MODULE 2

Generation and
Screening of
ideas

Generation and screening of ideas

Generation of ideas monitoring the environment regulatory
framework for projects corporate appraisal preliminary
screening project rating index sources of positive NPV
qualities of a successful entrepreneur the porter model for
estimation of profit potential of industries.
Market and demand analysis: situational analysis and specification
of objectives collection of secondary information conduct of
market survey characterization of the market demand
forecasting market planning.
Technical analysis: Study of material inputs and utilities
manufacturing process and technology product mixes plant
capacity location and site machinery and equipment
structures and civil works project charts and layouts work
schedule

Generation of ideas

Combining existing field of technology

Offering variants of Products or services
Stimulating the flow of ideas
SWOT Analysis
Clear Articulation of Objectives

Cost reduction
Productivity improvement
Increase in capacity utilization
Improvement in contribution margin
Expansion into promising fields

Fostering a conducive climate

Monitoring the Environment

For the purpose of monitoring business
environment may be divided into six broad
categories:
Economic Sector

State of the economy

Overall Rate of Growth
Growth Ate of Primary, Secondary and tertiary sector
Cyclical fluctuations
Linkages with the World Economy
Trade Surplus / deficit
Balance of payment situations

Monitoring the Environment

Governmental Sector
Industrial Policy
Government programmes and policies
Tax framework
Subsidies, incentives, and concessions
Import and export policies
Financing norms
Lending conditions of financial institutions and
commercial banks

Monitoring the Environment

Technological Sector
Emergence of new technologies
Access of technical know-how, foreign as well as
indigenous
Receptiveness on the part of industry

Socio-demographic sector

Population trend
Age shifts in population
Income distribution
Educational profile
Employment of women
Attitudes towards consumption and investment

Monitoring the Environment

Competition Sector
Number of firms in the industry and the market share
of the top few (four or five)
Degree of homogeneity and differentiation among
products
Entry barriers
Comparison with substitutes in terms of quality, price
appeal and functional performance
Marketing policies and practices

Monitoring the Environment

Supplier Sector
Availability and cost of raw materials and subassemblies
Availability and cost of energy
Availability and cost of money

Corporate Appraisal
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 and the important
aspects to be considered are :
Marketing and distribution
Production and operations
Research and development
Corporate resources and personnel
Finance and Accounting

Corporate Appraisal
Marketing and distribution

Market image
Product Line
Market Share
Distribution Network
Customer Loyalty
Marketing and distribution
costs

Production and operations

P& M condition and
capacity
Availability of R.M,
subassemblies, and power
Degree of vertical
integration
Locational advantages
Cost Structure

Corporate Appraisal
Research and
development
Resource Capabilities of
the firm
Track record of new
product development
Laboratories and testing
facilities
Coordination between
research and operations

Corporate Resources
and personnel
Corporate image
Clout with governmental
and regulatory agencies
Dynamism of top
management
Competence and
commitment of
employees
State of industrial
relations

Corporate Appraisal
Finance and Accounting
Financial Leverage and borrowing capacity
Cost of capital
Tax situation
Relations between shareholders and creditors
Accounting and control system
Cash flows and liquidity

Tools for identifying investment

opportunities
Porter Model: Profit Potential of Industries
Life Cycle Approach
The experience curve

Porter Model: Profit Potential of

industries
Profit potential depends upon the
combined strength of the five basic forces:
Threat of new entrants
Rivalry among existing firms
Pressure from substitute products
Bargaining power of buyers
Bargaining power of sellers

Forces driving industry

competition
Potential Entrants

Suppliers

Threat of new
entrants
Bargaining power
Bargaining
Of suppliers
The industry rivalry power of buyers
among existing firms
Threat of
substitute
products
Potential Entrants

Buyers

Threat of new entrants

New entrants add capacity, inflate costs,
prices down, and reduce profitability.
Entry barriers are high when
The new entrants have to invest substantial resources
to enter the industry
Economies of scale are enjoyed by the industry
Control of distribution channel by the existing firms
Product diffrentiation in the form of band image and
customer loyalty
Switching costs are high
The government policy limits or even prevents new
entrants

Rivalry between existing firms

Firms in an industry compete on the basis
of price, quality, promotion service,
warranties, and so on., The intensity of
rivalry in an industry tends to be high
when

Number of competitors in the industry are large

The industry growth is sluggish
The level of fixed cost is high
There is Chronic overcapacity in the industry
The industry confronts high exit barriers
The industrys product is regarded as a commodity or
near commodity, stimulating strong price and service
competition

Pressure from substitute

products
Substitute products may limit the profit
potential of the industry by imposing a
ceiling on the prices that can be charged
by the firms in the industry. The threat
from the substitute products is high when
The price-performance trade-off offered by the
substitute products is attractive
The switching costs for prospective buyers are
minimal
The substitute products are being produced by
industries earning superior profits

Bargaining power of buyers

If buyers are powerful, they can depress
the profitability of the supplier industry.
The bargaining power of a buyer group is
high when
Its purchases are large relative to the sales of
the seller
Its switching costs are low
It poses a strong threat of backward
integration

Bargaining power of suppliers

Buyer can hurt the profitability of the
buying industry when:
A few suppliers dominate and the supplier
group is more concentrated on the buyer
group
There are hardly any viable substitutes
The switching costs for the buyers are high
Suppliers do present a real threat of forward
integration

Life Cycle Approach

Many industrial economists believe that
most products evolve through a life cycle
approach which has four stages:
Pioneering Stage
Rapid Growth Stage
Maturity and stabilization stage
Decline stage

The experience curve( 80%)

Scouting for project ideas

Good project ideas-key to success
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
Developmental Agencies
Investigate local materials and resources
Analyse economic and social trends
Study new Technological developments

Scouting for project

ideas(contd.,)

Draw clues from consumption abroad

Explore the possibility of Reviving Sick units
Identify Unfulfilled psychological needs
Attend trade fairs
Stimulate creativity for generation new product ideas
Hope that the chance factor will favor you

Preliminary screening
Compatibility with the promoter
Consistency with governmental priorities
Availability of inputs
Adequacy of market
Reasonableness of cost
Acceptability of risk level

Project Rating Index

In order to streamline the preliminary screening,
a preliminary evaluation is translated into project
rating index. The steps involved in project rating
index are
Identify factors relevant for project rating
Assign weights to these factors
Rate the project proposal on various factors using a
suitable rating scale(5-point or 7-point)
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

Sources of positive net present

value
An understanding of entry barriers is helpful in
identifying positive NPV projects. There are six
main entry barriers that result in positive NPV
projects

Economies of scale
Product differentiation
Cost advantage
Market reach
Technological edge
Government policy

On being an Entrepreneur
Questions every entrepreneur must answer
i) Are my goals well defined
Personal aspiration
Business sustainability and size
Tolerance for risk

ii) Do I have the right strategy

Clear definition
Profitability and potential for growth
Durability
Rate of growth

iii)Can I execute the strategy

Resources
Organizational Infrastructure
The founders role

Qualities of a successful
Entrepreneur

Willingness to make sacrifices

Leadership
Decisiveness
Confidence in the project
Marketing orientation
Strong ego

Market and Demand analysis

The first step in project analysis is to estimate
the potential size of the market for the product to
be manufactured and get an idea about the
market share that is likely to be captured. Market
and demand analysis is concerned with two
broad issues:
What is the likely aggregate of demand for the
product/service?
What share of the market will the proposed project
enjoy?
Given the importance of market and demand analysis, it
should be carried out in an orderly and systematic
manner.

Key steps in Market and Demand Analysis

Collection of
secondary
information

Situational
Analysis and
Specification of
objectives

Demand
Forecasting

Characterization
of the Market

Conduct of
market survey

Market
planning

Situational Analysis and Specification of

objectives
In order to carry out market and demand
analysis, it is necessary to spell out its
objectives clearly and comprehensively. A helpful
approach to spell out objectives is to structure
them in the form of questions.
For example, a small but technologically
competent firm has developed an improved air
cooler based on a new principle that appears to
offer several advantages over the conventional
air cooler.

 The objectives of the market and demand analysis in this

case may be to answer the following questions:

1. Who are the buyers of Air Coolers

2. What is the total current demand?
3. How is the demand distributed temporarily and
geographically?
4. What is the break-up of demand for air coolers of different
sizes?
5. What price will the customers would be willing to pay for the
improved air cooler?
6. How can potential customers be convinced about the
superiority of the new product?
7. What price and warranty will ensure its acceptance
8. What channels of distributions are most suited for the air
coolers? What trade margins will induce distributors to carry it?
What are the prospects of immediate sales?

Collection of Secondary information(General

Sources)

Census of India
National sample survey
reports
Plan reports
Statistical abstract of the
Indian Union
India Year Book
Statistical Year Book
Economic Survey
Guidelines to Industries
Annual Survey of Industries

Annual Reports of the

development wing, Ministry of
Commerce and Industry
Annual bulletin of statistics
exports and import
Techno economic surveys
Industry Potential Surveys
The stock exchange directory
Monthly studies of production
of selected Industries
Other publications

Evaluation of Secondary Information

The market analyst should seek to know
Who gathered the information? What was the objective
When was the information gathered? When was it published?
How representative was the period for which the information was
gathered?
Have the terms in the study be carefully and unambiguously
defined? What was the target population?
How was the sample chosen? How representative was the
sample?
How satisfactory was the process of information gathering?
What was the degree of sampling bias and non-response bias in
the information gathered?
What was the degree of misrepresentation by respondents
How accurately was the information edited, tabulated, and
analyzed?
Was statistical analysis properly applied?

Conduct of market survey

Secondary information needs to be
supplemented with primary information gathered
through market survey
Market survey may be a Census survey or a
sample survey
Census survey covers entire population
Sample survey covers a part of the population

Market Survey
The information sought in the market survey
may relate to one or more of the following:

The 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
Attitudes towards various products
Distributive trade practices and preferences
Socio-economic characteristics of buyers

Steps in sample survey

Define the target population
Select the sampling scheme and sampling size
Develop the questionnaire
Recruit and train the field Investigators
Obtain information as per the Questionnaire from the
sample respondents
Scrutinize the information gathered
Analyze and interpret the information
Limitations of sample survey

Heterogeneity of the Country

Multiplicity of languages
Design of questionnaire

Characterization of the Market

Based on the market survey, the market for the
product / service may be described in terms of
the following:

Effective demand in the past and present

Break-down of demand
Price
Methods of distribution and sales promotion
Consumers
Supply and competition
Government policy

Demand Forecasting
Estimation of future demand is the next step after gathering
information about various aspects of the market and
demand from primary and secondary sources.
Methods of Demand Forecasting:
Qualitative Methods
Jury of Executive Method
Delphi Method

Time Series Projection Methods

Trend Projection Method
Exponential Smoothening Method
Moving Average Method

Demand Forecasting
Casual Methods

Chain Ratio Method

Consumption Level Method
End Use Method
Bass Diffusion Method
Leading Indicator Method
Econometric Method

Demand Forecasting Uncertainties

Uncertainties in demand forecasting arise
from three principal sources:
Data about past and present market
Lack of standardization
Few observations
Influence of abnormal factors

Methods of forecasting
Inability to handle unquantifiable factors
Unrealistic assumptions
Excessive data requirement

Demand Forecasting Uncertainties

Environmental change

Technological change
Shift in Government policy
Developments on the International Scene
Discovery of New sources of Raw Material
Vagaries of Monsoon

How to cope up with uncertainties

Conduct analysis with data based on uniform and standard
definitions
In identifying trends, relationships and coefficients, ignore the
abnormal or out-of-the ordinary observations
Critically evaluate the assumptions of the forecasting methods and
choose a method which is appropriate to the situation
Adjust the projections derived from quantitative analysis in the light
of unquantifiable, but significant influences
Monitor the environment imaginatively to identify important changes
Consider likely alternative scenarios and their impact on market and
competition
Consider the sensitivity analysis to assess the impact on the size of
demand for unfavourable and favourable variations of the
determining factors from the most likely levels.

Market planning
Marketing plan usually has the following
components:

Current Marketing situation

Opportunity and issue analysis
Objectives
Marketing strategy
Action programme

Market Planning
Current market situation examines the
following:
Market situation
Competitive situation
Distribution situation
Macro Environment

Opportunity and issue analysis examines

SWOT

Market Planning
Market Strategy covers the following:
Target Segment
Positioning
Product Line
Price
Distribution
Sales Promotion
Advertisement

Action programme operationalises the

strategy

Technical Analysis
The broad purpose of technical analysis is
a) to ensure that the project is technically
feasible and
b) to facilitate the most optimal formulation of
the project in terms of technology, size,
location and so on.,
The participation of financial analyst is also
essential with the technical analyst in the
project appraisal exercise who should be able
to raise basic issues to technical analyst
using common sense and economic logic.

Manufacturing process or technology

There will be two or more technologies to
manufacture a product or service. For Ex:
Steel can be made either by the Bessemer process or
the open hearth process
Cement can be made either by the dry process or the
wet process
Paper, using bagasse as the raw material, can be
manufactured by the kraft process or the soda
process or the Simon Cusi process
Soap can be manufactured by semi boiled process or
fully boiled process

Choice of Technology
Choice of technology is influenced by a
variety of considerations:
Plant Capacity
Principal inputs
Investment outlay and production cost
Use by other units
Product mix
Latest development
Ease of absorption

Appropriateness of Technology
It refers to those methods of production which
are suitable to local economic, social and
cultural conditions. The advocates of appropriate
technology urge that the technology should be
evaluated in terms of the following questions:
Whether the technology utilises local raw materials?
Whether the technology utilises local man power?
Whether the goods and services produced cater to
the basic needs?
Whether the technology protects ecological balance?
Whether the technology is harmonious with social and
cultural conditions?

Material inputs and utilities

Material inputs and utilities may be classified
into four broad categories:

Raw Materials
Processed Industrial Materials and components
Auxiliary materials and factory supplies
Utilities

Raw materials are further classified into the

following

Agricultural products
Mineral products
Livestock and Forest Products
Marine Products

Processed Industrial Materials and Components

Base metals, semi-processed materials,
manufactured part, components and subassemblies are some examples
Auxiliary materials and Factory supplies are like
chemicals, additives, packaging materials,
paint, varnishes, oils grease etc.,
Utilities are like fuel, water, power, steam etc.,
A detailed study of all the above has to be made
at the time of input study and also at the time
of formulating the project with respect
location, technology and plant capacity.

Product Mix
Market requirement guides the choice of product
mix. In the production of most of the items,
variations in size and quality are aimed at
satisfying a broad range of customers. Variation
in quality can enable a Company to expand its
market and enjoy higher profitability. While
planning the production facilities of the firm ,
some flexibility with respect to the product mix
must be sought. The degree of flexibility chosen
may be based on a careful analysis of the
additional investment requirement for different
degrees of flexibility

Plant Capacity
Plant Capacity or Production Capacity refers to
the volume or number of units that can be
produced during a given period.
Feasible normal capacity which is nothing but
the capacity attainable under normal working
conditions.
The nominal maximum capacity is the capacity
which is technically attainable and this often
corresponds to the installed capacity guaranteed
by the supplier of the plant

 Capacity decisions are influenced by the

several factors:
Technological Requirement
Input constraints
Investment cost
Market conditions
Resources of the firm
Government policy

Location and site

Location refers to a fairly broad area like a
city, an industrial zone, or a coastal area
Site refers to a specific piece of land
where the project would be set up.
The choice of location and site follows an
assessment of demand, size, and input
requirements.

 The choice of location is influenced by a

variety of considerations:
Proximity to Ra materials markets
Availability of infrastructure
Labour situation
Governmental Policies
Other factors

Climatic conditions
General living conditions
Proximity to ancillary units
Ease in coping with environmental pollution

Machineries and equipments

The requirement of machineries and equipments
is influenced by production technology and plant
capacity, it is also influenced by the type of
project.
Ex: For a process oriented industry, like a petrochemical unit, machineries and equipments
required should be such that various stages are
matched well.
The choice of machineries and equipments is
somewhat wider for a manufacturing industry

Machineries and equipments

The equipments required for the project may be
classified into the following types:

Plant equipments
Mechanical equipments
Electrical equipments
Instruments
Controls
Internal Transportation System
Others
In addition to the above spare parts and tools list also
has to be prepared

Constraints in selecting machineries and

equipments
Certain constraints that should be borne in mind
while selecting machineries and equipments are:
There may be a limited availability of power to set up
an electricity intensive plant
There may be difficulty ion transporting a heavy
equipment to a remote location
Workers may not be able to operate, at least in the
initial periods certain sophisticated equipments like
numerically controlled machines
The import policy of the Government may preclude
the import of certain machineries and equipments

Procurement of plant and machinery

The factors to be considered I selecting
the supplier of plant and machinery are
Desired quality of machinery
Level of Technological sophistication
Relative reputation of various suppliers
The expected delivery schedules
Preferred payment terms
Performance guarantee

Structures and Civil Works

It is divided into three categories:
Site preparation and development
Grading and leveling of the site
Demolition and removal of existing structures
Relocation of existing pipelines, cables, roads,
power lines, etc.,
Reclamation of swaps and draining and removal of
standing water
Connection for the following utilities from the site to
the public network
Electric power, water, communications, roads, railway
sidings

Other Site preparation and development work

Structures and Civil Works

Building and structures

Factory or process buildings

Ancillary buildings
Administrative buildings
Staff welfare buildings
Residential building

Outdoor works

Supply and distribution of utilities

Handling and treatment of effluents and wastages
Transportation and traffic signals
Outdoor lighting
Landscaping
Enclosure and supervision

Environmental aspects
A project may cause environmental pollution in
various aspects. The key issues that need to be
considered in this respect are:
What are the types of effluents and emissions
generated?
What needs to be done for proper disposal of
effluents and treatment of emission?
Will the project be able to secure all
environmental clearances and comply with all
statutory requirements?

Project charts and layouts

Once the viability of the project is analyzed
based on various aspects, project charts and
layouts may be prepared
The important chars and layout drawings are:

General functional layout

Material Flow Diagram
Production Line diagram
Transport layout
Utility consumption layout
Communication Layout
Organizational Layout
Plant Layout

Project charts and layouts

The plant layout is concerned with the physical
layout of the factory. Plant layout depends upon
the type of manufacturing process. The important
considerations in preparing the plant layout are:

Consistency with production technology

Smooth flow of goods from one stage to another
Proper utilization of space
Scope of expansion
Minimization of production cost
Safety of personnel

Schedule of project implementation

For preparing the project implementation
schedule the following information is required:
List of all possible activities from project planning to
commencement of production
The sequence in which various activities have to be
performed
The time required for performing various activities
The resources normally required for performing
various activities
The implications of putting more resources or less
resources than are normally required

Work schedule
Work schedule is nothing but the plan of work
concerning installation as well as initial operations. The
purpose of work schedule is
To anticipate problems likely to arise during the installation
phase and suggest possible means for coping with them
To establish the phasing of investments taking into account the
availability of finances
To develop a plan of operations covering the initial period

To avoid losses idle capacity and deterioration of stocks

of material work schedule should be drawn up with care
and realism so that the commissioning of plant is
reasonably synchronized with the availability of the basic
inputs

Need for considering alternatives

There are alternative ways of transforming an
idea into a concrete project. These alternatives
may differ in one or more of the following
aspects:

Nature of project
Production process
Product quality
Scale of operation and time planning
Location

Key project inter-linkages

Product/service
Demand
Size

Technology

Location

Selling Price

Production costs
Financial
Requirements
Profitability

Investment outlay

QUESTIONS???

THANK YOU