project lecture v

7/30/2019 Project Lecture V

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Lecture V

Projects

Academic year 2012-13

Trimester IV

GENERATION AND SCREENING

OF PROJECT IDEAS


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Scouting for Project Ideas

Analyse the performance of existing industries

Examine the inputs and outputs of various industries

Review imports and exports

Study plan outlays and governmental guidelines

Look at the suggestions of financial institutions and

development agencies

Investigate into local needs, materials and resources

Analyse economic and social trends


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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 newproduct ideas

Look at what the competition is doing


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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 atriggering process rather than an analytical

exercise


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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 thinkmore creatively


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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)


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C

ompetitor

Monitor the Business Environment


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Corporate Appraisal

Marketing and distribution

Production and operations

Research and development

Corporate resources and personnel

Finance and accounting


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Tools for Identifying Investment Opportunities

There are several tools or frameworks that are helpfulin 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


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Porter Model

According to Michael Porter the profit potential of an

industry depends on combined strength of the 5 basiccompetitive 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


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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


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Most products evolve through a life cycle. The broad stages

and the investment returns in these stages are as follows:

Stage Investment Return

Pioneering May have negative NPV

but may create options

for participating ingrowth stage

Rapid growth Positive NPV

Maturity NPVneutral

Decline Negative


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Experience Curve

The experience curve shows how the cost per unit behaves

with respect to the accumulated volume of production

10 20 40 80

100

80

60

40

Accumulated volume of production


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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


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Sources of Positive NPV

Economies of scale

Product differentiation

Cost advantage

Marketing reach

Technological edge

Government policy


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Qualities and Traits of a Successful Entrepreneur

Willingness to make sacrifice

Leadership

Decisiveness

Confidence in the project

Marketing orientation

Strong ego

Open-mindedness


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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


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Example of Construction of a Rating Index

Factor Factor Rating Factor

Weight Score

VG G A P VP5 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 0.20Stability 0.10 0.40

Dependence on firms

strength 0.20 1.00

Consistency with

governmental priorities 0.10 0.30

Rating Index 4.00


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Have you done the Preliminary Screening?

Among other things, you should examine the projecton 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


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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?

project lecture v

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