Unit-2-

Generation and screening of project

At the end of the unit, the student will be able to discuss

Generation of ideas
Monitoring the environment,
Corporate appraisal,

Tools for identifying investment opportunities,

( Porters model/ life cycle approach, experience curve),
Scouting for ideas,
Preliminay screening,
Project rating index,
sources of positive net present value.
 Generation of Ideas
• The first step towards establishing a successful venture

• Key to getting into right kind of business

• Needs imagination, sensitivity to environmental changes

and realistic assessment.

• This task can be structured / unstructured

• Identification is more a triggering process than analytical

exercise

• Once identified, a decision is taken at the strategically level

 Generation of Ideas
• The following steps can be helpful in stimulating the flow of ideas

• SWOT analysis- which represents a conscious , deliberate and

systematic effort by an organization to identify opportunities that can
be profitably exploited .

• Periodic SWOT analysis can facilitate in generating / stimulating

ideas.

Clear articulation of objectives

• They can be any one of the following ( in case of existing projects)

• Cost reduction
• Productivity improvement
• Increase in capacity utilization
• Improvement in contribution margins
• Expansion into green field areas which are promising

• A clear articulation of the objectives can help in channelizing the

efforts put by the employees in an organization
 Generation of
Ideas Fostering a conducive
climate

• Important to tap the creativity of people (Ex- 3 M

corporation)

• At operational level – Hindustan Unilever have adopted the

suggestions of lower level employees , used their suggestions
and promoted such a strategy

• Some of the idea generation techniques are

1. Brain storming
2. SCAMPER ( substitute, combine, adopt, modify, put to another
use , eliminate and reverse)
3. Mind mapping
4. Visualization
5. Attribute listing etc
 Monitoring environment .

Economic Government Technology

sector sector sector
State of economy Various policies Emergence of new
Growth rate (GDP and (Industrial, fiscal, technologies
the 4 sectors) monitory, EXIM)
Access to foreign tech
Cyclical fluctuation Lending conditions and
financing norms Receptiveness on the
BoP, Trade surplus/ part of industry
deficit

Social/ demographic Competition Suppliers sector

sector
Population trends, age
shifting , educational profile
, women employment &
attitude towards
consumption & investment
sector
No, their share in the Availability, cost,
market, entry barriers,
their marketing policies
 Corporate appraisal
• A realistic appraisal of S W of the company is essential to take up the
projects to next level. The broad areas in corporate appraisal
includes

• 1. Marketing and distribution

• 2. Production and operations

• 3. R & D

• 4. H R

• 5. Project Finance cost

• 6. Technical appraisal

• 7. Interlinkage of the above areas

• Let us analyse them a bit more
Marketing & distribution Production & opertions

1. Market Image 1. Capacity of plant & machinery

2. Product line 2. R M, Power & fuel
3. Market share 3. Degree of vertical integration
4. Distribution net work 4. Locational advantage
5. Customer loyality 5. Cost structure
R&D
1. Research capabilities of the
firm
2. Track record of new product
development
3. Lab & testing facilities
4. Coordination between
research & operations
Corporate resource &
personal
1. Corporate image
2. Clout with govnt and
regulatory agencies
3. Dynamism of top
management
4. Competence & Commitment
of employees
 Project finance cost

Cost of the project Means of finance

1. Land & site development 1. Share capital ( E / P )

2. Buildings & civil works 2. Un secured loans
3. Plant & machinery 3. Term loans (banks/ F I)
4. Technical K H 4. Debentures
5. Expenses on technology 5. Incentives / Subsidies
6. Miscellaneous fixed assets 6. Other sources
7. Preliminary & pre op exp
8. Margin for W C

9. Total cost of the project 7. Total means of finance

 Technical analysis
To ensure that the product is technically feasible, all the inputs
are available, optimum utilization of resources & have proper
plan in place in terms of location/ size etc. Its components are

1. Manufacturing process
2. Technical arrangement
3. Material inputs
4. Product mix
5. Plant capacity
6. Location
7. Machinery & equipments
8. Civil works
9. Environmental aspects
10. Project layouts
11. Project implementation
12. Alternatives if necessary
 Technical analysis (cont’d)

Manufacturing Technical arrangements Material / utility

inputs Process

Availability of Technology arrangement

Alternative tech knowhow

Choice of technology Collaboration

Plant capacity Support provided by

the partner
Principle inputs
Equity participation
Latest developments if any

Appropriateness of Termination of
technology
Availability (imports)

Mineral/
agricultural/ forest
products/ marine
Products etc

Power/ fuel/ water

etc
 Technical analysis ( cont’d)

Product mix Plant capacity Location

Product mix will Installed capacity Proximity/ availability

be Based on
market need Operating capacity 1. Market
2. RM
Size Capacity constraints 3. Infrastructure
4. Power
Quality 1. R M availability 5. Labour
2. Technology 6. Water
Range 3. Investment cost
4. Market conditions
5. Resources of the
firm
6. Government
policy
 Technical analysis(cont’d)

machinery Civil works Environment

Based on the levels Site preparation NOC from PCB

Of production
Building structures Effluents
Capacity matching (Main building/
admin building/ staff Emissions
Spares / tools/ qtrs etc)
jigs Disposal methods
Compound wall
Procurement Effluent treatment
Lab
Turn key projects
Performance guarantee
 Technical analysis ( cont’d)

Project layout Schedule for implementation Alternatives

Functional lay out Listing all activities Interdepende

ncy of
Material flow Sequencing them relationship

Production line Time for each activity

Transport layout Resources needed for

Them
Utility consumption
Lay out Program evaluation review
technique ( PERT)
Organization layout
Critical path method
Plant lay out (CPM)
Looking at the
Alternative Way to
Achieve the goal

Need to be flexible
 I n t e r linkages

Product- service Project Size/

Demand
location

S t

F I
Tools for identifying investment
opportunities
( Porters model/ life cycle approach, experience curve)
 Porters 5 forces
Potential
Entrants

Threat of new entrants Bargaining

power

Suppliers Industry Buyers

competitors

Bargaining

power Threat of new substitutes

Substitutes
The forces that drive competition and determine the profit potential
• Threat of new entrant - New entrant add capacity , inflate
cost , push price down and reduce profits for existing
units

• Bargaining power of buyers – Buyers are competitive

force and can bargain price cut , superior quality , better
service and are a powerful force thereby reducing
profitability

• Bargaining power of suppliers- Suppliers similar to

buyers are another competitive force can raise price,
provide inferior quality and hurt profitability

• Pressure from substitute products- May or may not be

of similar quality , but with lower price can impact the
profitability.
 Life Cycle Approach

Most of the products evolve through life cycle

comprising of four stages

• Pioneer stage- Relatively new stage with promising

prospects and only few survive

• Rapid growth stage– Orderly growth once passed the

first stage

• Stabilizing stage- More or less fully developed stage

• Decline stage- Changes in consumer taste , new

technology can drive the company to extinction unless
the company makes necessary changes for
sustainability
CostPer unit The experience curve

Volume of production

Cost / unit will decline with accumulated volume of production due

to economies of scale and technological improvements.
 Scouting for ideas,
preliminary screening,
Project rating index
 Scouting of project ideas
Wide variety of sources needs to be tapped before freezing
on the final choice. The various suggestions /options

Analysis of Examine the Review the Study

performance of input and EXIM policies Government
existing units/ output of Using Guidelines/
Industries to various various various inputs
look for industries / Statistics provided by the
opportunities in Cost / profits Looking for industry
investments Economies Export Indicators etc
Of scale/ Opportunities,
Out sourcing
Certain
activities etc
 Scouting of project ideas ( cont’d)

Analyze the Investigation of Analysis of Investigation

Suggestions Local market trends in the New technological
Of F I’s , Resources, Area of development
DFI’s
Dev Agencies Skills, RM’s Consumer New products
Such as SFC’s Infrastructure Preference, New processes
etc Facilities, Projected D & S From CSIR
Publications Social life of Journals etc
Of research the Attending National
Organizations People etc & international
Trade fairs
 Scouting of project ideas ( cont’d)

Attending Possibility Stimulate

trade Of reviving sick creativity for
fairs unit generating new
product ideas
Preliminary Project screening
Compatibility
with
promoters
Consistent
With
Risk Level
Government
policies

Availability
Cost structure
Of inputs
of project

Adequacy
Of market
 Project screening

• Compatibility with the promoter- Must be compatible with the

interest and resource of the promoter

• Consistent with government priorities– With national goals

• Availability of inputs- Assured supply to be ensured

• Market – Size of the market to ensure adequate sales for a

reasonable period and potential for growth

• Cost structure- To ensure that the project is viable and generate

enough profits

• Acceptability of risk level- Risk assessment in the areas of the

vulnerability of business to business cycles, technology changes,
competition, from imports consumer preferences etc.
 Project rating scale
• The project to be subjected to certain preliminary screening

• This has to be based on rating index

• The project promoters should first identify relevant factors

• Assign weights to each of these factors based on their relative

importance to the project.

• This can be on a 5 or 7 point scale

• Multiple the factor rating with factor weight to get the factor
score

• The scores are added to get the project rating index.

 Rating index for screening the project
Factor Weight V .Poor Poor Aver Good V. Good score
1 2 3 4 5
Inputs 0.25 X 1.00
Technology K H 0.10 X 0.40
Reasonable Cost 0.10 X 0.40
Market 0.20 X 1.00
availability
Firms own 0.20 X 1.00
strength
Stability 0.10 X 0.40
Government 0.05 X 0.40
prioritites
Total 1.00 4.60

Rating index is 4.60/5 X 100= 92 %

If the rating index is above 75 to 80 % , one can look at the project positively
 Entry barriers for +ve N P V
Net present value (NPV) is the difference between the present value of cash inflows
and the present value of cash outflows over a period of time. If the PV of Inflows
are higher than the PV of the outflows, the project has +ve NPV

NPV is used in capital budgeting and investment planning in projects to analyze

the profitability of a projected investment or project.

There are 6 main entry barriers to generate + ve NPV for an existing project

Market Reach

Technological Cost
Economies advantage
edge Of scale

Product Government
differentiation policies
 Sources of +ve NPV

Economies of Product Cost advantage

scale differentiation
Increase in scale Differentiating the products Monopolistic access to
of
production leads to can create entry barrier low cost of R M
decrease to
in unit Cost . new companies Locational advantage
More the economies of This can be achieved by
scale- More advantage innovative features, high Effective cost control &
for existing units quality, superior technology cost reduction
etc.
Greater the capital Edge on learning/
requirement for new units- experience curve
greater will be the entry
barrier
 Sources of +ve NPV

Marketing Technology Government

reach edge policy

Net work of Existing firms can enjoy Sheltering existing

marketing outlets can superior technology edge
be an entry over the new ones and
barrier to new units can create entry barrier to
new
ones
companies from
onslaught of new
ones
through various
restrictions such as
licensing, tariffs ,
controls etc.

Any projects which enjoy these 6 main entry barriers generate + ve NPV
 Unit-2

Concluded