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PMP Preparation Knowledge Series – Article on Project Business Environment

Updated: Jun 10



As a project manager, you are responsible for leading a project to completion, meeting all stakeholder expectations, and achieving the project’s objectives. A project is defined as a temporary endeavor undertaken to create a unique product, service, or result. Each project aims to generate a specific outcome for an enterprise—whether it’s a business, social, or government entity.


The expected outcome of a project could be a new product, solution, process, capability, or service. Achieving this outcome involves adhering to a timeline, budget, and quality standards. Enterprises undertake projects for justifiable business reasons, seeking to address specific needs, problems, or opportunities. The project outcome must effectively address these aspects.


Every project is initiated by the business and operates within its environment. As a project manager, understanding the business and its environment is crucial before commencing any project management activities. This understanding is essential not only for practical project execution but also in professional certification contexts, such as the PMP exam, where business environment competency is a key focus, comprising about 8% of the exam content.

Note – In PMP exam, there will be 8% or 15 questions from this competency domain.


Insights about Business Environment

As a project manager you need to become highly aware about the business environment and various aspects of the business environment which will impact how you will manage your project and things those can impact you and your project.

Following important aspects about the business environment are important:

1.       Understanding the business purpose of doing the project

2.       Understanding the place of doing the project

3.       Understanding the organization structure of the enterprise  where the project is happening

4.       Understanding what kind of project governance will  be present  within the business enterprise

5.       Understanding what kind internal and external compliances need to fulfilled from the business side


Let us deep dive into each of the above one at a time.


1.Understanding the business purpose of doing the project


As we already learned above, an enterprise decides to undertake a new project to create some new product or new solution or new capability for their existing enterprise. The project outcomes should create new value for the enterprise.


And all such new project initiative will require significant investments of efforts and money first and subsequently create expected business value and benefits. Hence the business decision makers will first create a project business case, clearly defining the need for doing the project and establishing an economic feasibility for doing it. They will clearly list down all the expected benefits from doing the project and also the cost-benefit analysis of doing the project.


Generally the business decision makers will establish the following 2 major project business documents:

  • A project business case ( Establishes the need, suggested solution, economic feasibility with cost benefit analysis)

  • A project benefit management plan ( List of expected benefits, how and when the benefits will be realized)


Generally the business decision makers will engage a Business Analyst (BA) to create the above 2 artifacts. While creating the Business Case, the BA will use various financial and non-financial techniques for selecting or not selecting a particular project. Some of these techniques include:

  • Payback Period, Opportunity Cost

  • Net Present Value (NPV), IRR, ROI etc.

  • You do not need to do any of these calculations as part of the PMP exam


Once these 2 artifacts are created, reviewed and approved by the authorized business decision makers, the project finally will get initiated. And this is where the as a PM you will come into picture.


Note:At this stage, the project has not yet started. Above activities are done at a business level, by the portfolio management group. Hence these activities do not fall directly under the responsibilities of a project manager. But as an incoming project manager for a new project, the very first thing you will like to understand will be these two artifacts. As a PM, you need to really understand the reasons and business justification of doing the project.


2. Understanding the place of doing the project

Just imagine you are going to do your project in one of the following 3 different environments:

  • A new emerging small startup enterprise

  • A mid-sized enterprise

  • A large matured business enterprise

In the above 3 scenarios, the business environments will be very different.

In a new small startup enterprise, you may find the following:

  • Less  processes and not much of systems

  • More informal

  • Resource and financial limitations

  • But immense amount of freedom, openness and opportunity to innovate

  • Specific ability to support and fund the project by the business

  • Organizational and reporting structures

  • Availability past historical data

In a mid-sized enterprise, you may find:

  • Some process maturity, some systems, some amount of automation

  • More formal

  • Resource and financial constraints, may be better than a start up

  • More compliances to internal standards, balance of freedom, openness and organizational compliances

  • Specific ability to support and fund the project by the business

  • Organizational and reporting structures

  • Availability past historical data

In a large matured enterprise, you may find:

  • Organization wide standardized processes, procedures, strong systems, high amount of automation

  • Highly formal and highly governed from the top

  • Bigger resource and financial pool ( May be)

  • Lesser freedom, much higher compliances to internal standards in comparison to above 2 scenarios

  • Specific ability to support and fund the project by the business

  • Organizational and reporting structures

  • Matured and organized past historical data


In the above context, it is to realize that the environments are very different. Hence managing project will also get impacted accordingly. As a PM, you will need to decide your project plans and strategy keeping these factors in mind.

As per PMI, PMBOK guide, the following 2 terminologies are used to explain the above.

Organizational Process Assets (OPAs)

Enterprise Environmental Factors (EEFs)

·         Processes, Procedures, Templates

·         Policies

·         Historical information

·         Past project records

·         Internal

o   Internal culture, reporting structure

o   Internal resource, funding and facilities

o   Employee capabilities

·         External

o   Social and cultural issues

o   Government regulations

o   Market place conditions 

 

Hence as a PM, first take a closer notice of all above factors. How these factors will impact your project and project management. Some factors may influence positively while some of them may impact your project negatively. As a PM you can control. Just understand and decide the right strategy to navigate your project through the real business environment.


3. Understanding the organization structure of the enterprise  where the project is happening

As you already know, the project will be happening within a business or social or government organization. But each organization will have a different structure based on nature of the primary business activities they perform.

Based on this, fundamentally there are 3 distinct types of organizations:

  • Functional

  • Project Oriented

  • Matrix ( Combination of functional and project-oriented)


Functional Organization

For example, an organization like a hotel, or a retail store or a manufacturing company or a bank, will mostly be doing ongoing operational activities on a daily basis. For example, in a hotel, the various activities they will need to do daily include reservations, front desk, checking-in, checking-out, room services, housekeeping, food and beverages, facility maintenance 24/7, accounts and billing etc. These activities are ongoing and routine.


In such environment, the entire organization is divided into many different departments or functions like sales, reservations, F&B, housekeeping, maintenance, accounts, HR, inventory management etc. Each department has a well-defined set of responsibilities to perform to run the business. Since these activities are ongoing, each department will have its own full time dedicated staff members.


Here the departmental heads (also known as functional heads or managers) are given highest amount of authorities to make necessary decisions for their respective departments and run the show fulfilling business expectations. Departments run in silos. The coordination between departments happens at the department head level.


In such environment, business is more operation driven. Permanency and continuity of work and people is more important. In such organizations, projects are not their primary focus. They are not in the business of serving customers through projects and project management. However, it does not mean that such functional organizations will never be doing a project. They will also need to keep improving their existing operations time to time through new product, new processes, and new efficiencies.


In a functional organization structure, whenever they will be undertaking a new project, the project will belong to a department or sometime a project will belong to a group of departments or sometime the whole organization. The departmental or functional heads (who actually are the business people) will be responsible for making and driving the various project decisions. Hence the departmental heads will now become responsible for driving both the departmental work and also the project work.


Hence for the department heads, there are 2 distinct responsibilities now, one to lead and manage the departmental work and second to lead the project as well. Departmental work and the project work, both are done by the departmental staff.


While both seem to be important, but in all practicality in such environment, the departmental work always takes higher priority than the project work. Departmental work here is more focused on the ongoing business; project work is more internal focused on bringing about a new improvement in existing operations. And since both work is managed by same staff and decision making is done by the same departmental heads, many a times, project work starts slipping behind. It is not that the departmental heads deliberately neglect the project; it is the constraint of this organization structure which eventually leads to the project receiving lower attention and priority and finally projects getting delayed.


To address the above, in some functional organizations, they appoint one of the team members as a project manager, or a project coordinator or project expeditor. But this does not help much as the decision making authorities for the project still lies with the departmental heads.


In conclusion, we can say that functional organization structure is excellent for certain kind of businesses where business activities are more operation driven. But this structure does not support project management and does not provide the required support and priority to the projects because of structural limitations.


Project –Oriented Organization

There are some businesses where everything seems like a project. They are completely project driven organizations. For example in a consulting company, a construction company or a company where they do work on contractual basis, all work is a project. They do work purely on a temporary basis. Each assignment is different.

In such environments, it is important to manage and deliver each project successfully. A consulting organization will have to deliver each new assignment to their customers as per commitment. For a construction company each new construction project needs to be done in time, within budget and with the right quality.


Such organizations will primarily focus on good project management. They need skilled project managers who can drive the projects to success. Here, the project managers become the most important managers and given highest authority and autonomy. The project manager can be given so much freedom to decide whatever is right for the specific project.


Focus here is to successfully deliver all projects. A highly skilled and fully authorized project manager enables good project management. Projects are given highest priority within the organization. A project manager can escalate or ask for whatever support they need from senior management. Hence this structure works very well for project management.


But this structure also has a lacuna. Since projects are of temporary in nature, the project team member assignments are also temporary in nature.  Project team members will be hired and assigned to projects when project starts, and will have to be redeployed or sometime asked to leave when the projects are over. Sometime this also referred as a “hire and fire” kind of an organization. This does not allow a fully permanent team to be present in the organization all the time. Everything seems temporary and contractual. People do not feel stable. Since people may be leaving after the projects, the organizations will be losing the experience. Experience seems to be retained more on documentation than the same people continuing forever, as in the case of a functional organization. Each project has its dedicated team and resources. Different projects run in silos. Different projects do not share resources in general leading to duplicity and inefficiency in resource management.


Matrix Organization

Having understood what is pure functional and project- oriented organizations are, we realize one thing that neither of these extremes are fully efficient. While a functional organization drives operation excellence with stable work force but does not support project management well. A project oriented structure focuses on project management and empowers a project manager to drive projects well, but does not ensure permanency of work force and hence does not guarantee true expertise building. One supports functions and other supports projects.


What is needed in real world is an organization structure which can drive both operational excellence and also project excellence. We should be able to manage both the functions and projects equally well. This is where a hybrid of both functional and project oriented structure will be required.


Matrix organization structure combines a functional structure with an independent project management structure into one structure. The organization will have two types of managers now. Functional managers will drive the departments and functions with dedicated full time staff. And project managers will drive the projects with right degree of authority and freedom. Their roles and responsibilities and respective authorities and powers are clearly defined.


The organization wide resources belong to the various departments and functions. When a new project has to be done, an independent project manager is assigned to drive the project. The required resources will be identified from the departments and assigned to the new project. The functional managers will be responsible to provide the right skilled staff for the project. The functional staff will bring the required skills and knowledge for the project. The assigned team members will report to the project manager as far as the project activities are concerned. Once the project gets over, the assigned staff members will return back to their original departments.


This way, this structure brings immense amount of efficiency.  Resources are not hired just for the departments or just for the projects.  A departmental resource will be working to drive the departmental work and also be working on project work as needed ensuring enhanced resource utilization. The functional managers and project managers coordinate with clear boundaries.


While matrix organization is efficient, this also has its own set of challenges which need to be addressed. One common challenge in matrix organization is the “dual boss reporting syndrome”. Each resource by default belongs to a department but also gets assigned to projects time to time. Hence each resource ends up reporting two different managers at the same time. This can lead to conflicts, loyalty issues, project team building challenges, over communication, sometime confusion among the team members on how to prioritize their work. But all these can be addressed through clear policies being made.


Types of Matrix

  • Weak Matrix (Functional work more important. Functional Managers more powerful than project managers)

  • Balanced Matrix ( Balanced authority and priority to both kind of work)

  • Strong Matrix (Projects given more importance. Project Managers more powerful than functional managers)


Summary

The organization structures as discussed above will influence the project and project management significantly. The priority given to a project and the amount of authority given to the project manager for making project decisions varies significantly depending on the organization structure. Pure functional and pure project-oriented structures are two extremes and have their own inefficiencies and limitations. But a matrix structure enables managing both functional work and project work equally well, by providing the right priorities to both work and clearly defining the responsibilities and authorities of functional managers and project managers.


4. Understanding what kind of project governance will  be present  within the business enterprise

Larger organizations with many projects running concurrently always, generally decide to standardize their project management processes internally. Generally such organizations establish a Project Management Office (PMO) or a project management Center of Excellence.


The PMO will have project management experts. The PMO will develop the project management processes, procedures, policies, templates and overall standards of project management for the given environment. PMO will also be given the responsibilities of maintaining repository of all project related knowledge and historical information of all past projects. This kind of PMO is referred as “Supportive PMO”, which is the primary function of PMO.


Presence of such a PMO will make things much easier for a project manager. The project managers know that all the knowledge and guidelines of project management will be readily available from the PMO. The PM does not have to worry about all these. The PM gets all the required knowledge of project management from the PMO and focuses on the core project work.


PMOs can also sometime be given the responsibilities of managing the shared resources such as a pool of project managers, pool of specific resources which need to be assigned to new projects as they start. This kind of PMO is referred as “Directive PMO”.

PMOs can also sometime be given additional responsibilities of auditing the project teams to check their compliance to the established project management methodologies and standards within the organization. This kind of PMO is referred as ‘Controlling PMO”.


PMOs will play a very important supportive role to the project managers and project teams. If there is a PMO, then as a project manager, you will like to understand the project governance framework established by the PMO and prepare to do all project management activities as per the project governance framework.


In absence of a PMO or Center of Excellent of project management, the project manager will have the added responsibilities to establish the procedures and templates for his/her project, which itself can take huge added efforts.

Summary

Hence presence or absence of a PMO and Project Governance Framework can make a huge influence on project management.


5. Understanding what kind internal and external compliances need to fulfilled from the business side

Compliance requirements, both internal and external, are integral to project management within organizations and businesses. These requirements serve to ensure that projects are conducted ethically, legally, and in alignment with industry standards and best practices.

External compliance regulations are imposed by governmental bodies, industry regulators, or international standards organizations. For instance, in the healthcare industry, projects must adhere to regulations such as HIPAA (Health Insurance Portability and Accountability Act) for patient data privacy. Similarly, construction projects need to comply with building codes and environmental regulations to ensure safety and sustainability. Adhering to these external requirements is crucial for avoiding legal penalties, reputational damage, and loss of business opportunities.


Internal compliance requirements are established by the organization itself and aim to uphold its policies, procedures, and values. These may include internal control mechanisms, quality assurance standards, project management methodologies, and ethical guidelines. For example, a financial institution may have internal compliance policies governing risk management practices within project finance initiatives. Ensuring internal compliance helps safeguard against internal fraud, mismanagement, and conflicts of interest. It also fosters transparency, accountability, and trust among stakeholders.

In project management, compliance requirements provide a framework for planning, executing, monitoring, and controlling projects. Project managers must identify relevant regulations at the project's outset and integrate them into project plans and procedures.


This involves obtaining necessary permits, licenses, or certifications, conducting risk assessments, implementing security measures, and documenting compliance activities.

Moreover, compliance requirements influence decision-making throughout the project lifecycle. Project managers must continuously assess project activities against compliance standards, identify any deviations or non-compliance issues, and take corrective actions as necessary. This proactive approach helps mitigate risks, ensure project success, and maintain stakeholder confidence.


In summary, compliance requirements, whether internal or external, are essential considerations in project management. They provide a framework for conducting projects responsibly, ethically, and in accordance with legal and regulatory obligations. By adhering to compliance requirements, organizations can mitigate risks, protect their reputation, and achieve project objectives effectively.


Summary (Business Environment or Business Acumen)

In project management, understanding the various aspects and factors of business environment and how they impact the project and project manager’s authority is very critical.


A project manager needs to understand the business reasons for doing the project, the structure of the organization, the existing project governance structure and the various compliances for the project. 


Business environment (or Business Acumen) is an important competency in the PMP exam. The PMP exam will test your understanding on the above.

To know more about who to prepare for PMP exam, please contact us at sunil@bharticonsulting.com .

 

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