Monday, 6 June 2016

Projects as a Form of Production

How Production Theory Links to Project Management

In the previous post the idea that a project might be considered as an internal, temporary micro-market post was considered. An economic approach emphasises both the market for projects and projects as markets, and leads to a different approach to the analysis of projects. This different approach is quite well suited to the growing importance of the economic role of projects in the modern economy.

This post is concerned with another aspect of the economics of projects. The starting point is the idea of a project as a form of production, in the economic sense of combining a number of factors or resources to create output. Here, a representative firm selects the technology to use, organises and manages the production process to maximise efficiency and deliver output.

The economic theory of production that developed after the mid-18th century was one of the main topics of classical political economy, firstly by the French physiocrats and their theory of agricultural rents and revenue, and later by Adam Smith and his analysis of the emerging factory system and profit. After the marginal revolution in economics in the second half of the 19th century, production theory adopted Alfred Marshall’s framework of optimal allocation of scarce resources.

In the neoclassical theory of production, the starting point is a set of physical technological possibilities represented by a production function. The output of a production process is determined by the choice of technology and the flow of inputs used, the flows of capital services, labour services, and services from land, energy and raw materials. The task of a firm and its managers is to combine all these into a flow of output. 

This economic model of the firm as a black box, turning inputs into outputs, left many unanswered questions. Production processes vary widely within and between industries, and across regions and countries. Industry concentration and structure, and the regulation of market power, have become increasingly important. The data we get from the SIC (System of Industrial Classification) comes with many qualifications.

During the 20th century answering these questions led to substantial new sub-fields in organisational and industry economics, investigating the boundaries and management of firms and industries. The single topic that attracted most theoretical research, however, was the choice and application of technology, as this had long been recognised as the driver of productivity and economic growth. Technology, in turn, is embodied in the capital used as a resource in the production process.

Many aspects of project management seem to be about resource allocation and delivery of a product (i.e. the project), the economic-orientated set of activities found in a production model. Although a wide range of management tools and methods are used in the course of a project, over the conception to handover cycle, the emphasis is actually on the way that the production process is managed. Thus the central role given to work breakdown structures, schedules and risk management. Further, the generic nature of project management supports this view. There is specific knowledge required for delivering construction projects, for example, but the broader set of PM skills are not industry specific and are about getting the various processes needed for a particular project right.

Also, many decisions in PM are often about the technology to be used. The substitutability of capital (how much equipment) and labour (how many workers) is apparent in any office and on every construction site. Economic theory gives technology the key role in determining efficiency, with management of the production process determining the level of efficiency. Thus a link between PM and the economic theory of production is found. These are both process-based and concerned with production technology choices.