UNIT-2
Project Identification
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Project identification:
It is an important step in project formulation. These are conceived with
the objective of meeting the market demand, exploiting natural
resources or creating wealth.
a) The project ideas for developmental projects come mainly from the
national planning process
b) Where as industrial projects usually stem from identification of
commercial prospects and profit potential.
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Generation of Ideas:
Most of the project ideas involve combining existing fields of
technology or offering variants of present products or services.
The typical route may be described as follows.
• Someone with specialized technical knowledge or marketing expertise
or some other competence feels that he can offer a product or service
which can cater to a presently unmet need or serve of market where
demand exceeds supply.
• His ideas are endorsed by his associates who encourage him and even
show willingness to collaborate with him on proposal.
• Finally he receives support from financial institutions and banks who
approve his project and show readiness to finance it.
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SWOT
analysis
threats analysis)
(strengths,
weaknesses,
opportunities
and
It is a framework for identifying and analyzing the internal and external
factors that can have an impact on the viability of a project, product,
place or person.
SWOT analysis represents a conscious, deliberate, and systematic effort
by an organization to identify opportunities that can be profitably
exploited by it. Periodic SWOT analysis facilitates the generation of
ideas.
1) Clear Articulation of Objectives
2) Fostering a conducive climate.
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1) Clear Articulation of Objectives:
A clear articulation and prioritization of objectives helps in channelizing
the efforts of employees and prods them to think more imaginatively.
The operational objectives of a firm may be one or more of the
following:
a) Cost reduction
b) Productivity improvement
c) Increase in capacity utilization
d) Improvement in contribution margin
e) Expansion into promising fields
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2) Fostering a conductive climate:
• To tap the creativity of people and to harness their entrepreneurial
urges, a conductive organizational climate has to be fostered.
• Two conspicuous examples of organizations which have been
exceptionally successful in tapping the creativity of employees are the
1) Bell Telephone Laboratory
2) 3M Corporation
1) Bell Telephone Laboratory: Has succeeded in harnessing creativity
by providing an unconstrained environment .
2) 3M Corporation: Has effectively nurtured the entrepreneurial urges
of its employees.
Hindustan Unilever is a prominent example in India.
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Preliminary Screening:
Some kind of preliminary screening is required to eliminate ideas which
prima facie re not promising.
For this purpose the following aspects may be looked into:
• Compatibility with the promoter
• Consistency with governmental priorities
• Availability of inputs
• Adequacy of market
• Reasonableness of cost
• Acceptability of risk level.
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Compatibility with the promoter:
The idea must be compatible with the interest, personality, and resources
of the entrepreneur.
According to Murphy, a real opportunity has three characteristics
1) It fits the personality of the entrepreneur: It squares with his
abilities, training and proclivities.
2) It is accessible to him.
3) It offers him the prospect of rapid growth and high return on
invested capital.
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Consistency with governmental priorities:
The project idea must be feasible given the national goals and
government regulatory framework. The questions to be raised in this
context are
1) Is the project consistent with national goals and priorities
2) Are there any environmental effects contrary to governmental
regulations?
3) Can the foreign exchange requirements of the project be easily
accommodated?
4) Will there be any difficulty in obtaining the license for the project?
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Availability of inputs:
The resources and inputs required for the project must be reasonably
assured. To assess this, the following questions need to be answered:
1) Are the capital requirements of the project within manageable
limits?
2) Can the technical know-how required for the project be obtained?
3) Are the raw materials required for the project available domestically
at a reasonable cost?
4) Is the power supply for the project reasonably obtainable from
external sources and captive power sources?
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Adequacy of market:
The size of the present market must offer the prospect of adequate sales
volume. Further there should be a potential for growth and a reasonable
return on investment. To judge the adequacy of the market the following
factors have to be examined.
• Total present domestic market
• Competitors and their market shares
• Export markets
• Quality-price profile of the product vis-à-vis competitive products
• Sales and distribution system
• Projected increase in consumption
• Barriers to the entry of new units
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Reasonableness of cost:
The cost structure of the proposed project must enable it to realize an
acceptable profit with price. The following should be examined in this
regard.
• Costs of material inputs
• Labour costs
• Factory overheads
• General administration expenses
• Selling and distribution expenses
• Service costs
• Economies of scale
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Acceptability of risk level:
The desirability of a project is critically dependent on the risk
characterizing it. In the assessment of risk the following factors should
be considered:
• Vulnerability to business cycles
• Technological changes
• Competition from substitutes
• Competition from imports
• Governmental control over price and distribution
• Shifts in consumer preferences
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PROJECT RATING INDEX(PRI)
When a firm evaluates a large number of projects ideas regularly, it may be helpful
to streamline the process of preliminary screening.
For this purpose, a preliminary evaluation may be translated into a project rating
index.
The steps involved in determining the PRI are as follows:
• Identify factors relevant for project rating
• Assign weights to these factors( The weights to reflect their relative importance)
• Rate the project proposal on various factors, using a suitable rating scale
• For each factor multiply the factor rating with the factor weights to get the factor
score
• Add all the factor scores to get the overall project rating index.
Once the PRI is determined, it is compared with a pre-determined hurdle value to
judge whether the project is prima facie worthwhile or not.
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MARKET AND DEMAND ANALYSIS
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Market and demand analysis is concerned with two broad issues:
a) What is the likely aggregate demand for the product/service?
b) What share of the market will the proposed project enjoy?
The above two issues can be known by
1.Collection of data
2.Market survey
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1.Collection of data:
In order to answer the questions listed while delineating the objectives of the
market study, information may be obtained from secondary and/or primary
sources.
General sources of secondary information:
1. Census of India: A decennial publication of the government of India, it
provides, inter alia, information on population, demographic
characteristics, household size and composition, and maps.
2. National Sample Survey Reports: Issued from time to time by the
cabinet secretariat, government of India, these reports present information
on various economic and social aspects like pattern of consumption,
distribution of households by the size of consumer expenditure,
distribution of industries
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3. Plan Report: Issued by the planning commission usually at the beginning,
middle and end of the five-year plans, these reports and documents provide a
wealth of information on plan proposals, physical and financial targets etc.
4. Statistical Abstract of the Indian union: An annual publication of the central
statistical organization, it provides demographic information, estimation of
national income and agricultural and industrial statistics.
5. Indian year book: An annual publication of the ministry of information and
broadcasting, it provides a wide range of information on economic and other
aspects.
6. Statistical year book: An annual publication of the united Nations, it provides
world statistics relating to various aspects like population, demography, gross
domestic production, industrial production, international trade etc.
7. Economic survey: An annual publication of the ministry of finance, it
provides the latest data on industrial production, wholesale prices, consumer
prices, exports, agricultural production, national income etc.
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2. Market Survey:
The Market survey may be a census survey or a sample survey.
In a census survey: The entire population is covered.
• Examples are: All industries using milling machine, all readers of the
Economic Times.
• Census surveys are employed principally for intermediate goods and
investment goods when such goods are used by a small number of firms.
• In other cases a census survey is prohibitively costly and may also be
infeasible.
• For example, it would be inordinately expensive, impossible to dover
every user of lifebuoy or every person in the income bracket Rs10,00015,000.
• Due to the above mentioned limitations of the census survey, the market
survey, in practice, is typically a sample survey.
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Sample survey:
In such a survey a sample of population is contacted or observed and relevant
information is gathered. On the basis of such information, inferences about
the population may be drawn.
The information sought in market survey may relate to one or more of
the following:
• Total demand and rate of growth of demand
• Demand in different segments of the market
• Income and price elasticities of demand
• Motives for buying
• Purchasing plans and intentions
• Satisfaction with existing products
• Unsatisfied needs
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Steps in sample survey:
1. Define the Target population
2. Select the sampling scheme and sample size
3. Develop the Questionnaire
4. Recruit and Train the Field Investigators
5. Obtain Information as per the Questionnaire from the sample of
respondents
6. Scrutinize the Information Gathered
7. Analyze and Interpret the Information
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Market Planning:
The market planning usually has the following components.
Current marketing situation
Opportunity and issue analysis
Objectives
Marketing strategy
Action programme
Current marketing situation:
It examines the market situation, competitive situation, distribution situation, and the
macro-environment. In other words, it paints a pen-picture of the present.
• Market situation: This deals with size, the growth, the consumer aspirations, and buying
behaviour in the market under consideration.
• Competitive situation: This dwells on the major competitors, their objectives, strategies,
strengths etc.
• Distribution situation: This compares the distribution capabilities of the competitors.
• Microenvironment: This describes the effect of social, political, economic, technological,
and other external variables on the market.
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 Opportunity and Issue Analysis:
In this section a SWOT( Strength, Weakness, Opportunity, Threat analysis) is
conducted and the core issues before the product identified.
• Alpha‘s Strength is that its parent ABC has to its credit the successful launch
of a shampoo in the current market.
• Its weakness is probably its limited resources.
• The opportunity for Alpha could be the growth witnesses in the mediumpriced segment of the soap market at the expense of low priced soaps.
• The threat might be the growing acceptance of new launches.
 Objectives: Objectives have to be clear-cut, specific, and achievable. The
following objectives have been set.
• Achieve break-even in 3 years
• Attain sales of Rs. 20 Million in first year, Rs.80 in the second, and Rs.120
million in the third.
• Achieve a top-of-mind recognition of 75% in the target segment in the first
year and 90% in the second.
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 Marketing strategy: The marketing strategy covers the following
• Target segment: the target segment from the point of view of income is middle class.
For instance, Alpha could specifically target students or teenagers or entry level
executives.
• Positioning: Positioning is how a product is placed in the mind of the customer.
Having decided on targeting students, Alpha could be positioned as romantic or
rugged.
• Product line: What fragrance goes with a romantic soap(lavender?)
• Price: Will Alpha be launched in the mid-price segment because the segment is
growing? Will the price decision change depending on whether the positioning is
romantic or rugged.
• Distribution: Alpha may like to confine its distribution to important consumption
centers in South and East.
• Sales Force: The sales force may be marginally increased.
• Sales promotion: Direct consumer promotion is usually expensive because it covers
thousands of individual consumers.
• Advertising: Unconventional and creative advertising options(balloons, advertising
behind bus tickets, pamphlets in newspapers, hoarding in high visibility locations like
bus stations etc). Newspapers and TV. M SIVA SURYA
PROJECT RISK ANALYSIS
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• Risk analysis is one of the most complex and slippery aspects of capital
budgeting.
• Many different techniques have been suggested and no single technique can
be deemed as best in all situations.
• The variety of techniques suggested to handle risk in capital budgeting fall
into two broad categories
1. Techniques that consider the stand-alone risk of a project.
2. Techniques that consider the risk of project in the context of the firm or in
the context of the market.
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SOURCES OF RISK:
There are several sources of risk in a project. The important ones are project
specific risk, competitive risk, industry-specific risk, market risk, and
international risk.
1. project specific risk: The earning and cash flows of the project may be
lower than expected because of estimation of error.
2. competitive risk: The earnings and cash flow of the project may be affected
by unanticipated actions of the competitors.
3. industry-specific risk: Unexpected technological developments and
regulatory changes, that are specific to industry to which the project belongs
will have an impact on earnings and cash flow of the project as well
4. Market risk: Unanticipated changes in macroeconomics factors like the
GDP growth rate, interest rate, and inflation have an impact on projects.
5. International risk: In the case of a foreign project, the earnings and cash
flows may be different than expected due to the exchange rate risk.
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Techniques of Risk Analysis
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1.Stand-alone risk: This represents the risk of a project when it is viewed in
isolation firm risk also called corporate risk.
Stand alone risk measures the dangers associated with a single facet of a
company's operations or by holding a specific asset, such as a closely-held
corporations
2. Systematic risk: This represents the risk of a project from the point of view of
a diversified investor. It is also called market risk.
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Demand forecasting:
After gathering information about various aspects of the market and demand
from primary and secondary sources, an attempt may be made to estimate
future demand.
A wide range of forecasting methods is available to the market analyst.
These may be classified into three broad categories.
I. Qualitative methods
II. Quantitative method/Time series projection methods
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I.
Qualitative methods: These methods rely essentially on the judgment of experts to
translate qualitative information into quantitative estimates.
The important qualitative methods are
1) Jury of Executive Opinion method
2) Delphi method
1) Jury of Executive Opinion method:
This method is very popular in practice, involves soliciting the opinions of a group of
managers on expected future sales and combining them into a sales estimate.
The advantages of this methods are
a) It is an expeditious method for developing demand forecast
b) It permits consideration of variety of factors like economic climate , competitive
environment, consumer preferences.
The disadvantage:
a)The reliability of this technique is questionable
b) The experts may be biased
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Delphi method: This method is used for eliciting the opinions of a group of
experts with the help of a mail survey.
The steps involved in this method are:
1. A group of experts is sent a questionnaire by mail and asked to express their
views.
2. The responses received from the experts are summarized without disclosing
the identity of the experts, and sent back to the experts, along with a
questionnaire meant to probe further the reasons for extreme views
expressed in the first round.
3. The process may be continued for one or more rounds till a reasonable
agreement emerges in the views of the experts.
Delphi method appeals to many organizations for the following reasons:
1. It is intelligible to users
2. It has fancy name
3. It seems to be more accurate and less expensive than the traditional face-toface group meetings.
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