Unit 3 - Establishing Small Scale Enterprise: Opportunities Scanning, Market Assessment

for Small Scale Enterprise, Selection of site and choice of Technology; Project formulation
and project report.

What is SSI or SSE ?

Small Scale Industries (SSI) are those industries in which the manufacturing, production and
rendering of services are done on a small or micro scale. These industries make a one-time
investment in machinery, plant, and equipment, but it does not exceed Rs.10 crore and annual
turnover does not exceed Rs.50 crore.

Earlier industries that manufactured goods and provided services on a small scale or micro-scale
basis were granted Small Scale Industries (SSI) registration by the Ministry of Small Scale
Industries. However, after the government passed the MSME (Micro, Small and Medium
Enterprises) Act in 2006, the small and micro-scale industries came under the MSME Act.

On 9 May 2007, subsequent to the amendment of the Government of India (Allocation of

Business) Rules, 1961, the Ministry of Small Scale Industries and the Ministry of Agro and
Rural Industries were merged to form the Ministry of Micro, Small and Medium Enterprises.
Thus, the SSIs are included under the Ministry of MSME.

For both Manufacturing & Service Industry -

 Micro Industry - Investment in Plant and Machinery or Equipment:

Not more than Rs.1 crore and Annual Turnover ; not more than Rs. 5 crore
 Small Industry - Investment in Plant and Machinery or Equipment:
Not more than Rs.10 crore and Annual Turnover ; not more than Rs. 50 crore
 Medium Industry - Investment in Plant and Machinery or Equipment:
Not more than Rs.50 crore and Annual Turnover ; not more than Rs. 250 crore

Currently, the SSIs are classified as small or micro-scale industries based on the turnover
and investment limits provided under the MSME Act and they need to obtain MSME
registration. The government provides many benefits to the small scale industries having
MSME registration at present.

Essentially the small scale industries are generally comprised of those industries which
manufacture, produce and render services with the help of small machines and less manpower.
These enterprises must fall under the guidelines, set by the Government of India.

The SSI’s are the lifeline of the economy, especially in developing countries like India. These
industries are generally labour-intensive, and hence they play an important role in the creation of
employment. SSI’s are a crucial sector of the economy both from a financial and social point of
view, as they help with the per capita income and resource utilisation in the economy.
Characteristics of SSI

Ownership

SSI’s generally are under single ownership. So it can either be a sole proprietorship or sometimes
a partnership.

Management

Generally, both the management and the control is with the owner/owners. Hence the owner is
actively involved in the day-to-day activities of the business.

Labor Intensive

SSI’s dependence on technology is pretty limited. Hence they tend to use labour and manpower
for their production activities.

Flexibility

SSI’s are more adaptable to their changing business environment. So in case of amendments or
unexpected developments, they are flexible enough to adapt and carry on, unlike large industries.

Limited Reach

Small scale industries have a restricted zone of operations. Hence, they can meet their local and
regional demand.

Resources Utilisation

They use local and readily available resources which helps the economy fully utilise natural
resources with minimum wastage.

Role in the Indian Economy

Employment

SSI’s are a major source of employment for developing countries like India. Because of the
limited technology and resource availability, they tend to use labour and manpower for their
production activities.

Total Production

These enterprises account for almost 40% of the total production of goods and services in India.
They are one of the main reasons for the growth and strengthening of the economy.

Make in India
SSI’s are the best examples for the Make in India initiative. They focus on the mission to
manufacture in India and sell the products worldwide. This also helps create more demands from
all over the world.

Export Contribution

India’s export industry majorly relies on these small industries for their growth and development.
Nearly half of the goods that are exported from India are manufactured or produced by these
industries.

Public Welfare

These industries have an opportunity to earn wealth and create employment. SSIs are also
important for the social growth and development of our country.

Seedbed for Large Scale Industries

SSI acts as the seedbed for Large Scale Industries (LSI) as it provides conducive conditions for
the development and growth of entrepreneurs. Small enterprises require low investment and
simple technology and use local resources to meet local demands through personal contacts.
Thus, it creates scope for the growth and development of LSI.

Objectives of SSI

The objectives of the small scale industries are:

 To create more employment opportunities.

 To help develop the rural and less developed regions of the economy.

 To reduce regional imbalances.

 To ensure optimum utilisation of unexploited resources of the country.

 To improve the standard of living of people.

 To ensure equal distribution of income and wealth.

 To solve the unemployment problem.

 To attain self-reliance.

 To adopt the latest technology aimed at producing better quality products at lower costs.
Types of SSI

SSI are primarily categorised into 3 types, based on the nature of work carried out, which are as
follows:

Manufacturing Industries

The manufacturing industries manufacture finished goods for consumption or used further in
processing. Some examples of such SSIs are food processing units, power looms, engineering
units, bakeries, shoemakers and tailors etc, as they all create products, rather than providing
services.

The manufacturing industries are industries transforming goods, that is, mainly manufacturing
industries in their own right, but they also concern the repair and installation of industrial
equipment and subcontracting operations for third parties.

Ancillary Industries

Ancillary industries manufacture components for other manufacturers. These manufacturers then
assemble the final product. Big companies manufacture finished goods, but they do not generally
make all the parts themselves. The vendors of such big companies are ancillary industries.

Ancillary industries are those industries which help both primary and secondary industries. This
industry manufactures spare parts, sub assemblies etc. Any heavy industry depends on the
machinery for its work to progress; the heavy industry always requires support of ancillary
industry. Due to the existence of ancillary units the heavy industries save much time for doing
innovation in their products rather than simply making smaller units.

Ancillary industries supply at least 50% of their products to other large or medium-sized
businesses or the parent unit.

Service Industries

Service-based industries are not involved in any kind of manufacturing products. They provide
services such as repair, maintenance and upkeep of the products after-sales.

“
https://www.ibef.org/industry/services#:~:text=India's%20services%20sector%20covers%
20a,and%20services%20associated%20with%20construction. “
Other types of SSIs are as follows:

Export Units

An SSI is considered as an export unit when the exporting is more than 50% of its production.

The export-oriented industrial unit is pretty similar to the ancillary industries. However, these
export-oriented industries export over 50% of their products to other companies. These industrial
units get accessed to various grants and bonuses from the Indian Government.

Cottage Units

The cottage units are considered as SSIs when they do not involve a dedicated facility and are
carried out within living spaces or houses of the owners. Cottage industry is “a business or
manufacturing activity carried on in people’s homes”.

In simple words, we can say it is industries run from people’s homes it at very low scales. It is a
small-scale, unorganized/decentralized manufacturing business generally operated from home or
‘cottages’ using simple hand-operated tools.

Examples of cottage industry or business include Smithy, Carpentry, Cotton Weaving , Silk
Weaving, Pottery, Blanket making, Stone Carving, Textiles, Ceramics, Handmade Jewelry, etc.

Village Industries

An SSI is considered village industries when they are established in rural areas and are not part
of the organised sector. Typically, these industries solely depend on human labour for
production.

Any industry located in a rural area which produces any goods or renders any service with or
without the use of power and in which the fixed capital investment per head of an artisan or a
worker does not exceed [one lakh rupees] or such other sum as may, by notification in the
Official Gazette, be specified from time to time by the Central Government .

The KVIC has broadly re-grouped various village Industries under seven heads for the purpose
of implementation of its programmes. The list of industries including the newly added ones is as
under.

Mineral Based Industry

1. Pottery

2. Lime
Agro Based & Food Processing Industry (ABFPI)

1. Pulses & Cereals Processing Industry

2. Gur & Khandsari Industry

3. Palm gur Industry

4. Fruit & Vegetable Processing Industry

5. Village Oil Industry

Polymer & Chemical Based Industry (PCBI)

1. Leather Industry

2. Non Edible Oils & Soap Industry

3. Cottage Match Industry

4. Plastic Industry

Forest Based Industry (FBI)

1. Medicinal Plants Industry

2. Bee Keeping Industry

3. Minor Forest Based Industries

Hand Made Paper & Fibre Industry (HMPFI)

1. Hand Made Paper Industry

2. Fibre Industry

Rural Engineering & Bio Technology Industry (REBTI)

1. Non Conventional Energy

2. Carpentry & Blacksmithy

3. Electronics
 SEP/Service Industry

1. V. I. Co-ordination

Examples and Ideas of SSIs in India

 Bakeries

 School stationeries

 Water bottles

 Leather belt

 Small toys

 Paper Bags

 Photography

 Beauty parlours

 Spinning and weaving industry

 Coconut oil making

 Cashew nut processing

 Clay products

 Agarbatti making

 Chalk making

 Biodiesel production

 Rice mill

 Toys making

 Honey processing

 Slippers making

 Detergent powder making

 Spices making
  Chocolate making

 Water bottles manufacturing

 Toothprick making

 Xerox and printing

 Pickle manufacturing industry

 Incense stick manufacturing industry

 Paper plate manufacturing industry

 Candle manufacturing

What is KVIC ?

The Khadi and Village Industries Commission (KVIC) is a statutory body formed in April
1957 (During 2nd Five Year plan)(as per an RTI) by the Government of India, under the Act of
Parliament, 'Khadi and Village Industries Commission Act of 1956'. It is an apex organisation
under the Ministry of Micro, Small and Medium Enterprises, with regard to khadi and village
industries within India, which seeks to - "plan, promote, facilitate, organise and assist in the
establishment and development of khadi and village industries in the rural areas in coordination
with other agencies engaged in rural development wherever necessary.

Pre-requisites for Establishing SSI

An entrepreneur should pass through the following stages for the establishment of an SSI:

 Decision on the Ownership

An entrepreneur wishing to establish an SSI must first decide on the ownership structure of the
SSI. The SSI can be established as a sole proprietorship firm, partnership or company.

 Product Selection

Next, entrepreneurs must decide whether the SSI will venture into manufacturing or provide
service, the product/product range that needs to be manufactured and the quantity of production
of products or the service that will be provided.

 Location

The location must be selected where the unit is to be established. The size of the plot, exact site,
covered and open area must be decided. Once the location is finalised, the SSI unit should be
established in that location and the business operation can start. The location of the established
unit will be the registered address/primary address of the SSI unit.
  SSI Registration

SSI/MSME registration can be applied at any time after the unit obtains the Shop and
Establishment Act registration, company registration, or partnership firm registration. If SSI
registration is applied before production, the turnover and investment details must be mentioned
as zero in the registration application. If SSI registration is applied after the SSI units start
production, then the turnover and investment details will be automatically filled in the
registration application from the ITR of the unit.

 Machinery and Equipment

The machinery and equipment required for manufacturing the chosen products or providing
services have to be decided. The machinery and equipment with the latest technology must be
procured and installed in the SSI unit.

 Power and Water Connection

The plot where the enterprise is located or SSI unit is established should have adequate power
and water connections. If pollution board permissions are required, all such permissions from the
respective authorities must be obtained for the SSI unit.

 Recruitment of Manpower

Once the machines and equipment are installed on the unit and the required permissions are
obtained, the need for manpower arises to run them. The required manpower must be employed
for starting and running the business unit.

 Procurement of Raw Materials

Raw materials are important for running an enterprise. The manpower will require raw materials
to work upon the installed machinery or equipment to manufacture or provide service.

 Production

After procuring the raw materials, the SSIs can start production of the products of the units. The
products manufactured by the SSI can be sold in the market after considerable units are
produced.

 Marketing

When the products are manufactured or services can be provided, the entrepreneurs must market
their products or services to gain customers and grow business.

 Quality Assurance
Before marketing the products, the product quality certification from the respective authorities
such as BIS, AGMARK, HALLMARK, FSSAI, etc., must be obtained.

Eligibility Criteria for SSI Registration

SSI registration can be obtained for enterprises that are considered as micro and small enterprises
under the MSME Act, 2006.

A micro enterprise is an enterprise whose investment in plant, machinery and equipment does
not exceed Rs.1 crore, and turnover does not exceed Rs.5 crore.

A small enterprise is an enterprise whose investment in plant, machinery and equipment does not
exceed Rs.10 crore, and turnover does not exceed Rs.50 crore.

Benefits of obtaining SSI Registration

 There are various tax rebates offered to SSI’s.

 A credit for Minimum Alternate Tax (MAT) is allowed to be carried forward for up to 15
years instead of 10 years.

 There are many government tenders that are only open to the SSI.

 Easy access to credit as banks and financial institutions offer many loan schemes for
small businesses.

 Once registered the cost of acquiring a patent, or the cost of setting up the industry
reduces as many rebates and concessions are available.

 Businesses registered as SSI are given a higher preference for government licenses and
certification.

 SSIs can obtain collateral-free automatic loans for the purchase of raw materials,
fulfilling operational liabilities or restarting the business.

 There are several government schemes that provide support to SSIs. These schemes are
listed below:

 Credit Guarantee Fund Trust for Micro and Small Enterprises (CGTMSE)
provides institutional credit to small scale industries.

 Credit Linked Capital Subsidy Scheme (CLCSS) is an extension of credit for the
upgradation of technology in SSIs.
  Market Promotion and Development Scheme (MPDA) helps SSIs to set up
marketing complexes or khadi plazas to expand the marketing network of Khadi
and Gram Udyog products.

 Coir Vikas Yojana (CVY) scheme envisages a wide range of activities like skill
development of artisans, mahila coir yojana, upgrading and establishing a new
unit under Coir Industry Technology Upgradation Scheme (CITUS), promoting
the domestic as well as an export market, providing of trade and industry-related
functional support services, and welfare of coir workers.

 International Cooperation Scheme arranges for delegations to other countries for

exploring technology upgradation, facilitating buyer-seller meets in foreign states.

 Marketing Assistance Scheme allows for arranging overseas exhibitions,

campaigns and other promotional activities.

 Procurement and Marketing Support Scheme aims at improving the domestic

markets and promoting new market access.

 Entrepreneurship Skill Development Programme scheme aims to develop

entrepreneurial skills in youth who are keen on setting up SSIs.

Administrative Bodies for SSIs

Several administrative bodies were established under the Ministry of Small Scale Industries and
the Ministry of Agro and Rural Industries to help sustain and encourage SSIs. However, after
these two Ministries merged into the Ministry of MSME, all of the SSIs are administered by the
Ministry of MSME. The following are the government administrative bodies that are operating
under the Ministry of MSMEs to provide help to the SSIs:

 Office of Development Commissioner (MSME)

 Khadi Village Industries Commission (KVIC)

 Coir Board

 National Small Industries Corporation Limited (NSIC)

 National Institute for Micro, Small and Medium Enterprises (NIMSME)

Establishing Small Scale Enterprise

The process by which an opportunity is identified is at times described as Opportunity Scanning

or Sensing and Identification (OSI). An opportunity is identified and an enterprise established so
that the person who carries out all the operations is self-employed, earns some income and in
some cases profit.

In a developing economy like India there should not be dearth of opportunities. One reads about
innovative devices conceived and manufactured by engineers and technicians. One also comes
across interesting success stories of entrepreneurs and businessmen describing a life span from
rags to riches. Presently, in our, country several schemes of promotion and assistance for setting
up small scale units or small businesses by new or first generation entrepreneurs, are being
implemented by the Central and State Governments. New product lines, new processes and new
technologies have made India their home in only recent past.

Entrepreneurs engage themselves in the following three interrelated activities viz.:

a) Identification of bussiness opportunity

b) Establishment of an enterprise based on the opportunity

c) Managing the enterprise as a profitable and growing concern.

In identifying his opportunity an intending entrepreneur like an individual businessman is

required to understand the environment in which he would operate. At the opportunity stage
again government policy and the market for the product/service would be the first to be taken for
examination. This is generally termed as the external environment.

Government policy for large or medium industry is regulatory but for small industry it is both
developmental and promotional.

The major tools which our entrepreneur uses in this activity – OSl - are two viz.,

 scanning of his environment and assessing his own strengths and weaknesses in
relation to opportunities in the market and
 competitive threats to the same.

The former can be a more general, all inclusive activity while the latter is a more specific and
situation-oriented activity. This is known in managerial jargon as SWOT Analysis meaning
thereby Analysis-of Strength and Weaknesses on the subjective side and Opportunities and
Threats in the market or the objective side. These tools are important and are generally
employed in the working of a business unit. But they can be extended into areas about setting
up of an enterprise and likewise identifying an opportunity.

Analysis of factors which have led individual entrepreneurs to set up their small enterprises
reveal a surprising degree of uniformity the world over. A small entrepreneur, the owner-
manager of a small unit, enters this world because of:

a) love for doing independent business-or being one's own boss

b) small business provides scope for taking initiative, organising activities and a kind of
freedom which owner-managed small units alone can offer

c) self-employment being an income generating activity, as an alternative to wage

employment

d) the flexibility in several operations which again is available in a small unit.

Another set of data on how were typical small scale units set up by identifying an opportunity
reveals the following factors. This data is based on Indian small industry.

a) Entrepreneurs have selected products based on their own experience or their partners
experience in the line
b) entrepreneurs have selected products based on the expansion/diversification plans of
their own or any other on-going business known to them
c) entrepreneurs have selected products which are likely to have ready demand either in
the local or regional market
d) entrepreneurs have selected products whose imports are banned or controlled by the
government. This factor has been found applicable in identification of opportunities
in small, medium and large scale industrial units
e) entrepreneurs have selected products which show high profitability
f) entrepreneurs have selected products based on certain specific advantages available to
that product - such as, reservation of product lines for small scale units, certain
regions or locations
g) entrepreneurs have selected product lines guided-mainly by changes in certain aspects
of industrial policy-more specially change in control and regulation of prices of raw
material or products. somewhat similar to the above is the situation when
entrepreneurs come to know of a product line as a result of reports by government
committees on policy. Entrepreneurs' selection of computers or electronic products
can be attributed to recent approach of government policy to these products.

What appears to take place is an opportunity envelope with positive and negative or
favourable and unfavourable factors attached to different opportunities. This envelope tells
us how an opportunity is finally identified by an entrepreneur.
Various steps that are followed -

1. Product Selection

The first and foremost step which should be taken while launching a small scale industry is to
choose a product to be produced. Before choosing that product, one must also conduct market
research on various products and then only choose to produce it. Some factors which must be
kept in mind while researching on the market are:

1. The product must be unique.

2. The product must have little or low competition from its competitors in the market.

3. The product should be new and innovative.

4. The raw materials needed to produce these products must be readily available.

5. The production of the product must be in the budget.

6. The product should be easily accessible in the market

The potential business entrepreneur must have clear small scale industry ideas before production
because the product is the core of the business. Some small scale industries examples are
producing handmade chocolates, making handmade soaps, producing spices, papad, and other
dry food items, producing hair oil, etc.

2. Location of the Enterprise

Location is a crucial factor while setting up a small scale industry. Location affects a lot of other
important factors such as transportation costs, availability of raw materials, availability of land at
low rates. Suppose the location of the production unit is in the proximity of the source of raw
materials. In that case, the transportation costs reduce and it maximises the profit. In India, the
government also offers pre-built areas or developed plots to develop small scale industries. So if
a person wants to start a small scale manufacturing business, he/she can easily start one by
registering with the government.

3. The pattern of the Organisation

Small scale industries can be chosen to be in three main forms of ownership. These are
Proprietary, Partnership, and Company.

Proprietary implies all the rights that the proprietor or the property owner can exercise and all the
items or products produced and marketed under exclusive rights. By exclusive right, we mean
that those rights are to be exercised only by the proprietor. The proprietary also has a registered
trade name. This trade name also protects the business from unethical works such as copying.
A partnership is an association of two or more people. The individuals involved in the small
scale industry business invest their money together in the partnership and carry on the company
as a joint venture. While being in a joint venture, the benefits and the losses are immense
because of the profits, losses, and risks shared by all the individuals involved. The partnership is
also characterised by the fact that the business gets the combined capital and managerial skills of
all the individuals involved. There the "partners" get a mutual benefit.

A company abbreviated as co. is a legal entity that is created by the state whose liabilities and
assets are separate from its owner. A company represents an association of people who may be
natural legal or a mixture sharing a specific objective.

Therefore according to the above guide, a person can decide the pattern of his organisation.

4. Project Appraisal

Project appraisal signifies the analysis of a scheme or project that has to be prepared according to
all the aspects such as financial aspect, technical aspect, marketing, and management. This is
done so that it will become the most feasible enterprise. It also helps the entrepreneur to acquire
data that will help him in the future. This will help it to become one of the best small scale
industries.

Analysis of the project is done by researching the product’s performance in the market, its
demands, and consumption. One can also analyse a certain idea by researching it, just like it was
stated above. So that if the idea about a certain product works and helps in more sales, it will be
incorporated by the company or enterprise for a long period. But if the idea doesn't work, it can
be discarded as soon as possible.

Market Assessment for Small Scale Enterprise

For a small-business owner, market analysis refers to the process of obtaining information about
customers, competitors and the industry in which the company operates. Market analysis is
conducted to help entrepreneurs decide whether the market is large enough to justify taking the
risk of starting the business. Established companies conduct market analysis on an ongoing basis
to shape the development of strategies to grow the company.

Steps :

1. Identifying a Market Need

Companies succeed by supplying products and services that meet the current most-pressing
needs and wants of customers. A business owner must constantly monitor the market to identify
when these needs change and adapt his product or service offering to be a better fit with these
changed needs. A business owner can gather information about customer needs through
conducting customer surveys and asking prospective customers what features of products or
services are most important to them. The market need could arise from a problem that customers
seek to solve or a personal or professional goal they seek to achieve. Consumers’ goal of saving
money on energy bills, for example, has given rise to a host of solutions including more energy-
efficient appliances and retrofitting homes so heating and cooling systems operate more
efficiently.

2. Defining a Market Opportunity

A market need becomes an opportunity for the business owner if he can create and sell a superior
solution for the need. The company must have the capability to deliver its products and services
at the high level of quality the customer expects. The business owner must make a realistic
assessment of what his company excels at in order to determine whether he can effectively
compete in the market. Another way to define market opportunity is to identify where
competitors are falling short of customer expectations and determine how your company can do
better. Look at the major competitors in your market and analyze their strengths and weaknesses
in relation to yours. An unmet need in the marketplace becomes your company’s opportunity.

3. Estimating Market Size

Accurately estimating the current size and projected growth of the market for the company’s
products and services is critical, because there must be enough customers to support the sales
level required for the company to become and remain profitable. Industry trade organizations
publish data on the current size and projected growth rates for their industries. For consumer
products and services, an effective way to analyze market size is to obtain information on
demographic characteristics -- the populations of consumers in your area broken down by
categories such as age and income level.

4. Choosing Target Markets

Target markets are the groups most ready to buy your products or services -- the customer groups
that have the most urgent need to purchase what you are offering. Narrowing the large overall
market down to target markets is necessary, because target markets have different motivations
for making purchases. Consumers’ lifestyles, beliefs, values and attitudes shape their buying
habits -- the kinds of products and services they are most interested in purchasing. These
purchase behaviors are referred to as psychographic characteristics

A market assessment is a comprehensive analysis of your company’s competitors, consumers

and other industry stakeholders.

A market assessment enables your company to understand the need and demand for its business
offerings in the market. It provides details on market opportunities, growth drivers and barriers,
industry cost structure, distribution channels, market trends, key success factors, market
competitiveness, and consumer preferences.
Conducting a market assessment study is critical for your company whether you are looking to
launch, expand your business or grow your consumer base.

It includes:

 Market Dynamics: Outlines the historical and forecasted market growth rates, market
segments, drivers and barriers, regulations and market trends

 Competitive Landscape: Outlines the overall competitiveness of the market, market

share of key players, capability, opportunity and threat analysis and competitive
benchmarking

 Consumer Dynamics: Offers insights into consumers’ requirements, preferences,

purchase behavior, and maximum willingness to pay

Selection of site and choice of Technology

Product and process go together and are critical elements of a small business operating strategy.
The environment in which small business prevails is dynamic and pressures for change in
product or service design can come from within the firm, Competitors, suppliers, legal sources
and legislations.

A manufacturer is liable for any injuries or damages caused by a faulty product either because of
poor workmanship or design. This aspect, known as product liability, provided under Consumer
Protection Act, 1986 is a strong incentive for design improvements.

The relationship between the product selected and the organisation structure can best be seen by
considering the technology by which the product is produced. For new organisations the choice
of product essentially determines the technology of production.

Processes can be defined as the facilities, skills and technologies used to produce a product or
service. Technology selection will significantly affect the management of human resources, plant
and materials capacity of the operation system. It also affects the external environment like
markets, competitors and society. The technology chosen to produce should be flexible to take
care of the changes in design of product or service.

Decisions relating to location are dynamic in nature and are important to new organisations. An
ideal plant location is one where the unit cost of production and physical distribution is minimum
and revenues are maximum. It should also provide an opportunity for the organisation to grow. It
is important to avoid a troublesome location rather than finding an ideal site.

The following are five tips to consider in the search for a business location:

1. Consider the surrounding community.

When hunting for a business site, entrepreneurs should consider whether a given community is
actively seeking new companies. Contact the local economic development agency to learn about
possible incentives, which could include financial support for tenant improvements,
municipal programs giving preference to area businesses or local tax and planning department
waivers.

Entreprenuers are advised to lock down incentives prior to signing a lease or making
a commitment as “communities sometimes do not follow through with promised incentives once
a company has signed a lease or bought a building.”

2. Beware of problem locations.

Some locations are great. Others are miserable. Consider the revolving restaurant site, a
spot that's home to a new restaurant every six months: Each new owner believes that he or she
has the secret sauce to make the site work only to call it quits after a short stretch. The fact is, not
all locations are the same. Regardless of the product, service or business plan, some locations are
simply bad for business.

“If you find yourself trying to decide between a better location at a higher rent versus a lesser
location for a lower rent my advice is go for the better location,” said a commercial lease
consultant. “When I’m consulting to tenants and doing site selection my job isn’t to find the
cheapest location -- it’s to select a site that will help the tenant maximize sales.”

3. Identify target customers.

Entrepreneurs must carefully consider their target clients when developing a business plan. Then
they should seek locations abundant with this type and ensure that these areas can provide
employees with the needed skills.

“Estimate the market size and the customers’ purchasing power in the primary area, “Driving or
walking time to the location should be studied. Also, examine the vehicular and traffic flow and
take note of physical barriers and traffic limitations or detours."

4. Pay a fair price.

The ideal location will rarely be one with the lowest price tag. Entrepreneurs should be realistic
and ready to pay for a good site. An ideal location will contribute toward the
enterprise's success. A poor one will result in rapid closure. Good locations are not cheap. A
business plan should include a realistic projection of the costs involved.

5. Know the competition.

Very rarely will a business be the only game in town. Entrepreneurs must assess the competition
and be certain there's enough business to go around. If a given community is already saturated
with similar businesses, consider a new location. Those determined to compete in a tight market
must offer a product or service sufficiently game changing to draw enough business to make the
operation viable.

“Identifying the competition in a market helps determine if your business idea is feasible,”
according to the Iowa State University website. “A competitive assessment also directs how a
product/service should be positioned.” This analysis will determine if the company can gain a
competitive edge by offering something the existing competition doesn't.

Project Formulation

A Project refers to an investment opportunity which can be analysed and appraised

independently. It refers to a series of activities whose goal is to bring into existence, a business
Organisation based on a viable economic opportunity within an established cost and time
framework.

The basic characteristics of a Project are:

 It involves a Capital Investment

 It ensures a yield of benefits in the future
 It has a specific life span and
 It calls for team work, the members of the team being drawn from various disciplines of
Management.

For eg. - A Company may take up a Project for the construction of a Motel in a Tourist Resort. It
may involve an investment of Rs. 50 Lakhs.The Company expects to earn a return of Rs. 8 Lakhs
after-tax per annum for the next 15 years from Restaurant Sales and Rentals of Rooms. The
completion of the Project requires the coordination of Engineering, Marketing and Financial
experts.An entrepreneur has a vast choice of investment opportunities. The ability to identify an

Investment Opportunity which can be converted into a viable business proposition (after
careful and systematic consideration) ensures entreprenuerial success.

There are a number of sources from which an entrepreneur can gain knowledge about Project
Ideas. Any decision to embark on a Project after considering only the obvious or immediately
available opportunities may lead to a Lost Opportunity. It would be advisable to scout for new
ideas from these sources:

a) A study of the performance of existing units in an industry with particular reference to

profitability of units and capacity utilisation would allow an entrepreneur to identify
relatively risk-free opportunities.

For example: If a majority of the hotels in a town enjoy a 80% occupancy rate, it indicates that
there is still a need for lodging facilities.
 a) A study of projects being encouraged by financial institutions ensures that the areas of
these projects are deemed highly viable. This is because the financial institutions back
projects after careful and thorough analysis.

b) A study of economic trends and consumption patterns of individuals will help in the
identification of Project Ideas.

For example: The increasing affluence of the middle class and larger expenditure on tourism,
travel and leisure indicates a vast potential for Travel Agencies.

c) An enquiry into Social and Cultural Trends may provide valuable insights.

For example: The search for an Indian Identity has caused a boom in the sales of ethnic fashion
wear in India.

d) An enquiry into business practices in foreign Countries may also provide valuable clues for
business opportunities.

For example: Adventure sports as a part of Tourism has been essentially borrowed from foreign
Countries.

e) An investigation into locally available resources and, raw materials and skills may indicate
the availability of business opportunities.

For example: The Kondapalli Toys made in Kondapally, Andhra Pradesh enjoy a world wide
market and opportunities still exist for their marketing within the country.

f) A study of developments in Technology may also provide new product ideas. Often, new
technologies allow a better utilisation of locally available raw materials as witnessed in the
Coir Industry.

g) A constant search for unfulfilled needs of the market allows identification of a series of
business opportunities. The development of any product / service which satisfies a
human need earlier not catered to ensures a steady market. This phenomenon can be
observed in the quick success of Fast Foods, Pre- School Nurseries and labour saving
devices in the kitchen.

In a country like India where the Government plays a positive role in the economic development
of the nation as a regulatory and promotional agency, the policies of the Government must be
taken into consideration while looking for new ideas.

Quite often, the plans of the Government provide new business opportunities for the alert
entrepreneur. Various incentives given to Small Scale Industries, Units set up in backward
regions, tax exemptions to specific products, etc. create new business opportunities. The scheme
of export incentives, introduced by the Government of India has lead a boom in the sales of
Garment Industries, Leather Industries and Handicraft Industries.

Project Formulation

Project formulation is the systematic development of a project idea for arriving at an investment
decision. It has the built-in mechanism of ringing the danger bell at the earliest possible stage of
resource utilization. Project formulation is a process involving the joint efforts of a team of
experts. Each member of the team should be familiar with the broad strategy, objectives & other
ingredients of the project. Besides being an expert in his area of specialization, he should be able
to play his role in the overall scheme of things.

It aims at a systematic analysis of project potential with the ultimate objective of arriving at an
investment decision. In this process it makes an objective assessment from all possible angles
starting from project identification upto its appraisal stage. Thus, project formulation is the
process of examining technical, economic, financial & commercial aspects of a project. It refers
to a preliminary project analysis covering all aspects such as technical, financial, commercial,
economic & managerial to find out whether it is worthwhile to take project for detailed
investigation & evaluation.

Need of Project formulation

The Project Formulation exercise is done with a view to;

1. Understand various dimensions of the project from a very broad angle

2. Facilitate the project authorities to take a decision as to whether it is going to be beneficial for
the organization to conduct a detailed feasibility study or not. Otherwise the project idea may be
dropped at this stage without proceeding or probing any further.

3. A well formulated project is the one which presents a very unbiased picture of the project idea
in more clear-cut terms with regard to all the above factors.

4. The project authorities should use the information generated through the formulation exercise
to identify the deficiencies and gaps and take remedial measures ahead of time.

5. Projects leading to loss in terms of money, time and desired output need immediate attention.

6. Pre-investment study and investment decision in any project in the government should become
the important function.

All projects have to undergo through different processes of preparation from the conceptual stage

to completion stage. These processes are;

I. Pre-investment planning

• Identification of Project

• Preparation of Project

II. Appraisal

III. Controlling and Monitoring

IV. Operation and Maintenance

V. Evaluation and feedback for correction

Scope of Project formulation

1. General Information 2. Product

3. Market potential 4. Plant and Machinery

5. Location 6. Raw Material

7. Utilities 8. Capital Cost

9. Working capital 10. Manufacturing Cost

11. Financial Analysis

Stages in Project Formulation

1. Feasibility Analysis

2. Technical Analysis

3. Economic Analysis

4. Project Planning & Design

5. Network Analysis

6. Input Analysis

7. Financial Analysis

8. Cost-Benefit Analysis

9. Pre-Investment Analysis

What is Feasibility Study?

As the name implies, a feasibility analysis is used to determine the viability of an idea, such as
ensuring a project is legally and technically feasible as well as economically justifiable. It tells us
whether a project is worth the investment—in some cases, a project may not be doable. There
can be many reasons for this, including requiring too many resources, which not only prevents
those resources from performing other tasks but also may cost more than an organization would
earn back by taking on a project that isn’t profitable.

A feasibility study—sometimes called a feasibility analysis or feasibility report—is a way to

evaluate whether or not a project plan could be successful. A feasibility study evaluates the
practicality of your project plan in order to judge whether or not you’re able to move forward
with the project.

It does so by answering two questions:

1. Does our team have the required tools or resources to complete this project?

2. Will there be a high enough return on investment to make the project worth pursuing?

A well-designed study should offer a historical background of the business or project, such as a
description of the product or service, accounting statements, details of operations and
management, marketing research and policies, financial data, legal requirements, and tax
obligations. Generally, such studies precede technical development and project implementation.
Types of Feasibility Study

A feasibility analysis evaluates the project’s potential for success; therefore, perceived
objectivity is an essential factor in the credibility of the study for potential investors and lending
institutions.

There are five types of feasibility study—separate areas that a feasibility study examines :

1. Technical Feasibility

This assessment focuses on the technical resources available to the organization. It helps
organizations determine whether the technical resources meet capacity and whether the technical
team is capable of converting the ideas into working systems. Technical feasibility also involves
the evaluation of the hardware, software, and other technical requirements of the proposed
system.
2. Economic or Financial Feasibility

This assessment typically involves a cost/ benefits analysis of the project, helping organizations
determine the viability, cost, and benefits associated with a project before financial resources are
allocated. It also serves as an independent project assessment and enhances project credibility—
helping decision-makers determine the positive economic benefits to the organization that the
proposed project will provide. The goal at the end of the financial feasibility study is to
understand the economic benefits the project will drive.
3. Legal Feasibility

This assessment investigates whether any aspect of the proposed project conflicts with legal
requirements like zoning laws (The zoning ordinance is the formal categorization of land-use
policies applicable to land within a municipality) , data protection acts or social media laws.

Let’s say an organization wants to construct a new office building in a specific location. A
feasibility study might reveal the organization’s ideal location isn’t zoned for that type of
business. That organization has just saved considerable time and effort by learning that their
project was not feasible right from the beginning.

4. Operational Feasibility

This assessment involves undertaking a study to analyze and determine whether—and how
well—the organization’s needs can be met by completing the project. Operational feasibility
studies also examine how a project plan satisfies the requirements identified in the requirements
analysis phase of system development.
5. Market Feasibility

The market feasibility study is an evaluation of how your team expects the project’s deliverables
to perform in the market. This part of the report includes a market analysis, market competition
breakdown, and sales projections.

Importance of Feasibility Study

The importance of a feasibility study is based on organizational desire to “get it right” before
committing resources, time, or budget. A feasibility study might uncover new ideas that could
completely change a project’s scope. It’s best to make these determinations in advance, rather
than to jump in and to learn that the project won’t work. Conducting a feasibility study is always
beneficial to the project as it gives you and other stakeholders a clear picture of the proposed
project.

Below are some key benefits of conducting a feasibility study:

 Improves project teams’ focus

 Identifies new opportunities

 Provides valuable information for a “go/no-go” decision

 Narrows the business alternatives

 Identifies a valid reason to undertake the project

  Enhances the success rate by evaluating multiple parameters

 Aids decision-making on the project

 Identifies reasons not to proceed

Apart from the approaches to feasibility study listed above, some projects also require other
constraints to be analyzed -

 Internal Project Constraints: Technical, Technology, Budget, Resource, etc.

 Internal Corporate Constraints: Financial, Marketing, Export, etc.

 External Constraints: Logistics, Environment, Laws, and Regulations, etc.

What Is Included in a Feasibility Study Report?

The results of your feasibility studies study are summarized in a feasibility report,
which typically comprises the following sections.

 An executive summary describing the project’s overall viability

 A description of the product or service being developed during this project

 Any technical considerations, including technology, equipment, or staffing

 The market survey, including a study of the current market and the marketing strategy

 The operational feasibility study, evaluating whether or not your team’s current
organizational structure can support this initiative

 The project timeline

 Financial projections based on your financial feasibility report

6 steps for conducting a feasibility study

You likely won’t be conducting the feasibility study yourself, but you will probably be called on
to provide insight and information. To conduct a feasibility study, hire a trained consultant or, if
you have an in-house project management office (PMO), ask if they take on this type of work. In
general, here are the steps they’ll take to complete this work:

1. Run a preliminary analysis

Creating a feasibility study is a time-intensive process. Before diving into the feasibility study,
it’s important to evaluate the project for any obvious and insurmountable roadblocks.
 For example, if the project requires significantly more budget than your organization has
available, you likely won’t be able to complete it. Similarly, if the project deliverables need to be
live and in market by a certain date, but they won’t be available for several months after the fact,
the project likely isn’t feasible either. These types of large-scale obstacles make a feasibility
study unnecessary, because it’s clear the project is not viable.

2. Evaluate financial feasibility

Think of the financial feasibility study as the projected income statement for the project. This
part of the feasibility study clarifies the expected project income and outlines what your
organization needs to invest—in terms of time and money—in order to hit the project objectives.

During the financial feasibility study, take into account whether or not the project will impact
your business's cash flow. Depending on the complexity of the initiative, either internal PMO or
external consultant may want to work with your financial team to run a cost-benefit analysis of
the project.

3. Run a market assessment

The market assessment, or market feasibility study, is a chance to identify the demand in the
market. This study offers a sense of expected revenue for the project, and any potential market
risks you could run into.

The market assessment, more than any other part of the feasibility study, is a chance to evaluate
whether or not there’s an opportunity in the market. During this study, it’s critical to evaluate
your competitor’s positions and analyze demographics to get a sense of how the project will do.

4. Consider technical and operational feasibility

Even if the financials are looking good and the market is ready, this initiative may not be
something your organization can support. To evaluate operational feasibility, consider any
staffing or equipment requirements this project needs. What organizational resources—including
time, money, and skills—are necessary in order for this project to succeed?

Depending on the project, it may also be necessary to consider the legal impact of the initiative.
For example, if the project involves developing a new patent for your product, you will need to
involve your legal team and incorporate that requirement into the project plan.

5. Review points of vulnerability for the project

At this stage, the internal PMO team or external consultant looks at all four elements of your
feasibility study—financial, market analysis, technical feasibility, and operational feasibility.

Before running their recommendations by you and your stakeholders, they will review and
analyze the data for any inconsistencies. This includes ensuring the income statement is in line
with your market analysis. Similarly, now that they’ve run a technical feasibility study, are any
liabilities too big of a red flag? (If so, create a contingency plan!)

Depending on the complexity of your project, there won’t always be a clear answer. A feasibility
analysis doesn’t provide a black and white decision for a complex problem. Rather, it helps you
come to the table with the right questions—and answers—so you can make the best decision for
your project and for your team.

6. Propose a decision

The final step of the feasibility study is an executive summary touching on the main points and
proposing a solution.

Depending on the complexity and scope of the project, your internal PMO or external consultant
may share the feasibility study with stakeholders or present it to the group in order to field any
questions live. Either way, with the study in hand, your team now has the information you need
to make an informed decision.