work?") from the perspective of program strategic goal management, the following three factors are important. (1) Effectiveness and Efficiency Effectiveness is the program's ability to generate value that is truly appreciated in the environment (market). In other words, it is the compatibility of the value with the environment (market). On the other hand, efficiency is the ratio of generated value to input. Although both are important for an organization, higher priority is given to program goals that create value with higher compatibility with the environment (market). Even if efficiency is not high at the beginning, it can be enhanced with continual efforts to improve. However, program goals that have no value (ineffective) in the environment (market) do not make any difference no matter how much effort is made to improve their efficiency. That is why effectiveness is given such a high priority. The most important thing is whether the program goals really conform to what the environment, market, or customers want. However, it should be noted that it is difficult to determine effectiveness/ineffectiveness and the degree of it; therefore, decisions on program implementation tend to be based on efficiency, which is easier to evaluate. (2) Timing In a competitive environment, timing (such as when to offer the value of the program to the market), is also a critical factor in evaluation and decision-making. Even if a program has the potential for offering a highly effective output, most of its effectiveness will be compromised once another company or organization gets a step ahead in providing the

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market with a similar value. Time is an essential factor in setting program goals. There are two main alternatives: take more time and achieve value considered highly effective; or release some of the outcomes ahead of time and then gradually create additional value. It is not easy to determine which to choose as various factors or stakeholders have to be taken into consideration. In any case, the possibility of realizing value within a short period of time can often be an advantage in a competitive environment. When setting program goals, it is important to be conscious about speediness. (3) Uniqueness of Value In order to gain a competitive advantage in a competitive environment, the value created by the program must be unique. As part of program goals, it is necessary to consider how uniqueness of value will be achieved. More specifically, it is important to create unique value that cannot be easily imitated by other companies or organizations, such as product or service features that are not seen anywhere else, characteristics obtained through the combination of products and services that are not seen anywhere else, a unique position in the market, and an effective scheme in the organization. A typical example of that is A Challenge to Unmet Medical Needs (see entry on page 172). Obviously, both the value that can be provided and the value that can be obtained are small in a satisfactory environment. In a competitive environment, more than one organization supplies similar products and services to the market. The market always evaluates them and recognizes the characteristics of each of the similar products or services while identifying those characteristics with those of the organization that offers the product or service. In other words, the culture and experience of the organization is significant when it comes to the uniqueness of products or services that the organization provides. 2-2-2. Feasibility of Program goals A trial to create and realize new value through a program always entails unknown factors; namely, speculative risks and pure risks. These are referred to as uncertainty in explaining the fundamental attributes of the program. The more value a program aims to create, the more uncertainty there is and, consequently, the lower the feasibility. Feasibility is a crucial factor in decision-making in an organization because the implementation of a program requires a massive input of resources. However, there are not any indicators that accurately evaluate the overall feasibility of a program; thus, comprehensive evaluation needs to be conducted by examining the results of risk analysis including a relative evaluation among different scenarios and feasibility assessment of the individual projects that constitute the program. 2-2-3. Expandability of the Program Continual growth is a crucial theme for a typical organization, especially a company. Figuring out how to design an expandable program is an important factor in considering program goals. This section explains the two aspects of program expandability. (1) Expandability of the Program Itself Expandability is an important aspect of a program. Once a program is completed successfully, it is necessary to expand the program itself with the aim of achieving the next step or to start a new program that is consistent with the original program. The goals and structure of the program should be designed in a way that facilitates such an expansion. With respect to that, P2M argues that it is crucial to start up a new scheme model project based on the service model project. A service model project is a project that actually obtains the value in the program, while the scheme model project is aimed at obtaining even higher level of value. The main challenge here is how to apply the lessons learned from the previous program to the next one. This challenge needs to be incorporated in the program goals from the beginning. When manufacturers set goals in their product development, they need to employ the

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strategy of putting particular products or services on the market first and applying market feedback to the products that follow. Also, their long-term product road map and individual projects have to be consistent with each other. Such a notion is demonstrated in organizations dealing with project-based businesses (programs), where they strategically decide the next projects they will work on in a way that allows them to make use of knowledge and experience they have acquired through the completion of the previous project. (2) Expandability Brought to the Organization by the Program Through the implementation of programs aimed at accomplishing their mission, organizations acquire management resources and competence that include uncommon management resources, new markets and customers, enhanced organizational and management capacity, sources of financing, credit, and brand power. These can be used in more advanced ways even after the program is completed. This is the idea of dynamic capability, which is especially significant for Japanese companies that emphasize the continuity of the organization. It is necessary to prevent the loss of human resources and technology that have grown more competitive through the implementation of the program or projects after the program or projects have been completed. However, the primary goal of program management is to accomplish the program purposes. Although expandability is an important factor in terms of business strategy, there can be no expansion if the program ends up in failure. Expandability is a secondary factor that takes post-program developments into account. The strategic goals of a program are the goals that have to be attained to accomplish the program mission. They specify what to do and the level of achievement that will result. In strategic goal management of the program goals, it is important to evaluate effectiveness, feasibility, and (especially in the case of companies and businesses) expandability. After going through this evaluation process, it is also important to develop a series of even more detailed program goals. When setting program goals, various factors must be taken into consideration. These include the relationship between the external and internal environments, changes in the external environment, and the relationship to the missions of companies or businesses positioned at the upper levels of the program mission as well as their potentials and uncertainties. Effectiveness and efficiency, timing, and uniqueness of value are important factors when evaluating the effectiveness of goals. In order to gain a competitive advantage in a competitive environment, the value created by the program must be unique. Feasibility is a crucial factor in decision-making in an organization because the implementation of a program requires a massive input of resources. Expandability of the program has two aspects; namely, expandability of the program itself and expandability brought to the organization by the program.

2-3. Implementation Strategy Management Implementation strategy management of a program aims to accomplish the strategic goals that are defined in strategic goal management. It is management of the strategy for program implementation. Its purposes are to increase the certainty and efficiency of the program as well as the competitiveness of the products and services provided through the implementation of the program. In this document, certainty is discussed later in the context of risk management. As for competitiveness of the products or services (one of the core factors in the program goals), it is possible to discuss this in the program design process or at the individual project level instead of dealing with it in the mission profiling performed during the early stages of program management. Actually, in the manufacturing sector,

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competitiveness is attained by developing, almost regularly, modified products one after another. In case of a strategy-type program, increasing competitiveness of the products or services is an important factor in strategic goal management, while it should be considered an important factor in implementation strategy management in case of operation-type programs.

Implementation strategy management of a program aims to accomplish the strategic goals that are defined in strategic goal management. It is management of the strategy for program implementation. The purposes of the program implementation strategy management are to increase the certainty and efficiency of the program as well as the competitiveness of the products and services provided through the implementation of the program.

2-4. Organizational Strategies and the Program Different organizations have different strategies. Further, resources available to an organization and the environment in which the organization implements its program are also different. Therefore, it is extremely difficult to generically explain the development of program mission into program goals. However, this paragraph does describe the types of programs that organizations commonly adopt. (See Chapter 1 of Part 4 for an overview of strategies in the company.) (1) Strategy-type Programs The main themes of a program in a corporate organization include: the establishment of a new scheme that brings about a competitive advantage in the market, development of innovative products or services that have never existed before, and creation of a brand new market through the implementation of a program that has never been experienced. All of these are expected to help cope with competition. (See Chapter 1 of Part 4.) In the case of strategies based on a Resource Based View (RBV)*14, acquisition of management resources that are valuable, uncommon, and cannot be copied by any other companies is the main theme of the program. When specifying program goals in a program of this type, perspectives from strategic goal management; namely, examination of the elements of program goals in the mission profiling process, is vital. Exhibit 2-3-3 lists the perspectives in strategic goal management. For example, the strategy on the market consists of a competitive strategy for products or services as well as the business portfolio strategy. Its fundamental strategy includes the creation of a new market and strategies based on the competitive strategy theory, such as cost leadership. The fundamental strategy is not a single strategy. In many cases, multiple strategies are combined to form a comprehensive strategy. Basically, each strategy is aimed at obtaining a strategic advantage over competitors. To that end, it is necessary to combine economies of scale, economies of scope, and other items listed in the entry on Source of Strategic Advantages with other items. In many programs, the program mission presents any of these items under Fundamental Strategies. Meanwhile, program goals defined in the mission profiling process are more specified versions of items in Source of Strategic Advantages that are arranged in accordance with the program. -----------------------------*14 RBV (Resource Based View of the firm): A strategy theory arguing that a company can obtain a competitive advantage by making use of its original resources. Advocated by Birger Wernerfelt in "A resource-based view of the firm" which was publicized in Strategic Management Journal and was developed by Joy B. Burney in Corporate Strategy Theory.

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Exhibit 2-3-3 Perspectives in Strategic Goal Management Source: Motoh Shimizu, "P2M ni okeru senryaku to risk no ichi-kousatsu (A study on strategies and risks in P2M)," The Journal of the International Association of Project and Program Management Vol.5, No.1 (2010), p.p.129

Examination from various perspectives is required for giving a program a concrete form. Major perspectives are listed in the entry titled Major Perspectives in Specifying Strategic Policies. With respect to economies of scale for example, the profit ratio goal is set first. In order to achieve this goal, the scope of the value chain and transaction costs in the value chain are examined. Also, affiliation, mergers and acquisitions, and other organizational matters as well as investments in technical development, facilities, and equipment have to be considered. The structure of the program is defined through such a process. Enhancing organizational strength is crucial in the field of RBV. In this field, as is seen in companies' efforts to improve their ability to ensure quality through the Toyota Production System or TQC, it is possible for small group activities, instead of projects, to accumulate remarkable capabilities over years. However, if some other company tries to introduce the Toyota Production System (lean production system), it is difficult for them to simply imitate Toyota because they do not have the same experience; thus, they need to establish a program or projects. As for the acquisition of scarce resources which are rarely available because of competition and high reproduction costs, it is necessary to think extensively about various alternatives, including securing scarce raw materials, opening stores at advantageous locations such as downtown and areas around train stations, hiring staff with professional skills, and acquiring venture businesses with superior technologies. In order to increase resource efficiency, strategies such as the development of an innovative plant and changes in operation methods are often taken. These strategies are aimed at improving efficiency in the use of physical resources and processes that have a massive impact on cost. In this case too, in addition to increasing efficiency, it is necessary to define the area of focus. The focus may be oriented towards either the integrated system or more fragmented portions such as individual modules, parts, raw materials, and other underlying technologies. It may be oriented towards a unique inner process that competitors cannot copy as well. Program goals only can be defined as a result of specifying the focus. (2) Operation-type Program In the case of operation-type programs, the organization already has a certain amount of experience in the accomplishments that the program is aimed at—envisaged outcomes in other words. Therefore, efficiency in implementing the program is a central concern. This

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makes operation-type programs different from strategy-type programs that focus on results rather than efficiency. Of course results are examined in strategic goal management. However, efficient implementation of a program and its results are more emphasized in implementation strategy management. In the construction, plant engineering, IT, and aerospace industries, the project itself is their business. In the pharmaceutical industry, similar—if not identical—programs or projects are carried out repeatedly. In these industries, the programs or projects themselves are their business, and their business strategy and program strategy overlap one another. The management of these overlapped strategies coincides with implementation strategy management. The following describes the strategies and policies taken in such a case. It is an important challenge for industries handling operation-type programs to strengthen competitiveness and promote growth by acquiring new customers. Even more importantly, however, they need to increase sales by carrying out programs one after another and to achieve efficient operation of the organization by leveling out the workload. This holds true for the challenges in multi-project management as well (Chapter 2-5 of Part 2). Efficient management of the organization through the combination of in-house resources, outsourcing, and cooperation is vital. At the same time, this directly leads to competitive advantages for the organization, such as enhanced capacity and equipment efficiency as a result of specialization, division of labor, and accumulation of experience. If the workload is disproportionately small to the capacity of the organization, that is a problem. However, overloads could result in the failure of a program or projects. Fundamental strategies, such as selective order acceptance in accordance with the capacity of the organization and the amount of business on the books is required. Many companies in the electrical machinery and automobile industries regularly release new products by modifying existing products. Programs in these fields have the characteristics of strategy-type programs when the target product is particularly new, while they take on an operation-type nature when the target product is a modification of reliably accepted conventional products. One of the fundamental strategies of operation-type programs is group development, which is aimed at increasing efficiency in product development by thinking of the business target as a product group. This strategy is adopted in the electrical machinery and automobile industries where there are various models in a single product area. It is the strategy of developing common parts and subsystems that are shared among many models so as to achieve efficiency and economies of scale. Some of the critical factors for successful group development are fabricating product components as modules and creating platforms that are shared among different models. If the percentage of modular production is small, optimization is possible to meet the needs of each market, although the amount of development has to be large. If the percentage of modular production is large, it is the other way around. A platform that can be used extensively is applicable to the development of many other products, which allows for efficient product development. However, if the platform is not adequately designed, it does not work as expected and each model requires customization. This affects product quality in the end. The extent of modular production and platform production and the timing of platform renewal in response to the changes in the environment are key factors. In order to promote platform production, there must be a program that determines which part of a product is made into a platform. This program consists of a project for establishing the platform and multiple projects for developing products built on this platform. Pipeline management is a typical strategy employed in the pharmaceutical industry whereby effective substances are selected step-by-step out of more than several hundred candidates. The number of candidates at each step in the selection process is controlled at an optimum level. This management method is adopted as one of the industry’s fundamental strategies. More specifically, when the number of candidate substances is more than the optimum level, the surplus is sold out to other companies. If the number is short, the shortage is supplemented by purchasing from other companies. The number of pipelines is controlled in this way.

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Exhibit 2-3-4 Modular Production and Platform Production

Exhibit 2-3-5 Pipeline Management Operation-type programs that deal with system products need extensive technology for their products. In order to enhance competitiveness, it is necessary not only to brush up the core technology that the company has but also to consider taking the strategy of tactically using unique outside resources through partnerships with other companies.

In strategy-type programs, a perspective from strategic goal management; namely, examination of the elements of program goals in the mission profiling process, is important. In the field of RBV, enhancement of organizational strength is a crucial element of program goals. Efficiency in program implementation is of great concern in operation-type programs. Efficient implementation of the program and its results are much emphasized in implementation strategy management.

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[ Modular Design and Group Development ] ******************************** Coping with shortening product lifecycles and increasingly diverse customer needs are the major challenges of our time. Japanese companies, known for their painstaking services, have met customers' needs by developing products of various kinds. This has resulted in a huge amount of design/development processes and product items as well as high product costs, which are affecting quality levels in some cases. Modular design is a development method where product specifications are divided into common specifications and unique specifications that are different among different models, and the components for the common parts are standardized. By combining these standardized components, companies aims to achieve even more diverse product specifications while reducing the number and duration of design/development processes. The standardized components are called modules. By disclosing the interface specifications, many suppliers are often made available. This increases the reliability of modular production and allows for sizable cost reductions. Exhibit 2-3-6 illustrates the modular production of cellphones, smartphones, and other products. In group development, different types of products are developed using different combinations of modules and by adding (or not adding) unique functions (enclosed by dotted lines). However, they are developed as the same group of products.

Exhibit 2-3-6 Modular Production of Cellphones, Smartphones, and Other Products *************************************************************************************

3. Program Risk Management 3-1. Program Strategy Management and Risks Risk is uncertainty in doing a business or taking an action, and is expressed as the total of the products of the incidence and impact of each risk. Generally, risk is considered a synonym to uncertainty. It may bring about not only negative impact but also a positive impact. Risk that causes only negative impacts is called pure risk, while risk that may cause either positive or negative impact is called speculative risk. In program risk management, business risks that the program itself entails, risks in the whole process of implementing the mission, and the risks in each project are evaluated by examining their impacts on the program. These risks are then addressed to make sure the program mission is accomplished.

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Exhibit 2-3-7 Program Strategy Management and Risk Management Source: Motoh Shimizu, "P2M ni okeru senryaku to risk no ichi-kousatsu (A study on strategies and risks in P2M)," The Journal of the International Association of Project and Program Management Vol.5, No.1 (2010), pp129

Program risk management requires flexible and dynamic thinking in order to cope with the multiplicity, expandability, complexity, uncertainty that the program entails. As is illustrated in Exhibit 2-3-7, risks, when looked at chronologically, can be roughly divided into risks leading up to the program design stage in the upstream process and risks at the program implementation stage in the downstream process. In strategic goal management at the program design stage, goals as to what to do and the level of achievement needed to accomplish the program mission are defined. Meanwhile, implementation strategy management is aimed at increasing certainty and efficiency in program implementation as well as competitiveness of products or services that are created through the implementation of the program. At the program design stage, risks associated with strategic goals, risks associated with the environment, and risks in implementing the program are examined. This process is not considered to be independent risk management. Identification and analysis of risks—including speculative risks—are carried out in strategic management. Identified risks are addressed by changing program goals and structures within permissible limits. Meanwhile, at the program implementation stage, it is also necessary to consider external risks that are brought about by the external environment (market, economy, social and natural environments, disasters, competitors) and risks that originate in wrong program goals or other structural problems in the program. In addition, there is risk management for each project and risk management of the program where the progress of individual projects is monitored so that the signals of risks in the project that may affect the program objectives are detected and addressed proactively.

3-2. Risk Factors and Countermeasures Many risk factors at the strategic level are associated with insufficient management capability and the changes in the external environment rather than individual technical risks. This is because programs have greater novelty and are likely to be affected by environmental changes. Moreover, since multiple projects are interrelated or interdependent, delay in one project might cause delay in other related projects.

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Therefore, risks are not eliminated by so-called risk management; it is program design that helps avoid risks. Exhibit 2-3-8 lists major risk factors and risk management measures. Note that there may be unpredictable risks besides those cited here. When an unpredictable risk arises, it is necessary to respond to it by gathering and organizing relevant information as well as developing more than one countermeasure. Decisions from upper management are sought if necessary.

Exhibit 2-3-8 Risks and Solutions at the Strategic Level Source: Motoh Shimizu, "P2M ni okeru senryaku to risk no ichi-kousatsu (A study on strategies and risks in P2M)," The Journal of the International Association of Project and Program Management Vol.5, No.1 (2010), p.p.129

3-3. Characteristics of Projects and Program Risk Management In a project, missions and prerequisites are explicitly given to a certain extent. In a program, however, resources and other prerequisites that should be considered are not always firmly defined. The scope and volume of risks and the number of uncertain factors that should be handled in program risk management are much larger than those in project risk management. That makes the risk management of programs difficult. At the same time, there is a wide choice of measures to cope with risks. Basically, program risk management identifies and analyzes individual risk factors and works out countermeasures. When discussing countermeasures, it is necessary to think about the relationships between each project so that the mission can be accomplished within the framework of the whole program. If a risk arising from a project cannot be contained within the project and affects other projects and the program, appropriate measures should be taken by evaluating the impact from the perspective of the whole program. The following are possible measures that can be taken: (1) Discontinue the project (only when it seems possible to virtually accomplish the initial objective of the program)

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(2) Have other projects or organizations functionally substitute for the project (3) Modify the project (to reduce the overall impact while maintaining the framework of the whole project) In projects, risk factors are identified and evaluated in advance and policies for coping with those risks are determined and implemented. Meanwhile, programs do not take such fixed steps. In the case of programs, multiple solutions for risks are prepared before evaluating the impact of risks on the progress of the whole program. Then, optimum solutions for accomplishing the program are flexibly chosen. Project risk management is aimed at the success of the project while program risk management focuses on the value created through the whole program.

Exhibit 2-3-9 Program Risk Management and Project Risk Management

Source: Motoh Shimizu, "Senryaku Program ni Okeru Risk Management (Risk Management in the Strategic Program)," The Journal of the International Association of Project and Program Management Vol.13, No.4 (2011), pp20

3-4. Development of Risk-sensitive Professionals Risk sensitivity is the ability to detect any small changes or abnormalities even in ordinary times and quickly take an action. In other words, it is the ability to catch any minor signals. Personnel with this mindset and sensitivity are called risk-sensitive personnel. Program risk management evaluates the interrelationship of impacts that project risks exert on the program. It also thinks of the program as a business and evaluates risk events in that business. Risks are addressed in order to accomplish the program mission. Since the culture of the organization that implements the program is "formed through the accumulation of the organization's experiences of success and failure", the ability of an organization to manage risks depends on how much knowledge the organization has obtained from its experience. That is why it is important for an organization to develop personnel with extensive experience.

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Exhibit 2-3-10 shows the keys to developing professionals who can quickly respond to risks. In order to quickly respond to risks, it is necessary to prepare frameworks such as an organizational structure and communication system that ensure that information on risk signals is conveyed to the program manager. At the same time, the division of roles of the members, action procedures, and other content that is needed to make effective use of the frameworks should be in place. It is inevitable that new risks will arise even if these frameworks and content are fully prepared in advance. In this case, what is most reliable is skills personnel have in predicting possible developments and optimizing plans and solutions according to what is going on.

Exhibit 2-3-10 Development of personnel who can quickly respond to risks It is required to develop the skills to “never miss minor signals and quickly taking action when risk symptoms are detected.” 2). These skills are obtained through the accumulation of hands-on experience, education, and training. The efforts to develop these skills are part of the process of developing personnel who can quickly respond to risks; namely, the process of training risk-sensitive program managers who have are in tune and able to make quick decisions. In developing such human resources, organizations undertake program management education such as P2M as well as organization-wide efforts to provide their personnel with opportunities to experience risks in a project with low risks first and then gradually in projects with higher risks.*15 At the same time, in practical applications, personnel in higher positions give advice to their subordinates while professionals who have experienced many programs provide mentoring support. "Everything that happens in business is a unique, one-shot event; business does not go in accordance to theory, strategy, and plan" 3). As the business environment changes dynamically, know-how obtained from the past program management is not always applicable to the present situation. It is difficult to predict when and how risks will arise. When a new risk emerges, value assessment indicators should be reexamined. It is crucial not only to increase individuals' experience working on multiple programs but also to accumulate this experience in the organization so that other people can share it. It is also necessary to be somewhat generous towards minor faults and develop risk sensitivity—the ability to detect the signs of a risk—through experiencing problems. -----------------------------*15 A typical career path in a business developing multiple products is first experiencing the role of project manager for a derivative model that has already been established to some extent, and then gradually moving up to project manager of core models before being appointed program manager handing a group of products.

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In program risk management, business risks that the program itself entails, risks in the whole process of implementing the mission, and risks in each project are evaluated by examining their impacts on the program. These risks are addressed to make sure the program mission is accomplished. Basically, program risk management identifies and analyzes individual risk factors and works out countermeasures. When discussing countermeasures, it is necessary to think about the relationships between each project so that the mission can be accomplished in the framework of the whole program. Risk sensitivity is the ability to detect any small changes or abnormalities even in ordinary times and quickly take an action. In other words, it is the ability to catch any minor signals. Personnel with this mindset and sensitivity are called risk-sensitive personnel. An organization's ability to cope with risks depends on how much knowledge the organization has obtained through its experience. That is why it is important for organizations to develop personnel with extensive experience.

[ Predictable and Unpredictable Risks ] ************************************** In the mid-2000s, in the wake of the Y2K problem and the September 11 terrorist attacks on the US (2011), Business Continuity Management (BCM) started being introduced in Japan. BCM is a corporate strategy designed to cope with crisis and is centered on the allocation of management goals and resources.

Exhibit 2-3-11 Predictable and Unpredictable Risks While risk management covers predictable risks and determines how to cope with them by evaluating their probability and impacts, BCM assumes that crises are inevitable and will certainly occur. Whether a risk is predictable or unpredictable does not matter in BCM, which requires not only the idea of preventing crises (preventing something from being destroyed and becoming useless) but also the idea of addressing a crisis that has already occurred (something has already become destroyed and made useless). This supplements risk approach and enhances the crisis management ability of the company or organization. *************************************************************************************

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[ Super Long-term Project Management ] ************************************ Management of projects with a lifespan of 50–100 years, such as a nuclear power plant or aerospace projects, are called super long-term project management. Nuclear decommissioning projects of Fukushima No.1 Nuclear Plant and the Trawsfynydd Nuclear Power Station in the UK, as well as hundreds of other decommissioning projects that will start within the coming decade or so, need to think of 100 years as their project period. Since large plant or social infrastructure projects beginning with planning through construction, operation, and scrapping take nearly 50 years, the business operator (orderer) has to think of the project as a super long-term project and regularly evaluate and inspect the progress as well as change the plan when necessary. It is also important to always hold the vision of completion. Therefore, it is recommended that this type of project adopt program management where the scheme model project, system model project, and service model project are defined and properly implemented. The fundamental attributes of project management are terminability, discreteness, and uncertainty. In super long-term projects in particular, special consideration should be given to uncertainties (risks)—or changes, in other words. Changes include social, political, and economic changes and changes in people (including thought patterns, ethics, and values). They are the toughest challenge. These changes significantly affect the environment surrounding the project; and they force the mission, vision, and strategy of the project to be revised. These super long-term projects should be planned by applying rolling planning—a planning method for long-term projects (see the column in Chapter 2-7 of Part 3). Should there be a drastic change in the environment, a radical program change could be the only way to cope with it. Since the project takes a long time, a special consideration should be given to ensure continuity on the assumption that all members will be replaced in the middle of the project. The key to that is documentation. Rules to ensure continuity have to be established and observed. In particular, changes should be recorded in a way that future members can easily understand. Deciding how to store various project documents is crucial; these include contracts and documents exchanged with ministries, companies, and other stakeholders in the business; drawings and specifications required throughout the plant lifecycle; completion documents for construction projects; and maintenance records. In addition, the life of the media used to store the documents and changes in applications have to be considered as well. At the same time, continual development and organization of documentation professionals and management personnel is vital. Also, the framework for national or international policies and long-term fundraising (laws, conventions, international fundraising organizations) should be established. Time goes by and the society and people change in the course of a super long-term project. However, those who carry out super long-term projects have to be responsible for the global environment and welfare of human beings in the future as residents of our planet earth. **********************************************************************************

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[References ] 1) 2) 3) 4) 5)

Motoh Shimizu. (2010). P2M niokeru Senryaku to Risuku no Ichi-Kousatsu [A studyon strategies and risks in P2M]. Tokyo, Japan: The Journal of the International Associatio of Project and Program Management Vol.5, No.1. p.p.129 Motoh Shimizu. (2011). Senryaku Puroguramu niokeru Risuku Manejimento [Risk Management in the Strategic Program]. The Journal of the International Tokyo, Japan: Association of Project and Program Management Vol.13, No.4 , p.p.20 Aki Nakanishi. (2007). Koushinraisei-soshiki no Jooken. [Requirements for Highly Reliable Organizations]. Tokyo, Japan: Seisansei Shuppan. p.p.116 The editorial staff of Diamond Harvard Business Review. (2005) Risuku Kando no Takai Riida ga Seikou wo Kasaneru. [Risk-sensitive Leaders Win Successes]. Diamond. p.p.200 Ikujiro Nonaka & Koichiro Tokuoka. (2011). Chi wo Kachi ni Kaeru Keiei wo. [Seeking for management that changes knowledge into value.] Tokyo, Japan: Nikkei

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Chapter 4 Value Assessment Management This chapter explains value assessment management which supports throughout the whole program integration management process. Management should make decisions to ensure the highest value of the program, to be achieved at each program phase, taking strategies and potential risks into account. Program value is something desirable for the organization that can be achieved or obtained by the program. For commercial corporations, program value may be boosting sales, improving productivity, expanding the market, and so on. But, it will be reduced to expand corporate profit. This suggests that corporate financial indicators are considered to be the most critical metrics in terms of program value for these companies.

Exhibit 2-0-1 Program management configuration (reillustration) However, there are some programs with significant value that can expect long-term and indirect benefits, despite the low possibility of producing immediate and direct expansion of benefits (e.g. basic research, company-wide quality management, and human resource education programs). In addition, for nonprofit businesses such as public businesses, program value is generally considered to be intangible value rather than financial benefits. This chapter explains the definitions of program value, value criteria, and the concept of value exchange, while deepening our understanding of tangible (primarily financial value) and intangible (e.g. know-how) assets. It includes case studies on the value assessment processes and management. Also refer to Chapter 3 Section 5 “Value and Value Assessment” for basic knowledge related to value and value assessment.

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1. Value Assessment Management 1-1. Value and Value Index (1) Definition of Value and Value Index

A program is an integration of organizational activities intending to create value that is formulated based on a holistic mission. Program value refers to new benefits that the program brings. Value is the new desirable outcomes for organizations to achieve with the program mission and purpose. In many cases, the program has customers, and the value obtained by executing organizations is a part of the value originally given to the customer that is returned to the organization. In the context of program value, maximizing value given to customers must be defined as a top priority. In considering the program as a part of or type of business operation, program value has significant commonality with value in business operation. In term of business operation, value creation means collecting elements (sources) with lower exchange value*16 to exchange in the market as commodities with a higher use value for customers. In other words, as the balance between the sum total of exchange value of resources used and exchange value of produced products becomes the profit of a business, program value becomes the balance between the sum total of exchange value of resources used when executing the program and the exchange value produced by the program.

Exhibit 2-4-1 Relationship between program value and value index Exhibit 2-4-1 shows program value and value index. The expected values as an outcome of the program are determined through development of the program mission, and the determined value will decide the viewpoint*17 from which evaluate program value. When viewing values through a value index to evaluate program value from the viewpoint, a part of the whole value is extracted as a program value. From the visible part of the evaluation index, tangible values are extracted, while intangible values are extracted when setting an evaluation index of invisible value. It is critical to evaluate both tangible and intangible values as part of program value. ------------------------------

*16 Exchange value: a price established in a market based on the consent of market participants. The concept of value is separately discussed in Capital published by Karl Marx with “use value” and “exchange value”. Despite active discussion over years by a large number of researchers (for example, Carl Mengar formed a theory focusing on “satisfaction of desire” in his Utility Theory of Value), a unified view is yet to be established. The Value System published by Shalom Schwartz is known as a “value theory”, relatively new and systematically formulated. In the book, “value” is defined as “desired, trans-situational goals, varying in importance, that serve as guiding principles for people’s lives”. *17 Viewpoint: a position from which one looks.

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Exhibit 2-4-2 Roadmap for value creation through programs

(2) Value Creation Roadmap

Exhibit 2-4-2 shows a value creation roadmap through programs. To maximize value creation expected through the initial program mission, the executing organization of the program executes each management process of the integrated management. Also, enhancing the practical competence of the organization through building and fostering communities in the course of the program execution is a key to increasing the value produced by the program. At the same time, enhanced competence can serve as the basis for program value for the future of the organization.

Exhibit 2-4-3 Mechanism for creating values through programs

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1-2. Mechanism for Creating Values Exhibit 2-4-3 shows the concept of mechanisms for creating program value. The concept and plan of the program are formulated as a scheme model. To create customer value and use value, resources available as a program are used under a system model projects based on the concept and plan to be converted into a system for operation. Compensation and satisfaction can be obtained by providing or distributing customer value or use value created by the method described above. With programs, organizational values can be achieved through the mechanism of value creation.

1-3. Intangible Assets The International Valuation Standards Council (IVSC) defines “intangible assets” as “non-monetary assets that manifests according to economic features, having no material entity. This gives rights and privileges to the owner and normally extracts income for the owner” (International Valuation Standards: IVS). For the same, the International Financial Reporting Standards (IFRS) has a simplified definition for intangible assets: identifiable non-monetary assets having no physical entity. This means that “non-monetary assets” here are not financial assets such as cash equivalents, accounts receivable, or the like. Exhibit 2-4-4 shows examples of what are generally considered an intangible asset.

Exhibit 2-4-4 Examples of intangible assets

1-4. Type of Programs and Value Viewpoints The purpose of a program is to create new value to satisfy the requirements of stakeholders. Programs can be considered organized activities intended to create values delivered from the program mission. Each type of program creates different values. Strategic programs include two variations: (1) creating completely new values for product concepts, market mechanisms, types of organizations and structures, and (2) altering existing values and product concepts, market mechanisms, types of organizations and structures not only to improve efficiency and effectiveness but to create some completely new value. For operation-type programs, values to be created include boosting financial benefits and creating/expanding knowledge and competitiveness through the integration of resources (e.g. efficiency and techniques primarily produced through integrated activities). In either type, a program consists of a large number of projects. From this perspective, the total program costs become equal to the sum total of all parts. However, the intended value of the program as a whole is far beyond the sum total of the values of each project.

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Part2 Program Management Chapter4 Value Assaiment Mangement Program integration management is designed for envisaging and realizing these factors. Therefore, program manager must have the ability to get an overview of the program as a whole from the perspective of value. The projects that make up the program include the following: those not producing any value by themselves, those that only consume costs, and those with high risks. All of the projects are executed in order to produce the overall program values. Unlike the concept of normal programs, even bottom-up type programs (executed by newly defining a program through the integration and reorganization of two or more existing project groups from a single viewpoint), program value must be in excess of the sum total of the values of project groups. Generally speaking, program costs can be assessed in the form of monetary worth. However, value can not be always assessed using the same criterion. In some cases, value is represented by investment costs, i.e., asset value through financing or taxes. Needless to say, these values are different from those created by the program. As a rule, corporate programs should eventually come as a consequence of numerical evaluation, such as sales, net profit, and return on investment (ROI); however, some exceptions should be allowed. For example, public programs (e.g. social infrastructure development) are often difficult to assess directly in the form of monetary value. Therefore, concept planning is made comparing the costs and the corresponding value at the program planning stage. In cases where the value cannot be assessed on a monetary scale, it must be assessed based on value indices that reflect the perspective of values of the organization or stakeholders; in this sense, management requires a sophisticated ability to evaluate value.

1-5. Assets and Resources It is said that assets used as indices of corporate value include physical assets, financial assets, supplier assets in terms of employees, customer assets, and organizational assets. In general, a corporation’s value is assessed using their financial statements. However, financial statements are being increasingly assessed on the basis of intangible assets, including intellectual property, which is difficult to reflect on financial statements. Meanwhile, it is necessary to identify resources to plan programs. Most program resources are assets possessed by the executing organization of the program. However, assets have value only when they are used as resources to create new values. The P2M classifies resources into six categories: human, physical, financial, information, knowledge, and infrastructure.

[ Challenges for Unmet Medical Needs ] ******************************** Development strategies of pharmaceutical companies are altered to those that pursue a competitive advantage by obtaining uniqueness of value after pursuing unmet medical needs. As a result of research conducted by the Office of Pharmaceutical Industry Research, which continuously aggregated and analyzed challenges to meet unmet medical needs among Japanese pharmaceutical companies (top 20 companies in terms of domestic sales) and the development status of new pharmaceuticals by treatment satisfaction (2005) (see Exhibit 2-4-5). As shown in the area of bottom left of the Exhibitrs, both the contribution of the pharmaceuticals to treatment and treatment satisfaction—unmet medical needs—are low. Despite this fact, you can see that 40.8% of all development pipelines of Japanese pharmaceutical companies have made an effort to meet unmet medical needs. Exhibit 2-4-6 shows a comparison of development strategies of pharmaceutical companies in their current form and during the late 20th century. The pharmaceutical goods targeted for development have changed from synthesized, low-molecular-weight compounds to high-molecular-weight compounds and biomedicines, while the research base has changed from central research institutions in Japan to research institutions and bio-ventures around the globe. The trend in development strategy targets used to be a blockbuster with common

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Part2 Program Management Chapter4 Value Assaiment Mangement diseases such as high blood pressure and diabetes. Now, the development strategy has changed from simply pursuing success in development to creating a “winner-take-all” situation with best-in-class (i.e., epoch-making) pharmaceutical goods for diseases in the course of going after unmet medical needs. Exhibit 2-4-5 New medicine approvals by treatment satisfaction (2005) (2006-2009)

Source: Unmet Medical Needs ni taisuru Iyakuhin no kaihatsu to shonin jokyo (Development and approval of pharmaceutical products to meet unmet medical needs) by Takeshi Eguchi and Masami Okubo, the Office of Pharmaceutical Industry Research, October 2010

Exhibit 2-4-6 Change in business model for pharmaceutical development (Reference) Takeshi Eguchi and Masami Okubo: Unmet Medical Needs ni taisuru Iyakuhin no kaihatsu to shonin jokyo (Development and approval of pharmaceutical products to meet unmet medical needs), Seisakuken News (magazine published by the Office of Pharmaceutical Industry Research), 1-4.31 (2010)

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2. Process of Value Assessment

The process of value assessment is the course of systematic value assessment for the program to achieve the value as planned throughout the whole program implementation processes.

2-1. Purpose of Value Assessment

In program management, value assessment is necessary for the purposes of: ・Decision-making in the course of management ・Financial assessment of program achievements ・Organizational learning In implementing a program and its comprising projects, a large number of decisions are necessary to be made. These decisions must be made assessing the achievements (value) against to the inputs to these processes. This is value assessment for decision-making in the course of the program. Specifically, value assessments are always required in making decisions for formulating ideas and planning the program in the concept and planning phase, selecting specific methods during execution of the program, and managing changes. When the program is complete, achievements as a whole must be confirmed using financial evaluations (e.g. profit and loss). In addition to this, evaluations are necessary not only when evaluating financial status during each program process, but also for the intangible assets by appropriate indices. In the course of formulating ideas, planning, and executing the program, and for the results of the program, an organization learns a variety of lessons to be developed into intangible assets of the organization. Continuous assessment of intangible assets can result in measuring the development of organizational learning and benchmarking with other entities. (1)Making Management Decisions Decision-making for the program can roughly be categorized into: (1) decisions on whether to invest in the program as a whole prior to the program starting, and (2) decisions in the processes of the program in progress and the projects. (a)Decision-making for Making Investments When making investment decisions, the investment can be judged appropriate only when the estimated investment as a whole and potential risks in program execution are lower than the financial value that can be obtained and the estimated expansion of intangible assets. In particular, if the program requires a longer time to be completed, it is necessary to assess the financial value to be obtained by converting it into current values (net present value (NPV)). The intangible assets (e.g. knowledge and competence to be obtained through the program) greatly impact organizational competitiveness. Therefore, investment decisions must be made also taking the estimation of the intangible assets into account. (b)Decision-making in Executing Processes of Program and Projects It is difficult to precisely assess the impact of decisions in individual project processes on the whole program. Therefore, normally, decisions are made in accordance with the assessment criteria for the process determined based on overall program concept and planning. In addition, during the execution of the program, change management of the program may be necessary, in order to achieve its ultimate purpose. (2)Financial Evaluation on the Program Achievements The most common method of assessing the achieved value of program is a financial evaluation. The Discounted Cash Flow (DCF) and other methods are effectively used for calculating business value using future and past cash flow and profit-and-loss as criteria. The companies accumulate the financial data of the program regularly, and it is important to keep the results of the value assessment as know-how for the organization, as the program organizations are often dismantled after the program completion.

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Part2 Program Management Chapter4 Value Assaiment Mangement (3)Learning as an Organization Learning in the course of a program means that the organization accumulates data for the values created as a result of formulating, planning, executing, and completing the program and how these values are assessed, in the form of explicit knowledge rather than tacit knowledge, including both cases successful and failed. Conventionally, programs and projects were considered one-time only and unlikely to be continued. However, programs and projects are now being considered as a part of formulating an ongoing mechanism to achieve organizational strategies. In this context, it is important to have opportunities to learn on what criteria value should be assessed, and how value should be assessed in order to create more of it in an ongoing manner by improving the knowledge and competence of organizations. Ensuring assessment accuracy can boost value. To ensure appropriate assessment, continually improving assessment methods and performance indices across the organization are keys. In the course of program execution, enhanced systems, improved knowledge, and competence of participants can be accumulated within the organization as invisible values, difficult for others to imitate, and can be eventually converted into intangible assets. These can be considered secondary values of a program, and are extremely important to ensure improved competence of the organizations involved.

2-2. Methods of Value Assessment (1)Recognition of program values Program value is the most critical policy guiding the program management activities. Assessing program value requires performance indices and target levels (desired values). It is necessary to collect appropriate data in a timely manner, in accordance with the overall program concept. Value indices include tangible and intangible results increased not only by the projects as a part of the program and work packages, but also through the synergic effects of them. The target levels are to be set for the models of scheme models, system models, and service models, respectively, based on the situation if the values are created or maintained as expected. (a)Values Vary by Changes in the Environment Program value varies over time, due to changes in the environment, and so on. Therefore, the expected value must be checked regularly while comparing it with the original plan. Changing circumstances may occur not only due to internal factors such as programs, but also to external factors such as politics, society, the economy, markets, competition, and technological innovation. (b)Values Vary by Standpoint Stakeholders with a variety of backgrounds (e.g. interests and standpoints) in pursuit of various values participate in programs. Therefore, it is important to create and maintain the values expected by the program and pursue well-balanced values while ensuring satisfaction for all stakeholders. However, in the real world, changing circumstances may cause imbalances in values that the stakeholders expect to receive. In this case, readjusting the balance of values among the stakeholders may be necessary in order to resolve conflicts between them. This is done by looking back to the program mission set forth when the program was formulated. (2)Program Value Assessment Process The program value assessment process is designed to create, maintain, and improve program values based on the value indices set according to the values required by the program mission, implementing evaluation at the predetermined timing including major milestones such as planning, changing, interim, and completion of the program.

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Part2 Program Management Chapter4 Value Assaiment Mangement The scope of activities for the program value assessment process includes: (i) designing the basic framework, (ii) developing value indices, and (iii) execution process of the value assessment (e.g. evaluation at milestones, preparing reports, proposing improvements, reporting to stakeholders, reviewing, giving feedback towards improvement, and data accumulation). (a)Designing the Basic Framework Exhibit 2-4-7 shows an example of program value assessment. The program value assessment process is a mechanism to assess the status of a program integrating a group of projects by focusing on a variety of tangible and intangible value factors that the program mission intends. Accordingly, the process to assess the program value defined by the program mission is necessary and a set of balanced indices common to the program and the projects is required to be appropriately designed.

Exhibit 2-4-7 Example of program value assessment process (b)Value Index Development Value indices should be set in a way that allows appropriate assessment to be done on assessment targets. Assessment targets include a variety of items, such as the achievement of the program mission, targets of each process, deliverables, stakeholder's satisfaction, and the like, and these items are set based on methods for setting value indices, including the Balanced Score Card method (See 2-6). (c)Value Assessment Management Process Exhibit 2-4-8 shows the process of value assessment management. Check the targets of strategies to be achieved and strategic factors by identifying the values required by the program mission. Next, design a framework of basic value assessment including performance indices while analyzing the relationship between strategic factors and expected results. Then, measure the results of projects and processes according to the set performance indices. The results should be reported to stakeholders. It is important to repeatedly verify the effectiveness of performance indices through the completion of the program, and repeatedly improve the performance indices and evaluation systems.

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Exhibit 2-4-8 Value assessment management process (3)Indices in Projects The purpose of a program is to create totally new values through the synergistic effects interactively produced by the projects. Therefore, the value indices of projects must be appropriate for the individual projects, while consistency in terms of program perspectives must be included. This means that value indices of projects must be designed to appropriately assess the values required by the mission of the program.

2-3. Corporate Accounting Techniques (1)Financial Accounting and Managerial Accounting Corporate accounting techniques as a basic method for assessing the value of business activities can be categorized into two types: (1) financial accounting and (2) managerial accounting. If we consider that the purpose of a program is to create value and especially create it for the private sector, and that a program is designed for producing financial compensation, it is necessary to assess value using the corporate accounting method. Here, this manual explains the general features of and applications for two types of accounting techniques. The primary purpose of financial accounting is to provide information to company stakeholders (e.g. shareholders, creditors, and tax collection agencies) with two functions—such as the provision of information and coordination of interests as main functions. Having financial-related information is particularly important for shareholders, creditors, and investors to make decisions about the investment of their own funds, and is essential to sustaining the company’s development and future growth—so information related to financial issues is particularly important. On the other hand, managerial accounting is designed to provide information parties within the company (e.g. top management and division managers), and such information mainly helps in the decision-making of top management and managers and in measuring/assessing the performance of internal organizations. Since financial accounting information is provided to parties outside the company (i.e. public entities), the method of information provision is stipulated by laws and ordinances, such as the Corporate Law, Financial Instruments, and Exchange Law and the Corporation Tax Law, as well as corporate accounting principles. The format of the information provided is stipulated by these laws and must be in the form of financial statements such as balance sheets, profit-and-loss statements, and cash flow statements. On the contrary, managerial accounting is used parties inside the company for private purposes and is not likely to be publically disclosed. Managerial accounting can be categorized into (1) decision accounting to make decisions, including management strategies, and (2) performance managerial accounting represented by the break-even point analysis and budget compilation/control.

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Part2 Program Management Chapter4 Value Assaiment Mangement (2)Financial Accounting Information and Business Analysis Financial information is the most fundamental data for business management. Therefore, using data for making management decision is natural and widely practiced. However, financial accounting data is periodically provided at the end of the fiscal year or every fiscal term for companies, and the information in general is a thing of the past. The danger has been pointed out in making management decisions relying upon only past financial information. The basic policy for making decisions about business conditions using financial information is judging the company’s future by analyzing the causal relationships between financial statements analysis and corporate behavior. In this case, it is difficult to judge the management performance using data from a single company. Therefore, both cross-sectional analysis and chronological analysis are important (See Exhibit 2-4-9). The former is to compare data between several companies from the same or other industries, and the latter is to compare data over time. Using these analyses can eliminate the impact of gaps in company sizes, so that the ratio analysis method is more commonly used than comparison using absolute values. Keys to financial analysis used are (1) safety analysis, (2) efficiency/productivity analysis, (3) profitability analysis, (4) growth analysis, and (5) comprehensive evaluation as an integrated analysis (See Exhibit 2-4-10). In cases where program evaluations are conducted using financial accounting data, it is basically same procedure for business analysis. To start, it is necessary to be able to identify to extract the financial information related to the program. It is necessary to analyze the causal relationship between the earned values expressed in the financial data and the implemented activities of the projects, before or during the execution of the service model projects. Program change is required when poor performance is predicted.

Exhibit 2-4-9 Cross-sectional analysis and chronological analysis

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Exhibit 2-4-10 Business analysis using financial information (reference)

Source: Created based on Accounting Theory and Today, Kunio Ito, Nikkei, Inc., 1994, pp. 568

(3)Managerial Accounting Information Managerial accounting is to make assessment and analyses by collecting the numerical management data to comprehend the business performance to make all kinds of judgment. The details and techniques of accounting differ according to the company or business units and are significantly impacted by their environment. Particularly in a rapidly changing business environment, decision-makers have to make the right decisions in a timely manner. Also, it is important to identify the necessary information from a flood of diverse information and use it quickly and accurately. Financial accounting information (see above) can be used as part of the information for managerial accounting. Exhibit 2-4-11 shows an example of managerial accounting techniques, aiming to formulate management strategies, and Exhibit 2-4-12 gives an overview of each technique. When assessing a program based on managerial accounting information, first of all, both representative (monetary) values to be obtained in the future, and investments required to produce those values are necessary. Needless to say, a program that eventually produces negative values never be implemented.

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Exhibit 2-4-11 Managerial accounting techniques for formulating and executing management strategies

Source: Managerial accounting, Kiyoshi Okamoto, et al., Chuokeizai-sha, Inc., pp. 17

Exhibit 2-4-12 Overview of managerial accounting techniques

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Corporate accounting techniques as a basic method for assessing the value of business activities can be categorized into two types: (1) financial accounting and (2) managerial accounting. The purpose of a program is to create value. Especially for the private sector, a program is designed for producing financial value, and it is necessary for such value to be assessed in the corporate accounting method. The primary purpose of financial accounting is to provide information to company stakeholders e.g. shareholders, creditors, investors, and tax collection agencies. Its two major functions are: provision of information and coordination of interests. Managerial accounting is designed to provide information parties within the company e.g. top management and division managers, and used to help and in measuring/assessing the performance of internal organizations, and in making the management decisions.

2-4. Assessing Present Values Decision-making related to multiple investments (e.g. whether to start a new business, develop new products, or develop new services) by companies or organizations may have a significant impact on activities and the performance of those companies and organizations. Therefore, all or part of the investments can be considered as a program. As stated above, when assessing investments (a program), it is critical to calculate the values to be produced by the program by subtracting investments from the size of values expected to be produced in the future. Simply put, this suggests that investments should be made if the value to be created is positive, and should not be made if the value is negative. Generally speaking, even if all investments (programs) produce positive values in a company or organization, it is impossible to implement all investments due to constraints in resources; thus, choices among the investments (programs) have to be made. Despite the above, not all investments (programs) produce value at the same time. Therefore, comparing investments on a single scale (such as value calculated by simply subtracting without considering timing) may lead to erroneous decisions In short, it is doubtful that a comparison between one project expected to produce a value equivalent to 100 yen after one year and another project expected to produce value equivalent to 101 yen after 10 years can be assessed by simply looking at the size of the value without considering the time span. In this case, evaluation methods based on financial theory and taking into consideration timeframe and monetary risks can be useful, and representative techniques include assessing investments by present value. The Discounted Cash flow (DCF) method is a project assessment technique that applies an idea of present value based on a prediction of value (cash flow) expected to be obtained in the future. A specific example is one using Net Present Value (NPV) and Internal Rate of Return (IRR). The future value can be converted into present value based on the financial theory that one yen today is more valuable than one yen tomorrow. Since tomorrow’s yen includes interest, its value as of today (NPV) is recognized only as its value minus a year of interest. The interest rate is called the discount rate and the general formula for calculating the NPV is shown in Exhibit 2-4-13.

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Exhibit 2-4-13 Calculation method for NPV Under the DCF method using the NPV, values may widely vary depending on the percentage at which the discount rate is set, embracing a fundamental problem in terms of the difficulty of predicting future cash flow, and the difficulty in being fully flexible in decision-making to cope with changes in the environment. Operation thus requires a careful attitude. Another method used for assessment is the Payback Period method (Payback Period). The Payback Period determines investment implementation based on the idea that project investment should be collected within a certain period. The Payback Period is a specific term during which the sum total of expected cash flow becomes equal to the initial investment. The Payback Period only counts cash flow within the Payback Period and excludes future cash flow. Normally, calculation is conducted without considering the time value of money. This is a real option method adopting financial option theory. As we live in an era of competition in a complicated environment, it is not likely that great value will be obtained without taking appropriate risks. To take effective risks, it is absolutely necessary to act in a flexible manner (select from among options) according to the situation, clarifying risks as time goes by and through careful analysis. The main options include: extension, expansion, diminishment, withdrawing, steps (implementing the process in a gradual manner), and conversion. In the context of program evaluation, there is an effective evaluation method based on financial theory that makes it possible to take into consideration the monetary value at the time and risks. The most well-known approach is evaluation using present values to assess investment projects. The Discounted Cash Flow (DCF) approach can be used to evaluate projects using present values based on the value (cash flow) expected to produce value in the future. In addition to the above, there are the real option method (which adopts a collection term approach) and the financial option theory.

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2-5. Value of Intangible Assets It is difficult to see intangible assets in the form of a financial index, so they are called “invisible assets”, and actually considered to be tacit knowledge. Assets (intangible assets) are invisible and untouchable, so accurately evaluating their value is extremely difficult. When assessing the values of intangible assets, evaluation may be conducted by focusing on corporate value (as a whole) from the perspectives of strategy and increasing competitiveness, and on specific factors (e.g. technology, branding, organizational strength, and the ability to establish relationships). When assessing intangible assets for program value, the whole can be assessed from the perspective of the program mission. In this case, the key is assessing the values while breaking them down into the specific effectiveness of the strategic goals. 2-5-1. Increased Significance of Intangible Assets These days, the significance of creating, maintaining, and improving intangible asset values in the context of business operations is widely recognized. A few years ago, Japanese companies were highly recognized around the globe for their LCD televisions and mobile phones. Today, foreign companies from Korea and the US dominate the market. This can be viewed as a result of efforts of Korean and US companies to boost competitiveness by effectively using intangible assets in addition to the performance of the products themselves (e.g. patents to boost the added value of the products, branding, customer services, and distribution network). Developing product technologies is a science rather than an industry, and innovative technological development thus requires significant time and effort. In addition, the techniques and technical know-how related to intangible assets will become widely known among competitors easily and within a short period. Therefore, to maintain and improve competitiveness, it is critical to handle intangible assets as well by conducting appropriate evaluations. So far, Japan has established a position of an advanced country with high quality and fundamental qualities that have created innovative values. In the future, however, the critical points for Japan are to reorganize business development in advanced countries in an effective manner and maintain its advantageous position for investing in emerging markets in a situation where the world now faces keener competition when doing businesses in these markets. The International Financial Reporting Standards (IFRS) has indicated a recognized standard for intangible assets. In cases where the economic benefits of the assets are ensured by agreement or by any other legal rights, or where assets can be separated from companies acquired or being acquired, they can be recognized as intangible assets. The target scope for program management can involve multiple industries and countries. This makes executing the project groups that make up the program more complex and wide-ranging, meaning that the value assessment at each process greatly impacts decision-making for the program as a whole. For program value, it is necessary to appropriately assess and handle intangible assets in a similar manner to reviewing business operations, further increasing the significance of this process. 2-5-2. Evaluating the Value of Intangible Assets In the course of program management, it is critical to assess the value of intangible assets at each process in an ongoing manner while staying in line with program mission, executing strategies, and bringing success to the program. To do so, accurately learning about intangible assets is also necessary. The purpose of assessing the value of a program’s intangible assets is to: (1) make the program succeed (i.e. create achievements: increase outcomes and outputs) and (2) improve organizational ability, including governance and evaluation ability. Since financial accounting requires objective accuracy, evaluation must be carried out based on objective indices using

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Part2 Program Management Chapter4 Value Assaiment Mangement data collected in a manner that meets objective standards. Specifically, when assessing organizational ability, involving the subjectivity of the evaluators is unavoidable. Similarly, ensuring objectivity in evaluating intangible asset value is difficult. In this section, there are two types of evaluation: quantitative (numerical) evaluation and qualitative (non-numerical) evaluation. Explanations will be added from the perspective of evaluating program value. (1) Quantitative Evaluation Quantitative evaluation uses numerical indices. Therefore, within the scope defined, objectivity of evaluation results can be ensured. When managing programs, it is effective to use quantification techniques on intangible asset values in order to share evaluation results for intangible asset values among stakeholders at each process or for the program as a whole. The key to quantification is clearly defining the evaluation targets and performance indices. (a)Evaluation Process Exhibit 2-4-14 shows the evaluation process for intangible assets. When assessing intangible asset values, note that the assessment should be carried out in a similar manner with the project for the processes (design, planning, execution, adjustment, and achievement). At the design process, define the target intangible assets and their values, while setting a value assessment method and indices. At the planning stage, set the value assessment timing and data collection method to be evaluated. At the execution stage, collect and analyze the data in a predetermined manner to calculate values. At the adjustment stage, adjust the parameters based on the results of data analysis and adjust by checking performance indices preset based on the results. Also check the accuracy of these results. The results of the evaluation will be reviewed by those involved, and value assessment report will be prepared including the results to be shared by the stakeholders.

Exhibit 2-4-14 Evaluation process for intangible assets When evaluating intangible asset values, accurately assess the values at each process, and analyze or assess the results in an appropriate manner. This can optimize the value assessment model to produce even more accurate value assessment. (b)Evaluation Indices Exhibit 2-4-15 shows an example of quantitative value indices for intangible assets. Indirect index are indices representing a whole or part of the target intangible assets. Program management includes some examples involving modeling (using organizational maturity and capacity), categorizing the status at each process and activity using specific expressions, and quantifying these factors.

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Part2 Program Management Chapter4 Value Assaiment Mangement The representative index should be assessed using the true endpoint. However, in cases where the representative endpoint is not measurable using the true endpoint, or where measurement would take too much time, a surrogate endpoint is used. When setting the representative endpoint, it is important to recognize that the validity of the relationship between a representative endpoint and a true endpoint has a significant impact on the accuracy of the evaluation. A comparative index is an index that relatively compares the target with an object (e.g. “up 50% from the previous year”), so note that defining the object has a major impact on the evaluation. The statistical index is set as an index with statistical meaning by analyzing data systematically collected based on a hypothesis. Verifying indirect indices or a surrogate endpoint in a statistical manner is considered to be the statistical endpoint. Essentially, it is unreasonable to design quantitative assessment (i.e. visualization through quantifying) for intangible assets defined as “invisible”. Therefore, it is critical to share with stakeholders and agree upon the level of accuracy at which intangible assets be assessed using indices when setting quantitative indices.

Exhibit 2-4-15 Example of quantitative value indices of intangible assets (2) Qualitative Evaluation Qualitative (non-numerical) evaluation means performing evaluations using indices that are difficult to quantify (e.g. team atmosphere or level of team member interest). Despite the significance of intangible values for the program, some are extremely difficult to quantify. For example, when it comes to improved organizational competence obtained through program execution, value assessment is highly affected by subjectivity, qualitative values, and beliefs. In the context of management, there is a known phrase “If you can't measure it, you can't manage it.” (Peter Ferdinand Drucker). However, it is true that values in program management are not always measurable. At least, promoting quantification of intangible values for evaluation based on scientific evidence as much as possible may improve accuracy in value assessment within a defined range. Still, it is difficult to quantify all intangible values. It is critical to combine subjective effectiveness and qualitative evaluation of intangible assets including the effectiveness of synergy in addition to quantitative evaluations in order to evaluate the value of intangible assets under the program. Therefore, when performing qualitative evaluations, you must consider the evaluation process and fairness between evaluation results to eliminate any sense of unfairness among stakeholders.

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Part2 Program Management Chapter4 Value Assaiment Mangement As stated earlier, we cannot see or touch intangible assets, making accurate evaluation of their values are extremely difficult. In order to lead the program to success by executing a strategy based on the program mission for program management, it is critical to accurately identify intangible assets and evaluate the value of intangible assets in an ongoing way at each process Program management incorporates an approach for quantifying intangible asset values. When quantifying, you must clearly define the evaluation indices and standards. When evaluating values of the intangible assets, ensure appropriate valuation at each process. Optimizing the value assessment model of the program as a whole through analyzing and evaluating the results can lead to more accurate results. When evaluating the values of intangible program assets, the key is to appropriately combine qualitative assessment of intangible assets (including subjective and synergy effects) with the quantitative value assessment. In order to perform qualitative evaluation, you must ensure a sense of impartiality among stakeholders by carefully and fairly addressing evaluation processes and results.

2-6. Designing Value Assessment Value assessment design can be defined as: identifying values created by the program, and designing value assessment processes such as measurement methods and evaluation criteria. Based on the measurement and evaluation results, it can also be defined as providing a framework that can be re-designed as needed. A program is the practical phase of bussiness strategy, and thus aims to contribute to eventually improving corporate value. The value indices to be evaluated should therefore ideally be a well-balanced index that takes into account the broader perspective. To ensure this, it is critical to understand that value has many variations and results are not the only kind of value. Identify the values to be created by the program from a broader viewpoint, and use indexing to ensure proper evaluation. (1)Designing Program Value Assessment The purpose of a program is to create new value by identifying the intended innovation factors, process innovation factors, and team (organization) reform factors under the program mission. Programs then aim to achieve financial targets (cash flow) and well-balanced satisfaction among stakeholders as a result of the created value. This is why reviewing and identifying the indices common to the program and specific sub-projects from viewpoints that include stakeholders, teams, innovation, processes, and cash flow are important. (2)Multiplex Evaluation Method Evaluation targets include achievement of mission, purposes, targets, deliverables, stakeholder satisfaction, and many other items. Such evaluation requires at the very least a pre-evaluation, interim evaluation, and post-evaluation. The indices must be thoroughly considered in terms of whether they are ⅰ) easy to understand,ⅱ)quantifiable,ⅲ)tabulated, ⅳ)timely, ⅴ)problem-free, and ⅵ) systematically controlled as a whole. As a prerequisite of these conditions, the most critical viewpoint is allowing evaluation using indices that are well-balanced and comprehensive. Index development should ideally be conducted by the owners who assigned the missions to the program and the program manager without restricting their thoughts or scale. Sometimes, evaluation plays a role in navigating decision-making for the current situation and paving the way for future achievements. In managing programs, it is necessary to have strategic ideas that match organizational ability while collecting information related to external changes. The concept of a balanced index is incorporating strategic success factors

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Part2 Program Management Chapter4 Value Assaiment Mangement into planning and evaluation systems beforehand. As an example of multiplex performance indices, there is an evaluation method developed by Robert Caplan and David Norton. Their method is known as the Balance Score Card (BSC), designed to comprehensively evaluate values as a whole using corporate activities. The BSC categorizes values into four viewpoints (the first three are conventional): ⅰ) performance management focusing on financial indices, ⅱ )customers, ⅲ)business processes, and ⅳ) learning and growth, with the aim of achieving a well-balanced evaluation by having parameters (e.g. strategies of the company, financial indices connected to the vision, and non-financial indices). Draw up a business strategy in a form of a strategy map and set performance indices and target values to measure the level of achievement of strategic objectives for each strategy goal (target), which is a factor making up the strategy on the strategy map. The purposes of the strategy goals (targets) are formulated on the strategy map, enabling a mutual relationship. Specifically, when an employee’s skill (viewpoint of learning and growth) is improved, work efficiency is improved (business process), enabling the employee provides prompt and advanced services to customers (customer viewpoint). This increases customer loyalty and eventually boosts sales (financial viewpoint). This chain reaction allows us to understand consistency of strategies. Further, evaluating with performance indices connected to each strategy goal (target) can lead to a well-balanced overall evaluation of business strategies. The program values can be categorized into ⅰ)values targeted by business strategy as goals to achieve with the program, and ⅱ)various values brought to stakeholders through program activities. These values further can be categorized into: ⅰ)values that can be measured by financial indices (e.g. profit and loss), and ⅱ)the invisible impact of values on the competitiveness of the organization. The BSC was originally designed as a system for evaluating the value of intangible assets and financial indicators when assessing organizational performance. Today, the BSC is commonly used by a large number of companies as a tool for measuring organizational strategies and their execution. Therefore, it can be used as a tool for program evaluation. (3)Project & Program Balance Score Card, PBudgeting The Project & Program Balance Score Card (PBSC) is a practical challenge for managing the setting of performance indices based on viewpoints, both those set with the Balance Score Card and others with viewpoints. The budget control framework and PBudgeting (PBGT) were put forth by Obara, Asada, Suzuki (2004). See Section 4, Chapter 4 for details. The PBGT gives financial support to the program’s execution planning and project using the PBSC. Plan and adjust the resources needed to execute the program and project from the perspective of cash flow and the viewpoint of interest. The PBGT promotes an understanding of the relationship between financial indicators and non-financial indicators assumed by the PBSC. Measure the amount of resources that should be invested and the level of achievement that should be obtained from the perspective of monetary value, and make the program and project feasible in terms of finances. The PBGT clarifies the connection between the program budget and project budget. With the PBGT, these two sides cannot be created or put into effect without establishing a relationship. The program budgets and project budgets are allocated to the division budget as an incremental expense. In other words, profits, costs, or effectiveness towards assets obtained in the course of execution of the program and the project will be added on the divisional budget (See Exhibit 2-4-16). Since the benefits of the program and project are added to the budget, the PBGT grabs the attention of department managers motivates them to cooperate with program and project trends.

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Exhibit 2-4-16 Relationship between program budget, project budget, and budgets for each division Source: Project Balance Score Card, advocated by Ohara, Asada, Suzuki by Shigenobu Ohara, Takayuki Shigenobu the Japan Productivity Center, 2004, pp. 30 Exhibit. 1-11

2-7. Evaluating the Value of Non-commercial Programs Value achieved through non-commercial programs is often not suitable for evaluation using commercial criteria (amount of money). At the conception phase of program, plans are normally formulated by comparing monetary costs and equivalent values, however, if the value cannot be assessed by the financial criteria, the value should be assessed based on value indices that reflect organization or stakeholder values. Given this, top-level organizations, program owners, and the managers that execute the program must have the capacity to determine value. Needless to say, investment efficiency must be explained for public investments such as roads, airports, and urban infrastructure development, even if they are non-commercial programs. Areas like disaster prevention, public hygiene, and social welfare also require a certain explanation of investment efficiency, i.e. policy evaluation. (1) Evaluating the Value of Non-commercial Programs State and local authorities conduct budget deliberations at their own assemblies. This can be considered a key policy process from the perspective of verifying the legitimacy of investments (budget spending) in each policy and maintaining fiscal discipline. However, conventional administration styles emphasize the establishment of laws and obtaining budgets, while disregarding evaluation functions such as actively reviewing policies based on efficiency and changes in socioeconomic conditions in subsequent years. Realizing this, the introduction of a system for assessing policies was proposed. In order to further build public confidence, the Government Policy Evaluations Act*18 evaluation was established and enacted. Unfortunately, this kind of non-commercial policy has difficulty evaluating the investment efficiency of a budget directly using financial scales. Consequently, policies are still assessed by a variety of indirect evaluation methods. ------------------------------

*18 Policy evaluation methods vary widely by field, but can be roughly categorized into (1) evaluation by a single index and (2) evaluation by multiple indices. Further, it is important to use the appropriate method according to the evaluation timing, such as before and after project execution. The following explains representative evaluation methods.

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Part2 Program Management Chapter4 Value Assaiment Mangement (a) Cost benefit Analysis Cost benefit analyzes benefits to be obtained and costs (amount of investment). Since it is impossible to directly represent the target benefits in amount, analysis must be done after converting the benefits into an amount of money through a variety of methods. This method uses the Cost Benefit Ratio as an evaluation index, and adoption criteria is generally defined as B/C≧1: ratio (B/C) between total present value of effectiveness convertible to currency value (B) and the total present value of costs (C). Exhibit 2-4-17 shows a representative example of currency conversion.

Exhibit 2-4-17 Representative example of cost benefit analysis

Bibliography: None-market Economic Evaluation Value, Best Value, Management Institute, Inc. Bulletin vol. 4 2003 pp11

(b) Cost Effectiveness Analysis Cost benefit analysis converts “benefits” into an amount of money for evaluation, while cost effectiveness analysis evaluates “effectiveness” for subjects that cannot be converted into an amount of money. Specifically, the evaluation uses factors such as reduction in pollution, mortality, smoking rates, or the number of survivors to compare with costs. These analyses can be used for evaluations before and after the execution of the project.

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*18 The Government Policy Evaluations Act: Enacted on April 1, 2002, with aim of promoting objective and strict execution of policy evaluation by defining basic items related to policies executed by the administrative agencies, in the hopes of appropriately reflecting the results in policies while disclosing information related to policy evaluation, thereby contributing to effective and efficient promotion of the administration and ensuring accountability among those engaged in government-led activities. It defines the way policy evaluation is carried out, handling of results of policy evaluation, basic policies related to policy evaluation, and role of administrative agencies in evaluating plans.

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Part2 Program Management Chapter4 Value Assaiment Mangement c) Inter-industry Relations Analysis Inter-industry relations tables (Input-Output Tables) clarify the interdependent relationships between industries in a country or area, i.e. the ripple effects of severity of impact of an industry output on other industries. The inter-industry relations table consists of three matrixes: (1) a basic transaction table allocating industry areas along the vertical and horizontal axes, (2) an input coefficient table, and (3) an inverse matrix table. The transaction basic table shows the inter-relationship of transactions between industries and production value and gross value added per industry. The input coefficient table indicates the number of units of raw materials per industry, needed for performing a unit of production per industry. The inverse matrix table indicates direct or indirect ripple effects needed to impact multiple stages per industry against final demands for a unit in a certain industry. Such data are compiled and published in a certain way; for example, statistical values per regional unit such as state or prefecture. The inter-industry relations analysis shows the impact of ripple effects in production as a result of policies and programs. Comparative analysis before and after execution in the inter-industry relations table suggests the impact of efficiencies on policies and programs. (2) Using the Valuation of Non-commercial Programs Programs categorized as non-commercial programs include potential value programs such as in-house basic research, innovation in organizational culture, education, and scientific research in addition to public programs. When assessing individual programs, directly evaluating potential values is not always easy. However, incorporating ideas for policy evaluation may allow evaluation of ripple effects and the like impacting commercial programs. Reference: Administration evaluation Q & A, Ministry of Internal Affairs and Communications ●Value achieved through non-commercial programs is often not suitable for evaluation using commercial criteria (amount of money). Therefore, the program value should be assessed based on value indices that reflect organization or stakeholder values. ●As a mean to evaluate non-commercial programs, policy evaluation system is known. Specifically, there are three analyses are commonly used: (1) cost benefit analysis: estimating benefits to be obtained to compare with costs (amount of investment), (2) cost effectiveness analysis: analyzes “effectiveness” that is impossible to convert into an amount of money, and (3) Inter-industry relations analysis: evaluates ripple effects of severity of impact of an industry output on other industries. ●Programs categorized as non-commercial programs include potential value programs such as in-house basic research, innovation in organizational culture, education, scientific research, and economic assistance to foreign countries. When assessing individual programs, directly evaluating potential values is not always easy. However, incorporating ideas for policy evaluation may allow evaluation of ripple effects and the like impacting commercial programs.

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3. Value assessment Indices Here, we show an example of specific value assessment indices for assessing programs. However, the example is shown is a reference only, meaning that the indices are not limited to the given example. It is necessary to design and assess value assessment indices according to the value creation system based on the mission. In other words, value assessment indices have to be designed and assessed according to specific features.

3-1. Example of BSC Targets and Evaluation Indices As described in the 2-6 “Designing Value Assessment”, formulate a business strategy using the strategy map from the Balance Score Card, and set evaluation indices to measure achievement level among the strategy goals (targets) as a part of the strategy on the strategy map as well as target values. Exhibit. 2-4-18 shows an example of strategy goals (targets) and evaluation indices for four viewpoints defined by the Balance Score Card. The evaluation index is designed to measure achievement of the strategy goals (targets). Therefore, this index can accurately reflect achievement level and at the same time, it must be a measurable index. Ideally, each strategy goal (target) has a corresponding index, but in the real world, there are some cases where assessment cannot be carried out using a single index. In this case, you have to assess using two or more indices. Note, however, that too many indices makes things complicated and difficult to handle, so you make sure you are managing an appropriate number of indices. Evaluation indices are continuously measured to perform evaluations. In the course of ongoing evaluation, when it becomes apparent that the evaluation indices are not fully capable of evaluating the achievement level of the strategic goals, it is necessary to consider reviewing the evaluation indices.

Exhibit 2-4-18 Example of targets and evaluation indices for Balance Score Card (BSC) Source: Kaplan, R. S. and J. Norton D.P. Atarasshii keiei Model—Balance Score Card (New management model—Balance Score Card) Diamond Harvard Business Review (Diamond, Inc.), August 2003, pp. 46

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3-2. Example of Evaluation Indies for the Business Model Gallery The Business Model Gallery is conExhibit red so that a complete picture of the business model can be obtained by looking at strategy in nine blocks and in the business model gallery (See Exhibit 2-4-19). When setting evaluation indices, set evaluation indices for each Business Model Gallery block to perform the evaluation. The following shows examples of evaluation indices for each block.

Exhibit 2-4-19 Example of evaluation indices for each area of the Business Model Gallery Reference: written by Alexander Osterwalder and Yves Pigneur, translated by Ryusuke Koyama, Business Model Generation—A handbook for Visionaries, Game Changers, and Challengers, Shoeisha, Inc., 2012

Exhibit 2-4-20 Example of indices related to program evaluation (Ex.: 5E2A)

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3-3. Well-balanced Evaluation Indices You must recognize that the present values of the program constantly change as time goes by, while the program is executed. Know whether the program accurately aims to achieve the values defined as its ultimate goal. If necessary, program activities may require alteration. When considering this beforehand (when looking at value assessment viewpoints), you can refer to efficiency, effectiveness, earned value, ecology, ethics, acceptability, accountability and the like as references for index development.

3-4. SMART SMART represents the five criteria used for a UK-based check system for policy evaluation, Public Service Agreements (PSA). SMART can be used as a reference for well-balanced evaluation indices. SMART is an acronym demanding that indices be Specific, Measurable, Achievable, Result-oriented or Relevant, and Time-bound. Examples of specific value assessment indices for evaluating programs include: BSC, Business Model Gallery, perspective of value assessment (5E2A), and SMART (Specific, Measurable, Achievable, Result-oriented or Relevant, and Time-bound). The value assessment index must be designed and assessed based on the mechanism of value creation according to the mission (i.e. specific content of the program).

[References ] 1)

2) 3) 4) 5) 6)

7)

Takeshi Eguchi, Masami Okubo. (2010). Unmet Medical Needs ni taisuru iyakuhin no kaihatsu/shonin joukyo.[Development and approval situation of pharmaceutical products to cope with Unmet Medical Needs]. Tokyo, Japan: Bullin for the Office of Pharmaceutical Industry Research, 1-4, 31, 2010 Kunio Ito. (1994). Gendai Kaikei Nyuumon. [Introdction on Modern Accounting]. Tokyo, Japan: Nikkei, Inc.. pp. 568 Shigenobu Ohara, Takayuki Asada, Kenichi Suzuki. (2004). PBSC Project and Program baransu sukoa kaado. [PBSC—Project and Program Balanced Scorecard]. Tokyo, Japan: Japan Productivity Center. pp.30 Kachi Sougou Kenkyuu Kikanshi. (2003). Hi shijouzai no keizaihyouka Best Value. [Economic evaluation of non-market materials Best Value]. Tokyo, Japan:Value Management Institute, Inc. bulletin Vol. 4, pp. 11 Kaplan, R. S. and J. Norton D.P. (2003). Atarashii Keiei Model—Balance Score Card. [New management model—Balance Score Card].Tokyo Japan: Diamond Harvard Busienss Review, Diamond, Inc. p.p46 Alexander Osterwalder and Yves Pigneur, translated by Ryusuke Koyama. (2012). Bijinesumoderu ・ jenereishon bijinesumoderu kyoukasho. [Business Model Generation—A handbook for Visionaries, Game Changers, and Challengers,]. Tokyo Japan:Shoeisha, Inc Motoh Shimizu. (2010). Jitusen purojekuto & puroguramu manejimento. [Practice Project & Program Management].Tokyo Japan: Japan Management Association Management Center,

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Program & Project Management for Enterprise Innovation

Part 3 Project Management Chapter 1

Project and Project Management

Chapter 2

Integration Management

Chapter 3

Stakeholder Management

Chapter 4

Scope Management

Chapter 5

Resource Management

Chapter 6

Time Management

Chapter 7

Cost Management

Chapter 8

Risk Management

Chapter 9

Quality Management

Chapter 10

Procurement Management

Chapter 11

Communication Management

Copyright © 2017 Project Management Association of Japan

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Chapter 1 Project and Project Management 1. Definition of Project A project is defined as a value creation undertaking based on a project mission which is completed in a given or agreed time frame and under constraints, including resources and external circumstances. A specific (project) missions means, fundamental requirement expected for project to be achieved by program. Specifying this demand is the start of the project management. To make clear the project mission, it is absolutely necessary to understand the purpose of the project, objectives, policies, techniques, action guidelines, and so on, in program. Once the project mission is specified and a decision is made to invest resources, the project mission becomes the Project Charter.

2. Basic Attributes of Project A project has three basic attributes, namely uniqueness of project mission, temporary nature characterized by defined starting and closing time and uncertainties such as environment changes and risks. Exhibit 3-1-1 shows the basic attributes of a project.

Exhibit 3-1-1 Basic attributes of a project

2-1. Uniqueness Uniqueness means the non-repetitive characteristics of project, “there is no project identical to the one”. Even if projects are similar, they are not conducted in a completely identical environment, they can be considered as non-repetitive. In order to cope with features of uniqueness, even if projects produce similar deliverables, we need to pay attention to the mixture of unexpected factors. When practicing, the following are required: a project-specific viewpoint, correspondence that assumes the adaptation method, wisdom and scheme such as originality.

2-2. Temporary nature The term “temporary nature” implies that a project has a clear starting point and endpoint. The starting point is clear, since a new team is formed under the project mission and a project manager is appointed. On the other hand, the endpoint is not always clear. In many cases, for example, that even when the development of a piece of software or a plant is complete, delivery is uncertain and maintenance continues without end. The key to avoid such situation is to specify the endpoint clearly. In general when executing a project, a project team is organized, an execution period is specified, and the team is disbanded when the project is completed. Specifying an endpoint can allow the manager to take clearer responsibility. 132

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2-3. Uncertainty The term “uncertainty” implies that a feature of projects is value creation undertaking for future, so always having characteristics of uncertainty. This uncertainty brings with project a variety of risks, such as unknown information, unestablished technology, and an unpredictable environment. It is necessary to identify these risks in advance in order to assume possible countermeasures. A project overcomes uncertainties with incorporate inventive ideas, wisdom, judgment ability, and creative team activities.

3.Stepwise Refinement and Rolling Wave Planning Critical feature of projects is stepwise refinement, comes from the basic project attributes of uniqueness, temporary nature, uncertainty. Each project has uniqueness and incorporates uncertainties, so that projects cannot avoid the unknown area. On the other hand, projects incorporate temporary nature that have a clear beginning and end. This means that projects have to be completed before a specified date, which means there is no choice but to start the project and can not wait until the unknowns become knowns. Therefore, projects often adopt the method of starting with some uncertain factors by defining some prerequisites, and then gradually detailing as the unknown aspects become clearer. This describes the concept of stepwise refinement. When practicing this method, there is a technique called “rolling wave planning technique” that allows to develop plans while detailing at each stage (see Part3, Chapter 2).

4.Definition of Project Management Project management is the professional capability to deliver with due diligence, a project product that fulfills a given mission, by organizing a dedicated project term, effectively combining the most appropriate technical and managerial method and techniques and devising the most efficient and effective work breakdown and implementation routes. The latest studies indicate that the origin of project management can be found in the construction of the pyramids in ancient Egypt. However, in the view point of systematization of project management have to wait until the invention of the project management approach e.g. the Gantt chart and critical pass method in the 20th century. Today, the objectives or meaning of project management is to achieve project goals effectively and efficiently by systematically applying the wisdom of predecessor mainly developed post–20th century to the project.

5.Requirements of Project Management The following are requirements of project management.

5-1. Due Diligence Due diligence here means, executing a project according to procedure meeting international standards or and complying with social norms, ethical standards, professional criteria, and regulations. Carrying out the steps of the project according to the process specified in the ISO Guidelines for Project Management is an example of a fair approach.

5-2. Ability to Execute Projects Efficient Efficiency refers to the ratio of output gained against resources. For projects involving production plants or manmade structures, efficiency means physical productivity indicator. Project management requires procedures, wisdom, and effort to minimize muri (unreasonableness), muda (waste), and mura (inconsistencies). In terms of capability that allow you to effectively execute projects, intellectual productivity is also critical for boosting value by effectively using physical productivity, market information, and production data or for integrating different types of technologies. 133

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5-3. Ability to Execute Projects Effective Effectiveness means an indication of favorable overall effect brought about by the project, and a level of satisfaction of stakeholders who are directly or indirectly involved in the project. Effectiveness can be also evaluated in terms of benefit acquired against the investment costs.

5-4. Temporary nature Team The term “temporary nature ” means the object has a start and an end date. As described in the definition of a project, basic project attributes include temporary nature and therefore, project management is executed by a temporary project team. In this regard, organizing and developing a team, developing efficient and effective execution ability, and ensuring deliverables to lead value creation are critical requirements of project management. Exhibit 3-1-2 is a diagram showing the definition of project management

Exhibit 3-1-2 Definition of project management

6.Concepts Related to Project Management This section explains critical concepts related to project management.

6-1. Project Business and Steady Business In general, tasks performed by organizations can be categorized into (1) steady business and (2) project business. The following are the features of steady business and project business.

Exhibit 3-1-3 Steady business and project business

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Note that the two do not have relationship mutually exclusive. Pay special attention to their relationship, which is a transition from project management to steady business as time goes by. This can be easily understood if you think about project execution as the organization’s means for coping with change. If steady business is not deemed realistic due to change in external environment, you have to organize projects with a project mission corresponding to the external environment and create deliverables as a new value creation framework. The results brought by the project will be transferred to permanent organization operating the project, once it is confirmed creation of the intended values. In this way, the results can be executed as new routine work. As you can see, steady business and project business cope with changes in the external environment, thus it is their nature to transform in a cyclic manner as the time goes on (see Exhibit 3-1-4).

Exhibit 3-1-4 Project business and steady business

6-2.Project Stakeholders The term Project Stakeholders is sometimes literally translated as “specific interested parties”. However, it actually includes business owners directly or indirectly involved in the project (i.e. project owners or authorized persons under the project), investment institutions, financial institutions, consultants, designers, project teams, project managers, contractors, manufacturers, business partners, resource partners, think tanks, authorized institutions, and the like. It is through the participation of these diverse parties that projects create value. Parties that directly participate in the project include project manager, members of project teams, and so on in addition to partners such as service providers, staffing agencies, and distribution companies. There are also some parties that are socially affected by the project (e.g. local authorities and local residents), although they are not directly participating or involved. Therefore, the collective term “stakeholders” should include institutions, businesses, and individuals that may have an interest in or are socially impacted by the project in the course of its implementation or realization. Business owners not only make decisions on investing resources based on a comprehensive assessment of the value that project deliverables are expected to bring, but also make decisions after evaluating conformity to stakeholder requirements. Project managers are professionals who are given the authority to execute projects. Their roles are embodying missions into practical goals and purposes and to execute their duties by forming a special team of specialists based on a recognition of limited resources. Project stakeholders are parties directly or indirectly involved in the project. Third parties not directly or indirectly involved in the project may be attracted by the project. Executing projects requires to pay attention to the potential impact on the existing interests of various stakeholders 135

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6-3. Project Lifecycle To fully understand execution process by collating characteristic basic attributes for each execution phase of the project, it is helpful to look at it in terms of a “project life cycle”, which is considered to be common global knowledge. The project has a starting point, and endpoint, and a life, and all projects have their specific lifecycles. If we graph the progress of a project, defining the time as the horizontal axis and work effort as the vertical axis, the graph takes an arced shape (see Exhibit 3-1-5). The cumulative work effort graph is in the form of an S-curve. When categorizing these by project-specific milestones, the categorized terms can be considered phases. Milestones differ according to product development, software development, plant construction, etc., and are selected in relation to the application. A normal project lifecycle consists of beginning, middle, and end phases. The middle phase is divided into a plural. This phase classification considers a verifiable interim, or final deliverables, to be an index. This is because tasks, quality, and management targets differ according to the type and features of the deliverables. Management that focuses on the planning and lifecycle of each project phase is based on this idea.

Exhibit 3-1-5 Two conceptual diagrams of project lifecycles Examples of project lifecycles and the features The features of a project include individuality and uniqueness. No two projects are the same; however, project phases can be classified into three similar types. (1) New product development projects Research and development of new products (e.g. pharmaceutical, automobile, and home appliances), prior to market distribution (2) Construction and engineering projects Construction of buildings and plants (3) Software development projects System development aimed at business innovation and service improvement Note: In addition to these three types, there are several projects (e.g. business reform and distribution reform) with similar execution types. The example shown in Exhibit 3-1-6 uses the terminology most commonly used in industry. However, terms vary by industry and company. Using human resources to achieve goals and establishing big goals for each phase are well-known techniques. 136

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Exhibit 3-1-6 Project lifecycle (PLC) by project application area Features of projects management is defining a rough concept, investing resources over time, and gradually specifying from upper concepts to details, maintaining harmony and balance, and embody the contents for achieving goals using a top-down approach. Thus, the details of the project are determined as time goes by, and the volume of information accumulated for achieving the project goal will geometrically increase. If the details of a project change after having progressed to a certain point, the impact gets severer the farther into the project. Exhibit 3-1-7 shows the fact that uncertainty (e.g. project specifications, quality, costs, and schedule) decreases as phases advance. On the other hand, when certainty increases, the works non-steady and creative are decreased, and the ratio of steady work is increase1).

Exhibit 3-1-7 Project lifecycle 137

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7.Project Activities 7-1. Configuration of Project Activities Project activities are value creation activities carried out by team members, and composed of activities that create deliverables and the management that execute the project. Activities for creation of project deliverables: Activities to create deliverables for in house or to customers of outside. Activities for implementation of project management: Activities observing entire project, with the understanding of a common view, adapting the conditions and entire environmental changes, to accomplish and to provide maximum efficiency and effectiveness in successful project. The overviews of project activities are as shown in Fig. 3-1-8.

Exhibit 3-1-8 Overview of project activities. The following gives an overview of activities.

7-2. Phases of Project Deliverable Creating Activities The main objective of a project is to provide a deliverable product of value creation based on the mission. The parts of the project that address this are deliverable creation activities (see Exhibit 3-1-9). The tasks associated with creating deliverables are executed by dividing project lifecycles, which is shown under concepts related to project management into deliverable creation phases. The project lifecycle can be divided or handled in different ways according to project type; however, execution by dividing into phases is common practice.

Exhibit 3-1-9 Phases of project deliverable creation activity 138

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Since phase system changes depending on the industry or the deliverables being created, the project deliverable creation activities are commonly systematized according to each industry or deliverable.

7-3. Management Cycle and Areas for Management Activities to Execute Projects 7-3-1. Management cycle It is required to execute and complete management activities in an effective and organized manner under certain constraints (e.g. delivery schedule, budget, and available human resources, etc.). Managers take charge of the activities. As with general management activities, project execution management activities are carried out while being continuously improved upon through the PDCA cycle. Project management is a temporary nature management activity and should be implemented based on the mission of responding to changes derived from steady work. Both starting from steady work and transitioning to steady work are included, so the project is executed in close relationship with checking and corrective actions (Act). In general, this process can be described with the cycle shown below: [ Initiation ] ⇒ [ Plan ] ⇒ [ Do ] ⇒ [ Control ] ⇒ [ Closing ] Exhibit 3-1-10 shows these relationships.

Exhibit 3-1-10 Project management cycle

7-3-2. Management area Note that project management activities have different methodologies for each target management area. For this reason, explaining processes and methodologies for each target management area is easier for learner to understand. Under the IS021500 PM Guidance established September 2012, the management area is defined as the “subject group”. Explanations in Part 3, Chapter 2 of this standard are given following the IS021500 definition for the management area system described below: (1) Integration Management (Chapter 2) Management area in an integrated manner from initiation to closing through transferring deliverables and from steady business through planning, implementing, controlling, and closing (2) Stakeholder Management (Chapter 3) Management area to expectations of stakeholders affected by the project as a management target 139

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(3) Scope Management (Chapter 4) Management area for deliverables and the scope of work for creating deliverables; in other words, an area targeting project scope and identifying and managing that scope (4) Resources Management (Chapter 5) Management area to control the resources needed to execute the project (5) Time Management (Chapter 6) Management area to complete the project before the delivery schedule (6) Cost Management (Chapter 7) Management area to complete the project within the given budget (7) Risk Management (Chapter 8) Management area identifying the risks associated and control the project (8) Quality Management (Chapter 9) Management area controlling quality of project activities and deliverables (9) Procurement Management (Chapter 10) Management area controlling contracts and external procurement to execute project activities (10) Communication Management (Chapter 11) Management area ensuring smooth communication with project stakeholders

Exhibit 3-1-11 Overview of management activities for project execution Exhibit 3-1-11 shows an overview of management activities during execution of the project. This shows from the start of the project after completion of the conceptual project plan, to completion of system mode.

[References] (1) Motoh Shimizu. (2010). Jitusen purojekuto & puroguramu manejimento. [Practicing the project and program management ]. Tokyo, Japan: JMA Management Center Inc. 140

Part3 Project Management Chapter 2 Integration Management

Chapter 2 Integration Management 1. Overview 1.1 Purpose The purpose of integration management is to clarify the scenario up to project completion and ensure management from the perspective of overall optimization to achieve goals.

Exhibit 3-2-1 Overview of integration management From the perspective of integration management, the key points for ensuring a successful project are: identify and define process rules and details from the perspective of overall optimization by management area, while ensuring consistency among dependent relationships, to establish a management system. Also, you must ensure infallible control based on well-balanced (between quality, costs, and delivery time (QCD)) and integrated judgment. The balance should be based on overall optimization, and various necessities in revisions and problems arising in the course of project execution are visualized through the integrated project management system. In particular, it is critical to fulfill the mission of the project through: (1) creating project value, (2) developing a project charter that outlines basic requirements such as deliverables, (3) developing a project implementation plan for activities that create project deliverables, (4) developing various management plans by integrating various management elements, (5) and executing the project while ensuring consistency with program management.

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1.2. Business Process Integrated project management defines a consistent flow of project management for executing the project. The following describes the relationship between the business processes involved in integration management and the project management cycle. Managing business processes can ensure completion of the project by controlling the problems that arise in the course of the execution of the project, plus any risks arising from internal and external factors from the perspective of overall integration. The start-up process defines the project mission and authority of project managers based on the conceptual plan from the program using the Project Charter. For stakeholders, there is a process for formally appointing a project manager as the person responsible for promoting the project and the start of the project. During the project process, a project execution plan and project management plan should be developed. The former is based on the Project Charter and relates to activities for creating deliverables of the project, while the latter relates to schemes for controlling the project to the end. For stakeholders, this is a process for presenting a management scheme and establishing a system for the project.

Exhibit 3-2-2 Relationship between business process and project management cycle The execution process is for implementing a series of project tasks based on the project plan. During the control process, performance of executed tasks should be measured to identify any gaps with the plan. The process is controlled based on comprehensive judgment using the identified gaps; specifically, by identifying necessary correction measures, the need for various changes following execution, and balancing quality, cost, and delivery time (QCD) to resolve problems. The closing process formally recognizes project completion and transfers the project to an organization that will effectively control and manage it using the deliverables and created values. This occurs after first translating the lessons learned from the project into organizational knowledge. The business processes for integrated project management should be controlled by dividing them into specific phases at activities for creating project deliverables. Management that optimizes the project as a whole by dividing it into several phases is called “lifecycle management”. This form of management often incorporates a set of established rules: goals are set for each phase and the achievement of these goals is verified and approved by an organization consisting of upper or external stakeholders so that it can enter next phase.

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Exhibit 3-2-3 Example of relationship between integration management process and deliverables process Each phase of the integrated project management process incorporates other management processes. You can decide whether to go to the next phase or not based on the results of the current phase (See Exhibit 3-2-3). The deliverables, completion report, turn-over report, and other documentation created during the current phase will serve as an input for the next phase.

1-3. Policies in Practice Approval was obtained from stakeholders for the goals and objectives of the project during start-up and the planning process. Develop a project management plan that ensures consistency among management items, and set baselines including scope, scheduling, and costs (See 3-3 “Baseline”). The execution process is for executing the tasks described in the plan, and the controlling process is for gathering information through meetings, conferences, and reports while analyzing any gaps with the plan. Specifically, those include a kick-off meeting, plan review, review when completing a phase, progress meetings, planning and organizing meetings for revision control, and the like. When organizing meetings and conferences, forming a team within the project executing organization is critical to executing policy due to the necessity of management aspects such as project size. In the closing process, it is critical to ensure that the project deliverables and created values fulfill the target criteria. Key policies include: checking and ensuring that the values created through the project (e.g. deliverables and streamlining routine work of the organization using those deliverables) fully fulfill the goals of the project.

2. Developing a Project Charter The purpose of developing a Project Charter include the three items below, which indicate how corporate goals can be achieved and what results the project can produce in relation to financing, relationships with customers, task control, and employees based on the Program Concept Planning Document provided by the program. 143

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Official approval to initiating the project Appointment of a project manager Granting the project manager access to organizational resources The goals of the Project Charter are: (1) to link the project to the strategic goals of the organization, and (2) to clarify basic requirements such as appropriate considerations, obligations, prerequisites, and constraints. The project mission developed at the program level for the project often includes policies and the like. The following are required to boost feasibility of the project mission. (1) Clarify the goals of the project (e.g. budget, delivery time, and quality) in the form of an overview (2) Identify the execution challenges and risks by identifying the constraints on the project (3) Specify the terms and conditions of the project execution plan and development of the project management plan

2-1. Program Concept Planning Document Projects can arise for a variety of reasons, including the strategies of companies or organizations and the programs that follow from those strategies. In general, projects are started with instructions and goals such as quality, cost, and delivery time, which are given by the higher-ups (e.g. project owners or company executives), together with objectives to be achieved and values to be realized. When a project is executed under the control of a program, the following items are provided from the higher-up processes as basic individual project items in the Program Concept Planning Document (See Part 2). Project mission Plan for project value assessment Scope of project Scope of deliverables Basic requirements of management Project lifecycle Schedule Risks, various constraints, and conditions Draft of the Request for Proposal (RFP) For an organization’s internal projects, a sponsor from the organization would be the one to form the project. On the other hand, it is customers who form external projects. In general, these projects are often formed as an annex to the agreement established for outsourcing contracts. From the perspective of customers, the Project Statement of Work is given the role of notifying outsourcers of the requirements (in short, the statement serves as an RFP). From the perspective of the outsourcers, the statement serves as a detailed list of deliverables and service specifications to complement the written proposals and estimates. The Program Concept Planning Document is supplied by higher-up processes as a result of the project when a program is executed. When the contents of the document satisfy the criteria described in 2-2 “Project Charter” the project is given a high degree of independence from the Project Charter. On the other hand, higher project independence requires the preparation of a Project Charter during this process.

2-2. Project Charter The Project Charter is a type of document specifying following items related to the deliverables, scope, and basic management requirements described in the Project and described in the Program Concept Planning Document. This document primarily indicates the strategic level of the organization from higher management. 144

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Project mission Strategic purposes of the organization Purposes and goals of the project, and deliverables Scope of the project Definitions of project success and Key Success Factor (KSF) used in assessment Milestone plan Project lifecycle Needs and expectations of stakeholders Prerequisites and constraints related to organizations, the environment, and external matters Guidelines for developing the plan Develop the Project Charter, officially get project approval, appoint a project manager, and finally, issue an order to create the project plan. If a project is designed for the benefit of external customers, some agreement-related documents provided by customers may be used as an alternative to the Project Charter. Developing Project Charter: officially approves the project, appoints a project manager, grants the project manager the authority to use organizational resources

3. Develop Project Plan A project plan is developed based on the “project charter” from the initial project mission so as to develop the project plan document as a road map that ensures possibility until the project is completed, and gain approval from the stakeholders. The project plan document consists of the following three plan documents. (1) Project execution plan document

The plan document breaks down the activities to achieve the project’s goal into specific work units.

(2) Project management plan document

The plan document unifies individual management areas and summarizes the development/administration of the management framework for smooth and efficient project performance to its completion.

(3) Project value assessment plan document

The plan document assesses the value generated by an individual project when it is achieved, as specified by the “Program concept plan document.” Exhibit 3-2-4 Project plan documents

These plans may be developed individually as independent documents or compiled into one document. The level of specificity of each plan document may be adjusted by the stakeholders of the relevant project at the discretion of the implementing body. It could be a detailed document or a summary that refers to proper supplementary plans. For a summary document, it should include a description of how to integrate and coordinate each supplementary plan document. Concerning the project management plan document, the plans in each management area must be integrated according to the characteristics of the project. 145

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Previous plan documents, processes, templates, and guidelines standardized by the organization are generally utilized in preparing each plan. When the project is implemented, its progress is monitored and requests for change are made, and each plan document is revised/renewed based on stakeholder approval through the change control process.

3-1. Project Execution Plan The project execution plan stipulates activities that create values of the project. When developing the project execution plan, the following must be planned to develop the deliverables targeted by the project, as stipulated by the project charter. (1)Identifying the required work tasks (2)Refining WBS into a work package for definition (3)Designating the implementing body, person responsible, schedule, cost, resources, and risk management (4)Ensuring consistency among all other necessary items The integrated plans are documented, coordinated, and agreed upon by the project stakeholders. In the coordination/agreement process, it is important to assess the organization’s capability to implement the project, and ensure operability of the plan. If the plan’s operability is unclear, the plan must include the feasibility to verify operability based on the verification results, and needs stepwise refinement i.e.Rolling wave planning technique. The project execution plan includes baselines in the “scope,” “quality,” “schedule,” “cost,” “resources” and “risk” regarding project implementation. The project execution plan must include the deliverables of all relevant project execution planning processes as well as the procedures necessary for defining/integrating/coordinating all performances in implementing, controlling and closing the project.

3-2. Project Management Plan The project management plan document stipulates the method of project management (e.g. management policy, standards, management guidelines) in order to develop the “framework of management until completion of the project. The major items to be reflected in the plan document are as follows: Selected project management process and project phase Role and responsibility of stakeholders Management system (including that for supervision/instruction) Management milestone and project management WBS Project completion criteria Method and mechanism of requirement/request management Method and mechanism of managing/controlling risks, tasks, and changes Method and mechanism of configuration management Method and mechanism of document management Method and mechanism of knowledge management Method and mechanism of measuring baseline performance Method and mechanism of communication among stakeholders 146

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Method of organizing conferences and meetings Plan for each management area of schedule, cost, quality, resources, procurement, and communication Other processes, rules, standards, and procedures necessary for management In preparing the plan documents, it is important to stipulate management rules and guidelines for the project stakeholders, in order to smoothly implement management. The project management plan is applied to the entire project, and may be applied to such management plans as the procurement plan and quality plan.

3-3. Baseline Baseline refers to planned thresholds value. In project management, the baseline is a plan for which implementation is approved by the project owner or project manager, and then specifically scheduled implemented. The plan is constantly updated by obtaining approval from the owner according to the changes of the status. The baseline represents “the latast plan.” In a project, the baseline includes the scope baseline, the schedule baseline, and cost baseline, and serves as thresholds for measuring project performance. The differences between the baseline and project performance are analyzed to forecast for the future. The baseline used for evaluating performance is elaborated into the work package (WP) level according to WBS as shown in Exhibit 3-2-5 (see Chapter 4, “Scope Management”) for details of utilization).

Exhibit 3-2-5 Baseline based on WBS 147

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3-4. Project Value Evaluation Plan In addition to the completion of direct output by project implementation, it is necessary to develop a plan to evaluate the values generated by completing the output and implementing the project. The project value evaluation plan document specifies value evaluation indicators, the evaluation method, and timing of evaluation concerning the values to be generated in the project. The plan is formulated and provided by each project in the “Program concept plan document.” Based on the content of the provided project value evaluation plan, it is necessary to ensure consistency with the project execution plan and project management plan. The following are important in preparing the project plan: Developing a project execution plan that specifies the project’s creating deliverables activities, and Developing a management plan that integrates the management areas of individual projects.

4. Execute Project Execute Project is intended to execute the work defined by the project plan document in order to generate project output. The project manager shall establish an organizational implementation system as per role sharing at the baseline at the time of planning, and supervise the implementation of tasks, problems that occur, measures for changes and risks, and inspection to confirm that the deliverables satisfies a specific quality standard. The implementation generally proceeds in line with the critical path. It is thus necessary to collect progress data on a timely basis. Other than the implementation system, the management system to perform project management should also be established. The implementation system established shall include the establishment of human organizations, information infrastructure and procedures, as well as management guidelines. A framework is necessary to capture the following progress data concerning the operations executed on a daily basis. Time based progress Number of work processes and accumulated costs Status of the deliverables to quality plan Status of developing element of deliverables The progress data above represent basic information used to assess the status of project performance for a comparison with the baseline, and are used in progress reports for project activity management. Basic information shall be collected in compliance with the performance evaluation method and the rules for declaring progress as specified by the project management plan. “Issue logs” document any issues that occurred in association with expected project operation, and describe possible solutions. These logs are used to promote communication and share understanding about specific issues.

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For issues logs: (1) Record accurately. (2) Classify the content in line with the level of emergency and potential impact. (3) Assign a person responsible for the work items of a solution, and determine the day to solve the issue. (4) Regularly supervise the progress of solving a issue. A issue left unsolved is a major cause of conflict and could delay the project. Along with schedule progress report, assess the issues logs, examine and decide on solutions, and then implement those solutions. The following must be executed in the implementation process: (1) Corrective measures for issues (2) Preventive measures against risks (3) Correction of defects in deliverables One of the important items in the implementation process is the “optimization of team performance.” The number of team members participating in the project increases as the project proceeds. They possess diverse knowledge, long experience, and other background as well. It is important to boost the motivation of these diversified participating members. Be sure to hold kick-off meetings (KOM) and continue efforts to optimize team performance through ingenuity in team building. Concerning “approved change” in the control process, the project plan must be renewed so as to reflect the change. It is important to inform and familiarize project stakeholders about the change control process and rules beforehand. Clarify the lessons learned regarding techniques, management, and process (e.g. solutions for issues that occurred in the project implementation process, measures against risks). A framework for knowledge management should be established and utilized, so as to use the clarified lessons. The followings are important in the project implementation process: Assessing the status of project performance, and Executing corrective and preventive measures, and correcting defects.

5. Project Operation Management 5-1.Project Management Item Project operation management aims to maintain a good balance among quality/cost/deadline (QCD) through comprehensive judgment according to the project plan, and ensure the completion of project operation in line with the goal. In this control process, it is important to evaluate differences between the baseline and results in the following areas that have been measured and visualized in the implementation process, estimate future projections, take corrective measures, review, and then make a new plan. 149

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Progress data

Basic information on the status of project performance

Measured value of quality control

Information on the degree of conformance to the quality standard in the quality plan as measured by the so-called “Seven tools for QC” (e.g. histograms, characteristic diagrams, Pareto charts, control charts) Information on the status of achievement in the output quality goal specified in the progress report document, and project completion report document

Risk register

Information on the status of risks at present in the change request and progress report document, and information on newly discovered risks

Issues logs

Information on the status of measures for existing issues in the change request and progress report document, and new problems that occurred this time and their corrective measures Exhibit 3-2-6 Project management items

Based on the results of this evaluation, the “progress report document” and “change request” must be prepared, and progress meeting must be held to control the status for stakeholders. Progress meeting, plan changes, and other decision-making tasks. A progress report document generally covers the following items: Progress of activities being implemented Completed activities and activities just started Difference in progress and performance summarized by WBS Corrective measures and predicted performance in the future Status of each output relative to the quality plan Status of issues and newly occurring issues as per issues logs Status of change request cases and newly occurring change requests as per the change registry Measures against potential risks and new risks as per the risk registry Message Prepare these basic reports by deciding on the content and level in line with the stakeholders that are to receive the reports and the purpose of conferences as described in Chapter 11, “2. Communication Planning.”

5-2. Project Phase and Completion Report Document For project phase and project completion, prepare a project completion report document in compliance with this process. A project completion report document informs stakeholders that the operations, deliverable and values specified in the project plan reflect the “approved change” made in the project promotion process, and were achieved as per the completion criteria specified by the plan, and that all project works have been completed and approved.

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5-3. Change Request A change request must be submitted in case that a problem occurs in the management process in individual areas of management (except communication management), and as a result of a comparison between the planned and actual values, changes are deemed necessary: (1) Corrective measures (e.g. measures for issues) (2) Preventive measures (e.g. risk management) (3) Correction to defective deliverable and update of project plan The procedure for a change request should comply with the change control process, rules, and the format of utilization documents prepared under the project management plan.

5-4. Earned Value Management (EVM) “Earned value management” (EVM) is one of the techniques of baseline management. EVM is a useful technique that can integrally assess the progress of the scope, cost, and schedule under the same measurement criteria, evaluate the project’s progress, and calculate the estimate of final cost and final period for cross-project or cross-section application. See Chapter 7, “Cost Management,” for details of EVM. EVM employs monitoring items to monitor operational progress of activities on the critical path. As operational progress of activities on the critical path immediately affects the project schedule, monitoring such progress is important. See Chapter 6, “Time Management,” for details of calculating the critical path and the control method. The following are important for project operation management: Visualizing differences from the integrated baseline and future predictions Meeting management for assessing and controlling the status Status management for changes, problems, and cases of risk

6. Change Control 6-1. Change Control As the project progresses, parts that were unclear or unreasonable at the beginning of the plan become clear, and the situation surrounding the project also changes, which, in many cases, inevitably dictates change to the initial plan (i.e. addition, deletion, change). How to make a change unfailingly and efficiently is one key to success of the project. Change control aims to control all changes added to the project and deliverables, and officially decide on approval/disapproval of these changes before advancing to the next stage. Change is officially decided by the change control conference that generally consists of stakeholders. Changes affect each other in almost all areas of management, such as the scope, cost, schedule, and quality. Thus, it is important for change control to function as part of a “change control system” that integrates all areas of management. According to the content of approved change, the project management plan document 151

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and project document are revised. Deliverable change is generally controlled as per the configuration management procedures. It is necessary to register change requests for the entire project in the change registry, evaluate each request from the standpoints of benefit from the change, scope of the change, resources, time, cost, quality and risk, assess the impact of the change, and then obtain approval before implementation. Change may occur at any stage of project implementation and has a huge impact on the goal of project achievement. Changes that require particular caution are those decided downstream in response to a decision made upstream of the project. Such changes cause a substantial change in the number of work processes, and have a huge impact on project quality. It is important to conduct intensive design change control at the upstream design stage.

6-2. Change Control System The factors of change can generally be classified as those in the scope of a contract with the owner , and those made by the contractor in the project plan. In any case, a change affects the scope, schedule, quality and cost of the project. It is thus necessary to have a “change control system” for smooth project performance in order to constantly monitor/analyze/evaluate the causes of change in detail, and properly take corrective measures based on the result. This change control system consists of work processes that include the following items. (1)Establish the project plan In order to monitor/identify change, establish the baselines of the scope, schedule, quality plan, and cost of the project. (2)Monitor the change item Constantly monitor and identify change from the baseline, and report when any change occurs to those concerned. (3)Evaluate the change item, and analyze the impact Evaluate whether to identify the items specified as potential change as a change. Then predict/analyze the scope and degree of impact caused by the factor of change, and formulate a change plan. (4)Approval or disapproval of change based on the proper authority The change plan is submitted to senior management with proper authority in the company or to the customer for approval or disapproval. (5)Renewal of the project plan According to the approved change request, change the contract, revise/renew the project plan and baseline, and then share the change information with those concerned. (6)Monitor the implementation of change Monitor the implementation of change along the timeline, and then report the status to those concerned who are involve in the project. The following are important for change control: Assessing the impact on each management area, Establishing an official change control conference by stakeholders, and Establishing a change control system for the central management of changes. 152

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7. Closing Project Phase or Project Closing of project phase or project aims to confirm the completion of all project processes and tasks, and close the project phase or project. In order to verify closing, prepare a closing report document, confirm the completed procurement and released resources, and then obtain official approval from the stakeholders (customers). The closing report document for a project or phase officially indicates the following based on an inspection (check) of the progress report document, contract document, and project completion report document. The complete deliverables meets the expectation/request from the stakeholders. The value generated by deliverables is in the stage of utilization or operation. In cases where the project or phase is terminated before completion, prepare a document agreed upon by the stakeholders (owner and contractor), and present the following: Reason for termination and completion of element output Uncompleted element output Confirm that the procured product or provided service meets the content specified by the requirement in the signed contract, and that acceptance inspection has been completed. The project staff assigned for project implementation and all leased resources are released upon termination. Upon close-out, evaluate the project, accumulate the related experience, and collect the lessons learned so as to utilize them for the present and future projects. Through the entire project, the project team and major stakeholders shall clarify the lessons learned in the areas of technique, management and project process. The lessons learned must be collected, edited, formatted, accumulates, familiarized, and shared in the entire organization. The collection of lessons learned requires habitual “reflection” so as to clarify the lessons learned, as well as “knowledge management” for feedback to individuals. The lessons concerning failure require a culture of causal analysis instead of ultimately pursuing responsibility. Some projects must be discontinued before being completed. Without any particular rationale, discontinuation of the project should ideally include the same activities as project closing, even if there is no deliverables to deliver to the customer. The following are important for the closing process: Achieving the target criteria in the project deliverable plan, and Managing the transition and transfer to regular operation.

[ Rolling Wave Planning Technique (Progressive Collaboration Planning) ]**** When a project is initiated, information may be limited, requirements may not be specified in detail, or components of the deliverables and the work cannot be disassembled to the work package (minimum WBS unit) level. The method of planning to describe the WBS level in detail to a disassemblable level in stages for such cases in line with the progression of the work process is called the “rolling wave planning technique.” Generally speaking, a project phase is detailed to the summary WBS level, and then 153

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detailed to the work package level when proceeding to the next phase, where the phase is consequently detailed to the level required for project promotion. The rolling wave planning technique is generally used after the stakeholders review and approve each phase. It requires a sufficient number of planning work processes or the establishment of a planning team. Project implementation with progressive elaboration refinement requires a review of completion approval at each work process, and a review of plan approval for the next work process. *********************************************************************************

[ References ] Motoh Shimizu. (2010). Jitusen purojekuto & puroguramu manejimento. [Practicing the project and program management ]. Tokyo, Japan: JMA Management Center Inc. 2) Larry Leach. (2007). [Lean Project Management] Russel Books. 3) Shoji Okamura. (2003). Tetutei kaisetsu! purojekuto manejimento [Project Management. Thoroughly Explained]. Tokyo, Japan: Nikkei Business Publications, Inc. 4) Tetsuhito Yoshikawa. (2003). Purojekuto maneijya ga seikousuru housoku – purojekuto wo insotsu dekiru riida no kokoroe to sukiru. [Rules for project managers to succeedknowledge and skills of leaders who lead a project]. Tokyo, Japan: Gijutsu-Hyohron Co., Ltd. 5) Harold Kerzner. (2003). Kerzner no Jitusen purojekuto manejimento. [Kerzner’s Project Management Case Studies]. Toyo, Japan: Japan Productivity Center Publishing 6) Yuji Kishira. (2008) Zentaisaiteki no mondai kaiketu nyuumon - Kiomite Mori wo Miru – Saikyoo no shikou purosesu. [Introduction of problem solving for total optimization- “See the trees for to see the forest” The strongest thinking process]. Tokyo, Japan: Diamond, Inc.. 7) Kimitoshi Hori. (2004). Nikkei Bunko, Facilitation nyuumon. [Nikkei Bunko, Introduction of Facilitation]. Toyo, Japan: Nikkei Inc. 8) Alan Donelon. (2008). Chiimunai no Iraira wo Tatuseido ni kaeru.[Change the “Irritation” to “Sense of Achievement” in the team]. Tokyo, Japan: Firstpress. 9) David Strauss. (2004). Chiimu ga zettai umakuiku houhou – koraboreishion riidashippu ishikettei no kotsu-. [Absolutely successful method for a team-Tips for collaboration, leadership, and decision making]. Toyo, Japan: Nikkei Inc.. 10) Manuel E.Sosa, Steven D. Eppinger and Craig M.Rowles. (2008/08). [Are Your Engineers Talking to One Another When They Should?]. Harvard Business Review, pp.132-143 11) Dragan Milosevic. (2007). Purojekuto manejimento tsuurubokkusu. [Project Management Toolbox]. (Edited and translated by) PMI Tokyo Chapter 1)

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Stakeholder Management

Chapter 3 Stakeholder Management 1. Outline 1-1. Purpose of Stakeholder Management Stakeholders with different interests and in different positions participate in a project having different requirements (see Chapter 1, 6-2). It is therefore important to manage the requirements from stakeholders so as to maintain the values expected from the project, and satisfy all stakeholders to the maximum extent possible. However, in reality, once the situation changes, a conflict occurs in values that stakeholders expect to enjoy. In such case, it is necessary to return to the project mission and coordinate the interests of stakeholders once again, so as to prevent a possible conflict between stakeholders.

Exhibit 3-3-1 Outline of stakeholder management

Stakeholder management aims to manage the requirements and expectations from various stakeholders involved in the project (including customers inside and outside the organization), achieve their satisfaction, and complete the project. The interaction of stakeholders relative to project changes as the project’s life cycle advances. It is thus important to monitor such changes.

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1-2. Work Process The work process of stakeholder management consists of the following two processes: (1) “Identify stakeholders” at the project initiating process (2) Maintenance and improvement of expectations/ requirements from stakeholders in the executing process In the process of the “identify stakeholders,” analyze stakeholders to clarify whether they influence the project or are influenced by the project, and whether project stakeholders are an individual, group, or organization, and then document the information regarding their interests and involvement on project success. Create a strategy by illustrating the relationship between the identified stakeholders and clarifying their positions in the project, as based on content of the contract, the implementation structure, communication plan, and risk plan. In the process of “stakeholder management,” the relationship with stakeholders is built and planned. Understand the requirements and expectations from stakeholders with different interests, and in different positions, and then undertake the project so as to satisfy individual stakeholders to the maximum extent possible. In case of conflict, it is important to pursue shared goals and seek social responsibility, in order to solve the conflict and establish or maintain a favorable relationship.

1-3. Implementation Guidelines Stakeholders at the program level include those who are involved in the entire program, those involved in multiple projects, and those involved in only one project. Their requests may extend beyond the scope of the project, and thus become more complicated. And in the process of implementation, individual projects may also need such changes as contraction, expansion, modification and discontinuation. In line with changes in the relationship within the scope of the program, requests and expectations from project stakeholders should be adjusted. Therefore, conducting interviews and analyses from multiple viewpoints are necessary to identify stakeholders and their relationship at the program level. This kind of information is difficult to accumulate as knowledge. In many cases, the relationship with stakeholders is initially designed, built, and then maintained mainly by the customer (i.e. project owner) who needs the project, or by a person who plays the main role in implementing the project (i.e. contractor). The relationship with stakeholders is thus significantly influenced by conditions specific to the project (e.g. environment of the entire market to which the project belongs, environment specific to the project), as well as the customer (i.e. project owner) who takes the initiative in management, or the business environment of the project implementation body, core competency, and available business resources. In order to reconcile the stakeholders concerning their requests, expectations, and any causes of conflict, it is very important and useful to build a consensus in advance, by preparing a contract that clarifies the baseline of requests and expectations. In order to sense any sign of conflict among the stakeholders and prevent it from arising, it is important to visualize the changes in requests and expectations from stakeholders. Thus, the project manager must always keep the customer’s perspective in mind. It is also necessary to establish and maintain a favorable relationship with other stakeholders. 156

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2. Identify Stakeholders 2-1. Identify Stakeholders The identify stakeholders aims to identify interests, expectations, and impacts based on quantitative and qualitative information on the stakeholders involved in the project through the “project charter” and “project organization chart” prepared at project initiation, and to prepare a stakeholder register. The preparation of a stakeholder register requires interviews and analyses with stakeholders from multiple viewpoints. It is difficult to accumulate this kind of information as knowledge. Lessons and assets gained from the past project will be utilized, and should be analyzed and identified by specialist members in each field.

Exhibit 3-3-2 Project owner and stakeholders

2-2. Stakeholder Register The “stakeholder matrix”8) is a useful frame used to identify the stakeholders. The influence on the diverse interests of identified stakeholders is classified and summarized into data folders by using the “stakeholder influence grid.”8) Strategies on the interests of stakeholders are summarized as the stakeholder register. The stakeholder register is a summary of evaluation information, such as stakeholder identification information, expectations/ requirements, influence, and interests, as well as information on the classification of interests by type as basic items. Other necessary information should be determined by each project. The stakeholder matrix and stakeholder influence grid that are necessary for preparing the stakeholder register are described below. 2-2-1. Stakeholder Matrix The Stakeholder matrix provides a frame for the systematically evaluation of requests and expectations from stakeholders. It is a matrix consisting of identified stakeholders and factors regarding the stakeholders that influence on project success. 157

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Clarify the degree of influence that the stakeholder has on each parameter that determines the success of the project. In stakeholder management, prepare an influence portfolio of stakeholders by influence item based on this matrix, and utilize it for management. Exhibit 3-3-3 shows an example frame of stakeholder matrix8).

Exhibit 3-3-3 Example frame of stakeholder matrix8)

2-2-2. Stakeholder Influence Grid For the influence of a stakeholder over diverse interests, the influence grid of stakeholders can be mapped based on the stakeholder matrix. Exhibit 3-3-4 shows an example of the classification of generic stakeholders by using two axes: the importance of support and the level of commitment concerning stakeholders.8)

Exhibit 3-3-4 Example of stakeholder influence grid8) Note) Such bubbles as A, B, and C represent different stakeholders. The size of each bubble indicates the stakeholder’s degree of influence.

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Stakeholder Management

The following are important for the identify Stakeholders: Conducting interviews from various viewpoints by a team consisting of experts from groups on individuals areas, and Conducting evaluation by using the Stakeholder Matrix.

3. Stakeholder Management Stakeholder management aims to build and maintain the relationship with stakeholders in a favorable situation through the following: (1) Understand needs and expectations of stakeholders. (2) Identify potential concerns of stakeholders and resolve any problems. In the process of project implementation, a variety of friction and conflict are expected to occur between stakeholders with different interests. Prevent such friction and conflict from arising. In case of conflict, resolve any problems as per arrangements in the previously agreed contract. If contract is not signed, coordinate an appropriate relationship from the standpoint of the company’s social responsibility. These are the operations of stakeholder management. This is why so-called “conflict management” is so important. When a project manager cannot solve the problem of stakeholders, inform a upper management with higher authority according to the project’s organizational hierarchy, or ask an outside individual for support. The center of the relationship among stakeholders is usually the customer relationship between the project owner (i.e. customer/client) and project executor (i.e. contractor). (See page 160, column on points to consider in the relationship between stakeholders.) Details of the relationship between both parties are generally presented in the form of a proposal, agreed upon, and then finalized in the form of a contract. The relationship among major stakeholders that surrounds the customer (i.e. client) and contractor, such as cooperating companies and relevant ministries and agencies, usually has some form of arrangement agreed upon in the contract. Stakeholder management is the management of engaging stakeholders where changes in values that stakeholders receive, risks, and operations are managed in processes ranging from executing to closing, with re-agreement being reached from the perspective of total optimization.

The following are important for stakeholder management: Regular evaluation of expectations and requirements, and Win-Win resolutions for conflicts.

〔Conflict Management〕 ************************************************************ Conflict management aims the adjustment of any conflicts and conflict of interests associated with the scope of supply of issues and service that may occur, the level of required quality, deadline, and budget, so as to implement the project smoothly as scheduled. In project management, it is most important to avert problems before they cause a conflict. Should any friction or conflict occur between stakeholders, seek a resolution through negotiations based on the previously agreed arrangement under the contract. 159

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The essence of negotiation is to contend your own interest, and have the other party accept your request by employing a strategy. The best strategy for resolving a conflict is to bring about interest for both parties and reach an agreement through a win-win approach, so as to “resolve the problem.” Exhibit 3-3-5 shows the strategies for resolving conflict and their results as described in reference 2).

[Remark] W: Either party wins, L: Either party loses

Exhibit 3-3-5 Strategies for solving conflict and their results 2) ************************************************************************

[ Points to Consider for the Relationship between Stakeholder ] *************** The customer (project owner), main body of management or the project perfomer’s environment, core competency, and available business resources significantly affect the relationships between stakeholders.

Exhibit 3-3-6 Customer relationships 160

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Thus, the “customer relationships” is the main component of the relationships, and can be roughly classified into the following: (1)Relation between the project owner and end user (end customer); (2)Relation between the client (customer) and contractor based on the contract. (See Exhibit 3-3-6.) Note that customer relationship may differ according to the position in the project. As shown in Exhibit 3-3-7, there are two different cases where the project executor is the project owner who mainly plans and proposes the project, and where the project owner orders a project to another entity, and the contractor serves as project performer. In any case, the relationship between the project owner, project executor, and end customer is the core that functions as the foundation of the project. The customer relationships should naturally be designed based on a recognition of those involved (i.e. what they can do for the project)—meaning, the core competency.

Exhibit 3-3-7 Relationship between the customer and project performer ***********************************************************************************

[ References ] 1) Motoh Shimizu. (2010). Jitusen purojekuto & puroguramu manejimento. [Practicing the project 2) 3) 4)

5) 6)

7) 8)

and program management ]. Tokyo, Japan: JMA Management Center Inc. Larry Leach. (2007). [Lean Project Management]. Russel Books. Harold Kerzner. (2003). Kerzner no Jitsusen purojekuto ,manejimento [Kerzner’s Project Management Case Studies]. Toyo, Japan.: Japan Productivity Center Publishing. Yuji Kishira. (2008). Zentaisaiteki no mondai kaiketu nyuumon - Kiomite Mori wo Miru – Saikyoo no shikou purosesu. [Introduction of problem solving for total optimization- “See the trees for to see the forest” The strongest thinking process]. Tokyo, Japan: Diamond, Inc.. Kimitoshi Hori. (2004). Nikkei Bunko, Facilitation nyumon. [Nikkei Bunko, Introduction of Facilitation]. Toyo, Japan: Nikkei Inc. David Strauss. (2004). Chiimu ga zettai umakuiku houhou – koraboreishion riidashippu ishikettei no kotsu-. [Absolutely successful method for a team-Tips for collaboration, leadership, and decision making]. Toyo, Japan: Nikkei Inc.. Manuel E.Sosa, Steven D. Eppinger and Craig M.Rowles. (2008/08). [Are Your Engineers Talking to One Another When They Should?]. Harvard Business Review, pp.132-143 Dragan Milosevic. (2007). Purojekuto manejimento tsuurubokusu. [Project Management Toolbox]. (Edited and translated by) PMI Tokyo Chapter

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Chapter 4 Scope Management 1. Overview 1-1. Objective of Scope Management

Exhibit 3-4-1 Outline of stakeholder management In order to achieve the final goal of the project, scope management entails a series of work processes to ensure the following: Analyze all necessary activities and resources; Secure necessary resources; Ensure steady implementation. What is important for scope management is to clarify the scope of deliverables (e.g. product or service) included in the project, define and analyze the operation required for deliverables, and assign roles for respective operations for implementation. When defining the scope, the content of the contract signed between the contractee and the contractor is usually the most important. Depending on the project’s progress, managing the changes in scope associated with changes in the environment and restrictions is also important. Operations implemented in scope management constitute basic data not only for scope management but also for time and cost management.

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1-2. Management Process Scope management is basically achieved through the process shown below. Scope plan

Analyze such conditions as contracts, project policies, and requested technologies pertaining to the project, and then define the scope.

Definition of scope

Define the final value generated by the project so as to clarify the objective, deliverables, requirements, boundary and scope of the project.

Preparation of WBS

In order to achieve the goal of the project, requirements a series of work to be completed and prepare a framework of hierarchic division.

Management of scope change

Maximize positive impact on the project on the project generated due to the change of scope, and minimize negative impact. Exhibit 3-4-2 Scope management process

1-3. Implementation Guidelines Through the implementation of scope management, the project can prevent the scope from expanding outside the scope of management, prevent any changes, and assure completion of the project as specified in the goal. Work Breakdown Structure (WBS) and tasks developed in scope management can serve as basic data not only for scope management but also for the planning of time management and cost management. In other words, both are important deliverables of project management. Scope management thus has an important goal of developing a WBS that serves as the foundation of the project plan, and managing the changes in WBS. For developing WBS, utilize the WBS template owned by the organization, WBS of the previous project, and WBS standard for the industry. What is important for scope management is to clarify the scope of the project’s final deliverables and service to be provided by the project, define and analyze the basic deliverables necessary for both scope of deliverables and service, and then identify works included in the project to the full.

2. Scope Plan In order to achieve the project’s goal, two important works for project management in the early stages of the project are: (1) Clarifying requirements from customers and other stakeholders, and (2) Organizing the activities to be implemented. Prior to a detailed definition of the project’s scope, analyze such conditions as the contract, project policy, and required technologies pertaining to the project, and prepare the scope plan. In order to prepare the scope plan, focus on and document the items below. Outline of the characteristics of the project’s deliverables and service Quantitative goal that serves as criterion for evaluating success or failure of the project Implementation guidelines and procedures necessary to clarify the scope The scope plan shall include an outline of the characteristics of the deliverables, quantitative goal to be achieved, and necessary implementation guidelines and procedures.

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3. Definition of Scope Definition of scope is the work to be implemented before planning the budget, schedule, resources, and quality of the project. Defining the scope accurately is the most important for the project’s success. A poorly defined scope may cause confusion in the project and result in changes or reworks, thereby exceeding the budget and causing schedule delays. One technique of defining the scope is to prepare WBS. In order to define the scope, focus on the following items: (1) Choose the units for an accurate estimation of cost, time required for work and necessary amount of resources. (2) Choose the units to define a baseline that can control both cost and schedule. (3) Choose the units that can clarify responsibility and authority for the work. In a project, scope refers to the following: (1) Scope of supply (2) Scope of work (scope of operation)*1 (1)Scope of supply

Functions and constituting elements included in the product or service provided. Foundation, building materials, equipment, plumbing, and electric appliances.

(2) Scope of work

Work implemented to provide a product or service. Project management, basic design, detailed design, procurement, inspection, installation, commissioning, etc.

Exhibit 3-4-3 Scope in a project A poorly defined scope may result in change or rework. The scope refers to the scope of supply and the scope of work.

------------------------------

Clarify the scope of work It is important for companies in Japan, where lump-sum contracts are the mainstream, to clarify the scope of work. However, it is not common to set a project’s basic conditions (requirement) or prepare WBS with customers when signing a contract to clarify the scope of duties. Trouble with customers occurs in many companies due to a difference in interpretation at the implementation stage. Similarly, problems occur frequently with relevant divisions in the company, between consortiums, or with sponsoring companies concerning the defined scope of work and responsibility. It is important to clarify the scope of work because it specifies responsibility for implementing the work, serves as the basis of addition and change control, and helps the contractor avoid risks in a larger, more complicated project. *l

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4. Preparation of WBS The preparation of WBS is a process of defining the work to be completed in order to achieve the project’s goal by breaking it into elements, and creating a breakdown diagram that represents the work hierarchically.

4-1. Definition of WBS WBS describes all the works to be implemented to achieve the project’s goal systematically and hierarchically based on the project’s deliverables and stages. The first upper level of the hierarchy may include the major deliverables that constitutes the “end product” of the project, or adopt the time related background of the work such as “phases” (where “end product” refers to hardware, software, service, and any combination thereof). The subsequent lower levels of the hierarchy provide a detailed definition of each work element that is necessary for producing the end product. The lower the level, the more detailed the indicated content. WBS should cover all the activities that are needed for the project to generate the deliverables. In other words, it is important to maintain the following relationship:

Project = WBS Many persons in charge usually share the work of the project. Through this mechanism, which develops the very basic concept of the project planning, completing all works of the project automatically ensures the completion of the project itself. In order to ensure this relationship, the most important point for developing WBS is to strictly comply with the “100 percent rule,” which ensures that higher elements in the hierarchy of WBS are integrated with the lower elements with 100 percent probability, and that 100 percent of the higher elements are completed when 100 percent of the lower elements have been prepared.

4-2. Objectives of WBS WBS becomes more important as the project becomes larger, more complicated, and globalized, thereby requiring a longer period of work. Especially in many large projects, a syndicate (e.g. consortium) is formed to disperse risks through project implementation. In order to clarify the work sharing and the scope of responsibility among companies involved in the project, it is indispensable to prepare WBS. WBS is prepared due to the internal and external factors below. Internal factor

External factor

Necessity in project management

Request from customers Necessity of project implementation by a consortium or joint venture

Exhibit 3-4-4 Objective of the preparation of WBS

4-2-1. Utilization of WBS in terms of necessity in project management The objectives and effects of WBS in project management are as follows: 165

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Assess and identify all works necessary for the project; Clarify the scope of work, responsibility, and authority in collaboration with the organization; *This is especially important when the project is implemented by a matrix organization.

Establish a framework for cost control and schedule control; Provide a foundation to assess the level of progress and productivity of the project; Provide an aggregate unit for project resources. Promptly respond to such orders as a specification change and addition. Respond flexibly to diversified requests for reporting. Provide the communication tool shared by project members. Give feedback on historical data related to the project.

4-2-2. Preparation of WBS upon Request from Customers The “cost code system” applied to the project or the “work category system to be applied to cost breakdown” may be requested by customers through a contract. In particular, a cost reimbursement-type contract (e.g. Cost Reimbursement Contract, Cost-plus Fee Contract) requires aggregation and the charging of expenses according to this cost code system. In the case of a lump-sum contract, the customer (contractee) monitors the project’s progress or manages the order of specification changes/additions requiring a basic recognition common to both customer (contractee) and contractor. That is why WBS is prepared. 4-2-3. Preparation of WBS for a Consortium and a Joint Venture Project WBS is prepared for a consortium and a joint venture project to clarify the scope of responsibility for both parties, confirm and report the project’s progress, and then charge the expenses for specification changes and additional work.

4-3. Establishment of WBS Generally speaking, when establishing WBS, there are no specifically predetermined principles of how to systematically break down the project constituting works from higher to lower levels. The constitution of work breakdown and the method of breakdown differ according to the type of project and form of organization that implements the project. Breakdown is the work that subdivides the work into smaller, more manageable piece of work and define in the project’s life cycle, in order to prepare WBS. Exhibit 3-4-5 shows an example of a thermal power plant construction, Exhibit 3-4-6 shows an example of software development. 4-3-1. Work Breakdown A project’s products and works are usually the main elements that constitute the project. These elements must be determined based on how the project is managed. For example, at level 1, the work is broken down according to such physical aspects as the product’s system constitution and zones (areas), and at level 2, according to such functional aspects as work categories. WBS elements should be decomposed to the planning of both time and cost. In order to confirm that the definition of each element has sufficient accuracy, the appropriateness of work breakdown is also verified. Verify that each constituting element can be given appropriate, schedule, and budget, and specify the person in charge of the work. If said breakdown is not good enough, then further break down or integrate to a level that enables proper management. 166

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Note that there is no omission or redundancy of constituting elements when preparing WBS. In other words, the sum of the work at the child level must equal 100% of the work represented by the parent.

Parent WBS = Σ Child WBS A unique identification number called WBS code (Account Code) is given to each Work item in WBS. Exhibits 3-4-5 and 3-4-6 are examples of the WBS for power plant construction and software development. In particular, Exhibit 3-4-5 illustrates an example of representing the relationship among the work package, task, and control account as described later.

Exhibit 3-4-5 WBS, work package, task, and control account (Example of building a thermal power plant)

Exhibit 3-4-6 WBS (Example of software development)

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4-3-2. Work Package and Task The “work package” (WP) is the lowest level of WBS constituting elements made by breaking down WBS to a detailed level that makes the budget and schedule plans feasible. The level of detail of work package, which is the lowest level of WBS is depend out on the required management level, such as the size of the project and the degree of importance. 4-3-3. Rolling Wave Planning Technique (See Chapter 2, “ Column ” p153) The “rolling wave planning” is a technique of elaboration planning according to the progress of a project, where a detailed schedule plan is prepared for the work to be implemented immediately, and a plan at a relatively higher WBS level is prepared for the work to be implemented in the distant future, for which to detail planning is difficult. In this technique, the work package has different levels of detail according to the level of progress even in the same project. Points to be considered for setting a work package are shown below. The work package must be the smallest unit of budget allocation. The total amount of budget allocated to all work packages must equal the total budget of the project. Clearly define the scope of work and the division (or person) responsible for implementing work. Have specific input and output (deliverables). The work package may be broken down into units called “tasks (or activities)” where necessary. “Tasks” are control units that have an optimal level of detail so as to implement more practical schedule plans and cost estimation. Recently, with a wider use of scheduling tools has increased WBS decomposition of work into tasks at the actual operation level. 4-3-4. Control Account The “control account” is an arbitrary point selected on WBS optimal for control in earned value management (EVM) that integrates and manages scope, schedule, and cost. A project usually consists of more than one control account, which consists of more than one work package. 4-3-5.Standard WBS Basically, WBS differs in individual projects. However, most projects have similar work elements, so that WBS prepared for previous projects can be referred to new projects. From a point of efficient use, a standard WBS should be established in advance according to the facility and model for each company and field, and then used by deleting, adding, breaking down, and integrating the elements of work based on the project’s characteristics. 4-3-6. The 100 percent Rule For projects, all tasks to be implemented must be defined in WBS. It is necessary to ensure that final deliverables of the project be achieved by implementing all the work packages. Thus, when preparing WBS for the project’s success, it is very important to comply with the 100 percent rule as follows:

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[ The 100 percent Rule ]1) The following WBS breakdown levels (subordinate) cover all works that belong to the parent elements. Check method: Check whether each element is suitable for covering all operation items under it. Check whether each element covers all work items required under it. For preparation of WBS, the following are important: The work of the project are WBS elements. Compliant with the 100 % rule deliverables

[ Two-axis Structure WBS ] *********************************************************** Generally speaking, WBS constituting elements vary according to the purpose of the project—whether aimed at a product, service, or deliverables. The following setting of constituting elements according to the objective contributes to smooth implementation of the work. Product: reflects the structure of final output. Service: classifies necessary works using the bottom up method. Deliverables: refers to processing procedures for the standard process. In any case, the first level should include the project management element.

Exhibit 3-4-7 Two-axis Structure WBS Source: “Glossary for Engineering Project Management,” Heavy & Chemical Industries News Agency, 1986

WBS stratification by using a single constituting element may not be sufficient, however, for such projects as a large-scale plant that requires a long period, a huge scope of operation, and the cooperation of many stakeholders.

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In order to deal with such cases, Japanese engineering companies usually prepare WBS based on two-axis stratification consisting of a physical WBS (covering a huge plant area) and a project work WBS, and then define a work package at the point where the two axes intersect.

5. Scope Change Control Scope change refers to a change from the scope of service in the contract. The scope change control system is positioned as an element of the change control system for the entire project. It describes the procedures for scope change and consists of clerical procedures for change, a follow-up control system for changed items, and the approval level of changed events. The events below cause scope change. Oversight or lack of understanding when defining the scope of a product or service (change in scope of supply) Oversight or lack of understanding when defining the work implemented to provide a product or service (change in scope of work) External factors (e.g. change in relevant laws and regulations) Change in order to review added values (e.g. proposal for cost reduction by VE (Value Engineering) or adoption of new technology after signing the contract) Change in customer requirements Scope change is closely associated with other management areas (e.g. risk management, time management, cost management, quality management) and must be implemented through constant integration with other management areas, so as to function as part of the processes integrated in the change control system described in Chapter 2.

Scope change must be implemented through constant integration with other management areas.

[ References ] 1) Gregory T. Haugan. translation supervised by Ko Ito. (2005). Jitsusen de yakudatsu WBS nyumon. [Effective Work Breakdown Structures]. Toyo, Japan: SHOEISHA Co.,Ltd.

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Chapter 5 Resource Management 1. Outline 1-1. Objectives of Resource Management The six types of project resources are “human resources,” “material resources,” “financial resources,” “information resources,” “intellectual resources” (including technical resources), and “platform resources.”

Exhibit 3-5-1 Outline of resource management

In project management, various processes and techniques that constitute project management are equivalent to software in a computer system, while the resources are equivalent to hardware that serves as the foundation of software. Naturally, the project would not function in the absence of either. Under management of the entire project, the project is initially completed when proper resources are obtained at a proper time. Project resource management aims at clarifying and properly obtaining the resources necessary for the project. Exhibit 3-5-1 shows an outline of resource management.

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Exhibit 3-5-2 Six resources in a project

1-2. Operation Processes Resource management consists of six operation processes: identify the resources, develop a resource plan, implement the resource plan, monitor/control the resource plan of improvement/correction, and accumulate the resources. Exhibit 3-5-3 briefly summarizes the flow of these operation processes.

Process of identifying resources

Identify the resources necessary for the project.

Process of developing a Develop a plan to obtain the identified resources. resource plan Process of implementing Obtain the identified resources based on the plan. the resource plan Process of Monitor whether the resources are obtained as planned, analyze monitoring/controlling the and evaluate any differences from the plan, and predict the resources acquisition of resources in the future. Process of the plan of improvement/correction

Redevelop the plan to obtain the resources based on the result of monitoring and controlling the resources, and review the prediction.

Accumulate the resources obtained in the project’s Process of accumulating implementation as an organization in order to utilize the resources the resources in future projects.

Exhibit 3-5-3 Operation processes of resource management Exhibit 3-5-4 shows a diagram of the management processes above.

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Exhibit 3-5-4 Operation processes of resource management process Management for obtaining the identified resources from external resources (shown in Exhibit 3-5-4) is explained in Chapter 10, “Procurement Management.”

1-3. Implementation Guidelines Resource management should be viewed from the standpoints of both the project and the organization . Point of view of the project

Point of view of the organization

Continue the following operation processes: identify resources necessary for the project, develop a plan to obtain these resources, obtain these resources according to the plan, monitor/control to confirm that the resources are obtained as planned, and review the plan as needed.

Establish a framework to utilize the resources obtained through the project and the value thereof as an asset of the organization. Support resource management in individual projects as an organization.

Exhibit 3-5-5 Point of view of resource management

2. Identification of Resources 2-1. Basic Information to Identify Resources The basic information to be referred when identifying resources is as follows: (1) WBS WBS can systematically show project elements that need resources, and is the most important basic information used to identify resources. (2) Historical information Survey the kind and quantity of resources necessary in similar project operations in the past, and utilize the survey results when identifying resources. Exhibit 3-5-6 shows examples of resources. 173

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Field

Specific example

Human resources

(1) Project members (in the organization, dispatch) (2) Service contractor

Material resources

(1) Material (2) Location (3) Device (e.g. construction machinery, computer hard disc) (4) Software (5) Engineering environment

Financial resources

(1) Capital, debt (2) Stock

Information resources

(1) Management-related data (a) Standards, guidelines (b) Templates (c) Past performance (d) Project data (2) Data shared in the organization (a) Intranet information (3) General information (a) Industrial information (b) Business information (c) Other necessary information

Intellectual resources

[Intellectual property rights] (1) Patent (2) Utility model (3) Trademark (4) Copyright (5) Know-how/knowledge (6) Brand [Internal technologies] (1) Advanced technologies, core technologies (2) Identification of human resources

Platform resources

(1) Network (2) Internal system such as an accounting system (3) Engineering tool (4) Project management information system (PMIS)

Exhibit 3-5-6 Example of resources

2-2. Setting the Level of Necessity of Resources 2-2-1. Ideal Resources The process of identifying resources basically begins with discussions about the ideal resources for project implementation without being restricted by such conditions as whether such resources can actually be obtained and procured within the budget. 174

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Necessary resources are clarified through the process of setting the project’s scope. In cases where roles are shared between setting the scope and acquiring resources, close information sharing is necessary. Human resources are indispensable for a project, and whether necessary personnel are assigned in the company when accepting an order must be confirmed. Later when developing a resource plan, discuss the number of human resources necessary and how to obtain them. 2-2-2. Necessity of Resources Clarify the necessity of each resource in project implementation by classification as shown below. (1) Essential: This is required to complete a project. (2) Necessary: This will help efficient project implementation. (3) Desirable: This will help project implementation, but is not a necessity. When “a resource plan” is developed while considering the conditions of restriction in the project, the criteria above are used in discussing the appropriateness of acquisition (e.g. setting priority). The necessity of items classified as [2] and [3] above will again be discussed when developing a resource plan from the standpoint of cost performance. 2-2-3. Availability of Resources Discuss the availability of resources. It is also necessary to consider the method of procurement and the supplier. More specifically, depending on the characteristics of a resource, it is important to specify whether procuring externally or using internal stock, and to identify the supplier. 2-2-4. Resource Metrics In order to check the progress in the plan as part of progress management (progress of resource procurement), it is necessary to establish quantitative metrics (measurement criteria) for each type of resource. When identifying the resources, the measuring unit for resources should be clarified.

2-3. Output from the Identification of Resources The output from the “identification of resources” process is a list of resources. The list of resources shows those necessary for the project and includes ideal resources. The list also indicates the necessity of each resource.

Identify resources necessary for the project, study their necessity and availability, and make a list of resources.

3. Development of a resource plan 3-1. Basic Information for Development of a Resource Plan When developing a resource plan, collect and classify basic information into the items below.

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Of the items above, intellectual resources that are closely related to human resources have a close relationship with “human resources” management. Also, information resources have a close relationship with knowledge management.

3-2. Operation to Develop a Resource Plan 3-2-1. Study Examination on a Specific Plan on Each Resource Study how and where to procure resources. Clarify when resources should be ready to use. For the study, the WBS operation plan table should be used as a basis. Refer to the WBS work package and identify the necessary resources. (1) WBS

Basic information on work to be implemented in the project

(2) Work plan table

Basic information for developing a plan on the time of procuring resources

(3) List of resources

List of resources prepared in the process of “identification of resources”

(4) Personnel plan

Plan on human resources necessary for the project 1)Resources retained by the company (including recycled resources) Internal resources

2) Internal training for engineers 3) Internal personnel 4) Availability (quantity available/ available timing)

(5) Information on resource location

1) Supplier 2) License External resources

3)Dispatch of engineers, introduction of technology 4)Dispatch of personnel, service contractor 5) Industrial information/business information 6)Availability (quantity available/ available timing)

(6) Organizational policy

The organization usually decides whether to purchase or rent the equipment to be used in the project. The method of procuring resources, as well as the policies and concept of the resource plan, should be thoroughly assessed by the organization.

(7) Achievement information

What kind of resource and how much of it was necessary in similar works in previous projects, in which phase of the projects it was required, and from where it was obtained.

Exhibit 3-5-7 Basic information for a resource plan

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Concerning human resources, consider whether human resource can be procured internally, and if not, when and how to procure externally from the standpoint of the necessary number of personnel, time, skill level, know-how, and organizational strategy, in order to complete the project. See Section 3-2-2 below for the personnel plan. Concerning material resources, determine the specifications of resources and equipment necessary for satisfying the request. Study whether the resources can be procured internally at an appropriate timing. If internal procurement is not possible, consider external procurement. Concerning information resources, examine or study whether information necessary for project implementation is available from internal information assets. If internal procurement is not possible, consider preparing a new resource or purchasing external information. Concerning intellectual resources, study whether to use intellectual property owned by an external organization or individuals for project implementation. When using such resources, examine measures for the use thereof. Concerning infrastructure resources, study whether the internal IT infrastructures suffice for the necessity of project implementation. If so, discuss the startup, settings, operational system, schedule, and cost. Repair may be necessary when internal IT infrastructures are to be used. If such infrastructures are not available, consider external procurement or the use of external infrastructures. In this case, study whether the infrastructures are to be used exclusively for the relevant project or used by the entire organization. To study the issues above, achievement information can be referred when estimating necessary resources and selecting suppliers. It can also be used for checking oversight. 3-2-2. Discussion on the Personnel Plan The labor power required for the project cyclically increases and decreases according to the progress of the project. It is thus necessary to identify the time period when maximum labor power is required, thoroughly discuss whether it can be procured, and the availability at each stage. Basically, estimate the necessary labor power along the time line, and expect change in the project’s life cycle. At the same time, it is necessary to discuss with relevant divisions, and coordinate the posting of internal personnel involved in the relevant project and other projects as an entire company. For individual personnel, the ongoing project is just one of many projects from a long-term perspective. Their moral (discipline) and morale (willingness) may be degraded unless they are given a long-term perspective of their duty in the relevant project and others. The management of project assignment to individual personnel and their divisions can also be an important factor that influences the success of each project. Estimation of the necessary labor power at an early phase should be carefully discussed, so as to avoid any addition after actual operation begins. Generally speaking, the addition of resources could increase the cost and delay the schedule. In particular, an addition of labor power has a seriously negative impact, and thus 177

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requires caution. The ability of personnel usually varies significantly. Refer to their previous achievements and referrals for deciding on their allocation. In particular, software development largely depends on the skills of personnel, and thus the evaluation of skills is very important. 3-2-3. Determination of an Optimal Draft Prepare more than one resource plan by expecting possible unavailability and various other cases, and then compare the plans through discussions. The development of alternate plans seeks different approaches to acquiring the resources necessary for the project. For example, discuss measures to find alternatives when a necessary resource is not available. This procedure also serves as a review of necessary resources. In the discussions, utilize achievement information and various problem-solving techniques, and select the most appropriate plan as the final draft among alternate plans by considering the project’s purpose, as well as the project’s conditions of restriction.

3-3. Output from Formulation of a Resource Plan 3-3-1. List of Resources Resources deemed unnecessary are removed from the list of identified resources, and resources newly identified as being necessary are added to the list. 3-3-2. Resource Plan Document A resource plan document should be compiled on how to procure the identified human resources, material resources, information resources, intellectual resources, and infrastructure resources. Study how to procure the specified resources in the list of resources, and summarize the result in a resource plan document.

4. Implementation of the Resource Plan This is a process of procuring the necessary quantity of necessary resources for an appropriate cost at a necessary time point based on the resource plan document. Procurement management is important for the external procurement of resources.

4-1. Basic information for Implementing the Resource Plan The basic information for implementing the resource plan is the resource plan document prepared in the process of “formulation of a resource plan.”

4-2. Procurement of Resources Procure the necessary quantity of resources necessary for project implementation at a necessary time point based on the resource plan document. It is important that necessary resources for an appropriate cost satisfy the quality requirement specified in the resource plan document. Lack of any these factors (i.e. quantity of resources, timing of resources procurement, quality of resources) will adversely affect the project. Concerning human resources, procure the necessary personnel internally or externally at a necessary timing. 178

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The internal procurement of human resources requires coordination with management of the relevant divisions. External procurement is conducted according to the procurement management procedures. Concerning information resources, procure management-related data, internally shared data, and general information both internally and externally, and customize the data for relevant project implementation. For example, obtain the standard procedural document owned by the organization, and prepare a procedural document that reflects requirements specific to the relevant project. Concerning intellectual resources, intellectual property rights to be procured externally should be procured based on the contract signed by the holder of said rights. Concerning foundation resources, establish the IT infrastructures necessary for project implementation. When using existing information system foundation, conduct timely renovation as necessary for smooth utilization. If existing information system foundation are not available, procure such foundation externally or use external information system foundation.

4-3. Output from Implementation of the Resource Plan 4-3-1. Resources Resources are obtained based on the resource plan document. 4-3-2. Resources Data Resources data are records of procured resources to be utilized for checking implementation, recycling, and reuse. Based on the resource plan document, procure the necessary amount of resources that satisfy the requirement at a necessary time point.

5. Monitoring and Control of Resources 5-1. Monitoring The resource plan developed in the previous section must be constantly monitored to confirm whether it is implemented as planned in the project implementation process. Resources must be followed to confirm whether their procurement and provision are as planned. It is necessary to establish a proper method of collect such data and information. It is also necessary to ensure the easy retrieval, collection, and accumulation of such data and information when developing the plan. In particular, when resources range over many items, an information system must be utilized. If such a system has yet to be established, establishing one should be considered part of improving foundation resources not only for the project but also for the entire company.

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[ Measurement Criteria for Software Development ] ************************** In software development, it is difficult to select proper measurement criteria for intangible software. Because management requires measurement data, however, various indicators are proposed to indicate progress. For example, the function point method indicates the size of software. It calculates the size indicators by focusing on the functions to be performed. Programming languages have recently diversified, causing a gap between the lines of source code (LOC) and actual estimation, which promotes the use of this function point method. As discussed above, it is important to clarify the criteria for progress in monitoring, and perform a consistent evaluation. ****************************************************************************

5-2. Control (Analysis, Evaluation, Prediction) At the beginning of a project, a performance policy and criteria for measuring progress are specified in the project implementation plan document. Based on the progress measurement criteria, compare the plan and actual checked in the monitoring, analyze the cause of any difference, and then evaluate the entire project. Also predict the supply of resources up to completion of the project in the future. For example, in such projects as plant construction, the procurement plan for equipment and materials should be periodically reviewed for a quantitative adjustment of materials as the design progresses. The addition of construction machines and personnel entails a lead time, which often causes delays in the schedule. Thus, a timely addition requires an evaluation and analysis of progress. In anticipation of a potential addition, take necessary measures immediately. As a countermeasure, employ such schemes as changing priority in activities in the improvement/correction plan so as to avoid any addition. Monitor whether resources are procured as planned, analyze/evaluate the difference from the plan, and predict the future procurement of resources.

6. Improvement/Correction Plan If any problem is found that may affect the work process as a result of analysis, evaluation, and prediction described in the previous section, redevelop the resource supply plan (e.g. change of quantity, timing, supplier), and predict once again. The re-prediction of resources is to rearrange the resource schedule prepared based on time management, by considering the restrictions on time and on the resources. Initial resource schedules in the daily plan are usually based on an assumption that resources are sufficiently procured. However, resources are usually limited, and multiple operational activities frequently request resources. Such circumstances often require a redistribution of resources without a substantial delay in the overall deadlines. Some arrangement is necessary for prioritizing certain activities based on a given judgment criterion. If such arrangement can no longer deal with the situation, the addition of resources should be decided. 180

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Human resources should be carefully added. Take the example of software development where human resources are the center of operation, so as to deepen your understanding of this problem. When there is a delay in operation in any field, human resources are generally added in order to catch up. In software development where machines are not used much, human resources are more likely to be added, even if we know this is not a good solution. It has been pointed out since the 2000s in the field of software development, the addition of human resources may cause a further delay in operation rather than recovering the delay.1) Any addition in the later stages of the work process has an especially greater impact. This is because software development requires communication between engineers. The addition of personnel synergistically increases communication. Above all, newly added personnel do not understand the project’s context, and need education from scratch. A large amount of time must be spent on education, which causes a serious impact. It is thus necessary to find any signs of delay at an early stage. When adding human resources is unavoidable, carefully study the characteristics of personnel to be added (applicability), and whether the addition poses any problem, and then decide on the addition. If the area of delay needs personnel who sufficiently understand the project or in case such addition could have a serious impact on the future schedule, there is another possible method where a task team is organized with members from the ongoing project personnel for intensive work to recover the delay, along with new personnel being added to the field where there is relatively low impact. In any case, the addition of resources is risky. An accurate estimation is also necessary from the planning stage so as to avoid any addition. Exhibit 3-5-8 shows the flows discussed above.

Exhibit 3-5-8 Flow of the improvement/correction plan Monitor if the resources are input as the planned, evaluate the difference with the plan, and predict the gathering of the resources in future. 181

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7. Accumulation of Resources 7-1. Significance of Accumulation of Resources Projects create value for the future under specific conditions of restriction, by completing the desired goal within a limited period and under a predetermined budget. In order to achieve this goal, human resources, material resources, financial resources, information resources, intellectual resources, and foundation resources are utilized. As a result, plants, buildings, software, research, and new products are generated. Material resources are completely consumed or utilized in a different form for different purposes. However, human, information, intellectual, and foundation resources are further developed through use in the project, the content of technologies becomes more sophisticated, and many generate a higher value of use. Of course, projects achieve the desired goals and result in a great qualitative improvement of resources, except for material resources. For example, look at the development of new technologies. Even though some new ones are being developed, the challenge actually began based on known technologies, where new facts are found and lead to new technologies. In the first place, it is said that any creation needs accumulation. The use of resources is expanded through the project, with their quality being improved. It is wasteful to only use the resources for the project. The results obtained from the project should be handed down to subsequent projects and the next generation. In the organization involved in the project, people generally tend to only pursue the success of the project. Not many people think about passing over the results for subsequent projects in the future. In order for an organization to improve its productivity, quality, and competitiveness, however, it is important to understand the characteristics of these resources, accumulate more sophisticated resources in the organization through project implementation, nurture higher awareness, and use such resources for future projects.

7-2. Recycling of Intellectual Assets and Information Assets 7-2-1. Stock of Resources and Standardization Among the various resources, many information resources such as data and information (flow information) obtained through the project, and intellectual resources can also be utilized for other projects. It is necessary to accumulate these resources in the company, organize the resources in the form of knowledge and a database, and then use the resources for future projects. This is the proper management of accumulated resources. However, the retrieval of resources accumulated disorderly entails a huge effort, which often results in resources not being utilized. Moreover, resources should be handled with specific intentions; otherwise, important resources may be missed, losing their value being stocked. In order to accumulate and effectively utilize resources, accumulate and manage resources in a well-ordered manner. A systematic framework to stock the resources is very important. It is necessary to establish a resources accumulation system in the 182

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organization, consider the reuse of data and information, and handle the data and information with a specific intention. For the purpose above, it is effective to set a standard for the accumulation and use of resources. Data, information, and knowledge from previous projects can be shared on a common basis, and effectively utilized when standardized. Processes, documents, tools, application technology, quality standard, and many more items should be standardized. Routine calculation by software and calculation by a simulator are examples of standardization, by which anyone can calculate and obtain the same result, thereby improving efficiency. Standardization (standard method) can be an information asset. Proper standardization requires settings based on sufficient experience. Standardization should be constantly reviewed from the user’s standpoint. This is a difficult task that contradicts the characteristics of standardization, which requires stability, but should be considered for standardization. 7-2-2. Importance of Information Systematization Most intellectual and information assets are buried in our brains. In order to draw out these assets to an organizational level, they should be accumulated in a form of documents and other materials. Thus, as the volume of information increases, it becomes more important to accumulate assets in the form of an information system for actual utilization. Particularly in recent years, Computer Aided Design (CAD), Computer Aided Engineering (CAE), and Product Data Management (PDM) have computerized most technical information for which technical simulation is frequently performed. Project management-related information is accumulated by the Project Management Information System (PMIS). Information systematization refers to accumulating the resources buried in human resources as tangible organizational assets. The world of systematized technologies plays a role that turns a lot of “implicit knowledge” buried in an organization into “explicit knowledge” . In providing and maintaining information, it is possible to reduce the burden necessary for forming explicit knowledge by adopting schemes in the system (e.g. classification, compliance with standards, data entry), which helps promote the updating of information. Moreover, systems that can simulate events beforehand based on accumulated technical information can simply utilize intellectual resources effectively, save most material resources (e.g. humans, materials, facilities), and dramatically improve the speed and productivity of the project. The same holds true for management-related information. Systematized technologies, on the other hand, are concealed in a so-called “black box.” This is also problematic in terms of training project managers and engineers, and requires caution.

7-3. Specific Measures to Accumulate Resources 7-3-1. Material Resources Material resources are disposed rather than accumulated.

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(1) Estimation of remaining material resources when the project ends An ideal project implementation is where the necessary amounts of materials and equipment are systematically purchased according to schedule, and when the project ends, all materials and equipment are used without any leftover. However, some leftover inevitably occurs. Materials, equipment and machines are disposed of, except for those to be reused. It is thus necessary to check the amount of remaining materials, equipment, and construction machines, the time of terminated use, and then consider how to utilize these resources. (2) Acquisition of information on the utilization of remaining material resources How to utilize the remaining materials, equipment, and construction machines at the end of the project may significantly affect the project’s profitability. Effective utilization is an important task at the end of the project. 7-3-2. Intellectual Resources (1) Management of project documents Retain and summarize contract documents, specification documents, drawings, cost data, quantitative data on materials, driving data, project’s progress records, minutes, problems that occurred and methods of solution, so that anyone who reads the documentation can understand its content. And be sure to follow any applicable standard. (2) Management of intellectual/technical resources generated from project implementation In order to reuse intellectual/technical resources generated from project implementation such as techniques, how to proceed with the project, and adopted construction methods, it is important to organize the information and generalize it as much as possible in a form that is available for other projects. As stated in the previous section, standards play an important role for management. Unlike material resources, software is not consumed and is easy to recycle. However, software depends on the design of each project, and may be difficult to reuse in other projects. It is important, however, to reuse software as a component and for standardization in terms of productivity and quality improvement. It is thus necessary to plan and implement measures for recycling, even before the stages of design and manufacturing. Note that object-oriented designs and programming are suitable for reuse. (3) Acquisition of rights over intellectual resources You must pay for the use of intellectual resources for which another person has acquired the rights, even if you developed the intellectual resources. It is thus necessary when signing a contract to pay attention to the attribution and scope of application of copyrights, patents, and licenses in case of software development. The contract should also focus on recycling as needed. (4) Informatization of intellectual resources This topic was previously explained in “Stock of resources and standardization.” 184

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7-3-3. Information Resources The project information resources below should be accumulated for the future. (1) Project information Documents concerning project information should not simply be filed, but effectively categorized and summarized as reference for other projects and for easy use. (2) Human network in project implementation Basically, a project is implemented through interaction and cooperation with many people that include customers, vendors, manufacturers and engineering contractors. It is a great asset to maintain a relationship with competent persons not only for the relevant project but also for other projects. (3) Regional (corporate) specificity The information concerning customers who worked together for the project is an asset for the project and companies that participated in the project. It is necessary to make efforts to share the way of thinking, work style, and customs of the customer with persons in the same company who will implement the next project. In particular, projects overseas (including alliances with foreign companies) entail cultural differences, a different historical background, and a different way of thinking. Sharing experience and knowledge clearly is indispensable for the success of the next project. (4) List of those involved in project implementation For information that is difficult to informative or be turned into explicit knowledge, a system is needed to question individuals with experience in the form of an accumulated project database. This is related to a human resources database. This is generally called, “Know Who.” (5) Utilization as IT information As stated in the section on “Recycling of Intellectual Resources and Information Resources,” it is necessary to maintain a system in order to easily retrieve and utilize information techniques, along with intellectual and information resources. It is desirable to establish a system so as to access and utilize the resource database through an internal information system that is an infrastructure resource.

7-4. Example of the Accumulation of Resources (1) Lessons learned When a project is completed, hold a meeting concerning the project, and share the precious experience gained when implementing the project for similar and subsequent projects, and utilize the experience to improve performance in the project. Items to be discussed include specific experiences of success, failure, and points to be improved in the entire project, and all should be documented. It is important not to seek responsibility for failure, but to clarify the cause of failure. These results should be summarized for plant construction projects in terms of project management, engineering, procurement, construction, control, commissioning, and turn-over by divisions, and used as internally shared 185

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resources. The experiences and know-how obtained through project implementation should not be limited to the project, or individuals engaged in the project, but should be used for improving organizational capability for project performance. (2) Accumulation of project documents When retained, the documents of all projects implemented in the past to the present may provide a great asset for a company. In the past, documents were filed and retained on paper. Nowadays, storage place of documents are retained on electronic media (thereby allowing quick retrieval when necessary), and utilized as a framework that enables the referencing of past experience when implementing a similar project.

[ Project Know-How Collection ] **************************************************** In order to pass on the experiences obtained through a project to the project manager and project key staff of the next generation by creating a knowledge database, an engineering company has compiled a book of know-how entitled, “What would you do in such a case?” This company always holds a meeting on the lessons learned when a project ends, and accumulates the experiences obtained in project implementation as know-how that is stipulated, as a rule, by the project implementation manual. This book of know-how consists of several items for domestic projects and projects overseas in consideration of usability. ********************************************************************************

7-5. Intangible Assets Among accumulated resources, intellectual and information assets, etc. have high value as intangible assets, and their utilization is proactively promoted. Intangible assets are generally defined here as the market capitalization of stock of a company, minus the amount of tangible assets recorded on the balances sheet. Most of a company’s value is generated from intangible assets through project resource management, particularly by accumulating and recycling intellectual and information resources, through which the project’s productivity can be improved. Intangible assets can also contribute to creating value for a company. Generally speaking, intangible assets consist of various elements. The following are typical elements: Intellectual assets: human asset, research & development capability, license (e.g. patent, trademark), etc. Customer assets:customer database, trust relationship with customers, etc. Brand assets:product brand, corporate brand, etc. These are included in the general resources shown in Exhibit 3-5-6 (on page 174), thereby suggesting a close link between resource management and intangible asset management. As discussed above, intangible assets are becoming a major factor that determines a company’s value. Conversely, management has been extremely difficult. 186

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This is because, while intangible assets are recognized as a resource, the methodology of related management and quantitative evaluation to support such assets are insufficient. In the future, use the concept of resource management discussed in this chapter as a basic methodology, and the information system foundation described “Information Management,” as the basis to calculate the value of evaluation, so that intangible asset management will gradually become possible.

[ Brand economics ] ************************************************************* For brand assets, for which quantitative evaluation has been considered the most difficult among other intangible assets, a model that enables quantitative management has been recently proposed. “Brand economics” is a model that establishes brand strategy by combining the brand information and EVA® (a method of Stern Stewart & Co., an American consulting company). In the future, many of these models will be proposed, and the most useful one arise will be chosen. *************************************************************************** Accumulate resources in the organization so that resources whose value is improved by project implementation can be reused in future projects.

[ Reference ] 1) 2)

3)

Frederick P. Jr. Brooks. (1996). Ningetsu no shinwa. [Mythical Man-Month]. Tokyo.Japan. Addison-Wesley Publishers Japan. Kunio Ito. Kooporeito・burando no hyouka to senriyaku moderu. [Corporate brand evaluation and strategy model]. Diamond, Harvard Business Review, Vol. 27, No. 3, pp.38-53 Mich Bergesen, Burando ekonomikusu: EVA to BAV no yuugou moderu. [Fact-based Brand Valuation: Bringing New Clarity to Brand Management Strategy]. Diamond, Harvard Business Review, Vol. 27, No. 3, pp.54 & 67

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Chapter 6 Time Management 1. Outline 1-1. Objectives of Time Management Time management is a series of work processes intended to optimize all works/resources necessary within the constraints of time, and to attain the project execution policy, in order to achieve such project goals as the targeted delivery time and realizing a balance of payments. For time management, it is important to plan the most efficient operation procedures on the time axis for the product or service in the project, control of the progress according to the plan, and predict and manage factors that cause changes in the plan. When implemented, time management clarifies the optimal plan and conditions on a time axis, and indicates how dissociate the actual status with the plan, and the cause of the dissociation. The process of time management covers defined scopes, and is closely linked with other management areas. In particular, it is directly correlated with cost management, which is an important task for project management.

Exhibit 3-6-1 Outline of time management 188

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1-2. Operation Process (1)

(2) (3) (4)

The operation process of time management consists of the following 4 items: Planning of schedule Initial planning: at an early stage of the project Replanning: when the schedule needs review due to various factors Project progress control Analysis and prediction of the tendency in progress Coordination for achieving the goal

1-3. Implementation Guidelines In order to successfully complete the project, it is necessary to prepare a comprehensive, optimal plan based on the budget, time, quality, and HSE (health, safety, and environment), which are the goal of the project. It is an important duty of project management at an early stage of the project to indicate the project execution policy toward achieving the goal, and to clarify the implementation plan. The following should be considered for planning. (1)Execution policy that leads the project to success, and rational procedures (2)Framework and method to trace the project’s progress (3)Method of monitoring and evaluating achievement (progress) of the plan (4)Procedures for the discussion, formulation, and implementation of forecasting and corrective measures (5)Summary and analysis of achievement, procedures for formulating improvement plans for the future All activities from start to completion of the project are closely networked. In this “figurative” net, activity and the activity duration can be regarded as knots and the activity duration rope that connects the knots, any activities that take longer than scheduled affects the entire schedule, resulting in deformation of the entire net, this is a delay in the project. As both schedule and cost are closely related, the project’s balance of payments is deviated from the optimal value set in the plan. Consider that the schedule and cost are in a trade-off relationship, and pursue a realistic optimal value based on the project’s characteristics. It is thus necessary to understand that time and cost are closely related as pertaining to the following issues: Optimal schedule that realizes minimum administration expenditure Optimal schedule that achieves maximum productivity Preventing dissociation between income and expenses Securing the achievement of target with incentive (bonus) and preventing a delay penalty In order to achieve the planned schedule, all those involved in the project who are responsible for individual activities must be strictly aware of compliance with the schedule. Continuous efforts in the organizational administration have significant meaning (e.g. instructions for schedule management and communication in meetings, daily encouragement for those involved in the project, detailed adjustments in the execution plan). This requires efforts for time management as well as communication, along with various aspects of team building. 189

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2. Develop Schedule All those involved throughout the project’s planning and performance must accurately recognize the activities described in the schedule. Particularly important activities that must be performed in advance are: 1) clarification of the project plan and management policy, 2) defining the project scope and individual activities, and 3) systematizing WBS.

2-1. Development of a Schedule Policy The project manager must understand the project’s characteristics, and play the center role in developing a performance policy for successful completion of the project. The schedule develops the execution policy into the implementation plan, and shows its details in the form of a scenario. Schedule plan policy and management policy should be clarified at early stages of the project (including estimation stage).

2-2. Definition of Control Subject Defining those subjects to be controlled is an important task that guides the management unit in individual activities. It requires discussion about various aspects (e.g. priority and timing in the schedule, organization, interface concerning responsibility and the scope of work and supply, work assignments, manageable optimal size). When performing this time management, the points to focus on are as follows: (1) Alignment of the project plan/management level and optimal management size in the scope of tasks (2) Recognizing the kind of activities; identifiable definition (3) Establishing common definitions in planning and management that cover all stages of the project (4) Establishing common code to identify and handling data (for documentation and data processing) (5) Common definitions for comparison or analysis with actual data (6) Consistency with work jurisdiction (e.g. operation of specialty divisions, contractors’ work, specific management objective of project)

2-3. Establishing Performance Guidelines In order to describe how to conduct time management in the project, it is necessary to prepare the following execution guidelines (procedures): Schedule plan, control procedure Progress calculation procedure Schedule, progress reporting procedure

2-4. Schedule Plan The schedule plan is to establish a schedule that forms the basis of project execution, and requires the knowledge accumulated by those involved under supervision of the project manager. As the framework of the schedule is established along with budget estimates, both reality and feasibility must be fully verified. Once the project started, it is also necessary to compare the plan expected at the estimation stage the assumption and constrain in implementation, and promptly 190

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re-verify the execution policy, and realize the methods and means of implementation. Once the basic draft schedule is completed, the project manager should hold meeting of those involved to a work process with the following intentions: Inform stakeholders of the project implementation policy, plan, and conditions of constrain. Confirm the consistency of implementation policies and plans with relevant divisions and those involved. Elicit critical paths and problems in the plan, and summarize the opinions on countermeasures. Promote confirmation and agreement on project milestones. Confirm the commitment of all those who participate in the project to ensure compliance with the work process. Promote agreement on the schedule level and objective. The level of schedule is usually established based on the purpose of use (generally, corresponding to the users’ level). The basic framework remains the same, but detailed expressions and points to be stressed change according to the level. In addition, properly judge the level requiring management according to the size of the project. The following are example levels of a large project in the engineering industry. Level 1 = project master schedule Level 2 = project control schedule Level 3 = project task schedule (details developed from level 2) Level 4 = detailed schedule for key management The detailed schedule for key management includes a frontend schedule (schedule for the time being), critical schedule (important schedule), equipment delivery request table, order of equipment operations, list of documents, equipment and materials supply table, and a short-term management cycle schedule.

2-5. Progress Plan The progress plan is a method of assessing the project’s progress at each implementation stage, allocating the weight of individual operations on the time axis, preparing an “S curve” that accumulates said tasks to express a quantitative progress plan (see Exhibit 3-1-5 p136), and setting the measurement criteria. For those purposes, it is necessary at the planning stage to establish progress measurement criteria corresponding to each stage of the project. As in the example of plant engineering, establish (at the planning stage) the criteria for measuring progress in each stage of design, procurement, and construction as shown below.

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Design

Select as a weight the man-hours (work hours) required for design. - Measure by designing activities and events. - Measure by documents, the output of design, and interim achievement criteria.

Procurement

Select as a weight the budget for equipment and materials. - Measure with the number of orders as the unit and the interim achievement criteria.

Construction

Select as a weight the estimated direct labor hour (quantity x unit working hours). - Measure with the accumulated actual amount of work and interim milestone.

Exhibit 3-6-2 Example of criteria for measuring progress in a plant engineering

2-6. Identification of Schedule Risk For smooth project implementation, it is necessary to identify risks (uncertain factors) when developing the project schedule plan, and estimate the probability and amount of impact. If necessary, perform Monte Carlo Simulation to verify the degree level of influence on the project schedule by probability numerically.

2-7. Network Technique As previously stated, in order to successfully complete the project, precise planning and management of the project schedule (time) are important elements. Recent years have seen a rapid increase in larger projects, advanced techniques, and more complex operations, for which more sound planning and management are requested to realize more efficient project implementation. Under such circumstances, the Critical Path Method (CPM), Program Evaluation and Review Technique (PERT), and other methods using a network have become widely used. The environment where computers enable the high-speed processing of mass data largely contributed to the popularity and development of these network methods. Such network methods as CPM and PERT refer to a method that clearly defines and classifies each activity necessary to complete the project, connects these theoretical mutual relationships with arrows, and displays these relationships in the a form of a digraph.

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Exhibit 3-6-3 Example of ADM network There are two methods of showing a network: Arrow Diagram Method (ADM) and Precedence Diagram Method (PDM). ADM indicates a task as an arrow between two dots called nodes. Codes and numbers are assigned to individual nodes, which are called “task b-c,” for example. ADM adopts dummy arrows for formless activities (arrows) to be used only for expressing the constrain in order (see Exhibit 3-6-3). PDM adopts boxes to represent tasks. Codes and numbers are assigned to individual tasks, such as “task B.” The arrows show the order between tasks. These arrows are called “constraints” (see Exhibit 3-6-4).

Exhibit 3-6-4 Example of PDM network 193

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ADM was initially used as an easier display method, however, PDM, which is easier to understand and handle, has recently become mainstream. Most planning/scheduling software products adopt PDM as their basis. The basic network scheduling is to optimize the time scheduling and resources (e.g. human resources, materials, budget) necessary for the project, and simultaneously implement resource scheduling in consideration of time and resources. The following shows the basic procedures using the network method.

Exhibit 3-6-5 Basic plan operation procedures using the network method < 1/2 >

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Exhibit 3-6-5 Basic plan operation procedures using the network method < 2/2 > As ICT technical information terminals have become ubiquitous in recent years, project management methods are rapidly advancing. With the schedule as an axis, the diversified functions below are gradually being added to the management support system. Support for establishing WBS Support for scheduling and cost integration management Support for risk management Analysis of probability for planned feasibility As stated above, some software is equipped with the function to collaborate with other systems so as to integrate the entire system. By flexibly utilizing such software, the accuracy of project plan, assessment of the status, and forecasting of the future will be comprehensively improved. The support for decision making in management will also be enhanced.

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3. Project Progress Control Once a plan is established and then actually initiated, it is necessary to continuously monitor, measure, and assess that actual work is performed as planned. In general, focus on the following: Difference in activity schedule on the time axis Status of progress on S curve Activity efficiency (productivity) Status of mobilization of resources Status of risk factors Because these items require the latest actual information, it is necessary to identify the procedures and reports needed to collect the data.

4. Progress Trend Analysis and Forecasting It is necessary to analyze the trend in progress based on the status assessed in the progress management/measurement mentioned above, and forecast the future of the project. This aims to elicit problems early, specify countermeasures, and eliminate factors that may affect the plan. The following analysis provide important information for forecasting.

4-1. Scope Analysis It is necessary to compare the plan and current status, assess any change in the scope, and forecast the influence. Scope analysis is basically a method of assessing change in the quantity of work along with its cause, and analyzing the difference from the quantity of work achieved (including forecasting).

4-2. Schedule Analysis Schedule analysis assesses the difference between the initially planned schedule and current status, by basically focusing on the following two things: (1) Confirm any change in the critical path and in margin (float). (2) Compare the days when each task was planned on the project schedule and when the task is achieved (including predicted day) on the time axis, and assess the margin (float). In order to analyze any future trend, scope analysis, progress analysis, and productivity analysis should also be assessed together.

4-3. Progress Analysis Progress analysis quantitatively confirms the project’s progress relative to that planned by using specific parameters, and assesses the level of in the current status with the achievement upon completion as 100%. Basically, progress in the plan is plotted on the time axis as an S curve, which is compared with the S curve of actual progress. This analysis also assesses the actual tendency in progress to forecast the future.

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4-4. Productivity Analysis Compare planned and actual work efficiency. Check the actual efficiency in records, assess the tendency so as to use it as reference information for future schedules and progress forecasting. Basically, the following items are compared: Workload necessary for achieving 1% of progress Workload necessary for finishing 1 unit If any significant difference is observed in the items above, it is necessary to focus on individual factors, conduct detailed analysis, and discuss countermeasures. “Earned Value Management” is a method of analyzing progress and productivity that comprehensively assesses and forecasts scope, schedule, and cost (see Chapter 7, “Cost Management,” for details).

5. Adjustment to Achieve the Goal As the project progresses, the scope and work volume become clear in detail. At the same time, the project is affected by internal and external change factors that may cause a delay in progress from the initial plan. If revising the plan too often, you may lose sight of the target. However, if you stick to the plan based on estimated information to continue the project, or leave the dissociation untouched, the project may not develop further. It is thus necessary to review the initial plan when a certain status occurs or at a predetermined time, and then reconfirm the scenario (preplanning) through project completion. Schedule change closely influences and is mutually influenced by scope, cost, and other management areas. Thus, schedule change must function as part of processes integrated in the change control system (to be explained later).

6. Relevant Knowledge for Critical Chain Management Critical chain management is a methodology that adopts the concept of Theory of Constraints (TOC), advocated by Dr. Eliyahu Goldratt, to project management. While PERT and CPM are methods of mathematical optimization in scheduling issues, critical chain management is considered a practical method of totally optimal time management by focusing on human psychology and behavioral characteristics when performing tasks with many uncertain elements, as well as social/organizational issues. One major difference from conventional methods is that while a certain amount of extra time (buffer) is implicitly accepted in the planning so as to finish individual work activities as planned conventionally, critical chain management does not allow any buffer in individual work activities, and establishes a plan so as to complete the project as soon as possible, where buffers are collectively managed for the entire project while the project is underway. This buffer is utilized effectively so as to shorten the project period. A significant amount of time can be saved in projects where office workers with a larger buffer are the main body than in projects where site workers with a smaller buffer are the main body.

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Since the mid-1990s when the method was first advocated, the method has now become increasingly applied for its usefulness and achievement as a new method aiming to shorten the period of a project.

6-1. Buffer Included in the Planning Stage Plot the time necessary to complete an task on the horizontal axis, and make a probability distribution. Given the high uncertainty of each operation in the project, the distribution forms a beta distribution that stretches to the right, instead of normal distribution. In order to meet deadlines, conventional project management makes estimates with 90% probability in consideration of various uncertain factors, instead of using the median (50% probability) for scheduling. Due to the characteristics of its probability distribution, the duration may be two or three times as long as the case with 50%(Exhibit 3-6-7). The difference between this completion time based on 50% and that based on 90% is a reserved time called a buffer, which is considered a cause that prolonged the project duration from the planning stage.

Exhibit 3-6-7 Task duration estimation in the critical chain

6-2. Steps to Implement Critical Chain Management Critical chain management enables the project manager to focus on changes in each task, project buffer, and converged buffer on the critical chain, thereby reduce the factors that delay the project. (1) Identify the critical path Make a list of all tasks and their periods in the project on the network chart to identify the critical path. (2) Collect buffers in each task into the project buffer Buffers other than those in the critical path should be deleted to the minimum necessary. (Leave the period with 50% probability.) Accumulate the buffers collected from each task to the end of the critical path. This buffer is called the “project buffer.” The probability of each task being delayed is 50%, but such delays can be fully recovered by the last project buffer. (Exhibit 3-6-8) 198

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Exhibit 3-6-8 Accumulating buffers from each task to the project buffer (3) Cut the project buffer by half to shorten the project period. Accumulating buffers from each task to the project buffer the project buffer by Half (4) Prevent delays in the critical path caused by a feeding buffer To deal with the delay of a task in a non-critical path that converges into the critical path, establish a feeding buffer and prevent the critical path from delaying. A “converged buffer,” also known as a “feeding buffer (FB),” is established at the task convergent point to protect the critical path by dealing with delays in the non-critical path that converges into the critical path. As long as the converged buffer has an extra period, the critical path is not affected. (5) Prevent competition for resources by critical chain When a resource is placed in a competitive situation between tasks in the same project (i.e. same resource adopted by more than one task), prioritize the task in the critical path. In order to avoid delays in other tasks, also reformulate the schedule to avoid overlapping on the time axis. The path that combines this critical path and a bottleneck resource is called the critical chain. This could be the final condition of restriction for the project. As a result, the feeding buffer may have to move to the convergent point of the critical chain. (Exhibit 3-6-9)

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Exhibit 3-6-9 Preventing competition for resources by the critical chain

[ Reference ] 1)

Eliyahu Goldratt/translated by Ryo Sanbongi. (2003). Kuritikaru chein naze purojekuto wa yoteidoorini susumanainoka?. [Critical Chain why project does not progress as schedule]. Tokyo, Japan: Diamond, Inc.

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Chapter 7 Cost Management 1. Outline 1-1. Objectives of Cost Management Cost management is a series of processes that provides to formulate a budget necessary for completing the project, and estimate and optimize costs of all work resources necessary for project implementation within the budget as a target.

Exhibit 3-7-1 Outline of cost management Specifically, cost management calculates and determine the budget concerning products or services included in the project, considers the balance of expenditure and controls progress by using a consistent indicator (i.e. cost), solves various problems in project implementation, and foresees and controls factors that cause changes in the budget. These management processes must cover the scope baseline and have a close relationship with other management areas. Particularly in the case of business—for which raising profit is the ultimate proposition—the indicator of cost is directly linked to that proposition. Thus, cost management is an important work that governing all areas in project management. This chapter explains cost management relative to establishing a project that includes facilities, equipment, IT software development, planning, implementation, and administration. Exhibit 3-7-1 shows an outline of cost management.

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1-2. Work Process The process of cost management entails the quantitative control of cost by using such independent control elements as quantity, unit price and efficiency. These processes are essential operations for controlling the balance of expenditure and risks in the project and is directly related to corporate management.

Exhibit 3-7-2 Three operation processes of cost management The operation process of cost management consists of [1] cost estimation, [2] budget setting, and [3] cost management.

1-3. Practice Control Cost estimation is performed in various stages of a project’s life cycle. It is important to prepare a proper cost estimation policy according to each purpose for efficient estimation. Determination of budget setting is necessary for the proper control of project cost because it includes the formulation of a cost baseline and cash flow that provide as the basis of cost control in project implementation.

1-4. Cost Management and Cost Engineering (1) What is cost engineering? Cost management is implemented based on the concept of cost engineering. Cost engineering can be defined as follows: “Cost engineering is the application of engineering techniques that utilize scientific principles and techniques to the issues of cost estimation, cost control, the consideration of profit and loss, and business planning.”

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(2) Three variables that constitute cost The structure of cost is expressed by the following formula:

Cost= f (quantity, unit price, efficiency) More specifically, cost can be considered a function of three variables—quantity, unit price, and efficiency. Information about these three items is required for cost calculation and cost control. Quantity includes the amount of materials and volume of work. Example of unit price are the unit price of materials and unit price of workers. Efficiency includes workers’ productivity and facility productivity. Note that cost is different from price. Price means sales price, which consists of general management cost necessary for corporate administration and profit, added to cost. In order to perform cost management, it is necessary to understand the fundamental concept of cost engineering concerning the three cost variables [i.e. quantity, unit price, efficiency].

Exhibit 3-7-3 Three variables that constitute cost (3) Averaging concept The averaging concept is a basic concept of cost engineering, and should never be forgotten when implementing cost management. The averaging concept means finding some significant correlation or mean value from data of past project (e.g. work volume, unit price, efficiency), finding formula on rule, and then using the rule for future estimation. The three most important points of this concept are as follows: 1)When there are many cases of the data, the mean value can be used as criterion for a comparison of verification. 2)The law of averaging concepts cannot be applied to estimation of each single item.

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3)Time and labor efficiency is realized by estimation. Adopting the averaging concept in estimation can save estimation time and workvolume, although less accurate than the build-up method. This is an essential method for the Order of Magnitude Estimate (OME) and Preliminary Cost Estimate (PCE), which are explained later in Section 2-5. This is also used as comparison criterion for evaluating whether the estimation result is appropriate. (4)Variation factors and correction When discussing cost, it is necessary to consider some variation factors that affect cost, and add necessary correction. For example, correct the difference, in productivity by site and the unit price of materials and manpower, which are known as ‘location factors’, follow up on changes in the cost index continuously so as to reflect changing prices in real time, and then make corrections. Other variation factors, which are needed to pay attention continuously are the market’s willingness and market trends, competitiveness when receiving an order, and trends in exchange markets.

2. Cost Estimation 2-1. Outline Cost estimation is performed at various stages in a project’s life cycle. Each estimate has its purpose, and different estimation methods are adopted according to the purpose. Thus, the expected accuracy of estimations are different. Exhibit 3-7-4 shows examples of representing the concept of cost estimation for a project to construct a production facility.

2-2. Objectives of Cost Estimation Cost estimation is performed in a project’s life cycle by the owner or contractor based on their purpose. The objectives are as follows: Establish a conceptual plan in the business planning phase. Conduct a feasibility study in the business planning phase. Determine a project budget to decide on final investment in the project definition phase. Allow competitive bidding on project participation in the project implementation ph ase. Determine an implementation budget in the project implementation phase. Perform Estimation at Completion (EAC) in the project implementation phase.

2-3. Basic Data for Estimation A project is progressively elaborated as it advances through stages. The basic data necessary for cost estimation are merely an overview of project facilities in the conceptual stage, an early stage of the project, and are also progressively elaborated. In the definition phase, basic design data become available, and in the implementation stage, detailed design data and design documents become available along with the progress of the project.

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Exhibit 3-7-4 Typical concepts of cost estimation (case of production facility)

2-4. Cost Estimation Method The major cost estimation methods are described below. A single method or several methods in combination can be used for cost estimation. Exhibit 3-7-4 shows the cost estimation methods according to the basic data necessary for estimation, but not limited to those methods. (1) Capacity Slide Method (production facility index method) This is a method of calculating the necessary cost of content by using the rule of thumb that the cost of all equipment or a single unit of equipment in the facilities is proportional to the power index of content based on the known content and cost. The method is expressed by the following formula:

C1=C2× (S1/S2) n Apply the following to the formula: C1: cost of facilities or equipment to be obtained C2: cost of known facilities or equipment S1: capacity of facilities or equipment to be obtained S2: capacity of known facilities or equipment n: index specific to facilities or equipment The value of the index can be calculated statistically from previous achievements, but is adopted the range of 0.6-0.8, and is specifically given the value of 0.6 in many case. Thus, the method is also known as the “0.6 square law method.”

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(2) Ratio method Based on a concept where similar types of facilities have similar ratios of cost constitution, this method calculates equipment cost, for example, and estimates other expense items and the total cost of facilities by using the known ratios of equipment cost, other cost expense items, and the total cost of facilities. (3) Composite unit price method This is a method of estimating the cost of facilities and equipment which consist of more than one element, by calculating the representing cost per unit (e.g. per ton of equipment weight, per pump kW) based on the previous achievement. (4) Factored & Modular Method This is a method of estimating cost by using a model made by generalizing the formula to calculate the cost of facilities or a single unit of equipment based on the statistical relationship between previous achievement data and other variables. (5) Build-up calculation method This is a method of confirming the quantity of materials and equipment, volume of engineering work, necessary workload, and a breakdown of expenses that constitute cost by expense item, estimating unit price, analysing costs based on unit price times quantity, and then accumulating all costs to estimate the cost of the entire facility.

2-5. Cost Estimation Accuracy The accuracy expected in cost estimation varies according to the period given for estimation and the experience of the person in charge of cost estimation. However, it is mainly determined by the level of detail in basic data made available at the time of estimation, that is, the level of a project’s definition (see Section 2-3 above). Estimation accuracy is low in case of a poorly defined project. Thus, better estimation accuracy can be expected in case of a highly defined project. The accuracy of cost estimation can be roughly classified in the following three categories according to the level of definition of the project (see Exhibit 3-7-5). (1) Order of Magnitude Estimate (OME) (2) Preliminary Cost Estimate (PCE) (3) Definitive Cost Estimate (DCE)

2-6. Cost Estimation of Expense Items Expense items that constitute the project cost can be roughly classified in terms of direct cost and indirect cost.

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Exhibit 3-7-5 The accuracy of cost estimation Specific expense items included in direct and indirect costs vary, however, according to industry. The classification of direct and indirect costs is also relative, meaning that an expense item may be classified in direct cost or indirect cost depending on the organization.

Exhibit 3-7-6 Cost estimation expense items

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In the case of plant construction project, direct cost is spent, for example, for machines and equipment, engineering work, and direct labor that constitute part of a permanent facility constructed in the project. In contrast, indirect cost includes general expenses and the cost of temporary facilities for constructing the permanent facility.

Exhibit 3-7-7 Items conform to cost The following items should also be considered in estimation. Cost estimation can predict future cost by identifying available information according to the purpose based on the quickest cost estimation method and previous achievement data.

3. Budget Compilation 3-1. Procedure to Establish Cost Management Before determination of the budget, establish cost management procedure for the project by following the steps below. (1)Establish the management policy and concept. (2)Establish the minimum control unit based on WBS. (3)Establish the management level by cost categories according to the project’s size, type and characteristics of the contract. (4)Establish the means of interfacing with the schedule controller and finance departments.

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3-2. Determination of the Budget To implement the project, the budget must be determined. When project implementation is decided, the procedures to determine budget are as follows. (1)Confirm whether any estimation or underestimation was identified. In cases where a detailed estimation is impossible and bundled cost is estimated, such cost should be allocated to the relevant WBS. (2)In case of using foreign currencies for a overseas project, establish an exchange rate for the currencies during project implementation. (3)Reflect the results of the operation above, and convert the Definitive Cost Estimate (DCE) into the implementation budget. (4)Allocate budget (cost, quantity, efficiency) to appropriate WBS levels for cost management.

3-3. Establishment of a Cost Baseline The cost baseline is also known as the Performance Measurement Baseline (PMB), and serves as the basis of the plan for yield and schedule/achievement evaluation, so as to evaluate the project with budget allocated to the time axis. The cost baseline serves as criterion for cost management through earned value management.

3-4. Earned Value Management 3-4-1. Earned Value Management In project implementation, delays in schedule on budget overrun can be often occurred unfortunately, which will cause difficulties in proceeding with the project along with the initial plan. By adopting Earned Value , the progress of the scope, cost, and schedule can be integrally assessed by the same measurement criteria, where the project’s progress and performance can be evaluated, and Estimation at Completion and the period of completion can be calculated. A series of processes that adopt such a technique to optimize the project is called “Earned Value Management (EVM).” EVM can be used in project management internally; owners or constraction, for the following purposes: Evaluate the project’s progress and performance, which serve as the rationale for proper invoicing and payment. Detect such problems as cost overruns and delays in schedule as early as possible, and take preventive actions. Assess the impact of a problem quantitatively, and take corrective actions properly. Inform those involved of the project’s current status quantitatively in the form of a communication report written in an understandable manner. Compare and evaluate multiple projects for optimal resource input.

3-4-2. Developing of a plan The person who implements the project shall establish the framework to collect and integrate project information, and a framework to evaluate the project in order to integrally assess the scope of progress, cost, and schedule by using the same

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measurement criteria. The criteria for evaluating the project should also be established. In Earned Value Management, establish a plan by following the steps below. (1) Define the entire scope. First, define the entire scope as WBS (see Scope Management). (2) Set the control account. In order to integrate, control and evaluate the schedule and cost based on the scope, establish an optimal framework to collect and integrate necessary project information. The framework at this level is called the Contro1 Account—an appropriate point on WBS optimal for management (see Scope Management on page 168). Usually, a project consists of multiple control accounts, each of which consists of multiple work packages. The control account is a basic unit to measure and evaluate earned value. The aggregated control accounts constitute the value of the entire project. Each control account includes the following manageable elements: Description of the scope of work Schedule (start and end dates) Amount of budget allocated to the period Departments and persons responsible Work packages (more than one) Measurement method of earned value(EV) Exhibit 3-7-8 shows the control account table of construction work as an example of the control account format.

Exhibit 3-7-8 Example of control account table

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Establish the elements included in each control account by using the following methods: (a)Method to measure earned value There are several methods of measuring earned value. Exhibit 3-7-9 shows five typical methods. (b)Schedule Assign the scheduled start date and end date of the project to each control account (see Time Management).

Exhibit 3-7-9 Methods of measuring the earned value (c)Responsible departments and persons From the Organization Breakdown Structure, allocate an organization in charge and the persons responsible to each control account. Do not assign more than one person responsible to a control account. (d)Budget Distribute the budget allocated to the control account to the operation period of the relevant control account by using the adopted earned value measurement method. (3) Cost baseline (Performance Measurement Baseline: PMB) As shown in the examples of basic terms of earned value management in Exhibit 3-7-10, the cost baseline usually forms an S curve.

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Exhibit 3-7-10 Basic terms of earned value management

3-5. Prediction of Cash Flow Prediction of cash flow refers to predicting the time and amount of income and expenditures during the project. Both schedule and cost are combined for such prediction. This aims to prevent the project administration from running short of necessary funding. A typical method is to compare the accumulated income and expenditures during the project in a graph, in order to constantly check the balance.

For budget formation, prepare a cost baseline along the timeline by using the total cost estimated as project’s implementation budget.

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4. Cost Management Cost management is generally implemented according to the cycle as shown in below.

Exhibit 3-7-11 Cost management cycle In the cost management cycle (Exhibit 3-7-11), those involved in the project are most concerned about the prediction of total cost upon completion. Thus, first predict numerical values upon completion by analyzing the current status. Survey the cause of the over-budget (overrun) tendency elicited from the prediction, propose a corrective measure to minimize the over-budget problem, generate budget redundancy (e.g. underrun, prevention), and monitor the effect of the corrective measure implemented. The work above are the most important task for persons in charge of cost management.

4-1. Analysis of Current Status This is to measure the earned value and actual cost for analysis. It’s to evaluate the project by using the earned value and focusing on the deviation between the Performance Measurement Baseline and achievement. It is regularly estimated cost and period at the end of the project. And also it’s to adopt variance analysis, performance analysis or trend analysis, or any combination thereof for evaluation based on the three elements explained below. 4-1-1. Three Elements used for Earned Value Management In earned value management, the three Abbreviations below is used for analyzing the current status.

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Exhibit 3-7-12 Three elements used for earned value management 4-1-2. Variance Analysis The variance in cost and schedule is quantified by using earned value (EV), expressing it by using Cost Variance (CV) and Schedule Variance (SV), and then they are calculated by using the formula below. CV=EVᅳAC SV=EVᅳPV The negative values of CV and SV express cost overruns and delays in schedule, respectively. This shows the quantitative difference between the planned and actual cost and schedule. 4-1-3. Analysis of Performance The performance of cost and schedule is quantified by using yield (EV), expressing it by using the Cost Performance Index (CPI) and Schedule Performance Index (SPI), and then they are calculated by using the formula below. CPI=EV/AC SPI=EV/PV CPI and SPI indicate the level of cost and schedule performance with 1.0 as the border. When evaluating and improving performance, the improvement of SPI and CPI is not the same. Measures to improve SPI have an impact on cost, which largely affects CPI in many cases. As a method of utilizing the analysis data, judgment criterion is set in some projects for an alarm for such performance indicators as CPI and SPI, and if the level exceeds the criterion, the cause is identified so that necessary measures can be taken for improvement. 4-1-4. Trend Analysis As shown in Exhibit 3-7-13, trend analysis is an analytical method using an illustrated performance curve where three elements of the project are plotted on the time axis, and a trend report where efficiency indicators of CPI and SPI are plotted on

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the time axis so as to predict whether the project’ progress and efficiency will be improved or become worse in the future, as based on the previous trend.

Exhibit 3-7-13 Example of performance curve & CPI/SPI trend report

4-2. Forecasting 4-2-1. Calculation of Estimation at Completion (EAC) By utilizing Earned Value Management, it is possible to predict Estimation at Completion (EAC) and perform project management from an early stage of the project. ・ Calculation of Estimation at Completion The project’s Estimation at Completion (EAC) can be calculated by using the formula below.

EAC=ETC+AC

*Estimate to Complete (ETC)

The three formulas are used to calculate ETC are shown below. Generally speaking, formula (2) is most commonly used. If substitute the formula (2) of ETC to the formula above, EAC = B AC/CPI is obtained. (1) ETC=BAC-EV In cases where “current cost performance will not continue in the future” (2) ETC=(BAC-EV)/CPI In cases where “current cost performance will continue in the future” (3) ETC=(BAC-EV)/(CPI×SPI) In cases where “current cost performance and schedule performance will continue in the future”

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There is one thing to note when judging management by using EAC: Because EAC enables prompt calculation of the cost of remaining operation automatically and quantitatively, it is suitable to assess a problem’s degree of impact, but not to assess financial cost that requires high accuracy. If more detailed cost estimation with high accuracy is required, list and accumulate all remaining works for estimation (an operation called “Check Estimate”). 4-2-2. Calculation of Estimated Period to Complete The project’s Estimated Period to Complete can be calculated from SPI by using the calculation formula below. (1)Project period/SPI or (2)Remaining period/SPI + consumption period The calculation formula above (i.e. same as that for EAC) enables prompt calculation of the project period and is suitable to assess impact on the schedule. If a more detailed and accurate remaining period must be calculated, adopt the network method, etc., introduced (see Chapter6 Time Management). 4-2-3. Reporting Performance Results to those Involved As part of communication management, share the project’s progress and analysis results with those involved on time. Exhibit 3-7-13 shows the graph and table formats used to make brief and concise messages. It is important that the communication plan clarify the purpose, frequency, and targeted recipients of the report.

4-3. Change in Cost 4-3-1. Change in Cost Baseline Changes in the project affect on each other, and may require correction of the Performance Measurement Baseline (PMB). The correction of PMB should be judged based on the scale of change and the level of impact on the entire project. It is important to clarify beforehand the conditions and criteria used to decide on the change. The management process of PMB change should function as part of the processes integrated in the change control system (explained later), and not solely as Earned Value Management. 4-3-2. Change Control Typical variable factors of cost in cost management include changes in scope, workload, responsibility management, and schedule. These fluctuating elements are closely related with time, quality, and other management items, and thus should function as part of the processes integrated in the change control system. Thus, after the change of variable factors of cost is approved according to the change control system process, update the implementation budget.

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Clarify who requested the change—the owner or contractor—before closing the account as a cost. It is important to clearly record individual items for continuous management. If multiple contractors divide an work with different conditions and ordering environments, such works as a survey on cause, influence, causality, its records, and cost assessment for individual items have particularly great significance. Since variable factors of cost influence closely with other management items, it should perform as part of the integrated process.

[Reference: Earned Value Analysis (Summary)] (1)Cost Variance, CV=EV-AC (2)Schedule Variance, SV=EV-PV (3)Cost Performance Index, CPI=EV/AC (4)Schedule Performance Index, SPI=EV/PV (5)Budget at Completion (6)Estimate at Completion (EAC): The three calculation formulas for EAC are as follows: Present variance is transient, and variance will not occur any more: EAC=AC+ (BACᅳEV) Present cost variance will continue: EAC=AC+(BACᅳEV)/CPI=BAC/CPI Present cost efficiency and schedule efficiency will continue: EAC=AC+(BACᅳEV) /(CPI×SPI) (7)Cost prediction required in the future (ETC: Estimate to completion) : ETC=EACᅳAC [Association of Advancement Cost Engineering International in the US]* ************ The US Association of Advancement Cost Engineering International (AACEI), in Recommended Practice No. 18R-97 “Cost Estimating Classification System – As Applied in Engineering, Procurement, and Construction for the Process Industries” (Revised on November 29, 2011), summarized an analysis of the relationship between a project’s definition and estimation accuracy. The tables below show the results. Table 1 shows the five estimation classes (Class 1 through Class 5), and indicates the purpose and method of estimation in each class, and the accuracy of expectation as “Secondary Characteristics.” The determinant of these estimation classes is the level of a project’s definition, which is shown as one of the “Primary Characteristics.” Table 3 shows specific levels of a project’s definition. The levels of a project’s definition are indicated in percentage, which specifically indicates the extent to which project data and engineering output can generally be used for estimation. For example, if the project is defined(each data of available for estimation) in Table 3(see p218), the accuracy of estimation in Class 3 can be expected as listed in Table 1(see p218).

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Table l - Cost Estimate Classification Matrix for Process Industries

Table 3 - Estimate Input Checklist and Maturity Matrix

©2011, AACE International, USA (All Rights Reserved) . Reprinted with the permission of AACE International, 1265 Suncrest Towne Centre Dr.Morgantown. WV 26505 USA. Phone800-858-COST/304-296-8444, Fax:304-29l-5728. Internet:http://www.aacei.org Emal: [email protected] Copyright © 2011 by AACE International; all rights reserved. As AACE International Recommended Practices are continuously being developed and updated, please visit www.aacei.org/resources/rp for the latest information.

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Risk Management

Chapter 8 Risk Management 1. Overview 1-1. Objectives of Risk Management Almost every project involves uncertainties and risks. To lead a project to success, such risks must be dealt with appropriately. Generally, risks are defined as uncertain events that may affect a project’s objectives. However, we must remember that risks can be managed to a certain extent by analyzing the probability of risk events and the extent of their effects.

Exhibit 3-8-1 Overview of Risk Management Japan is said to lag behind Europe and the United States in terms of hazard prediction, crisis management, and project risk management because of its historical and cultural background. This is attributable to the fact that, historically, large national development projects in Japan were based on the national budget for a single fiscal year, and there was no particular need for risk management across project life cycles; in addition, private sector facility construction projects were mostly fixed-price contract projects 219

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that did not include specific requirements regarding risk management or assign responsibility to stakeholders. By contrast, in Western countries, cost reimbursement contract or unit price contract projects are common, and the specific requirements regarding risk management and approaches are more robust. In this environment, risk management was not regarded to be important by companies or project implementing organizations; considerable risks were tolerated. Today, however, technological innovation occurs at an accelerated pace and project periods have been shortened, making it more difficult to carry out projects with limited budgets. Consequently, accountability in project implementation is required more and more not only in private sector projects, where competition is severe, but also in public sector projects, where financial reforms and cost reductions are strongly required. For this reason, risk management will become even more important and indispensable. This chapter focuses on basic practical knowledge and implementation procedures that can apply to all projects. The implementation of risk management in projects not only enables many risk events to be managed, but also helps to improve performance and outcomes through the management of opportunity events. Risk management starts with the development of a risk management plan for a particular project environment, including the project execution strategy (plans, contracts, etc.). Next, constraints and uncertainties found in the overall project strategy and contract documents are analyzed in order to identify risk events. Risk events are quantitatively analyzed and evaluated before developing countermeasures to prevent such events. These countermeasures are implemented, checked, and monitored throughout the project life cycle. Basically, this process must be repeated throughout a project rather than only being carried out once during the initial planning stage. As with other knowledge areas in project management, we must organize information about risks obtained at this stage and store such knowledge in a database to use it effectively. We must systematize the risk management knowledge acquired in this way and use it effectively during the project planning and implementation stages.

1-2. Management Processes Risk management consists of the following processes: policy formulation; risk identification; risk analysis and evaluation; preparation of risk countermeasures; execution, monitoring, and evaluation of risk countermeasures; and compilation of lessons learned from risk management (Exhibit 3-8-2).

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Exhibit 3-8-2 Risk Management Core Processes

1-3. Practical Guidelines Risks are uncertain events that may affect the objectives of a project to be implemented. They are also the results and effects caused by such events. Risks encompass not only negative results and effects but also positive consequences. Risks can be classified from multiple perspectives as shown in Exhibit 3-8-3, such as internal/external risks, static/dynamic risks, and pure/speculative risks.*2

Internal risks: Risks that can be controlled and influenced by project teams (e.g., risks related to employment of personnel, cost estimations, etc.) External risks: Risks that cannot be controlled or influenced by project teams (e.g., risks related to market trends, government policies, etc.)

Static risks: Risks that occur regardless of social or economic changes (e.g., fires, natural disasters, accidents, theft, etc.) Dynamic risks: Risks that occur as a result of social and economic changes or development (e.g., risks related to innovation and trends in production technologies, consumer preferences, changes in politics and the economy, etc.)

Pure risks: Risks that can only cause damage (e.g., natural disaster risks, etc.) Speculative risks: Risks for which whether they will ultimately be harmful or beneficial is unclear (e.g., risks related to economic activities, etc.)

Exhibit 3-8-3

Example Definitions of Risks

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*2 The concepts of pure and speculative risks were proposed and generalized in H. Mowbray & Ralph H. Blanchard, Insurance (6th Edition; New York: McGraw Hill Book Company, Inc., 1969). The concepts of static and dynamic risks were introduced and generalized by Allan H. Willett in The Economic Theory of Risk Insurance (University of Pennsylvania Press, 1951).

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1-3-1. Perils and Hazards Accidental events that cause losses or damage as well as circumstances involving the risk of such events are called perils, while situations and conditions that may cause loss are called hazards. One must understand that the risk chain of perils and hazards causes serious problems in project management. To take a traffic accident as an example, the combination of excessive speeding (peril) and frozen roads (hazard) constitutes a risk chain which may lead to a serious accident. 1-3-2. Risk Mapping Classifications of risks based on a perspective of studying which risks are generated by which causes and which risk response plans are needed when implementing projects provide a useful risk management tool for identifying risks based on the experiences of different industries. Since the nature of risks varies greatly depending on industries and project content, it is useful to map risks for each specific project in order to review how to cope with risks based on a general overview. Exhibit 3-8-4 summarizes the risks involved in an example project. Risks can be classified and categorized based on different concepts, and reviewing the properties of risks from different angles enables us to understand their natures more accurately.

Exhibit 3-8-4 Example of Risk Mapping 222

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Risk management refers to management activities undertaken to identify, analyze, and evaluate the variety of risks involved in a project with a view to developing strategies to manage such risks in order to avoid them or to reduce their impact. The purpose of risk management is to maximize the areas under control in an uncertain environment while minimizing the uncontrollable areas in which there is no clear relationship between causes and effects, thereby helping those in charge make decisions that bring positive results. 1-3-3. Basic Concepts of Risks Risks refer to outcomes likely to prevent achievement of a project’s ultimate goal (e.g., accidents resulting in losses, disadvantages, and other qualitative or quantitative events or situations, which may also serve as opportunities) as well as the probability of occurrence of such outcomes. The basic elements of risks are as follows. (1)Risk events (2)Risk event uncertainty and probability (3)Impacts of risk events Risks can be conceptually represented by the following function.

Risk = f (Risk Event, Uncertainty , Impact) For example, risks in a contract project are events inherent to the project (e.g., whether the project can be completed within the delivery schedule defined in the contract with the client; whether the budget is sufficient to cover project costs; whether appropriate measures have been taken to ensure the safety of project team members; and whether project outcomes will meet the specified standards for performance and quality). External events (e.g., economic inflation and institutional changes) that impact these elements are also included as risks. 1-3-4. The Nature of Risks in Project Life Cycles The nature and content of risks vary greatly depending on the view project life cycles as well as project content. Risks in the life cycle of contract projects for civil engineering and facility construction have the characteristics shown in Exhibit 3-8-5. The probability of risk and opportunity events at the beginning of a project decreases as the project proceeds; by contrast, the impact of risk events (including the amount of loss resulting from a risk) increases as the project approaches its end (completion and handover). The planning stage is a period with many risk events, while the implementation and delivery stages are periods with large risk impacts. As can easily be understood, if incomplete elements of project plans or requirement specifications are not properly defined at the beginning of a project when risks are identified and quantified for risk assessment, problems that occur will have greater effects as the project proceeds. 223

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Increase in risks (amount)

Planning Phase I Concept

Phases of a Project Life Cycle Implementation/ Delivery Phase III Phase IV Phase II Implementation Completion Planning

Overall project risk

Period with many risk events

Monetary amount

In contract projects, the total amount of risks (theoretically, the total amount of direct and indirect costs, including costs of damage incurred in the event of project cancellation or in cases where products cannot be delivered as planned) and possible opportunities (bonuses, incentives, and increases in added value resulting from innovative efforts) are specified in advance by contract. In such projects, risks are typically reviewed at the beginning.

Period with large risk impacts

Impact of risk events

Time Exhibit 3-8-5 Characteristics of Risks in a Project Life Cycle Note: Exhibit 3-8-5 shows the characteristics of risks in different phases of a project life cycle, which starts with a Request for Proposal (RFP) and ends with the handover.

In development projects aimed at developing, manufacturing, and selling products, the characteristics and content of risks vary among the different phases of the project life cycle—i.e., development, manufacture, and sale of products. Although the theoretical value of risks is large during the development stage, most actual risk factors consist of resources (including human resources and costs), which increase over time. Meanwhile, development of technologies and construction of facilities to manufacture products are started according to the level of product development. The components and content of risk events in this phase differ from those in the initial phase. Different risks are also involved in the stage of selling manufactured products, where new risk elements emerge, such as market risks and disruption of raw material supplies. In a project aimed at developing or manufacturing products, the absolute amount of input resources (including human resources and costs), plus direct and indirect costs incurred in the event of project cancellation, constitute the total amount of risks behind the impact of risk events. These are formulated based on the impact of the risk event, but projects are assumed to provide opportunities for profit through the sale of products. On the other hand, from the client’s perspective, even a contract project has a life cycle exceeding the project period, which consists of a series of activities that include not only technological development and facility construction but also operation and management of facilities (in concession agreement projects such as Private Finance Initiative (PFI) or Build-Operate-Transfer (BOT) projects, the entire contract period, including facility operation, constitutes a single project). Also in such cases, the nature, content, and impact of risks vary among the different phases of the project life cycle. 224

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Exhibit 3-8-6 summarizes risks from the client’s perspective, for whom the project life cycle is longer than the project itself. For clients, project life cycles are composed of multiple different phases. The process of creating a contractual framework for facility design and construction as well as for fund procurement (or financing) and a contractual framework for realizing the project will constitute a single phase. The risk involved in the development phase is whether such a framework can be realized. After the contract has been entered into, the construction phase begins, and the construction sub-contractor assumes responsibility for risks until completion of the project. For the client, risks continue until the contractor completes the facilities, assets to be used for operation have been concretely secured, and a basic business framework has been realized; then, risks gradually diminish, reaching a minimum when facilities are delivered to the client, at which point asset risks are transferred to the client. The need to create a facility operation system prior to completion of facilities generates risks in a new phase. These risks continue to increase until operators are trained and facilities are put into operation; when operators have acquired skills after a training period, operational risks decrease and stabilize.

Exhibit 3-8-6 Nature of Risks from the Client’s Perspective, Taking into Account Longer Project Life Cycles

Note: The phases in Exhibit 3-8-5 assume the development of identical risk events (homogeneity of risk events). By contrast, each phase in Exhibit 3-8-6 represents different categories of risks (heterogeneity of risk events). In the latter case, the total amount of risks is represented by the integral across the entire process. Also, different phases partially overlap with each other during certain periods. The size of risk events varies depending on the nature of the project. Exhibit 3-8-6 is just a visual representation of this.

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As shown in Exhibit 3-8-7, generally in the case of research and development projects (such as development of a new product or formulation of the overall framework for project finance), in the beginning uncertainty is high and the theoretical value of risks is large. In reality, however, the resources should be controlled (including human resources and costs) and input into a project step-by-step with a view to establishing a feasible implementation framework. Not all elements are fixed in the project development phase. Therefore, a trial-and-error approach is used to identify and quantify risks as well as to develop risk response measures. Even in such cases, the basic process whereby risk response measures are developed at the initial stage of the project remains the same.

Monetary amount

Theoretical value of risks

Impact of risk events = Mainly input resources (personnel and money)

Time

Exhibit 3-8-7 Relationship between Risks and Time in Projects

[ Risks in Power Plants ] ********************************************* Construction risks faced by contractors for a power plant project are illustrated in Exhibit 3-8-5, while the project’s risks for clients are illustrated in Exhibit 3-8-6 (these risks can be categorized as follows: development risks prior to the signing of a lump sum construction contract; the risk of the contractor being unable to carry out the project once the contract has been signed; and the risks involved in operating the facility to prepare the plant operation system prior to and after completion of the plant). Risks in the process prior to establishment of a contractual framework and financial agreement vary in direct proportion to the absolute value of input resources. However, once the framework has been fixed, it becomes possible to identify the logical maximum of risks involved in subsequent developments and to formulate detailed risk response measures. With respect to the construction project, the basic scheme is the same as shown in Exhibit 3-8-5. However, from the middle of the construction period, new risks arise in the process of developing facility operation systems (including development of a system to supply fuel for power generation, personnel training, and preparation of facility operation systems). These risks continue to increase as facilities completion and remain even after completion until personnel acquire sufficient plant operation skills; then, such risks decrease to a constant level during the stable operation period. Risk events during the facility operation period consist of a variety of elements. Elements that may prevent stable facility operation include market risks, the risk of disruption in the supply of power generation fuel, accidents, and natural disasters. All 226

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these elements constitute risks. However, the content and impact of these risks differ greatly from those in the construction phase. For a client who views the entire process, including facility operation for a designated period of time, as a single project, it is appropriate to analyze risk events and assess their development for each phase. In this type of case, the largest risk in the project life cycle for the client is whether construction can be completed within the specified delivery schedule. This is because profitable activities can be started to recover investment only after facilities are put into operation; profits cannot be obtained unless facilities have been completed. Risks for the project as a whole are likely to decrease as investment is gradually recovered. For the client, an accident that causes physical damage to turbine rotor shafts is the largest risk in the facility operation phase. If such an accident occurs, it will take a long time to replace parts; as a result, the project itself may fall apart if the client does not have spare supplies and devices on hand. Independent Power Producers (IPPs) that conclude long-term power supply contracts with electric power companies must cover all these risks for their clients.

[ Risks in the Software Industry ] *************************************** It is no exaggeration to say that in recent years, no new products, including electrical devices, can be developed without using software. It is taken for granted that software is not only used to develop new products but is also embedded into products used by consumers. Such software is called “embedded software.” Today, product development cycles are becoming shorter and to respond to recent trends at the required speed, there is no choice but to use the latest software. As a result, products are designed and developed for use with the latest OS and chips. Since embedded software is used in combination with hardware, hardware is developed prior to software in such development environments. At the start of development, software developers use software simulators to design products that depend on hardware. However, the performance that is originally targeted is not always achieved by the latest OS and chips. In such cases, modifying the hardware will not solve the problem. Therefore, instructions are often given to improve performance using software, causing the volume of software development work to exceed the original plan. Problems like this always occur toward the end of a project, leading to increased costs resulting from increases in the number of personnel and greatly affecting the efficiency and quality of the project. Sometimes, it even becomes necessary to recall products that have already been sold on the market. If these kinds of risks are not predicted at the beginning of a project, and no countermeasures are developed to deal with risks that arise, or if plans are prepared based on optimistic assumptions, problems will appear to occur out of the blue, throwing the project into serious confusion. In addition, if experiences of such problems are not included in the database and used as lessons learned by the organization, confusion will continue to occur in nearly every subsequent project.

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2. Development of Policy Awareness of the following key points is essential for risk management: Assume that risks always exist. Prepare countermeasures by identifying (predicting), analyzing, and evaluating risks in the most reasonable way. Risks may turn into opportunities. It is incorrect to assume that every attempt to avoid risks, which are uncertain and difficult to identify, will be ineffective. We must accept the principle that risk management is indispensable when implementing projects, which always involve uncertainties. Policy formulation is the process of developing basic policies about which risk management strategies and approaches should be used when implementing a project.

2-1. Policy Formulation by Companies and Project Implementing Organizations Executives of companies and project implementing organizations must define basic policies and systems for risk management. Once they have defined policies and systems, they determine who (which department) is in charge of managing and maintaining the risk management systems. To this end, they hold risk management or risk review meetings jointly with parties involved in the project and experts in pre-determined project phases, from planning to facility operation. They also establish standards and systems for risk management, including periodic checking of the total amount of risks and risk response countermeasures using established standards and procedures.

2-2. Formulation of Policies for Individual Projects In individual projects, it is necessary to formulate risk management strategies and policies suitable for each project in accordance with the overall risk management policies established by companies and project implementing organizations, and to clearly define these strategies and policies in risk management procedures. To ensure these policies and manuals are effective, project managers make them known to all parties involved in the project, and carry out the subsequent processes that form the core of risk management. Note that the strictness of risk response measures and level of risk tolerance in the process of formulating strategies and policies vary depending on the content and nature of the project. In contract projects, for example, prerequisites and requirements are explicitly defined. Therefore, risk management is strict and the level of risk tolerance is low. In development-type projects, however, objectives may be realized within some range of risk tolerance, depending on how the missions and objectives of the project are defined. In such cases, the project’s flexibility is greater and the level of risk tolerance is comparatively higher. Policies for individual projects therefore vary depending on their definitions, requirements, and prerequisites. 228

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[ Dispersion of Risks in Large Projects ] ******************************** In recent years, there has been an increase in the number of overseas plant construction projects in which international joint corporations conduct bidding, conclude contracts, and carry out the projects. There are a variety of reasons why companies form joint corporation to receive orders and implement projects instead of working as separate entities. Considering the recent trend in which projects continue to increase in scale, major reasons appear to be as follows: dispersion of risks, avoidance of concentration of human resources in one organization, and enhancement of competitiveness by bringing together the advantages of different companies (technical competencies, sales capabilities, etc.). In the plant industry, joint corporations are often organized into two categories: the consortium type and the joint venture type. There are also hybrid types that combine these two. In a consortium-type organization, individual companies are each in charge of their respective operations and are obligated to perform their operations at their own responsibility and at their own expense. In other words, companies in charge accept responsibility for all benefits and losses as well as technological problems that result from their own operations. However, they have no obligation to assume responsibility for mistakes made by other companies that belong to the same consortium. In a joint venture-type organization, companies perform their respective operations as members of a joint corporation rather than as themselves. Therefore, the outcomes (benefits and losses) resulting from the operations basically belong to the joint venture and are split among the individual companies at a predetermined ratio. Errors by one company participating in a joint venture are also covered by other companies, including those that did not make the errors, at a specified ratio. These two forms of joint corporations are different ways of defining the internal division of responsibilities among participating companies. In most cases, individual companies act as if they each had the full responsibility of their joint corporation toward the organization ordering plant construction. Accordingly, the management of joint corporations also reflects how they are organized.

Joint Venture

Consortium

PD

PD DPD

DPD Joint Venture Directorate

E

P

C

Company A

Company B

PM

PM

E

P

C

D

P

C

Exhibit 3-8-8 Forms of Joint Corporations in the Plant Industry

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Exhibit 3-8-9 Joint Ventures and Joint Consortiums In a joint venture-type organization, individual companies perform all operations as members of the joint corporation. Therefore, the joint corporation must manage the operations performed by each company. To this end, an organization called a Joint Venture Directorate (JVD), for example, is created to manage the operations performed. JVD members are assigned by participating companies. In this type of joint project, operations are performed by participating companies in different countries under the management of a JVD, which is headed by a Project Director (PD). Previously, the person in charge of a project used to be called a Project Manager (PM). However, since projects have become larger and more complex in recent years, causing management operations to become more diversified and specialized, both PDs and PMs are assigned for project management, with PDs engaged in higher-level management. Companies other than the leader company appoint Deputy PDs (DPDs) to participate in the JVD. The PD and DPDs manage the JVD and make decisions through council meetings. The PD may be temporarily authorized to make emergency decisions for the joint corporation without holding a council meeting if necessary. Also, depending on the nature of the project, the composition and number of participating companies, and the capital contribution ratio of individual companies, a PD appointed by the leader company may be authorized to make a wider range of decisions in order to ensure smooth management of the joint corporation. In a consortium-type project, each company usually performs its operations at its own responsibility. Therefore, although PDs/DPDs are appointed for the joint corporation, their activities are limited to coordination between the operations of different companies and management of issues related to the joint corporation as a whole. Unlike in a joint venture, each participating company manages its own operations. *****************************************************************************

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3. Risk Identification Risk identification is the process of studying which risk factors and events may affect project implementation and of documenting the characteristics of risks based on a review of contracts and specifications by applying brainstorming and/or other methods. This is a process for identifying as many risk events as possible that must be managed in a project. It also includes analyzing what may occur as well as how and why it may occur. The content and nature of individual risks (risk profiles) differ from one project to another. Accurate understanding and analysis of the content and nature of risks makes it possible to appropriately identify risks.

3-1. Basic Information To identify risks, it is necessary to understand the concepts and have basic knowledge about risks as well as to review issues based on basic information related to the following requirements specified in project policies and plans as well as in project contracts. Examples are given in parentheses. (1) Strategic policies (including strategic decisions made at the beginning of a project) (2) Constraints imposed by legal institutions, customs, and cultures of relevant countries (including issues resulting from legal systems, political backgrounds, and cultures of the countries of clients and other stakeholders) (3) Levels of customer satisfaction and market popularity (objectives of projects, causes of inhibiting factors, etc.) (4) Contractual constraints (contractual requirements that are difficult to satisfy, etc.) (5) Organizational policies (problems resulting from the natures of project organizations and company organizations, etc.) (6) Constraints on requirements (issues that may make it difficult to meet requirements, including basic design requirements) (7) Technological constraints (new technological elements, problems related to customer requirements and specifications, and product quality, etc.) (8) Time-based constraints (difficulties in meeting schedules, etc.) (9) Procurement policies and plans (selection of vendors and design contractors, assessment of their performance, etc.) (10) Economic restrictions (problems and restrictions related to cost estimation when receiving orders, etc.) In addition to the above examples, it is also necessary to use historical information, including experiences (human knowledge) from similar projects and feedback data (databases) in order to identify risks.

3-2. Techniques for Risk Identification In a project, before a variety of risk events actually occur, there are signs. It is important to detect these signs promptly in order to implement risk management. Table 3-8-10 shows the major techniques, tools and approaches that are applied to analyze these signs.

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Exhibit 3-8-10 Examples of Tools, Techniques and Approaches for Risk Identification

4. Risk Analysis and Evaluation 4-1. Risk Analysis and Evaluation The purpose of analyzing and evaluating risks is to quantify the positive and negative events likely to affect a project in the future by using basic methods of probability and statistics as well as other tools so that those who make project management decisions can predict and evaluate such events in order to choose appropriate policies regarding uncertainties. In projects, many risk events are inherent in different areas, including new advanced technology research, technological development, engineering, marketing, finance, and project organizations. Skilled experts engaged in these areas often lack basic knowledge about project management; also, because decision-making processes are not well established for organizational reasons, experts sometimes make incorrect choices. In many companies and organizations, decision making itself is based on precedents and depends on outdated, non-scientific methods. These factors, which affect the quality of risk analysis and evaluation, also greatly affect project costs, schedules, and quality. Risk analysis refers to evaluating risks and uncertainties using methods based on mathematical and logical thinking. Projects that contain greater uncertainties require more reliable risk assessment.

4-2. Risk Quantification Methods Risks must be quantified to be evaluated. Typical risk quantification method are focused on in this situation. Risks are calculated to provide basic standards for assessing the relative costs of risk events. 4-2-1. Simplified Quantification This method evaluates risk events based on the probabilities and impacts of their occurrences by preparing matrices to calculate indexes. However, this method does not calculate the monetary value of project risks. Therefore, it cannot be used to compare 232

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different risk events or analyze the total value of risks. This method is useful for determining the relative levels of risk events in an entire project based on their scores as well as for reviewing which risk events should be given priority in risk management. This method maps relationships between risks in an entire project and provides an overview of such risks, thereby clarifying the relative positions of individual risks. It enables determination of the order of priority and policies on risks as well as the development of an appropriate risk response plan. A variety of similar methods are available, such as creating matrices showing the probabilities and impacts of occurrences of risks (see Exhibit 3-8-11) to compare and evaluate risks in individual projects based on relative scores. In a typical matrix, for example, the probabilities of risk events and their levels of impact are each categorized into one of three levels (high, medium, or low) to facilitate assessment of risks based on a six-cell matrix.

Exhibit 3-8-11 Risk Matrix 4-2-2. Monetary Evaluation of Risks The monetary value of risks can be calculated using the following formula. Total risk amount

= Σ Individual risk amounts = Σ [ Risk event, Uncertainty , Impact ]

Uncertainty: Estimated probabilities of each risk event occurring Impact: Degree of impact if each risk event occurs (profit or loss) Evaluating the monetary value of risks is also useful when making decisions under uncertain circumstances. Supposing different alternatives for an event, probability theory gives the sum of the probabilities of the occurrence of all alternatives as 1.0. Based on this basic principle, a logic tree of alternatives (decision tree) can be applied to help make decisions in a scientific manner. In the Exhibit below, the product of a probability and monetary value is called the Expected Monetary Value (EMV). 233

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[ Logic Tree for Decision Making ] ****************************************** The logic tree (decision tree) in Exhibit 3-8-12 shows the alternatives available to Company A when producing a system: whether to purchase software and produce the system on its own or whether to outsource production of the system to a subcontractor. In this example, the expected probabilities of market conditions improving and deteriorating in the future are calculated, along with the monetary value (profits) resulting from the respective events, excluding software purchase costs and outsourcing costs, in order to make a decision based on the EMV calculated from these values. Notes: 1) The results given below are profits (excluding software costs). 2) Outsourcing costs: 7,000 3) The difference in profit between outsourcing and purchasing software is assumed to be 20,000.

EMV = 68,000

Result: 80,000; EMV = 64,000

Improvement of market conditions

P = 0.8 Deterioration of market conditions

Purchasing software

P= 0.2

40,000 Selection of events Outsourcing software development to a subcontractor

41,000

Improvement of market conditions

7,000

P = 0.8

Outsourcing software development to a subcontractor

EMV = 48,000

Result : 20,000; EMV = 4,000 Result : 60,000; EMV = 48,000

Deterioration of market conditions

P = 0.2

(Unit: million yen)

Result : 0; EMV = 0

Expected Monetary Value = EMV

Exhibit 3-8-12 Logic Tree (Decision Tree) ******************************************************************************* [ Application of the real option method in risk management ] ******************* The real option method is applied in quantitative risk analysis and risk management related to investment decision making. This method determines management risk priorities by quantitatively identifying and evaluating the present value of risks that cause future cash flows to increase or decrease compared to their present values. It is used mainly to assess investment value. The real option method is also used to assess weather derivatives options. The method makes it possible to financially compensate for downside risks by paying option fees for uncertain risks related to abnormal weather conditions in the future. Based on a decision-making model for contract terms concerning products and services that involve high future uncertainties, we can quantitatively analyze the present value of alternatives and assess risks using the option method in management decision making.

4-2-3. Statistical and Simulation Methods When estimating the total cost of a project, a statistical method can be applied to determine the probable range of costs based on the estimated costs of individual items. The probability distribution method is used for such calculations. 234

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Simulation analysis is designed to develop a model by estimating the probability of occurrence of each risk event chosen for simulation. Different probability distributions are used to create models based on track record data and the nature of risk events (uniform distribution for cases where no information is available about risk events; normal distribution for natural phenomena, production errors, etc.; and triangular distribution for cases where values falling between the maximum and minimum have the highest probability of occurrence). The level of impact (on costs, schedules, etc.) of risk events is estimated in accordance with the maximum, minimum, and other parameters of probability distributions. Simulation is then performed with simulation software using the Monte Carlo method and other statistical methods. Decisions are made based on the simulation results.

5 Preparation of Risk Countermeasures 5-1. Preparation of Risk Countermeasures Risk management refers to implementing necessary countermeasures in order of priority to reduce and remove project risks that have been analyzed and assessed. Risk prevention includes preparing a risk control plan designed to avoid, mitigate, distribute, and transfer risks, as well as arranging for risk financing to provide financial measures to control risks that cannot be completely removed even using all available countermeasures.

5-2. Composition of risk countermeasures As shown in Exhibit 3-8-13, risk countermeasures can be roughly classified into a risk control plan and risk financing. 5-2-1. Risk Control Plan A risk control plan stipulates procedures for effectively avoiding or mitigating losses resulting from risk events at a minimal cost. Such plans are designed to avoid, mitigate, distribute, and transfer risks (see Exhibit 3-8-14).*3

-----------------------------*3: There are a variety of definitions for risk countermeasures. For example, some people categorize risk control into two types, namely risk avoidance and risk removal (mitigation), and then further divide risk removal into subcategories such as prevention, distribution, combination, and restriction (George L. Head, The Risk Management Process, 1976). Others divide risk countermeasures into risk avoidance, mitigation (optimization), transfer, and retention (acceptance) (ISO/IEC Guide 73:2002, Risk Management Vocabulary Guideline for use in standards). The US Department of Defense Acquisition University regards risk control as compromising the following countermeasures: Acceptance, Control, Avoidance, and Transfer (ACAT). These are merely different ways of categorizing risk countermeasures, so it is not necessary to employ a strict definition.

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Exhibit 3-8-13 Composition of Risk Countermeasures

Exhibit 3-8-14: Example of a Risk Control Plan

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5-2-2. Risk Financing Risk financing refers to preparing in advance a mechanism for assuming the financial burden of losses resulting from a risk event and refers to measures taken to transfer or retain risks (see Exhibit 3-8-15).

Exhibit 3-8-15 Examples of Risk Financing 5-2-3. Acceptance of Risks In projects, risks that cannot be avoided, mitigated, distributed, or transferred by risk control plans and cannot be managed by risk financing are accepted. Accepted risks are usually covered by insurance to safeguard against losses from risk events. Of course, it is also possible to address the outcomes of risk events within organizations. For example, project implementing organizations may allocate risk countermeasure costs as risk money in project budgets. Relevant budget items include “escalation,” “contingencies,” and “estimating allowance.” It is also possible to maintain insurance services within a project organization to provide self-insurance. Generally, the behavior of investors and consumers towards uncertainties in the market is classified into three categories: risk averse, risk neutral, and risk taking. In other words, entities in the market have different risk preferences. It is necessary to assess the risk preferences of each market entity and to develop and implement countermeasures for risk avoidance, mitigation, distribution, and transfer for the appropriate entities. The basic rule is to use diverse methods to develop risk management measures for diverse entities (see Exhibit 3-8-16). Escalation

Estimation allowance

Contingency

A reserve included in advance in an estimated budget to prepare for adjustments required in case of a change in performance costs that may occur after the initial estimation due to market factors beyond control, which results in a difference between a project's estimated costs and costs at completion. A reserve amount or money included in an estimated budget for items that are difficult to clearly specify or quantify but are certain to incur costs (e.g., design, manufacturing, and construction costs) by multiplying each item by a factor. In general, a reserve for risks included in a project budget to prepare for costs that are difficult to quantify in advance due to uncertainties.

Exhibit 3-8-16 Examples of Risk Management Expenditures 237

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6. Implementation, Monitoring, and Evaluation of Countermeasures This is the process employed to implement the planned risk response plan. In risk management, it is essential to implement, monitor and evaluate the management process—from risk identification to execution of countermeasures—throughout the project.

7. Compilation of Lessons Learned from Risk Management Each project is unique and has its own defined time frame. Consequently, risk management is diverse and difficult, so it is an indispensable element of project management. Therefore, in order to effectively perform risk management, it is important to use historical track record data and to gather and apply the knowledge of experts and experienced professionals. To this end, there is a need to save data concerning sequences of risk management processes and outcomes in individual projects and to compile such data into a collection of knowledge, case studies, and databases. This requires companies to develop knowledge database systems.

7-1. Collection of Case Studies on Similar Projects’ Risks At the end of a project, it is necessary to assess what was achieved by risk management using the latest version of the project risk checklist (which is always being revised) and to save information in a track record database so that it can be used easily in subsequent projects.

7-2. Probability Distribution Data on the Analysis Accuracy for Each Scheduled Activity To improve the accuracy of schedule risk analysis, it is necessary to statistically summarize differences and deviation between planned and actual schedules for each project operation and to save probability distribution data. Saving basic data is important not only for schedule risk analysis but also for simulation analysis in general, including statistical analysis of project costs.

7-3. Collection of Case Studies on Risk Countermeasures I t is also important to compile a collection of case studies and know-how on risk countermeasures, as well as results and outcomes.

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Chapter 9 Quality Management 1. Overview 1-1. Objectives of Quality Management Quality management is a sequence of processes for economically producing products and services having a level of quality that meets customers’ requirements. What is most important in quality management is to economically and efficiently study customers’ requirements in order to design, manufacture, and sell products and services that meet those requirements so that customers can use such products and services with a sense of security and satisfaction.

Exhibit 3-9-1 Overview of Quality Management For project members, carefully performing quality management to detect defects in the early stages broadens the range of alternatives in terms of remedial measures and also makes it possible to minimize negative effects on project costs and schedules. The purpose of quality management is to provide products and services of the specified quality through quality plans, quality assurance programs, quality audits, and quality improvement based on management strategies and project policies (plans and contracts) under a predetermined quality system. 239

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1-2. Work Processes Quality management consists of the following work processes: quality planning, quality assurance, and quality control (Exhibit 3-9-2).

Exhibit 3-9-2 Quality Management Work Processes

1-3. Practical Guidelines The ISO 9000 family provides basic standards for quality management within the context of project management. Important keywords for quality management include the following. Conformance to requirements (P. B. Crosby) Fitness for use (J. M. Juran) Prevention over inspection Management responsibility Continuous improvement In many European countries and the United States, quality assurance standards were established during the 1970s. The background to this development was that an increase in the international competitiveness of high-quality Japanese industrial products greatly contributed to Japan’s economic growth, while during the same period economic development stagnated in Europe and the United States. This led European countries and the United States to place high priority on quality. These quality assurance standards were developed separately, raising concerns they might hinder international trade. As a result, a movement arose to establish international quality assurance standards, and in 1987, the ISO 9000 family of standards was introduced. These standards have subsequently been revised several times. The most important standards are listed below. They have also been translated into Japanese and adopted as Japanese industrial standards.

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ISO 9000: 2005 (Quality management systems – Fundamentals and vocabulary) ISO 9001: 2008 (Quality management systems – Requirements) ISO 9004: 2009 (Quality management systems – Managing for the sustained success of an organization – A quality management approach) 1-3-1. Quality and Grades Quality refers to the degree to which a set of inherent characteristics fulfills requirements. Inherent characteristics include physical properties of products and services (mechanical strength, chemical components, electrical conductivity, etc.) as well as sensual characteristics (color, smell, sound, etc.), behavioral characteristics (sincerity, honesty, etc.), temporal characteristics (punctuality, reliability, etc.), ergonomic characteristics (safety, etc.), and functional characteristics (vehicle velocity, etc.) Requirements include those explicitly specified in contracts and other written documents as well as those tacitly approved. Needs and expectations that must be fulfilled are also considered to be requirements. By contrast, grades are categories or ranks of products or services designed for the same use that meet different quality requirements. Accordingly, good quality products are not the same as high-grade products. Frequently cited examples include the distinction between first-class and economy-class airline services and the distinctions between different classes of the same car model. In order to clarify customer requirements, it is very important to determine the required levels of quality and grade. 1-3-2. The quality of Project Management It is also essential to ensure the quality of project management not only by guaranteeing the quality of final deliverables (hardware, software, services, or combinations thereof) but also by explicitly showing project processes and management procedures in advance. Project management refers to applying the sequence of design, planning, implementation, adjustment, and production of outcomes to achieve the project’s objectives. 1-3-3. Management Policies At the beginning of a project, it is important for managers to establish management policies designed to ensure that the level of quality required for the project (program) is achieved. Managers must consider the following requirements when formulating management policies. Clearly understand customers’ needs. Set quality goals for the final product and for project management procedures. Create the environment required to meet the quality standards to be achieved for the product and for management procedures. Make continuous improvements throughout the project lifecycle as well as in individual projects. 241

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These management policies are established at the corporate management level as company-wide program management policies. Project managers of individual projects must also establish similar policies for their respective projects in accordance with the organization’s overall policies.

2. Quality Plan 2-1. Quality Plan A quality plan is formulated to establish the most appropriate quality standards for the quality characteristics of a project’s products and services based on project contracts and basic requirements as well as to determine methods that can meet the established standards. It is implemented not by itself, but in coordination with plans for other programs, including schedules and cost plans. The most important point of quality management is that quality is achieved not by tests but by a carefully prepared quality plan.

2-2. Project quality Management System The project quality management system describes the organizations, responsibilities, implementation procedures, work processes, and required resources for quality management; it is included in the quality plan.

3. Quality Assurance Quality assurance refers to a set of programs and activities developed to ensure the quality specifications required by customers are properly achieved. In recent years, as a result of quality management, high priority is placed not only on customers’ requirements, but also on social and environmental quality requirements. There is a need to take into consideration not only the value of products and services for the consumers who use them, but also their impact on society, including product liability and environmental destructiveness. The basic function of quality assurance is to achieve consensus regarding these quality requirements at the beginning of a project as well as to clarify how to carry out quality management in the project and produce outcomes in compliance with applicable standards, criteria, and regulations, thereby allowing customers (including stakeholders) to develop a sense of trust and satisfaction. Project managers and project team members are accountable for quality assurance. Details about this accountability are provided on the following pages.

3-1. Principles of Quality Management The ISO places high priority on top management’s participation in developing quality management systems and provides the following eight principles of quality management (Exhibit 3-9-3) based on the assumption that efficient organizational management requires administering and supervising quality management systems in a systematic, transparent way. 242

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Project Management Chapter9 Quality Management • Customer-centered approach

Organizations depend on their customers. Therefore, organizations must make efforts to understand customers' needs at present and in the future, to meet their requirements, and to exceed their expectations.

• Leadership

Leaders match policies to their organization's objectives as well as organize and maintain an internal environment that enables employees to fully participate in achieving organizational goals.

• Participation of employees at all levels

Employees are fundamental resources of organizations; their full participation ensures that organizations can effectively use their capabilities to obtain profits.

• Process-based approach

Activities and related resources that are used and managed in a single process make it possible to efficiently achieve the desired results.

• Systems-based approach to management

Defining, understanding, and managing mutually related processes as a single system contributes to effectively and efficiently achieving organizational goals.

• Continuous improvement

For organizations, continuous improvement of general performance is a semi-permanent goal.

• Fact-based approach to decision making

Efficient decision making is based on analysis of data and information.

• Mutually beneficial relationships with suppliers

Organizations and suppliers are independent; their mutually beneficial relationships increase their abilities to create value.

Exhibit 3-9-3 Eight Principles of Quality Management

3-2. Basic Principles of Quality Management Systems Customers demand products and services having characteristics that meet their needs and expectations, which are stated in product and purchase specifications and are generally referred to as customer requirements. Customer requirements are specified in contracts with customers or determined by project organizations themselves. In either case, customers make the final decision as to whether products and services are acceptable. Changes in customers’ needs and expectations as well as competition and technological progress make it necessary for project organizations to improve their products and processes on a continuous basis. The quality management system approach requires organizations to continue to manage processes that significantly affect the production of products and services accepted by customers based on analysis of customer requirements. A quality management system provides a framework for continuous improvement to increase the probability of satisfying customers and other stakeholders.

3-3. Quality Management System Approach The approach for constructing and implementing a quality management system consists of a number of steps, including the following. Clarifying the needs and expectations of customers and other stakeholders Establishing organizational policies and quality objectives Clarifying processes and responsibilities required to achieve quality objectives Clarifying and providing resources required to achieve quality objectives Establishing methods to assess the effectiveness and efficiency of individual processes Developing indicators to assess the effectiveness and efficiency of individual processes Providing a means to prevent non-conformance to requirements and remove their causes Establishing and applying processes to realize continuous improvement of the quality management system 243

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3-4. Quality Audits A quality audit is a process for systematically reviewing and assessing a company’s quality system and how quality management activities are undertaken in accordance with said system. Criteria used in audits include the following. Criteria stipulated by law Criteria stipulated by transaction contracts Criteria stipulated as certification standards Quality audits also include audits conducted periodically and those conducted without notice as well as those conducted by internal auditors who have received standardized training and those conducted by quality system certification institutions and other third parties.

3-5. Changes in Quality The quality of products and services is affected by requests for direct or indirect changes, including changes in project scope. Such changes also affect the quality assurance process, and are managed by a change management system.

4. Quality Control 4-1. Quality Control and PDCA cycles Quality control refers to activities designed to inspect whether products and services meet specified quality standards, to study the causes of unsatisfactory results, and to take action to eliminate these causes. Types of inspections include measurements, experiments, and tests conducted to verify whether products and services meet requirements. Quality control in software development requires reviewing the deliverables of individual phases and work activities. In order to produce high-quality products at low cost, it is particularly important to ensure that reviews are conducted at the beginnings of projects. This is because the costs required to detect and correct errors are relatively low at the requirements definition stage, but increase exponentially as the project proceeds from system design to development. Reviews during the initial stage of a project are important for the same reason that design reviews conducted at the design stage of a construction or engineering project are important. Costs required to correct errors in the procurement and manufacturing stages are significantly larger than costs required to correct errors detected during the design stage. This observation applies not only to the impact of costs but also the impact on project schedules. In quality management, the basic procedure is to make continuous improvements in accordance with a PDCA cycle (Exhibit 3-9-4).

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Plan

Do

Act

Check

Exhibit 3-9-4 PDCA Cycle

More specifically, the quality management process involves the following. (1) Selecting and specifying control elements (2) Identifying standards and guidelines for project implementation with respect to products and services (3) Establishing methods for assessing whether the standards and guidelines have been achieved as planned (4) Evaluating deliverables with reference to the standards and guidelines as well as providing measures to improve or avoid unsatisfactory results (5) Developing countermeasures to solve fundamental problems related to non-conformance to requirements and providing feedback

4-2. The Seven QC Tools Typical quality management tools include the seven QC tools (Exhibit 3-9-5). Histograms

A histogram is a graph that shows the distribution of data and is also called a frequency distribution diagram or column diagram due to its shape. A limited range of measurement values are displayed along the xaxis, while the frequencies of values are displayed along the y-axis. Cause-and-effect diagrams Also known as a fishbone diagram, a cause-and-effect diagram is designed to show relationships between causes and effects at a glance. This diagram is characterized by its representation of major causes as boughs, with branches attached to represent minor causes. Pareto diagrams A Pareto diagram is a line diagram that shows, using columns arranged in order of size, cumulative shares of frequencies and loss amounts of deficiencies, defects, and faults grouped by cause and by event type. A Pareto diagram makes it possible to assess at a glance which items can be most effectively dealt with and which items can be ignored. It also enables the assessment of changes and trends based on transitions (temporal changes) in characteristic values and defect rates. Control charts A control chart shows a diagram with lines called upper and lower control limits that provide decision-making standards. Test values exceeding these limits are considered to be abnormal and serve as indexes to start detecting the causes behind such values as well as to implement corrective measures. Check sheets A check sheet provides a table that shows at a glance where numerical data (quantitative items) for categorization items, such as the number of failures and defects, is concentrated. Scatter diagrams

Graphs

A scatter diagram is a graph that plots points on a coordinate plane with the horizontal axis indicating factors and the vertical axis indicating results. It is used to verify the causal relationships between factors and results and shows their correlation at a glance. Representing data in graphs makes it possible to provide an overview of the data, to compare amounts, and to clarify how things change. Bar graphs, line graphs, pie charts (other than the above-mentioned Pareto diagrams, histograms, control charts, and scatter diagrams) are generally called "graphs."

Exhibit 3-9-5

The Seven QC Tools 245

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4-3. Other Techniques The new seven QC tools In contrast to the above-listed seven QC tools, which are mostly quantitative analysis techniques, the following new seven QC tools are qualitative techniques: the relational diagram method, affinity diagram method, system diagram method, arrow diagram method, matrix method, matrix data analysis method, and PDPC method. Benchmarking A method that analyzes a company’s performance by comparison with other companies. Statistical design method A method of designing products by applying the occurrence probability to calculate variations in component elements. Improvement proposal activities Developing environments that encourage employees to propose methods of improvement by introducing award programs and other systems; this is a basic TQC activity in Japan (refer to the column).

[ The history of Quality Management ]

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In the early 1950s, Dr. Deming, an American statistician, visited Japan to cooperate in preparing a plan for the National Census survey. In Japan, Dr. Deming was invited by the Union of Japanese Scientists and Engineers (JUSE) and other organizations to lecture on Statistical Quality Control (SQC) to Japanese business managers, engineers, and scientists. He introduced the well-known concept of the Plan-Do-Check-Act cycle. Dr. Deming is also famous for the Deming Prize, which was created by money he himself donated from his lecture fees. Part of the royalties for the Japanese translations of his books was added to the Deming Prize fund, contributing to the fund’s subsequent development. During the 1960s, quality management in Japan evolved from SQC to TQC. Kaoru Ishikawa, who is known as the father of quality management in Japan, proposed QC activities, playing an active role as a pioneer of TQC activities. Ishikawa also invented the cause-and-effect diagram (Ishikawa diagram, also known as the fishbone diagram). In the late 1970s, as Japanese-made products gained global recognition, activities were developed to thoroughly study the driving force behind Japanese manufacturing. Japan as Number One by sociologist Ezra Vogel became a bestseller; the books took as its topic what to learn and what not to learn from Japan. Japan’s Total Quality Control (TQC) saw subsequent development as Total Quality Management (TQM) in the United States. However, compared to QC activities in Japan, which started from on-site improvement activities based on a bottom-up approach, TQM differed fundamentally in that it started as management-level quality activities based on a top-down approach. In many European countries and the United States, quality assurance standards were established during the 1970s. The background to this development 246

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was that an increase in the international competitiveness of high-quality Japanese industrial products greatly contributed to Japan’s economic growth, while during the same period economic development stagnated in Europe and the United States. This led European countries and the United States to place high priority on product quality. These quality assurance standards were developed separately, raising concerns they might hinder international trade. As a result, a movement arose to establish international quality assurance standards, and in 1987, the ISO 9000 family of standards was introduced. These standards have subsequently been revised several times. The most important standards are listed below. They have also been translated into Japanese and adopted as Japanese industrial standards. In the United States, the Malcolm Baldrige Award (National Quality Award) was created in 1987 under the Reagan administration. Named after the United States Secretary of Commerce at the time, this award aimed to increase the international competitiveness of the United States. Based on this model, the Japan Quality Award was created in Japan in 1995 **************************************************************************** .

[ References ] 1)

ISO 9000 family, ISO 10006, ISO ISO 9000: 2005 Quality management systems – Fundamentals and vocabulary ISO 9001:2008 Quality management systems – Requirements ISO 9004:2009 Managing for the sustained success of an organization – A quality management approach ISO 10006:2003 Quality management systems – Guidelines for quality management in projects

2)

JIS Q 9000 series, JIS Q 10006, Japanese Standards Association (JSA) JIS Q 9000: 2006 Quality management systems – Fundamentals and vocabulary JIS Q 9001: 2008 Quality management systems – Requirements JIS Q 9004: 2010 Managing for the sustained success of an organization – A quality management approach JIS Q 10006: 2004 Quality management systems – Guidelines for quality management in projects

3)

4)

5) 6)

Kaoru Fujita, Zenzaburo Katayama, et al. (1988). QC nanatsudougu de mondai

kaiketsu, suguni tsukaeru QC syuhou. [Solving Problems with Seven QC Tools: Ready-to-Use QC Techniques]. Tokyo, Japan: JUSE Press. Genichi Kobayashi and Satoru Takahashi. (2000). Korewa tukaeru purojekuto manejimento – ISO9000 2000nen taiou. [Practical Project Management: ISO 9000. Updated for the 2000 revision,Tokyo, Japan: Ohmsha, Ltd. Katsuya Hosotani. (1982). QC nanatsu dougu. [Seven QC Tools]. Tokyo, Japan: JUSE Press. New Seven QC Tools Research Association. (1984). Yasashii shinQCnanatsu dougu. [Easy-to-Use New Seven QC Tools]. Toyo, Japan: JUSE Press

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Procurement Management

Chapter 10 Procurement Management 1. Overview 1-1. Objectives of Procurement Management In projects, procurement refers to activities to obtain materials and human resources required to complete a project from outside the project organization. Procurement includes not only purchasing but also rentals and leasing. Procurement management is management of contractual relationships established to procure resources from outside sources.

Exhibit 3-10-1 Overview of Procurement Management in Projects

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Procurement management covers the processes from establishing contractual relationships to procure materials and human resources (to be obtained from outside the project organization during the resource management process) through to concluding contracts and realizing outcomes. Materials and human resources incorporated into the project organization through procurement management as well as outcomes from human resources are handled in the resource management process.

1-2. Work Processes Procurement management consists of the following four processes: planning, execution, control, and acceptance of delivered products. Procurement planning

In a procurement plan, summarizing policies and methods for procuring resources scheduled to be obtained in the resource management process from outside the project organization.

Procurement execution Concluding contracts with suppliers based on the procurement plan. Procurement control

Monitoring progress, quality, risks, costs, and other elements to implement corrective measures as needed based on the contracts with suppliers.

Acceptance of delivered Completing contractual relationships by checking appropriateness of products final outcomes and by receiving delivered products based on the contracts with suppliers.

Exhibit 3-10-2

Procurement Management Processes

1-3. Practical Guidelines Procurement management refers to procuring materials and human resources required for a project that are to be obtained from outside the project organization through resource management. It is important to obtain resources having a level of quality that meets the resource requirements in the required amount when required. In the supplier selection process, the purchaser must review procurement strategies from the viewpoint of achieving total optimization of the project and choose suppliers through fair procedures. After concluding a procurement contract, the purchaser and supplier must properly manage tasks according to the contract and complete delivery of resources.

2. Procurement Planning 2-1. Basic Information for Procurement Planning The following basic information is required to develop a procurement plan. (1)List of resources This is a list of resources to be obtained from outside the project organization through resource management. The list stipulates amounts of resources required, periods when they are required, and resource requirements.

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(2)List of suppliers A list of suppliers of resources owned by the project organization can be used as candidate suppliers for projects.

(3)Contract types Types of contracts vary depending on individual equipment and materials as well as on services. Therefore, the most appropriate type of contract must be used after considering the advantages and disadvantages of different types of contracts.

(a) Classification of contracts by price-setting method

Exhibit 3-10-3 Classification by Price-setting Method

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(b) Classification by scope of contractual responsibilities In large plant construction projects and similar projects, contracts are sometimes classified by the project phases-engineering, manufacturing, procurement, and construction-covered by contractors. Contracts used in such projects are typically classified as follows. Engineering contracts Engineering plus equipment supply [including variations, such as FOB (Free On Board) contracts and CIF (Cost, Insurance and Freight) contracts, depending on risk allocation] Engineering, equipment supply, plus installation supervision Engineering, equipment supply, plus construction work[EPC(Engineering, Procurement & Construction) contracts, turnkey contracts, etc.] (4)Need for standardized procurement-related documents Procurement management requires standardized documents. Use of standardized documents helps improve the quality of materials and services. (5)Execution budget In a project where the procurement budget accounts for a large proportion of the total project budget, procurement management performance significantly influences whether the project succeeds or fails. Therefore, a execution budget must be developed in order to properly manage purchase order spending. (6)Procurement organization To appropriately manage projects, a procurement organization must be created within the project and its responsibilities must be clarified. Procurement management includes many processes that can improve operational efficiency when managed under a centralized, comprehensive system, such as market research conducted on an ongoing, company-wide basis, research on vendors and suppliers, development of cost data, adjustment of delivery schedules across different projects, and cost reduction through bulk purchasing for multiple projects. Accordingly, many companies have internal organizations with procurement functions. Meanwhile, in projects where not only costs but also special skills and other project requirements must be considered when choosing suppliers, it is necessary to maintain close communication between project management personnel and the procurement organization so that materials having the required functions, performance, and level of quality can be obtained as planned. Furthermore, when a trade-off must be made between the delivery time and cost, strategies must be prioritized. Also, when obtaining intellectual assets from outside sources through intellectual property licenses, there is a need to enlist support concerning terms of use and other contractual issues from specialized divisions, including legal affairs personnel. 251

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(7)Procurement via the Internet and other networks Procurement services via the Internet and other networks are available to reduce communication costs and procurement periods. When using such services, it must be ensured that the project organization and suppliers have access to the information platforms required to use the services.

2-2. Procurement Plan (1) Prepare a procurement plan to describe policies and programs for procuring resources to be obtained from outside the project organization listed in the resource plan. (2) Select supplier candidates to participate in bidding for the project from among those in the project organization’s list of suppliers. Special care must be taken when selecting candidates, since selection is affected not only by the project team’s policies but also by the policies of the project organization’s procurement division and even by customers’ policies. (3) To procure resources, choose the most appropriate type of contract (see Section 2-1-(3)) by considering the level of risks assumed by the purchaser and supplier, the procurement budget, the nature of the project, and the policies of the project organization. (4) Check the overall project schedule to determine when resources are needed and procure resources to meet such delivery schedule. When reviewing schedules for procuring material resources, consider not only delivery schedule but also the periods required by supplier candidates to prepare quotations and proposals as well as to evaluate such quotations. (5) It is also necessary to review in advance how to evaluate proposals submitted by supplier candidates. Instead of merely comparing amounts of offers submitted by multiple supplier candidates, check whether it is necessary to prepare estimates to provide independent assessment criteria or whether monetary amounts should be used as the only assessment criteria. If commercial and technological matters must be evaluated, choose specific items and calculate scores by weighting the evaluation items.

2-3. Deliverables of the Procurement Planning Process The following deliverables are produced by procurement planning. (1) Procurement plan A procurement plan summarizes what has been reviewed during procurement planning. It includes, for example, the following information. The procurement organization, roles and responsibilities Procurement budget Contract types Independent cost estimates List of supplier candidates Criteria for evaluating supplier candidates 252

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(2) Procurement document A procurement document is prepared by the purchaser to describe requirements for proposals to be submitted by supplier candidates. This document is sometimes called a Request for Information (RFI), an Invitation to Bidders (ITB), an Invitation for Bidders (IFB), a Request for Proposal (RFP), or a Request for Quotation (RFQ). Procurement documents are distributed to supplier candidates and must be prepared to specify commercial requirements and technological specifications as clearly and exhaustively as necessary to avoid misunderstandings between the purchaser and supplier candidates. Summarize project procurement policies, the types of contracts selected, the list of supplier candidates, and other information in the procurement plan. Also, prepare a procurement document to obtain proposals from supplier candidates.

3. Procurement Execution 3-1. Basic Information Used in Procurement Execution The following basic information is used in procurement execution. (1) Procurement plan Major data required for selecting supplier candidates is as follows: the procurement budget, types of contracts to be chosen, the list of supplier candidates, and criteria for selecting suppliers. (2) Procurement document Items to be described in procurement documents vary depending on the resources to be procured. The important point is to explicitly specify the minimum requirements (see Section 2-3-(2)).

3-2. Procurement execution Procurement execution covers the process from distributing the procurement document to supplier candidates in order to obtain proposals through to selecting suppliers to conclude contracts with. (1) Distribution of the procurement document The purchaser distributes the procurement document to obtain proposals from supplier candidates. If there are too many candidates, the purchaser sometimes employs a pre-qualification system to create a shortlist before distributing the procurement document to obtain proposals. In such cases, only those candidates that pass pre-qualification receive the procurement document. Candidates prepare proposals after reviewing the procurement document; they can ask questions of the purchaser about the document’s content. In most cases, to maintain fairness in the bidding process, all supplier candidates are notified of the questions asked by other candidates along with the responses to such questions. 253

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(2) Acceptance of proposals Supplier candidates’ proposals must contain descriptions of all items requested in the procurement document. They must strategically review, from a variety of perspectives, whether they can meet all requirements, what measures they will take if any requirements cannot be met, how they will deal with various risks, and what they need to do to make a competitive bid. Supplier candidates must submit their proposals by the deadline specified in the procurement document, which usually specifies the proposal format and submission method. In some cases, for example, technical and commercial proposals must be submitted separately. (3) Evaluation of proposals The purchaser evaluates supplier candidates’ proposals. If evaluation criteria have been prepared in advance, the proposals are evaluated according to such criteria. The purchaser must ask any questions that arise when evaluating candidates and receive answers from them. If the estimated costs and schedules submitted in proposals may be affected by the answers to these questions, the purchaser asks candidates to describe such effects in their answers. The purchaser must follow fair procedures when selecting suppliers. (4) Conclusion of procurement contracts The purchaser concludes a procurement contract with selected suppliers.

3-3. Deliverables of the Procurement Execution Procurement contract A procurement contract is a legal agreement that obligates the supplier to deliver resources according to the contract and the purchaser to pay for the resources delivered. Contracts are normally prepared in document format and preserved as such. Various types of contract document formats are available. The following data is generally included in procurement contracts. Descriptions of deliverables and the scope of services Procurement schedules, delivery schedule and place, contract amounts, and terms of payment Inspection and acceptance criteria Frequency and content of progress/performance reports Other general contract terms

Based on the procurement documents prepared by the purchaser, supplier candidates must prepare competitive proposals that meet the requirements. The purchaser must then select suppliers in accordance with a fair evaluation procedure. 254

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4. Procurement Control 4-1. Basic Information for Procurement control The following basic information is used in procurement control: (1) Procurement contract A procurement contract stipulates what services need to be performed by the supplier after the conclusion of the contract to provide human and material resources, as well as obligates the purchaser to pay for services rendered. Both parties must fully understand the content of the contract and cooperate with each other to efficiently implement the project. (2) Progress/performance reports After concluding a contract, the supplier must periodically report to the purchaser on the progress and performance of its operations in accordance with the terms of the contract. Reports are prepared in accordance with the frequency, style, and format stipulated in the contract, or based on an agreement between the supplier and purchaser if the contract contains no such stipulation. If circumstances that may prevent fulfillment of the terms of the contract, including schedules and quality, are foreseen in a report, the purchaser and supplier must openly discuss what measures are needed to make improvements and corrections. Depending on the quality of a supplier’s operations, merely receiving a report may be insufficient; instead, the purchaser may choose to directly inspect how the supplier is carrying out operations.

4-2. Procurement Control The procurement operations carried out for a project can be grouped into the three categories shown below. Exhibit 3-10-4 illustrates operational processes in procurement of materials and services. Ongoing use of external resources is also called “outsourcing” in contrast to use of internal resources. (1) Procurement of equipment and materials (hereinafter the “materials”) These operations are performed in order to procure materials (including software) required for a project based on specifications determined during the design stage. Procurement operations refer to the sequence of operations from purchasing through to delivery of products that have passed inspections to a specified location (final destination).

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Contract management

Delivery schedule management

Quality management

Budget management

Products and outcomes

Transportation

Packaging

Inspection Deliverables

Inspection

Manufacturing Service

Contract

Required products and services

Procurement management

Exhibit 3-10-4 Procurement Process (2) Procurement of services These operations are performed during all project stages in order to procure services required for the project from outside sources. The procurement of a service starts with its commissioning and ends with its completion in accordance with the contract. (3) Licenses Licenses to use the technologies required for the project are obtained by paying fees to the license holders. Management of procurement operations consists of the same processes required for overall management of projects. (1) Contract management Contract management in procurement refers to monitoring the performance of suppliers’ operations based on contracts to ensure that outcomes meet contractual requirements; it also includes properly paying for suppliers’ achievements based on contracts. Contract management involves legal and accounting issues. Therefore, it is essential to obtain the cooperation of the legal and accounting divisions as functional organizations as needs arise. Contract management covers the process from preparation of bidding documents prior to conclusion of a contract through to expiration of the warranty for outcomes delivered by the supplier. Ownership of copyrights for software is determined based on the rights defined in contracts. 256

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In order to change the terms of a contract, equipment or material specifications, or the content of services after concluding a contract, it is necessary to constantly monitor how such changes may affect schedules, contract costs, and project quality. Contract management in the broad sense of the term includes quality management, delivery management, and budget management as described in the following. (2) Quality management Quality management includes the following operations performed by the purchaser: operations to check whether equipment ordered and deliverables of service operations meet the requirements specified in the contract and to ensure that no quality issues arise due to the purchaser’s circumstances (e.g. unclear specifications, unanticipated changes, extremely short delivery schedule, etc.) as well as operations to monitor the supplier’s quality management. (3) Delivery management Delivery management is performed to monitor schedules for individual procurement operations based on an overall schedule for the process from purchasing through to delivery of materials and service outcomes. Delivery management also includes gathering information on events that may affect delivery, as well as coordination with suppliers and customers with respect to causes of delivery delays. A delayed delivery by a single supplier may affect the overall schedule and costs; accordingly, delivery management is required to prevent delays and to gather sufficient information on deliverables that may have significant effects on schedules. Delivery delays may result from either the purchaser’s or suppliers’ circumstances. Both must be given attention in delivery management. (4) Budget management Budget management is performed throughout the project implementation period to manage changes in economic conditions, project scope, and costs resulting from changes in product specifications and quantities as well as to manage payments to suppliers.

4-3. Deliverables of Procurement Control Procurement control documents Procurement control documents are prepared by the purchaser to record suppliers’ performance by monitoring how suppliers carry out operations based on contracts and by taking measures to make improvements and corrections if necessary. Procurement control documents can also be used for future projects as sources of information on suppliers’ performance.

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5. Delivery of Procured Products 5-1. Process of Delivery of Procured Products Project completion and the delivery method are not always fixed; they are determined for each project by contract. Plant delivery in construction/engineering projects is conducted so that the contractor and customer both confirm the fulfillment of all obligations stipulated in their contract. Plant delivery refers to transferring plant management responsibility from the contractor to the customer—i.e., the contractor turnover to the customer on the contrary it is said takeover from customer, who assumes responsibility for its management. Except in full turnkey contracts (complete package contracts), delivery is usually performed at some point between mechanical completion of the plant and completion of commissioning. However, when a customer concludes a project-financing contract with a financial institution, the plant may not be deemed complete in terms of the financing contract from the perspective of the customer even if physical delivery of the plant has been completed. This is likely to occur when, based on the covenant clause in the financing contract, the financial institution demands that the customer not only physically complete the plant, but also fulfill the project’s requirement of realizing reliable, steady cash flow. The above example is based on the concept of “financial completion” in contrast to a project’s “physical completion.” In such cases, the customer must fulfill the requirements of the covenant clause and have completion of the plant confirmed by the financial institution in order to be absolved from the obligation to the financial institution regarding the project. Deliveries of software development projects vary depending on the project type as well as the range of work and roles covered by the customer; these are determined for each project based on an agreement confirmed by the customer and supplier. Delivery in software development is deemed complete when fulfillment of all obligations stipulated in the agreement is confirmed by both customer and supplier. The most important point about obligations in the construction stage of software is that delivery is deemed complete when the constructed system enters the testing phase (in the production environment with actual data), at which point responsibility for system management and subsequent operation is transferred to the customer. Procedures from construction to project completion for software development are shown in Exhibit 3-10-5. Generally, software development contracts are executed in three different stages: the function specification phase; system implementation phase; and the operation preparation transition phase. Products are delivered at each stage of contract execution. However, the entire system (the final deliverables of the project) is normally delivered upon completion of the development stage (completion of system tests). The project itself is deemed complete at the end of the operation test phase, when the system is put into full operation (put into service). In many cases, contracts are concluded for one of these three stages or for combinations thereof (Exhibit 3-10-5). 258

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Contract events

System tests (ST)

Completion of system tests

Reporting of construction completion

Operational tests (OT)

Completion of operational tests

Procurement Management

Work items System function tests Performance tuning

Function checks Performance checks Operability tests

Actual environment/data

Full-service operation

Completion of the contract Delivery

Exhibit 3-10-5 Procedures for Delivery of a Software Development Project

5-2. Operation and Performance Guarantee In any project, it is necessary to check whether the original goals have been achieved. Thus, performance guarantee is one of the highest priorities in construction and engineering projects. Accordingly, obligations for performance guarantee are defined in detail in contracts. It must be confirmed that completed plants provide the process performance required for production processes, including with respect to the level of quality as well as amounts of products and sub-products to be produced, in addition to the utility consumption performance required for production, in compliance with the contract specifications. Important items required to demonstrate plant performance include mechanical performance, process performance, and utility consumption performance. Some contracts, such as financing-related contracts, do not necessarily include stipulations about physical elements. Conceptually, this implies that fulfillment of contractual obligations can be confirmed simply by checking whether project goals have been achieved. In software development, performance guarantee is a priority as important as assurance of system functions and quality. Details about performance guarantee are 259

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defined upon contract conclusion or in agreements between the supplier and customer. To carry out performance guarantee, it is necessary to check integrated performance — the combination of mechanical and software processing performance — through system tests conducted in a mock operational environment. It is also necessary to implement a business operation cycle in the production environment during final operation tests in order to confirm the performance and check whether the system has been designed in compliance with the contract specifications.

5-3. Project Handover and Acceptance Project handover and acceptance vary in content and form depending on the objectives and specifications defined in contracts. The essential function of handover and acceptance is to discharge contract parties from their contractual obligations. In many construction and engineering projects, for example, handover is deemed complete when achievement of the original performance goals has been confirmed in test operation. However, if the customer’s contractual demands include more than simply achievement of performance, delivery is not deemed complete until such contractual obligations have been properly fulfilled. Meanwhile, in software development projects, acceptance is usually deemed complete at the end of the development stage, when system tests have been conducted to ensure the system’s function and performance in a mock operational environment. Such an acceptance transfers responsibility for system operation to the customer. However, even at the stage of operation tests, the supplier often maintains a relationship with the customer in accordance with the stipulations in their contract or agreement in order to meet the need to make up for any initial insufficient performance in operation tests and to support full-scale implementation of the system. Such projects are deemed complete when the transition to full-scale operation is finished after operation tests and system implementation.

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Chapter 11 Communication Management 1. Overview 1-1. Objectives of Communication Management

Exhibit 3-11-1 Overview of Communication Management We are now well into the twenty-first century, an era of rapid globalization and diversity. Today, projects in which people with different ways of thinking, values, and cultural backgrounds work together across national borders and generations are now commonplace. One of the most significant factors leading projects to success is communication management that facilitates communication between project participants with diverse backgrounds. When implementing a project, it is important to promptly gather information on the project’s actual status through communication and to communicate this status accurately to stakeholders to help solve the various issues that arise in the course of the project. There is also a need to conduct predictive management to prevent problems before they actually occur. To that end, it is important to create a system to gather information in advance through mutual communication between stakeholders. 261

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The objective of communication management is to identify means of correctly, efficiently transferring information required for a project to stakeholders as well as to plan and promote communication to support efficient project management.

1-2. Operational Processes Communication management consists of the following three operational processes. • Communication planning

Planning process for analyzing communication needs, which includes identifying stakeholders who need communication, information collection units, distribution methods, and means of communication

• Information distribution

Process for accurately and efficiently transferring information to those who need it

• Communication execution management

Control process for solving communication problems that may arise

Exhibit 3-11-2

Operational Processes of Communication Management

In particular, it is recommended to periodically review and revise (if necessary) the communication planning process in order to ensure the effectiveness of all phases of the project on an ongoing basis.

1-3. Practical Guidelines In the communication planning process, it is important to identify stakeholders’ communication requirements along with the most appropriate means of communication. In promoting projects, meetings and conferences play a pivotal role as a means of communication. Therefore, there is a need to establish and manage meetings to achieve the purpose of each project process. Decision-making conferences and meetings across different teams are particularly important. Also, facilitation techniques can be used effectively to manage conferences and meetings in order to promote problem solving and consensus building. In the information distribution process, it is necessary to find reporting methods appropriate to the level of difference between plans and actual results (e.g., reporting on project progress or reporting on problems) as well as to communicate information in accordance with rules. Communication activities for the coordination of stakeholders' interests are particularly important. Information concerning improvements in quality and countermeasures to mitigate risks, changes and problems must be accurately shared among the stakeholders concerned in a timely manner. Given this, it is necessary to promote information sharing through the use of groupware and other information systems. In the process of communication management, it is necessary to promptly identify factors that impede communication and take measures to solve such problems. A variety of factors can impede communication during execution of a project, including the following: complex, multi-layered communication routes; organizational and team cultures that hide problems; and communication between members with different cultural backgrounds in global projects. These impediments arise in the process of 262

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project implementation. It is important to identify these impediments during the planning stage and constantly monitor them during the implementation stage in order to promptly implement measures to solve any problems that arise.

2. Communication Planning The purpose of communication planning is to carry out the following and prepare a communication plan based on project charters, stakeholder registers, role descriptions, and other documents. Identification of the purposes and themes of communication Identification of entities requiring communication for each purpose and theme Establishment of means of communication Review of methods for improving communication efficiency through the use of groupware Based on the results of the operations described above, project personnel need to clarify the purposes and themes of communication; to identify relevant stakeholders, communication frequencies, and means, methods, procedures, and rules of communication for each theme; and to prepare a communication plan. A communication plan generally provides a communication list compiled in order to summarize communication management procedures, including communication methods, processes, and rules as well as other plan items. An example of a communication list is presented in Exhibit 3-11-3. Revisions to communication plans must be made in accordance with change management rules and document management rules depending on the revision requirements approved for the project. Stakeholders

Objective

Theme

Frequency Means of communication

Method for storing and sharing for information

Outcomes to be submitted

Project owners, members in Reporting the current charge, and project status to high-level managers management staff

• Checking the Monthly project's overall status and discussing corrective measures in meetings

Conferences and documents

Shared folders accessible Status reports by project over the Internet managers

Project managers and project team members

Reporting progress to project teams

• Checking the project Weekly progress and discussing corrective measures in meetings

Conferences and documents

Shared folders accessible Progress reports by over the Internet project members

Related members

Transferring information

Matters to be communicated

Change review board members

●●●

As needed E-mail

Shared folders accessible Contact slips over the Internet

Requesting changes and Sharing requests for approval changes and approval of changes

As needed Reviews in meetings based on written documents

Shared folders accessible Change logs over the Internet

●●●

●●●

●●●

●●●

Exhibit 3-11-3

●●●

●●●

Example of a Communication List

Role descriptions used in reviewing a communication plan provide information about the respective roles and responsibilities of the project organization and stakeholders. Role descriptions are generally provided in a Responsibility Matrix 263

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(RM) that lists the responsibilities of individual stakeholders for different service in a Work Breakdown Structure (WBS) based on the project scope. Exhibit 3-11-4 presents an example of a Responsibility Matrix, which shows who does what (roles) and who decides what (responsibilities). This matrix specifies what information must be communicated and who is responsible for doing so by clarifying roles and responsibilities under the project’s system. Member

A

B

C

D

Definition of requirements and basic specifications

S

K

P

A

Basic design

S

K

P

A

P

P

Detailed design

S

K

A

I

P

P

Production (development)

S

P

P

I

P

K

Testing and inspections

S

Task

E

F

・・・

P

K

A A

S: Approval; K: Decision; A: Execution (planning); P: Support; I: Information provision

Exhibit 3-11-4

Example of a Responsibility Matrix (RM)

Communication plans include descriptions of each of the four principal below.

items

2-1. Establishment of the Purposes and Themes of Communication Purposes and themes of communication include decision making, reporting, making contact, requests, and information provision. It is necessary to organize and identify the items required for communication in accordance with the purpose and theme. As there is a need to promptly share information within the project organization, reporting plays a particularly important role in the project implementation process. Reports provide the designated recipients with useful information on project management in a timely manner, and they can be provided both periodically and irregularly. In addition, a wide range of reporting methods are available. The purpose of reporting is to clarify the current status and future prospects of the project as well as to promote shared understanding among interested parties. It is necessary to report project progress to high-level program management members (customers, project owners, program owners, etc.) as well as to gather data on the latest project status (including schedule progress, resource input status, and availability of additional resources) and to provide project personnel with feedback on the results of reviews conducted to ensure total optimization of the program. Communication must be carried out at the following timings: at the beginning and end of each project phase and upon reaching management milestones. 264

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Reporting during the planning stage aims to make project management policies known to all interested parties, while reporting during the implementation stage aims to enable stakeholders to share information on project performance and outstanding actions as well as on problems and issues. Meanwhile, reporting during the completion stage is performed to officially record the final specifications of project outcomes, along with the fact that such outcomes were properly inspected and accepted, and to utilize data obtained and lessons learned in project management for future projects. Reporting plans include descriptions of the types of reports to be submitted, reporting methods for each type of report, where reports and messages are to be submitted to, the frequency of reporting, report content, and the level of detail.

2-2. Identification of Entities Requiring Communication for Each Purpose and Theme Entities requiring communication are identified for each purpose and theme based on a project organization chart and the WBS specified in Chapter 4: Scope Management. The project organization chart is used to identify teams and members in organizations that require mutual communication. At the same time, the WBS and project outcomes also help to identify entities requiring communication. By combining the entities requiring communication that have been identified from both the project structure and project outcomes, it is possible to identify targets for vertical communication, which consists mainly of directions, orders, decisions, reviews, and reports, as well as for horizontal communication, which consists mainly of information sharing and development. Alignment matrices,7) which will be mentioned later, and other techniques are used to identify entities requiring communication.

2-3. Establishment of means of communication Generally, the following three types of communication are available. (1) Interactive communication: conferences, meetings, etc. (2) Push communication: reports, e-mails, etc. (3) Pull communication: bulletin boards, etc. It is necessary to establish the most appropriate means of communication in accordance with the purposes of communication. The means of communication most commonly used during projects are conferences and meetings (generally referred to collectively as “conferences”) such as the following. Workshop conferences in which outcomes are produced through collaborative work (e.g., planning and reviewing) Brainstorming conferences in which participants express their opinions to solve problems 265

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Briefing conferences, such as progress briefings and issue briefings Decision-making conferences, such as steering committee meetings Conferences for coordinating interests, such as contract negotiation meetings Conferences include periodic conferences as well as irregular conferences held depending on the project’s status. In order to lead a project to success, it is very important to identify which periodic and irregular conferences are required in each project process and to notify all participating members of the conferences in advance, so as to ensure that all required members participate in the relevant conferences to achieve the project’s goals.

2-4. Document Management Large amounts of information are exchanged during the course of projects. The number of communication channels in a project with n stakeholders can be calculated using the following equation.

The total number of communication channels is n × (n − 1) ∕ 2 (where n represents the number of stakeholders) As shown in the above equation, the number of communication channels increases exponentially as the number of stakeholders increases. As a result, the amount of information created, gathered, distributed, and stored also increases, so a communication plan is required to enable more efficient communication. To efficiently promote communication, it is important to use groupware and other information systems to centrally manage and store information and documents. For the accumulation (storage) of information, it is necessary to manage it in an organized and systematic way. Depending on the type and amount exchanged, information may be centrally managed in a single location or stored separately in multiple locations according to specified categories. Information can be stored in two basic forms: on paper or as electronic media. Information must be saved based on individual companies’ Business Continuity Planning (BCP) rules in case any of the following occur: emergencies, including natural disasters, accidents, fires, and information network failures. Regardless, at the beginning of a project, it is essential to construct a document management system that defines data categorization methods, management locations, management codes, data managers, version update procedures, and standards for removing outdated versions, as well as to make this system known to all interested parties. In the past, information sharing and communication were subject to organizational and geographical constraints at the source of information. Today, however, use of IT (e.g., e-mail, groupware, and social networking services) provides easy access to communication free from temporal and geographical restrictions. Projects require the performance of a large number of non-routine transactions 266

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between a variety of stakeholders. Therefore, use of information systems is likely to prove effective in improving work efficiency and accelerating decision making. However, direct communication through face-to-face conferences and over the telephone conveys not only explicit information, but also the overall atmosphere, members’ feelings, and surrounding conditions. It is therefore necessary to effectively use the appropriate means of communication depending on projects’ purposes and circumstances.

3. Information Distribution The purpose of distributing information is to provide project stakeholders with the required information at the required times and to communicate based on the defined communication method. Distribution of information also requires the recipient to respond appropriately to unexpected demands for information by judging whether the request is justified or not. Tasks in this process include obtaining information required to conduct operations, providing information to those who need it to perform their jobs, and distributing and collecting the deliverables to and from stakeholders (including relevant company members, customers, and partner companies). There is a need to quickly and accurately distribute a wide range of information to various stakeholders; thus, effective use of information systems is essential. The following table lists examples of information systems used to distribute information. Document management system Groupware

System for storing project documents, managing changes, and distributing documents to relevant stakeholders System for sharing stakeholders' schedules and other necessary information

Communication document System for sharing requests for work and remaining work management system items among stakeholders to prevent operations from being omitted and non-delivery of information E-mail

Exhibit 3-11-5

System used to communicate general information and work requests

Examples of Systems Used to Distribute Information

Unexpected events often occur in projects. One factor causing such events is the relationship with stakeholders. Studies have revealed a lack of communication with stakeholders in public works projects and projects to bring in business ultimately results in failure due to opposition from stakeholders. Project managers must sufficiently communicate with stakeholders as often as necessary and comprehensively analyze information obtained through such communication in order to use it to develop countermeasures to cope with events that may occur in the future.

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Major pieces of information that must be distributed are listed below. Project deliverables Plans and management manuals Progress reports, project completion reports, and project completion reports Notices, conference minutes, and other project records about matters such as decisions made, changes approved, issues resolved, and requests for revisions Causes of problems, reasons for the selection of corrective measures, etc. Feedback about information distribution These pieces of information are distributed according to the communication plan. To ensure efficient project implementation, the centralization of information is necessary.

4. Communication Management The purpose of communication management is to meet project stakeholders’ communication needs. What is most important in this process is management of the following conferences scheduled in the communication plan. Kick-off meetings for team building Steering committee meetings, completion reporting, operation assessment, and other meetings for decision making and consensus building Irregularly held meetings, such as reviews of problems and issues among stakeholders Periodic meetings held to share information on progress management Meetings to prepare plans on outcome processes to maintain and improve quality; review meetings; and meetings to confirm specifications and requirements To manage communication based on meeting minutes and other documents, personnel involved in the project share and develop information on decisions made, agreements reached, as well as new problems and issues discussed at conferences and meetings. Facilitation techniques are effective for smoothly organizing conferences and meetings. To provide stakeholders with accurate, timely information according to the communication plan and to ensure proper project management, it is necessary to continue to coordinate and promote communication among project stakeholders who have different priorities with respect to concepts and implementation according to their positions. The following factors may interfere with smooth communication. Lack of understanding of the purposes and means of communication among project members and complex, multi-layered communication routes Cultures that hide problems Intercultural communication Corrective measures must be implemented to solve any communication problems that occur as well as to monitor the effects of implemented measures. 268

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[ Alignment Matrix ]

***************************************************************

To ensure smooth communication among stakeholders, it is important to identify entities requiring communication. The Alignment Matrix method, which is presented in the references,7) is often effective in identifying such entities. The following gives an overview of the method. Enter the technological interfaces between components identified by the system architect in a Design Interface Matrix (DIM). Then, enter technological interactions with other teams—current interactions as well as interactions expected in the future—identified by members of the component and sub-system design teams in a Team Interaction Matrix (TIM). Create an Alignment Matrix (see Exhibit 3-11-6) by integrating the above two matrices to show where interfaces and interactions match and where they differ from each other.

Exhibit 3-11-6 Alignment Matrix Source: Manuel E. Sosa, Steven D. Eppinger, and Craig M. Rowles, “Are Your Engineers Talking to One Another When They Should?” DIAMOND Harvard Business Review, August 2008, pp. 132–143. ***********************************************************************************************************************

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Japan International Cooperation Agency. (2006) Puroguramu manejimento [Program management]. Tokyo, Japan: Japan International Cooperation Agency. Keinosuke Ono. (2005). Mishon keiei no susume. [Toward mission-driven management]. Tokyo, Japan: Toyo Keizai Inc.. Isao Endo.(2005). Kigyoukeiei nyuumon. [Introduction to corporate management]. Tokyo, Japan: Nikkei Inc. Sachihiko Harashina. (2000). Kankyou asesumento. [Environmental assessment]. Tokyo, Japan:NHK Publishing, Inc.. Environmental Assessment Research Association. (2000). Wakariyasui senryakuteki kankyou asesumento. [Strategic environmental assessment]. Tokyo, Japan: Chuohoki Publishing Co., Ltd.. Seiichi Nagao. (2003). Senseigata purojekuto manejimento. [Proactive project management]. Tokyo, Japan: DIAMOND, Inc. Hiromi Hara. (1990). Kokusai purojekuto no ningen kankei – ibunkakan manejimento no kiso. [Human relations in international projects: fundamentals of intercultural management].Tokyo, Japan: Engineering Advancement Association of Japan. Kichiro Hayashi. (1994). Ibunka intafeisu keiei – kokusaika to nihontekikeiei. [Intercultural interface management internationalization and Japanese management].Tokyo, Japan: Nikkei Inc. Nobuyuki Honna et al. (eds.) (1996). Ibunka rikai to kominyukeishon. [Intercultural understanding and communication,]. Tokyo, Japan: Sanshusha Publishing Co., Ltd.. Hiroshi Kagawa. (1997). Amerikajin to hataraku tameno 3 tuno kachi to 7 tuno housoku – Shinsedai wo ikiru guroubaru manejimento. [Three values and seven laws for working with Americans: global management in a new age].Tokyo, Japan: Spike Co., Ltd.. Gyo Furuta (ed.),(1996). Ibunka kominyukeishon [Intercultural communication,]. Tokyo, Japan: Yuhikaku Publishing Co., Ltd.. Keizo Baba. (1989). Muishikino manejimento – Nippon no keiei tuyosano kongen. [Unconscious management: The source of strengths of Japanese management]. Tokyo, Japan: Chuokeizai-Sha, Inc. Hirotaka Takeuchi and Yoko Ishikura. (1994). Ishituno manejimento – Nipponteki doushitu keiei wo koete, maneijya 431 nin genba karano teigen. [Heterogeneous management: beyond homogeneous japanese management (proposals from 431 working managers), DIAMOND, Inc.. Hiroyuki Itami, Toshihiro Nishiguchi and Ikujiro Nonaka (eds.). (2000). Ba no dainamizumu to kigyo. [Field dynamism and corporations].Tokyo, Japan: Toyo Keizai Inc.. Kyoko Yashiro, Eriko Machi, Hiroko Koike, and Tomoko Isogai. (1998). Ibunka toreiningu – boodaresu shakaiwo ikiru. [Cross-cultural training] . Tokyo, Japan: Sanshusha Publishing Co., Ltd..

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Program & Project Management for Enterprise Innovation

Part 4 Business Management Foundation Introduction

Strategy Formulation

Chapter 1 Business Enterprises and Programs Chapter 2

Program strategy method

Chapter 3

Project Organization Management

Chapter 4

Project Finance Management

Copyright © 2017 Project Management Association of Japan

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Strategy Formulation

1. Strategies (1) Definition of Strategies A strategy is the most fundamental plan developed by an organization to maximize its long-term success. The term “strategy” is defined in various ways by researchers of business administration. In program and project management (P2M), however, the term is defined as described above from a practical management perspective rather than an academic perspective. For commercial enterprises, “long-term success” means “long-term profits.” Here, the expression “long-term” refers to focusing attention on outcomes over the long run rather than short-term gains and losses to ensure business management based on the going concern (business continuity) assumption. For other organizations, success can be defined according to their respective purposes.

Exhibit 4-0-1 Strategy Target Areas

(2) Targets of Strategies Strategies are developed for a variety of areas with a view to maximizing long-term success. For private companies, principal targets fall into the three areas shown in Exhibit 4-0-1: i) market selection; ii) acquisition of competitive advantages; and iii) development and enhancement of capabilities and resources. 1) Market selection Market selection refers to choosing specific markets as business targets. Choosing a market also necessarily means choosing which products to sell. To put it simply, market selection defines “where” to fight battles using “what.” Generally, products are delivered to end-customers through a variety of value chain processes, ranging from procurement of raw materials in the uppermost stream to parts production, assembly, and sale. Companies must choose their positions in the value chain to 276

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maximize their long-term profits based on the market environment and their own capabilities. In industries such as the many mature industries of Japan, where the positions of individual companies are fixed, market selection may seem relatively unimportant. However, in the electronic vehicle (EV) industry and other industries that are likely to grow rapidly in the near future, choosing a target market (e.g., a market related to engine systems, driving systems, battery systems, or services) is the most important strategic issue for involved companies. Even for companies in mature industries, developing a new product series is a strategic action aimed at choosing a profitable market, regardless of whether management is making such a choice consciously. 2) Acquisition of competitive advantages The second area, acquisition of competitive advantages, is often called the competitive strategy area. It concerns the challenge of coming out on top in the market competition against other companies for customers. This includes various forms of competition—not only competition among multiple companies selling the same type of products and services (e.g., compact passenger cars, LCD TVs, and hamburgers), but also competition among companies in different industries (e.g., catalog retailers attempting to attract mass retailers’ customers). Michael Porter’s five forces analysis classifies these various forms of competition into five categories for systematic analysis. Further, Porter describes three types of strategies as the most basic competitive strategies: i) cost leadership, ii) differentiation, and iii) focus. Cost leadership is the basic strategy used by strong companies in the mass production and mass service markets. Many theories and practical knowledge concerning business administration (e.g., economies of scale, the experience curve, economies of scope, and lean production) relate to this area. Differentiation is a strategy aimed at obtaining customers by adding new features and performance unavailable from competing products, by providing special services or by creating unique shapes, functions, and designs. The focus strategy aims to concentrate on a specific market segment (regions, customer categories, etc.) and to gain competitive advantages over competitors by assuming cost leadership or differentiating products within the targeted segment. 3) Development and enhancement of capabilities and resources The third area is concerned with how to develop and enhance the capabilities and resources required to develop businesses. In long-term competition, it is important to develop, based on a resource-based view (RBV) of organizations, outstanding capabilities and resources that cannot easily be imitated by competitors. Capabilities that are difficult for competitors to imitate include the following: skills of managers and employees as well as their willingness to improve their skills on an ongoing basis; organizational systems designed for efficient operation; TQM and other organizational initiatives for quality improvement; large sales networks; and maturity of organizational capabilities in software development and project management. Compensating for the lack of capabilities by introducing technologies, forming alliances with other companies, and carrying out mergers and acquisitions is also strategic measures. 277

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As shown in Exhibit 4-0-1, these target areas are not independent from one another; in many cases, they are mutually related. For example, a competitive strategy that focuses on senior customers is itself a market selection strategy. Lean production is a competitive strategy aimed at acquiring competitive advantages by reducing wasted effort, including dead stock, defective products, and waiting time; however, a human organization designed for lean production also serves as a highly efficient production network that cannot easily be imitated by competitors.

(3) Presentation of Strategies Organizations not only need to formulate strategies but also appropriately present their strategies to both internal and external groups. In recent years, non-routine operations that do not fall under regular patterns have become more important than ever before. In such a business environment, presenting business strategies to all relevant members can enhance the consistency of the direction of organizational efforts. Also, meeting all requirements in practical operations carried out by managers requires enormous amounts of time and money. Therefore, managers always face the need to choose not to do something instead of attempting to do everything within the limits of available time and resources. In such cases, clear presentation of strategies provides decision-making standards for daily management, thereby effectively improving operational efficiency.

2. Strategy Formulation (1) Basic processes of strategy formulation The basic purpose of strategy formulation is to present the ideal state of an organization (To-Be), along with a scenario that shows how to achieve that ideal from the current state (As-Is). However, the As-Is/To-Be model of strategy formulation differs considerably from the As-Is/To-Be model in production processes and quality improvement activities, where current conditions are clear and the ideal state is also easy to describe. The most important differences are the following.

1) It is difficult to define an ideal state and unequivocally identify what needs to be realized to achieve significant results. 2) There is a need to construct a scenario based on an uncertain environment, including aspects such as market conditions and competition with other companies. Therefore, in the beginning, an ideal state in a strategy is necessarily represented in the form of abstract and ambiguous concepts. To render such an ideal achievable, it must be developed into substantial, concrete outcomes. In addition, it is also necessary to develop assessment standards that enable comparison between the ideal and current state. To this end, a variety of analysis tools as shown in Subsection (2) have been developed and are used to evaluate current and ideal states as well as to study the surrounding environments.

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(2) Analysis tools Exhibit 4-0-2 lists typical tools and frameworks used in a variety of analyses commonly employed to formulate strategies. It is important to choose these or other tools appropriate to the relevant strategy area and to perform analysis by combining multiple tools depending on the purpose of analysis. Name

Overview

Accounting inf ormation Analyzes appropriate numerical indicators w ith respect to organizational perf ormance based on analysis f undamental inf ormation on business management, including f inancial and administrative accounting data. SWOT analysis

PESTEL analysis

Analyzes the strengths (S) and w eaknesses (W) of a company, opportunities (O) in the environment, and threats (T) f rom the environment based on data on organizational capabilities and business environments. Analyzes political (P), economic (E), social (S), technological (T), environmental (E), and legal (L) aspects of business environments.

3C analysis

Analyzes mainly management records, management resources, and strategies using an analysis f ramew ork f ocused on the immediate business environment of a company: Customers, the Company, and its Competitors.

Marketing mix (4P)

Principal elements that must be combined in business activities in the market are represented by f our Ps (Products, Prices, Places, and Promotion). In recent years, f our Cs (Consumers, Customer costs, Convenience, and Communication) have come to be thought important f rom purchasers' perspectives.

Porter's f ive f orces

The f ive types of threats in competitive markets identif ied by Michael Porter: the threat of new entrants, industry rivalry, substitutes, bargaining pow er of suppliers, and bargaining pow er of buyers.

Three basic strategies

The three basic strategies identif ied by M. Porter to be used to acquire competitive advantages: cost leadership, dif f erentiation, and the f ocus strategy.

PPM

PPM stands f or Product Portf olio Management. PPM analysis provides guidelines f or allocating a company's management resources based on the location of its products in f our quadrants ("cash cow ," "star," "problem child," and "dog") of a coordinate plane, w here relative market shares of products are represented along the horizontal axis and market grow th rates along the vertical axis.

VRIO

Analyzes the ef f ectiveness of targeted management resources in a competitive environment f rom f our dif f erent perspectives: economic value (V), rarity (R), imitability (I), and organizational capabilities (O) to ensure ef f ective use of resources.

Capability maturity model

Evaluates w hether an organization's operational processes are properly managed on a f ive-point scale f rom 1 (initial state, chaos) to 5 (optimized state). Originally developed to assess sof tw are development processes, the capability maturity model (CMM) is used today f or a variety of purposes, including benchmarking of organizational capabilities.

Business model canvas

Develops business models f or f ormulating corporate business strategies by analyzing the f ollow ing nine major elements: customer segments, value propositions, relationships w ith customers, sales channels, key resources, key activities, partners, cost structure, and income f low s.

Exhibit 4-0-2 Major Analysis Tools Used in Strategy Formulation

3. Forms of Strategy Formulation Several approaches are available to formulate strategies in real organizations. Generally, strategies are formulated as fundamental business management plans based on assessments and decisions made by high-level organization personnel; lower-level personnel are expected to act in accordance with such plans. Meanwhile, behavior patterns developed from the experience of repeated actions that have led to success in long-term business projects are quite often adopted as an organization’s basic policies. It may even be argued that strategies are behavior patterns established in companies as a result of such experiences of success. The process in which strategies focused on quality were established in Japanese companies is one such example. In the beginning, companies had no choice but to make efforts to improve their low-quality products which were exported overseas from Japan; however, such efforts led to low-cost 279

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production and customer satisfaction, which brought successful results and developed into a basic strategy. The former types of strategies are intentional strategies. Since such strategies are formulated as originally intended, they are called “deliberative strategies”*1 in contrast to the latter type of strategies, called “emergent strategies,” which are formulated as consistent behavioral patterns developed from the experience of carrying out specific activities. In reality, strategies are formulated not in these pure forms but as mixtures of both types. Umbrella strategies developed by companies by establishing an overall framework (umbrella) based on careful deliberation and that allow for spontaneous activities as well as trial and error within this established framework to develop emergent strategies is a primary example of such a mixture. In addition, there is also a cycle-type strategy formulation model used to analyze how practical corporate strategies are formulated. Instead of distinguishing between the formulation and implementation of a strategy in a linear model as shown in Exhibit 4-0-3 (a), this model assumes that strategies are established as a result of iterating the learning cycle illustrated in Exhibit 4-0-3 (b), in which in the beginning faith in an existing strategy is put into action and then revised and re-established based on reflections on the results of said action.

Execution Strategy (Formulation)

Execution

Results

Faith

Results

Reflection

(a) Linear strategy process model

(b) Cycle-type strategy process model

Source: Kazuhiro Mishina, The Logic of Strategy Failure, Toyo Keizai Inc., 2004, p. 166.

Exhibit 4-0-3 Cycle-type Strategy Formulation Model In today’s environment, where rapid changes make forecasting the future difficult, it is important to use deliberative strategies and emergent or cycle-type strategies appropriately depending on one’s purpose.

-----------------------------*1: Henry Mintzberg broadly distinguished between two categories of strategies: those that are intentional and those that are realized as patterns (consistent actions). He called those realized as originally intended “deliberate strategies,” those not realized as intended “non-deliberate” strategies, and those realized without any original intention “emergent strategies.”

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4. Programs and Strategies There are many different forms of success for business strategies as well as different ways to achieve success. In program and project management, the process of defining the form of success to be achieved by a business strategy is known as mission profiling. Program missions that are proposed (as concepts) are defined in mission profiling as feasible strategy goals (a group of goals) that are detailed and structured. In many cases, these strategy goals are implemented as projects through specific real-world activities. Therefore, programs are essentially detailed business strategies, while individual projects are part of such strategies. Accordingly, programs and projects differ from “tactics,” which are locally applied practical techniques. Programs are a form of business strategy. At the same time, however, it is necessary to note that programs have their own strategies as basic policies required for their implementation. Organizations tend to repeat a variety of strategic processes. Therefore, although organizations may develop strategies through emergent processes, it is difficult to formulate strategies for a single program through emergent or cycle-type processes based on a repeated pattern. Strategies are mostly based on careful consideration of plans; accordingly, in many cases, strategies are formulated through mission profiling in a virtual cycle-type process that repeatedly carries out mission definition and scenario development for different cases.

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Chapter 1

Business Enterprises and Programs

Business Enterprises and Programs

A business enterprise refers to ongoing activities undertaken to achieve specific purposes (e.g., producing products, obtaining profits, or contributing to society). The significance of an enterprise lies in whether it can provide value to its stakeholders; an enterprise that cannot provide any value to its stakeholders has lost its significance. In this chapter, we discuss how the concepts of program and project management can be applied to business enterprises in order to provide an understanding of the foundation of business management as well as to consider how to effectively provide value, which is the raison d’être of business itself. In addition to provision of value, we also discuss corporate social responsibility (CSR) for continued business management, which also closely relates to the raison d’être of business.

1. Business Management Foundation Business management foundation can be broadly characterized as being composed of three elements: business strategies and activities; organizations and processes; and management resources. The performance of these components greatly affects business management. These three components of business management are closely related to each other and the proper function of each component enables a business enterprise to achieve expected results. In this chapter, we provide an overview of each of these elements (see Exhibit 4-1-1).

Exhibit 4-1-1 Components of Business Management Foundation

1-1. Business Strategies and Activities Business strategies are paramount in business management. A business strategy provides a basic plan for maximizing long-term success in business management. Activities of individuals engaged in business are also indispensable to realize business performance. Activities undertaken by a variety of individuals at different organizational levels contribute to creating business achievements. Needless to say, to lead a business enterprise to success, it is important to create an environment that enables the individuals engaged in the enterprise to act 282

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independently based on an adequate understanding of strategies and implementation policies. In reality, however, strategies and activities are often not connected properly, and various obstacles and gaps can be found between them. To properly connect strategies and activities as well as to maximize business achievements, it is necessary to develop a system designed to visualize the strategies themselves and to translate general missions and goals into specific activities. See Chapter 2 for strategy visualization methods.

1-2. Organizations and Processes An organization is a group of individuals who share the same missions, purposes, and goals as well as effectively communicate with one another in collaborative efforts to achieve such missions and goals. In a small organization, a mere sense of mutual cooperation may spontaneously generate collaboration. In organizations in which a large number of individuals work together, it is necessary to determine the division of labor among individuals and overall framework for coordinating different operations, without which collaboration will result not only in inefficiencies but also in confusion. Determining in advance which manager is responsible for giving instructions to which group of individuals, who performs which tasks, and who communicates information to whom is an important element of the foundation of business management. In particular, given that existing organizations may not always be effective in achieving their missions and goals, we must recognize the need to proactively determine organizational structures and functional arrangements. As will be described in detail in Chapter 4, it is necessary to properly understand and define the advantages and disadvantages of different organizational structures as well as to decide whether to choose an organizational structure focused on functions (sales, development, manufacturing, and logistics), one focused on projects, or a mixture of both. In recent years, efforts have been made to develop new products and technologies by creating informal networks rather than formal organizational structures in order to benefit from relationships among individuals and partnerships between companies so as to achieve functional goals.1) Today, it is becoming more and more important to develop an environment that enables not only formal functional organizations but also members of informal communities to act on their own initiative. In addition to re-examining organizational structures and functional arrangements, it is also necessary to clarify which business processes are used to achieve missions and goals. Processes determine the activity style*2 of individuals working in an organization; a sophisticated activity style is more likely to produce sophisticated results. Making activity styles visible to all organization members facilitates further improvements, thereby enabling individuals to contribute to ongoing business achievements. ------------------------------

*2: The style of individual activities in an organization is greatly affected by operational processes, including procedures for work operations and decision making. As is the case in judo and karate, where individuals with high levels of stylistic maturity also have sophisticated skills and are likely to perform well, sophisticated activities make it easier to achieve successful results in organizations.

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Processes can be categorized broadly into operational and management processes. However, these two categories are closely related to each other and are difficult to treat separately. It is necessary to define operational processes for each specific goal to be achieved and to visualize how missions and goals will be achieved through these operational processes while at the same time developing management processes to facilitate the decision making required when problems arise.

[ Network Organizations ] **************************************************** Unlike conventional, hierarchical organizational structures that have divisions of authority, a network organization is a form of organization (or community) in which individual members act on their own initiative to achieve a common purpose as well as interact and collaborate with each other without the restrictions of a hierarchical chain of command. This form of organization is appropriate when collaborating across formal organizational divisions within a company or when forming partnerships across companies or industries. It is distinctly different from a conventional organization having a hierarchical chain of command because in network organizations members act on their own initiative to collaborate with one another. Network organizations need individuals who can act independently as well as accept and benefit from heterogeneous cultures. Conventional hierarchical organization

• Existence of clearly identifiable leaders • Clear hierarchical chain of command • Promotion of homogeneity

Network organization

• Absence of clearly identifiable leaders • Individuals act on their own • Acceptance of heterogeneity

Exhibit 4-1-2 Hierarchical and Network Organizations Networks are formed in various ways: they may be formed only within a company or spread to allied companies and even across different business segments and industries. Networks often spread from inside a company to the outside as the focus of innovation shifts from closed innovation, in which companies work to achieve innovation within, to open innovation, in which they work to achieve innovation using external resources. Type

50 top-selling pharmaceutical products (2011)

Developed within one company

Breakdown of the 50 products by development period 25 old products

25 new products

34%

50%

17%

Purchased through M&As

36%

35%

37%

Partnerships*

30%

15%

46%

* Products developed by companies through collaboration with other companies, including license agreements, joint ventures, and joint development projects (quoted from EvaluatePharma 2010 )

Exhibit 4-1-3 Origins of 50 Top-selling Pharmaceutical Products

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The data actually highlights the importance of networks with external resources in the pharmaceutical industry. Data on 50 top-selling pharmaceutical products indicates that approximately one-third of these products were developed within a single company. However, if we narrow the data set to the 25 most recently developed products, one finds that approximately half (46%) were developed through collaboration among multiple companies, illustrating the importance of using networks.

1-3. Management Resources Business management requires investment of management resources into programs and projects in order to achieve goals. Management resources include not only funds but also human and material resources (materials, equipment, etc.) as well as information, intellectual resources, and infrastructure facilities. How to obtain and use these management resources is of crucial importance when building a business foundation. Today, however, as business environments change at an accelerated pace, it is not realistic for a company to provide all management resources on its own. Therefore, it has become increasingly necessary to carefully evaluate what to develop as internal resources for core business operations and what other resources to obtain from external sources through the informal networks described above. To evaluate which management resources to develop on its own, a company must understand what does and does not provide competitive advantages to its business. What cannot be purchased by money, takes time to create, and can be used in multiple products and areas can serve as a source of advantage.2) Technologies and human resources that play crucial roles in business, the public’s trust, and brand identities are examples of such sources. In personnel management, leaders able to lead value-creating programs and projects to success must be viewed as core human resources, along with individuals with special skills in planning, sales, and development. At the same time, how to train individuals to become such leaders is an important issue in resource management. Meanwhile, obtained resources must be used in a flexible manner. A project originally designed to achieve the mission of a business enterprise may sometimes negatively affect other projects within the same program. This occurs when the project is assigned a specific range of responsibilities and retains all resources required to fulfill such responsibilities, including budgets, personnel, and facilities, thereby preventing the most appropriate resource allocation to achieve the mission. To avoid such a situation, a foundation must be built to manage individual projects to achieve total optimization of the program as a whole.

2. Business Strategies and Programs This section describes in detail how to break down business strategies that provide general business management plans into specific activities from a program perspective in order to show how to build programs designed to create and develop projects from strategies.

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2-1. Translating Business Strategies into Programs Business strategies must provide a general plan regarding how a business enterprise should achieve successful results in the long run; strategies must include specific missions and goals as well as provide an overall framework for achieving results. The units of action chosen to achieve missions and goals do not necessarily need to be fixed-term projects with specific implementation plans. An entity (program) committed to producing projects designed to achieve missions and goals can serve as a unit of action. For example, when given general missions or goals (e.g., developing a new global business that will become profitable within five years), it is necessary to show what approach is needed to achieve such missions and goals. This is followed by breaking down the missions and goals into more specific programs and projects (e.g., developing a global logistics system and an appropriate sales system as well as forming manufacturing and purchasing partnerships to reduce costs). Process of translating business strategies into a program Translating major action items

(1) required to achieve strategies

Achievement of strategies in business area A Program for global manufacturing, procurement, and optimization

(1)

New product launch program Construction of a global sales system New product development project

For North American markets

operation and (3) Routine improvement activities

Ensuring consistency between

Existing product sales promotion program (3)

Translating items required to

(2) achieve program goals into projects

(4)

Project to clarify sales strategies in different countries

(2)

into programs

(4) programs and enhancing coordination

Development in Asia

(5)

Review of the introduction of a company-wide computer system for logistics cost reductions

adjustments in (5) Periodic accordance with companywide activities outside the program

Exhibit 4-1-4 Translation of Business Strategies into a Program The important point is to define units of action with clear responsibilities and authority even at higher program levels and to allow these units to organize necessary projects at their own responsibility. In order to achieve missions and goals, these units of action must sort out all possible problems and carefully review such problems along with measures to deal with them. At the same time, there is also a need to push projects forward to achieve successful results while simultaneously formulating measures to cope with risks and changes in business environments as well as preparing alternatives in case existing projects fail to achieve their goals. It is necessary to recognize the need to change conventional processes (As-Is) through operational reform and to organize programs for change toward the ideal state (To-Be), thereby realizing an environment designed to facilitate decision making and promote reform initiatives. 286

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Many of the conventional processes were developed in the business environments of the past and present; therefore, they have proven track records and are familiar to many people (As-Is). By contrast, many ideal processes (To-Be) defined for the future differ from conventional, familiar routines and require people to change. For this reason, they are likely to cause opposition and are often excluded from consideration. In order to produce new results in programs, it is further necessary to create an environment that allows various sources of opposition to be eliminated and positive action to be taken. Such an environment facilitates achievement of successful results. Programs for achieving missions and goals aimed at by business strategies are broken down into more specific projects. The road map method (see Part 4, Chapter 2) provides a means of visualizing this breakdown process.

2-2. Program Hierarchy Exhibit 4-1-5 presents an example of a program hierarchy. Program

Program

Project

Project

Routine operations

Exhibit 4-1-5 Program Hierarchy Programs with major missions are not always comprised of three levels (strategies, programs, and projects) as shown in the above structural diagram. Programs themselves also sometimes have a multi-tiered structure, with different programs developed for different missions. In addition, program goals are often achieved over the course of a long period of time. In some cases, multiple projects may still be ongoing while operational processes implemented as a result of earlier projects have already commenced regular operation. However, such regular operation must be regarded to be part of an ongoing program implemented to achieve program goals rather than being dismissed as a collection of fixed-term projects. Doing so helps to clarify the purposes and goals of such operations and also facilitates achievement of program performance.

[ Case study: Program axis at L’Oréal ] ******************************************* L’Oréal, a cosmetics manufacturer, has a large number of brands. The company manages these brands by creating different business divisions for different groups of target customers: Maybelline and other brands for general consumers; luxury brands, including Helena Rubinstein; and professional brands, including Kérastase. The company assigns a brand manager to each of its business’s brands in order to promote market development measures and product development projects for that brand. 287

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Technology axis

A controller centrally manages budgets for activities undertaken within a brand to ensure that decisions are made with a view to obtaining value. Under this system, business divisions provide an axis for programs. Meanwhile, when a new technology is developed, L’Oréal implements controls across multiple brands by first selling a set of products that can most easily benefit from the technology under a brand that specializes in such products, after which it uses the technology to develop products for its other brands. Such controls function as programs developed along a technology axis, enabling L’Oréal to maximize its achievements by combining these programs with other programs developed along the division (brand) axis in matrix form. In addition, the company also incorporates characteristic differences among regions, ethnic groups, and cultures into product development. In this manner, L’Oréal manages multiple programs in association with each other.

Brand axis

Exhibit 4-1-6 Different Program Axes at L’Oréal ***********************************************************************

2-3. Business Management Cycles and Program Management Processes In this subsection, we show specific ways to manage programs in a business enterprise and describe practical methods for implementing programs in enterprises organized as going concerns. Program-centered business management requires synchronizing and coordinating business management cycles with program management processes. Designed to maximize program achievements, program management processes are defined based on program risks and the timing of investment decision making. Meanwhile, business management consists of processes executed across different programs and is periodically performed in the cycles of strategic decision making and review by organizations. In order to implement strategies for a business enterprise, a medium-term management plan is usually developed three to five years in advance. Specific activities are defined in such plans, with budgets allocated to the activities for the relevant fiscal years and business plans formulated to put strategies into action. A medium-term management plan (rolling) is revised each year to maintain consistency with annual business plans. As shown in Exhibit 4-1-7, to implement strategies based on a program, the program must be formulated in accordance with policies established in the medium-term management plan so that program activities can be reflected into annual business plans. 288

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Business Enterprises and Programs Business management cycle (Repeated annually)

Formulation of strategies

Formulation of medium-term plan guidelines

Formulation and approval of the business plan

Review of the business plan and approval of the budget

Evaluation of the business plan

Monitoring of program achievements

Drafting of a program (Top down)

Solicitation of program proposals (Bottom up)

Drafting of a program (Bottom up)

Launch of the program

Program planning

Evaluation and review of the program

Implementation/ Control of the program

Realization of program value

Termination of the program

Program management process (Generally implemented over multiple years)

Exhibit 4-1-7 Coordination between a Business Cycle and Program Programs include those developed in a top-down manner as well as those proposed from the bottom up. All programs take concrete form once allocated a budget in the business plan. Approved programs are translated into specific action plans to be implemented. Program progress and value acquisition status are monitored periodically using IT tools. When adjustments are made in business management strategies, practices must be corrected in light of the results achieved as well as changes in external environments. Budget reallocation is particularly important. Program performance and changes in business environments are likely to cause changes in programs’ strategic order of priority, which in turn affects program management as a result of budget adjustments among programs. Thus, strategic adjustments are made to multiple programs when adjusting business management strategies, thereby ensuring healthy coordination between strategies and programs.

3. Program and Project Governance Governance refers to control. In this guidebook, the process of controlling projects to maximize program achievements is called “project governance.” Similarly, activities undertaken to control the fundamental conditions of programs themselves are called “program governance.”

3-1. Program Governance To realize effective program governance, one must confirm the degree of achievement of missions and goals agreed on with higher-level decision makers and make adjustments, if needed, beyond the control of program personnel. Program governance must be implemented from a business perspective under the responsibility of program owners. Program governance includes the following operations. 289

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Resolving any conflicts arising between programs Revising overall business strategies when it has become difficult for programs to achieve their general business missions Modifying missions in response to revisions made to overall strategies as a result of changes in business environments

3-2. Project Governance Effective project governance requires program personnel to implement a variety of governance measures depending on projects’ circumstances, since projects are the elements of a program carried out to achieve a program’s overall mission. More specifically, program personnel must not only provide support for projects and make necessary adjustments but also take measures aimed at achieving program objectives, including cancelling or integrating projects and changing project organizations, including leaders, if needed. To this end, it is important to implement a system designed to monitor project status when necessary and to develop performance indicators to periodically gather quantitative data on project performance. More specifically, for project governance portfolio management and other methods are available, which will be described in the next chapter. Effective project governance requires developing an environment that enables projects to achieve successful results; it is also necessary for program personnel to monitor processes that cannot be controlled by project personnel, including relationships with other projects covered by the same program, with a view to implementing any necessary measures. There is a need to make decisions, depending on the circumstances, as to whether to only develop an environment that allows project personnel to act independently to achieve results, or whether to allow program personnel to more actively intervene in projects. Governance over projects covered by the same program is usually implemented under the responsibility of program managers. However, in addition to program managers, program owners may also participate in program governance if an entire organization is in charge of project governance, including multiple programs. Intervention in project management includes the following operations. Enhancing resources and re-scheduling plans when a project may not be completed by the scheduled deadline or may not achieve the expected results Cancelling a project or making necessary adjustments when there is a gap between the requested results and those the project aims to achieve due to changes in the business environment Making changes in project organizations to solve problems resulting from mistakes in leader selection Resolving conflicts between different projects and revising overall schedules according to circumstances Reallocating project budgets that have not been executed as scheduled to other projects

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These operations are performed to control the components of the aforementioned foundation of business management and to make necessary adjustments according to circumstances.

4. CSR and Programs/Projects Corporate Social Responsibility (CSR) refers to companies’ social responsibility. This concept was developed based on the idea that in order to realize a sustainable society, all entities, including profit and non-profit organizations in both the public and private sectors, should assume responsibility not only for the economy but also for social and environmental issues.

4-1. Importance of CSR in Projects Before the ISO announced new CSR standards on November 1, 2010, there were no clear rules about CSR, and individual companies had developed different guidelines. The new standards announced by the ISO were subsequently discussed at international conferences by major stakeholders with different backgrounds (consumers, governments, industries, labor representatives, NGOs, academic and research organizations, etc.) from a wide variety of nations, including both developed and developing countries, and ISO 26000 was finally issued to provide international standards. These standards are not management standards that must be verified by certification, but are merely intended to provide guidance.3) However, they are expected to serve in the future as a globally shared text that provides guidelines for various organizations around the world in fulfilling their social responsibility.4) ISO 26000 presents the following seven core subjects as basic issues related to organizations’ social responsibility. (1) (2) (3) (4) (5) (6) (7)

Organizational governance Human rights Labor practices The environment Fair operating practices Consumer issues Community involvement and development

Further, the following seven principles are defined as the key principles of social responsibility.5) (1) (2) (3) (4) (5) (6) (7)

Accountability Transparency Ethical behavior Respect for stakeholder interests Respect for the rule of law Respect for international norms of behavior Respect for human rights

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Companies are expected to contribute to society’s sustainability, while projects are an indispensable part of corporate activities. Therefore, company projects must be carried out in compliance with these CSR principles. Accordingly, companies must consider CSR to be their corporate mission and implement governance to ensure fulfillment of CSR in their programs.

4-2. Effects of CSR on Projects Today, CSR exercises powerful effects on project activities. However, its effects vary depending on companies’ circumstances; there is no established pattern of effects. We provide an overview of effects through case studies on a project sponsor company and project contractor company.

[ Case study : Project Sponsor (Shell Group) ]

************************

Shell’s business principles are focused on providing services “more efficiently,” “more effectively,” “more responsibly,” and “more profitably.” Within this framework, as a global corporation the company promotes technological transfer while paying respect to the interests of individual nations. Shell also places the highest priority on its public reputation, developing and implementing projects in accordance with the following standards. Economic performance of projects Compliance with all related laws and regulations Clear compliance with fair competition rules Business ethics Non-involvement in politics Highest respect for health, safety, and the environment (HSE) Cooperation with local communities Open communication Shell has the Shell Project Academy, where education on these policies is provided as an important part of the curriculum. ***************************************************************************

[ Case study: Contractor/Supplier (Emerson Process Management) ]

***

Emerson is highly recognized as a major manufacturer of process control and instrumentation systems not only because of its technologies and project management capabilities, but also because of the following business ethics program that ensures fair business practices and fair trading, which are an integral part of CSR. The company obliges its employees to undergo collective training on how to faithfully implement its ethics program. In addition, Emerson provides the Ethics Online website and obliges its agencies to take lessons in ethics. The company also awards commendations to employees who have contributed greatly to the implementation of this business ethics program.

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Make efforts to create opportunities for all companies that have transactions with Emerson (including customers) to obtain profits. Do not request that subcontractors participate in bidding when they have no possibility of winning the bid. Do not submit a bid that is unlikely to meet a customer’s requirements. Do not promise delivery by a deadline you cannot meet. Publicly disclose standards for selecting suppliers and comply with those standards. Once a bid has been submitted, do not continue sales activities for that project. Remove brokers (agents) who claim to have influence over customers. Comply with agreements made after submitting bidding materials. Pursue fair contract terms. Work in collaboration with business partners to solve problems. Remunerate employees who have acted in accordance with high ethical standards. Follow these policies with zero tolerance for violations (no exceptions). *****************************************************************************

4-3. CSV for New Value Creation In 2006, Michael E. Porter of Harvard University and his research partner Mark R. Kramer proposed the concept of “Creating Shared Value” (CSV) as a strategic concept to further expand the concept of CSR.6) 7) CSV maintains that, as CSR is adopted by an increasing number of companies as an important principle of corporate activities, actively and strategically incorporating CSR activities into business will increase corporate profits and competitiveness as well as resolve a variety of social issues, thereby bringing benefits to society. Porter called such activities “strategic CSR.” Even today, many companies cannot shake off the idea that CSR is a cost. By contrast, Porter maintains that CSR is a prior investment that brings benefits to companies. As examples of products and services that resolve social issues, Porter cites Toyota’s Prius and General Electric’s (GE’s) ecomagination initiative.8) As a hybrid car that uses a gasoline engine and an electric motor, the Prius became one of Japan’s bestselling automobile models in 2013. At the same time, it achieved cost efficiency unattainable by vehicles with gasoline engines, thereby reducing carbon dioxide emissions and contributing to cost reductions on a society-wide scale by reducing fuel consumption. The term “ecomagination” was coined by combining “eco” with “imagination.” GE’s ecomagination initiative aims to construct a 21st-century style, next-generation smart grid by gathering innovative ideas in a global, open environment with a view to accelerating the creation of smart grids that are cleaner, more efficient, and economically more appropriate through the application of smart-grid technology. These examples show relationships between society and companies that produce products and services. There are also examples of companies contributing to society by improving their competitiveness and resolving social issues through efforts to optimize a value chain composed of multiple companies. Examples include companies focused on business development in specific regions that are working to improve the socioeconomic status of local communities by developing human resources, enhancing corporate 293

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competitiveness, and improving social infrastructures in the targeted regions.

4-4. Corporate Value Assessment Based on ESG Standards The major objective to achieve by programs and projects is to increase the corporate value of the collective organizations implementing such programs and projects. The Financial Instruments and Exchange Act obliges listed companies to periodically release financial statements that include accounting information, which enables their corporate value to be assessed from a financial perspective. In recent years, in addition to financial information, many companies also release non-financial information on a wide range of corporate citizenship activities in documents called environmental/CSR reports. This is because the idea that companies must take responsibility for their activities toward stakeholders (including customers, end-consumers, employees, and local communities) has become widely accepted and a lack of concern for social justice, ethics, and the environment may jeopardize companies’ very existence. Therefore, it is necessary to always be aware of how companies look in the eyes of the public at large, even when implementing in-house programs and projects. As the economy shifts from indirect financing to direct financing in Japan as well as in Europe and the United States, it is becoming ever more important to develop public relations activities so as to help investors properly assess companies’ corporate values. In recent years, companies’ corporate values are assessed based not only on financial information, but also above all on non-financial information. Non-financial information includes, in addition to information on ESG (Environmental, Social, and Governance) risks related to individual companies, information on the negative risk of being hit by natural disasters or becoming involved in international conflicts, as well as positive information about epoch-making inventions and intellectual property assessments. Financial information represents corporate value resulting from corporate activities carried out from the past to the present. Non-financial information, by contrast, represents the future corporate value of such corporate activities. Whether companies are making appropriate efforts to resolve issues described in their reports on financial and non-financial information has become important in evaluating their corporate value. Investors make investments based on assessments of information on a wide range of corporate activities. For this reason, investment is believed to contribute to resolving issues related to the global environment and society as well as to creating a sustainable society. In social responsibility investments, corporate value is evaluated from a sustainability perspective as well as a profit perspective, with emphasis placed on achieving harmony between the environment and society as well as sustained corporate growth.

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[ References ] 1) Hiroyuki Itami and Tadao Kagono. (1989). Zeminaaru keieigaku nyuumon. [Introductory seminar on business administration]. Tokyo, Japan: Nikkei Inc.. 2) Larry Huston and Nabil Sakkab. (2006). P&G: Konekuto ando diberopu senryaku. [Connect and develop: inside procter & gamble’s new model for innovation (Japanese translation)]. Tokyo, Japan: DIAMOND, Inc.. 3) Kenichi Kumagai, Ugokidasu ISO2600.[ ISO 26000 in action, Japan productivity center productivity labor information center. 4) Japanese National Committee for ISO Working Group on Social Responsibility website (http://iso26000.jsa.or.jp/contents/), (2013).Yasashii shakaiteki sekinin -ISO2600 to chuushoukigyou no jirei -. [Introduction to corporate social responsibility: case studies on ISO 26000 and SMEs (commentary)] Tokyo, Japan 5) Michael E. Porter. (2008). Senryaku to shakai. [Strategy and society]. Tokyo, Japan: Harvard Business Review (Japanese translation), DIAMOND, Inc.. 6) Michael E. Porter and Mark R. Kramer, Strategy and Society. (2006) [The link between competitive advance and corporate social responsibility]. HBR. 7) Michael E. Porter and Mark R. Kramer. (2011). [Creating shared value]. HRB. 8) Ecomagination, http://www.ge.com/jp/eco_challenge/, (2014) 9) http://www.saa.or.jp/acount/account/esg.html. (2014). Kigyou bunsekiniokeru ESG (kankyou, shakai, gabanansu) yooin no kenkyuu.[The securities analysts association of Japan, “Study on ESG (environment, society, and governance) factors in the analysis of corporate value]. Tokyo, Japan: .Koueki Shadan Houjin Anarisuto Kyoukai 10 ) http://www.keizaireport.com/sp/socialinvestment.html. (2013). Shakaiteki sekinin toushi: SRI. [Social Responsibility Investment: SRI]. Tokyo, Japan.

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Chapter 2

Program strategy method

1. Need for Program Strategy Method 1-1.Challenge of Implementing Strategy Ideally, once a strategy is established in an organization, it should be carried out certainly. However, this is not always the case. It is more realistic to suppose that a gap exists between planning and implementation, and smooth transition to strategy implementation cannot be realized without bridging the gap in one way or another. To actually implement the strategy, all concerned personnel must understand the significance of it in relation with his/her work, and a mechanism must be devised to align all activities toward the direction indicated by the strategy.

1-2.Need for Tools in the Strategy Implementation Stages An important prerequisite for the implementation of the strategy is visualization of it for those concerned. This encourages concerned personnel to communicate with each other, promoting dissemination of the meaning of the strategy throughout the organization. The lack of communication may lead to fatal consequences: many of those concerned will act without understanding it, or interpret it in their own way within their limited range of knowledge. Personnel of all levels within the organization should correctly understand the strategy for secure implementation of it. For this to happen, visualization of the abstract entity, the strategy, is required down to the level easily accessible by every concerned personnel, so that they can share the concept through discussion. Visualization enables all those concerned to see the same entity, which helps reveal perception gaps and misconceptions. The efforts to correct these misunderstandings brings various vectors within the organization into alignment. Visualization is all the more necessary because the strategy is an abstract and intangible entity. Clever application of strategic planning tools renders visualization easier, and makes the discussions more effective 1).

2. Methods for Implementing Strategy 2-1. Strategy Planning Using a Road Map A strategy is the fundamental plan created to achieve business objectives, and it determines a course of actions to lead the organization to continued success. To realize the strategy as an organization, concrete actions must be clarified. The first step is to draw up a future scenario for success, and concrete actions are devised for implementation along the lines of the scenario. The scenario should not be built based on the current situation. Rather, it should envisage what the business is supposed to be in the future and define the action to be taken today for the realization of the ideal. The road map approach provides an appropriate methodology to render the strategy into a chronological series of actions, giving an overall view of the paths into the ideal future.

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2-1-1. Definition of Road Map

Exhibit 4-2-1

Product×Customer Road Map

The road map represents a planning and communication tool used to organize the multiple steps and measures required to attain the strategic goal in chronological order, along with the information indicating the mutual relationship between each step and measure. For drawing up a business strategy, the following three types of road maps prove effective for strategy building. (1) Customer road map: This road map defines the timing to make approaches to the company’s customers – existing customers, as well as the future customers targeted in the business strategy – in chronological order. It includes planned revenue (sales, profit) as well. (See Exhibit 4-2-1) (2) Product road map: This road map presents the release schedule of the company’s products to market in chronological order, accompanied by the development cost for each product. (See Exhibit 4-2-2)

Exhibit 4-2-2: Product road map (3) Technology road map: This road map presents the release schedule of the in-house developed – internal and external release - in chronological order, accompanied by the cost development required. (See Exhibit 4-2-3) 297

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Visual presentation of the strategy by means of a roadmap helps prevent the occurrence of discrepancies between product and elemental technology development, and between the sales and development sections. This method makes is possible to bring various vectors in the organization into an alignment toward realization of the strategic target.

Technology development

Product development

Year

X

X+1

Product PJ-D

X+2

Technical development A Technical development B Technical development C

X+4 Company X X1Model

Company X XModel

Product PJ-E Product PJ-F

X+3

Company Y TModel

Company F ZModel

Company F Z1Model

Company F Z2Model

TypeA0

Company F Z3Model

TypeA1

TypeB2

TypeB1 TypeC1

TytpeC3

TypeC2

Exhibit 4-2-3

Product roadmap × Technology roadmap

Which roadmap has the precedence in strategy planning varies from one enterprise to another: select the optimum roadmap for the enterprise – in view of the line of products and business characteristics – to build the strategy. The following are illustrative cases in the automobile and hi-tech industries, and in the pharmaceutical industry.

[ Example: Automobile and Hi-tech Industries ] ******************************* In an environment characterized by ample product lineups and fierce competition between companies, the development of new products that are not only of high value but also meet market needs are strongly desired with higher efficiency. Properly coordinated use of a product roadmap and technology roadmap can make such a development project – new in the market and meets the needs - proceed easier. (1) Application to enhance development efficiency As the R&D expenditure and development resources are limited for any enterprise, strategic and efficient resource allocation is a must. On the other hand, amid the general trend to shift to high-mix low-volume manufacturing to meet the variety of customer needs, reduction of development cost per specific product has become increasingly important to maintain competitiveness for survival. The market effect gained by putting new products to market is not enough anymore: high development efficiency is the key to competitiveness. Under such circumstances, implementing a project on a product by product basis is deemed to be inappropriate in terms of efficiency, cost, and time. This scheme provides little possibility for successful business. A business scenario that takes development efficiency and profitability simultaneously into consideration is of service to maximize the outcome of the business. For this 298

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purpose, combined use of product and customer roadmaps proves effective: the former draw a road map evolved from a basic product to its more sophisticated variants, and the latter navigates the way to differentiate the products for marketing. Effective multi-project development planning, while ensuring consistency between the two, is highly desired. One of enabling factors for this scheme includes modularization of the product’s building blocks – for common use of the blocks. Note, however, excessive move to common parts utilization would lead to incapability to meet customer needs, and, on the other hand, too many customizations would lead to the generation of variety of similar, but not identical, products. This situation almost cuts out the effect expected from common use of modularized elements. An attempt for standardization and modularization should include careful considerations on the company’s strong/weak points and market trends, before implementing the project. Some components deserves focus for in-house development, and some suit general-purpose design rather than seeking differentiation. Well-informed design of modular structure can have a huge effect on business results. (2) Application to the development of high-value added products Amid rapid growth of new technologies in recent years, it is often the case that a need arises to adopt a newly established technology to the product in the middle of development. Only timely introduction of notable new technology may enhance added-value and achieve the compatibility to market needs, thus ensuring advancement of the product series into the future. Well-informed and well-timed introduction of new technology to the product lineup (addressing the trend of time) should be incorporated into the product roadmap and technology roadmap. Otherwise, the development project as a whole will have improper scheduling for the development of new technology and product releases. When will a new technology be tested on what product? What product will incorporate the tested technology on a full scale? These questions should be contemplated strategically from the viewpoint of putting attractive products on the market and prevailing in the fierce competition. To continue to release competitive products, uninterrupted close watch on the trend of technology is essential. Based on the information, a roadmap should be drawn up for well-timed in-house development of a new technology. The technical roadmap helps the personnel of the product planning section to know when the company’s new technology will become available, enabling them to decide the product for the implementation of the technology in a planned way.

[Example: Pharmaceutical Industry]

*****************************************

The pharmaceutical sector is characterized by the use of life-cycle management to maximize product value and to maintain revenue through elongation efforts. In such a sector, the use of a product roadmap proves very effective. Fill the target disease and launch*3, and the timed schedule for upgrading the product’s value (value maximization = longer product life) in the product roadmap for use in actual implementation of the activities. Effective measures to maximize sales and maintain competitiveness include: scope extension of therapeutic objectives (e.g. addition of drug 299

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efficacy), change of medicine shape (e.g. from powder to capsule), planned alteration of dose and daily frequency. Drawing up product roadmaps on a business domain basis (for example, cancer, diabetes, and other therapeutic areas) can provide a panoramic view of the product lines, making review of product mix verification easier. It helps grasp the whole status of product development, enabling to understand the timing to bring a new product to the market. It also enables to verify the current product mix, and make a decision to acquire another company’s product if the product mix proves to lack something.

2-2. Portfolio Management Portfolio management is used by a variety of sectors as a strategy planning and control tool. The Product Portfolio Management (PPM) scheme developed by Boston Consulting Group is used for strategy planning of business and products: the 2 elements are normally called Business Portfolio Management and Product Portfolio Management. Product Portfolio Management is a tool designed for a company with multiple businesses and product lines to realize long-term growth. It aims at devising a well-balanced investment plan for limited financial resources from the viewpoint of cash flow analysis - where considerations are paid to such examinations as the lifecycle of the product and market, identification of profitable business/products, and selection of business/products to invest.

Exhibit 4-2-4

Product portfolio (an example)

Product portfolio is represented as a four-quadrant matrix – “growth rate of the market” as the vertical axis, and “relative market share” as the horizontal axis – wherein each business is plotted as a scaled circle. The essence of portfolio management is risk minimization and value maximization. As such, it aims at maximizing risk and maximizing value of the portfolio as a whole by controlling the combination and balance of the businesses/products to invest. ------------------------------

*3 Means to place a new product/service on the market.

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The program/project portfolio management is a tool to realize business strategy by controlling the selection, prioritization, resource allocation, and timing of implementation of a program/project, with an aim to maximize its total value and minimizing its total risk. The program/project portfolio has been utilized in a variety of sectors as a tool to establish strategy – e.g. strategic planning and control - although each sector has its own evaluation on its efficacy. This section gives an account on effective utilization of the portfolio approach to a project and program. 2-2-1. Utilization of Portfolio Once a strategy is devised, the limited resources of the company (personnel, material, financial) must be allocated appropriately in line with the strategy. The portfolio analysis proves to be an effective tool to verify the current situation of the strategy implementation, by applying various evaluation indexes to determine what the company should do next – selecting a program/project to focus on – and thus achieve optimum resource allocation accordingly. This analysis usually uses a snap-shot portfolio at the time when the strategy planning took place. Note that the portfolio analysis does not fit certain sectors well. The pharmaceutical sector is one of the best fits for this analysis because it provides suitable elements for portfolio building – business areas, developed products, lifecycle phases of the products, and investment efficiency. On the other hand, the sectors involving products, technology, and customers (typically automotive and hi-tech) generally display affinity to the roadmap rather than to the portfolio approach. The roadmap approach enables devising and evaluating strategy in terms of a time axis, revealing more clearly the internal relationships of a program/project. 2-2-2. Items for Portfolio Evaluation Portfolio analysis underlines the relative values and risks of each program and project. There is no off-the-shelf evaluation index: the user must select evaluation items suitable for a particular sector and enterprise for construction of an objective unit of measurement. Example of evaluation index Compatibility with, and contribution to the strategy (level of matching of the project to the strategy) Market size (sales scale, impact to the market) Market competitiveness (competing power of the product in the market) Financial reward (cash flow produced by the project) Technological innovation (originality in technological aspect, contribution to the enterprise) Success probability (how likely it is the project will succeed) Development investment (expenditure required to complete the project) Development time (period required to complete the project) Marketing and other business deployment cost Receptivity of the environment and society (Whether or not it generates a negative impact on environment and society) 301

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Contribution to improve in-house business process Contributions from the viewpoint of human resources development Contributions to upgrade corporate brand 2-2-3. Implementation of Portfolio In portfolio analysis, assessment using a variety of evaluation indexes is not linked directly to the conclusion. It is recommended to hold a series of discussions in reference to the snapshot portfolio taken at a certain point in time, before reaching the conclusion. For example, a project with very high expected yield may not fit anywhere into the roadmap, or, may have poor compatibility with the company’s strategy. These may not deserve an investment decision (or, to the contrary, may deserve investment for a pro-tempore cashflow boost). A project with apparently low expected yield and high risk may deserve proactive investment if it has, upon completion, a large positive ripple effect to other projects.

Exhibit 4-2-5

Project portfolio (phase-wise pipeline)

2-2-4. Challenges Faced by Enterprises for Portfolio Implementation Many enterprises have an intention to implement a portfolio, but they have a common challenge of how to gather usable information for making judgments. To gather information from a new or an existing project, provision of information from an external partner enterprise, marketing section, and on-site sources plays an essential role. For actual implementation of information gathering, the type of information must be identified, and an information flow needs to be defined for facilitating the acquisition of information. Gathering of the latest information should not be an extra heavy load for on-site personnel: building of a mechanism to facilitate information gathering – as a simple extension of routine jobs – is highly desirable.

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2-2-5. Portfolio Execution Each organization should establish a clear schedule to perform portfolio analysis. Typical timings include: regular (e.g. quarterly, bi-annual, annual), at the receipt of a new project order (or, at the initiation), and, when a drastic change occurs to the ongoing project. When the circumstance surrounding the project changes significantly, review its effect on the strategy to point out what has deviated from the original plan. Then, take a current snapshot of the portfolio for review analysis, and visualize the repercussions caused by the change. Effective utilization of portfolio is ensured by positioning it as a visualization tool to grasp how the situation has changed, under the understanding that the circumstances will always change.

2-3. Other Strategy Planning Tools The strategy map of the BSC framework represents a story compiled as a chart. In this map, the strategy as a whole is reviewed from four different perspectives (finance, customer, business process, learning and growth). This technique is characterized by the inclusion of non-financial viewpoints, and has proved effective as a strategy planning and communication tool, as it is suited to grasp a large picture. The large picture it presents is beneficial especially for the employees, as it makes it easier to understand such questions as: “To where is the company moving?” and “What is my position and role as a part of the whole, and what contribution is expected of me?”. As a result, this technique can also serve as a “consensus building tool” and “employee’s motivation upgrading tool”, and similar effects as the roadmaps described above are expected. On the other hand, as the strategy map does not contain a time axis, it cannot directly provide the view of the strategy scenario from the viewpoint of time.2) The strategy canvas (Part 2 - Chapter 2) also provides utility as a strategy planning and communication tool. The strategy canvas represents a graph drawn with two axes: “value delivered to the customer” as the horizontal axis, and “scale of the merit enjoyed by the customer” as the vertical axis. The two business value curves drawn on the canvas – one for the partner enterprise, and one for the enterprise– make it possible to signify the points for beneficial differentiation for the company. It provides an easy to understand picture for common understanding of the strategy, from which the focal points for differentiation - value items to be enhanced for the customer - can be read.3) There are additional strategy planning techniques and tools available for use. An adequate technique or tool should be selected in view of the situation your company is placed.

3. Customer Relation Strategy 3-1.The need for Customer Relation Strategy The customer relation strategy refers to a technique to enhance a customer’s business results by proposing a solution it needs to overcome the problems it currently faces. To deliver such a solution, the knowledge of the customer’s business agenda plays a critical role, which translates into the need for good customer relation building. 303

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Building a customer relation, and enhancing it constantly, is directly linked with business success, especially for the enterprises whose business basis depends on the provision of services – typically, IT and the consulting sector. Enterprises who proactively and systematically seek good customer relations building can have a much larger opportunity to gain business than others. Through a carefully planned process of relationship building with a customer, hidden problems (an event the customer is unaware of) often come to light. Analysis of these problems and proposal of solutions to increase the company value will lead to business acceptance. Because this technique involves a presentation of problems even the customer has been unaware of, accompanied by a proposal of solution, the tendering is not usually caught in a fierce competition (proposal, price), thus leading to sustainable acquisitions of business. From the viewpoint of the customer, a third party that can point out hidden problems and propose a solution represents a helpful advisor. In addition, the in-depth knowledge of the business background and situation surrounding the customer, already in the hand of the company, will enable quick introduction of the solution at a lower initial cost. Once the company gains trust from the customer, it will be able to receive business sustainably. Such a stable series of transaction leads to reduction of sales cost, as well as acquisitions of business without stiff price discounts. Conscientious efforts to build a favorable relation with a customer can create a sustainable win-win relationship.

Exhibit 4-2-6

Steps for customer relation building

For building strategic relations and promoting trust in an organized manner, an in-house liaison officer is arranged to maintain good contact with each customer/stakeholder.

3-1-1. Drawing up a Customer Profile Building a profile for each customer provides an in-depth understanding of the customer. The profiling includes such aspects as: business environment of the customer, direction of the business, visible problems, and even the hidden agenda (yet unknown to the customer) that only comes to light through investigation. Make an inventory of various information regarding the customer, and compile a list for sharing among those concerned. 304

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3-1-2. Role Definition for Dealing with a Customer Identify the stakeholders in the customer’s company, and make their personal profiles. It is important to grasp if the key stakeholders feel positive or negative to your company, and what impression they have toward the other competitors. Gather relationship information about them – power balance, who has the executive decision – and compile the information as a list. In reference to this, decide who in your company is the best counterpart for each stakeholder, and in what frequency he/she should approach. Each counterpart should proactively approach the customer to keep the line alive. 3-1-3. Drawing up an Activity Plan Define the objectives regarding the customer for several years such as this year, next year, the year after next. In addition, break down the objectives for this year into specific activities and goals. Arrange them in chronological order for sharing. Such planning should not be compiled by a sales personnel or a person in charge of customer relations, rather, all concerned members should get together to build the plan using all the information available. 3-1-4. Execute and Review the Activities The action plan must be reviewed regularly and modified as needed during its execution based on the information gathered thorough contacts with the customer. When information of great importance which may affect your company’s plan, readjustment of the action plan itself (or, even a remake from scratch) may become necessary. Well-informed coordination within the company is important to perform consistent activities. To achieve this, setting up a venue for information sharing is highly recommended to continue the activities leveraging the latest common information. Such activities – well-planned, consistent within the organization – facilitate capturing the confidence of the customer, which in turn leads to gaining business contracts steadily.

3-2.Application to Project Activity The business development scheme that involves customer relations, as described above, may be applicable not only to organized activities, but also to project activities. Active implementation of project activities can help a project manager (or a leader, personnel in charge) to gain and cement the confidence of the customer, which may lead to the reception of a new project. From another point of view, he/she is given, through project activities, an opportunity to take a continuous look into the internal issues of the customer. This knowledge enables him/her to make a new proposal to the customer, which may lead to the creation of a new project. Through the project activities, the manager gains opportunities to edge into the customer’s organization, enabling him/her to have a ringside view of the customer’s business process. He/she can take advantage of the knowledge to devise the next proposal. As described above, even the day-to-day activities of a customer-linked project can provide plenty of opportunities for business creation.

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Building friendly relations is of importance not only for customers, but also for the vendors who provide products and services to you. A very friendly relationship with the vendor is closely linked with the stable provision of competitive products and services, giving you a competitive edge over other companies.

4. Process of Decision Making 4-1. Phases and Pattern of Decision Making When we plan and execute a program or project, we have to make a decision in many phases. In this section, we first analyze the patterns of making decisions and give an overview of major theories on decision making. Then, we discuss the characteristics of indecisive organizations, and, based on the discussion, explain the method leading to an appropriate strategic decision and its effect.

Exhibit 4-2-7

Patterns of decision making

4-1-1. Regular Decision Makings and an Ad-hoc Decision Making In an organization, decisions have to be made regularly. Collegial systems such as boards of directors and managers conferences regularly convene and make official decisions that direct the operation of the organization. These cases represent active decision making for given problems. From time to time, a decision has to be made in an ad-hoc manner. This is passive and interim decision making for a problem that demands expediency. Sometimes, a conference becomes the scene of a dramatic decision. An ad-hoc decision is often made under unconventional conditions such as: multiple plans from which a selection must be made, uncertainty of given information, need for expertise, serious consequences for a failed decision, and setting of a deadline. 4-1-2. Individual Decision Making and Collective Decision Making Many of the regular decision making instances are consensual: typically those made at a general meeting of stockholders. Normally, the final responsibility rests with the host –that is the person of the highest rank. In the ad-hoc cases, the manager in charge of the scope of business often makes the executive decision and assumes the responsibility.

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4-1-3. Authority Levels and Strategy of a Decision Making Normally, the scope of authority and contents of decision making depends on the job title and job category. A person in a higher level job is required to make a decision on the matters of higher significance. For example, a project manager is empowered to make a decision on the day-to-day operations of the project, but the executive decision to select or abandon the project itself rests with the program manager. Many cases of decision making are related to formulaic operational problems, but some of them occasionally demand determination. Strategic and no-turning-back issues occasionally arise such as: organizational change to tackle a new challenge, abandonment of some asset (selection and concentration of resources), and high-risk high-return investments. Thus, the gravity of decision making depends on the strategic nature of the issue, as well as on the leader’s job title. 4-1-4. The point of Decision: Trade-off and Uncertainty Multiple options are always an issue in the decision making process. Even a simple single issue problem provides two options –i.e. go or no-go – for comparative examination. Multiple evaluation measures normally pertain to a comparison. When you decide which car to buy, you make a final selection after you have studied various aspects such as price, performance, and mileage. By the same token, a decision making process requires comprehensive assessment of multidimensional evaluation measures. The reasons that call for a decision are largely classified into two categories. The first category involves a trade-off relationship among the evaluation measures. For example, plan A is characterized by low cost and long delivery, and B by high cost and short delivery. The second category involves uncertainty in each option. Uncertainty arises in many aspect of an issue: “Why the failure happened in the first place?”, “What is happening inside the equipment?”, “In what direction does currency rates of this country move?”, and so on. The limited ability of our knowledge and forecasts give rise to such uncertainty, and this is where decision making goes into action to fill the gap.

4-2. Mechanism and Procedure to Make a Decision 4-2-1. Who has the Authority and Who Assumes Responsibility In a program and project, the scope of decision making authority is normally assigned depending on the job title (role) in the organization. The authority may be delegated to a lower rank in the hierarchy depending on the nature of the business and corporate culture. It is generally recognized that the delegation of authority rarely occurs in western enterprises where the top-down scheme is predominant. In contrast, the bottom-up scheme is often seen in traditional Japanese enterprises, where the on-site personnel hold relatively strong power. The top-down scheme has the merit of quick strategic decision, and requires a leader with high information processing ability because detailed information is reported to him. The bottom-up scheme has the merit of quick solution of on-site problems, but is generally slow to change strategy in response to an altered environment. Japanese management in recent years is often called middle up and down, which, if managed cleverly, may combine the merits of both styles. 307

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The agent of decision making (individual or collegial system) is determined on a case-by-case basis. Decision making by an individual is generally quicker, but collective discussion to reach a decision may produce better results, especially in unconventional cases.

[ Example: A large Pharmaceutical Company ] ***************************** A large pharmaceutical company convenes a product strategy session gathering representatives from six sections – sales, production, development, research, affiliation, and intellectual property – to summarize relevant information from all these sections. The direction of product development is determined through comprehensive and multifaceted discussions in this session. This cross-functional problem solving approach is said to be one of the successful decision making mechanisms in the pharmaceutical industry.

Marketing Manufa -cturing

Patent

Decision making committee Develop -ment

Alliance

Research

Exhibit 4-2-8

Decision making system in a large pharmaceutical company (product development project)

**************************************************************** 4-2-2. Timing of Decision Making Normally, the regular, active sessions provide the basis of the decision making mechanism, augmented by the occasional ad-hoc sessions. In some cases, several gates are inserted in the project schedule plan to give an opportunity for a Go/Stop decision. Similar scheduling should also be made for the ad-hoc decision making process, specifying at what level of maturity a report, consultation, and decision is to be made; in case of continued open discussion longer than a given number of days, the authority to decide must be delegated to an upper layer. 308

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4-2-3. Criteria of Decision Making As described above, there are normally multiple evaluation measures for decision making. In many cases, cost considerations play a central role, with the addition of a variety of other factors such as technical (performance, quality), time (delivery), non-monetary (human resources, future prospective), risk (safety, uncertainty) , and others. In case the evaluation measures have trade-off relationships with each other, prioritization - from the viewpoint of achieving the objective - may become necessary. In the case of the Apollo project, the objective was to achieve “a manned lunar landing within ten years”. The order of priority should naturally be as follows: safety > deadline > cost. Several methods are available for prioritization of evaluation measures: AHP (Analytic Hierarchy Processes) defines priority on a case-by-case basis and evaluates each option using semi-quantitative calculations; Bayesian decision-making technique apply subjective probability under an uncertain environment. 4-2-4. Decision Making Process Decision making steps for two approaches – active and problem-driven – are summarized in Exhibit 4-2-9. The former approach is generally allowed to use sufficient time and cost. The latter often has to reach conclusion within a limited time, under limited cost. In each case, the most important steps include items like “design of implementation tool” and “search for solution”. These deserve the focused discussion with longest time and largest resource. Discussion items of importance also include: results simulation based on the possible options, scenario creation, and sensitivity analysis on important factors (price, risk, etc.). Types of DSS (decision support system) are now being contemplated which perform “what-if” simulation on the spot. However, the final decision naturally rests with a person. [Active decision making process] [Problem-driven decision making process] Business strategy

Cause analysis

Future forecast (making hypothesis)

Solution search

Objective setting

Evaluation of options

Design of implementation method (strategy)

Selection

Evaluation of options

Execution

Selection

Evaluation of results

Execution Evaluation of results

Exhibit 4-2-9

Decision making process 309

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[ For wise Decision Making ]

****************************************************

Those concerned with projects often say: “Risk of decision is better than the risk of non-decision”. “A person of decision is a good superior” is another saying. In other words, making decision at an optimum timing is such a difficult thing. To cultivate an ability to make a consistent and solid decision, a procedure for decision making should be established. This does not mean to call for an individual to possess a transcendental bravery or discerning power. It rather aims at bringing out collective wisdom from a group. ***************************************************************************

5. Open Innovation Amid the shifting trends of source of competitiveness to open innovation, the demand to realize innovation through programs and projects are rising. Essential factors to realize an innovation through program include a correct understanding of the nature of the innovation, and embedding the activities for the realization of the innovation in the program itself. Open innovation represents a novel paradigm among the ways leading to realize an innovation. Correct understanding of this concept and well-designed embedment in program activities will open up the possibility toward innovation.

5-1. Innovation Model Innovation is a concept first propounded by Joseph Schumpeter, which means to bring forth a novel entity into the world. Depending on the context, an innovation can be classified into three categories.

Exhibit 4-2-10

Types of innovation

The type of innovation a program aims to realize depends on the objective of each program. If we look, for example, at the area of business model innovation, the situation becomes more complex because the program necessarily incorporates elements of product innovation and process innovation. At the same time, from the viewpoint of value proposition, the inclusion of auxiliary elements increases the possibilities of producing a variety of options, further enlarging the opportunity to gain greater innovation-like value.4)

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5-2. Definition of Open Innovation The concept of Open Innovation propounded by Henry Chesbrough (assistant professor, Harvard Business School) in 2003 advocates “creation of values through an organic linkage of in-house and external ideas”5). It represents a new paradigm to realize innovation, and is heteronymous to “Closed Innovation” that indicates all in-house R&D. The major stream of innovation is gradually shifting to open innovation, and the advocates of closed innovation are gradually on the decline. The concept of open innovation should proactively be introduced in the field of program activities for efficient realization of innovation.

Exhibit 4-2-11

Closed innovation and open innovation

The concept of open innovation contains largely opposite flow of information and materials: In-sourcing (inbound) and Out-sourcing (outbound) In-Sourcing In-sourcing represents a “technology innovation open toward the inside” characterized by proactive utilization of external ideas for diversifying the sources of innovation, with a resultant effect of accelerating innovation inside. In concrete terms, in-sourcing includes in-licensing (introduction of external ideas and technologies to develop new products), building comprehensive cooperative relationship with universities, and technology acquisition by means of investment in entrepreneurial ventures. Out-Innovation Out-innovation represents a “technology innovation open to external influences” characterized by proactive and intentional provision of in-house technologies to third parties, aiming at the creation of new markets and enhancing the value of the 311

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technologies. In concrete terms, out-innovation includes licensing unused in-house technologies to third parties to gain profit, and intentionally spinning off a promising technology to a separate company for effective business creation and probing the market. Some companies open some in-house projects to general access, aiming at creation of markets and probing the response from consumers.

5-3. Open Innovation and Collaboration The distance to market poses a major challenge in the way to realization of innovation. The longer the time to market, the lower the success probability of the innovation. In the development process, the most advanced cutting-edge technology often has a long distance to market, because of the low visibility of the market. Identification of suitable complementary technology is not easy. Therefore, the key to successful realization of innovation would be a construction of a framework that can shorten the time to market. “Low visibility market” means a situation in which the developer is at a loss to identify a suitable application of the newly developed technology. “Difficulty in identifying complementary technology” means the situation that looms before the developer when, even if the market has fuzzily come into sight, he/she can have only a vague idea about the challenges that lie ahead before the innovation is brought to market as a complete product or service. Even if the technical challenges to overcome become apparent, it may not be easy to solve them singlehandedly. What is required here is an introduction of complementary ability from a third party and a collaboration-based open innovation framework. Gawer & Cusumano (2002) advocate that the following four elements should be taken into consideration in a product development process6).

Exhibit 4-2-12

Four collaboration elements in product development

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5-4. Platform Strategy in Open Innovation The paradigm of innovation for products development has been rapidly shifting, along with the focus of value creation, from the conventional main stream of vertical integration (integral type) to horizontal (international) division of labor (modular type). Amid the shifting trend, the need for strategic perspective on the infrastructure has been increasing. The infrastructure aids efficient construction of innovation in an open innovation environment. The concept of mix-and-match – optimum combination of in-house and external innovation elements - is increasingly gaining ground as an important strategic challenge in open innovation. In other words, the methods that address the following needs are of critical importance: a method to accelerate technology development while minimizing uncertainty; a method to minimize the time to market that is flexible enough to accommodate new development; and a method to deliver unused in-house technology to external third parties for maximizing innovation efficiency as a whole. Today, various products from a variety of vendors have close interdependency and capacity for innovation is dispersed among many enterprises. This situation makes it impossible for any organization to make an underlying decision with complete disregard to other network-connected enterprises in the related fields. Gawer and Cusumano (2002) point out the importance of building a common platform on which every player can perform its activities. The platform in this context means a system that evolves through cross-fertilization of emerging innovations developed by its lower systems. In concrete terms, the platform can present itself in a variety of morphologies as: standard, product architecture, service system, and project consortium. In other words, it embraces a wide scope from infrastructure to cooperative frameworks. A well-planned construction of such platform facilitates collaboration, leading to higher success probability of an innovation.

[ Example: ASML ]

********************************************************

In the world sales ranking of semiconductor equipment, ASML (a Dutch manufacturer) ranked 10th in 1996, 3rd in 2002—with a share of approximately 1/3 of Applied Materials (AMAT) in USA—and then in 2011 raced past AMAT to became the top rank manufacturer. The source of such upswing in competitiveness can be largely attributed to ASML’s platform strategy. The key of ASML’s growth is visible in how it competed in competition among photolithography machines—the very core of semiconductor manufacturing equipment. In the area of semiconductor photolithography machines, Canon, Nikon (both Japanese) and ASML combined occupy almost 100% of the total market. But, as of 2007, the share distribution was strongly lopsided: Canon 45%, Nikon 45%, and ASML only 10%. As of 2011, only four years later, ASML succeeded in reversing the balance and gained a 77% share of the total market. Without a doubt, ASML gave birth to innovation in this business. Several grounds can be pointed out to explain this share changeover, but the introduction of the product platform concept apparently played a major role. Photolithography machines fall in the domain governed by Moore’s law, meaning that they require a 200% performance 313

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(speed) upgrade every two years to remain competitive in the market. Canon and Nikon employed an all-integrated design approach to extract the utmost performance from the photolithography machines. This approach allowed the Japanese products to be adjusted on a machine-by-machine basis, providing them with highly acclaimed superb precision. However, this adjustment scheme also produced varied inter-machine precision, rendering each machine to be used only in the process for which it was adjusted, resulting in low machine availability. On the other hand, ASML adopted a modular design approach based on its long-term strategy. The modularized ASML products were able to exhibit almost uniform precision, showing only few inter-machine differences. This characteristic enabled the semiconductor manufacturers to set up one ASML machine for different processes, realizing machine availability almost twice that of Japanese counterparts. In addition, ASML outsourced development and production of each module to the best-fit external company, and focused itself on assembly. This scheme, outsourcing module level innovation to external companies, enabled faster development and production, and a drastic reduction of man-hours per machine. As a result, ASML could deliver its products at a lower price to customers and gain higher cost competitiveness. In summary, ASML reached the top-share position through its efforts to establish a product platform strategy, and build an alliance for distributed development and production of modules. This case represents one of the typical successes of the open innovation strategy. ***************************************************************

5-5. Program and Innovation A program represents a value creation activity. As such, the activity is expected to realize innovation to deliver new value to stakeholders. Naturally, launching the program activities does not automatically guarantee the creation of expected new value. The success depends heavily on how well the program activities are carried out. To achieve innovation through implementation of a program activity, it is important to have a thorough understanding of the enabling mechanism.7)8) Implementation of a program is considered an expedient way to realize an innovation in business activities. However, an understanding of innovation steps in each program activity should be a prerequisite for enhancing the probability of successful innovation, in view of the whole of the business. The basic steps leading to realization of innovation are listed in Exhibit 4-2-13.

Exhibit 4-2-13

Steps to realize innovation

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In the first step, identify the field of business to which your arsenal at hand (technology, service, and others) may be of effective service, and define the theme you seek to realize in the innovation. Blind pursuit of innovation, as a business, is dangerous. Such a shotgun approach would prove to have an astonishing low probability of success. Careful location and identification of a promising business area is an expedient way to gain a high success probability. The direction of business strategy plays an important role here: the business area where you have to engage in fierce competition must be selected from the viewpoint of well-managed, strategic decision making. In the second step, examine carefully, from the customer’s point of view, how the fruit of program activities (products, services) can be of service to potential customers. Only the customers, not the manufacturer, can decide the value of products and services. Therefore, no product of technological excellence may be recognized as of value, if it was developed without a correct understanding of the user value. You must understand where the customer finds value. To find it, attempts should be made to identify the visible and invisible needs on the side of the customers, and understand what is lacking. All customers have their own particular needs (something they want to settle). Customers find value in a product that meets their needs and will be willing to pay for it. An important viewpoint for developing innovation is to know “what business the customer wants to settle now”, and “what price he/she is willing to pay for that.” 9) 10) 11) However, the need (business) may not be apparent to a third party; rather, the need is more often hidden in the implicit feeling of the customer. The process to create innovation starts with the effort to identify explicit and implicit problems of the customers. Then, every effort should be paid to the goal: delivery of products and services that can solve the problems at an acceptable price. To realize such innovation, marketing activities play an important role to find out potential needs. Conventional marketing activities, such as request gathering and questionnaire investigation, would prove insufficient. Additional marketing activities—such as customer behavior observation, dialogue with customers, discussion among customers, to name only a few—is needed to discover potential needs.12) In the third step, gather ideas and technologies useable for realization, and try to make maximum use of them. Understanding the needs does not lead directly to innovation. Ideas and technologies must stand in service to you. However, you may not come out with such ideas and technologies easily. Any idea may seem trivial at first, but it always has the possibility to trigger another in succession and grow into a brilliant one. The final achievement of idea gathering efforts depends heavily on the method to make maximum use of the ability of each individual to come up with a brilliant idea.13) As an idea is often triggered by some cue, a “meaningful connection” among individuals is very important. Discussions among individuals from each individual perspective--different expertise, culture, value set, and social footing--can often create novel ideas.14)15) 315

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The creation of processes that facilitates the derivation of ideas from individuals for efficient fermentation is essential, and includes the construction of an idea gathering mechanism and relationship building with in-house and external organizations and communities. In the fourth step, the ideas are tried and verified. Without verification procedures, the new ideas remain as a collection of hypothetical fancies. The ideas must be thoroughly verified: a huge investment based on uncertain ideas would carry a high risk and cost dearly. To avoid a disaster, the ideas should be checked for real-world validity experimentally at the earliest stage before deciding on a huge investment, and modifications should be added as needed. Through such experiment, you can not only be certain of the ideas’ feasibility, but also gain a sense of what would come in the real world. The feeling of trust and knowledge gained though the experiments can help drastically lower the risk involved in the huge investment. Implementation of the verification process toward success, called PoC (Proof of Concept), in this step helps increase the probability of successful innovation. In the implementation stage of the PoC process, the strategy employed for the realization of innovation should be reviewed simultaneously. The tested assumption that the products and services will be accepted by the customers does not suffice. Additional validation of the way you compete with competitors—how you differentiate the products, how you can deliver value to the customers, and how to realize innovation—should be reviewed from the standpoint of the business model. There are many alternatives to select in deciding the way you fight with competitors: all in-house production and service delivery, in-house production and sales through alliance network, formation of a joint venture for production and service delivery, modularized design for distributed function-wise production with alliance partners, and so on. This is the stage for drawing up the strategy for realizing the innovation in concrete terms. Think hard to decide the best way to maintain competitiveness by looking at things from customers’ points of view, and select optimum strategic policies. Otherwise, even with products and services of excellent quality, the odds are against your winning. As this step consists of the implementation of hypothesis-verification-learning cycles, acting quickly is of key importance. An expedient way to increase the speed is to lower the hurdle between hypothesis and verification steps. Avoid placing too much weight on the decision, as an organization, to actually implement the verification experiment, and try to build an environment in which you can perform verification freely.16) In the fifth step, the well-verified ideas are put out into the world. This step often involves a larger investment than the other steps. Surefire success is everything in this step. Failure won’t be tolerated. The style of management will become more control-oriented at this stage, as feasibility and speed is more and more sought after in the project.

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The decisions in this step must be made in a cautious manner, taking various risk factors into consideration. Once a decision is made, the management must carry out the project to the end under strong leadership. Much of the discussions on project management up to this point have been centered on the fifth step. To realize innovation, the discussions concerning the first to fourth steps, with a shifted focus on various aspects of management, are also important. To attain the final goal—the realization of innovation—securing the implementation of step-wise, optimized management is required. [ Reference ] 1) K.Shimizu. (2011). Senryaku to Jikko – Soshikiteki kominyukeishon toha nanika. [Strategy and practice – what is organizational communication?]. Tokyo, Japan: Nikkei Business Publications, Inc. 2 ) T.Yoshikawa. (2001). Balance Score Card Nyuumon – Dounyu kara unyou made. [Introduction bakance score card - from introduction to operation]. Tokyo, Japan: Japan Productivity Center. 3) W.Chan Kim, R.Mauborgne (Tr. Y.Ariga). (2005). Buruu ooshan sutoratejii. [Blue ocean strategy]. Tokyo, Japan: Random House-Kodansha 4) L.Morris. (2008). Inobeishon wo umitsuzukeru soshiki. [Organization that continues to innovate]. Tokyo, Japan: Nikkei Inc.. 5) H.Chesbrough. (2008). Oupun inobeishon. [Open innovation]. Tokyo, Japan: Eiji Publishing. 6) A.Gawer, M.A. Cusumano.(2005). Puratto foumu riidaashippu. [Platform leadership]. Tokyo, Japan: Yuhikaku, Publishing Co.. 7) Robert G. Cooper (2001). [Winning at new product]. Basic Books 8) Robert G. Cooper Scott J. Edgett. (2007). [Generating breakthrough new product ideas]. Product Development Institute Inc. 9) C. Christensen. (2001). Inobeishon no jirenma. [The innovator's dilemma]. Tokyo, Japan: Harvard Business School Press 10) C. Christensen.(2003). Inobeishon no kai. [Innovator’s guide to growth: putting disruptive innovation work]. Tokyo, Japan: Harvard Business School Press 11) C. Christensen. (2008). Inobeishon no kai, jitsusenhen [Innovator’s guide to growth: putting disruptive Innovation to work]. Tokyo, Japan: Harvard Business School Press. 12) Anthony W. Ulwick. (2005). [What customers want]. McGraw Hill. 13) J.Nast. (2008). Aidyia mappu. [Idea mapping]. Tokyo, Japan. Hankyu Communications. 14) Douglas Graham. Thomas T. Bachmann (2004). [Ideation]. John Wiley&Sons, Inc. 15) James Hornitzky. (2010). [Idea Creation, capture and management for innovation]. VDM Verlag Dr. Muller. 16) C. Christensen, J. Diar, H. Gregersten. (2012). [The innovator's DNA]. Tokyo, Japan.: Harvard Business School Press,

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Chapter 3

Project Organization Management

Project Organization Management

1. Overview Different from stationary organizations commonly found in enterprises and public corporations, the project organization has the characteristic of being a limited term operation to achieve specific objectives, and it generally consists of the members directly involved in the project. Proper review and understanding of the characteristics of these two organizations, including their inter-relationship, is of utmost importance for designing a project organization. In a project, creation of value represents accumulated contributions from individual members. A feeling of unity, sense of achievement, and the satisfaction of each project member, therefore, have a significant effect on the efficiency and success of the operation of the project. Team building efforts constitute an essential part for running a project organization efficiently as they enhance a sense of ownership among the members, as well as a sense of self and unity in the organization, and leadership promotion of self-improvement. The project organization management needs to take heed of these aspects to function efficiently. The parent organization governing the project should work systematically toward upgrading abilities required to accomplish objectives. Continuous monitoring of organizational project management maturity is one of the desirable measures for exercising corrective actions in a timely fashion, leading to higher project performance.

2. An Organization and Project 2-1. Characteristics of a Project Organization Because the project is a time-limited entity, project-by-project optimized design and well-coordinated operation are all the more important, in contrast to stationary organizations. From the start of designing and managing stages of the project organization, a mechanism should be incorporated that makes it possible to maintain organic linkage among the limited resources (human resource, material, technology, tools and system) in the wake of ever-changing working processes (plan, execution, adjustment, achievement, and maintenance), so that the targeted objectives – delivery schedule, cost, quality, and others - will be securely attained. The project organization is an entity that should be designed for the ultimate purpose of attaining the business objective, entailing careful considerations to maintain balance between long-term and short-term objectives. In doing so, it is essential to maintain proper perspective of the relationships with stationary organizations and changes in the business environment, for determining optimal implementation of the project organization. Key points for project organization design include implementation and execution of the following mechanisms:

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(1) Quick and accurate directive/command conveyance mechanism that reaches down to working-level personnel. (2) A mechanism to facilitate the handover of authority and responsibility to lower levels of the hierarchy that helps stimulate communication and a sense of coherence (3) A mechanism that enhances rapid decision-making (4) A mechanism to foster communication that minimizes the need for coordinators (5) A mechanism that provide transparency to all personnel so that they know what is going on in the upper and lower stream of the project. This greatly helps perform them perform their assignments efficiently (6) A mechanism that points out and corrects matters impeding the performance of assigned duties, contributing to the maintenance and upgrade of quality. (7) A mechanism to motivate every member of the project toward successful attainment of the objectives Stationary organizations usually have a set of codes of conduct based on shared understandings such as: established organizational culture, decision-making rules, communication methods, organizational practices, common knowledge of the organization structure and its political positioning. In contrast, launching a project organization entails creating all of these at the start of the project. To facilitate this process, it is required to disseminate the necessary information across the organization – for checking and understanding - by means of elaborate documents (code of practice, and schematic plan for executing the project).

2-2. The relations between Stationary and Project Organizations In a situation where the project is to be positioned within a framework of a stationary organization such as an enterprise, an important aspect that needs comprehensive review for better design and operation of the project organization is the relation with the stationary organization that lies far up in the hierarchy. Through understanding of the rules and regulations in place in the stationary organization is highly desirable for well-suited design and operation of the project organization. Project organizations are categorized into the following three models: (1) Function-based organization model, (2) Project-based organization model, and (3) matrix-based organization model. 2-2-1. Function-based Organization Model In a project organization that adopts the function-based model, the organization is further broken down into a set of sections – as usually seen in stationary organizations - based on the function assigned to it. Each section is expected to maximize efficiency to execute its own function. Within a section, a normal hierarchical pecking order is maintained and communication inside is usually smooth. Communication across the sections, however, may be strongly affected by differences of business culture and boundaries between them. Some such organizations that belong to this model don’t even have a project manager, in which case the section heads take care of coordination tasks for the project. (See Exhibit 4-3-1) 319

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Exhibit 4-3-1

Project Organization Management

Function-based organization

2-2-2. Project-based Organization Model A project organization that belongs to the project-based organization model is characterized by the independence and strong authority placed in the hand of its project manager. He/she has the executive authority to select or reject a resource and coordinate among the resources as well. Motivation toward the project is generally high in this type of project organization. The back-office sections provide support services to the project. (See Exhibit 4-3-2)

Exhibit 4-3-2

Project-based organization

2-2-3. Matrix-based Organization Model The matrix-based project organization is a happy medium of the function-based and project-based models featuring characteristics of both. This model is further classified into three variants, depending on authority given to the project manager and the heads of function-based sections, as well as on the coordination methods employed. (See Exhibit 4-3-3) (1) Section-based coordination type In contrast to the function-based organization model in which the section leader takes the role of project coordination, the project members assume the role of

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inter-project resource coordination in the section-based coordination type. This scheme – i.e. project members assume the role of coordinator - enables quicker response to problems that arise than in the function-based organization model. Note, however, that the coordinator will not be able to fulfill the role if the line manager does not pay respect and gives full cooperation to his/her role, in which case the project may result in chaos.

Exhibit 4-3-3

Matrix-based organization

(2) Work sharing type The work sharing type is a variant of the project organization model characterized by formation of a project team, which is dedicated to a particular operation. A project manager is selected from the team. The project consists of full-time members and common members who serve multiple projects concurrently. Team organization may change from one project to the other. Because this scheme has two distinct reporting lines – the section leader and the project manager – confusion tends to occur if the roles of the project manager and line manager have not been clearly defined in the decision making stage of project activities. (3) Resource pooling type The resource pooling type is an organization model in which executive authority is given to the project manager to control the progress of the project. The line manager, after he/she has assigned resources to the project, is detached from day-to-day operation of the project, unless he/she is urged to remain. This type has some variant cases: for example, project managers form an independent expert organization or are placed in an existing organization.l)

[ Reference: Network-based Organization model ]

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The network-based organization model is characterized by the way its leadership is established: it arises spontaneously among the project members and is not to be applied in a forceful and designed manner through the organization’s authority. Management of the project in this scheme does not require imposing disciplinary

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constraints. Rather, mentoring and coaching play an important part in motivating the participating project members to exercise leadership spontaneously. It is necessary, however, to always keep aware of the objectives to be attained, and perform continuous monitoring of the degree of progress. For example, Google provides its employees with the now famous innovation promotion arrangement: “20% of working hours can be spared for the employee’s own pursuit of ideas, free from his/her normal assignment”. This approach constitutes one of most significant pillar of its corporate culture, and, in fact, this rule has initiated many useful services. This 20% rule can be regarded as a specific embodiment of the network-based organization model.2)

2-3. Design of Project Organization Model Each project organization has its own strengths and limitations. Therefore, it is highly desirable to carefully review the features and characteristics of the project to optimize the design of the project organization. Strengths and limitations of each organization model are summarized in Exhibit 4-3-4.

Range of role & responsibility

Awareness – Relationship

Sense of value – Vision

Skill Exhibit 4-3-4

Structure

Evaluation – Reward

Career path education

Key points of a matrix model

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3. Management of a Matrix-based Organization Model 3-1. Notes on a Matrix-based Organization Model A matrix-based organization model has two reporting lines, which often make it unclear where responsibility lies and thus its management is more challenging. Therefore, the following items must be taken into consideration while designing and operating a matrix-based organization model. (See Exhibit 4-3-5)

Exhibit 4-3-5

Strengths and limitations of organization models

(1) Defining visions and encouraging them to be shared The first thing to do in designing and operating an organization model is to define the visions, and get the ideas through the organization. When a vision – for example, “Prompt proposal of a new service/commodity aiming at more convenient life of consumers through the use of the Internet” - is set, it is necessary to expound, in relation with the vision, why the specific type of matrix organization is optimum for efficient realization of the vision, and get the members to understand the strategy. (2) Defining the role and authority given to the project manager and line manager In a matrix organization, the relation between the project manager and line manager is very important: a confused handling of these managers should be carefully avoided. For the organization to yield concrete results, the roles and authorities for the project manager and line manager should be clearly defined and they must be consistently maintained throughout the lifecycle of the project.

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(3) Designing the decision-making process Because a matrix organization model involves multiple reporting lines, conflicts tend to take place in decision-making processes. Therefore, a clear executive decision-making process should be designed before the launch of the project to address the situations where a conflict takes place in the organization’s decision making. In this design, the following terms should be stated explicitly: the decision-making procedures, criteria for decision making, who has the executive decision, and who authorizes it. (4) Designing a communication path Both in a stationary organization and project organization, design of communication paths is an essential element for proper operation. This is also true within a project organization. As in the case of decision-making processes, a matrix organization model tends to produce confusing or duplicated communication. A clearly defined flow of information should be an essential part of the communication path design. (5) Defining the techniques and skills required in the project The techniques and skills required in the project needs to be defined. In addition, it is also important to know how many of the members possess one or more of these. Depending on the number of available human resources, the project organization model may need a design review. (6) Building sound relationships within the project organization Because of the inherent complexity of the matrix organization model, building a mechanism to produce and maintain sound relationships within the project team is all the more important. This involves an attempt to improve the organizational environment – including the relationship with the upper level organization from which the project is derived - to foster self-initiated activities of the project team as well as continuous team-based efforts to build sound relations within the project team that help each member attain self-growth and increase in self-awareness. (7) Formulating skill development plans The project itself can provide a superb venue for skill improvement. Based on this understanding, it is important to create a systematic mechanism that allows each project member to grow through his/her project activities. Formulation of a carrier path program and skill development plans has an effect of identifying the skills to be acquired through execution of the project, which motivates the project members to pay conscious effort to acquire them, thus ensuring secure skill improvement. (8) Designing a system to evaluate project team members A fair and equitable evaluation system constitutes an essential aspect for a project organization to function continuously without running out of steam. Design and introduction of such system – with clearly defined evaluation criteria, a transparent evaluation process, and open access to the results – is also highly desirable from the viewpoint of maintaining organization health and soundness.

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4. Project Management Office 4-1. The Objective of a Project Management Office The objective assigned to a project management office is to coordinate simultaneously running projects so that they proceed smoothly, for achieving optimum conditions in the organization as a whole. The concept of such a unit is nothing new: large-scale projects carried out by the U.S. air force in the first half of the 1950’s were accompanied by an office implemented solely for the purpose of direct control of the project. Modern project management offices, however, have become diversified based on business needs: in addition to the project management offices dedicated to a specific project, those in constant existence for the service of organizations have increased in number. The ways in which a project management office are utilized are also quite varied, and its positioning in the organization can also be shifted depending on such factors as the size of the enterprise and characteristics of the project and the contents of the corporate strategy, thus producing many variants.

4-2. Configuration of a Project Management Office In specific terms, project management offices can be classified, depending on the assignment given to them, into the following types: (1) SPO (Strategic Project Office) A project management office set up to achieve organization-level strategy, whose task is to exercise influence and control multiple projects toward harmonized achievement of the strategy. The functions include: selection and prioritization of projects, and budget allocation. (2) PMCoE (Project Management Center of Excellence) A project management office’s function is to upgrade the project management abilities of the organization as a whole. It exercises indirect supporting roles for the projects: development and dissemination of project management methodology, standardization and familiarization of project management processes, and, development and support of project management tools. (3) PMO (Project Management Office) An office implemented on an organization by organization basis (strategic business units, sectors). It assumes a role to directly/indirectly support a project that belong to the specific organization. The ways in which a PMO is involved in the process of project execution can be classified in the following three categories: 1) Support type PMO 2) Management type PMO 3) Line control type PMO

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Business Unit President

Project management office

Hardware Development Unit President

Product Planning Unit President

× × × ×

× ×

Exhibit 4-3-6

Support type PMO

Software Development Unit President

× × ×

Business Unit President Project management office

Product Planning Unit President

Hardware Development Unit President

× ×

Project manager 3

× × ×

Project manager 4

×

×

Project manager 1 Project manager 2

Exhibit 4-3-7

Software Development Unit President

× × ×

Management type PMO

The role of the support type PMO is to provide various supportive services to each organization. A PMO is staffed with human resources who have experience in administration/management jobs, and performs advisory functions to the project managers and section heads in view of smoothing project operations. In many cases, the business unit president makes inter-project adjustments based on the advice from the PMO. (See Exhibit 4-3-6) The management type PMO, endowed with administration functions, performs monitoring activities on every project. It gathers relevant information on the projects, and makes analysis based on the accumulation of objective data. In case a problem occurs while executing a project, it issues a warning for corrective action, and makes necessary adjustments. In this context, visualization of the project is important. (See Exhibit 4-3-7) The line control type PMO is generally a battery of experts in project management, forming a pool of project managers within the organization. Project managers cultivated in the organization are gathered in the PMO, and all the projects are controlled by those in the PMO. Inter-project coordination is left to the discretion of the head in charge of the PMO. (See Exhibit 4-3-8)

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Business Unit President Project management Office

Development planning Research Section

Project manager X

Planning Section

Development Unit 1

Section 1

Development Unit 2

Section 2

Section 1

Section 2

QC Unit

Inspection Section

Standard Section

Project structure Or

Project manager Y

Matrix structure

Project manager Z

Exhibit 4-3-8

Line control PMO

(4) PCO (Project Control Office) The role of the PCO is to control and manage a specific project. It assumes advisory and supportive functions exclusive to the project’s manager. Many enterprises implement a function-based organization project, and, faced with the limitations of the scheme, may want to allow higher levels of autonomy and mobility in the project operation. Still, they may be reluctant, at least for the moment, to establish new project business divisions. In such situations, the above described PMOs can be useful even as a transient organization unit3). (5) PgMO (Program Management Office) The PgMO is normally implemented on a program-by-program basis. In a situation where multiple projects proceed simultaneously, many problems may occur that defy easy application of a single-project-oriented solution – e.g. problems involving inter-project consistency and those that need addressing across all the projects. Development of a project governance system is required to resolve such problems quickly to ensure the achievement of the program. The PgMO is basically a framework to assist program managers. As such, it performs a variety of management assistance activities in various programs levels including: reviewing progress of each project, adjusting consistency among the projects, and addressing problems out of reach of a project.

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5. Project Teams The agent that executes a project is a group of individuals organized pro tempore with a common objective in mind (i.e. a team), which will usually be disbanded after the completion of the project. A project team consists of a project manager (project leader), project team members, and a set of personnel in charge of specific auxiliary tasks. (See Exhibit 4-3-9) Project management team of a customer/sponsor

Project manager

A project Project team

Project execution organization Project team

Project team member Execution organization Person in charge from each organization

Project team of external partners: design, production, labor service

Exhibit 4-3-9

A project team

Because the project consists of individual human beings, the quality of the project manager - as well as his/her experiences, skills, attitude and mode of behavior – has significant effect on the performance of the project team. A competent project manager is good at motivating the team members effectively and leading the building of sound relationships among the individual team members, enabling the team to deliver maximum results. The following section defines the roles and scope of responsibilities undertaken by the manager and each member of the project, and illustrates Critical Success Factors (CSF) of team building.

5-1. The Roles and Scope of Responsibilities Undertaken by the Project Team (1) Project Manager The project manager is appointed by the project’s sponsor before it is launched. The criteria for selecting a project manager commonly include such capacities as: customer relationship, communication, diplomacy, problem-finding and problem-solving, stress tolerance, decision making, and leadership. Some organizations require acquisition of a project manager qualification for a candidate to be eligible for selection. The project manager, once selected, should be endowed with the sufficient authority in terms of budget control and chain-of-command structure that are essential for administrating the project. He/she is expected to assume responsibility, by fully exploiting the given authority, to control the balance of the time schedule, cost, and quality to maximize customer satisfaction. The predominant portion of his/her work is said to be spent maintaining good communications, which makes sense in view

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of the importance of the human element. For proper operation of the project, excellent role performance of the project manager is absolutely necessary.4)5)

[ Example: Roles of a Project Manager ]

************************************

In a project, a system engineer with years of experience was appointed as the project manager. The engineer had to undertake a part of the design work in addition to administrative tasks. This situation forced him/her to be involved too much in the designing tasks, distracting him/her from the responsibilities as a project manager. The operation of the project became gradually deteriorated. ***************************************************************************************************

(2) Project Team Member Each project team member is normally appointed by the project manager. The project manager is given direct authority over personnel decisions to allow for better project operations, and determines the organizational structure of the project, as well as the appointments of project members, in line with the scope, time schedule, cost, level of technical difficulties, and the type of contract. In matrix- and function-based organization models, however, the authority to select project members are often placed in the hand of a line manager instead of the project manager, with consideration given to the environment surrounding the project and human resource cultivation. Note that, in some organizations that allow stronger authority to project managers, he/she is sometimes endowed with veto power against the acceptance of the selected members. Prior to launching the project, the project members create a Responsibility Assignment Matrix (RAM), which corresponds to the project scope-based WBS. RM is a useful tool for sharing important information for conducting the project – i.e. “who does what” and “who decides what”. (See Exhibit 4-3-10) A











Requirements, Basic specifications









Basic design











Detailed design













Production (Development)













Test/Inspection



......

P P



A A

S: Approval K: Decision A: Execution (Planning) P: Support I: Information provision

Exhibit 4-3-10

Responsibility Assignment Matrix(RM)

5-2. Project Team Building Team building is an essential activity in order to efficiently enhance the project operations and strengthen the ability to accomplish the project. At the kickoff of the project, concentrated efforts for fostering an environment in which each member feels comfortable and secure in exchanging constructive opinions, leading to common understanding of objectives and goals of the project is highly desired. This breaks the ice with the members gathered from different sections.

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Project team building brings about desirable effects not only at the kickoff of the project, but also when practiced during, and at the end of the project.

Exhibit 4-3-11

Addressing the gaps in the level of consciousness through team building

(1) Objectives of team building The most significant objective of team building is to dissolve emotional gaps between the project members. With such emotional gaps still in place, discussions tend to lack substance, leading only to harmless and seemingly logical, but not productive, conclusions. In this situation, neither constructive exchange of opinions nor a concrete executable solution would be expected. Dissolution of emotional gaps enable all the members to deepen the debate without eroding mutual respect, leading to consensus formation and an executable solution. (See Exhibit 4-3-11)6) Main objectives of team building are as follows: 1) Dissolution of emotional gaps between individual project team members 2) Sharing of project objectives and how the project has been developed 3) Sharing of the goals (scope, time, cost, etc.) of the project 4) Understanding of the objectives of the project, risks and countermeasures involved in it. 5) Relationship-building with the stakeholders such as customers and partners 6) Enhancement and maintenance of morale 7) Sharing and dissemination of successful experiences with the project members, etc. (2) Factors leading to successful team building Team building in the project should go ahead with considerations given to the following: 1) Coming out of one’s shell 2) Sharing common objectives 3) Understanding one’s role and responsibility for attaining the objectives 4) Developing shared understanding of successful experiences Titles and authoritarian hierarchy among the members can be the greatest impediment in the team building process. In trying to resolve technical challenges,

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such unproductive relationships within the organization can have huge detrimental effects: discussions often lead only to sterile, pre-determined conclusions, and the members often feel being forced to work. The first thing that needs to be done for removing such disincentives is to have each individual understand that the environment in which he/she works is safe and secure. As a concrete measure for deepening mutual understanding between the project members, provision of venues for each individual to come out of his/her shell and communicate with other members would be a good starting point. Examples of such venues include the intensive debates held in kickoff meetings (KOM) and training camps, and everyday 5-minutes meetings. They provide good opportunities to share important aspects of the project’s objectives, goals, project services, technical problems, and time requirements.

[ Example: How to Conduct a Kickoff Meeting (KOM) ]

*******************

(1) The project manager lays out overall objectives and goals of the project, and the project members discuss important items for assimilation (use of a whiteboard for description/organization recommended). (2) The project team members further explore the objectives until they are broken down to manageable levels (use of WBS, KJ method recommended). (3) Formalization of the results in writing (all the participants place his/her signature on documentation). (4) Provision of venues for getting to know each other (getting-together meeting, etc.) ***************************************************************************

5-3. Precautions for a global project team A project team consisting of multi-national members poses peculiar difficulties for good team building. A fruitful team must be built in an environment where individual members have different set of values amid a backdrop of different cultures and languages. The Japanese tend to rely on non-verbal communications, which never works in a global team. In a global team, everything has to be made explicit in writing. It is important to preserve activity records (minutes, e-mails, etc.) that make it possible, in case of trouble, to track the chain of events in the past – e.g., the work instructions issued to a project members, and the state of progress among the members. In other words, key events leading to the problem must be explained in a coherent fashion.

5-4. Precautions for a Virtual Project Team The virtual project team is a team that carries out tasks without having many face-to-face contact opportunities between the members. This scheme requires higher than normal levels of attentiveness for team building. Supportive relationships among the members – spontaneously arising if they work in close contact - can easily be lost simply because they work in geographically separated locations. Modern day IT technologies and effective use of IT tools can compensate, to a considerable extent, the disadvantages caused by geographical separation. Regular face-to-face meetings, notwithstanding, are highly desirable, although they involve cost and time issues.

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6.Maturity of Organization 6-1. Feature of Project Management Methods Model As a person's capability improves in accordance with his/her growth, it is possible to improve the capability of organizations. Organizational maturity represents the stages of improvement in the capability of an organization to perform a project from the viewpoint of process. In organizations with low maturity, projects are likely to be processed in disorder: An urgent task is delayed and a task with a lower priority is advanced, or a necessary task is omitted and an unnecessary task is considered inevitable. In such circumstances, projects are likely to fail to a considerable extent. Meanwhile, in highly matured organizations, projects are performed in a smart manner. Only necessary tasks are performed and projects have a high probability of success. There are various viewpoints for maturity models of project management. In this section, a maturity model focused on the link between corporate strategies and projects is described. In this model, the objective of an enterprise is broken down to some processes, such as a strategy to achieve the objective, a program as a practical activity to implement the strategy, a project incorporated into the program, and a task as a working level activity for the project and effectiveness in each process is evaluated. That is to say, as the following Exhibit shows, this is a maturity model for organization level processes under the concept that corporate activities are organically performed by linking a strategy for an overall company with a program, project, and task as if they were toothed wheels.

Exhibit 4-3-12

Project Management Maturity Model

6-2. Definition of Level for Project Management Maturity Model In this process model, maturity is defined by classifying it into the following five levels: Level 1 Haphazard An organization has a low level of awareness of a project and performs haphazard project management. Enormous efforts are spent on the activity for solution (so to speak, fire fighting) and many projects result in failure. Whether a project ends in success or failure depends on personal capabilities.

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Level 2 Systematic An organization understands the significance of preventing the occurrence of problems and becomes more committed to planning. Whether a project results in success or failure depends on the team's capability rather than personal capabilities. An organization is able to manage similar projects sufficiently but becomes confused for new projects in which it has no experience. Level 3 Scientific Scientific management is performed and the project status is visualized through a system. Personnel concerned act based on visualized data. Level 4 Integrated Multiple projects are performed in an orderly fashion in an organization and no confusion occurs. A project is managed smoothly across the organizations in accordance with the corporate management process, and the project is harmonized within the organization. Level 5 Optimization Most projects result in success and the company has a top level competitiveness in the industry in all aspects including quality, cost and delivery. Corporate strategies are certainly linked with projects, and strategic projects are managed effectively. Sufficient authorities are delegated and project personnel work on project activities keeping a high motivation for a clear objective.

6-3. Detail of Each Level The status of the above types of organizations is shown for each process. (1).Level 1 Haphazard (a) STRATEGY An enterprise has no project culture and little awareness to link corporate strategies with projects. A great amount of funds and resources are spent on the operation to maintain the organization rather than strategic projects. Strategies are not linked with projects and recognition of programs is insufficient. Since a strategy posted by an organization is not shared among the organization, no specific actions are taken to put the strategy into practice. (b) PROGRAM Little awareness of the concept of program and no system to assume responsibility for the implementation of projects. Screening and priorities of projects are decided subjectively, and no rules are established for the organization. (c) PROJECT No activities are made as an organization to build and improve the process of project management, or to improve project management skills. Project management is performed in a haphazard manner, and success in a project greatly depends on personal capabilities. (d) TASK Even identification of tasks using WBS etc. is not implemented, and tasks are not classified. Tasks are not controlled in terms of scale, and are unclear in 333

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responsibility. Checking the quality of tasks is left to persons in charge. No predetermined processes are prepared for the checking. This causes problems in quality and many rework cases. (2) Level 2 Organization Systematic (a) STRATEGY Strategies are planned in a top-down style, correctly conveyed among the organization, and understood by all members. Projects are recognized as a specific activity to achieve strategies, and discussions are made on whether strategic elements are necessary for screening of projects. (b) PROGRAM The concept of program is recognized, and processes for screening program scopes and projects are prepared. A program manager responsible for the program is appointed and an environment where the program manager can participate in the project is prepared. A move to strengthen the "axis" of the project becomes active and an atmosphere comes up which pursues the result of the project rather than that of the organization. Rules for deciding priorities of projects are prepared in the organization but the order of priorities is not reviewed considering progress and coordination among projects with high priorities is not complete. (c) PROJECT Whether a project results in success or failure depends on the team's capability rather than personal capabilities. An organization is able to manage similar projects sufficiently but becomes confused for new projects in which it has no experience. The management process for projects is prepared but is used for only a few projects or organizations. Visualization is started using project management tools but is centered on schedules or the like, not extended to resources or cost. (d) TASK Tasks are screened and estimated based on experiences. The process to control tasks as an organization is prepared but is used for only a few projects. Troubles often occur to tasks in which no personnel have experience. Data on tasks are in some cases accumulated on a personal basis but the system for the organization to accumulate data is not prepared. (3) Level 3 Organization Scientific (a) STRATEGY Results of projects are reflected on the process to plan corporate strategies. A process is generated where feedback from new business produced by projects is periodically reflected on strategies and a cycle of "strategy - project - service strategy" is established. Improvement of the corporate climate and culture necessary for successful achievement of projects is started, factors for success to achieve strategies are identified (Key Performance Indicator KPI, Critical Success Factor CSF), and specific actions to achieve success factors are broken down as programs and projects.

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(b)PROGRAM Capacity planning is implemented on the program level or the overall organization level, and the long-term burden on projects within the organization is recognized at a rough level. Screening of projects, decision on the scale and contents, timing for injection and completion, etc. are checked with actual capability of organizational personnel. This enables a decrease in confusion resulting from the presence of multiple projects and long-term allocation of personnel for the organization. Further, criteria for success evaluation for projects are improved, and decision on objective success evaluation in accordance with the criteria becomes possible. (c) PROJECT Systematic project management is performed and projects are visualized through periodical furnishment of project data from personnel concerned. Project management based on data analysis is practiced. A project office is founded as to prepare a system and environment that support multiple projects. (d) TASK Past organizational data are accumulated and examined, and tasks are standardized. Standard WBS and standard operation manuals are prepared for all personnel. Progress, quality and productivity concerning tasks are visualized to be recognized by all personnel. (4) Level 4 Organization Integrated (a) STRATEGY Integrated management is possible including the strategy and project based on a common vision that has penetrated throughout the company. Further, the wall between corporate departments is cleared and the merger of different knowledge and technologies across departments is promoted. This enables creation of new business. Not only the feedback from downstream to strategies but also feedback to strategies through across-the-board merger of operation departments and sectors are generated. (b) PROGRAM All data are integrated concerning profit and productivity of each project that are necessary for program management, and are ready for visualization. Information on the project portfolio is updated according to the results and the progress data on a project. Then decisions on the order of priority and direction of projects can be made based on highly reliable information. Balanced scorecards are introduced as a scheme to control realization of projects. (c) PROJECT Projects are managed in an orderly fashion across the organizations in accordance with the company's project management process on a level to achieve multi-project management and integrated management. Harmonization between projects and the organizations are completed and overall optimization is accomplished. Complete education for project management is systematically performed and a project management skill map is prepared for use. Career path for 335

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the project manager is presented. (d) TASK Data on tasks are periodically analyzed, and inefficiency and rationalization of tasks for the organization can be identified. Tasks to be improved are recognized quantitatively, and task rationalization and sharing are promoted on the organizational level. Task rationalization and sharing improve productivity and quality. (5) Level 5 Organization Optimization (a) STRATEGY Ideas and proposals of experienced individuals are actively incorporated into the strategy drafting process. Official strategy drafting processes prepared for the organization are extended to a personal level anyone can take the opportunity to participate in the strategy drafting process. Further, an open and free climate, which is inevitable for implementing project management, is created in the organization. The organization keeps on changing and a culture that accepts constantly improvement and actively promotes new trials is fostered. (b) PROGRAM The degree of achievement of corporate strategies is visualized with various indicators. Indicator values with which the degree of actualization of strategies is measured are regularly collected as data and the degree of achievement is checked. Prediction of future achievement becomes possible depending on the level of achievement for goal values and actions necessary for improvement can be implemented based on predicted values on data. Prediction of the future portfolio is possible based on predicted information of projects. Influence of new projects can be analyzed with portfolios in a time series. Program indicator values flexibly respond to strategic changes and data can be collected in accordance with indicators. (c) PROJECT This is the level for optimization of the project management process. The best project management process can be created at any time in accordance with corporate environment. Organizations are dynamic and provided with the option and flexibility that enables changes according to environments. Data on project management are collected, and analyzed regularly. Any problem in a process is corrected immediately. (d) TASK Improvement of tasks are proposed and implemented not only on the organizational level but also on the personal level. Contents of proposals that are devised and improved for each employee are shared as an organization for all personnel to use. Further, proposed improvements, if necessary, are standardized as an organization according to needs.

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7. Strategic Alliance 7-1. Types and Patterns of Alliance An alliance is a relationship in which two parties or organizations work together for a specific purpose. In the field of management, it implies a cooperative relationship between enterprises for attaining a common objective. The types of inter-enterprise cooperation include, in the order of decreasing closeness of relationship: merger and acquisition, acquisition, capital injection, continuous affiliation, and fixed-term affiliation. As programs and projects are both fixed-term activities, this section focuses mainly on the construction and operation of fixed-term affiliations. Business with external subcontractors through normal contracts can be considered as one of the cooperative relationships, but it strays somewhat away from the context of “alliance”. See section “Open Innovation” for inter-enterprise cooperation aiming at the development of a new product. Although common objectives of an inter-enterprise affiliation range depending on the situations, the intentions lying behind an alliance building can be listed as below: Mutual complement of business resources Rapid implementation of business plan and pursuit of economics of scale Development of new market Getting the upper-hand in the competitive environment Risk sharing Building a successful inter-enterprise affiliation is by no means an easy task – as a study*4 reported, 50% of alliances end in failure. This section first marshals patterns of alliance relationships and the related terminology, then gives an account on desirable forms of contracts, as well as on scope sharing, project formation, and risks and notices to be remembered. Inter-enterprise alliances can be broadly grouped into two categories: between customer and supplier; and between two companies in the same trade. The production-distribution alliance between Walmart and P&G through the Quick Response (QR) program is a typical example of the former category. Private finance initiatives (PFI) can be considered as being a variant of this scheme (see Part4, Chapter 4-6). The enterprise consortium formed for the construction of the Channel Tunnel – CTG/FM – falls in the latter category.

[ Example: The Channel Tunnel construction project ] ********************** The Channel Tunnel project – often referred to as the last big project in the 20th century – was approved by the U.K. and French governments in Feb. 1986 and construction work was launched in May of the same year. The Channel Tunnel was put in service in May 1994. From the start of the construction work, the project took only eight years before realizing the European dream awaited for 200 years. Many Japanese enterprises took part in the project and successfully completed their task, overcoming the difficulties involved in the international project. (from “collected cases of P2M”) ----------------------------*4 Keasler & Denning “A Re-examination of Corporate Strategic Alliances: New Market Responses”, Quarterly Journal of Finance & Accounting, University of Nebraska, 2009

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Enterprise collaboration may take the form of those with limited numbers of participants, or those “open” to many enterprises – the latter form is often referred to as a consortium. From a different point of view, the enterprise collaboration can be a special-purpose company (SPC) or an entity in existence only by the contract among the interested parties. These collaboration patterns have their own merits depending on their objectives. Note that the terminology that represents these collaborations – e.g. joint venture, consortium, alliance, and tie-up - varies from country to country, industry to industry, and sector to sector. For example, in the construction industries in Japan, a consortium for bidding is often called a joint venture (JV). (See Exhibit 4-3-13)

Exhibit 4-3-13

Patterns of collaboration

7-2. Contracts that Bind Alliance Proper contracts are the essential qualification for building a responsible alliance between the enterprises. To realize a fair win-win relation in an alliance business between the independently managed enterprises, it is recommended to include the following terms on a case-by-case basis. (See Exhibit 4-3-14)

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Project Organization Management

Key points of alliance contract

(1) Profit & loss share This term sets down the “one-purse” policy in which the outcomes of the project profits and losses alike - are shared by all the participants at a pre-defined rate. It prompts each participating company to do its best, and has an effect of avoiding such an undesirable situation as that in which an enterprise is negligent for the purpose of enhancing its own profit. If this occurs, other enterprises may have to suffer a loss to cover the negligence. (2) Limitations on claims for mutual compensation This term restricts the right on mutual compensation in a framework in which each enterprise has its own “purse” depending on the range of responsibility. This translates into no claiming of cost overruns, within a certain definite range, caused as the result of another enterprise’s oversight. The idea lying behind this term is practiced within a company: the manufacturing department does not claim compensation caused by an oversight in the design section. (3) Business terms of service provision from the parent company In case a co-parent company is established with the aim of executing a project, one of the parent companies may share the majority of actual operations. If such is the case, the business terms for each service provision should be defined beforehand (e.g. unit price based payment, all-in contract, etc.) (4) Handling of transaction information asset A set of agreements should be set up regarding the handlings of information asset gained through the execution of the project such as intellectual property rights and transaction information (customer list, etc.). Possible options include: commoditization, separation by defining some sort of boundary, or, inhibition of competition in related fields for certain years to come. (5) Neutral mediator and dissolution of partnership Provisions in case of alliance failure are also essential – e.g. a clause that calls for the introduction of a neutral mediator, and those defining concrete procedures to dissolve the partnership. A “successful alliance” is often assumed out of good will. It is to be understood that this may not be the case.

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7-3. Sharing of Scope and Project Formation In a project where multiple enterprises form an alliance with others, responsibility sharing poses a particularly important problem. The composition of an alliance framework is determined in an upstream stage in which the scope and range of responsibility are allocated to each participant. This step is called “formation design”. As shown in Exhibit 4-3-15, the patterns of scope sharing can be divided into three types: vertical specialization, horizontal specialization, and a hybrid of the two.*5 Vertical specialization represents a scheme in which the scope is broken down on a work function basis – i.e., development, design, and production. Thus, it is a sharing scheme corresponding to a functional WBS system. This scheme requires precise project coordination because it needs a variety of information and materials transfer interfaces from upstream to downstream enterprises. Horizontal labor specialization represents a scheme in which the scope is divided on a project product basis. Thus, it is a sharing scheme corresponding to a product oriented WBS system. Each alliance participant carries out its duty responsibly (development, design) within the constituent element assigned to it. The division is devised in such a way that the number of inter-element interfaces becomes as small as possible. This scheme has a merit of a more clearly defined range of responsibility and smaller alliance risk. On the other hand, it is generally harder to exploit complementary effects, or synergy, between the work functions. Hybrid is a sharing scheme which lies somewhere between the former two and requires finer mutual coordination. Actually, the hybrid type is often implemented in real world. The selection from various types of sharing schemes should be based on the factors such as: risk minimization and the synergy effect obtainable from alliance building. Each enterprise has its own motivation to join the alliance, which has a huge effect on formation design. In many cases, some enterprises join the alliance with quite a different intention from others. If the objective of the alliance building lies in mutual complement of business resources, especially in functional and technological capacities, it should aim at improving comprehensive strength by mutual embedding of lacking capabilities. The balance of power in formation design generally shifts to those enterprises in possession of special functions and technologies. In case the main objective of the alliance lies in risk dispersion, the dominant factors determining the formation design are the nature of the risk-causing elements, as well as the knowledge and capacity to handle them possessed by each participant. As such, the balance of power generally shifts to those with higher risk-bearing capacity. These considerations often result in hybrid type formation design, which is complex.

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*5 T. Sato, S. Akiyama “Kaigai Kigyo tono Kyoudou Project Suikou ni okeru Risk Youin” Proceedings of the Society of Project Management, Vol.9. No.1, 2007

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Classification of formation design (source: Sato, Akiyama, 2007)

7-4. Risks and Points of Attention in Alliance Building Points of attention for successful alliance building are listed below: (1) Rebellious behavior Each private enterprise normally behaves to maximize its benefit. Pursuit of each enterprise’s own benefit sometimes creates a problem. Typical rebellious behaviors include: 1) Too much dependence on other participants and load avoidance (debasement of quality and quantity of resources put into the project out of a desire for self protection) 2) Enlargement of enterprise’s own benefit (loading of resources larger than planned allocation, usually aiming at enlarging contract job from the cooperative partnership) 3) Monopoly contract (securing profit by way of subcontracting: this may occur when the market principle does not effect the provision of services within the cooperative partnership) (2) Cultural differences An unavoidable concern pertains to cross-border alliances – i.e. cultural differences between the countries. Some enterprises are hyper-cautious about this issue. However, risk analysis can’t go very far if it tries to elucidate the potential issues of the stakeholders as long as the analysis is based on such an intangible word as “culture”. It is to be understood that the major origin of risk in terms of cultural differences lies in the vector of actions, or the method of work, on a whole company level, rather than the differences in lifestyles on an individual basis. (3) Differences in business operation infrastructure Each enterprise has its own business operation infrastructure that is different from others in varying degree, depending on its field and scale of business, history, and corporate culture. Even the style of business operations provide several variants: 341

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top-down and bottom-up, manual-oriented or discretionary, WBS system and application systems, and the degree of authority delegation. Entrepreneurial ventures and established enterprises often show large difference in the mode of business operations, which may cause conflict when they try to make a decision together. Before-the-fact consensus formation on the authority of project managers and an introduction of a joint audit system may be effective to prevent such situations. (4) Selection of partners and profiling The first step of risk avoidance is the selection of a good partner, indicating the importance of enhancing profiling capability regarding the third party. If an enterprise wishes to capture the high ground during the execution stages of a program/project, it must have a point of superiority in the balance of power. In this context, strengthening of the business operation infrastructure proves to be a universal measure, which makes the partner’s wish to work together even stronger.

[ Example: Partnering Scheme ]

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The relationship between the purchaser and the contractor normally shows conflict of interest. Especially when the contractor receives the order at lower price because of fierce competition, creation of additional charges becomes an important measure to salvage profitability. This situation often makes negotiations – conflict regarding addition and reduction of fees - lengthy and mired, resulting in a possible damage to the relationship. The original target of the project should be shared by both parties: to deliver high quality products to the ordering party. The idea of partnering, which has become widespread in recent years - was devised to turn the conflict relationship into a cooperative one, leading to a successful project. Because the final goal of the project should be the same for both parties, building a consensus between the two - working together for the same goal – should resolve difficult problems that may arise during the project. The partnering method calls for building an open and cooperative relationship among the parties - based on mutual reliance, respect, and honesty - to eliminate, as long as possible, the sources of problems, thus proactively preventing conflicts from occurring. The most important key to a successful partnering is to promote trust between the leaders at the top: a sound relationship based on mutual trust prevents collapse of the partnering even if some problems occur. Although various problems and conflicts will occur among the people on the line, a firm mutual trust relationship between the leaders at the top can resolve almost all of these issues through dialogs between them. ******************************************************************************

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8. Design and Application of a Community The importance of community in program/project activities has been on the increase. The closed innovation paradigm assumes a project is to be executed within a formal organization, and results are also expected within it. Therefore, the way the project is managed and how the organization is governed is of great importance, calling for discussions centered around such issues as: handling of a program/project in an formal organization, team theory, and organization governance. Today, however, the innovation paradigm is shifting from closed innovation to open innovation (see Chapter 2 of Part 4-Section 5), creating the need to know how to achieve results in an informal organization – i.e. in a situation beyond the formal organization framework assumed by the closed innovation concept. Communities – informal organizations – exist in large numbers, and people are involved in their daily lives, directly or indirectly, in some communities. Exploring the ability of those involved in a community is tantamount to acquiring a new resource useful in a project. Understanding the importance of communities, and the way people are involved in them, paves the way to widen the possibilities of value creation through the program/project activities in the open innovation environment. This chapter gives an account of preferable usage of external communities from the perspective of business, including the method to design a community for better involvement in the value creation activities of a program/project.

8-1. Significance of a Community Some communities are passive, meaning that an individual is obliged to participate regardless of his/her will, and others are active communities consisting of voluntary participants. Passive communities include local resident communities, school communities, and company communities. These have a close relationship with human lives, and people live their lives as a community member. Active communities include academic societies, NPOs, and athletic clubs. These are characterized by the fact that the people who share something in common – expertise, hobbies, and interest – get together. Activities in such a community gives rise to synergy that enhances the community’s presence, providing a variety of benefits to the members. Communities have traditionally come into existence through person to person relationships: most of them are rooted in local society. Therefore, expansion of communities, if any, has been implemented by creating new local chapters and networking them. With the evolution of the Internet, virtual communities came into existence, where people are connected by way of the Internet without the need of face-to-face encounters with each other. This is the era of virtual communities built across the boundaries separating regions and countries. How to explore the potential of virtual communities from a business perspective has become a theme of significance when we think of value creation.

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[ Example: Hack For Japan: an Engineers Community ] ********************** The Hack For Japan is a community of IT engineers and others that aims at performing support activities to help restoration in the wake of the Great East Japan Earthquake. They gather via the Internet across social boundaries (enterprises, organizations, institutes,…). “Hack” here is an abbreviation of “hacker” that means an expert of computer technology, and also implies a person who creates freely and voluntarily out of a belief in mutual help. In the restoration efforts after the disaster of the Great East Japan Earthquake, individual engineers got together voluntarily to form a community for exploiting their expertise for the benefit of those who suffered in the disaster, whereby the word “Hacker” served to show their identity. The engineers, who have never seen each other before, got together with a laptop in one hand to put out ideas and created support programs together after a process of trial and error. These IT-technology based accomplishments include: an Android application for checking radiation dosage, Geiger counter production technology, techniques to restore damaged photographs to their original state. Many of these achievement were provided for free. The concept binding this community is “The codes connect one heart to another”. This motto represents the will of the engineers to build a bond connecting a one heart to another by means of program code: the hearts “of the developers and those who suffered from the disaster”, “developers and designers”, and “those suffered in the disaster”. ********************************************************************************

8-2. Fundamental Rules in a Community There has been little need to view a community from the perspective of business. We can point out some exceptional cases to this trend: in construction projects, there has been a strong concern over the relationship with the community of stakeholders, or local residents, and, as an important task of the project activity, many efforts have been made to maintain a favorable relationship with the local community. However, only small attempts have been made to leverage communities for maximizing the achievement of programs and projects. Many projects have viewed communities predominantly from the perspective of risk management, and addressed the community-related issues accordingly. Once viewed from the perspective of value creation, we discern that communities can provide a great many possibilities. At the same time, the direction we should follow concerning how we can make the best use of the communities for maximizing the achievement of business projects looms into view. The only rule applied to those concerned with a community is the “win-win relation”. Namely, mutually beneficial collaboration represents the absolute rule. Those who can not follow this “win-win relation” have to leave the community, and the community will even fall apart if this rule collapses. A member can only find his/her place in the community by observing the rule, and his/her reputation and status in it will become higher as his/her contribution becomes greater. This is an irreversible rule

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if one attempts to leverage a community for business. He/she must contemplate how to obtain maximum benefits from the community while abiding by the rule. Contributions to a community (efforts, expense, etc.) would become a sheer waste of resources if nothing is obtained. To gain something through the beneficial use of a community, one should always keep this rule of thumb for collaboration in mind and start every approach to the community from this baseline.

[ Example: Open Source Software (OSS) development community ] ****** The OSS development community is generally divided into two groups: the developer community and the user community. The former consists of software experts and engineers gathered together in an attempt to make contributions in technical aspects – writing source codes and testing. The latter uses OSS software for dissemination and provides pieces of know-how obtained while using it. The developer communities, although quite varied in structure, often consists of several core-members and other many engineers. They have so far produced many practical applications – typically Ruby and Seasar2 – and a number of new achievements are under construction. The members of this community are receiving full benefit of the knowledge and technology acquired in such a way, for example, as applying them to external activities (e.g. projects other than OSS to which he/she belongs).

********************************************************************** 8-3. ctive Utilization of Community Methods of community utilization vary and the scale of benefits obtainable from them also differ from one case to another. It should be noted here that the basic existence value of a community should be closely linked with the benefits of those who participate in the community: the community unable to provide benefits to its members inevitably falls into decline. The manner in which a community is utilized can not be discussed without taking contributions to the community into consideration. In the following sections, several examples are presented to illustrate how to utilize a community.

[ Example: Creation of Customer Value: Harley-Davidson ]

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Let us take a look at a community that absorbs the modes of behavior and needs of the participants, leading to creation of value. The developers in Harley-Davidson actively come on board regional Harley clubs and enjoy touring around with Harley-enthusiasts. As participants in the community, they talk about Harley-Davidson motorcycles in an open manner with other enthusiasts. By doing so, they listen actively to gather a variety of opinions useful for new development. In this manner, Harley-Davidson creates an enthusiast-based community and contributes to the community by developing motorcycles to their tastes. The enthusiasts, on the other hand, contribute to the sales of Harley-Davidson by selecting its product when they make a replacement purchase. ******************************************************************************

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[ Example: Creation of an Improvement Project: Starbucks club ] ********* Community schemes that makes use of virtual networks includes the Co-Creation approach of Starbucks. Starbucks forms a community with coffee fanciers who especially favors Starbucks varieties. They discuss and put forward ideas that might be useful for developing new products and services, as well as for improving the way it does business and service quality from the customer perspective. In this community, Starbucks and its fanciers get together to discuss seriously how to give a boost to its business. This is a joint effort – between Starbucks and fanciers – to spark exchange of opinions for the betterment of the business. Therefore, the ideas put forward are made open to all the members, as well as the current status of the adopted ideas. Starbucks draws in coffee fanciers to its community and lets them think about how they can bring more excitement to the business, providing a source of inspiration to Starbucks. All the participants join the community voluntarily and enjoy being a helpful part of Starbucks management. In this way, Starbucks makes beneficial use of external resources – i.e. general coffee fanciers - to bring ides to the table that would provide inspirations for its growth. Starbucks forms, from its own motives, a community and prompts the community members to be a part of management. The members voluntarily put forward a variety of ideas, leading to creation of new value-added products/services and boosting earnings growth. This approach is a typical example of utilizing a community for the creation of new additional value. ****************************************************************************

[ Example: Organized Community Utilization in P&G ]

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Acquirement of technology can be another objective of community activities. When a project is contemplated, it may be self-sufficient in terms of required technology, or, it may need an addition of new technology. In the latter case, a decision must be made whether to try to break through: even if in less than an ideal way, by combining available technologies, or, by developing novel technology from scratch. Either option, however, may not be a correct answer from a business point of view. Combination of available technologies may only result in insufficient quality, translating into loss of competitiveness. Development from scratch, on the other hand, may require prohibitive cost and time, leading to an economically unfeasible business. A third approach is an introduction of technology from an external party. The fact that you do not have the technology does not exclude the possibility that you may find it elsewhere in the world. If it is not exactly the one you require, a slight modification may make it applicable to your needs. The issue here is the fact that you do not know where you can find the technology. The knowledge of where it is will open the way to make an approach to the possessor whose technology may solve the challenge once for all. In recent years, instances of community building focusing on searches for new technology are increasing in number. P&G is eager to build P&G-centered closed communities by recruiting companies now doing business with, or willing to do business with P&G. The company willing to 346

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participate has to conclude confidentiality agreements. In return, P&G discloses the technology required for a new product it is planning to develop. Each participant selects a candidate technology from its arsenal and actively proposes it to P&G. If adopted, it closes a contract with P&G for licensing the technology for profit. This scheme enables P&G to acquire new technology from the community members in a timely fashion, leading to significant reduction of time to market. In addition to evaluate the proposed technology, P&G works as a good-will intermediary: P&G introduces technologies, even if P&G does not require them itself, to other member of the community in view of the needs of the company. Thus, the community participants not only provide technologies P&G requires, but also have more chances to build business with other companies within the community. Participation in P&G’s closed community opens a lot of doors for the member companies to do business. P&G makes full use of this scheme to increase the number of community members, and to gain a vantage point to acquire a new value. This is a good example of collaborative utilization of a community. Each of the above described attempts to make use of a community represents enterprise-based organizational efforts. Each enterprise approaches, invests, and contributes to a community in a deep understanding of its importance, and, in return, gains benefits. The now famous “15% rule” of 3M can be interpreted as an illustrative example of this scheme. 3M encourages its employees to use 15% of their work time on their own freely, and 3M considers their activities as an investment. The employees make an effective use of the given time for voluntary activities including creation of a variety of communities as needed. The community activities, in return, sow a seed for innovative products. An important thing to be noticed here is that an innovation is created through the various activities of a community, and the community needs proactive support and investment from the enterprise. Strategic investment from an enterprise to a community may prove to be a huge source of benefits to the enterprise. *******************************************************************************

8-4. Value of a Community The value of communities has been under gradual review in the light of their merits to business: a growing number of cases indicate that participation in a community can be a boost to the business. A growing number of enterprises, who have no idea where the required technology is, are willing to pay to get an introduction to it from a company with well-developed network connections (with other companies, persons, and universities). This is a kind of business matching service, which nourishes a community over time with a variety of persons and gains reward by utilizing the community. Individual persons and companies who participate in the community (technology network) come to understand the concrete benefits the community can provide – i.e. expanding possibilities of technical cooperation business – making them all the more willing to take part in the business matching business network.

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The role of the company that hosts the community is to serve as a coordinator. It makes calls for participation to many researchers, engineers, and enterprises to expand the network in order to enhance its value. The host company gains benefits (revenue) from its activities as a mediator – i.e. providing the community members with the possibilities of business expansion. This is one of typical examples of business that gains benefits directly from the value of communities.

8-5. Reputation of the Entity and Branding Reputation can be a significant differentiating index in the community. The reputation of an enterprise in a business community has not been a serious concern, at least in terms of viewing its competitiveness. Enterprises have been able to carry on business and generate revenue by selling products without paying much attention to, or even totally disregarding, its reputation in the industry business community. However, amid the paradigm shift from closed to open innovation, enterprises have to conduct themselves in a manner that pays more attention to the community. Because, reputation in the community may play a significant role in expanding the possibility of obtaining a project. Typical cases of this situation can be seen in pharmaceutical industry. In the pharmaceutical industry, where the trend to open innovations has been more advanced than other industries, many of the new drugs have been discovered through open innovation schemes and the number of such drugs is only increasing. In an increasing number of cases, drug discovery is made in an entrepreneurial venture, then, after being purchased by a well-established pharmaceutical company, the drug is put into clinical trial before marketing. New chemical compounds and bio-products for innovative drug discovery are in a constant state of short supply, causing large pharmaceutical companies to always be on the hunt for scooping up novel agents using a large amount of money. According to IBM report10), large disparity in terms of revenue is observed in the community of pharmaceutical companies, between the companies that are met with a good reception form entrepreneurial companies and those that are not. In other words, those enterprises well-liked by entrepreneurial ventures have shown higher earning rates than others. This fact indicates that, in the community of the pharmaceutical industry, entrepreneurial ventures are likely to select a large business that shows understanding towards them on an equal footing as a partner. Thus, an entrepreneurial venture, if it has discovered a promising agent, makes an approach preferentially to those sympathetic enterprises. Thus the large business that is first approached by the entrepreneurial venture gains larger business opportunities, leading to higher revenues than others. Reputation in the industrial community has rarely come under the spotlight, yet it is becoming a significant source of competitiveness. However, the reputational standing of a company is generally hard to change: it is strongly affected by the behavior and attitude of all the personnel of the company. As described above, a factor

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that has remained outside of serious consideration is now taking front stage– i.e. enterprises with collaboration-friendly cultures gain a larger edge in terms of competitiveness.

[ Reference ] 1)

Y. Shibao. (1999). Purojekuto manegimento kakushin. [Project management innovation].Tokyo, Japan: Japan Productivity Center

2)

S. Levy (tr. T. Naka, C. Ikemura). (2011). Google netto hasyano shinjitu. [In the Plex: how Google thinks, works, and shapes our lives]. Tokyo, Japan: Hankyu Communications Co., Ltd.

3)

Thomas R. Block & J. Davidson. (2002) [The project office / best management practice]. Frame Crisp Management Library (Crisp Publications, 1200 Hamilton Court Menlo Park, CA 94025 < tr. K. Nakamura [Purojekuto manejimento ofisu] Tokyo, Japan: Japan Productivity Center >

4)

Vijay K. Verma. (1997). [Managing the project team] Project Management Institute

5)

Vijay K. Verma. (1996). [Human resource skills for the project manager]. Project Management Institute

6)

M. Matsuyama ed.(2009). Senryaku Kyanpu – ni(2) haku、 mitu(3)-kka de saikyo

no senryaku to jikkou chiimu wo tsukuru. [Strategy camp - Make the strongest execution team with 2 nights and 3 days]. Tokyo, Japan: Diamond, Inc. 7) Harold Kerzner. (2001). [Strategic planning for project management using a project management maturity model]. John Wiley & Sons, INC、. 8) Yoshiaki Shibao and Masashi Ochi (2005). [Study of Project Management Maturity Assessment] Journal of the Society of Project Management Vol.7, No.6 (20051215) pp. 34 - 46 9) Yoshiaki Shibao (2008). [Study of project management maturity in pharmaceutical industry] ProMAC 10) IBM institute for Business Value.(2010). [Collaborative innovation-partnering for success in life sciences]

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Chapter 4

Project Finance Management

Project Finance Management

1. Overview Project finance management is one of the most important enablers for program/project management aiming at building a structure for procuring funds for the implementation of a project. A project can only be started when a structure is ready for contribution of funds for performing the project. When the required fund scale of a project is large, it is quite rare that an owner company can finance the fund on its own and it is usual to consider a structure for funds contribution on borrowings (debts, finance) from third parties. Project finance management creates a feasible financing scheme in consideration of an efficient funds contribution structure in line with the creation of a structure for a project. The creation of this structure is either taken charge of by a customer (owner) or by a contractor (service company). To establish this system, a scenario will be considered where a single project entity does not guarantee debt repayment on a standalone basis but instead cash flow generated by the project is used as a source of repayment and various stakeholders supporting the project share the risk and provide various types of security so that the project itself supports the debt. Practice Guidelines

Environmental Changes & Const raints

• Aim at a delicate combination of factor substitutability and option possibility, design for the most efficient methods for fund procurement • Aim at reasonable burden distribution and sharing through agreement on reasonable risk sharing in consideration of the balance of burden among stakeholders.

• Misdist ribution of the funds to be invested in the project, diversity in methods, elements, and conditions, as well as substitutability for business eligibility and risksharing • Changeability of factors (susceptibility to change), substitutability (possible to be substituted), correlation and chain spread (link with each other), dynamic nat ure (move dynamically)

Objective • Creating an efficient fundcontribution s tructure for the project • Limiting risks in the project • Ensuring business eligibility and feasibility • Creating a fund procurement structure concurrently with formation of a project struct ure • Attain burden alleviation and risk diversification

Knowledge Databases

Work processes • Creation of basic conception • Selection of elements and their specification • Creation of a feasible and optimum structure • Optimum risk sharing • Assessment of business eligibility and loan eligibility

Results • Ensuring project feasibility and start • Creation of a stable risk management system that supports the project (risk management system as a structure and integrated achievement of fund procurement)

• Similar case analysis, success and failure experiences, accumulation of data and methods (finance, legal affairs, contract practice, etc.) • Examples of risk sharing, etc. (perfect contract st ructure and composition)

Exhibit 4-4-1

Overview of Project Finance Management

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For this purpose, a concept for a basic structure should first be established, and then optimum factors for giving shape to this concept should be chosen from the market. In consideration of constraints, a feasible structure should be created after a series of adjustments, and through this process, optimization of risk sharing among stakeholders should be examined. In creating such a structure, selection of the best factors should be made through trials and errors. In addition, its feasibility and business eligibility are constantly assessed and that its results are expected as a feasible structure. A procedure is adopted by which a concept is planned based on a certain primary objective and in consideration of the most efficient fund procurement method required for the project. Exhibit 4-4-2 indicates primary work process in the Finance Management and their co-relations. It is noted that the work processes are subject to assessment to raise feasibility and insure an optimum structure.

Exhibit 4-4-2

Correlation among Work Process Elements

2. Basics of Project Finance Management 2-1. Necessity of Finance Knowledge While a project is born from contractual relationship between a customer and a contractor, there is a project where a customer cannot be clearly defined at an early stage although there is a definition of the mission. In either case, financial resources (funds) are required for its realization. Note: In the contracting industries, the term ‘customer’ (British English), ‘client’ (American English) and ‘owner’ (meaning a company owning a production facility as an objective of a project) are used alternatively In this case, a customer contributes its own funds or a contractor arranges for funds for its customer. Or a third party such as financial institutions finances funds for

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either a customer or a contractor. In general, where the required amount for a project is large, it is difficult to procure the entire amount with its own funds, and it becomes necessary to achieve the fund procurement for the project by utilizing financial schemes available on the market. A project is often realized only after the financial scheme for the project is considered. Thus, to materialize a project, it is necessary to understand the concept of finance and the framework of fund procurement as knowledge. Finance, which is a wide concept, includes fund procurement, funds management, debt collection and assets and profit calculations of companies and the financial transactions of government agencies which are called financial affairs, and accommodation of funds (transfer of resources from an entity with excessive funds to an entity with deficient funds), called financing. Therefore, finance can be defined as "exchange of funds" including fund procurement and its extension, fund collection. "Funds" of fund procurement are financial resources and need to be expressed in figures by a specific currency. The procurement source is basically equity and debt. The equity expects to receive its return - collection of the equity cost including added value - as dividends from profits of the project in general. On the other hand, the debt expects to receive its return - principal payment and interest as added value - in a contracted form from the borrower. The equity and debt have a great interest in the success or failure of the subject project to which funds are contributed. The equity depends on business profits for its return and can suffer total loss in the case of business failure. The debt, in the case of failure of the business in question, assumes the risk of being forced to expect its return from the value to be obtained from the disposal of other assets of the borrower that is security.) The success or failure of the project concerned, namely whether sufficient value capture is made or not, is primarily*1 formed based on whether a profit is made or not, and this can be judged from the information concerning finance. This information is summarized in the asset and profit calculation by "financial accounting information" made in monetary expression. Financial accounting represents what the financial status of a company is and expressed or disclosed in monetary value based on the established principles and system (accounting system) ; and the financial status is eventually summarized in financial statements. In project management, a project itself is regarded as one company and the financial status of the project is calculated; actually it is often the case where an SPC (special purpose company) is established for the sole objective of performing the project, and therefore financial accounting is often that of the special purpose company. Financial statements or final numeral indication of financial accounting, consists of a balance sheet, a profit and loss statement and a statement of cash flow (referred to as three major statements or three major financial statements). These are normally included in documents for settlement of accounts of a company, and in project -----------------------------*1 Primarily" means that the value of a project does not necessarily lie in pecuniary earnings. The value of the environment or contribution to the local community is prioritized in some cases.

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management, the period for a project life cycle should be considered as a subject, and a prospect for financial accounting over the future should be assessed. The financial accounting information containing such future information makes it possible to forecast future profits and conduct analysis such as risk management. This also makes it possible to analyze the propriety of project finance to be described later and moreover this is an important judging element for managerial decision making. The preparation of financial accounting information containing future information and its analysis are substantially different from that of conventional project management in that it mainly handles budget and cost control in terms of fund-related matters. The method of financial accounting itself is basically common to the world. These three major statements are in close relation with each other, and for example cash in the profit and loss statement should be equivalent to that in the cash flow chart. Checking the coherence among the three major statements is important in checking the accuracy of the three major statements. Various financial accounting analyses can be conducted based on the information including the future three major statements. Although it is not necessary for a project manager to understand the knowledge of financial accounting in detail, it is necessary to understand the basic flow. The preparation of financial statements from a simple business plan will facilitate this understanding.

2-2. Basic Concept of Finance As described earlier, equity and debts are basic fund sources when a framework for funding is examined. For equity, rights and liabilities of investors such as the amount of investment and a voting right should be stipulated by an investment contract. For debts, there are such types as indirect financing – by banks - and direct financing – such as issue of bonds -, and the amount of loan, term of loan, interest rate, security, etc. should be stipulated by a loan agreement. Although investment practice is a fund contribution practice in expectation of a return such as dividends, it is only expectation and its realization is not guaranteed. On the other hand, in finance practice, a borrower and a lender exist and a lender basically expects reliable debt repayment. For this reason, when judging that a borrower lacks financial strength, the lender often requests a creditworthy third party - for example its parent company in the case of a company - to guarantee the debt repayment. In addition, the lender requests the security (for example, land and building, stock, term deposits, etc.) of the value corresponding to the debts until the debts are securely paid off. 2-2-1. Corporate Finance When a corporation, which plans and realize a project, borrows funds necessary for the project from financial institutions, the responsibility for debt repayment lies in the corporation, a borrower, and an entire profit of the relevant corporation including a profit generated by the project will be a source for debt repayment. This means that financial institutions assess earning power and

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financial strength of the corporation that aims to realize the project and provide credit to this corporation. This is referred to as corporate finance. In other words, the corporation is assessed and given credit, and it is not the project that is given credit. When a corporation establishes an SPC with the objective of realizing a project and this SPC as a borrower is financed by financial institutions, the circumstances will be exactly the same if the corporation guarantees debt repayment as a parent company. (Refer to Exhibit 4-4-3.) 2-2-2. Project Finance In contrast, the manner of finance where the subject of credit by financial institutions is not a specific corporation but a personified project is called project finance. The project borrows funds, but more specifically, the relationship of rights and obligations concerned with the performance of the project and borrowing practice is held within the project as a premise by establishing an SPC with the only objective of performing the project and making it a borrower. Through this practice, the parent company avoids debt repayment guarantee to its subsidiary and considers off-balance-sheet-debt (avoidance of debt recognition in a balance sheet). It can be thought, from the fact that an entity of a parent company with single financial structure does not guarantee debt repayment, that a sound scheme to reliably repay principal and interest exists in the project supported by multiple elements and stakeholders and the whole scheme produces credit. From the standpoint of funding to a project, rational expectation holds where stable debt repayment is made only after the project generates stable cash flow. For such a reason, cash flow, and business assets or business structure itself that generates cash flow are security for financing. Besides, to reinforce and make secure the above, diversified elements supporting the project including performance guarantee by various stakeholders involved in the project constitute a part of security and a scheme to combine and support these security elements is created. The project itself that has not been realized yet becomes an entity having creditworthiness through the creation of this scheme. The project including borrowing practice is performed by an SPC that is established for that purpose, but this subsidiary has entity in some cases and no entity in other cases. When there is no entity, it is easy to understand that the parent company creates a framework of a kind of a quasi-deco glomeration model and performs the project through this framework. This means that the parent company that is the entity to create a project prepares for and contributes the equity that is risk money to a certain degree and procures the necessary funds for the project with this equity and loan. Thus, project finance is a scheme in which the project can procure funds necessary for the performance of the project independently from the market and is based on a premise that this scheme itself supports debts. In this case, finance is structured and realized in parallel with the establishment of the project framework, and the project can be started only after both are realized. In the

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modern society, the concept of efficient funding focusing on a project is being utilized in diversified fields such as mega-projects including natural resources development and development of infrastructure, development of public facilities and provision of public services based on a contractual framework with public bodies including PFI (private finance initiative) and PPP (public-private partnership), asset formation of real property, or M & A (merger & acquisition) of corporations. (Refer to Exhibit 4-4-3.)

Corporate Finance

Project Finance

Loan to an entity planning a project or a sponsor (investor)

Sponsor (Investor) Equity

Debt guarantee

Project Company

Loan Funds Provider (Debt)

Loan to a project compan y that pe rforms a project or to a project

• Definite promise of investment • Definite promise of addition al support • Guarantee for contractual performance • Investment stock as security, etc.

Source for Repayment of Loan

Sponsor (Investor) Equity

Project Company

Loan Funds Provider (Debt)

Source for Repayment of Loan

All business earnings (including those from the project) of the sponsor (investor)

Project Contract

Land, eq uipment, building, raw materials, products, contractual rights, insurance claim right, all tangible and inta ngible assets related to the project such as deposit in the project account

Cash flow arising out of the p ro ject itself (Restriction on debt repayment retroacti on toward investors)

Security

Security

Credi t of the sponsor (investor) and part of its general properties (land, stock, etc.)

Cash flow of the project, all tangible an d intangible assets, contractual right, equity of the sponsor (investor) for the project company’s stock, etc.

Object of Examin ation of Loan Eligibilitybetween Corporate O bject of Examination of Loan Figure 4-2-3: Difference Finance andEligibility Project Finance Past financial status and performance projection of the sponsor (investor)

Exhibit 4-4-3

Business eligibility of the project, risk factors that prevent smooth operation of the pr oject an d their ade quate mitigation, or system to prevent manifestation of risks

Difference between Corporate Finance and Project Finance

Funding Secured by Earnings from a Project *********************** Company A plans to implement a project by investing $7 million including a construction of facilities. If Company A uses its free cash flow, the project is considered sound as an investment, but Company A has to use its resources. When sounding out the bank on borrowing funds through its finance department, the bank said that it will require stocks or land as security to guarantee debt repayment. If Company A accepts such requirements, failure in the project may affect the survival of Company A. In this case, if the project can prove to financial institutions that the investment project reliably generates cash flow, the project can borrow funds from financial institutions without using the resources of Company A by offering cash flow and project-related assets as security because principal and interest can essentially be repaid from profits generated by the project and such profits are used as a source for repayment. Company A separately establishes an SPC to

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perform this project to isolate a risk involved with financing. The idea of funding from the market by turning risk into cost is a framework for sharing risk with others, and enables efficient use of in-house resources. Thus, for companies the consideration of the efficient funding manner of the project is a part of resource management of the manner of efficient resources. *****************************************************************************

3. Basic Conception of Finance for a Project 3-1. Basic Conception of Project (Project Design) To achieve the objective of the project, an overall framework of relations among all stakeholders involved in the project should be designed and then a basic framework for implementing the project should be fixed. A basic framework for various issues, e.g., to what extent one's own resources (workforce, funds) should be injected, or whether to procure funds from the market, and how to set the relationship between these issues needs to be established. For this purpose, an optimum structure for realizing the project should be designed by specifying the stakeholders related to the project and by a. designing a structure to reasonably share the burden and risk supporting the project, b. aiming at a structure to properly combine commitments of various stakeholders; c. collecting best elements from the market; and besides d. assuming that these elements are substitutable on the market. What elements should be incorporated in the project and how the whole project should be designed are different from a project to another. For example, a project scope and risk assumed within a company internally in some cases while they may be given by others based on contractual arrangements in other cases; this is the difference between internalization and externalization of risk, which means whether scope is taken into by a company and risk is managed internally at the company or whether risk management is entrusted to a third party on contractual relationship. This depends on policies on distribution of management resources and the amount of relevant costs. In finance, it is critical whether an entity that assumes risk can reasonably control risk, and that the structure of the overall project supports risk, and how earnings from a project are distributed among stakeholders. Funds needed to implement a project do not exist beforehand. In planning and development phases of a project, funding is planned for its achievement, and at the same time, means and methods for its implementation are designed. Funds in this case include any fund necessary for implementing a project including equity and debts. Both equity and debts are funds contributed to a project but their costs and characteristics are different. Besides there are a variety of combinations of these funds and the amount of costs may substantially change, on which financial viability may depend. Thus, basics of designing a project are designing a general framework for a whole structure of a project.

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Exhibit 4-4-4

Project Finance Management

Project Design (Example)

3-2. Basic Conception of Funding (Funding Design) The basic conception of fund procurement is to consider an outline of the structure of fund procurement after a basic conception of a project is prepared. Funds necessary for realizing a project are all funds needed for construction and improvement of facilities (the sum of initially estimated cost and unexpected, extra costs). If a project is defined as an individual entity with one life cycle, repayment of loans, payment of all necessary costs and expenses, should be covered by generation of profits from cash flow of the project itself after the facilities are completed. In some cases, however, unexpected demand for funds such as in a shortage of operation funds may occur that are needed to continuously perform a project, and this should be taken into consideration. Project finance is based on prior arrangement of a long-term framework for injection of funds needed for projects. Major components of the funds injected into a project are equity and debts. A framework for injection of funds into a project is determined on the inter-relationship of these two funds. A

Debts Gross amount of funds needed for a project

Equity

Exhibit 4-4-5

Relationship between Equity and Debts

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Note: The vertical axis of the above figure is the theoretical gross amount of funds necessary for a project. It is possible to procure 100 percent of the funds necessary for implementing a project from equity, but is impossible to procure them from debts. In projects, funds are procured in an optimum combination of equity and debts. In the above figure, the more Line A moves to the right, the higher leverage of equity and the more risk on debts. When Line A moves to the left, the risk on debts will be lessened. Therefore, borrower (equity) orients itself to Line A that is set on the right of the figure. On the contrary, lenders (debts) orient themselves to Line A that is set on the left. They are in the relationship of conflict. In any project, a balance between them is maintained at any point. In project finance, the balance will be kept on the right to the extent possible to aim for enhancement of the leverage of equity, efficiency improvement of equity, non-retroactivity (promotion of off-balance) of debt repayment (for investors). The dotted line of the above figure shows a typical point of balance in project finance. There are many options in the market concerning types and pattern of funds available for projects, and entities that provide funds. Funds for projects are procured by combining such options. Types of funds refer to equity, debts and quasi-equity, or, funds classified between equity and debts such as subordinated loans contributed by sponsors (investors). Patterns of fund contribution refer to common stock, preferred stock, various types of stock, corporate bonds, convertible bond, or loan money from financial institutions, subordinated loans from sponsors (investors), subsidies contributed by the government, etc. As an entity that contributes funds, there are sponsors (investors), general investors, institutional investors, commercial banks, institutional financial agencies, international agencies, central and municipal governments, etc. Since levels of tolerance toward risks are different according to fund contributors, expected costs of each fund are different. Expected cost is determined on the inter-relationship between risk and return. With an eye on this difference and balance, elements of funds for projects are combined to procure funds. Since expected cost of equity is higher than that of debts, the efficiency of equity is enhanced by increasing debt elements to the extent possible (enhance the leverage of equity) and then total cost of funds needed for a project can be reduced. Because financial institutions are essentially oriented to reliable repayment of principal and interest, risks financial institutions can take are limited. Therefore, financial institutions take the following attitude in composing a finance structure: (1) They request a structure to stabilize cash flow to be generated by a project and at the same time, (2) claim for priority to cash flow distribution, collateralization of all assets and priorities to receive payment of debts (3) responsibility for risk elements that have a negative influence on the generation of stable cash flow from a project is assumed to be taken by major stakeholders.

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(When equity has high leverage, most of cash flow generated by a project is appropriated to repayment of principal and interest, because secure repayment of principal and interest will not be expected if this is not stable.) This structure means that funding financial institutions (debts) take risk when a project clearly fails, but they intend to have a project and stakeholders of a project assume other risks as much as possible when a project does not lead to a failure. However, if its burden is smaller than that of debts (higher leverage of equity), the relationship between risk and financial burdens will become asymmetric and risk of financial hazard will increase. Therefore, structural schemes to deal with financial risks are incorporated into projects. That is to say, (1) various regulations that secure achievement and stable implementation of a project are imposed on the project and stakeholders, and (2) based on the idea that a project constitutes credit, any status of the risks on the overall project and on the elements of the project is subject to strict investigation when credit is granted by financial institutions, and (3) when a project cannot assume all risks, they are shared by various stakeholders. From the above, in the case of project finance where the responsibility of stakeholders related to the contributed amount of equity is limited, there are some cases where the additional fund contribution framework by sponsors (equity) and financial institutions (debts) are arranged in a reasonable range assuming cost overrun associated with construction, or where a certain support framework by sponsors (equity) is arranged in preparation for depletion of operating funds of a project company at the operation stage. The concept is to solidify the overall structure by limitedly reinforcing what seems weak and what seems to have risks.

3-3. Basic Conception of Security (Security Design) When a parent company does not guarantee the repayment of borrowed debts, the repayment depends on lenders’ expectation that cash flow generated by a project is stable and that this cash flow will continue sustainably. For this reason, cash flow itself (future receivables) of a project is security, and the asset structure and scheme of a project that generate this cash flow is comprehensively object of security, too. Thus, the concept to request comprehensive security in relation to a project means that focus is placed not on the asset value a project but on the fundamental business value of a project. The concept is, the project itself is put up as security and when debts are not repaid, the project is taken over and efforts are made to revive it. In the worst case, the project is disposed of for liquidation, which is appropriated to the payment of outstanding debts. The range of requested security is basically held within the project and the borrower, but when the lender judges this to be insufficient, the lender may request security from other stakeholders supporting the project. In this case stakeholders who obtain economic benefits from the project attract attention and the biggest beneficiaries are naturally sponsors (investors). However, security may be requested of not only sponsors but also other stakeholders.

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The level of risk retained by a project is in direct proportion to the degree of strictness in security. In this case security needs to be designed on the premise that there are always limitations of costs and the degree of tolerance that stakeholders concerned assume. Meanwhile, the contents and composition of security may greatly change according to the extent of the involvement and motivation of stakeholders toward the project. From such circumstances, in designing a framework for funding and project structure, a well-balanced idea is required, and security tolerable for a project and stakeholders should be designed in parallel. Although financial institutions do not request a debt repayment guarantee from sponsors (investors), they demand the sponsor (investor), an important stakeholder responsible for realizing the project, as security, (1) definite promise of injecting predetermined capital funds, (2) definite promise of support for fund contribution to additional and restrictive projects, if necessary, (3) guarantee for performance of contractual obligations of the project operation company (non-monetary), and (4) hypothecation of stock equity of the project operation company. If the sponsors (investor) intend to assume greater responsibility and greater risk, such security will not be needed. In this case, financial institutions turn their concern from a project to the sponsor (investors) and in some cases may not extend the loan to the project. Various security factors requested by financial institutions are presented as “Security Package” and its overall structure and expected effects become judging factors for financial institutions to determine loan eligibility.

4. Selection and Specification of Fund Elements 4-1. Concept of Selection and Specification of Fund Elements There are various potential fund providers on the market, but the amount of money to be contributed to a certain project is not limitless. Besides, a single entity cannot always provide the total funds for the whole project. In addition, conditions, expenses and procedures for funding differ according to circumstances depending on the type of funds and a contributing entity. Each fund provider has a certain level of tolerance for the amount of funds it injects into a project and risk involved in contributing funds to a project. If greater risk is expected, the amount of funds is subject to stringent scrutinizing and expected cost of funds, namely procurement cost of funds, becomes larger, and financial viability may not be established in some cases. In such scrutinized conditions, in consideration of the fact that fund providers are always substitutable, it is desirable that an optimum combination of funds should be aimed through selection of elements in the market.

4-2. Procedures The procedure to specify fund elements is to select elements from multiple alternatives and specify them by properly assessing the environment surrounding the project and properly recognizing restrictive conditions. This basic concept and work flow are as shown in Exhibit 4-4-6. The basic alternatives are (1) fund amount, (2) fund

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provider, and (3) how to provide funds. Respective fund types and contributors have their own conditions and costs. Loan amount and terms of lending depend on the risk retained by a project and the proposed manner to manage said risk. How to set alternatives and combine them determine the structure of funding. In general, internal conditions required for a project are also elements that determine the structure of funding. In other words, judging elements are (1) the amount of funds that can be procured, (2) advantage in conditions (amount of finance cost as life cycle cost recognized from the viewpoint of the project), (3) length of the loan period, (4) level of strictness in security conditions, and (5) length of the period and an level of requirements for necessary procedures and examination.

Exhibit 4-4-6

Basic Concept of Fund Element Selection and Specification

Therefore, the procedure to select elements and specify them can be summarized as follows. Select efficient combinations from the options in the market by taking into account the cost of funds injected into the project and restrictions / conditions fund various providers can demand. The efficient funding is to reasonably realize funding of as large an amount as possible at a minimum cost for the project. Verify the cost and benefit concerning the funding for the selected combination. If the cost is high, financial viability will deteriorate. If restrictive elements are eminent, possibility and feasibility of the structure become problematic. Verify whether individual funds are an optimum element for the project. Optimality needs to be judged based on balance between cost and benefit. In the above process, cost and restrictive elements and conditions should be considered in parallel. Restrictive conditions, rather than costs, may become an obstruction. Costs should be considered on the premise of present value costs as life cycle costs. Certain elements or combination thereof should be specified as base. Thereafter, the procedure should be taken in which they are fixed as the optimum framework elements while possibility and feasibility are verified. When specified elements are composed of multiple, different fund providers, a framework for cooperation and sharing among fund providers, creditors, needs to be established. 361

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The way security and rights and obligations that creditors expect should differ. This will, for example, lead to the following circumstances. The issue of bonds by an SPC responsible for performing a project is one of efficient methods of funding on the direct financial market. In this case, purchasers of bonds (bond holders) are composed as many and unspecified, and unstable creditors and they pay in the full amount at the same time they purchase bonds. Their basic concern is to gain stable interest income and usually the interest is fixed and the term of redemption is long. If an SPC falls into default, they take actions to determine their loss by trying to sell bonds or collect credit. Meanwhile, financial institutions would not provide the funds they are committed to at a single time but they inject funds into the project according to actual demands. Their loan period is short and their behavioral principle is to securely collect principal and interest by motivating stakeholders concerned and having them performed the project while supporting and managing the project. Therefore, financial institutions principally consider continuing the project as long as possible by taking deliberate actions and repairing problems when a project company falls into default. If both parties participate in the same project as creditors, decision making and behavior as creditors are basically different, and therefore, consensus formation among creditors concerning a decision making method is required in advance in the events of default.

5. Creation of Feasible and Optimum Structure (Structuring) 5-1. Structuring Structuring means summarizing and streamlining of various fund providing entities, fund types, patterns, and conditions into a organic framework that establishes loan eligible conditions of a project, and the creation of a structure for achieving a project. In this case, assuming that a single entity cannot support a project or bear project's debts, as a whole, a structure is designed and established in such a way to meet loan eligibility by combining various commitments as a package based on contracts among a variety of entities concerned with the project. In other words, structuring aims at establishing a structure where the project as a whole can independently procure funds.

5-2. Project Scheme The basic relationship of roles and responsibilities among stakeholders can be defined by breaking down the basic design of a project and specifying the basic relationship of stakeholders involved in the project. To this end, elements, framework, and correlations for achievement of a project are organized as a scheme. A project scheme is a conceptual framework of a project that is reasonably assumed to be viable. This scheme specifies the relationship among stakeholders and clarifies roles and responsibilities of involvement in the project. Each structuring process goes through different details. A project scheme is also a bird's eye view of the framework of the overall project and serves as a road map suggesting what to achieve from here.

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Needless to say, it will not necessarily function as the ultimate framework for a project. The concept of structuring refers to planning of the materialization of individual elements and the concurrent realization of the structure and composition of the total project by depicting the whole picture. (See Exhibit 4-4-7.)

Exhibit 4-4-7

Project Scheme (Example Production Plant Project)

This figure is an example of a manufacturing industry. In some cases, there are no contracts depending on the content of a project (for example, product sales contract), or contract elements are combined (for example, an operation company procures or supplies raw materials by itself, or a project company takes charge of operation by itself, etc.). The above figure only exemplifies a possible case.

5-3. Finance Scheme Finance scheme refers to a scheme that shows the relationships between the individual fund providers and a project, and a project and stakeholders, and matters related to fund contribution. It can be referred to as a picture that shows the whole relationship seen from the viewpoint of funding. (See Fig. 4-4-8.) Finance schemes recognize project elements from the viewpoint of funding for projects and systematize major relationships among them. The idea that a debt provider can hypothecate the framework that produces cash flow of the project, the project enables restoration and relief in terms of mortgaging the total project, if necessary taking over the project and consigning to a third party on assignment. This idea is based on the premise that elements (entities) concerning a project are substitutable in the market and that survival and continuance of projects become possible by substituting elements that have failed or broken down. For this reason, various agreements that enable succession of rights need to be determined in advance among a project company, lending financial institutions and all stakeholders concerned if a certain phenomenon occurs.

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Exhibit 4-4-8 Finance Scheme (Example Production Plant Project) This figure is an example in which the project scheme in Exhibit 4-2-7 is deployed as a finance scheme.

5-4. Procedure for Structuring 5-4-1. Integral Relation between Project Development and Fund Contribution The process to develop a project and the process to build a structure that provides a project with funds are like two sides of the same coin. This results from the following background. (1) Fund contributors and stakeholders who assume the risk involved in a project are supportive elements of a project. Finance practice relies on a framework for contractual risk sharing by these stakeholders. (2) A finance structure needed for a project is designed only on the premise of various elements and risks composing the project, their relationship and exchange of funds. On the other hand, because a framework for fund contribution affects financial viability and feasibility, it will be meaningless unless a finance structure is designed in parallel when creating an overall structure. (3) In the framework of overall project and its chronological development, it is a premise for a project that a structure where the way of risk bearers and risk sharing can be reasonably foreseen is viable in a project, and this is also a premise for project viability. (4) Finance is an essential element for achieving a project, and a project framework is realized only when supported by a finance framework.

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5-4-2. Elements of Structuring In project schemes, details are examined for each contractual relationship that is assumed to be an element that structures a project, and as a result, a project profitability model is created upon recognizing cost elements, and based on this, phased and parallel actualization of each element is designed. Normally, this actualization is processed by controlling funds and costs to be injected within a certain time frame. Exhibit 4-4-9 shows a logical process for creation of a project profitability model, designing its optimization and creation of its optimum framework by planning and examining each element that constitutes a project under its basic design. Specifically, as a result of examining the following elements, an interim project profitability model is created and its optimization is planned in line with verification of the relationships between the elements and the whole project. (1) Elements that compose a framework to generate cash flow (for example, examination of technologies to be adopted, design and construction of facilities, etc.) (2) Risk elements concerned with acts to generate cash flow (for example, examination of marketability of product sales, income structure and risk of the project, etc.) (3) Creation of framework to generate cash flow and the manner of actual activity (for example, examination of risks and various problems involved in the manner of maintenance and operation and maintenance management of facilities, etc.) (4) The manner of elements and activity incidental to practice producing cash flow (for example, examination of the manner of supply and procurement of raw materials and fuel needed for operation and maintenance management of facilities and its optimization, etc.) (5) Particular conditions or environmental elements etc. according to cases such as requests from customers and location requirements. (6) Basic framework of funding that supports a project based on the above The above means creation of an overall structure as a whole in parallel with phased materialization of individual elements composing the whole framework. After such a process, the optimization of a project in the whole, materialization of finance and the project are planned. In addition, because regulations on finance imposed by loan agreement covers both a whole project and elements, all of these become subjected to be examined by lending financial institutions and the satisfaction of loan eligibility by the details is a premise for the actualization of finance.

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Exhibit 4-4-9

Project Finance Management

Elements of Structuring (Example Production Plant Project)

Construction and Improvement of Public Facilities etc. by PFI Method**** In March 2001, construction and improvement of public facilities etc. by the PFI (Private Finance Initiative) method was legally approved in Japan. PFI is a method, for example, to entrust design, construction, funding, maintenance management and operation of public facilities such as a government building, school, hospital, fundamental transportation facilities to private sectors, and is a contract of a scheme to receive compensation over a long period while providing services for a prolonged period. In this case, it depends on the types of facilities but all elements mentioned in Exhibit 4-4-9 are covered in bidding and contract as a package. BTO (Build, Transfer & Operate), BOT (Build, Operate, Transfer) and BOO (Build, Operate, Own) are also a type of the scheme to achieve this. The life cycle of a project is long and a whole business is regarded as one project, which leads to a concept that the function and scope of which customers conventionally take charge are transferred to a contractor together with risks.

******************************************************* 5-4-3. Points to Note in Examining Individual Elements Usually all of various elements composing a certain scheme are not achieved simultaneously and parallel but they are planned to be achieved gradually for individual elements while a general view is broadly observed. When individual elements are examined, the following concept is usually taken. (1) Of an overall scheme, important contractual relation is prioritized and gradually materialized. (Contractual relationship should be recognized based on importance criteria to determine the priority of cases to be handled, and it should be fixed gradually according to this priority.)

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(2) The priority of contractual relation that brings inflow of funds (cash in) is generally higher than that of contractual relation that brings outflow of funds (cash out). Of course there is in some cases no explicit contractual relation that brings inflow of funds. (3) After that, contractual relation that is a bigger expenditure item or contractual relation that has stronger influence on a project is fixed on a priority basis. (The amount of money and degree of influence on an overall project, when risk occurs, become decision criteria.) (4) In consideration of the above, contractual relation that is substitutable on the market or that with little influence should be postponed. On the contrary, contractual relation that cannot be substituted needs to be given top priority. (For example, contractual relation in which essential technology is involved should be given top priority in that an overall project will not be achieved without this technology.) Thus, it is necessary to recognize which contractual relation should be handled on a priority basis based on importance decision criteria while always imaging a completed form of an overall framework. After this, it is necessary to consider a work handling procedure and arrangement based on such criteria and handle work step-by-step. To optimize the whole while planning to optimize a part means that the procedure is not one-directional but the procedure seeking the optimum structure is adopted by trial and error, going back and forth. As a result, the whole procedure itself works dynamically and besides flexibly. Exhibit 4-4-10 shows this work flow.

Exhibit 4-4-10

Correlation of Structuring Work Flow

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5-4-4. Elements for Finding Optimum Solution of Structuring The structure of finance and finance schemes vary according to industries, business fields and individual projects. There are also various possibilities for methods of structuring. The following are mentioned as elements for finding the optimum solution: (1) Originality and device for designing structure (2) Risk tolerance level by fund providers or risk bearers in the market (3) Structure of risk sharing and actual balance between costs involved and financial viability Ways of structuring vary widely, and this is also an area where originality and ingenuity can be demonstrated to the maximum extent in the process of project creation.

5-5. Entrance and Exit of Entity From the standpoint of a sponsor (investor), a project is officially performed by newly established an SPC and a borrower of funds is this SPC even if the sponsor itself plays a major part in the realization. Although the sponsor (investor) is a core entity to substantially realize a project, its role, responsibility and commitment are limited in an overall framework of a project, and financial institutions recognize an SPC as a separate entity, provide credit and finance to it, which is characteristic of project finance. Hierarchical investment structure is created in some cases where the sponsor (investor) owns an investment subsidiary by business field and this investment subsidiary owns an SPC. Thus, when the sponsor (investor) and an SPC are hierarchically structured as legally separate entities, the sponsor (investor) will have means enabling to exit from the project by disposing of the whole or a part of stock equity of its investment subsidiary or an SPC. Such structure as enables avoidance of responsibility of the sponsor (investor) means that lending financial institutions, debt contributor, request stricter regulations (for example restriction on transfer of stock) of the sponsor (investor) with regard to exit from the project. Therefore, when the project is composed of hierarchical legal entities, rules and commitments of entrance and exit of entities participating in investment practice are important for finance as well as for the project. In project finance, exit of the sponsor (investor) from a project is taken into consideration in advance and its framework and conditions are established. The exit includes negative and positive exits. Negative exits refer to withdrawal from a project or succession of the project by financial institutions in charge, change of the project owner, etc due to failure of a project. Positive exits refer to capital gain of the sponsor (investor) through the sale or transfer of equity stock of the project company to a third party with a direct or indirect method or through initial public offering.

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6. Optimum Risk Allocation in Project Materialization 6-1. Concept It is the last work of structuring to summarize, through a contract agreement, roles and responsibility and relationship of rights and obligations between a project and stakeholders. This is also coordination of interests among stakeholders concerned with the project, and means determination of risk sharing and risk management on the project. Risk allocation in this case aims at identification of risks and the entities that assume the risks responsibility by agreement. Meanwhile, risk control primarily means to set up a structure where risks are properly controlled and the way responsibility is taken, and relation of rights and obligations in the project. If risk allocation is one-sided or unbalanced in view of the whole project, the overall project may have an unstable structure and lose loan eligibility. When risk allocation is determined on a contractual basis, the following reasonable effects can be expected: Efforts by risk bearers to avoid risk or to prevent risk from occurring Efforts by risk bearers to mitigate its influence if risk occurs Bearing of cost needed for the repair by risk bearers if risk occurs The above shows that capability of entities that allocate risk and a structure that supports the project against risk are critical. Concept of risk allocation and its work flow are as shown in Exhibit 4-4-11.

Exhibit 4-4-11 Concept of Risk distribution and Workflow In the process of structuring, fixed concept does not necessarily exist in a framework of risk allocation and risk control. Optimum solution can be freely pursued in the process of building up a framework of the overall project in accordance with individual circumstances. In setting up structures, there is a broad flexibility and structures may change dynamically in the process of building up a structure. In this case, risk and reward become alternative, and entities of allocation or its manner will greatly change depending on the degree of tolerance on the risk among stakeholders concerned with the project. It is fundamental to allocate the risk to the most suitable stakeholder of the project who can bear the risk at the minimum cost and to determine the manner of its sharing through contract. The above concept does not necessarily mean that risk is controlled only within the

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above frameworks. From the financial point of view, a reasonable structure should be built as a framework for the overall project to reasonably control risk. It is no exaggeration to say that its effectiveness relies on how to practice risk control such as solid recognition and countermeasures with regard to individual risk factors. When risk occurs, it is important that who does what is arranged and foreseeable (predictability), from the viewpoint of the financial structure.

6-2. Concept of Risk Allocation and Optimum Allocation 6-2-1. Characteristics of Risk Allocation The risk allocation at the stage where all of given conditions or requirement for a project are not satisfied may change or can be changed in the process of alternative selection or negotiation due to the background in which there are few constraints. This risk allocation has the following characteristics. (1) Risk is converted into cost. Assumption of risk by an entity is based on a premise that a reward (compensation) corresponding to the risk is paid to the bearer. In this sense, risk allocation is determined by the relation between the risk judged by the risk bearer and a reward (compensation) and the judgment on to what extent the risk is tolerable. (2) Relationship between the project and every stakeholders related thereto constitutes all risk allocations; (3) Various relationships among fund contributors (between a sponsor (investor) and loan providers, between loan providers and an SPC, a borrower, between a sponsor (investor) and an SPC) become all risk allocation matters. (4) Risk bearers may be changed in the process of constructing a structure. In addition, risk attributes may be converted or substituted. (For example, if there are stakeholders who can assume the risk in a more optimum form not only between the two contracting parties but also in a framework of the overall contract, change of the risk allocation can also be an alternative selection. Or a more optimum method, such as bearing of risk by multiple entities by resolving risk factors and functions, can be designed.)

Changing Risk Attribute ************************************************* Suppose that a subsidiary that is established to perform a project borrows the necessary funds from a financial institution, and that the institution demands pecuniary guarantee such as a bank guarantee letter of the parent company to ensure the performance of obligations by the subsidiary. In this case, in addition to hypothecation of the subsidiary's assets, negotiation may be possible on the substitution of pecuniary guarantee with non-pecuniary guarantee such as guarantee by the parent company for performance of contractual obligations. The essence of risk to support a subsidiary does not change, but risk attributes are changed from pecuniary obligations to contractual performance support obligations. The meaning of whether a parent company guarantees a pecuniary debt or not is greatly different for the parent company. ****************************************************************************

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6-2-2. Consideration to Optimum Risk Allocation In the above case, the following should be taken into consideration for optimum risk allocation: (1) Even if the risk allocation between the parties concerned is partial optimization, but from the project's viewpoint, it may not be necessarily total optimization. (2) If reasonable risk allocation is not designed among the parties concerned, risk allocation and total optimization may be contrived by involving stakeholders of other projects. (3) Total optimization is often prioritized from the viewpoint of building up a structure of the entire project. In view of the project, optimum balance of risk allocation in the whole project is considered as significant. From such circumstances, it is not a desirable concept to have specific stakeholders assumed excessive risk because this is in general judged to increase the possibility of occurrence of risk.

6-3. Project Execution Contract, Loan Agreement, Various Security-related Agreement The concept of risk allocation is determined through negotiations among stakeholders concerned with a project and is confirmed in the form of a contract. A means to determine the risk allocation concerned with a project is a contract and when project finance is premised, various contractual rights and obligations held by an SPC that is responsible for performing a project are all security in terms of the loan agreement. Project finance is extremely reliant on the contractual relationship between the parties concerned and performance of contractual obligations by the entities concerned with a project. Therefore, a whole project is based on a premise that every contract, an element constituting a project, is valid, continued and effective and that entities responsible for each contract have the capability to perform the contract. The loan agreement in project finance combines all contracts related to a project (various project contracts). All relationships of rights and obligations concerned with the project security are defined in contracts, which are called various security-related contracts (security documents). These contracts are classified into the following types: Attachment concerning real estate, movable property, credits and all other rights of the project company Attachment concerning bank accounts Attachment concerning equities of the sponsors (investors) in the project company, etc. Contract for prior assignment of rights between the project company of various project contracts and contract parties concerned, etc.

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6-4. Refinance and Decentralization of Small-Lot Finance Risks The finance structure once built up does not necessarily need to be fixed. At the stage where loans on loan agreements are all made and the project is progressing satisfactorily, it is possible to repay a part or whole of debts before maturity and replace the existing loan with a new one from a fund contributor who offers better conditions by reconstructing the finance structure depending on circumstances. This is called refinance, which is one alternative for efficient management of funds and is effective for improvement of the profitability of projects.

Funding by Issuing Advantageous Bonds **************************** The private power generation cases (Independent Power Producer: IPP) in the United States or some developing countries after the middle 1990's or PFI businesses in UK after 2000's are premised on long-term and continuing contracts with electric power companies or public entities, and are characteristic of a compound contractual framework with fund procurement/construction and operation of a facility, and provision of services as one. In this fund procurement, there were cases of refinancing in which funds were first procured using equities or loan funds from commercial banks, and after a project facility is completed, funds were directly procured from the financial market by an SPC issuing bonds and repaying all or part of the loans. This is based on the viewpoint that the possibility of elicitation on the risk concerned with projects will change as time passes and on the concept that the structure of debt is redesigned by searching for fund providers who hesitate to assume much risk but offer funds with more advantageous conditions at a stage where the project facility is completed and actual cash flow of the project appears to have become stable. The period of redemption of bonds is longer than that of bank loans and bonds bring more advantageous funding cost and improvement in profitability in view of life cycle cost even if their stated interest rate is higher. Refinancing enables the acquisition of the difference between market interest rate and contracted interest rate in the declining phase of the long-term interest rate as compared to the point of the initial contract, which can contribute to the improvement in profitability to a great extent. In case that there is transparency in the risk should be and structure of its risk allocation that supports the project, part of equities and debts may be decentralized in small lots for a few specified or many unspecified investors in the financial market by means of securitization or bond issuing. Substitution of part of equities by these means at a stage where the project is completed and the project starts to produce cash flow serves as a means for the exit from the project. Meanwhile, decentralized funds in small lots have different attributes from normal equities or debts. Therefore, when they coexist in a project, relationships of rights and obligations among investors or creditors should be redesigned.

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7. Evaluation of Financial Viability and Economic Efficiency 7-1. Evaluation of Financial Viability and Economics Projects are not achieved or their funding framework is not built as long as financial viability is not confirmed and verified by a reasonable decision. Financial viability evaluation should start by setting up various prerequisites as basic goals in the initial stage of the project and designing a temporary project profitability model. After that, the contents should be determined through phased corrections of this profitability model in consideration of various fluctuation factors and elements in the structuring process. At an initial stage of projects, prerequisites are merely hypothetic conditions and will change in accordance wit phased definition of elements in the process of structuring a project, so they need to be verified constantly. When the overall framework and structure are defined, evaluation of financial viability is established. Process of structuring also serves as a continuous process for evaluation of financial viability. The output of project profitability model creation is financial statements over a life cycle of a project and various analysis evaluations derived from them. In creating the project profitability model, many factors are assumed as prerequisites. When examples of factors are listed, they include an initial investment cost including a reserve, its fund procurement (the manner of composition of equity and debt), revenue, expense, interest, charge, tax and depreciation at the time of operation, and they also include macroeconomic factors in addition to project-related direct factors. For example, a price trend of related products, supply trend, interest rate trend, labor cost trend, and in the case of an overseas project or export-import-related project, foreign exchange trend and tax practice in the relevant countries need to be assumed. These differ depending on the content of a project, but examination of these factors is critical for the evaluation of a project.

7-2. Loan Eligibility 7-2-1. Decision criteria for loan eligibility A project itself should have loan eligibility to achieve project finance. Proving this loan eligibility leads to the accountability of a sponsor (investor) who aims to achieve the project toward loan providers (risk sharers). The following points are decision criteria for loan eligibility. Project risk is properly recognized and grasped, and a structure for appropriate protection, mitigation and management with respect to risk is contractually established in the project. The project has sufficient profitability and debt paying capability. Elements for profitability fluctuating risk are accurately recognized and an adequate buffer or cushion for fluctuation of the project's cash flow is designed as a structure. The project's structure is designed so that risks are adequately controlled, and are assumed by proper entities, which have the appropriate capability of performing contractual obligations.

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An adequate security framework for loan actions is established and details of the framework have effectiveness. 7-2-2. Subjects of Examination (Due Diligence) From the viewpoint of loan eligibility, the following are required: (1) Confirmation of financial viability and economic efficiency (2) Reasonable structure of risk allocation and risk control in the project which support the financial viability and economic efficiency (3) Full consideration of cover and protection in the project's structure when risk occurs in the project. The subjects of examination, or due diligence, for the above are the following items. However, depending on the content of the project, the number of items may increase or decrease, or items may need to be more specific. Profit structure of a project (for example, constituent elements that produce profits, market risk related to project and method of mitigating it, etc.) The manner of elements, system and management to achieve the project (for example, technologies to be adopted, system such as design, construction, administration, operation, and facility maintenance, and the manner of methods and management for achievement, etc.) The manner of a structure, expenses and management to perform a project (for example, structure of purchasing costs of raw materials, the manner of a system, structure, management and operation concerning purchasing, etc.) Financial viability and economic efficiency of the project Long-term, financial outlook of the project Overall structure of the project and competence and capability of each stakeholder who supports this Competence and capability of a sponsor (investor), a most important stakeholder Stability and strength of the contract structure that supports the project Effective security framework that supports the framework that produces cash flow.

7-3. Financial Accounting Analysis / Evaluation Financial accounting analysis brings effective indicators by which the financial viability and profitability of a project are evaluated. Generally, evaluation of investment profitability is a means to evaluate economic efficiency of a project from the viewpoint of sponsors (investors). Safety evaluation brings indicators to verify the safety in repayment of principal and interest from the viewpoint of fund providers that funds to a project. In other words, both types of evaluations become necessary from the standpoint of sponsors (investors) as they are the entity to promote the project and plan funding. Safety evaluation brings indicators to assess the capacity of repaying loans, and the following methods are generally known. (1) Debt Equity Ratio (2) Loan Life Debt Service Coverage Ratio (LLDSCR) (3) Yearly Debt Service Coverage Ratio (YDSCR)

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Financial accounting analysis and evaluation methods for projects are used by many entities. Their details and viewpoints may be different depending on the relevant parties that provide funds or stakeholders. For example, financial institutions mainly pay attention to cash flow of a project, capital structure of a corporation, fund's source and usage, profitability of a project over a certain period, future profitability forecast and so on. On the other hand, profitability (for investment), current and future profitability of a project and its future stability are strictly the center of evaluation for a sponsor (investor), a project investor. Institutional investors such as pension funds, who regard investment as a means to earn interest, mainly pay attention to the debt service coverage ratio and rating and evaluation by third parties such as rating agencies. In addition, when contracting constructors execute construction contracting agreement with entities that constitute project finance, the framework of funding and its credit risk are mainly investigated and evaluation is made focused on short-term liquidity. Thus, funding financial institutions pay attention to satisfaction of DSCR (Debt Service Coverage Ratio) to some extent and stability of elements that constitute cash flow. As mentioned, financial institutions are not necessarily consistent with sponsors (investors) in evaluation or concept.

7-4. Procedures for Financial Accounting Analysis / Evaluation Financial accounting analysis and evaluation normally take the following steps: 7-4-1. Establishing a Base Project Profitability Case (Base case) Establish a base project profitability case (Base Case) which is a decision criterion, on a reasonable and feasible premise in consideration of given conditions, and confirm that profitability and safety evaluation are satisfied on this premise. 7-4-2. Verification by Various Sensitivity Analysis Verify what influence the change of conditions (variable value) as a premise will bring about to financial viability and the overall project, and its tolerance level and limit. 7-4-3. Verification of Deterioration in Financial Viability Cases In consideration of deteriorated scenarios by factor that aggravates cash flow of the project, verify to what level of deterioration of prerequisites the project is bearable and what scenarios can develop. (Downside Scenario) In addition, if the worst case occurs due to a combination of multiple factors, it is verified to what extent the project is bearable (Worst Case Scenario)

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7-4-3. Examination of Response Plans (Risk Protection Plan, Contingency Plan) If the above 7-4-3 is likely to occur, consider possibility of deterioration of financial viability, measures to mitigate the impact at the time of occurrence (risk protection plan) or a plan in preparation for deterioration of financial viability (contingency plan), and aim at a structure where appropriate cover is made even if deteriorating factors occur. As a result, risk allocation for the parties concerned is changed depending on the evaluation of these risks and response measures by the funding financial institution, and how to make up for risks or set up mitigation measures (protection) are arranged through negotiations with the financial institution. The concept of risk protection is, for example, as follows. In case a project has a identifiable risk and the possibility of its occurrence depends on managerial efforts of the project company, the risk cannot be controlled by any party other than this project company. The financial institution imposes restriction on dividend (to motivate an SPC and sponsors to solve the issue) if the project fails to maintain a certain level of DSCR (Debt Service Coverage Ratio), and demands definite promise for additional fund contribution (Cash Deficiency Support) of sponsors or have cash-rich stakeholders cover if the source for debt repayment becomes short. Or the financial institution decides that the project company falls under the event of default and places it under the control of the funding financial institution as a measure for solution. Thus, "protection" refers to the concept of contractual motivation for risk avoidance or restoration and prior determination of response to the occurrence of risk. It should be noted that between risk response plans when a framework of a project is structured and those in a project where certain given conditions and requirement are clearly fixed with a customer as contract conditions, the contents and attributes are different. In the case of the former, the framework and preconditions and requirement are not fixed and risk response plans can be flexibly considered in the overall framework of the project including multiple stakeholders. In the case of the latter, on the other hand, risk response plans are strictly considered in the fixed preconditions and requirement and there is no flexibility. Elements of concept and tools are similar, but subjects and approach of the concept are different. Exhibit 4-4-12 suggests that the way of evaluation of financial viability also has the possibility of exerting influence on the framework of the overall project, negotiations of conditions and risk allocation etc.

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Exhibit 4-4-12

Project Finance Management

Work Flow for Verification of Financial Viability

This Chapter is from New Edition Part 4 Chapter 2, 2007, Edited Version for P2M Seminar at SKEMA Business School, July 2010

[ References ] 1) 2) 3) 4) 5) 6) 7)

Peter K. Nevitt, F. Fabozzi, (2000). Project Financing Seventh Edition, Euromoney John D Finnerty (1995). Project Financing, John Wiley & Sons Katsuma Ohara (1997). Project Finance, Kinzai Institute for Finance Affairs Nagamiki Nishikawa, Katsuki Ohuchi (1997). Introduction to Project Finance, Kindai-Sales Katsuki Ohuchi (1999). Domestic Project Finance, Kindai-Sales Nishimura & Partners (editing), (2005). Corpus Juris Finance (Vol. 1 & 2), Commercial Law Center Edward Yescombe /translated by Jin Sasaki (2006). Principles of Project Finance, Kinzai Institute for Finance Affairs

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Program & Project Management for Enterprise Innovation

Part 5 Knowledge Foundation Chapter 1 Systems approach

Copyright © 2017 Project Management Association of Japan

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Chapter 1

Systems Approach

1. Overview This chapter discusses fundamentals of systems approaches and their application in the project management context. In pursuing activities such as planning and management of a project, you may encounter ambiguity or unexpected events. Even if you understand there is a problem to be solved, quite often you will have difficulties in formulating a project and finding clues to solve the problem. Also, you will often get lost about your task after the project has been kicked off and find yourself saddled with a task that is different from what you expected of. A way of thinking to avoid such situations as much as possible is systems approach. The systems approach a problem-solving approach based on systems thinking where you first identify an overall structure, then capture the subject as a system (a collection of various elements that relate to each other and function as a organic structure), and reveal relationships among the elements that constitute the system, followed by further specific review on its details. The systems approach seeks to articulate not only the details of a project’s activities but also the issues to be tackled in the project as a whole and its scope, including its results and service structure, and enable you to plan and manage the project activities.

Exhibit 5-1-1

Overview of Systems Approach

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Examples of the Systems Approach In general, cotemporary process-oriented project management activities do not highlight the systems approach particularly, but in fact project management had been diversified from systems management, a division of the systems approach, and there has occurred renewed quest for the system approach in recent years since there have been an increasing number of project categories that are difficult to be captured as a system. Figure 5-1-2 shows comparative examples to support this claim. The horizontal axis shows the degree of difficulty in terms of systems visualization (modeling). The vertical axis has science/technology rich stream and human activity rich stream as the subject of a project, out of which the visualization of social systems is the most challenging. The results of a manufacturing plant project present a plant as a whole, a hard and tangible system. On the other hand, in a regional development project in the social stream, there is no hard substance result as a whole although there are some tangible facilities scattered in a battery limit of the regional development project but what is really important here is a convention of the overall developed system as the benefit of the project, which is consensus built among the stakeholders of the region and susceptible to varying benefit evaluations. However, such a project needs to be visualized to have its task pursued and, therefore, new approaches are being explored. While a conventional engineering method that deals with tangible objects, including in a project of plant stream, is called the Hard Systems Approach (HAS), a method called the Soft Systems Approach (SSA) is proposed as an approach to deal with something intangible, as in a project of human activity stream, which is hard to be systemized.

Exhibit 5-1-2

Subjects of Project and Degree of Difficulty in Systems Modeling

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Systemic View According to National Literacy Trust of U.K., systemic view: Looks at the whole structure of systems that input upon an issue Looks for interrelationships across system Seeks to understand the long standing causal factors which generate problems Looks for the key levers of influence across the whole system Looks to see how one sector or organization’s actions or influence impacts upon the rest of the system both short and long-term Consciously avoids 'shifting problems' to other parts of the system Looks for the main sources of resistance to change, rather than pushing harder to overcome resistance and barriers by increasing the driving forces Generally is geared to the long-term and seeks to identify the slow, subtle and often hard to detect changes which over time can have powerful implications

Three Methods of Systems Approach The Systems approach is a thinking process whereby, in solving a problem, one takes into account systematically all of relevant elements surrounding the problem to solve it in a way that achieves optimal results as a whole. The systems approach can be grouped into the following three methods in project context: Systems Analysis An analytical process to analyze a proposed system and examine what should be done and how requirements can be executed in the most appropriate manner, etc., to facilitate a better choice from multiple alternatives Systems Engineering An integrative engineering process to capture and describe a project’s mission to engineer built environment, hardware, software or a combination thereof as a system, deduct it into components and integrate the whole component into a totally functioning system, though systems analysis and evaluation. Systems Management A management process that guides a systems approach under the constraints of an organizational strategy, mission, budget, timeline, resources and other specific objectives, much part of which is carried out in the form of program and project management. Or the systems management is a broader management framework than project management. In fact, the U.S. Department of Deference (DOD) defines that “systems management is the management of a program.” Meanwhile, the utilization of systems analysis is primarily done in the strategy (program) development phase and it is a supplementary function of systems engineering in the project implementation phase. These relationships are presented Exhibit 5-1-3, which is based on the DOD guideline

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Exhibit 5-1-3

Framework of Systems Approach

2. The Systems Approach 2-1. What Is a System A system can be defined as a totality of various elements, which are inter-related and have a function to achieve certain objectives as a whole. It is considered as a function for problem solving processes under which a boundary is set between inside and outside of the system and ‘Input’ comes through the boundary from the outside into the inside and ‘Output’ goes through the boundary from the inside. In recent days it has become more common that, in addition to the input, output and process, the constraints such as law and regulations, specifications and contracts, that would constrain the process and external disturbance including changes in the environment surrounding the process are included explicitly, as shown in Exhibit 5-2-1, “Diagram of System Environment.”

Disturbance Constraint

Input

Process

Output

Exhibit 5-1-4 Diagram of System Environment

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2-2. What Is the Systems Approach The systems approach refers to a thinking process that systematically approaches a problem by using the concept of systems. It is a way of thinking to identify and define a problem and take into account all relevant elements systematically to produce the best solution as a whole. 2-2-1. How to Look at a System While the word of a system is often seen and heard in our daily lives, it is used in various ways. In general, the systems approach considers a system as follows:2) (1) A System Can Be Recognized How a particular event is recognized is different depending on each person. Similarly, how an event is recognized as a system and described varies from a person to another. In this sense a system does not exist objectively but rather exists as a subjective concept within ourselves, in other words, it is to be recognized specifically. Depending on the specialty, interests and credo of a person who looks at it, it appears as a different system. (2) A System Has Hierarchy and Emergent Property If you acknowledge that a system is made up by hierarchy (overall system and elements or sub-systems), it becomes easier to understand a system. However it then looks as if the properties of the whole system are different from the sum of the properties of its parts (sub-systems). That is, the whole has properties that its parts do not possess. This difference between the ‘properties of the whole’ and the ‘sum of the properties of its parts’ is called emergent property (note). (Note) Emergent property It refers to the occurrence of an unimaginable phenomena to the whole put together, despite the fact that the properties of its elements (sub-systems) are known. Reacting hydrogen with oxygen will make water. Though the properties of water completely depend on hydrogen and oxygen, it does not resemble either of the two. It is difficult to predict such properties of water from those of oxygen and hydrogen, making water look as if it emerges out of the blue. In this way, the concept of emergent property that a combination of well-known elements can sometimes bring out an unexpected phenomenon has become a counterargument to the conventional reductive method that seeks to ‘understand the whole by understanding parts that are broken down from the whole.’ (3) A System Has a Function of Communication and Control In order for a system to continuingly exist as a system, its overall system has to control the behaviors of its elements (sub-systems) somehow. If respective elements behave completely freely, it will not take long before the system falls apart. To keep this control, the overall system needs to obtain information relating to the states and behaviors of its respective elements. In this sense communication and control are the concepts necessary to maintain a system. In particular, in understanding human activities as a system, control and communication is vital to maintain the structure.

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(4) A System Has Self-Organizing Nature Self-organizing nature is the concept to refer generically to a property that a system remakes its own structure by itself through the interaction with the environment. That is, it is a property to rebuild itself into a more complex system, not just maintaining itself. It can be considered as a system that conducts a special type of control to make itself more complex. In other words, it is a special case of communication and control. Self-organizing nature is also a concept for the purpose of recognition. 2-2-2. Categorization of Systems A systems approach categorizes systems into three. Hierarchy, emergent property, communication and control and self-organizing nature are found in each of the categories. (1) Nature Systems Among those that exist in the nature without human intervention, many can be recognized as a system and are easier to deal with when they are recognized as such. The examples include the relationship between a particle and an atom (physics), the one between an atom and a molecule (chemistry), the one between an organ of an organism and the individual organism (biology), the one between organism species (ecology), and the one between the sun and its planets (astronomy). (2) Artificial Systems Among those that are created by human beings, some can be recognized as a system and are easier to deal with when they are recognized as such. For instance, an automobile and computer program as well as laws and mathematics are artificial systems. A physical artificial system is designed to achieve a particular purpose. (3) Human Activity Systems When human beings act in a social situation, they not only are influenced by the situation but also have certain influences on it. Also, the meaning of their activity cannot be neutral and both a person who acts and the ones who observe the activity recognize it as a system by finding some meaning to it.

2-3. Systems Approach and Project Models The systems approach can be applied to business management, too. Abell (D.F. Abell), for instance, made a suggestion of specifying ‘Customer Class’ that uses products and services, ‘Customer Function’ to which products and services are used and ‘Unique Technology’ for providing products and services, as a way of defining the business domain.3) If resources such as materials and human resources can be added to systems approach, the scope of project activity as well as deliverable such as products and services can be defined. Furthermore, for ‘Internal Structure of System’ as well, functional structure can be clearly indicated if the work of its component elements can be represented similarly in detail by input, process, output, constraint, and disturbance.

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Based on these ideas, in seeking to identify the mission and objectives of a project and the requirements on its deliverable, there is a method that considers the whole as being composed of by three layers, captures each as a system and describes it as a model. It categorizes the first layer as ‘Customer Service System Layer,’ the second as ‘Product System Layer’ and the third as “Project System Layer.’ The viewpoints in modeling each layer are as follows: (1) A Viewpoint of Service Offering (First Layer) The viewpoint of the first layer is an approach to be aware of service offering to the client function, to which functions (values) of which type of customers it aims at contributing, and provide the functions of a product that will enable it. It starts with customer value and, in order to maximize it, the service offered to customers is considered as a system and documented as a service model. In terms of customer function, a single product may not be sufficient to satisfy the services demanded by customers. For example, unless the product functions are offered together with another service, customer satisfaction may not be obtained. On the other hand, a product may have a function that is not expected by customers, in other words, ‘adverse effects.’ In such a case you will have to offer a service that restrains the adverse effects or avoids the occurrence of a problem as well.

Service γ

Function c

Function a Side effects δ Client Service α

Function b

Function d

Side effects δ Product A

Exhibit 5-1-5

Service β

Product B

Relationship between Customer Function (First Layer) and Product (Second Layer)

(2) A viewpoint of Project Result (Second Layer) The viewpoint of the second layer is to capture the function and internal structure of a project’s result (product) that is demanded in the customer service model and describe it as a system model. You should first document the relationship between the functions and side effects of a project’s result and the one between resources to be consumed and information to be provided in using the result. In addition the relationship between the elements that make up the result and the above items should be documented clearly.

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It is ideal to capture and document the result of a project as a system at the earliest possible stage of the project activity. However, since a project is organized to deal with a task with many non-repetitive and unknown elements, the target result may not be specified immediately. Therefore it is often the case that you draw a broad model at an early stage and continue to examine it to make it more detailed. The structure of a system as the result will be detailed or modified as the project activity progresses. (Refer to Exhibit 5-1-5.) (3) A Viewpoint of Project Structure (Third Layer) The viewpoint of the second layer is, in seeking the offering of customer service, to optimize a service model and a system model derived from it from the overall perspective, capture the structure of a project that will achieve it as a system and convert it into a model. In order to generate the results or offer services, a project engages in various activities. It needs to procure necessary resources, perform conversions such as processing, transporting and inspection, and produce target results. If a single activity cannot produce a target result directly, an intermediate product will be produced and several activities put together in order will have a result generated. Further, even when the mission and target result of a project is something unknown and uncertain, those who have unique skills relating to those resources may sometimes participate to devise a way to combine existing elements and produce the target result. From these, it is important to capture a project itself as a system, control the elements and their inter-relationships to achieve the service that satisfies the customer function, an ultimate deliverables, and such that there is no missing element or a waste.

2-4. Modeling to Support Decision-Making Modeling, or use of models to recognize and describe a real world system in a simplified yet symbolic and characteristic manner with vital functions and relationships captured, is a central methodology of the systems approach. Generally, modeling to support decision-making through the systems approach can be thought of as follows: 2-4-1. Modeling and Simulation A person who performs an analysis needs to have a ‘certain image’ in mind as the assumptions for modeling. When a problem of an organization or society is handled, even communication would be difficult if the concepts held by those who are involved in a system are not universal to a certain extent. Moreover, in a project involving certain reforms or changes, it is desirable that ‘those who are concerned have a similar recognition to some extent (formulation of a problem) for such need. In gaining a deeper understanding of conceptualized matters, a model is constructed on one’s own and understanding is sought after based on it. A model plays an important role in not only a daily life but also in the areas of science and creative work. In order to build a model, you need to abstract what you think is important essentially from the subject and describe it. This work is called modeling. Through modeling, you can deepen your understanding of the object and communicate with

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others.4) Model categories include concept models, analytical models (logic / mathematical formula models), icon-type models (cast models), and they enable simulations such as computer simulation, prototyping, test marketing, depending on which type of model, to support explaining a phenomenon from a complex model or large-scale model and making a decision on the best plan based on case studies. 2-4-2. Points to Consider in Modeling While there has been no modeling technique recognized as global standard yet, there are several candidates for it such as UML (Unified Modeling Language) that is being established by Object Directed Technique Standardization Consortium (OMG) and IDEF (Integrated DEFinition) provided by DOD (the U.S. Department of Defense). Depending on each technique, what each model represents differ, but you should take into consideration the following, which are applied uniformly to major modeling techniques. (1) Entity and Relationship

Multiple entities (things) that form the object related world and the relationships (connection) among them shall be grasped. If it does not encompass the time changing process of elements, it is called a ‘static model’. If the static model is correctly described, then it is easy to represent by words the constituent elements or function of the system, or to rewrite it into a functional model. (2) Event and State Transition

In order to grasp the nature of an entity, a chain or rule of sequence of the events (occurrences) that cause a change in the state of the entity shall be described. This is an approach to grasp the ‘dynamic nature’ of an entity. A model that describes the condition in which the phenomena of the object world undergo changes over time is called a ‘dynamic model’. On the other hand, there is a method that analyzes the state transition by focusing on the sequential relationship, and it is to disregard events and abstract the state change of an entity to form a model. Such a model is called a ‘state transition model’. (3) Function and Conversion

The technique of ‘function and conversion’ is to use input, process, output, constraint and disturbance as a way to represent the activities of the elements. Such a model is called an ‘input and output model’ or ‘I-P-O model’. In this method of representation, you can describe how the state of multiple entities changes as a result of a single activity or event. This method is of help to representing the working and operation of a system. (4) Interaction

When an entity has reached a certain state, or a certain event has taken place, you may wish to get other activities started as well. In such a case, there is a method to describe how the state of the interactions among entities is. However, at present the method of describing the interactions is poor, with few worthwhile to make recommendation for.

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(5) Procedure A procedure is to describe the sequence of a series of activities to be carried out to attain an objective, as well as the rules of the selection of activities and the sequence of such activities. A workflow or business process is a kind of procedure. When there are a wide variety and a number of elements related to a system, the description of situations (cases) in which a procedure must partially be changed (selected) becomes extremely complex. More often than not, omission or logical mistakes are incorporated in the set procedure, to which attention should be paid. In an actual project, many problems are too complex to be described as a procedure. In order to avoid and lessen these problems, the structure of an entire system can be represented as a combination of blocks by forming a subsystem out of the activities that are accompanied by several sequences. It does not mean that every one of the above viewpoints must be used. It is desired that a modeling technique should be selected according to the nature of an object. Also, attention should be paid to the fact that too much concentration on one method of notation may cause an oversight of the important nature of a problem.

2-5. Soft Systems Approach Systems Analysis (SA) and Operations Research (OR) as well as Systems Engineering (SE) which are conventional primary decision-making methods, and management science in general, have been every effective in answering a question of ‘How it should be achieved’ when ‘What needs to be done’ is given. In other words, the strength of systems engineering lies in giving an answer to a question as to ‘how it should be achieved’ when a purpose is given. The methods to apply SA, OR, SE, management science, systems engineering and others to solve this question of ‘how the purpose agreed or defined should be delivered’ are called ‘Hard Systems Approaches.’ On the other hand, there are many problems having vague aspects un-definable with such approaches. For instance, due to the presence of numerous stakeholders in a project as in human activities and social systems, their interests could be in conflict and arbitration may be difficult with the systems approach described above. And, a method to use a lenient approach to form consensus among people concerned with different values, and find or create relationships under the condition when the objective setup or relationship is not clear, is called ‘Soft Systems Approach.’ A Soft Systems Approach can be considered as a process under which, in a situation where an ideal state or a problem is vague and chaotic, people with different opinions discuss repeatedly to explore a point of compromise that would get the viewpoints of each other co-existed. One of such Soft Systems Approaches is soft systems methodology, which is explained in the next section. 2-5-1. Soft Systems Methods Soft Systems Approach, which is appropriate when an agreement on the objective to be accomplished (‘What’) has not been reached among the interested parties or when a complex social event is being dealt with and the objective cannot be defined clearly, has seen various techniques developed since 1970’s. Among many soft approaches, the

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below describes Soft Systems Methodology (hereinafter SSM) developed by a British professor Peter Checkland, in particular.5) The basic assumption of SSM refers to that ‘the meaning of a social situation is different depending on where you stand.’ For example, a famous thief in the Edo era was a ‘serious burglar creating so much scandal’ to hypocrite but was an ‘ally of the poor people who re-distributed the wealth of the greedy rich people.’ Even if it is a physical object that can be normally thought of as observable objectively, there may actually be discrepancies in how it appears, depending on the background and credo of an observer. A social event will have even more distinguished differences in its meaning by person and which hat one wears. Rather, it may be pertinent to mention that it is the characteristic of a social event to have its meaning appear differently according to one’s standpoint. In a situation with such multiple standpoints and meanings it is not easy to gain mutual understanding across them and, effectively, you cannot expect mutual consent to occur automatically without an explicit approach. In other words, a complex situation will require a ‘technique’ for the interested parties to discuss.2) SSM emerged as an approach to explore a meaning from a situation where such varied values are intertwined in a complicated manner. The keyword of SSM is ‘accommodation.’ It is a process that looks for a point at which you can compromise by accepting the differences as they are, without asking for the consolidation of different standpoints and values, and each adapting to others. It expects that, as you self-modify your values (mental models) that you entertain unconsciously as well as own standpoints and assumptions by learning the situation of others and deepening your understanding, you will create a substitute plan acceptable to those involved and come closer to an agreement. Any project has a difficulty of not knowing everything beforehand for the present and future. The process and result of a project are uncertain by nature. In a situation where all cannot be pre-determined, ‘obtaining accommodation’ among those involved in a project is an important element to determine its success.6) 2-5-2. Seven Stage Models of SSM The process of SSM is often described as ‘seven stages.’ You do not necessarily go through those seven stages in the order to implement SSM, and rather you can come and go freely across the stages to deepen an understanding as a whole. That said, since describing SSM as the seven stages facilitates the understanding of what needs to be done in SSM, we use this description (refer to Exhibit 5-1-6).

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Stage 7: Execute a reform plan

Stage 1: Set up the structure of a problem situation

Reform plan Stage 6: Create a reform plan

Rich picture Stage 2: Select relevant systems

Comparison table Stage 5: Compare with the real world

Real world

Relevant systems (multiple) Model Stage 3: Prepare the root definition

→Move to a hard approach

Definition Stage 4: Construct a concept model

System thinking

Reference: “System Thinking and System Technology,” Seiemon Ioi, Masaaki Hirano and Seiji Kurosu, Hakuto-Shobo Publishing Company, 1997

Exhibit 5-1-6

Soft Systems Methodology (SSM)

Stage1: Structure a Problem Situation A problem situation that is not structured yet shall be converted into a structured problem situation. A description of a structured problem situation is called a ‘rich picture’ in SSM and the stage 1 will have a rich picture drawn is acceptable to those who are involved in the problem situation. Stage2: Select Relevant Systems The rich picture is examined and ‘relevant systems’ that should be brought under review are selected. In terms of those relevant systems, you shall highlight what the systems would ultimately do. Here you are supposed to select multiple relevant systems that would reflect different standpoints. Stage3: Prepare the Root Definition The multiple relevant systems are expanded for the ‘root definition’ respectively. In the process of expanding into the root definition, you shall consider the world views of the systems’ beneficiaries, executors, owners and others as well as constraints to refine the definition. Stage4: Construct a Concept Model A ‘concept model’ shall be constructed based on the root definition. In this concept model it is the activities to materialize relevant systems that are provided in the root definition that will be modeled logically, not the reality. Stage5: Compare with the Real World A comparison table shall be created to compare the concept model with the rich picture. Through a comparison with the rich picture that describes a real problem situation, you identify an activity that does not exist, or that does exit but is not functioning well, and discuss on the activities necessary for a reform or transformation.

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Stage6: Create a Reform Plan Based on the comparison table and rich picture, those involved review a feasible ‘reform plan.’ This feasible reform plan is the output of the stage 6. Stage7: Execute a Reform Plan The reform plan prepared in the stage 6 shall be executed. As a result of the execution, the problem situation changes and the next cycle of SSM will start in a new circumstance spiraled up. Out of the above seven stages, the stages 1 to 5 can be labeled as a soft approach that clarifies ‘what needs to be done’ and the stages 6 and 7 are as a hard approach that explores ‘how it should be accomplished.’

3. Systems Engineering 3-1. Systems Engineering General Systems engineering is an applied engineering discipline and can be defined as creatively integrating various technology elements and methods so that respective component elements of a system can work surely and efficiently toward a single goal based on a plan chosen by a systems approach. Therefore, it can be said as a scientific and technological method to design and configure various kinds of elements economically and rationally in order to accomplish a particular objective based on a certain plan primarily with an ‘artificial system’ as its subject. The objective of systems engineering is, in a situation where not only the solution but the problem itself is vague and obscure, to clarify the problem image and identify the problem to be solved and its solution. When concrete problem-solving actions are taken according to the solution, and the problem is finally solved, the role of systems engineering is over.

3-2. Phases of Systems Engineering 3-2-1. Relationship with Project Life Cycle A project is typically managed with the activity to create the project product, which function is separate from the management activities to run a project efficiently and effectively. Generally, the activity to create the product adopts systems engineering techniques. Put in a reverse order, systems engineering can be said as a process to capture and describe the object of a project as a system, relate respective elements to each other, materialize the system and confirm if it is in line with the project mission. In particular, it is common that each phase of systems engineering is crosschecked with the project life cycle for the purpose of management. 3-2-2. Five Phases of Systems Engineering A typical engineering flow is explained. A.D. Hall sorted out the patterns of systems engineering practice and built a classical model of systems engineering in five phases (refer to Exhibit 5-1-7).7)

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Phase 1: Research & investigation

(Program plan)

Phase 2: Phase 3: Probing plan (Project plan I)

Development plan

(Project plan II)

Preliminary study, concept idea

Definition phase, system idea

Detailed design, execution plan

How the overall picture looks like?

What is a problem? What is a solution?

How should it be pursued in concrete details?

Phase 4: Phase 5: Development (Execution I)

Execute & evaluate

Current engineering (Execution II)

Continuous enhancement

Source: Prepared by reference to “A.D. Hall’s Academic Theory”

Exhibit 5-1-7 Five Phases of Systems Engineering Phase1: Research & Investigation Phase The first research & investigation phase (program plan) is a phase during which the concept and vision need to be firmly established. Starting with ‘how the overall picture looks like’and ‘what the overall concept is,’ you shall establish the fundamental vision of a program (program plan). This is also called as preliminary investigation (FS: Feasibility Study) and involves a review of feasibility of the plan. You shall investigate all of the programs that you plan to carry out, gather necessary information, and consolidate opinions as a whole. Building a single system sometimes may not solve a problem completely. In such cases it is desired to focus on a portion of the problem that requires immediate attention and take the approach to solve one by one. That is, you will create a ‘program plan’ under which you create a scenario for solving the problem and kick off several projects sequentially and in an inter-related manner. However, somehow society and industry's environments change and thus problem status changes, a project may not be allowed to start according to its program plan. Therefore, the person in charge of program planning needs to have the role of ‘Steering’ for problem solution by reevaluating the plan, redirecting project activity as well as modifying its path. That is, the program planning phase does not end at the making of the plan but continues as long as the project operating according to the program is in motion. Phase2: Probing Plan Phase Probing plan phase (Project Plan I) is a definition phase during which ‘what a problem is’ as well as its solution shall be defined according to the concepts of the program plan. The target deliverable of this phase is a ‘system plan’ that should be able to solve the problem. Not just drawing a system plan, you need to prepare and evaluate multiple system plans, choose the best alternative for the project, and present it together with the rational for the decision to a decision-maker. In this phase it is important to identify various concepts relating to the object system, or 393

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form a new concept, to document them in such a way easy for the users and development division of the system to understand. The problem-solving process during this phase shall be discussed in 3-3-2 in more detail. It is risky to allocate into a project too many resources which do not have the prospect of problem solution. In order to reduce the risk, it is desired to probe the possibility of problem solving beforehand and start a ‘Research Project’ or ‘Problem Solving Plan Project’ for deciding the outline of the system to be constructed as a feasible solution and its realization method. In particular, if there turns out to be no possibility of problem solving after the review, moving to the next phase should be avoided. In the case that it is recognized some system is needed for a solution to the problem, a move can be made to the next development plan phase. However, there are times when multiple projects need to be started for problem solving and the project plan has to be fed back to the ‘program plan’ prepared in the previous phase. Phase3: Development Plan Phase The development plan phase (project plan II) is a phase during which a project design is prepared from the viewpoint of ‘how a project will be pursued in concrete terms.’ This phase shall be carried out only after execution of development is decided. For various activities in the development plan phase, you should create a plan for execution according to a clear solution and with the goal and means of the development clarified. The plan for execution should be prepared in greater details and the man power, cost, schedule and the priority of the work should be clearly provided. Phase4: Development Phase The development phase (execution I) is a phase during which you ‘execute and evaluate’ the development and production of a particular system. The job leaves the hands of the systems engineer and is transferred to the development section. The role of systems engineering is to make the requested items specified in more detail, evaluate and support the execution of development. The real picture of all problems is not necessarily clarified in the previous phase. Many discoveries are made in execution stage and the status of the problem changes. Problems newly found out should be fed back to the project manager and the path of the project plan needs to be modified. Plans in the previous phase may need to be rearranged in some cases.

Phase5: Current Engineering Phase Current engineering phase (execution II) is a phase of operation during which you introduce and implement a system and ‘continuously improve’ it. This starts when the jobs thus far are all completed and as long as the system developed is placed in use, it will continue. This activity has a goal of enhancing capabilities further through use and operation of the system. As described above, the relationship of project management and systems engineering in those activities is very close. The goal of the project is realized in this phase. When a number of projects are involved for problem solution, introducing and implementing the deliverables from

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a single project would not be sufficient. In the development plan phase, you should consider the relationships with systems that are developed by other projects to prepare an appropriate introduction plan, and make tools and structure required for integration in the execution phase readily available.

3-3. Process of Systems Engineering 3-3-1. Problem Solving Model A general problem solving model can be described as in Exhibit 5-1-8: Uncertain situation

Solve Evaluation a problem of an idea

Setup of a problem

Identify an idea

(Dewey’s model)

Exhibit 5-1-8

Problem Solving Model

First, a party with a problem learns that he/she is in an uncertain situation. Therefore he/she starts interacting with his/her environment and making research. Next he/she attempts to define the problem and sets it up. Once it is complete, he/she finds an idea that appears to be able to solve it. Lastly he/she evaluates the idea and clarifies how appropriate it is to solve the problem. There is interaction among these three elements. For instance, when the party identifies a certain idea, the problem may be reframed according to it. 3-3-2. Problem Solving Model in Systems Engineering In systems engineering, a problem-solving model can be described as six processes of a problem setup, definition of an objective, system synthesis, system analysis, selection of the best system and creation of an action plan (refer to Exhibit 5-1-9). It should be considered that these problem-solving processes are repeated as a subsystem in each phase of systems engineering. Today with advances of high technology and the fast pace of business, in particular, the importance of the problem solving process during phase 2, probing plan phase (project plan I), has been increasing. Project managers will need to have sufficient comprehension of the problem solving process during this phase going forward

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State of a problem (1) Setup of the problem

(2) Definition of the objectives

(3) System synthesis Feedback loop (4) System analysis

(5) Selection of the best system

(6) Preparation of the plan for execution Execution

Exhibit 5-1-9

Model for Solving a Problem in Systems Engineering

(1) Setup of a Problem It is important to recognize the problem as a problem and the need for a solution is recognized by stakeholders or the organization, or in some cases, by society. A project cannot be started without someone realizing the existence of the problem and going through the process of ‘Problem Recognition and Problem Formulation’ where parties concerned recognize the need for a solution. A ‘problem’ cited here has a broad meaning. A problem that involves a system can be included in not only ideas and needs but also emotional insecurities or frustrations of the concerned parties. To set up a problem, you need to uncover the political, economic, and social environment and investigate if there are regulations and standards that might be relevant. Especially, it is important that the project manager and systems engineer are looked at as a ‘Sensible Partner’ by the stakeholders, by grasping the problem simply and describing it, and confirming its meaning. For this reason, you should not take actions that may make stakeholders raise their guard, such as investigating a cause, making evaluation or proposing solution ideas. Such actions taken before the problem setup is not finished would have very high possibilities of distorting the project's tasks. (2) Definition of the Objectives This involves thinking about the objective of the system based on the problem investigated and described to define objectives that are to be accomplished by a project. There are various objectives behind a problem. A project manager or a member in charge of systems engineering needs to infer those objectives, confirm them with a stakeholder who originally raised the issue, and figure out what he/she really wants. Objectives are many, inter-relating to each other and forming a value system (Note), which is an association of activities that will realize the customer value as a whole. If some of the objectives contradict, their higher-level objectives may be consistent to each other. Also, even though sub-objectives are consistent, it is not rare that there are more than one objective which contains conflicts and contradiction. In short, you should identify a value system and 396

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introduce a new higher-level objective that would coordinate between the conflicts and contradiction. It will be good if you pick up a group of objectives, from this value system, that are to be accomplished by a system and relate them to each other to select the objectives of a project. (Note) Value System It refers to a large entire activity, behind the real system, that forms a value as a whole. Through the recognition of this value system, objectives will be extracted and defined, and a real system that would realize them will be developed. Therefore it is sometimes used to mean the setup of an objective, which comes before a real system. Michael E. Porter argues that the value chain of a particular company lies in a large activity group that it is involved in and labels this entire large activity group as a value system. He also argues whether you can gain and maintain competitive advantages depends on not only your own value chain but also how you fit to the entire large activity group that you are involved in (value chain).

(3) System Synthesis System synthesis (generating system ideas) is to draw up the system's internal structure, framing with available resources. When ‘Designing’ is mentioned, generally, some people assume naively that they do not need to think about ‘How to realize it’. However, if it is not possible to realize, any system design plans would turn out to be worthless. To ensure the feasibility of the ideas, it is important to start from system synthesis. For system synthesis, it is desired to determine whether you start from the whole to parts (Top-Down Design), work from parts to the whole (Bottom-Up Design), or use the combination of the two, according to the characteristics of the problem. The top-down design would often suffer from inconsistency built in. Also, there is a risk of not reaching resources that would be required to implement. With the bottom-up design, the feasibility would be guaranteed but it often comes with a risk that the proposed system idea does not conform to the overall objective. In conducting the work of system synthesis, it is desired to keep the ‘value system’ in mind and uncover to which value respective component elements (such as subsystems and parts) contribute. This gets ready for system analysis. And the result of the system synthesis should be documented as a model. Since the value system contains inconsistency and conflicts, there will often be more than one system ideas and component plans. You should propose multiple ideas so that the decision-maker can select what he/she believes is the best out of many ideas. In terms of the system's component elements, once you confirm their feasibility given that available resources are utilized, it is not recommended that you create plans in more detail. From there on, it should be left to the hands of the development engineers. As for the component elements of which you have not been able to confirm the feasibility, you will need to dig into more details until you can confirm one way or another. By keeping such focused detailing in mind, you can save time and efforts significantly from a problem setup project.

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(4) System Analysis System analysis refers to investigating the characteristics of a series of system plans that are generated from a hypothesis and their component elements to examine if intended deliverables can be obtained and what unintentional results (side effects) may appear, and derive the characteristics of the system. As a recent trend, a person who is in charge of systems engineering often takes responsibility for system synthesis and system analysis as well and, therefore, the two processes cannot clearly be separated and, on top of it, system analysis is often omitted. However, it brings a higher risk of project's failure due to defects found in the system tests at the final stage of system development or during the transition stage. Even if you have a single person to be in charge, you should clearly separate the work of system synthesis and system analysis to understand the characteristics of system plans. It is desired to determine the method and metrics of measurement appropriately in grasping the characteristics of the system. For system analysis methods, there are many tools available in the market, including those for OR (Operations Research), structure analysis and simulation analysis. It is important to choose the one appropriate for the use in order to get hold of system characteristics. However, it is not desirable to solely depend on a particular method or tool. It should be reminded that they deal only with specific aspects of the system. Especially in terms of a task with social implications, you should take into consideration such factors as causal relations and interests and incorporate qualitative characteristics as well. In such cases, what-if thinking (a method of knowing by analogy what would happen if this happens) and past experience will be helpful. In addition, in understanding the system characteristics, you should determine appropriate methods and metrics of measurement. All things cannot be measured in quantitative terms. You should remember to draw out the characteristics of the system and its component elements by combining metrics appropriate for the nature of an object, such as ‘designation metric’ (for things, etc.) that allows you to simply distinguish, ‘order metric’ (for performance, etc.) that allows you to know how they rank to each other, ‘interval metric’ (for temperature, recurring profit, etc.) that tells you by how much they are different, and ‘multiplier metric’ (for distance, weight and sales, etc.) that tells you about the multiplying factor. (5) Selection of the Best System When there are substitute ideas for the system or component elements, you need to choose the preferable one out of them to determine the idea to be recommended, as well as providing the reason for the decision. Since it would be difficult in many cases in terms of time and efforts required to design all the substitute ideas in detail, it would be better to choose the system idea to be recommended during the system design process and create a detailed design plan for it. However, for the final decision making, you should document those substitute ideas that are not adopted and the reasons for it. It is desired to make a decision based on objective data as much as possible. Also, you should

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have it clear beforehand which metrics relate to which value and how much it contributes to that value. At times, after a plan for recommendation has been decided, there emerges an opinion that measures to supplement its weak points should be added. In such a case it is advised to go back to the ‘system syntheses for the addition and supplement. Further, there are times when it becomes clear that system plans can achieve much more effects than what the stakeholders expect, or much less. It is then preferable that you go back to the ‘program plan’ and modify the path of the entire problem solving plan. Whether the system actually realizes the effects as expected is influenced by the timing and order of execution. When selecting a system plan, you should preferably have an appropriate order and method of constructing its subsystems as well as the execution period clarified and a draft of execution plan prepared. This is part of the efforts to ensure it is feasible. (6) Creation of an Action Plan Based on the results obtained from the above problem solving process, you will need to consolidate the information to craft an action plan and pass it over to the next phase. These processes will be repeated many times, according to the level of details of the deliverables required during each phase of system engineering, and lead to the final result.

4. Systems Management 4-1. Systems Management Systems management refers to integration management to optimize the entire systems by taking advantage of systems approach, which is a method to approach an object, as well as knowledge, techniques, skills, tools and others in systems engineering, which is an engineering technique to materialize a system. It is defined as a process that deals with every management aspects of a system, from making a selection through systems approach and putting into practical use what is designed and produced by systems engineering.

4-1-1. Project and a System The management functions of project management refer to not only those to run individual tasks effectively and efficiently, but also relate them to each other holistically, pre-determine the direction of the activities and lead them along it so that they are executed in a harmonized manner. The management functions are normally executed cyclically through the cycle of planning, implementation and evaluation. A system is a ‘conglomeration of various inter-related elements’. It should be considered that a system does not exist naturally by itself but that it manifests itself as a result of a person’s identifying or providing relationships among several elements based on a certain perspective. In the process of implementing a project, this approach of considering various elements for its subject as a system is useful.

4-1-2. Management of System Structure Since changes are inevitable in the systems approach, ‘system configuration

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management’ is indispensable to a project. Fundamental tasks to this include documenting elements that consist of a system and their inter-relationships, repeat the process of maintenance, reference and update. Those activities are provided below in a more concrete detail: (1) Configuration Management Its primary role is to identify the elements and their relationships that consist of a system and understand the structure of the entire system. This facilitates, based on this information, you to identify any duplication of the component elements and breaks in their relationships. If there is any problem identified, it should be reported to a project manager and a modification to the path of the project activities needs to be requested. (2) Progress Monitoring You can keep a track of the progress of a project by keeping a record of the individual status for the system component elements and their relationships that you have clarified beforehand. (3) Change Management While a project is in progress, there often occur situations where the specification of a system needs to be modified due to an environmental change, requests from stakeholders, technical or other reasons. You then need to investigate which system element would be impacted by the change or not. In some cases, a change request should not be accepted as it is expected to give an adverse impact on an entire system. The first and primary task of change management is to come up with how to deal with a change and provide data for taking countermeasures. When changes take place frequently, project team members may often get confused about which change instruction they should follow. The second task is to keep track of the sequence of the changes taken place and control ‘project version’ of the system specification. (4) Inter-systems Adjustment In some cases where a project consists of multiple subprojects dealing with more than one system, there shall be interfaces among such multiple projects. In those cases it becomes important as part of systems management function to consider the total project itself as a system and capture the relationship, too. When there are overlaps in the resources used by the project teams or when they are supposed to deliver and implement the deliverables to the same party, for example, the schedules for the activities of multiple projects will need to be modified. (5) Escalation to Program Management In the phase of systems engineering, when researching the objective world and probing a possibility of problem solution, you may encounter situations where there are more than one system within a single project and/or a problem that is not solvable within the project. It is not appropriate to decide within the project how to deal with those issues. You should report to a program manager about such issues and problems to arrive at an overall solution, in order to coordinate the stakeholder's interests and remove the overlaps and inconsistency among the projects.

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4-1-3. Maintenance of System Environment A system will be impacted by constraints and disturbance from the environment. Therefore it is necessary to maintain a good environment for the smooth operation of project activities. It is effective to provide required resources and information in timely manner and maintain a worker-friendly work environment. In an inferior work environment, project activity cannot be started, or even it would be better not to start in some cases. In order to carry out proper project activity, you need to review various information, plan and execute. Thus, if you have resources and information used to construct a project ready beforehand, you will be able to perform project activity smoothly and effectively. Also, when common parts and resources are used in the products by different projects, you can possibly save time and efforts by establishing a link between the projects and carrying out the project activity together. While a project information system is particularly effective in such a case, you should be careful about one thing. There is a risk that the tasks and target deliverables of a project would be distorted as a result of attempts to apply it to an existing project activity support system and project information system. You should remember that it is a task of paramount importance to a project to achieve provision of the ‘service’ to ‘customer function’ and that it is not an objective to incorporate it into an existing system. Examples of the tools to support the above activities include PDM (Product Data Management) that supports design and development of products and Information Repository.

4-2. Dealing with Items That Cannot Be Captured as a System For things that can be regarded as a system, accumulated techniques and tools ready for use can often be helpful. Systems management can be powerful in such a case. On the other hand there are many things that cannot be captured as a system in the real world. Certain things, including those relating to implicit knowledge such as human emotions and business judgment, as well as chaos and complex systems, cannot be captured as a system.

4-2-1. Implicit Knowledge and Project Management Even in the case of an item (such as implicit knowledge) that is hard to be captured as a system, you should apply a systems approach as much as possible, convert tacit knowledge into explicit knowledge and understand the structure of the project related world. This is because it will reduce uncertain and opaque parts of the structure of which cannot be identified and thus increase the possibility of accomplishing the project’s mission. In addition, it is desired that you also document uncertain and opaque items as much as possible so that a project manager can separate items that can be systemized from those not clearly. It is better to leave those that should not be systemized to the hands of a ‘human being’. By leaving the parts that need to be executed or customized by a customer or an operator, not by a system, in nature to the hands of a human being and combining them with parts systemized, you can make it a strong system.

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4-2-2. Chaos / Complex System and Project Management An example of an item that is difficult to be systemized is where, as seen in chaos, slight differences in the assumptions such as initial values can sometimes cause a system’s ultimate behaviors that have not been expected at all, even if behaviors of individual elements can be formulated. For instance, if you change the initial value slightly in a non-linear equation to forecast the weather, you could get a totally unexpected result. Further, if you plot all the calculation results on a screen, you’ll see a form with regularity as a whole even the values seem to be random. An issue having such a nature is called an issue of ‘chaos’ (note). Fluctuations in stock prices are studied as one of the issues of chaos, too. It should be noted that in some issues of a project there exist elements that are similar to chaos, whose forecast or control is very hard to make. In between this chaos and a system, there exists an issue. The state called an ‘edge of chaos’ has a ‘self-organizing nature’. For instance, in between the state of water and that of ice, beautiful crystal is formed. When many elements with self-organizing nature gather, they will exhibit surprising behaviors as a whole. Such an element or a collection of elements is called a ‘complex system’ (note). An organism is a complex system. For example, the immune system of a human being consists of the working of various cells such as macrophages, but it has no specific organ. Each element behaves on its own, and the overall working of them functions as immunity. Nature and a human society that consist of self-organizing nature as edge of chaos have many aspects that cannot be described as a system. If you venture systemization of such parts, it may bring out unexpected side effects. In a business or society, such a phenomenon can be observed as a very common situation. A business or society is a collection of individuals that work in a self-sustaining way, and their linkage has the business performed and social activities pursued. This led to a general recognition that an approach is required to capture a system structure from a viewpoint different from the conventional one. Of course, not much study has been done of the cases to directly utilize the ‘complex system’ for project management. But where you handle social problems or business networks, you can put it to use for finding a clue for analysis.

(Note) Chaos (originally from Greek word of Khaos) Japanese translation is ‘konton,’ referring to a situation where things are hard to distinguish. The chaos theory is, simply put, even if its law of motion is deterministic (once a state at a particular point of time is determined, all of subsequent states will be determined from the principle), slight errors in the initial data are exaggerated during the course of motion, resulting in behaviors that are very complex, irregular and unstable and making the future states unpredictable. Chaos has been defined by various researchers and refers to a phenomenon of ‘non-periodic oscillation that is generated by a deterministic system.’ A deterministic system means a system based on a constant law that cannot be broken. That is, chaos is an unpredictable non-periodic behavior that does not exhibit regularity, while it is a system governed

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Part5 Knowledge Foundation Chapter1 Systems Approach

(Note) Complex system Complex system is a system where many factors or unknown factors relate to determine the behavior of the overall system (system as a whole), and future behavior of which cannot be predicted with common techniques as respective factors give impacts to each other. It is famous as an extraordinary system to which a reductive approach cannot be applied. Therefore, the attitude to try to understand complex phenomena as they are, as opposed to the conventional basic stance of the science under which you apply simple rules and principles to understand phenomena, can be pointed out as the basic stance of the complex system.

4.3. Various Problem Solving Techniques There are many problem solving techniques based on the concept of systems, including brainstorming method, KJ method and work design method, and they are used in various ways. Each of the methods has its own characteristics and strengths/weaknesses and, as such, it is desired to choose a method appropriately depending on the nature of a task and the status of a problem. Exhibit 5-1-10 categorizes these techniques. Classification

Sub-classification

Technique Brainstorming method

Free association method

Card BS method (KJ method) Brain-writing method Input-Output method Attribute listing method

Dispersion technique

Forced association method

Checklist method Matrix method Morphological analysis method Synectics method

An