Generation and Screening of
Project Ideas
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Generation of ideas
Monitoring the environment
Corporate appraisal
Profit potential of industries : Porter model
Scouting for project ideas
Preliminary screening
Project rating index
Sources of positive net present value
On being an entrepreneur
Generation of Ideas
To stimulate the flow of ideas, the following are helpful
 SWOT analysis
 Clear articulation of objectives
 Fostering a conducive environment
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Business Environment
Competitor
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Corporate Appraisal
 Marketing and distribution
 Production and operations
 Research and development
 Corporate resources and personnel
 Finance and accounting
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Tools for Identifying Investment Opportunities
There are several tools or frameworks that are helpful in
identifying promising investment opportunities. The more
popular ones are:
 Porter model
 Life cycle approach
 Experience Curve
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Porter Model
According to Michael Porter the profit potential of an industry
depends on the combined strength of the five basic competitive
forces as shown below
Forces Driving Industry Competition
Potential
Entrants
Threat of New
Entrants
Suppliers
Bargaining
Power of
Suppliers
THE INDUSTRY
Rivalry Among
Existing Firms
Bargaining
Power of Buyers
Threat of
Substitute
Products
Substitutes
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Buyers
Life Cycle Approach
Many industrial economists believe that most products evolve through
a life cycle that has four stages:
 Pioneering stage
 Rapid growth stage
 Maturity and stabilisation stage
 Decline stage
Investment in the pioneering stage, per se, may have a low
return and negative NPV. However, it may create options
for participating in growth.
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Most products evolve through a life cycle. The broad stages and
the investment returns in these stages are as follows:
Stage
 Pioneering
Investment Returns
 May have negative
NPV but may create
options for participating in
growth stage
 Rapid growth
 Positive NPV
 Maturity
 NPV - neutral
 Decline
 Negative
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Experience Curve
 The experience curve shows how the cost per unit behaves with respect to
the accumulated volume of production
100
80
60
40
10 20 40
80
Accumulated volume of production
 The key factors that contribute to decline in unit cost with respect to the
accumulated volume of production are learning effects, technological
improvements, and economies of scale
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Scouting for Project Ideas
 Analyse the performance of existing industries
 Examine the inputs and outputs of various industries
 Review imports and exports
 Study plan outlays and governmental guidelines
 Look at the suggestions of financial institutions and development agencies
 Investigate into local materials and resources
 Analyse economic and social trends
 Study new technological developments
 Draw clues from consumption abroad
 Explore the possibility of reviving sick units
 Identify unfulfilled psychological needs
 Attend trade fairs
 Stimulate creativity for generating new product ideas
 Hope the chance factor will favour you
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Preliminary Screening
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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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Project Rating Index
The steps involved in determining the project rating index are
as follows
 Identify factors relevant for project rating
 Assign weights to these factors ( the weights are supposed to reflect their
relative importance)
 Rate the project proposal on various factors, using a suitable rating scale
(Typically a 5-point scale or a 7-point scale is used for this purpose.)
 For each factor, multiply the factor rating with the factor weight to get the
factor score
 Add all the factor scores to get the overall project rating index
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Construction of a Rating Index
Factor
Factor
Rating
Weight
Score
VG
5
Input availability
Technical know-how
Reasonableness of cost
Adequacy of market
Complementary relationship
with other products
Stability
Dependence on firm’s
strength
Consistency with
governmental priorities
Factor
0.25
0.10
0.05
0.15
G
4
A
3
0.10
VP
1
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0.75
0.40
0.20
0.75
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0.20
0.40
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0.05
0.10
0.20
P
2
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1.00

Rating Index
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0.30
4.00
Sources of Positive NPV
It appears that there are six main entry barriers that result in positive NPV
projects. They are as follows:
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Economies of scale
Product differentiation
Cost advantage
Marketing reach
Technological edge
Government policy
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The Questions Every Entrepreneur Must Answer
According to Amar Bhide the following are the questions that
every entrepreneur must answer:
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Are my goals well defined ?
 Personal aspirations
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Business sustainability and size
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Tolerance for risk
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Do I have the right strategy?
 Clear definition
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Profitability and potential for growth
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Durability
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Rate of growth
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Can I execute the strategy
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Resources
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Organizational infrastructure
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The founder’s role
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Qualities and Traits of a Successful Entrepreneur
It appears that a successful entrepreneur has the following
qualities and traits :
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Willingness to make sacrifices
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Leadership
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Decisiveness
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Confidence in the project
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Marketing orientation
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Strong ego
 Open-mindedness
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Summary
 Identification of promising investment opportunities requires imagination, sensitivity
to environmental changes, and a realistic assessment of what the firm can do.
 To stimulate the flow of investment ideas, the following are helpful: (i) SWOT
analysis,
(ii) clear articulation of objectives, and (iii) conducive climate
 The business environment which needs to be monitored regularly to identify
investment opportunities, may be divided into six broad sectors: economic sector,
government sector, technological sector, socio-demographic sector, competition sector,
and supplier sector.
 A realistic appraisal of corporate strengths and weaknesses is essential for identifying
investment opportunities which can be profitably exploited. The broad areas of
corporate appraisal are: market and distribution, production and operations,
research
and development, corporate resources and personnel, and finance and accounting.
 According to Michael Porter the profit potential of an industry depends on
the combined strength of the following five basic competitive forces(i) threat of
new entrants , (ii) rivalry among existing firms, (iii) pressure from substitute
products,(iv) bargaining power of buyers, and (v) bargaining power of sellers.
 Good project ideas- the©key
to success – are elusive. So a wide variety of sources
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 It is possible to develop a long list of project ideas.
For the preliminary screening of these ideas, the following aspects may be
looked into: compatibility with the promoter, consistency with governmental
priorities, availability of inputs, adequacy of market, reasonableness of cost,
and acceptability of risk level. When a firm evaluates a large number of project
ideas regularly, it may he helpful to streamline the process of preliminary
screening by employing a project rating index.
 It appears that there are six main entry barriers which result in positive NPV
projects: economies of scale, product differentiation, cost advantage, marketing
reach, technological edge, and government policy.
 Every entrepreneur must answer the following questions : Are my goals well
defined ? Do I have the right strategy ? Can I execute the strategy ?
 It appears that a successful entrepreneur has the following qualities and
traits: willingness to make sacrifices, leadership, decisiveness, confidence in
the project, marketing orientation, and a strong ego.
© Centre for Financial Management, Bangalore