Lecture V

Projects
Academic year 2011-12
Trimester IV
GENERATION AND SCREENING
OF PROJECT IDEAS

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 needs, materials and resources
Analyse economic and social trends
Scouting for Project Ideas..contd
Study new technological developments
Draw clues from consumption abroad
Explore the possibility of reviving sick units
Identify unfulfilled psychological/social needs
Attend trade fairs
Stimulate creativity for generating new
product ideas
Look at what the competition is doing
Often the outcome of a triggering process
Identification of opportunities requires
Imagination
Sensitivity to environmental changes
Realistic assessment of what the firm can do

Identification is often the outcome of a
triggering process rather than an analytical
exercise
Generation of Ideas
To stimulate the flow of ideas, the following are helpful
SWOT analysis
Clear articulation of objectives: it might be
cost reduction, productivity improvement, etc
Fostering a conducive environment: some
companies like HUL have successfully used staff
suggestion schemes to motivate employees to think
more creatively
How to do it?
To come out with a good business idea,

the firm must systematically monitor its business
environment,

and

assess its competitive abilities (corporate appraisal)
C
o
m
p
e
t
i
t
o
r

Monitor the Business Environment
Corporate Appraisal
Marketing and distribution
Production and operations
Research and development
Corporate resources and personnel
Finance and accounting
Tools for Identifying Investment Opportunities

There are several tools or frameworks that are helpful
in identifying promising investment opportunities

The more popular ones are:
1. Porter model
2. Life cycle approach
3. Experience Curve
These are explained in the next 3 slides

Porter Model
According to Michael Porter the profit potential of an
industry depends on combined strength of the 5 basic
competitive forces driving industry competition
Potential
Entrants
Suppliers
THE INDUSTRY
Rivalry Among
Existing Firms
Buyers
Substitutes
Threat of New
Entrants
Bargaining
Power of Buyers
Bargaining
Power of
Suppliers
Threat of
Substitute
Products
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
Most products evolve through a life cycle. The broad stages
and the investment returns in these stages are as follows:
Stage I nvestment Return
Pioneering May have negative NPV
but may create options
for participating in
growth stage
Rapid growth Positive NPV
Maturity NPV neutral
Decline Negative
Experience Curve
The experience curve shows how the cost per unit behaves
with respect to the accumulated volume of production
10 20 40 80
100
80
60
40
Accumulated volume of production
Experience Curve.contd
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
Investments aimed at reducing costs are
essential for long term survival & profits
Sources of Positive NPV

Economies of scale

Product differentiation

Cost advantage

Marketing reach

Technological edge

Government policy

Qualities and Traits of a Successful Entrepreneur

Willingness to make sacrifice
Leadership
Decisiveness
Confidence in the project
Marketing orientation
Strong ego
Open-mindedness
How to determine Project Rating Index
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 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
Compare with a pre-determined hurdle value
Example of Construction of a Rating Index
Factor Factor Rating Factor
Weight Score
VG G A P VP
5 4 3 2 1

Input availability 0.25 0.75
Technical know-how 0.10 0.40
Reasonableness of cost 0.05 0.20
Adequacy of market 0.15 0.75
Complementary relationship
with other products 0.05 0.20
Stability 0.10 0.40
Dependence on firms
strength 0.20 1.00
Consistency with
governmental priorities 0.10 0.30

Rating Index 4.00


Have you done the Preliminary Screening?
Among other things, you should examine the project
on the following parameters and see if it works:
Compatibility of project with the promoter
Consistency with governmental priorities
Availability of inputs
Adequacy of market
Reasonableness of cost
Acceptability of risk level
Preliminary Screening ..contd
Have you done the following?
Do you need any authoritys approval, license, etc? Are you
eligible?
How long will it take for you to break even? Is that
acceptable?
How are you funding the project? What is the approximate
period of repayment of debt, if any?
What factors are critical for success of the project? Do you
have any major gaps? How will you plug these?
Have you examined the business model and economics of the
competitors?
How will you beat the competition?