Project Planning, Appraisal and Control - 1 PDF

Capital Expenditure 1
MODULE I: PLANNING OF PROJECTS Notes
Unit 1: Capital Expenditure
Structure:
1.1 Introduction
1.2 Capital Investment Appraisal
1.2.1 Net Present Value vs. Internal Rate of Return
1.3 Internal Rate of Return (IRR)
1.3.1 Capital Rationing — A Linear Programming Approach
1.4 Summary
1.5 Check Your Progress
1.6 Questions and Exercises
1.7 Key Terms
1.8 Check Your Progress: Answers
1.9 Further Readings
Objectives
After studying this unit, you should be able to:
Ɣ Understand the process of capital investment appraisal
Ɣ Discuss the terms such as Net Present Value (NPV) and Internal Rate of Return
(IRR)
Ɣ Explain capital rationing by linear programming approach
Ɣ Talk about advantage of NPV over IRR
1.1 Introduction
Capital investment appraisal involves assessing the varied facets of returns that the
investment in an enterprise can generate in a fixed time phase. The appraisal aims at
determining whether capital investment is consistent with the overall national and
sectorial objectives and whether it will give a fair return to the entrepreneur. The five
methods discussed in this chapter are of considerable use to small entrepreneurs in
selecting the optimum size of investment for their enterprises.
1.2 Capital Investment Appraisal

There are two parameters needed for any capital investment appraisal. They are
precise estimates of:
(i) Investment required or proposed in the project.
(ii) Working results of the project during its life:
(a) Revenue
(b) Costs (Direct and Fixed).
There are several methods available involving capital budgeting procedure for
appraisal of investments. Some methods are very simple while others are very
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2 Project Planning, Appraisal and Control
sophisticated as mathematical calculations are as needed to arrive at the results.
Notes
Procedures for the five methods are described below:
(i) Pay back period.
(ii) Rate of Return.
(iii) Present Value Method.
(iv) Internal Rate of Return.
(v) Benefit-Cost Ratio.
(i) Pay Back Period: This is a simple method and widely applied even today in
industry. In short, this method aims to determine the period taken for the repayment of
capital invested. In other words, it determines the number of years it takes to recover the
capital invested with the help of future net cash flows. This method obviously will lead us
to the conclusion that those projects which repay the investment in shorter periods are
better. To illustrate this by an example:
Assume that there are three alternatives for investing an amount of ` 10,000. All the
alternatives will yield results only for a period of three years and there is no scrap value at
the end of the life of the project.
Project A Project B Project C
Initial Investment ` 10,000 ` 10,000 ` 10,000
Expected Year 1 ` 7,500 3,000 4,000
Net Cash Year 2 ` 5,500 5,000 6,000
Inflow Year 3 ` 3,000 10,000 7,000
Time taken to recover the Investment: Less than 2 More than 2 Exactly 2
year year year
Project A is better than Project C which is better than Project B.
Merits: (i) A very simple method.
(ii) Better method for underfinanced business and business having
liquidity problems.
(iii) When interest rates are very high, it is always better to recover the
capital as quickly as possible.
Demerits: (i) Time value of money is not taken into account.
(ii) Cash flow widely differing in magnitudes may be treated as equal.
(iii) The overall life of the project is not taken into account.
(iv) This method will not be able to choose projects which have a larger
cash inflow during the later years. Such projects are penalised by this
method.
(v) If there is any scrap value for the project at the end of its life, it is not
taken into account in this method.
Hence this method is very good for projects of a very short duration. If an investor is
not sure of the political situation, or if he needs a quick turnover of his capital or if he is
not willing to expose his capital to risk for a long time, it is preferable to relay on a shorter
pay-back period project. Anyway, this method may be used as an initial screening device
for selecting a few projects for further tests.
(ii) Rate of Return: This method calculates the annul rate of return earned by the
project. Rate of return is the ratio of profit to capital employed.

Following the previous example,

Notes
Project A Project B Project C
Total expected net cash inflow ` 16,000 18,000 17,000
for 3 years
Less: Initial Investment ` 10,000 10,000 10,000
Net Profit ` 6,000 8,000 7,000
? Profit per year ` 200 2667 2333
Rate of Return on Investment 20.00% 26.67% 23.33%
Here we find that project B is better than project C and both are better than project
A.
Merits: (i) It is a more meaningful method.
(ii) It does not take into account the magnitudes of cash flows during the life of
the project. Two projects having different annual cash inflows, but the same
total inflow will be ranked equal.
(iii) There are a few criticisms against this method such as if different
depreciation methods are used, the same project may give two different
rates of return.
For such investment in real estate, this method may be more meaningful.
Both the above methods do not take time value of money into account.
(iii) Present Value Method: This is a very sophisticated method and it takes the
time value of money into account.
All the methods to be described below take the time value of money into account.
Since a rupee received tomorrow is not the same as the rupee one receive today, these
methods "discount the future value of money to the present day." All these methods
adopt the discounted cash flow technique, which is nothing but a compound rate of
interest calculation.
For example:
Let P = Amount of principal invested at time O.
An = Amount expected at the end of the period n.
r = the interest rate
n = the number of years.
In the above notations if we keep n =1
Then A1 = P(1+r), and
if n = 2,
then A1 = A2 (1 + r) or A2 = P (1+r)2
In other words, it can be said that if P rupees are invested for n years at a compound
interest rate of r, it will accrue to A rupees at the end of n years. The same can also be
stated as the present value of An rupees is rupees P today. Thus, the present value of
future income is written, as:
An
P
1 r n

An
Notes The pre-calculated vales for is given for various interest or discount rates
1 r n
and for different years. These values are terms as “Present Value Indices” and the table
gives the present value of Rupee One.
The present value method, as mentioned earlier, is a sophisticated method. which
takes into account the time value of money. In this method, a comparison is made
between the present values of the future expected cash inflows and the investment made
which is the cash outflow. The investment is subtracted from the present value of cash
inflows, thus arriving at the net present value of the investment. If this is a positive figure,
the project is worthwhile considering and the greater the figure in terms of its magnitude,
the better the project is.
Example: Taking the same example give earlier:
Project A
Year 0 1 2 3
Investment: ` 10,000 - - -
Net Cash inflow ` 7500 5500 3000
Present Value Index at 10% 0.909 0.826 0.751
discount rate (from tables)
Present Value of Inflows ` 6,818 4,545 2,254
Total Present Value of Inflow: ` 13,617
Less: Present Value of Outflow: ` 10,000
Net Excess Present Value: ` 3,617
Project B
Year 0 1 2 3
Investment B ` 10,000 - - -
Net Cash inflow ` 3000 5000 10,000
Present Value Index at 10% 0.909 0.826 0.751
discount rate (from tables)
Present Value of inflows ` 2,727 4,132 7,513
Total Present value of inflow ` 14,372
Less: Present value of outflow ` 10,000
4,372
Project C
Year 0 1 2 3
Investment ` 10,000 - - -
Net cash Inflow ` ------- 4,000 6,000 7,000
Present Value ------- 0.909 0.826 0.751
Index at 10%
Present Value of inflow ` ------ 3,636 4,958 5,259
Total Present Value of Inflows ` 13,853
Less: Present Value of Outflows ` 10,000
Net excess Present Value

Comparing the net excess present value of the three projects, we identify Project B
Notes
to be the best.
If any project is left with a scrap value at the end of its life, such value can be added
to the last year's cash inflow as an additional inflow. Then the same procedure is adopted
to calculate the next excess present value.
Another important point to be mentioned is that the discount rate adopted decides
which project is the best. Now, in the above example, if we take 20% as discount rate
instead of 10%, we will end up saying that project A is the best. Those projects which are
having high cash inflows initially will turn out to be better than those having high cash
flows at the end of the project life.
(iv) Internal Rate of Return (IRR): IRR is defined as "the rate which will discount
the net cash inflows of a project to the present value equal to the project investment or ou
tlay. In other words, IRR is that rate of discount which will equalise the present values of
cash outflows and cash inflows. This method is used as a yardstick for selection of the
project. Actually, IRR gives the rate of return of the project, i.e., the rate at which the
project pays for itself.
When we worked out the present values in the 1st section at 10% discount rate, we
obtained a positive difference when the present value of outflow was deducted from the
present value of inflows. Now we have to find out that discount rate which will equalise
both. This is done only by a trial and error method.
Take, for example, Project C in the above case. At 10% discount rate, the difference
was positive. Let us now try a discount rate of 30%.
Year 0 1 2 3
Investment ` 10,000 - - -
Net Cash inflows ` 4,000 6,000 7,000
Present Value
Index at 30% 0.769 0.592 0.455
Present Value of inflow
Total Present Value of Inflows ` 9813
Total Present Value of outflows: ` 10,000
Net excess Present Value: ` 187
Now we encounter a negative difference. This shows that IRR is less than 30% but
far greater than 10%. The same procedure can be adopted using 28% discount rate. By
adopting 28% discount rate, the net excess present value would be ` 109. This will be
again a positive figure. It is now certain that the IRR to be 28.8%. The same procedure
can be followed for the other two projects also and the IRR can be found out. This will
help us in choosing the project with the highest IRR.
(v) Benefit-Cost Ratio: This is again another yardstick used in the selection of
projects. In this case the proportion of the present value of future inflows to the present
value of outlay or investment at a specified discount rate is taken. The ratio should at
least be 'one' to select a project and the greater the ratio than 'one', the better is the
project.
The ratio cab be written as:
Present Value of Cash Inflows
Benefit-Cost Ratio =
Present Value of the Outlay/Inv estment
Taking the same example given under present value method,

Notes Project A
B-C Ratio 13,617 = 1.36
=
10,000
Project B
B-C Ratio 14,32 = 1.44
=
10,000
Project C
B-C Ratio 13,853 = 1.39
= 10,000
Here Project B is better since the ratio is greater than those Projects A and C.
In judging the investments, it is better not to rely just only on one method but to use
a couple of methods to see the consistent behaviour of the project.
1.2.1 Net Present Value vs. Internal Rate of Return

Net Present Value (BPV) and the Internal Rate of Return (IRR) are two universally
accepted criteria for judging the worth and hence the acceptability investment proposals.
Both are based on the time value of money as the basic postulate and in a good number
of cases, give identical results on the worth of an investment proposal. In such cases,
adoption of either of the two criteria — NPV or IRR — would lead to identical conclusions
as regards the acceptability (or otherwise) of an investment proposal.
The Net Present value of an investment proposal is estimated by subtracting the
discounted cash outflows of various years of the life if the project from the discounted
cash inflows, with the 'cost of capital' of the project being used as the discounting factor.
The equation for the NPV of a project will be (assuming the entire investment made in the
initial Zero Year):
N
¦ 1 K
At
NPV = t
C
t 1
A1 = Cash inflow at the tth year. (Net profit after tax, with depreciation and other
non-cash expenditure written back along with interest-term debt capital).
500
400
300
200
100
100
200
300
400
500
0 5 10 20 30 50 60

N = The life of the project in number of years

Notes
C = Initial investment
K = Cost of capital
Example:
The NPV of a project, which costs initially ` 25,000 and generates cash-flows of
` 9,000, ` 9,000, ` 8,000, ` 7,000, ` 6,000 and ` 5,000 in the next five years, given the
discounting rate to be 10% p.a., would be:
` 9,000 8,000 6,000 5,000
25,000
1.1 1.12 1.13 1.15
= ` (8,181.82 + 6,611.57 + 5,259.20 + 4,098.08 + 3,104.61 – 25,000)
= ` 2,255.28
The underlying assumption behind the concept of NPV is that the internal
reinvestment rate of the project's cash inflows is equal to the discount rate employed. In
other words, while estimating the NPV of a project, basic presumption is that the cash
inflows of the project are getting reinvested at a rate of return equivalent to "K" in the
formula given above. This assumption may not be wholly tenable inasmuch as the
complexities obtaining in the capital market may not permit such uniform rate of return
over the length of a project (the early cash inflows may not be amenable to be reinvested
at a rate equal to the cost of the capital for the project), but nevertheless, it introduces a
semblance of consistency while dealing with diverse investment proposals, inasmuch as
all these proposals under consideration at anyone point of time are supposed to invest
their future cash inflows at the uniform rate of the cost of capital.
IRR: The Internal Rate of Return is another technique of utilising the concept of time
value of money. The IRR is arrived at by computing the rate of discount which equates
the present value of cash inflows to the present value of cash outflows. In other words,
IRR corresponds to the rate of discount at which the NPV of the project is zero.
Example:
The IRR of a with an initial outlay of funds of ` 20,052 and generating cash inflows of
` 9,000, ` 8,000 and ` 7,000 in the three years of its life would be 10% p.a. Which has
been arrived at by trial and error method, as shown below:
(i) If the discounting rate is 12% then NPV is
9,000 8,000 ½°
= ` °®
7,000
20,052 ¾
°̄ 1.12 1.122
1.12 3
°¿
=` (8,035.71 + 6,377.55 + 4,982.46 – 20,052)
= ` 656.28
If the discounting rate is 8%, the NPV
° 9,000 8,000 7,000 ½°
® 20,052 ¾
°̄ 1.08 1.08 2
1.08 3
°¿
=`
= ` (8,333.33 + 6.857.71 + 5,556.83 – 20,052)
= ` 695.87
Therefore, the IRR must lie between 8% p.a. And 12% p.a. Trying 10% p.a. as the
discounting rate, then NPV

9,000 8,000 7,000
Notes 20,052
1.10 1.10 2 1.10 3
=`
= ` (8,181.82 + 6,611.57 + 5,259.20 – 20.052)
=0
Therefore, the IRR is 10% p.a.
1.3 Internal Rate of Return (IRR)

The Internal Rate of Return (IRR) is the universally accepted criterion for judging the
worth of investment proposals. It is based on the time value of money.
The IRR is basically formulated on the principle that the cash inflows of each
individual project (having different IRRs) are reinvested at their respective IRRs. This
seriously flouts the concept of uniformity in the capital market — after all each individual
project cannot reinvest its cash inflows at different rates, because the reinvestment rate
would have to be uniform at any given situation. Thus, while making a comparison
between the NPV and IRR — the one pertaining to NPV, i.e., reinvestment of the cash
inflows of all the projects uniformly at the cost of the capital, does not suffer from much
contradiction, from the purely theoretical stand point of an ideal capital market as regards
its applicability in real life capital market, scenario, and has a distinct relative advantage
over the concept of reinvestment of cash inflows at varying internal rates of return of each
individual project, as proposed under the IRR technique. In this plan, therefore, NPV has
well-established edge over the IRR. Some authors have, however, expressed their
doubts as to the validity of assumption of the development of cash inflows at the rate of
marginal cost of capital for NPV and at the rate of the internal rate of return of each
individual project for IRR.
1.3.1 Capital Rationing — A Linear Programming Approach

In situations of capital rationing, either external or internal use may be made of
linear programming techniques by budding up an appropriate model. The fundamental
theorem around which the model is woven is to maximise the net present values of all the
investment proposals within the constraints of the availability of total funds. A frequently
used model could be written as:
n
Maximise ¦PX
i 1
1 1
¦C
i 1
11X1 d B1 t 1,......, T
Subject
X1 = 1 or 0 (i = 1,.....,n)
Where C11 = amount of funds required by the ith project in period t where projects
C = 1, ...n, time periods t=1, ..... T.
P1 = net present value of the project i.
Bt is the absolute amount of funds to be invested in period ‘t’. Xi is an integer
representing the project ‘i’ taken on — it cab be either 0 or 1 (rejected or accepted).
In the constrained maximand from NPV is maximised withing the constraints of
funds availability and mutual exclusiveness of project (acceptance of one project ‘i’ taken
on —— it cab be either 0 or 1 (rejected or accepted).

In the constrained maximand from NPV is maximised, within the constraints of funds
Notes
availability and mutual exclusiveness of project (acceptance of one project to the
exclusion of another).
Another variant of the maximand can be:
T
Maximize Z = ¦aD
t 0
t 1
¦C
j 1
jt X j D t d Mt t
xj
0,1, ......., T
D t t0
Subject to
Where a = time-value factors vector.
D = divident vector.
C = matrix of cash flows (outlays are positive and inflows negative), the rows are
the cash flows of each period and the columns are the cash flows of each
investment
M = Column vector of cash available from outside sources.
x = Column vector indicating the number of units invested in each investment.
Number of different investments = J.
T = Horizon of planning periods.
Through these linear programming models, based on the NPV method, although the
firm may not be able to rank the investment opportunities, it would nevertheless be able
to select the best set of investments from the criteria of maximising their net present
values within the constraints of the availability of a predetermined quantum of investible
funds. However, the problems associated with such model building exercises stem from
the enormous information inputs that would be needed to make use of them (present
value of all investment opportunities and constraints, etc.). Besides, serious doubts have
been raised in some quarters as to the theoretical soundness of the assumption
underlying such model building. It has been held by them that the cond!pt of NPV traces
its origin to perfect capital market conditions with no capital rationing, and making
adjustments in its applicability by superimposing conditions of capital scarcity militates
against the very concept of NPV. Besides, if a market-dominated marginal cost of capital,
the very basis of the principle of NPV, exists, then the idea of capital rationing simply falls
through. However, even within these limitations, these linear programming techniques
may be made use of with a view to maximising the net present value of the available
investment opportunities, using NPV as the basic theoretical frame work. To this extent,
NPV does have an edge over IRR, as no such modellirig could be woven around the
concept of IRR. In a capital budgeting scenario for IRR technique, a threshold limit is
fixed (more often than not on the basis of a subjective linking of the threshold limit to the
availability of funds). In comparison, thus, IRR suffers from various inadequacies
vis-a-vis NPV, in situations of capital rationing.
Conclusion
The internal rate of return as a capital budgeting technique has been claimed to
have certain inherent advantages, a few of which are listed below:
(i) The internal rate of return is a relative measure of the worth of a project, as
opposed to the absolute measure of the worth of a proposal in the NPV method,
facilitating to some extent inter se ranking of projects having uniform scales of investment,
timings of cash flow and project timings. For the same reasons, it has an appeal to the
entrepreneurs, since returns are measured in perc~tages, which make so much more of

a sense to them, vis-a-vis the net present value, which is a measure in absolute terms of
Notes
the increase in the firm's net wealth.
(ii) Some authors have held that IRR, not requiring the computation of the cost of
capital (which is quite an involved exercise), has an edge over the NPV method, which
uses the cost of capital as a discounting factor. However, the assumption would not
stand the test of a close scrutiny, since for deciding upon the accept-ability or otherwise
of a project under consideration, a know-ledge of the cost of, capital would be called for,
as this would determine the threshold level, as far as the acceptability of the investment
proposals is concerned. Only in the NPV method does it enter into the calculation at a
much earlier stage and in the IRR method, it is only used for the purpose of comparison.
However, as opposed to these advantages, IRR suffers from the following
drawbacks:
(a) The basic theoretical foundation for IRR as regards the reinvest ment of the
surplus is seriously flawed as discussed above.
(b) Computation of IRR is much more difficult compared to NPV.
(c) The ranking of mutually exclusive projects under IRR is a very cumbersome
process, involving as it does the computation of IRR of the differentials of cash
flows of the projects taken in pairs and arriving at the best solution. NPV
method gives consistent results in all such cases.
(d) In non-conventional projects, involving more than one change in the sign of
cash flows, there would be more than one, valid solution for the value of IRR
and that too, varying over a wide range, rendering the decision-making process
much more difficult. No such difficulty arises in applying NPV method in such
cases.
(iii) In a capital rationing scenario, the IRR method does not lend itself to any
analytical treatment. The only solution in such cases would be to decide upon, somewhat
arbitrarily, a cut-off IRR rate, beyond which all proposals would be accepted. However, in
the NPV method, linear programming solutions are available, which although having
limitations from a purely theoretical angle, offer very good practical solutions.
It would thus be seen from the above that on balance, the NPV method enjoys
decided advantages over the IRR method as a capital budgeting technique.
1.4 Summary
The internal rate of return (IRR) as a capital budgeting technique has certain
advantages as well as drawbacks. In case of net present value (NPV), linear
programming solutions are available. This gives good practical solutions. In comparison
to IRR, the NPV method enjoys greater advantages as a capital budgeting technique.

Multiple Choice Questions
1. Present value method takes the _____ value of money into account.
(a) Space
(b) Present
(c) Time
(d) Net
2. ______ of IRR is much more difficult compared to NPV.
(a) Analysis

(b) Addition
Notes
(c) Subtraction
(d) Computation

1. Explain the requirement of capital investment appraisal.
2. Write a short note on internal rate of return.
3. Give a brief account of net present value method (NPV).
1.7 Key Terms

Ɣ Appraisal: Assessing varied facets of returns that the investment in an
enterprise can generate in a fixed time phase.
Ɣ Rate of Return: It is the ratio of profit to capital employed.
Ɣ Linear Programming: It is to maximise the net present values of all
investment proposals within the constraint of availability of total funds.

1. (c) Time
2. (d) Computation

1. Chandra, P. (2002), Projects, Tata McGraw Hill.
2. Desai, V. (2014), Project Management, Himalaya Publishing House Pvt. Ltd.
3. Finnery, J. (1996), Project Financing, Wiley.

Notes
Unit 2: Phases of Capital Budgeting
Structure:
2.1 Introduction
2.1.1 More than mere Accounting
2.2 Total Systems Approach
2.2.1 Budget Objectives
2.2.2 Budgetary Control
2.2.3 Advantages of Budgetary Control
2.2.4 Steps in Budgetary Control
2.2.5 Programmes, Budgets, Controls
2.2.6 Conscious Budgeting
2.2.7 A Check List for Effective Budgeting
2.2 Summary
2.5 Key Terms
Objectives
Ɣ Understand Budgetary Control as a tool of management to plan, execute and
control operations of business
Ɣ Discuss that phases of capital budgeting are more than mere accounting
Ɣ Explain the importance of budgetary control because of its advantages
2.1 Introduction
Budgetary control is a tool of management used to plan, carry-out and control the
operations of the business. The entrepreneur finds it quite handy in planning the growth
of his business or enterprise.
Over the years many have associated the word ‘budget’ with restrictions, pressure
devices and limitations. This is entirely due to misunderstanding of the performance and
misuse of budgets. As such the current trend is to drop the word ‘budget’ and use in it
place the term “profit plan”, as more descriptive of the characteristics and objectives of
the budget planning process and control.
The concepts and procedures under budget plan and control have wide application
not only in profit-oriented enterprises but in every enterprise where the resources are
limited and have to be properly applied. This, in a sense is ‘managerial budgeting’. It
applies to public and private enterprises, government departments and charitable
organisations.

Phases of Capital Budgeting 13
The modern approach is towards a comprehensive budget plan and control. The
Notes
other terms used in this regard is ‘profit planning and control’. The steps involved in this
include specifying enterprise goals, developing a long range budget, carving out of it a
short range budget, periodic review of performance and follow-up. This forms the basis
for all the modern management approaches like management by objectives, participative
management, dynamic control, continuous feedback responsibility accounting and
management by exception.
2.1.1 More than mere Accounting

Though budget plan and control is closely related to accounting. It is not confined to
it. It is a total management system with intimate relationship to the accounting system.
Accounting provides historical data as a means to quantify the goals and supplies the
units in which to report achievement and a basis for review. It also supplies information
for marginal costing, standard costing and flexible budgets.
Management objectives are operationalised through proper strategies, by budget
plan and control. The latter is a financial and narrative expression flowing from the
planning decisions. Budget plan and control gives a firm basis for participative
management. It requires involvement of all management levels in the planning process
and in the approaches for accomplishing the goals. It enlightens the members of the
management team regarding the objectives of the enterprise and its approaches. Thus it
creates involvement and commitment.
The mechanics of preparing the budget plan consists of finalising the functional
objectives and then preparing the master budget. The techniques adopted comprise
among other measures forecasting of future targets, resolving sales-production,
inventory problems, resources determination and cash flow determination. To increase
the effectiveness of budget control, all enterprises should be divided into organisational
subunits, as decision centres or responsibility centres. They could also be viewed as cost
centres, profit centres, or investment centres depending on the main objective and
responsibility, of the subunit.
2.2 Total Systems Approach

A comprehensive budget plan and control encompasses much more than a periodic
financial budget. It covers all operations in the enterprise and involves a total systems
approach.
Subsequent to the preparation of the comprehensive budget, supplemental analysis
might have to be undertaken periodically for individual decisions. The usual techniques
are planning model, simulation, break-even analysis, marginal cost, return on investment
(RoI), preparation of flexible budgets and preparation of data base.
The positioning of a budget director with a direct responsibility for the preparation of
the budget plan is found very useful. A recent trend is to have an executive committee
instead of a single budget director. This committee receives and reviews budgets from
subcentres and helps in forging a master budget for the organisation. It is also
responsible for revision of the budgets from time-to-time.
The financial budget is only a part of the overall budget plan. It is an attempt to
quantify the financial results of the management objectives, strategies and overall
budget.
In harmony with the overall comprehensive objectives of the enterprise, both
strategic or long-term and tactical or short-term budgets should be evolved. The short
range, tactical budget should be dove-tailed with the long range budget. As a practical

approach, the long range budget is first evolved and thereafter the tactical budget. Many
Notes
factors like general forecasting for the economy and for the industry as a whole, enter
into the evolution of the long range budget. Its time span all covers more than one year,
whereas the short range budget normally covers a period of one year only. It is also
further subdivided for each month or quarter.
2.2.1 Budget Objectives

One of the major aims of a system of budgetary control is that of entrusting the
individual planner at all levels in the acceptance of budget responsibilities. It is a way of
splitting up the business into natural divisions and departments, budgeting the
performance and cost requirements of each section, and then using these budgets as
both the targets at which to aim and the measures with which to control. There should be
a clear structure and pattern of organisation where techniques of budgetary control are
applied.
Unless something of this sort is in existence and there is knowledge in an
organisation of the lines of authority, it will be impossible to get the full advantages from a
system of budgetary control. An organisation operates various controls of the output,
quality and cost of its departments and divisions. There should be supervisors in each
department who should know their subordinates and to whom they should report. The
supervisor has the responsibility for output, quality and cost. He is an important person in
budgetary control. This applies whether he is in-charge of a production or service
department.
Master Budget
Sales Budget Cash Budget Production

Budget
Selling and Capital Budget for Prime

Distribution Expenditure Cost and
Costs Budgets Budgets Overhead Cost
Stock Budget Administration

Cost Budget
Master Budget
(Including Budgeted P&L A/C and B/S)
Accounting Variance Analysis Action by Management at all

Reports and Statements Levels to Remove Variance
Noted in Performance
Fig. 2.1: Budgetary Control System
2.2.2 Budgetary Control

Budgetary control is a plan of operation based on a forecast of sale, income and
expenditure which deals with departmental budgets framed on the basis of policy
requirements and the responsibilities of supervisors/executives. This activity also calls for
a constant comparison of the actual with the budgeted results.

In the words of C.L. Van Sickle, “a budgetary control system is a carefully worked
Notes
out financial plan, including the procedure involved in its operations for conducting the
various divisions of a business for the ultimate purpose of earning a profit”.
At present, budgetary control has become a means of effective management control.
It is looked upon as a profit plan. The primary object of a budget is to ensure the optimum
utilisation of available funds for the purpose of producing at minimum cost and selling in a
competitive market at maximum profit.
Budgets are broadly classified into:
(a) Revenue and expense budgets;
(b) Time, space, materials and manpower budgets;
(c) Capital expenditure budgets;
(d) Cash budgets;
(e) Master operating budgets.
Budgetary control provides a basis for: administrative control, direction of the sales
effort, production planning, control over stocks.
The budget co-ordinates production, sales and finance. It compels small
entrepreneurs to think on a continuing basis to maximise profits.
TYPES OF BUDGETS
(1) (2) (3) (4) (5)

Revenue and Time, Space, Capital Expenditure Cash-Budgets Master Operating
Expenses Budgets Materials and Budgets Budgets
Manpower Budgets
1. Sales budget is the

foundation of 1. Budget for direct 1. Financial plan for They give a A master operating
budgetary control. labour-hours, initial capital forecast of cash budget gathers data from
2. Operating expense machine-hours. expenditure. receipts and the several departments
budgets deal item 2. Budgets for units 2. expenses. Cash and summarises them,
Financial plan for
of expense e.g., budget is the most first in a forecast income
of materials, units growth or
direct labour, important single statement, and then in a
produced. expansion. These
materials, etc. control of a forecast balance sheet.
are tied with
business.
long-term
business
planning.
Fig. 2.2: Types of Budgets
Price fixing, financial requirements, expenses control, production control and profit
maximisation.
2.2.3 Advantages of Budgetary Control

The important advantages of budgetary control are as follows:
(i) It helps the process of planning.
(ii) It provides an effective means by which, the entrepreneur can delegate
authority without sacrificing his overall control.
(iii) It keeps expenditure in check.
(iv) It helps in coordinating activities of an enterprise.

(v) It helps in determining the policies of the enterprise.
Notes
(vi) It aids in measuring performance.
(vii) It promotes cooperation and enhances controls on business activities.
2.2.4 Steps in Budgetary Control

The following are the steps involved in budgetary control:
1. Preparation of the Budget
2. Publishing the Budget.
3. Measuring the Results.
4. Comparing the performance with the Budget.
5. Correcting the unfavourable variance for better growth.
2.2.5 Programmes, Budgets, Controls
BEING AWARE OF OPPORTUNITY IN THE LIGHT OF BACKGROUND

MARKET COMPETITION – CUSTOMER NEEDS – OUR INTERNAL AND
STRENGTHS – WEAKNESSES EXTERNAL ANALYSIS
STEP 1 OBJECTIVES OR GOALS

WHERE WE WANT TO GO, WHAT WE WANT TO ACHIEVE AND WHEN?
CORORATE PLANNING PREMISES IN WHAT ENVIRONMENT – INTERNAL

STEP 2
OR EXTERNAL - WILL OUR PLANS OPERATE?
IDENTIFY ALTERNATIVES - WHAT ARE THE MOST FAVOURABLE

STEP 3
ALTERNATIVES TO ACHIEVE OUR OBJECTIVES?
COMPARE WHICH ALTERNATIVE OFFERS BEST CHANCE TO REACH

STEP 4
OUR GOAL AT LOWEST COST AND HIGHEST PROFIT
CHOOSE AN ALTERNATIVE SELECTING THE COURSE OF ACTION TO BE

STEP 5
UNDERTAKEN
FORMULATE SUPPORTING PLANS SUCH AS PLANS TO BUY MACHINERY,

STEP 6
BUY MATERIALS, SELECT AND TRAIN WORKERS, DEVELOP A NEW PRODUCT
NUMERISE PLANS BY MAKING BUDGET - DEVELOP SUCH BUDGETS AS

STEP 7 VOLUME AND PRICE OF SALES OPERATING EXPENSES NECESSARY FOR PLANS,
EXPENDITURE FOR CAPITAL EQUIPMENT
Notes:
1. Planning is simply a rational approach to the accomplishment of an objective.
2. The planning process is similar to the procedure of decision making through scientific
analysis and investigation of problems and/or opportunities.
3. Planning is fundamentally choosing, and in this sense, is essentially decision making.
4. Planning is deciding in advance what to do, how to do it, when to do it and who is to do
it.
5. Planning bridges the gap between where we are and where we want to go.
2.2.6 Conscious Budgeting

Stated in simple terms, budgeting/planning is a technique of organising, developing
and controlling business activity in a systematic manner. But, surprisingly enough, we

often hear of conscious planning in social activities rather in business life. In business/
Notes
industries, people are, by and large, hesitant to plan because of:
(a) The uncertainties inherent in the ever-changing economic environment which
very often renders planning hazardous, if not meaningless;
(b) The lack of professional management;
(c) The tendency of businessmen to follow the rule-of-thumb methods; and
(d) The absence of a comprehensive and reliable management information
system.
However, these are precisely the reasons which make the use of this technique
imperative.
Indeed, the greater the uncertainty, the greater is the need for planning would be
extensive because an entrepreneur’s response to change can be quicker. It is said:
“Today is the product of yesterday’s decisions; and the future that we plan today affects
the present”.
Conscious planning is necessary for the survival of industries in which capital
commitments and financial risks are high, and which necessitates heavy research and
development expenditure in an environment of acute competition and fast-changing
market preferences and consumer tastes.
Conclusion
The process of budgetary control helps the small-scale entrepreneur to regulate his
production, sales and administrative cost, and to maximise his profits. The perspective
outlook acts as a lever for efficient management and lays a strong foundation for
accelerated growth. Further, it enables the entrepreneur to plan for the expansion of his
unit. Budgetary control is an effective tool of accelerated growth. By introducing
budgetary control, the entrepreneur imposes a rational pattern on the external statistics
of his business, a process which provides him with a basis for further effective planning
and control.
A Check List for Effective Budgeting

1. Are plans explicit?
2. Are plans understood?
3. Are plans (and the planning function) accepted within the organisation?
4. Are plans capable of being adapted to meet change?
5. Are plans (and objectives) compatible with internal and external constraints?
6. Are plans capable of being monitored (i.e., in quantified format)?
7. Is the company’s level of activity expanding or contracting?
8. What effect is the answer to question 7 having on manpower requirements and
capital equipment requirements?
9. What effect is the answer to question 7 having on administrative requirements?
10. What effect is the answer to question 7 having on financial requirements?
11. Are ‘tomorrow’s bread-winners’ (promissing new products) being developed? If
so, have consumer requirements been carefully evaluated?
12. Is consideration being given to the use of new materials, new process and new
technology?
13. Who will be affected by future plans? How will these people be affected? How
will the resistance be overcome?

14. Do all employees — and especially supervisors and managers — fully
Notes
understand the cost implications of their work? Are they able to plan cost
expectations accordingly?
15. Can responsible individuals throughout the organisation work to meet budgets?
16. Are responsible individuals able to help in developing cost targets for
themselves and their subordinates?
17. Does the budgeting process have top management sponsorship and support?
18. Is the budgeting process seen as being a major tool of management rather
than an accounting technique?
19. Is the time period covered by the budget related to the necessity for, and the
possibility of effective management action?
20. Are the figures in the budget complied on the basis of the same definitions as
the actual figures with which they will be compared?
21. Do the budget targets lead to objective attainment?
22. Do the budget targets represent reasonably attainable goals?
23. Is control effect focused on significant deviations from plan?
24. Is the staff function in the budget process carefully distinguished from the line
function?
25. Are budgets flexible in relation to changing conditions?
26. Is the budget used as a tool for cooperative planning and control rather than as
an inflexible tool of dominance?
27. Are budgeted expenditures classified in sufficient detail and over sufficient
headings to permit the estimating of costs by each major item and function
under each area of responsibility?
28. Do budget control reports include reasons for variations as well as results?
29. Do budgets motivate people in the desired direction?
30. Does the budgeting process encourage delegation?
31. Is balance achieved between budgeting for short run operations and planning
long-term strategy.
32. Is the budget built on a thorough knowledge of cost behaviour pattern.
33. Are forecasting procedures adequately developed?
34. Is a budget officer employed? If not, why not? If so, are his terms of reference
widely known?
35. Does the company have a budget committee with properly described
responsibilities?
36. Are the dangers of budgeting understood? Avoided? Would the budget system
cause undesirable behavioural effects on people?
37. Is the whole planning budgeting endeavour based on a careful and continuing
evaluation of all major factors (both external and internal) that will affect the
future so that the budgets would be realistic?
2.3 Summary
The process of budgetary control helps the small scale entrepreneur to regulate his
production, sales and administrative cost, and to maximise profits. It enables the
entrepreneur to plan for the expansion of his limit.

2.4 Check Your Progress Notes

1. Budgetary control is a plan of operation based on _____ of sale, income and
expenditure.
(a) Prediction
(b) Calculation
(c) Forecast
(d) Quantity
2. The process of budgetary control enables the entrepreneur to plan for the ______ of his
unit.
(a) Closure
(b) Selling
(c) Appraisal
(d) Expansion

1. Explain the importance of budgetary control as a tool of management.
2. Give brief account of budget objectives.
3. What do you understand by budgetary control?
2.6 Key Terms

Ɣ Budget: It is a plan that explains growth of a business or an enterprise (the
term profit plan is used or profit planning and control – in modern times).
Or
Budget is a total management system with an intimate relationship to the
accounting system.
Ɣ Budgetary Control: It is a plan of operation based on a forecast of sale,
income and expenditure.

1. (c) Forecast
2. (d) Expansion

1. Patel, B.M. (2000), Project Management, Vikas Publishing House.
2. New Bold, C.R. (1998), Project Management, St. Lucie Press.
3. Desai, V. (2014), Project Management and Control, Himalaya Publishing
House Pvt. Ltd.

Notes
Unit 3: Levels of Decision Making
Structure:
3.1 Introduction
3.2 The Concept of Decision Making
3.2.1 Definition
3.2.2 Features of Decision Making
3.2.3 Direction of the Process
3.2.4 Types of Decisions
3.3 Decision Making Aids
3.3.1 Routine Decisions
3.4 Think Sharp
3.4.1 Importance of Management Science in Decision Making
3.4.2 Decision Making and Uncertainty
3.4.3 Management Tools in Decision Making
3.4.4 How to Use Operations Research?
3.4.5 Limitations of OR (Operations Research)
3.5 Decision Making Process
3.5.1 Models of Decision Process
3.5.2 The Process-steps
3.6 Summary
3.9 Key Terms
Objectives
Ɣ Understand the concept of decision making
Ɣ Discuss the procedure to be followed in different types of decision making
Ɣ Explain the ways to improve decision making abilities
Ɣ Talk about models of decision process
3.1 Introduction
A good decision becomes clear only in hindsight. At the time it is being taken there
are multiple perspectives around a decision based on the presented evidence, and in fact,
a decision becomes a judgement call. Getting the decision maker to make the call
requires that he or she is persuaded that it is a good call. To do this, goes beyond
decision templates and cost benefit analysis. It requires a nuanced understanding of the

Levels of Decision Making 21
decision maker’s world. This means understanding – what is the past history around the
Notes
decision, what is the external context for it, what precedents exist in house or elsewhere,
what competitors are doing, who within the organisation supports it, who opposes it,
where the decision needs to be taken, and who all will be present when the decision is
discussed. This is the decision maker’s world. Yet it is surprising how many senior
managers neglect this decision preparation.
In a small-scale industry, an entrepreneur has to take a proper decision from its
conception to production, marketing, diversifying and building up his/her small industry.
On the one hand the process of decision has to contribute to maximum profits at one end
and on the other hand, the industry should have a smooth sail. Briefly, a small-scale
industry is essentially an information and decision making system. In fact, decision
making is viewed as a process beginning with a problem and ending with appropriate
means of its solutions.
3.2 The Concept of Decision Making

Decision making is one of the most important functions of a leader and its
importance goes on increasing as we go up the ladder. In simple terms, a decision
means a choice whereby a person comes to a conclusion about a situation. Decision
making may be defined as the selection of one course from two or more alternatives. It is
a choice-making activity and the choice (decision) determines action or inaction. Thus,
decision making and speedy implementation will prove beneficial to a small entrepreneur.
3.2.1 Definition
The simplest definition to the term ‘Decision’ is – ‘a course of action consciously
chosen from available alternatives for the purpose of a desired result’. Thus, a ‘Decision’
represents an action or series of actions chosen from a number of possible alternatives.
The crucial aspect in taking ‘Decision’ is to select or choose an appropriate alternative
out of many possibilities. Such selection or election of one alternative which is considered
as most appropriate, needs a conscious judgement which is a by-product of a sequential
set of steps, viz., deliberation, evaluation and thought. If the incumbent, who is
responsible to take an appropriate decision, do not go through this rigorous sequence, he
or she may likely to faultier thereby takes an inappropriate decision which may not bring
desired solution to the identified problems.
With this basic understanding of the term ‘Decision’, the concept of ‘Decision
making’ can be defined as, a conscious and human process involving both individual and
social phenomenon based upon factual and value premises, which concludes with a
choice of one behavioural activity from among one or more alternatives with the intention
of moving towards some desired state of affairs. It is truly a complex, mental and
intellectual process involving judgement, evaluation and selection from several
alternatives in order to achieve or attain something positive.
3.2.2 Features of Decision Making

The main characteristic features of decision making are as follows:
Ɣ Decision making is a process of choosing a best course of action out of
available alternatives;
Ɣ Decision making is an implied duty of a manager, thus the essence of the
management;
Ɣ It involve certain commitment – be it relates to resources, direction or
reputation of the enterprise;

Ɣ It presupposes the existence of various possible alternative solutions to the
Notes
identified problem.
Ɣ If there is only one possible solution available without any alternatives, there is
no question of taking decision, except to implement the available lone solution;
Ɣ Decision making is always purposive and goal-directed in the sense that the
decisions should aim at achieving some objective or purpose;
Ɣ Decision making is the end process. Meaning thereby, the decision which
emerges out this process, is the end product of the entire exercise;
Ɣ It is an intellectual and mental process supported by sound reasoning and
judgement;
Ɣ Decision making involves certain authority and equally certain degree of
responsibility;
Ɣ Decision making, being a process, involves a series of sequential steps which
are necessarily to be complied with, for ensuring a sound decision;
Ɣ Decision making is all pervasive in the sense that all levels of managers do
take decisions, though the impact and scope of decisions vary commensurate
with their position in the managerial hierarchy.
In the entire gamut of organizational activities, the ‘Decision making’ is considered
as the most crucial but equally challenging job the managers at all levels need
necessarily to perform. While going through the process of decision making, the manager
uses his soul and mind in a most judicious and thoughtful manner. The success of the
business organization largely depends upon sound decisions and any inappropriate
decision may cause failures and disappointments. Decisions need to be taken timely and
delayed decisions, though found to be sound enough, may be purposeless as ‘decision
delayed is decision denied’.
3.2.3 Direction of the Process

Managerial decisions are based on the flow of information. The decision is the point
at which plans, policies and objectives are translated into concrete actions. Planning
leads to sound decision making and implies decision making, i.e., the selection, from
among alternatives, of a course of action. In other words, decision making is at the core
of planning. For instance, choosing of objectives, policies, procedures, programmes,
rules, strategies and tactics, etc., needs the entire process of decision making. The
purpose of decision making as well as planning is to direct human behaviour and effort
towards a future goal or objective. After all, it is in the process of planning/controlling, that
most decision making is done.
In the entire process of management and in each of the management activities,
such as planning, organising, directing, controlling, etc., decision making is always
essential. Managerial function is exercised through decision making. Decisions are
necessary on numerous issues and problems in each area of business, e.g., production,
marketing, finance, personnel, administration, etc. Hence, decision making process is at
the centre of the management universe. A manager reaps a double advantage when he
faces a problem and has to find a sound solution. First, he serves the organisation when
he successfully overcomes the obstacle. Secondly, he achieves simultaneously personal
satisfaction and advancement – a sense of accomplishment which is the best reward to
satisfy egoistic demands. As decision making spreads through all elements of
management, many a time, management is defined as decision making process.
Whatever a manager does, he does, through decision making. To make a decision
means to make a judgement regarding what one ought to do in a certain situation after
considering thoroughly the available alternative courses of action. Problems or difficulties

are viewed as opportunities to test managerial talent and to make improvements or

Notes
progress. In a sense, problems are the food or diet upon which manager lives and
prospers. A business executive is by profession a decision maker. Uncertainty or risk is
his opponent; overcoming it is his mission. Whether the outcome is a consequence of
luck or wisdom, the moment of decision making is the most creative event in the life of an
executive or a manager.
3.2.4 Types of Decisions

There are different types of decisions. According to Peter Drucker, there are four
basic criteria which determine the nature of a decision and the level of authority that
should decide. These are:
(1) The future time involved; (2) The qualitative factors entering into a decision;
(3) Whether a decision is rare or routine and repetitive; (4) Whether the impact of a
decision is on other functions, areas or on the business as a whole. If it affects only one
function, it is the lowest order.
We have the following types of managerial decisions:
1. Strategic or Basic Decisions: These are basic and usually long-term, vital or
important managerial decisions. Strategy can be defined as the behaviour of
management in trying to achieve success for corporate goals in an environment of
competition. It is based upon the action, or probable action, of others – chiefly rivals. It
includes awareness of goals, unpredictability of events, and the need to anticipate actual
behaviour of opponents. Strategies are solely calculated to implement plans and
objectives to attain an advantageous position over an opponent. Examples of strategic
decisions are: major capital expenditure decisions, all decisions affecting organisation,
productivity, pricing, location and size of the business, change in product-line. All
strategic decisions are basic onetime decisions involving long range commitments and
large investments. They are also unique in nature. A slight mistake in these decisions
would seriously injure the entire organisation. Almost all strategic decisions involve
considerable risk and investment and are invariably made by top managerial agencies.
2. Tactical or Routine Decisions: Routine decisions are also called tactical
decisions. They are unimportant. They are also repetitive. They need little thought. They
may have a few alternatives. They relate to the economic use of existing resources. They
are also called programmed decisions. All such decisions can be taken by middle and
first-time managers. They do not involve any high risk or uncertainty.
3. Programmed and Non-payment Decisions: Simon has classified all decisions
in two classes: (1) Programmed Decisions, and (2) Non-programmed Decisions. This
classification describes more clearly the methods of decision making that accompany
each type and it is more readily adaptable to modern technique of quantitative decision
making.
(a) Programmed Decisions: They are routine and repetitive decisions.
Organisation can develop specific processes for handling these decisions, e.g.,
standing operating procedures, and policies. They can be computerised also.
(b) Non-programmed Decisions: They are one-shot, ill-structured novel and policy
decisions. They are handled by general problem-solving processes. They
involve judgement, intuition, and creativity. They are made by trained and
higher level managers.
4. Organisational and Personal Decisions: Barnard suggests a useful distinction
between organisational and personal decisions. The executive makes organisational
decisions, when he acts formally as a company officer. Organisational decisions reflect

company policy. They can be delegated to others. Personal decisions refer to those
Notes
made by a manager as an individual and these cannot be delegated.
Characteristics of a Decision: Managerial decisions have a few important features:
(1) They are rational, i.e., based on reason. We usually have deliberation, calculation and
reasoning before we arrive at our final choice or solution to a problem, (2) They are
selective, i.e., involve selection of the best course from among the available alternative
courses. (3) They are usually purposive, i.e., relate means to the end. The solution to a
problem provides an effective means to the desired goal or end. (4) They are usually
positive but we may have even a negative decision, i.e., decisions not to act. A car
manufacturing company, Volkswagon, decided not to change the model (body style) and
size of the car though the other rival (Ford Corporation) was planning to introduce a new
model every year in the USA. In the words of Chester Barnard, “The fine art of executive
decision consists in not deciding questions that are now pertinent, in riot deciding
prematurely, in not making decisions that cannot be made effective, and in not making
decisions that others should make”. Thus, a negative decision is also important.
DESIRED
PROBLEM THE EFFECTIVE END OR
TO BE SOLUTION MEANS GOAL
SOLVED OF THE
PROBLEM
THE SOLUTION TO THE PROBLEM PROVIDES EFFECTIVE

MEANS TO ACHIEVE DESIRED END OR GOAL
Fig. 3.1: Purposive Decisions
5 Steps for Improving Decision Abilities

Ɣ Assess your decision effectiveness
Ɣ Identify your critical decisions
Ɣ Ensure success for individual critical decisions
Ɣ Build an organisation that decides and delivers
Ɣ Embed decision capabilities in everyday practices
The who’s who of Decisions. Decision making is the raison d’etre of small and
medium enterprises as well as of corporate life. One can improve decision making by
looking at the whole organisational system.
Indeed, the nature of today’s organisations is such that it can no
longer be taken for granted that a decision taken by managers higher up
in the hierarchy will be readily executed by those below – especially if
the decision involves major changes that people don’t fully understand
or believe will affect them negatively. “A lot of companies still look to the
organisational chart when they think about decisions, but it’s no longer
adequate. Things are more complex now”, says Rogers.
In Decide and Deliver, the authors first set out tools to measure a
Paul Rogers corporate’s decision making capabilities in terms of quality, speed, effort
and execution. The second step is to look at the corporate’s decision
architecture as separate from the organisational chart. Here, the book presents the
example of an Indian company, Pipavav Shipyard, which is into the construction of
commercial tankers, with plans to build naval ships, offshore equipment as well. The
crucial ongoing decisions here are of two types. The first is to do with what to offer in
each business in terms of range of services, pricing, lead times. The second is to do with

optimal use of dock space between businesses. “It’s not just the big, one-off strategic
Notes
decisions taken at the board level that are critical. There are also everyday decisions
taken in departments and divisions and on the front lines that are crucial and need to be
explicitly identified”, says Rogers.
The third step in Decide and Deliver is better management of the individual decision
making process and this includes tips like designing meetings around decisions and
limiting the number of participants to seven or less. The authors also recommend
separating the decision from the discussion of choices, a practice followed by pharma
company Roche, where a two-part system is followed for major decisions. Participants
first consider the facts and alternatives (including whether more are needed) and whether
everyone agrees on the criteria for making the ultimate choice. In a second, separate
session, they choose from among the alternatives and plan execution.
Decision making is so intrinsic to management that it’s impossible to see it in any
way as a new-new thing. Acknowledging this, Decide and Deliver simply revisits the old
management issues in its fourth step, viewing these through the decision making prism.
For example, “is our structure aligned with our strategy?” is rephrased as “does our
structure support the decisions most critical to creating value?” and the trite “are we
winning the war for talent?” is restated as “do we put our best people in jobs where they
can have the biggest impact on decisions?”
Ten such questions, covering structure, roles, processes, culture and so on, form
the basis of building an organisation geared to effective decision making. “Getting an
organisational system to support people in making and executing good decisions quickly
is the most challenging step. You have to determine which elements of the organisation
actually reinforce good decisions and which don’t. Then you adjust the parts getting in
the way”, says Rogers.
While the major decisions requirmg RAPID and such may take place at the top,
corporates need to embed decision capabilities down the organisational hierarchy.
Practices that work for the top management committee can and should be replicated in
individual divisions and departments and in other geographical locations so that
tomorrow’s leaders experience how they work.
In its transformation, ABB involved not just executive committee members but future
committee members and senior country managers from around the world. CEO Jurgen
Dormann, who set a new style for decisions and actions, composed weekly e-mail
newsletters that went to all employees, explaining the priorities, the challenges and what
the company was doing about them. Decide and Deliver quotes Tarak Mehta, global
head of ABB’s transforment business as saying: “It started to build like a wave”. It was
one quarter after another of delivering what we promised and exceeding external
expectations.’
“If you don’t know what’s behind the change, such imoprovements may seem like
magic”, says Rogers. “But there’s no magic to it, only discipline, commitment and
relentless focus on decisions”.
Chart 1: Types of Decisions
Basic and Routine Tactical and Programmed and Organisational

Strategic Unprogrammed and Personal
Basic Decisions: Tactical: Routine, Programmed: Those Organisational:
Unique,one-time unimportant, which are routine, Those made in the
decisions, involving containing repetitive, have set up role of company
long-term few alternatives. procedures, deal with executive, reflect

commitments, large Situation is given, low risk, more easily company policy;
Notes
investents, costly requirements are delegated, subject to can be delegated
mistakes. evident. The only quantitative Personal:
Examples: Plant problem is to find assessment programmed Decisions made
most economical into Computer. by a manager as
locations, product
adaptation of
to be made, basic Unprogrammed: New. an individual;
known resources.
policy decisions, unique.non-repetitive, cannot be
Decision shall
capital investment high risk, many courses delegated.
achieve the
Project. desired end with of action possible, no
Routine minimum effort easy quantitative
Decisions: and assessment, involve
Repetitive, involving disturbance. greater expenditure of
little thought, Strategic: resources, cannot be
tending to have only Decisions, programmed into
minor effect on the
upon basic computer.
organisation. These
objectives
decisions are made
and basic
with the help of
policies. They
standing plans,
involve either
e.g., procedures
finding out what
and policies. the situation is, or
Examples: changeing it,
Salesman’s call on either
customers on a finding out what
day. A clerk sorting the
parts into bins.
resource are or
should be.
Examples: Major
capital
expenditures,
Productivity.
Automation,
Reorganisation.
Plant layout,
Location, Size,
etc.
Note: 1. Basic strategic and unprogrammed decisions are identical or similar.
2. Routine, tactical, and programmed decisions have similar concepts.
3. Plans and policies represent management decisions.
3.3 Decision Making Aids
3.3.1 Routine Decisions

Routine or repetitive or programmed decisions are comparatively easy. For them,
the aids are also simple.
1. Habit: Routine decisions can rely heavily on habit. Practice leads to perfection.
Many complicated but repetitive jobs are done just by practice. Man cannot do
such jobs economically if he did not reduce the decision making to a habit
pattern.

2. Standard Procedures: Standard methods and standard procedures can be

Notes
followed for routine decisions. Predetermined standards can be used by a
decision maker, e.g., output and performance standards. These are good aids
in routine decisions. In the words of Simon, “the collective memories of
organisational members are vast reservoir of factual skills and operating
procedures”.
3. Policies: Policies prescribed by the top management are standing answers to
recurrent questions or problems. They can guide decisions and actions of
routine nature. Policies reduce the range of individual decisions and encourage
management by exception; the manager concentrates only on the unusual
problems to seek good solutions – the problems not precisely covered by
existing policies.
4. Organisational Structure: Organisational structure offers an invaluable aid in
routine decisions.For example, delegation and decentralisation enable
subordinates to take routine decision on their own account. Joint participation
aids in decision making. Management by objectives aids in routine decisions.
Information system aids in routine decisions.
Novel or One Shot Decisions

Basic, novel or one shot decisions are important non-programmed decisions. For
them the aids are:
1. Intuition: It is a subjective factor. It means a keen and quick insight. It is helped
by previous experience and training. Managers who have strong intuitive power can
provide a direct line to the essence of truth. It is independent of any reasoning process.
Intuition is an essential asset in decision making. Decisions can be taken quickly.
Decision making ability can be fully utilised. However, modern management relies more
and more on the rational and problem solving approach for decisions of vital importance.
In the last analysis, decisions based on intuition and/or inspiration are subjective and not
objective. Similarly, we have no scientific basis for such decisions.
2. Experience: One can make decisions and plan on the basis of previous
experience or one may copy the actions of others. Personal experience or experience of
others, even that of a rival may act as a good guide and a true manager can derive profit
from lessons of the past. This method of decision making reflects the traditional approach
to planning and decision making. It should be given due consideration, but the past
information must be properly analysed and used with other methods of taking decisions.
Experience is a good teacher. But it tends to emphasise excessive conservation. It lacks
creativity and it may reject good ideas which have not been given a fair trial.
3. Considered Opinions: Considered opinions should be used in decision making.
This is a usual method under democratic participative management. Group decisions can
provide maturity and we have due rationalisation in the decision making process.
However, considered opinions should be supported by analytical statistical techniques.
4. Facts (knowledge): It is now widely accepted that all managerial decisions must
be based on relevant, adequate and up to date facts and figures. Information is an
important management tool. Management information system and decision making
processes are today inseparable and inevitable. Factual data in decision making has
assumed unique importance under computer system. Of course, facts must be carefully
classified, analysed and interpreted. Every fact should be tested for its truth.
Quantitative Decision Making Tools: Modern management has at its disposal
refined mathematical and statistical aids, e.g., operations research, linear programming,
simulation, Monte Carlo, queuing theory, game theory, probability theory, break-even

analysis, PERT (Programme Evaluation Review Technique), sequence analysis, etc.
Notes
Computer and Management Information Service offer substantial help in decision
making.
3.4 Think Sharp

1. Single out the objective of your decision.
2. Prepare gather information about all aspects.
3. Look at the outcomes that you are required to achieve.
4. Thrash out all alternatives. Make a list of these options.
5. Assess each option against the outcomes listed.
6. Ascertain the best option.
7. Apply your decision into action and execution.
8. Evaluate the outcome of your decision to further hone your decision making
skills.
3.4.1 Importance of Management Science in Decision Making

Every managerial (decision making) situation can be divided into two parts:
(1) preparatory decision making, and (2) action decision making. Managers manage
by experience and knowledge. Experience alone (i.e., the process of personally
observing, encountering, or undergoing something) will prove inadequate. So too will the
mere acquaintance with facts, truths, or principles (i.e., knowledge). We need
combination of both experience and knowledge, for managerial decisions in today’s
complex organisations. Personal experience has to be supplemented and augmented by
knowledge of facts, principles, and laws applicable to similar business systems. Complex
managerial problems need systematised body of knowledge. Thus, management
scientists or operations research (OR) analysis can be invaluable service to the manager.
Under the systems approach, the manager and management scientists have something
in common, viz., their view point of an organisation as a system. OR analysts offer
quantitative solutions to management problems and management chooses the best
alternative on the basis of experience and judgement. Thus, operations research
analysts are attached to the top management for arriving at sound decisions on complex
management problems with the help of computers.
3.4.2 Decision Making and Uncertainty

Decision making process involves uncertainty and the unknown factors. It attempts
to reduce uncertainty and remove doubt. But as decisions involve the future and also the
choice among the probable alternatives, they cannot have absolute certainty and they
can lean to wrong conclusions, due to unpredictability and uncertainty of the future.
The higher the degree of certainty, the more simple, routine and repetitive decisions
can be. We can have easy comparison of the alternatives. Judgement will play a minor
role. Such decisions can also be standardised or programmed,
Top management must reserve the decision making power where we have: (1) high
uncertainty and risk, (2) high chances of being wrong due to unpredictability of the future;
(3) high cost of correction of mistakes or error in decisions. All decisions regarding basic
objectives, policies, and all production decisions are taken by top management. Under
the principle of exception, higher level management does not delegate the power to
decide when decisions involve higher element of risk and uncertainty. Routine repetitive

and programmed decisions can be taken by lower level management through delegation
Notes
of authority.
3.4.3 Management Tools in Decision Making

Neither break-even analysis, nor cost benefit analysis, nor operations research and
any other new quantitative decision techniques can help make final decisions. The
modern mathematical and statistical techniques suggest the best alternatives based on
facts and figures. But facts may not be adequate and we are living in a fast changing
environment. Hence, these techniques help the manager to take objective and sounder
decisions. In the final analysis, a manager is still the decision maker. He makes the final
selection. He takes the final decision. A manager has to bank on his experience, training,
knowledge, wisdom and judgement as well as foresight and imagination and then choose
the best course of action. The tools of management are used by a skilful manager to help
his judgement. These tools are not substitutes for management. In essence, a computer
cannot and shall not displace the manager in decision making. Of course, modern
management science techniques, e.g., OR (Operations Research) and management
information service, are of real value to management as efficient instruments in making
wise rational decisions for profitable operation.
3.4.4 How to Use Operations Research?

Operations research (or Management Science) is a scientific approach to problem
solving for executive management. Management scientist OR analyst goes through six
steps while analysing management problems: (1) Formulation of the problem.
(2) Construction of mathematical model to represent the system under investigation and
analysis. (3) A solution from the model. (4) Tests of the model and solution derived from it.
(5) Set-up controls over the solution. (6) Implementation of the solution, i.e., putting the
solution to work. OR analyst uses linear programming for solving problems of allocation
of resources. He uses queuing techniques for solving waiting line problems. Statistical
decision theory is used to determine the expected value of each alternative.
3.4.5 Limitations of OR (Operations Research)

(1) OR cannot make the final choice nor translate the decision into action; (2) At
times subjective judgement of the decision maker must override the recommendation of
OR; (3) OR techniques as yet are not adaptable to the prediction of customer reactions to
a given style, colour, pattern, etc., nor can OR clarify the alternatives in human relations
or personnel problems.
3.5 Decision Making Process

Decision making is frequently defined as the selection of the course of action from
two or more alternative courses of action. This definition is precise, easy to remember
and pinpoints our attention upon essential element of decision making activity.
Whatever a manager does, he does through decision making, i.e., making a choice.
Thus, management is always a decision making process. Please note that decision
making process is necessary for the formulation of all plans and policies.
Decision making process is most essential for the formulation of all plans and
policies. More importantly it helps in implementing the strategies and courses of action to
achieve the objectives of a small-scale industry. According to Larson, the key to
understand a decision process also lies, first in understanding the type of the problem
which has created the need for a decision, because the problems may differ
considerably.
The decision making process consists of: (i) identifying a problem; (ii) identifying the
Notes
alternatives; (iii) evaluation of alternatives in terms of goals sought; (iv) choosing an
alternative, that is, making a decision that will satisfactorily solve the problem; and (v)
implementing the decision quickly to achieve the objectives of the organisation.
The decision making process can be defined as a series of steps (step-by-step
approach) that start with an analysis of information (facts and figure) and ultimately
terminate in a solution – a selection from several available alternatives and verification of
this selected alternative to solve the problem under consideration. Verification may be
done immediately or at sometime in the future.
3.5.1 Models of Decision Process
A variety of models of the decision process tell us about the different phases or
stages in the decision process. The three important models of decision process are
attributed to Calkins (1959), Mager (1964) and Elbing (1978).
While Calkins and Elbing have proposed five sequential steps in decision making,
Mager thinks that the decision process is like a tree, with its trunk representing the final
decision and branches representing the possible alternatives out of which one is finally
chosen as a course of action. Further, Elbing stressed that decision making is not merely
making a choice, but making it on the basis of a well thought out strategy that ensures
sound decision making.
3.5.2 The Process-steps
The process of decision making has six distinct steps: (1) Defining of the problem;
(2) Analysing the problem; (3) Developing alternative solutions to the problem;
(4) Deciding upon the best solution, i.e., choosing the best alternative or selection of a
decision; (5) Execution of a decision or converting the decision into effective action;
(6) Follow-up after action. The last step must be included in order to ensure that the
decision are effective in meeting our set objectives.
1. Defining the Real Problem
The first step in decision making is to find the real problem and define it. A problem
originates when a manager is acutely conscious of an unsatisfied need – a felt need.
Pinpoint the gap between what we want to happen and what is likely to occur if no action
is taken. Identify the cause of the gap and/or any obstacle standing in the way of
achieving the desired objective. Sound diagnosis or defining the problem covers three
elements:
1 2 3 4 5 6
Define the Analyse Develop-

Real the ment of Decision Action Follow-up
Problem Problem Alternative After Action
Collection Analysis of Selection of Execution or Measurement

Careful Implementati
Classification the the most or Result
Identifica on Decision
Analysis of Alternatives Promising Against
tion of (Conversion
Facts and and the and Objective
Objectiv of Decision
Figures Probable Desirable Evaluation of
e or into Action)
Consequenc Course of Results of
Goal
es from the Action Selected
use of each (Choice- Decision and
Making) Action
FEEDBACK FEEDBACK
Fig. 4.2: Decision Making Process

1. A result that is desired: The gap between where we are and where we want to
Notes
go.
2. The key obstacle to activating the result: The root cause and other causes of
the gap.
3. The limits or boundaries within which we must find a satisfactory solution.
Let the problem be stated in terms of a gap. This will sharpen our objective of the
desired results. After specifying the results desired, we have to identify obstacles (real
causes) that must be overcome to reach these ends or objectives. We have to distinguish
between the symptoms and the real causes of a problem. A key obstacle can be
distinguished from a symptom. When a symptom is removed, the trouble persists, but
when a real cause is removed, the situation improves. Treating the fever (symptom) itself
will not work. The doctor will have to find out the real cause of the fever. This he does by
diagnosis.
While defining the problem, we have to find critical factors or strategic factors of the
problem. These factors limit or restrict the chances of a solution of the problem. These
are the root causes or obstacles. For example, the limiting or critical factor in
house-lighting is a fuse. A machine fails due to the lack of a screw. It means that the
screw is the limiting factor. A car otherwise in order suddenly stops. Lack of petrol is the
limiting factor. When choosing among alternatives or tentative solutions to the problem
under study, the more the decision maker takes into account those factors that are
limiting or critical to the later alternative solutions, the easier it is to make the best
decisions.
The limiting or critical factor is the root cause or obstacle to be removed. It may be
money, material, managerial skill, technical know-how, employee morale, customer
demand. It may be an external root cause, e.g., political situation, government
regulations. It may be constant or changing.
After specifying the result desired and the main causes or obstacles in achieving our
objectives, we have to find the boundaries imposed on acceptable solutions. For instance,
existing company policies and activities may influence the acceptable solution
considerably. We may have limited available resources and this will influence an
acceptable solution.
2. Analysis
Once the problem is defined and the right question is found, the next step is
systematic analysis of available data or information. Additional information may not be
necessary for correct solutions when the problems fall within the scope of existing
policies. In all other cases, getting the relevant and adequate facts is a necessary step for
sound decision making.
Information system and databases provide timely flow of relevant information to
management. This will assure proper information for analysis. Judgement is necessary to
secure only relevant facts for analysis. Management information service (MIS) and
decision making are closely inter-connected – as sound decisions are based on
collection, classification and analysis of facts and figures. Creative ideas help creative
search for alternative solution to a problem.
3. Development of Alternative Solutions

Once the problem is defined and the available information is analysed, the decision
maker is ready to take the third step, the developing of alternative courses of action.
Logic terms this step as the formulation of hypotheses tentative explanations or
conclusions. The development of alternatives is the central step of the decision making

process. At this stage we come across creative or original solutions to the problems. The
Notes
techniques of Operations Research (OR) and other computer appliances are special aids
in the development of alternative courses of action. Modern management uses these
techniques in decision making.
4. Selection of the Decision

Rarely does a manager have only two alternatives from which he has to select one.
In practice, he will have many alternatives from which he will choose one. Of course,
there is always one other alternative, viz., to do nothing.
Making, the correct choice is not easy. In business, decisions are neither black nor
white. Many a time, they are grey. There are four criterias in choosing the best
alternative – picking up the best from among the possible solutions. To take a decision
and act thereon is important. In industry (SSI) time is money. Timing problems elude
analysis, depend on perception and are very difficult to systematise. (4) Limitations on
the resources at our disposal also influence our final choice. Solutions possible on paper
may fail in practice due to lack of resources. Human resources are always limited. We
must have people to carry-out our decisions. Their vision, competence, skill and
understanding will determine finally what they can and cannot do.
The worth of a decision is governed by three concepts: (1) Does the decision
contribute towards the achievement of stated objectives? (2) Does it represent the
maximum degree of economic effectiveness? and (3) Is it capable of execution?
5. Implementation of the Decision

It is the final step in decision making. An SSI entrepreneur has to put the selected
decision into action. As decisions are made effective through the action of other people,
we need three things:
(1) Effective communication of decisions is necessary. Information must flow to
those people who will convert the decision into action. Decisions must be communicated
in clear, concise and understandable terms to the subordinates. (2) Securing employee
acceptance is necessary in the execution of the decision. Group participation in both
creative thinking and decision making will facilitate the smooth execution of decisions. A
manager can look after diagnosis and analysis. But in developing alternative solutions
and in choosing the best solution, group participation is essential to improve the quality
and to secure employee support. (3) Correct timing of decision execution will minimise
the resistance to change. Every decision introduces a change and people are reluctant to
accept a change. Hence, timing plays an important role in effective decisions.
6. Follow-up System
He who makes no mistake makes no progress. Follow-up system is essential to
modify decisions, if necessary, at the earliest opportunity while the decision is verified
through implementation. In management cycle we have planning (deciding)-action-
control-planning-action-control. This is an ongoing process. All facts cannot be secured
because of cost and time involved in analysing the problem. Hence, we may have to
modify our decisions and remove the mistake as early as possible.
A follow-up system will ensure the achievement of objectives. It is exercised through
control. In practice, planning and control are inseparable and they are the two sides of
the same coin.
Conclusion
The concept of decision making and implementing is quite crucial for the success of
a smallscale industry. By and large, small-scale industries are individual organisations,

wherein the leadership is vested with the entrepreneur/proprietor or partner. The process
Notes
of decision making is one of continuous from selection to managing it. It calls for right
decision at right time. More importantly, search for change, which the small
entrepreneur/industrialist always looks for, involves continuous decision making and
essence of quality decision making is to make sure that each decision, made is firmly
anchored in position before it is operational. Entrepreneurial dynamics is, however, best
sustained and nourished through effective decision making. ‘Making effective
decisions’, therefore, ranks the highest amongst the important concerns of the
entrepreneur’s managerial competence.
In a growing, dynamic and forward looking set up, decision making is a continuous
process since no single route can necessarily be perfect. In the case of small industry,
the entrepreneur has to take a correct and effective decision at every stage of its
operation from conception onwards while moving along the determined course of action,
it is not unusual to encounter unexpected difficulties and problems. More often than not
these problems may assume unwieldy dimensions. The quality of decisions taken while
grappling with such situations more or less represents the quality, the managerial
(entrepreneurial) apparatus. By and large, entrepreneurial decisions are innovative and
motivated. Decisions determines the level of success of the enterprise, towards the
ultimate goods. So, decisions which have far-reaching and long-term perspectives to the
enterprise have to be taken after careful study and consideration. Obviously, the
entrepreneur has limited alternatives and he has to choose the best out of alternatives
available for achieving excellence. With experience, the entrepreneur will sharpen his
skills of decision making to achieve his goals. In a way, the process of decision making is
also a process of learning on an ongoing basis.
3.6 Summary
The concept of decision making and implementing is quite crucial for the success of
a small scale industry. It is the making of a continuous act from selecting to managing. By
and large, entrepreneurial decisions are innovative and motivated. It determines the level
of success of the enterprise to the ultimate goods.

1. Decision Making may be defined as selection of one course from ____
alternatives.
(a) No
(b) Present
(c) Past
(d) Multiple
2. In decision making, there is attempt to ______ uncertainty and _______ doubt.
(a) Increase, create
(b) Increase, decrease
(c) Decrease, increase
(d) Decrease, clear

1. Explain the concept of decision making.
2. How does decision making help the entrepreneur?

3. Describe in brief models of decision process.
Notes
3.9 Key Terms
Ɣ Decision: Selection of one course from two or more alternatives.
Ɣ Decision making: It is a conscious human process involving individual and
social phenomena.
Ɣ Standard procedures: Pre-determined standards used by decision makers.
Ɣ Intuition: Keen and quick insight.

1. (d) Multiple
2. (d) Decrease, clear

1. Meredith, J.R. (2000), Project Management, John Wiley & Sons.
2. Anthony, R.N. Management Control, Tata McGraw Hill.
3. Desai, V. (2014), Project Planning, Himalaya Publishing House Pvt. Ltd.

Facets of Project Analysis 35
Notes
Unit 4: Facets of Project Analysis
Structure:
4.1 Introduction
4.1.1 Technical Analysis
4.1.2 Economic Analysis
4.1.3 Financial Analysis
4.2 Social Analysis
4.3 Institutional Analysis
4.4 Corporate Appraisal
4.5 Environmental Analysis
4.6 Monitoring the Environment
4.7 Logistics
4.7.1 Procurement
4.8 Use of Consultants
4.9 Summary
4.12 Key Terms
Objectives
Ɣ Understand various dimensions of technical analysis
Ɣ Discuss the logistics as an important aspect of project implementation
Ɣ Explain the need of consultants
4.1 Introduction
Some of the principal lessons that the World Bank has learned in assisting its
member countries in managing their investment resources are offered not in the belief
that they provide final answers to the formidable problems of development, but in the
conviction that better national investment planning, macro-economic and sector policies,
and project work can ease the path of development, bring its benefits to people sooner,
and distribute them more equitably.
Throughout the several stages of the project cycle, various dimensions of project
work are addressed, both separately and in relation to each other, and in varying degrees
of detail.

Notes 4.1.1 Technical Analysis

The various dimensions, technical analysis is perhaps the most familiar. Among the
issues of technical design are size, location, timing, and choice of a technology package.
We have already alluded to the need to select a technology appropriate to the
circumstances of the country and the requirements of the project. The point bears
repeating in any list of lessons. “Appropriateness” is a relative concept. It generally
means that the technology should be determined in relation to the objectives of the
project, to the impact on intended beneficiaries, and to local conditions, including the
availability and cost of capital, raw materials, and labour, the size of markets, and the
present and potential capacity for planning and implementation.
Numerous trade-offs are implicit in these considerations: for example, the
technology may often have to be reduced in complexity to fit the capabilities of local
institutions or the socio-cultural traditions of the beneficiaries. The range of choice is very
wide, from sophisticated, high technology for long-distance telecommunications even in
the least developed countries. Whatever the choice, it is important that it not be unduly
biased by government interventions or price distortions of the kind referred to earlier.
Technical analysis also provides an opportunity to consider how a country can best
take advantage of its investment plan, policy framework, and development projects to
build a capacity to use science and technology effectively throughout the economy. Both
trained people and institutions capable of utilizing their skills are required. In the early
stages of a country’s development, the emphasis should be on building local capacity to
import technology from abroad knowledgeably and to adapt it to local conditions. At the
stages, the emphasis should shift to the development of local technology and its
integration with imported technology, and to the encouragement of local research and
innovation.
4.1.2 Economic Analysis

The basic question that economic analysis addresses is how to allocate scarce
resources among many competing uses. It seeks to determine not only whether a project
can be expected to provide a satisfactory return to the economy, but also whether there
is an alternative way of achieving the same objectives that would offer a higher return.
The analysis entails a comparison of costs and benefits with and without the project, both
discounted to present values, through the use of analytical techniques that by now are
highly refined — though no more accurate than the underlying data. Its central
concept — that, for purposes of economic analysis, resources should be valued in terms
of their opportunity cost to the economy in their best alternative use — is applicable to all
economic systems, whether market-oriented, centrally planned, or a combination of the
two.
Most lending agencies use cost-benefit analysis to assess the projects they help
finance, and many developing countries are applying this analysis in one form or another
to projects that they fund from public resources. Private industrial enterprises also use
cost-benefit analysis for major investments. If done properly, it can be a powerful tool for
guiding investment choices.
Cost-benefit analysis encounters some practical problems, among them: how to
define the situation “with” and “without” the project (which should not be confused with
the situation “before” and “after” the project); how to handle sunk costs incurred before
the analysis (the short answer is to disregard them); how to establish the shadow (that is,
opportunity) prices for labour and capital when market prices are distorted for various
reasons; and how to deal with nonquantifible benefits. For most of these problems of
definition or measurement, reasonable approaches can be found that are consistent with

the realiability of the available data. The results of the analysis can be presented as a
Notes
measure of net present value, as an internal rate of return, or as a cost-benefit ratio; each
has its particular uses.
Not all types of projects are amenable to cost-benefit analysis; it is not customarily
used, for example, in evaluating education or health projects. Nor does it have the same
meaning in different sectors. In power and water, for example, where prices are publicly
administered rather than fixed by the marketplace, the economic rate of return is a
minimum estimate, more indicative of the appropriateness of the regulated tariffs than of
the real return to the economy. Cost-benefit analysis, therefore, is not very useful in
comparing the merits or relative ranking of projects in different sectors. Much depends on
the common sense, judgement, and even ingenuity of the analyst. Whim, bias, and
intuition will also inevitably play a part. These caveats notwithstanding, economic
evaluation can introduce rationality into the decision making process, identify and
measure risks, and avoid some of the more serious mistakes that can occur even in the
best laid investment plans.
4.1.3 Financial Analysis

Issue of financial analysis arise in the course of project design in several ways. The
first and most universal concern, applicable to all types of projects, is that there be
sufficient funds both to complete the project and to operate and maintain it subsequently.
This sounds obvious, but far too many development projects have been launched without
adequate consideration of the future availability of funds. This is notably true for
education projects, in which recurrent costs for teachers’ salaries may quickly exceed the
capital costs of the facilities; or for projects in irrigation, roads, health, water supply, and
other infrastructure, in which facilities once completed may deteriorate rapidly for want of
adequate maintenance. This reluctance to provide adequate recurrent expenditures
reflects in part the greater political appeal of new investments and in part the
unwillingness of most external leaders to finance such expenditures.
A second financial concern is to recover an appropriate portion of the costs from the
beneficiaries or users. A cost recovery policy has three separate but related objectives:
Ɣ Economic efficiency: The resources provided under a project are used most
efficiently when, they are priced in accordance with their marginal or
opportunity cost. The extent to which efficiency prices can be applied, however,
varies widely from sector- to-sector.
Ɣ Income distribution: In the interests of equity, the prices or other charges levied
to recover costs should take into account differences in income levels (as
affected by the project) and in ability to pay.
Ɣ Revenue generation: Governments in developing countries, being short of
resources, need to generate revenue from projects. In addition, revenue-
earning enterprises need to be made or kept financially viable. If rural and
urban development, water supply, and other projects are to be replicable on
the scale necessary to reach the large numbers of potential beneficiaries, a
substantial contribution from the initial beneficiaries will often have to be
secured.
Difficult trade-offs may be required among these sometimes conflicting objectives,
and the poorer the country the more painful the choices may be. Cost recovery for basic
services can be an explosive political issue. This fact, together with administrative
considerations, determine what can be accomplished and how quickly. Two important
rules to follow are that new or increased levies should be related to benefits as they

materialise and imposed in small but regular increments, and the similar situations
Notes
should be treated similarly to avoid the appearance of discrimination.
The financial viability of revenue-earning enterprises — electric and water utilities,
public and private industries, railways, telecommunication entities, and so on — can be
translated into three subsidiary objectives or tests of performance:
Ɣ Will the enterprise have sufficient revenue to earn a reasonable return on its
invested capital? As part of the test of “reasonableness”, will it be able to
generate enough funds internally from its operations to make a satisfactory
contribution to its future capital requirements?
Ɣ Will the capital structure of the enterprise enable it to meet all of its capital
obligations, including the service of its debt, in a timely manner?
Ɣ Will there be adequate liquidity, that is sufficient working capital to cover all
current operational requirements?
Insistence on financial viability is an important means of imposing discipline on an
enterprise and encouraging efficient management and use of resources. There is almost
always some scope for improving financial performance by raising operating standards
and reducing waste. Achieving financial viability will, however, ultimately throw issues of
tariff policy into bold relief. In many cases, increases in prices — often substantial — will
be necessary to reach the financial objectives. To raise the price of a basic product or
service that figures prominently in the cost of living is an act of political courage. But not
to raise the price may, in the long run, have even more adverse economic, and therefore
political, consequences. During an inflationary period, governments are especially
reluctant to increase the cost of basic goods and services. This is understandable, but
failure to raise prices may also have an inflationary impact if the government must borrow
to cover the deficits.
One means of easing the bureaucratic and political pain of raising the price of public
services, as we have noted, is to adjust prices in small increments and at regular
intervals. Another is to make price increases automatic or quasi-automatic, as and when
fuel costs are passed on to users through equivalent increases in electricity prices
without the need for government approval each time.
4.2 Social Analysis

Social analysis deals with the impact of projects on people. Its role is to consider the
suitability for the proposed project design for the people it is intended to serve, to make
proposals for improving the “fit” between the two, and to fashion strategies for project
implementation that can be expected both to win and hold people’s support and to
achieve project goals by inducing changes in social attitudes and behaviour. Some
projects — in such fields as rural developments, education, and health — are clearly
oriented towards people. Infrastructure projects are less so, but even these may have to
deal effectively with people, as workers or consumers, in order to achieve their objectives.
A project that runs counter to or ignores the traditions, values, and social organization of
the intended beneficiaries, or that is based on objectives which they do not share, has
little prospect of success.
Social analysis is a relative newcomer among the dimensions of project analysis. It
focuses on four principal areas:
Ɣ The socio-cultural and demographic characteristics of the project population.
Ɣ The way in which the project population is organized to carry-out productive
activities.

Ɣ The project’s cultural acceptability, including its capacity for both adapting to
Notes
people’s behaviour and perceived needs and for bringing about changes in
them.
Ɣ The strategy necessary to elicit commitment from the project population and to
ensure their sustained participation throughout the project cycle.
Predicting social behaviour is even more uncertain than forecasting financial or
economic behaviour. Project planners have often made unduly optimistic assumptions
about local people’s interest in and need for a project, the economic and social incentives
for them to participate, and the rate at which change in their social condition can be
brought about. Social analysis with professional training and broad experience can
improve the projections, however, more important, they can make a significant
contribution to a project’s success by helping to design effective organizations and
approaches to achieve desirable change in social behaviour.
Social analysis of projects has frequently failed to take adequate account of the
particular interests and needs of women. Although they constitute half the world’s
population, women have reaped far less than their share of the benefits of development.
Women tend to have less schooling them men, their mobility is constrained by economic
and social considerations, and they often face legal barriers to their ownership of assets
or access to credit. Yet women play a key role in the development process, both as
producers and consumers; for example they provide most of the agricultural labour used
in production, harvesting, marketing, and storage. Moreover, the central position of
women in family life profoundly influences attitudes and decisions on education, nutrition,
health, and family size. Thus, even if women never enter the formal labour market,
ensuring that they receive an adequate education may be one of the best investments a
country can make.
Failure to appreciate the role of women when projects are designed and
implemented is not only inequitable but also retards the pace of economic growth.
Decisions about which technologies to use and about how to provide a wide range of
services must be made with full regard to women’s needs and constraints; otherwise,
project benefits will be reduced and the position of women made even worse. In many
respects, women are the largest underutilized resource for development.
4.3 Institutional Analysis

In recent years, institutional analysis has become one of the important dimensions
of project work. The outcome of development projects depends on the quality of the
institutions responsible for them. Yet institutions in developing countries typically suffer
from an acute shortage of experienced managers and staff, an excess of untrained staff,
overstrained services and facilities, low wages and salaries, inadequate data and
information system, and an inimical policy environment. There are no standard solutions
and few readily transferable institutional models from either developed or other
developing countries. Institutional development must be seen as a lengthy process of
experiment and adaptation, subject to many reverses when political or economic fortunes
change. Still, when strong institutions have been forged, they have played a key role in
development.
The overall policy environment affects the performance not only of project but also
of the institutions responsible for them. If managers of these institutions are compelled to
spend time and effort counteracting the impact of government economic policies (such as
a critical shortage of foreign exhcange for spare parts owing to an overvalued exchange
rate), they cannot build long-term capacity effectively. Institutional problems multiply
rapidly when government policies seriously distort the economic environment or when
government regulations impose extraneous requirements, such as the employment of
Notes
extra staff for political or social reasons.
Institutional problems have been compounded as more complex development
objectives have been assigned to projects. Executing multicomponent projects or
projects focused on alleviating poverty or upgrading social services has placed heavy
demands on institutions. Knowledge of the economic, social, and behavioural
characteristics of small farmers, urban squatters, or disadvantaged tribal people is still
rudimentary. Understanding of the management and institutional techniques for dealing
with such projects is also at an early stage.
Institutions in the public sector present a particular challenge, both because of their
importance and because of the many problems they characteristically confront. A
comprehensive reform of the public administration — however badly needed — is a very
ambitious undertaking. Few countries, developed or developing, have successfully
carried out such a reform in the face of the strong resistance that these efforts generate.
While careful diagnosis of the problem of the public service is a necessary first step in
establishing an overall strategy for change, implementing the strategy will almost
invariably call for a selective approach. The best results have been achieved by
concentrating on a few of the more critical problems. The ones to tackle first are those
that seriously constrain the performance of the public administration and that are within
its capacity to solve; in addition, it should be possible to mobilize and maintain public
support for the reform effort.
Parastatals and other forms of state-owned enterprise have proliferated in recent
years. Their performance has at best been mixed, and concern has been growing about
the need to increase their efficiency, reduce their deficits that burden the public budget,
and avoid political interference in their affairs. Given the preponderance of public
enterprises in the economies of many developing countries, reforming them has
repercussions going far beyond improved project performance. Some governments, in
fact, are beginning to devote considerable effort to limiting the spread of public
enterprises and to transferring ownership of some of these enterprises to the private
sector. The legitimate demands on the public sector are very large, and the capacity for
public management is among the scarcest of development resources. This capacity
should, therefore, be reserved for use where it is most needed and most likely to be
efficacious; governments should exercise caution in deciding which fields are appropriate
for public ownership.
For those agricultural and institutional parastatals carrying out processing,
manufacturing or marketing operations that private producers and merchants can do
efficiently, the simple answer may be to abolish them. For other parastatals, reducing the
number of staff, rationalizing their structures, and appointing and promoting staff on the
basis of merit are among the measures needed. In several countries, policy reforms are
being tried that will improve the “rules of the game” under which the enterprises operate.
This reform has two objectives: to give public enterprises greater authority and autonomy
to carry-out their activities in accordance with broad goals and specific performance
targets agreed on with the government; and to hold the enterprises accountable for their
results, while improving the flow of information to government about their performance.
A widespread weakness of development institutions, particularly but not exclusively
in the public sector, is the shortage of qualified managers at the middle and upper
echelons and of experienced specialists such as accountants and engineers. This is a
basic characteristic of underdevelopment that can change only gradually. In the long run,
the education through universities, vocational schools, and management institutes —
must provide the solution. But some steps can be taken immediately. Expatriate

managers and consultants can be used to free bottlenecks in the short run — as long as
Notes
care is taken that this does not delay the development of local managerial capacity, but
rather fosters it through counterpart and on- the-job training. Whatever the source of
management, greater attention to organizational questions and improved management,
accounting, and information systems and procedures can enhance effectiveness.
Continuity of management is also important; frequent changes for political reasons are
highly disruptive.
One fruitful approach to strengthening management in the public service is through
improved incentives. Salary and other financial incentives for public officials cannot
normally match those in the private sector, but disparities can be narrowed. In particular
cases, elements of the financial package other than pay can also be improved without
disturbing prevailing standards in the public service. Establishing “super-grades” outside
the normal system may be a way to meet special needs, while making lateral entry and
exist easier can encourage managers to view public service as a natural stage in a
career.
Programmes for training managers and staff also deserve much more attention. The
potential contribution of such programmes is very large, yet experience shows that too
often they have little effect. Training programmes cannot be added on to projects at the
last moment, but must be planned carefully in advance and properly executed. Adequate
resources, must be provided and skilled trainers recruited. As a general rule, the closer
training is to the workplace in which it will be used, the more effective it is likely to be.
This argues for on- the-job training when feasible.
4.4 Corporate Appraisal

Appraisal means Assessment and Estimation.
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 are:
1. Marketing and Distribution
2. Production and Operations
3. Research and Development
4. Corporate Resources and Personnel
5. Finance and Accounting
Marketing and Distribution

Ɣ Market image
Ɣ Product line
Ɣ Market share
Ɣ Distribution network
Ɣ Customer loyalty
Ɣ Marketing and distribution costs
Production and Operations

Ɣ Condition and capacity of plant and machinery
Ɣ Availability of raw materials, sub-assemblies and power
Ɣ Degree of vertical integration
Ɣ Locational advantage
Ɣ Cost structure

Research and Development
Notes
Ɣ Research facilities, laboratories and equipment, modelling and testing facilities
Ɣ Capability of the firm to invest in R&D
Ɣ Presence of well-known researchers and scientists
Ɣ Track record of new product developments
Ɣ Co-ordination between Research and Operations
Corporate Resources and Personnel

Ɣ Corporate image
Ɣ Clout with governmental and regulatory agencies
Ɣ Dynamism of top management
Ɣ Competence and commitment of employees
Ɣ State of industrial relations
Finance and Accounting

Ɣ Financial leverage and borrowing capacity
Ɣ Cost of capital
Ɣ Tax structure
Ɣ Relations with shareholders and creditors
Ɣ Accounting and control system
Ɣ Cash flow and liquidity
4.5 Environmental Analysis

It is now widely recognized that environmental analysis is necessary for a country to
ensure the sound management and use of its natural resources as an integral part of its
strategy for economic growth. Desertification, deforestation, soil erosion, overexploitation
of such renewable resources as fisheries, and air and water pollution are lowering the
carrying capacity of the environment. Usually the poor are disproportionately affected by
environmental degradation. The objective of environmental management should be to
achieve a balance between human demands on the natural resource base and the ability
of that resource base to meet these demands on a sustainable basis in the interests of
future generations as well as those alive today.
With careful environmental management, the pace of economic and social progress
need not be slowed. In environmental work, the “ounce of prevention” is almost always
more important and less costly than the “pound of cure”. Sometimes remedial action may
not be feasible at all. All proposed development projects should be screened to detect
those with a potentially harmful impact on the environment. Most environmental problems,
if properly anticipated, can be dealt with at relatively small cost — usually less than 5 per
cent of total project cost. Analysis of the trade-offs between different design features and
their environmental costs and benefits should be a routine part of project work; the
analysis is complicated, however, by the fact that the standard time-discounting
methodology, gives insufficient weight to environmental costs and benefits because of
their long-term nature.

4.6 Monitoring the Environment Notes
Effective Monitoring
In order to keep a tab on the progress of the project, a system of monitoring must be
established. This helps in:
Ɣ Anticipating deviations from the implementation plan
Ɣ Analysing emerging problems
Ɣ Taking corrective action
The environment of any organization is “the aggregate of all conditions, events and
influences that surround and affect it”.
Characteristics of Environment
Ɣ Environment is complex: The environment consists of a number of factors,
events, conditions, and influences arising from different sources. All these do
not exist in isolation but interact with each other to create entirely new sets of
influences.
Ɣ Environment is dynamic: The environment is constantly changing in nature.
Due to the many and varied influences operating, there is dynamism in the
environment, causing it to change its shape and character continuously.
Ɣ Environment is multi-faceted: What shape and character an environment will
assume depends on the perception of the observer. A particular change in the
environment, or a new development, may be viewed differently by different
observers. This is seen frequently when the same development is welcomed
as an opportunity by the company while another company perceives it as a
threat.
Ɣ Environment has far-reaching impact: The environment has a far-reaching
impact on organisations. The growth and profitability of an organisation
depends critically on the environment in which it exists. Any environmental
change has an impact on the organisation in several different ways.
External and Internal Environment

The external environment includes all the factors outside the organisation which
provide opportunities or pose threats to the organisation. The internal environment refers
to all the factors within an organisation which impart strengths or cause weaknesses of a
strategic nature.
An opportunity is a favourable condition in the organisation’s environment which
enables it to consolidate and strengthen its position. An example of an opportunity is a
growing demand for the products or services that a company offers.
A threat is an unfavourable condition in the organisation’s environment which
creates a risk for, or causes damage to the organisation. An example of a threat is the
emergence of strong new competitors who are likely to offer stiff competition to the
existing companies in an industry.
A strength is an inherent capacity which an organisation can use to gain strategic
advantage. An example of a strength is superior R&D skills which can be used for new
product development so that the company can gain a strategic advantage.
A weakness is an inherent limitation or constraint which creates strategic
disadvantages. An example of a weakness is overdependence on a single product line,
which is potentially risky for a company in times of crisis.

Ɣ Promising investment idea enables a firm/entrepreneur to exploit opportunities
Notes
in the environment.
Ɣ The firm must systematically monitor the environment and assess its
competitive abilities. For purposes of monitoring, the business environment
may be divided into six broad categories:
1. Economic Sector
2. Governmental Sector
3. Technological Sector
4. Socio-Demographic Sector
5. Competition
6. Supplier Sector
Economic Sector
Ɣ Growth of primary, secondary and tertiary sectors
Ɣ State of the economy
Ɣ Overall rate of growth
Ɣ Cyclical fluctuations
Ɣ Inflation rate
Ɣ Linkage with the world economy
Ɣ Trade surplus/deficits
Ɣ Balance of Payment situation
Governmental Sector
Ɣ Industrial policy
Ɣ Government programmes and projects
Ɣ Tax Framework
Ɣ Subsidies, incentives and concessions
Ɣ Import and export policies
Ɣ Financing norms
Ɣ Lending conditions of financial institutions and commercial banks
Technological Sector
Ɣ Emergence of new technologies
Ɣ Access to technical know-how; foreign as well as indigenous
Ɣ Receptiveness on the part of industry
Socio-Demographic Sector
Ɣ Population trends
Ɣ Age shifts in population
Ɣ Income distribution
Ɣ Educational profile
Ɣ Employment of women
Ɣ Attitude towards consumption and investment
Competition
Ɣ Number of firms in the Industry and their market share (of the top five)
Ɣ Degree of homogeneity and differentiation among products

Ɣ Entry barriers
Notes
Ɣ Comparison with substitutes in terms of quality, price and functional
performance
Ɣ Marketing policies and practices
Supplier Sector
Ɣ Availability and cost of raw materials and sub-assemblies
Ɣ Availability and cost of energy
Ɣ Availability and cost of money
4.7 Logistics
Managing the logistics process is an important aspect of project implementation.
Delays in acquiring the necessary goods and works are likely to be compounded into
further delays and increased costs for the project as a whole. Logistics is, therefore, a
process to be carefully planned, organised and managed, the more so since the number
of ways things can go wrong sometimes appears endless.
Logistics management must serve three objectives. The first is to help ensure the
efficient execution of the project by acquiring materials and equipment with the optimal
combination of quality, price, and delivery time. The second is to promote such national
goals as the development of indigenous industry, the balanced regional development of
industry or the support of small-scale enterprises. The third is to be comply with the
procurement regulations of any external lending institutions helping to finance the project.
There are a wide variety of types and methods of logistics. The one which is most
appropriate depends on the size and nature of the project, the particular materials or
equipments to be procured, and the regulations of lending agencies. For large projects,
international competitive bidding is generally the best way of ensuring efficient logistics,
safeguarding against waste or corruption, and satisfying the interest of lending agencies
that all qualified firms be permitted to bid. Local competitive bidding is more appropriate
for small-scale procurement of materials and equipment in which foreign firms will not be
interested; changes in procedure may be necessary to ensure effective competition
among local firms.
4.7.1 Procurement
Managing the procurement process is an important aspect of project implementation.
Delays in acquiring the necessary goods and works are likely to be compounded into
further delays and increased costs for the project as a whole. Procurement is therefore a
process to be carefully planned, organized, and managed, the more so since the number
of ways things can go wrong sometimes appears endless.
Procurement must serve three objectives. The first is to help ensure the efficient
execution of the project by acquiring goods and works with the optimal combination of
quality, price, and delivery time. The second is to promote such national goals as the
development of local industry, the balanced regional development of industry, or the
support of small-sale enterprises. The third is to comply with the procurement regulations
of any external lending institutions helping to finance the project.
There are a wide variety of types and methods of procurement. Which is the most
appropriate depends on the size and nature of the project, the particular goods or works
to be procured, and the regulations of lending agencies. For large projects, international
competitive bidding is generally the best way of ensuring efficient procurement,
safeguarding against waste or corruption, and satisfying the interest of lending agencies

that all qualified firms be permitted to bid. Local competitive bidding is more appropriate
Notes
for small-scale procurement of goods and works in which foreign firms will not be
interested: changes in procedures may be necessary to ensure effective competition
among local firms.
4.8 Use of Consultants

Procurement of consulting services raises different issues. There is, first, the
question of need. Most of the services for which consultants might be recruited can, in
principle, be provided by local staff of the project agency if they are competent,
experienced, and available. When such in-house capacity does not exist (as may often
be the case) and cannot be put in place by additional training soon enough to meet the
demands of the project, the next best choice is the use of local consulting firms.
Establishing a local consulting industry is desirable both to provide some competition to
stimulate agency staff and to supply more specialized skills or expert services. When
local services are not available, firms from other developing countries may offer the dual
advantages of better knowledge and understanding of comparable local conditions and
relatively low costs. There will, however, remain some assignments — especially for
large or complex projects and those requiring highly technical knowledge — for which
only expatriate consultants from developed countries are qualified. Joint ventures
between foreign and local consulting firms, if entered into voluntarily, are often a good
way of developing local capacity.
The consultant-client relationship is a close, personal one; when a satisfactory
partnership already exists with a particular firm, it may be eminently sensible to continue
it. When no such relationship exists, or when for other reasons it is desirable to invite
proposals from a short list of qualified firms, the selection process should ensure that
price considerations are subordinated to a concern with quality. The cost of consulting
services is usually only a small fraction of total project costs, but the quality of the work
performed can have an impact on the final project out of all proportion to the cost
4.9 Summary
Throughout the several stages of the project cycle, various dimensions of project
work are addressed, both separately and in relation to each other, in varying degrees of
detail. Technical analysis provides an opportunity to consider how a country can take
best advantage of its economic plan. Economic evaluation can introduce rationality into
decision making, which can avoid some of the most serious mistakes. Financial concern
is to recover an appropriate portion of the cost from the beneficiaries.

1. In the early stages of a country’s development, one should import technology
knowledgeably and adapted to _______ conditions.
(a) Present
(b) Past
(c) Future
(d) Local
2. Social analysis deals with impact of projects on _______.
(a) Society

(b) Leaders
Notes
(c) Experts
(d) People
3. Usually, _______ are disproportionally affected by environmental degradation.
(a) Wise
(b) Educated
(c) Rich
(d) Poor

1. Give a brief account of facets of project analysis.
2. Why is social analysis and environmental analysis important?
3. Explain the role of consultants.
4.12 Key Terms

Ɣ Appropriateness: It means technology should be determined in relation to
objectives and requirements of the project.
Ɣ Deforestation: Cutting of trees to make way for city development.
Ɣ Logistics: It is a process that is carefully planned, managed and organised for
safety.

1. (d) Local
2. (d) People
3. (d) Poor

1. Chandra, P. (2002), Projects, Tata McGraw Hill.
2. Patel, B,M. (2000), Project Management, Vikas Publishing House.

Notes
Unit 5: Portfolio Planning Tools
Structure:
5.1 Introduction
5.1.1 Steps in Business Planning
5.1.2 Uses of a Business Plan
5.2 Business Plan Outline
5.2.1 Right Thing at the Right Time
5.2.2 Technique of Planning
5.2.3 What is Planning?
5.2.4 Project Planning
5.2.5 Project Planning Matrix
5.2.6 Project Approach
5.2.7 Types of Planning
5.2.8 Phases of Planning
5.2.9 Situation Appraisal
5.2.10 Areas of Planning
5.2.11 Phases of Project Planning
5.2.12 Objectives and Strategies
5.3 Summary
5.6 Key Terms
Objectives
Ɣ Understand the steps involved in business planning
Ɣ Discuss techniques of planning
Ɣ Explain types of planning and appraisal
Ɣ Talk about objectives and strategies
5.1 Introduction
Project planning is emerging as an important area of project management. Project
planning will cover all aspects relating to an enterprise — a project. Broadly, planning
implies comprehensive and coordinated activities in all facets of an enterprise and is
aimed at the acceleration of development. Herein macro- and micro-planning are
blended to ensure the success of the project. It, therefore, involves commitment at levels
to the development ideal. Project planning is a process involving the joint effort of a team

Portfolio Planning Tools 49
of entrepreneurs, technicians and skilled workers. A planned project is a tool to achieve

Notes
the objectives of the project at a minimum cost.
Clearly, change can no longer be considered as an aberration.
In an age of perpetual change, planning presents a special problem for business.
For example, how do you plan a product with a five-year lead time? And with markets
changing and competition intensifying almost daily, how do you plan and develop
systems to guide your company through the present and on to the 21st century?
Business’s only answer is to plan for change as a way of life. Rather than making
only occasional and drastic course corrections, business must now get out in front of the
change curve and lead change rather than follow it. Business must invent a whole new
concept of itself. It must see itself not land bound by tradition and predetermined plans
but rather flowing along with the river of change. It must work with nature, not against it. It
must make progress by changing the very essence of the enterprise, by creating new
opportunities and by creating its own future.
Having an effective plan for crisis is usually about 90 per cent of the solution to that
crisis. But getting ahead of the change curve doesn’t mean that business people must
make advance plans for each and every contingency. You can go broke buying
insurance. And you can paralyze an institution with too much planning.
5.1.1 Steps in Business Planning

The basic job of the entrepreneur is to conceive business visions and turn them into
business realities. Vision has two parts. The first is the intuitive discovery of a potential
business pattern — involving so called “right brain” activities. The second part of building
a vision is the often tedious yet crucial work of business planning. In business planning,
you convert your intuitive vision into an action plan. The two parts of vision cannot be
done sequentially. The task alternates rapidly between the creative — thinking up ways
the business could unfold — and the analytical — figuring out the concrete implications of
the intuitive vision.
Business planning involves documenting as best as you can everything that is
important to the business, such as:
Ɣ Your destination.
Ɣ The strategies for getting there.
Ɣ Where you would like to be at specific times.
Ɣ The obstacles you may encounter.
Ɣ The approaches you plan to use in overcoming these obstacles.
5.1.2 Uses of a Business Plan

Many people think of a business plan as a tool for raising money or getting corporate
approvals. Actually, its value as a selling tool is a small part of the value of business
planning. The benefits of the planning process include training yourself to become more
intrapreneurial, screening your ideas, attracting a venture team, building team consensus,
as well as getting the money and permission to proceed.
5.2 Business Plan Outline
Cover Sheet
Name of business Names of principals
Address and telephone number of business

Statement of Purpose (executive summary)
Notes
Description of business — product or service Business structure
Description of:
Amount of money being requested
How funds will be used
How funds will be repaid
Marketing Plan
The industry Competition
Market size and opportunity Market segments served Marketing-mix
Key factors to success in market
Financial Plan
Sources and application of funds Capital equipment list
Balance sheet Break-even analysis Income statements
Pro forma cash flow statements
Organizational Plan
Location of business
Organizational structure
Management
Non-management personnel
Summ ary
Application and expected effect of loan on business
Supporting documents (as required)

Personnel resumes
Job descriptions
Credit reports
Letters of reference
Copies of contracts
Copies of leases
Copies of letters of intent
Legal documents
Production requirements
Source: Reprinted by permission of the publisher, from Robert D. Hisser and
Candida G. Brush, The Woman Entrepreneur: Starting, Financing, and Managing a
Successful New Business (Lexington, Mass: Lexington Books, D.C.Heath and Company,
Copyright 1986), 64.
5.2.1 Right Thing at the Right Time

The success of a small-scale industry solely depends upon one’s doing the right
thing at the right time. In other words, a small-scale industrialist has to be conversant with
the varied regulations governing the small-scale industry and the procedures to be

followed in order to acquire the necessary assistance and incentives offered by the
Notes
government from time- to-time.
The procedural aspects of small-scale industry are quite formidable. Each and every
entrepreneur is often overwhelmed by the multitude of procedures he has to face at
every stage of the development of a small-scale industry. It is, therefore, necessary to
emphasise here that the student should concentrate more on the purpose and the
principles underlying the various procedural formalities than on such routine formalities
as filling in various forms, applications, etc.
In this chapter, the treatment of procedures — right from conceiving a small-scale
industry until the repayment of creditors and ploughing back of profits — is based on the
personal and practical experience of a small industrialist. In the latter part of the
discussion, a reference has been made to the varied regulations that a small-scale
industrialist has to abide by.
A discussion of the relevant procedures to be followed when setting up a small-scale
industry has been dealt with, with reference to the various phases of its development.
These phases are:
Ɣ Selection of a small industry and preparation of feasibility and project reports;
Ɣ Accommodation, power and other infrastructure facilities;
Ɣ Machinery;
Ɣ Raw Materials;
Ɣ Finance;
Ɣ Marketing; and
Ɣ Securing various incentives offered for the establishment of small-scale
industry.
Stated in simple terms, planning is a technique of organising, developing and
controlling business activity in a systematic manner. But, surprisingly enough, we more
often hear of conscious planning in social activities rather than in business life. In
business/ industries, people are, by and large, hesitant to plan because of:
1. The uncertainties inherent in the ever-changing economic environment which
very often renders planning hazardous, if not meaningless;
2. The lack of professional management;
3. The tendency of businessmen to follow the rule-of-thumb methods; and
4. The absence of a comprehensive and reliable management information
system;
However, these are precisely the reasons which make the use of this technique
imperative.
Indeed, the greater the uncertainty, the greater is the need for planning and the
benefits from planning would be extensive because an entrepreneur’s response to
change can be quicker. It is said: “today is the product of yesterday’s decisions: and the
future that we plan today affects the present”.
Conscious planning is necessary for survival in industries in which capital
commitments are heavy and financial risks high, and which necessitates heavy research
and development expenditure in an environment of acute competition and fast changing
market preferences and consumer tastes.
5.2.2 Technique of Planning

The technique of planning was first introduced by the multinational corporations as
an instrument of management control and business development. As long as a business

enterprise is small and manufactures only a few products for the limited and compact
Notes
market with which it is familiar, it is possible for it to adapt itself to a change without much
attention to planning, provided that the change is gradual. But when an institution grows
into a multinational organisation, it is compelled to decentralise and delegate authority to
branches and subsidiaries, and to operate on a system of remote control. With the rapid
widening of the area of operations sectorally and spatially, in an ever-changing political,
economic and social environment, intractable issues arise of coordination, control,
decision making and management.
5.2.3 What is Planning?

What, then, is planning? It is not an effort to predict results or to eliminate
uncertainty. Broadly specking, it is an effort to develop and allocate financial and
manpower resources as soundly as possible under certain conditions, and to be as well
prepared as possible for the future. From this it is evident that planning must not be
confused with prophecy or forecasting. Plans are certainly made in advance of an
anticipated result. The fact that results cannot be guaranteed does not condemn planning
or condone the failure of a plan.
It is much more comprehensive than specific project planning. It involves nothing
less than the total resources — financial and manpower of the small industries so that
they may attain both short-term and long-term objectives. It involves a proper selection of
objectives, strategies, policies, programmes and procedures. Above all it entails a
consideration of the alternative to achieve the desired results. And this endeavour
becomes meaningful only if the planning and control processes are delegated
downwards through all the levels of management to secure not only greater accuracy but,
more importantly, personnel involvement and commitment all down the line.
In other words, a lack of understanding of, and confidence in plan among the line
staff who are not closely associated with its preparation is bound to seal its fate in that it
may not get off the ground. In such cases, pressures from top are of little avail. Planning
is, therefore, much more than a mathematical exercise. It is a blueprint for action. It is a
new technique of management, known as management by objectives, which calls for a
complete change in the style of management, in the organisational structure and in
information flow, combined with a complete change of attitude to people, to tasks,
communications and control.
5.2.4 Project Planning

Planning is thinking deeply through a problem, examining all the logical paths and
writing down all the times in their logical and time order. Planning in any project sector
should justify the following:
(a) Planning would help to optimise the use of scarce resources.
(b) Optimisation and better utilisation of the existing resources.
(c) Results in the desired benefits.
(d) Within the budgetary provisions of a financing institution.
The need for a well-planned project is now well established. Lack of proper planning,
for example, had exhausted the ground water potential in some states or are being over-
exploited. Improper planning again had resulted in financing the farmers desirous of
taking hybrid/graded milch animals, going for country breeds, as the advances have not
considered the seasonality and adequacy or availability of breeds.

5.2.5 Project Planning Matrix Notes

The project planning matrix is the crux of the entire project planning approach. It
consists of the overall goal; the project purpose; the results/outputs which the project
manager must achieve and sustain; and activities necessary to achieve results/outputs.
Table 5.1: Project Planning Matrix
Project Title Project Country: PPM prepared

No. Est. Project (date)
Duration:
Summary of Objectively verifiable Means/Sources of Important
objectives/ activities indicators verification assumptions
Overall Goal (OG) to Indicators that OG is For sustainability of
which the project reached: Overall Goal
contributes
Project purpose Indicators which show For the achievement
the achievement of a of the OG
successful
Results/outputs Indicators, describing For the achievement
the Results of the PP
Activities Specification of Information from the For obtaining the
Quantities and accounts results
Unit/Costs for each
individual
The interesting feature of the matrix is that it forces planners to come out clearly with
objectively verifiable indicators and the means of verification. This ensures that vague
objectives are not entertained.
The project planning matrix also lays down the resources needed for various
activities. The specification of input is important for the calculation of costs.
This stage involves the preparation of the feasibility report of the project conceived.
The feasibility report relates to technical, economic, financial and managerial feasibility.
This will indicate the technical, financial and marketing aspects of the project conceived.
For the purpose of preparation of this report, information will have to be collected,
compiled and analysed in the concerned areas like requirements of raw materials, target
market for the product, the technology of production, the financial requirements, the
requirement of skilled and unskilled labour, etc. Understanding the market for the product
is important and a detailed study must be undertaken, depending upon the various data
collected. The market may be regional, national or international, which indicates the
probable volume of production that can be undertaken. Also information relating to the
existing producers manufacturing similar products, the end-users of the product, the
potential manufacturers of the product, the potential end-users of the product and or any
other possible new uses for which the product could be put to, must be gathered and the
report must be prepared accordingly. Useful information can be obtained for the above
purpose from the Annual Reports prepared by the Directorate General of Technical
Development (DGTD) guidelines for industries, and the industry-wise notes prepared by
development corporation.
Understanding demand for the product is another areas which is significant at this
stage. Whether the demand is for original requirements or for replacement should be
examined. The sensitivity of the buyers to the quality and price of the product and

whether the demand is seasonal or perennial should be studied. Availability of
Notes
substitutes, standards and norms that are to be maintained while manufacturing the
product, institutional demand, etc., must be carefully considered before arriving at the
demand for the product to be manufactured and marketed.
5.2.6 Project Approach

The discussion above also indicates that project designing should address itself to
possible approaches to the agricultural development projects. Three possible
approaches are usually accomplished. These are described briefly below.
1. Subsector or product approach: The effort is restricted to a subsector of
agricultural production or one product which covers a broad geographical area.
Examples, of such an approach are found in the projects involving tea, coffee,
rubber or horticultural projects and dairy, poultry or sheep farming, etc.
2. Functional approach: The effort here is restricted to certain development
functions like marketing research or agricultural extension projects. The
emphasis is on the services and not on the output or a specific product.
3. Regional approach: The effort is limited to a geographically bounded area,
within which the tasks are usually broadly conceived. The best example is the
Integrated Rural Development Scheme (IRDS) as applicable to each of the
blocks.
All these approaches have the same goals, that is, the gradual development of the
total economy of the country. The subsector approach seeks to involve ever-increasing
number of subsectors of development. The functional approach aims at increasing the
services and the regional approach implies a commitment to more and more regions. But
the experience in project financing has clearly shown that no distinct demarcation could
be made as above, notwithstanding the fact that all these become compartmentalised in
cases where state level projects are involved. Otherwise, these are, in fact, parts of a
project approach. This could probably be best illustrated with an example, say, of milch
animal financing.
The financing bank, as per the above, would develop the scheme as a subsector
approach. The definition of project given in the earlier pages underlines that the location
should specifically be mentioned. Thus, the regional approach criterion is also satisfied.
Mere supply of a high-yielding buffalo or a cow would not solve the problem. The
functional approach would now come in when the extension/veterinary services are
included in the project.
5.2.7 Types of Planning

Managerial plans are classified as follows:
1. Objectives: The objectives which an enterprise intends to achieve. Objectives
are necessary for improving performance and to achieve good results.
2. Policies: Policies are a basic statement serving as a guide for planned action
and implementation. They bring uniformity in decision making.
3. Procedures: Procedures involve the selection of a course of action. They
streamline of a course of action. They streamline activities and also help in
control and coordination.
4. Rules: Rules are specific guideline for the enterprise. They also regulate and
help in controlling the varied activities of the firm.

5. Budgets: Budget is a plan of action. It facilitates division of work and fixation of

Notes
individual and divisional responsibilities. It also exercises economies of scale of
operation of an enterprise.
6. Programmes: Programmes weld together different plans for implementing
them into a complete and orderly course of action.
7. Strategies: Strategies may be regarded as a specific plan programme adopted
in a competitive environment.
5.2.8 Phases of Planning

Corporate planning involves four main phases:
1. Choice of definition of objectives and goals;
2. Preparation of operating plans for budgets to achieve these objectives, choice
of a criterion that should be used for selecting a course of action in view of the
significant, uncertain and multidimensional consequences;
3. Evolving strategies and taking strategic decisions in order to integrate these
plans; and
4. Implementation.
The objective should preferably be measurable in value and time and described in
terms of output — such as the expected rate of growth, profitability, return on investment,
share of market and involvement in the socio-economic issues in accordance with public
policy.
In arriving at a set of desired objectives a small-scale industry has to take into
account several internal and external factors, to begin with, it must first decide where it is
going; for unless it knows this, it cannot very well decide how to get there and know or
evaluate the difficulties it is likely to encounter in reading its goal.
5.2.9 Situation Appraisal

A situation appraisal is concerned with an evaluation of the ability of a small-scale
unit to perform the essential tasks of the business in which it wishes to specialise. It
searches the whole spectrum of the small-scale industry to identify its strength and
weakness in terms of opportunities and threats indicated by environmental analyses.
Some major areas to be examined include management, organisation, lines of service,
production schedules, geographic presence, pricing strategy, sales promotion and
management, human resources and systems support. Each of these areas can be
examined for efficiency, effectiveness, integration within the organisation, and the
external image it would project of the unit.

Notes Analysis (1)

1. External Environment — market, competition, customer needs
2. Internal Environment — our strengths, our weaknesses
Setting Missions — statement of business, fundamental

socio-economic objectives (2)
Planning premises or assumptions in what external and

internal environment will our plans operate? Forecasting the future (3)
Intelligent search of opportunities — most promising alternatives

to fulfil our objectives under the situational forecasts — economic,
social technological political (4)
Comparison and evaluation of alternatives in light of objectives

set — on the basis of costs-benefit analysis. (5)
Picking up a few best alternatives to be Decision making point

pursed in order or priority (6)
Decide basic policies and strategies (7) To realise goals in the

best manner
Formulate strategic or long range plan (8) To management

responsibility
Formulating supporting functional or Functional or management

tactical plans (9) responsibility
Numerise plans by making budgets (10) Operating plans
Devise control mechanism to ensure Designing, planning and

accomplishment of objectives with/without control of resource
replanning (11) utilisation within each
functional areas
Fig. 5.1: Steps in Project Planning Process

(Planning is intelligent cooperation with the inevitable)
A second aspect of a situation appraisal is an examination of the current financial

performance of small industries. Each department and division must determine where it
stands and how its position has been achieved. Data should first be collected on major
categories of assets and liabilities, such as loans, deposits, total assets, earning assets
and equity. The collection of data then leads to simple analytical measures, such as the
rate of growth and stability to be achieved.
The next step is to develop market share for this purpose; it would be useful to build
a comparative database from a panel of small-scale industries considered to be
competitive in various markets and products. The position of the small-sale industry in

each major area for which financial objective have been stated is then compared with
Notes
that of the small-scale industries in the panel for compound growth rates over the past
five years. Such comparisons will indicate whether others in similar circumstances have
been able to achieve the desired results, and whether the objectives are realistic.
On the completion of the environmental analysis and situation appraisal, the results
should be assembled into a set of statements which describe the current position of a
small- scale industry. It is now possible to study today’s objectives and strategies as a
major step in the process of translating the objectives and strategies which will guide the
future development of small-scale industry.
The Functions of Project Planning are:

Ɣ The project planning is required to completely define the work.
Ɣ It provides a basic for organising the work of the project and allocating
responsibilities to individuals.
Ɣ It provides a means of communication and coordination between all those
involved in the project.
Ɣ It includes the people involved to cater to their responsibilities.
Ɣ It instills a sense of urgency and time consciousness.
Ɣ It establishes the basis for monitoring and control.
Ɣ It is necessary to improve efficiency of operations.
Ɣ If must eliminate and reduce uncertainty.
5.2.10 Areas of Planning

1. Planning the project work: The activities relating to the project must be
detailed including schedules and sequences of work.
2. Planning of manpower: The manpower required for all categories of the
project must be estimated and the allocation of people also must be planned.
3. Planning the Money: The expenditure must be budgeted in a time-phased
manner.
4. Planning the Information System: The information system required for
monitoring the project must be defined.
5.2.11 Phases of Project Planning

The phases of project planning can be classified as:
(i) Pre-investment phase.
(ii) Implementation phase.
(iii) Operation phase.
(a) The Planning Activities in the Pre-investment Phase Must Include

1. Estimating the demand and supply patterns of the product.
2. Establishing the import and exports over a period of time.
3. Determining the scope for expansion from existing product-line.
4. Identifying the consumption patterns in other locations.
5. Determining the natural resources needed for the production activity.

Once the investment opportunity has been seen, preliminary project analysis is
Notes
done that involves determining the marketing, technical, financial, economic and
ecological feasibility. The analysis of the feasibility studies more or less enable the
establishment of location, production capacity, production technology and other inputs.
(b) The Planning Activities in the Implementation Phase

The implementation phase for an industrial project involves setting up of
manufacturing facilities — consisting of several stages namely.
(i) Project Engineering and Designs: This must include preparation of
construction drawing and blue prints, plant design, plant engineering, selection
of specific machinery and equipment, determining water and power
requirements, safety devices, etc.
(ii) Negotiations and Contracting: This phase includes drawing up of legal
contracts with respect to project financing and also contracting out work like
construction of buildings, supply of machines and equipment, civil works, etc.
(iii) Construction: This includes the actual construction of plant and erection of
machinery and equipment.
(iv) Training: This includes the training of engineers and technicians and workers.
(v) Plant Commissioning: This deal with planning the start up of the plant.
(c) The Planning Activities in the Operation Phase

This is the longest phase in terms of time span. It begins when the project is
commissioned and ends when the project is wound up. The planning activities in this
stage must be aimed at enabling. Uninterrupted and smooth functioning of the plant and
machines. This planning must also include developing some norms of productivity.
5.2.12 Objectives and Strategies

The most critical and difficult task in planning is to establish objectives and
strategies for the future. Strategic management, managing towards and by objectives,
and strategies of the organisation — these are the new and dramatic developments in
management and planning.
The establishment of objectives begins with an examination of the organisation as it
exists, a statement identifying each major business and major market served, and a
statement of the current objective and strategies of each unit. There is a natural tendency
to follow organisational lines when working on this part of the task. Many a time, however
an entirely different and revealing view results from stepping back and asking: How does
the user of our services view us?
The basic value of management — how it views its customers, the competition it
faces, government regulations, how it deals with its employees, suppliers and others —
determine the character and image of a small-scale industrial project. To the extent
possible, the philosophy of management ought to be stated explicitly and incorporated in
the internal planning literature at this point.
A capsule statement of current corporate strategies for each of the major business
should be prepared for the guidance of executive management. It is important that
members of the management agree on major thrusts of policy. For example, if executive
management has not agreed on a location strategy, every proposal for a new location
must be examined and evaluated as an entirely new decision.

An examination of its strengths and weaknesses, its opportunities and the threats it
Notes
faces would probably uncover some core problems which need to be attacked by the
management — for example, the need to establish a consistent pricing policy for all the
customers or the means of payment for services rendered. The identification of these
core problems and the assignment of responsibilities for their solution are important at
this point in the planning process. The next step in establishing objectives and strategies
is to formulate existing objectives into a concise and consistent set of statements
covering at least the financial and market position and public responsibility.
These statements, communicated to every executive in the organisation and applied
to daily activities, become powerful guiding forces for the small- scale industrial unit.
The time has now come to assemble the statement of the environmental analysis
and situation appraisal as well as statements of current objectives, strategies and
categories of corporate objectives for the future.
The statement of objectives for the future begins with a statement of mission, which
provides a most important guidance mechanism, clearly delineating the fundamental
business and thrust of the small-scale industry relating to the various stages of
production and aspects of marketing.
Each time the planning process is undertaken, important business, principle
markets and management philosophy should be re-examined in detail and restated. This
exercise provides an opportunity for the management to re-evaluate its position and
achieve a new commitment to principles. In addition, the new members of the
management will want to approve these statements or suggest modifications in
emphasis.

Notes

Notes
Fig. 5.3: Structure of Corporate Planning
Valuable Tool For Project Planning

Project delays and escalation of costs are everyday occurrence in India. Indian
always seem to slip up in the implementation of projects. Reviews no doubt are held. But
the focus unfortunately is often on placing the blame on someone for the delay, rather
than on finding out how to set things right and solve the problems that have arisen in the
course of implementation. How to overcome this malaise? Is there any tool available
which can help those connected with a project to come together and systematically
analyse the problems and come up with a useful action plan.
A common malady in this endeavour is the lack of teamwork. While exhortations are
often made for better teamwork, the basic means of achieving this, namely participative
action planning, is missed out. Hence, the use of any new management tool should be

able to ensure this aspect. That is vital in Indian conditions where teamwork is more often
Notes
conspicuous by its absence.
ZOPP — the German technique

ZOPP stands for the German term “Zelorientierte Project Planning” which means
“Objectives-oriented Project Planning”. This technique which is highly turned to easy
application and one of the latest in the field of management was pioneered by the
Deutsche Gessenschaft fur Technische Zussammenarbit (GTZ — the German Wing for
Technical Corporation. GTZ has been applying this technique as a rule to all its overseas
assisted projects since the mid-eighties.
With appropriate modifications, this technique has been found to be highly suitable
for Indian conditions. The Indian situation is characterised by uncertainties which have
the effect of changing the field condition midway during project, thus changing the rules
of the game from what was originally visualised. Ability to improvise solutions for
emerging field problems is a must if any project is to succeed.
Secondly, however brilliant a planner may be, if the implementor does not have any
involvement in the details of the planning process, his commitment to the plan is not total.
This results in tardy implementation of plans. ZOPP is useful in tackling both these
problems in an effective manner.
Successful Indian exercises

During the last three years this technique has been successfully applied to a variety
of situations in India. For example, turnaround strategies of firms have been evolved out
of this exercise. Preparation of growth plans and assessment of training needs have also
been successfully done through this technique. Sorting out problems arising from
reorganisation moves and business policy and diversification decisions have also flowed
out of such an exercise. Establishment of training institutions has also been under taken
based on its application.
On the development projects front an ZOPP exercise for the World Bank assisted
social forestry project in West Bengal turned out to be highly fruitful and similar
applications are on the anvil for drinking water projects. Yet another application was in
the field of projects for the physically handicapped. A com mon feature of all these
exercises was the total involvement of the participating teams and the subseque nt
satisfying reports that the author received from these teams about the implementation of
the action plans drawn up through this method.
Three features characterise ZOPP application. The first is that it consists of a
sequence of successive planning steps. Second, there is permanent visualisation on the
cards and documentation in the form of charts easily visible and understandable and
which remain in front of the participating group all the time. Third, it is based on the team
approach and hence whatever that is evolved has to be through the consensus approach.
The what and why of ZOPP is presented in the table.
The first of the steps is Participation Analysis. This gives an overview of all persons,
groups, organisations and institutions connected with the project. It also incorporates the
interests and expectations of persons and groups significant to the project.
On the face of it, it may seen to be a simple analysis, but in practice, it helps to
sharply remind the participating group of all the ‘stakeholders’ of the project. For example,
in the case of industry, the interests of customers suppliers, shareholders, the community
and others have to be taken into account. In one such exercise, one of the groups
identified even the families of employees as a group which has influence on the
enterprise. The recognition of this led to the evolution of mechanisms to inculcate a

greater sense of belonging to the enterprise which included the employees families. In
Notes
the case of developmental projects, the recognition of the ultimate beneficiary, namely
the rural poor, tends to help focus the projects on their needs. It also helps to identify the
important groups including the non-governmental organisations (NGOs) which the
project has to involve, to make people participation meaningful.
The What and Why of ZOPP
Sr. Steps Purpose

1. Participation ananlysis To identify persons and groups significant to the project and to
recognise their interests and expectations.
2. Problem analysis To identify the core problem and the causes and effects in the
form of a Problem Tree, to provide a proper diagnosis.
3. Objectives analysis Development of specific objectives relating to the causative

factors of the problem so that the achievement of these
ensures project success.
4. Planning matrix To spell out detailed action plans and develop indicators which
will help to know how far progress has been achieved in
specific areas identified under the plan.output
The Problem Tree

The next step is the most important one. It is the identification of the core problem
through problem analysis. This consists of: (a) analysing the existing situation
surrounding a given problem condition; (b) identifying the major problems in this context;
(c) defining the core problem of a situation; and (c) defining the core problem of a
situation; (d) visualising the cause-effect relationship in a diagram (Problem Tree).
This part of the exercise is the most crucial one on which subsequent steps are to
be based. What happens in reality is that like the proverbial five blind men and the
elephant, the problems identified in the initial stage trend to be narrow in their individual
outlook and hence not agreed upon by the total group. It takes quite a bit of dialogue and
discussion before a consensus can be arrived at. It also invariably means that the core
problem has to be raised to a high enough level so that it focuses on the broader issues
and thus helps the group to have a balanced rather than biased view. For instance, in
one of the industrial groups, their preoccupation was with the overtime problem. But after
considerable discussion, the problem focus shifted to a higher level of costs and
productivity and in the process developed an appreciation for all the factors involved
rather than being obsessed with only one to the exclusion of others.
In the case of developmental projects, for example, the need to make a project a
people’s one, rather than a governmental one, surfaced as one of the main problems.
Carefully done with the help of an experienced moderator, this process can be one of the
most useful contributions, to solving problems. What it helps to do is the right diagnosis in
the first place, before prescribing hasty solutions.
Apart from the core problem, the causes and effects and their relationship in the
form of a Problem Tree helps to give the participating group a total perception of what it
means to live with the prob lem. For example, higher costs would mean loss of market
share and reduced potential for growth. Such effects are brought out in a telling manner
through the chart form of visualisation.
The Problem Tree also goes into the main causes which need to be tackled before
the problem is solved. For example, in one of the groups the core problem was identified
as “performance below potential”. The reasons for this were identified as lack of skill

development to perform the job well, system inadequacies, lack of team effort, and
Notes
inadequate timely feedback.
Once the Problem Tree is developed the diagnosis part is complete. The next step
is to develop the Objectives Tree. This sequence helps in framing the objectives, which
will effectively overcome the problems diagnosed, instead of being general in character.
Also, the means of achieving this objective will be directly related to the causes. Thus, a
very specific and direct relationship is established between the diagnosis and the
treatment. It is akin to medical practice where three-fourths of the success of treatment
depends upon correct diagnosis and the treatment being directly focussed on the
causative factors rather than on symptomis.
Project Manager
Projects are ‘engines of growth’ in the corporate world and wherever we book these
days we can find dedicated teams working on specific projects, under the direction of a
project manager. All disciplines, including accounting, advertising, banking and the law
have their projects, and even the United Nations. Here we look at the projects in industry,
and the project managers thereof. Each project is unique, seldom perhaps rarely are
there ever two projects which are identical. This makes project management one of the
mos t challenging tasks facing a project manager and his team.
What, who, how?

Most of the successful companies use the project concept for solving complex
problems and managing difficult situations. It is through this concept and a competent
project manager that General Motors beat their American competitors to the ‘small car’
market by almost three years. They sensed the ‘oil crisis’ s one months before it came
and launched their ‘down-sizing’ project. For a project at Honda, key people w ere taken
from various divisions of the company and ‘banded together’ at a project centre under the
direction of a project manager, charged with the mission: complete the project on time
and within budget.
The project manager is required to have qualities which seem mutually exclusive.
He is called upon to be highly intelligent — but not too clever. He must be forceful — yet
sensitive to people’s feeling. He must be dynamic — whilst exercising patience. A fluent
communicator, yet a good listener. What a man! The quality of ‘leadership’ is most
difficult to define, although it can be recognised immediately when present. The task of
the leader has been neatly summed up as ‘to get people from where they are to where
they have not been’. There seems to be no definite pattern to be seen amongst
managers and other leaders, but they all do have some common traits. These include an
urge to lead, a willingness to work long hours and a readiness to lead by example. A true
leader is more an artist than a technician, with an ability to present a vivid picture of what
he requires to others. Henry Kissinger put it this way: “A great leader is not so much
clever as lucid and clearsighted.
5.3 Summary
Project Planning is emerging as an important area of project management. It implies
comprehensive and coordinated activities in all facets of an enterprise. The basic job of
the entrepreneur is to conceive business visions and turn them into business realities.
Planning is thinking deeply through a problem, examining all logical paths and carrying
out in their time frame.

5.4 Check Your Progress Notes

1. The basic job of the ____ is to conceive business visions and turn into reality.
(a) Leader
(b) Manager
(c) Entrepreneur
(d) Employee
2. The objective of planning should preferably be measurable in _____ and time
(a) Value
(b) Space
(c) Input
(d) Output
3. The most critical task in planning is to establish objectives and _____ for the
future.
(a) Task
(b) Strategies
(c) Discussion
(d) Research

1. Explain the steps in business planning. Give a brief outline.
2. How will you approach project designing?
3. Explain different types of planning.
5.6 Key Terms

Ɣ Planning: It is coordinated activities in all aspects of an enterprise.
Ɣ Matrix: It is the crux of the entire project (planning) approach.
Ɣ Appraisal: It is evaluation of the ability of a unit to perform essential task.

1. (c) Entrepreneur
2. (a) Value
3. (b) Strategies

1. New Bold, C.R. (1998), Project Management, St. Lucie Press.
2. Meredith, J. (2000), Project Management, John Wiley.

Notes
Unit 6: Strategic Position and Action

Evaluation
Structure:
6.1 Introduction
6.1.1 Meaning
6.1.2 Definition
6.2 Scope of Appraisal
6.2.1 Steps Followed in Project Appraisal
6.3 Economic Aspects
6.3.1 Organisational Aspects
6.4 Managerial Aspects
6.4.1 Technical Aspects
6.4.2 Location and Site
6.4.3 Site
6.4.4 Size of the Plant/Scale of Operation
6.4.5 Technical Feasibility
6.4.6 Financial Aspects
6.4.7 Market/Commercial Aspects
6.4.8 Political and Labour Considerations
6.4.9 Technical Collaboration Arrangements
6.5 Summary
6.8 Key Terms
Objectives
Ɣ Understand the meaning and scope of appraisal
Ɣ Discuss steps followed in project appraisal
Ɣ Explain the importance of technical appraisal in project evaluation
Ɣ Talk about the size of plant – scale of operations
6.1 Introduction
Project appraisal an exercise whereby a lending financial institution makes an
independent and objective assessment of various aspects of an investment proposition
to arrive at the financing decision. Appraisal exercises are basically aimed at determining

Strategic Position and Action Evaluation 67
the viability of a project and sometimes, also in reshaping the project so as to upgrade its
Notes
viability. This is done by allocating the term finance sought by a promoter.
The factors generally considered by institutions while appraising a project included
technical, financial, commercial, economic, ecological, social and managerial aspects.
This makes it necessary to recognise the inter-relationship underlying the various
aspects of a project. For example, the size of the initial market and the estimates for
demand build-up would determine the plant capacity and production phasing; these
together would have a bearing on the profitability, which, in turn, would determine the
means of financing. Location also has an important bearing on project cost and cost of
production. Above all, the management behind the project has a decisive influence on
most of these aspects. These considerations imply that project appraisal is viewed as a
composite process as against the approach of viewing each aspect individually.
This chapter will focus on the appraiser’s thinking process from the viewpoint of the
lending financial institutions This will help ensure necessary preparation on the part of the
borrowers-entrepreneurs/businessmen/business women.
6.1.1 Meaning
The exercise of project appraisal simply means the assessment of a project in terms
of its economic, social, and financial viability.
This exercise is critical as it calls for a multidimensional analysis of the project that is,
a complete scanning of the project.
Financial institutions and banks make a critical appraisal of projects which are
submitted to them by the entrepreneurs for getting loans. They have traditionally been
accepting the data provided by the entrepreneur as valid while assessing the project.
Infact, the emphasis has largely been on the cash flow and financial viability of a project
in assessing their suitability for extending the loans.
Project Appraisal
Technical Financial Commercial Economic Managerial
Legal Social Ecological Organisational
Fig. 6.1: Aspects of Project Appraisal
6.1.2 Definition
Project appraisal can be defined as the promoter taking a second look critically and
carefully at a project as presented by the promoter person who is in no way involved in or
connected with its preparation and who is as such able to take an independent,
dispassionate and objective view of the project in its totality as also in respect of its
various components. The person who carries out appraisal of a project is usually an
official from the financial institutions or a team of institutional officials. Since all ending
activities involve risk in a smaller or larger measure, project appraisal aims at sizing up
the quality of projects and their long-term profitability aims at minimising the risk of
lending by rectifying their weaknesses and improving their quality by incorporating into
them features/safeguards missed by the promoters either because of lack of knowledge
or information

Notes 6.2 Scope of Appraisal

The appraisal of a project is undertaken by the financial institutions with the twin
objectives of determining the market potential of a project and selecting an optimal
strategy. The methods of analysis vary from project-to-project. Nevertheless, certain
common aspects of study from the angle of technology and engineering are with a
mention:
1. Choice of technical process and/or appropriate technology;
2. Technical collaboration arrangements, if any;
3. Size and scale of operations;
4. Locational aspects of the project and availability of infrastructural facilities;
5. Selection of plant, machinery and equipment together with background,
competence and capability of machinery/equipment suppliers;
6. Plant layout and factory buildings;
7. Technical engineering services,
8. Project design and network analysis for the assessment of project implemen-
tation schedule;
9. Aspects relating to effluent disposal, management of entry, utilisation of
by-products, etc.
10. Project cost and its comparison with other similar projects, based on
technology, equipment, product-mix and time spread;
11. Determination of project cost estimates, profitability projections, etc.
12. Sensitivity analysis.
It must be remembered that the different aspects of a project are not independent
entities but are highly inter-related; and a meaningful project appraisal depends upon the
appreciation of this fundamental fact. For example, the size of the total market for a
product as it exists now and the year-to-year estimates of the future progressive call for
expansion of demand would determine planned capacity of the proposed unit and the
phasing of production over the years. These in turn would influence the project cost and
profitability which would determine the means of financing. The cost of the project and
profitability are influenced to a significant extent by its location. Over and above this, the
management behind the project, has a decisive role to play in almost all aspects of the
project.
6.2.1 Steps Followed in Project Appraisal

Project appraisal is a scientific tool. It follows a specific pattern. First and foremost,
an analysis of a region’s economy provides a general framework within which the
assessment of any project is made. This analysis indicates whether the project is in a
potential environment which enjoys priority for economic development of the region/state
concerned. This exercise itself usually involves the investigation of six different aspects:
economic, technical, organisational, managerial, operational, and financial. The relative
importance of these different aspects can vary considerably according to circumstances
and type of project. The main stages of the system of project appraisal are:
Step 1 — Economic Indicates priority use.
Step 2 — Technical Involves scale of the project and the process adopted.
Step 3 — Organisational Suitability is examined.
Step 4 — Managerial Adequacy and competence are critically scrutinised.
Step 5 — Operational Capability of the project.

Step 6 — Financial Determines the financial viability for sound

Notes
implementation and efficient operation.
Project Appraisal Format
Criteria Project-I Project-II Project-III Project-IV

1. Investment size
2. Location
3. Technology
4. Equipment
5. Marketing
6. Power and Water
7. Others’ performance
8. Working capital needs
9. Labour component
10. Economic viability
Total
Point Scale: A = 5 points; B = 4 points; C = 3 points; D = 2 points; E = 1 point.
Fig. 6.2: Steps of Project Appraisal
6.3 Economic Aspects

The economic aspects of appraisal are fundamental as they logically precede all
other aspects — this is so because the bank will not finance a project unless it stands
assured that the project represents a high-priority use of a region’s resources. However,
a purely financial analysis normally does not provide an adequate basis for judging a
project’s value to the economy, since the financial analysis looks at the project only from
a limited viewpoint of the revenues entering the project’s own accounts. So, an economic
or social analysis looks at the project from the viewpoint of the whole economy, asking
whether the latter will show benefits sufficiently greater than project costs to justify
investment in it.
The economic benefits brought about by a successful project normally take the form
of an increased output of goods or services, either directly of indirectly (as in a large class
of cost-reducing projects). This increased production will also generate many different
forms of additional income, such an increased wages or employment of labour, larger
government revenues, higher earnings for the owners of capital, or most frequently, a
combination of these income benefits.
In a large majority of cases, it is possible to quantify project costs and benefits, and
to construct a rate of return or some other appropriate move. Future costs and benefits
are calculated, using either market or shadow prices, as found appropriate. Further both
costs and benefits are put under subsidence to initiate the projects’ estimated rate of
return.
The latter is then compared with the minimum earning power of capital judged
appropriate for each country. While the rate of return is an important test that all projects
with quantifiable cost and benefits must pass, importance and its significance is usually
overestimated. The rate of return is a necessary confirming test of projects that have to
be justified within a much wider frame of reference, in which basic project objectives and

the nature of project benefits (e.g., foreign-exchange savings, increased employment
Notes
and improved income distribution) play major roles.
E Increased Output
c
o Enhanced Services
n
o Increased Employment
m
i Larger Government Revenues
c
Higher Earnings
A
Higher Standard of Living
s
p Increased National Income
e
c Improved Income Distribution
t
s
Fig. 6.3: Economic Aspects of a Project
6.3.1 Organisational Aspects

As a lender and a development institution, the bank places particular stress on the
need for an efficient organisation and responsible management for the execution of the
project. During appraisal, these two essential dimensions of a project are examined. If
one or the other is found wanting, short-term remedial steps are recommended to the
entrepreneur and the bank may make a clause for assistance — such as the recruitment
of individuals or an organisation qualified to assist in running the enterprise, at least
during the initial phase; or those for a longer term, such as a management study,
reorganisation or creation of a new autonomous agency to operate the project. In either
case, the need for training local staff to fill positions at all levels is examined, and training
programmes may well be included as part of the project. The objective of this aspect of
appraisal is to make sure that the project is adequately carried out and that a
locally-staffed institution, capable of contributing effectively to the development of the
sector in question, is created.
Structure Organisation Recruitment Training
Organisation
Fig. 6.4: Organisational Aspects
6.4 Managerial Aspects

If the management is incompetent, even a good project may fail. It is rightly pointed
out that if the project is weak, it can be improved upon, but if the promoters are weak and
lack in business acumen, it is difficult to reverse the situation. It is, therefore, natural that
financial institutions very carefully appraise the managerial aspects before sanctioning
assistance for a project.

It may be relevant to recall here that there are provisions which enable financial
Notes
institutions to exercise control over the assisted units. For example, they now stipulate
the condition of option for conversion of loans into equity in respect of loans aggregating
to ` 5 crore or more generally, and in respect of sick units, irrespective of the amount of
assistance and the level of shareholding in the assisted company.
Further, there is a provision for appointment by the financial institutions of nominee
directors on the boards of all MRTP companies assisted by them. As regards non-MRTP
companies, nominee directors are appointed on the boards on a selective basis,
especially in cases where one or more of the following conditions exist, viz.: (a) the unit is
running into problems and is likely to become sick, (b) institutional holding is more than
26 per cent and (c) the institutional stake by way of loans/investment exceeds ` 5 crore.
The Companies Act, the Industries (Development and Regulation) Act, etc.,
empower government to exercise powers of control over the management, including the
takeover of management of industrial undertakings.
All these indicate the importance given to proper managerial strategies to prevent
mismanagement.
If a proper appraisal of the managerial aspects is made in the beginning itself, future
problems in this area can be avoided to a very large extent. It is, therefore, necessary
that the overall background of the promoters, their academic qualifications, business and
industrial experience, their past performance, etc., are looked into in greater detail to
assess their capabilities for implementing the project for which financial assistance has
been sought.
6.4.1 Technical Aspects

The importance of technical appraisal in project evaluation needs no emphasis.
Technical appraisal of a project broadly involves a critical study of the following:
6.4.2 Location and Site

An industrial feasibility study aspect refers to the appropriate and location selection
of a geographical area where the project should be located the selection. Towards this
end, the required site characteristics shall be kept in mind when selecting the location.
There are a number of important factors that influence industrial location because
the site may significantly influence the cost of production and distribution, distribution
efficiency, the operating environment, etc.
The problem of site selection gets complicated by the fact that at a particular
location where one or a few factors are favourable, other factors may not be so. Selection
of an optimum location, therefore, revolves round the combined consideration and
evaluation of all the relevant factors.
The important factors that influence industrial location are the following:
1. Raw Material Supplies: Certain industries are located near the source of raw
materials. This is particularly true of industries based on gross (weight-losing) localised
material — industries with a high Material Index (the proportion of the localised material
to the final product). For example, iron and steel mills are usually located near the ore
deposits and sugar mills in the sugarcane cultivating regions. Similarly, the timber
industry tend to be closer to forests or rive ways leading from forests. Kallayi (near
Calicut, Kerala), one of the largest timber business centres of the world, is on the banks
of the Chaliyar river leading from the richly endowed Nilambur forests. In certain cases,
even industries based on pure materials prefer to be located near source of raw materials.

The jute industry in India, for example, is developed in the jute growing region. Similarly,
Notes
the early development of the cotton textile industry was in the cotton growing region.
Industries using perishable raw materials also tend to be located in closer proximity
to the raw material sources.
2. Proximity of Markets: Certain categories of industries tend to be located near
the market. This is particularly true of the industries with the manufacturing process that
involves an increase in weight and/or bulk. In such cases, the transport and distribution
costs can be minimised by being closer to the market. Bottling of drinks is a very good
example. Industries with fragile and perishable output also have a tendency to be located
closer to the market.
When there are large markets geogrphically spread, national or internationally,
manufacturing units may be established in close proximity to the major markets.
3. Transportation Facilities: Transportation facilities including the cost of transport
play an important role in industrial location. No wonder, centres connected with sea, air,
rail and road transport facilities exert a strong pull on industries. It is not only the
transportation of the materials and finished products that it is to be considered but also
the transportation facilities for the personnel.
In a vast country like India, there may be significant variations in transportation costs
between different locations.
Places with a high transport disadvantage are not likely to attract industries. It is due
to this reason that the Government of India is providing transport subsidy to industrial
units located in certain hill regions and islands with a view to encouraging the industrial
development of these regions.
4. Power and Fuel Supply: Power and fuel supply conditions have an important
bearing on industrial location. Cheap power or fuel and its uninterrupted supply is an
important attraction for industries, especially in the era of energy crisis. In the past,
certain industries tended to be located near coal deposits. But the advent of electricity
has greatly changed the industrial location patterns. Now, it is not very difficult to take
power supply to the location of raw material supply so that the weight-long materials may
be processed at their location.
Electrification of various parts of the country, including the villages, is encouraging
decentralisation of industries.
5. Water: Certain industries like the paper industry by their very nature require large
quantities of water. The quality and properties of the available water is as important as
the quantity of water available and the stability of its supply. A number of industries also
use the water sources for effluent disposal. While selecting the location, the possibility of
the pollution of water by other industries making the water unfit for industrial and
domestic purposes should also be considered. The requirements of water by the
employees and their families housed near the industrial unit for domestic purposes and
its availability should also be considered.
6. Manpower: The economic, social and political aspects of labour supply have an
important influence on industrial location. Not only the quantity but an assessment of skill
levels of the available manpower are very important. In certain regions, abundant cheap
labour may be available; but if the labour does not possess the required skill, the industry
will have to incur expenditure on training the labour.
Cheap labour is particularly important for industries where labour accounts for a
significant part of the total value added. On the important factors influencing the location
of plants in the less developed countries by the multinationals (MNCs) is said to be the
cheap labour supply.

For the assessment to be realistic, it is essential that the wage rates be compared
Notes
with the level of productivity by the labour.
Certain socio-economic characteristics and political affiliations of labour are also
important considerations. In certain localities and communities, labour turnover and
absenteeism are high. These factors may not only tend to increase the expenses but also
affect the smooth functioning of the enterprise.
Some regions may be characterised by the dominance of militant trade unions,
widespread labour unrest, etc., seriously affecting the smooth functioning of industries.
Industries prefer to consider other areas for their location.
It may be difficult to get professional, skilled manpower, etc., if the location is very
remote and deprived of civic amenities.
7. Labour Laws and Government Policy: Labour laws and the government’s
attitude and policy towards strikes and other labour problems and employee-employer
relations, etc., may also influence location decision making.
8. Natural and Climatic Factor: Natural and climatic factors also play an important
role in the location of certain industries, as the absence of these conditions will
necessitate additional expenditure to create favourable conditions artificially. For
instance, humid climate is conducive to cotton textile industry. Favourable climatic
conditions and other environmental factors played a major role in the location these
industries.
9. Strategic Considerations: They also influence the location of industries. It is not
likely that major industries will be located in strategically sensitive areas even if all
economic factors favour such a location. Especially in the case of strategic industries,
special care is taken to assure that the location chosen is not easily accessible to the
military forces of other countries. For defence industries, strategic location may be the
sole criterion.
10. Taxes and Fees: Variations in taxes, fees and charged may also influence
industrial location.
11. Incentives and Disincentives: There are also certain incentives and
disincentives which also may affect industrial location. For instance, in India, the Union
and State Governments offer a number of fiscal, monetary and physical incentives for
industries in the notified backward regions.
Certain disincentives like higher taxes may discourage industries in certain regions.
Government may even ban new industrial units in congested areas large urban areas or
developed regions.
12. Site and Services: Some industries require a large area of land which may not
be available in a locality where all other factors are favourable. Availability of the required
type and quantity of land at reasonable prices is, thus, an important factor.
With a view to developing industries in certain regions, government has been
providing developed sites and necessary facilities and services. Certain such locations
like Hosur (Tamil Nadu) have been very successful in luring industries.
Similarly, industrial estates have been established in different parts of the country to
encourage the development of industries.
13. Socio-economic and Political Factors: Socio-economic and political factors
are also sometimes very important, especially in respect of location of public sector units.
Some large-scale public sector units are located in backward regions on such
considerations. Social and political considerations sometimes favour industrial location in
certain sensitive regions.

14. Miscellaneous Factors: There are also a number of other factors that may
Notes
influence industrial location — the attitude of the local community, proximity of
complementary industries, prospects of development of the region, service facilities
required by the industry, recreational and social facilities, proximity to important centres
like metropolitan centres, personal factors, historical factors, etc.
6.4.3 Site
There are a number of important factors to be considered in the selection of the site.
These include the load bearing capacity of the site, towards flood and earthquake
hazards, access to transport facilities, facilities for water supply and effluent discharge,
ecological factors, etc.
The nature of the industry has a bearing on the site selection. For example, some
industries like the paper industry need abundant supply of water. For some industries,
effluent discharge is a major problem. Environmental pollution is a serious problem that
certain industries have to confront with. All these factors influence the selection of site.
As stated earlier, the government provides ‘site and service’ in specified locations.
However, some of the facilities needed for certain industries may not be available on
these sites.
6.4.4 Size of the Plant/Scale of Operation

The size of the plant or scale of operations is an important factor that determines the
economic and financial viability of a project.
In many industries, there are certain technological plant capacities which are
economical. If the size is sub-optimal, there will be diseconomies of scale.
This is one of the important reasons for poor performance of many industrial units in
India. Diseconomies of scale result in high cost and make survival in a competitive
market, particularly in the international market, very difficult. The Government of India in
this context, has emphasised that the plants or scale of operations should be of
economic size.
An important aspect of technological size is that the available process technology
and equipment are often standardised at specific capacities in production sectors.
Operative capacities in such sectors are, therefore, available only in certain multiples.
There are, however, certain factors that may come in the way of optimal scale. For
example, there may be demand constraints, i.e., the market demand may be too low that
it cannot absorb the output of the large plant. In some cases there may be resource and
input constraints. For example, the available raw material in a region may not be
sufficient to feed a large plant. When there is important control, non-availability of
economic size plants or equipments domestically makes the adoption of optimal scale
impossible. Sometimes, there will also be scarcity of finance.
Another factor that may discourage the establishment of large-scale facilities is the
risk of rapid obsolescence of technology or the product.
6.4.5 Technical Feasibility

Appraisal of ethnical aspects of a project involves scrutiny of such aspects of the
project as:
(a) Manufacturing process/technology selected.
(b) Technical collaboration arrangements made, if any.
(c) Capacity/size of the project and the scale of operations.
(d) Location of the project.
(e) Availability of physical and social infrastructural facilities.

Notes
(f) Availability of various inputs covering raw materials as well as utilities.
(g) Selection of plant, machinery and equipment together with background,
competence and capability of machinery/equipment suppliers.
(h) Plant layout/and factory building.
(i) Technical engineering services.
(f) Project design and network analysis for assessing the project’s implementation
schedules, etc.
The technical feasibility study should consider the adequacy and suitability of the
plant, the equipments and their specifications, plant layout, balancing of different sections
of the plant, proposed arrangements for procurement of the plant and equipments,
reputation of the machinery suppliers, etc.
The feasibility study should also consider the technology required for a particular
project, evaluate technological alternatives and select the most appropriate technology in
terms of optimum combination of project components. The various implications of the
acquisition of such technology should be assessed, including contractual aspects of
technology licensing where applicable, etc.
Government of India’s policy in this respect clearly states that while evaluating
applications for industrial licensing, the following factors will be specifically considered:
(i) Whether the proposed capacity is of economic size.
(ii) Whether the processes proposed to be adopted are efficient from a
techno-economic point of view.
(iii) The extent to which diversification and expansion proposals will result in fuller
utilisation of capacity and economies of scale.
Besides, proper evolution of alternative technologies is essential for selection of the
appropriate one. This evaluation should be related to plant capacity and should
commence with a quantitative assessment of output, production build-up and gestation
period and qualitative assessment of product quality and marketability.
The selection of technology has to be related to the nature of the principal inputs
that may be available for a project and to an appropriate combination of factor resources
for both short and long periods.
6.4.6 Financial Aspects

The purpose of the appraisal of financial aspects of a project is generally to ensure
its initiation of financial conditions for the sound implementation and efficient operation.
The scope of this aspect of appraisal varies, of course, considerably with the nature of
the project and whether it is revenue-producing (e.g., industry, utilities, agriculture) or not
(e.g., education, most highway projects).

F Financial Soundness
Notes i
n Efficient Operation
a
n Cost of Production
c
i Return on Investment
a
l Prospects of Marketing
Profitability
A
s Effective Controls
p
e Budgeting
c
t Pricing
s
Fig. 6.5: Financial Aspects of Project Appraisal
For projects which involve the marketing of a product or service by an entity, the
appraisal includes in investigation of the availability and cost of raw materials, power,
labour, and services needed for production, and the prospects for marketing the product
or service profitably.
In every case, it is necessary to ensure that satisfactory accounts are maintained for
effective control over expenditure and revenue, and to disclose the project and entity
carrying it out. Also, since the banks finance only a part of the investment cost of a
project, it is necessary to ensure that funds from other sources are available on
acceptable terms to meet the balance of the cost. This may be relatively simple where
the government is able, without difficulty, to provide the rest of the necessary funds from
budgetary sources; or it may be complicated, as in a project to expand or modernise a
revenue-earning concern, where all the financial requirements of the concern during the
construction of the project must be considered.
Financial appraisal also evaluates capacity of revenue-producing investments from
the standpoint of the entity. Industrial sponsor or other investor who would make them, in
order to ascertain whether it is sufficiently attractive to warrant their participation.
Establishing that the entity carrying out the project is in a position to manage its business
in a costeffective fashion, is another important aspect.
The financial aspect of project appraisal covers the following areas:
(i) Cost analysis: In the case of cost analysis it is to be decided or to be worked
out what would be the cost of production. There are different methods of finding
out cost.
(ii) Pricing: This strategy concerns the fixing up of the product’s price. Price
fixation is a very tedious job. The price must be fixed very judiciously, because
the price is the cause of demand. If the price is high, the demand may be low
and vice versa and a low price may mean a lower rate of profit also.
(iii) Financing: The funds needed to finance the project is an important aspect of
project appraisal. It is concerned with raising the funds and making their most
efficient use. The funds must be raised from places where the rate of interest is
lower.
(iv) Income and expenditure: The income and expenditure profile is concerned
with the estimates regarding the income expected and expenditure involved in
the project. This helps in ascertaining the cost involved in production and profit

expected therefrom. Detailed proposed accounts should be made for future

Notes
reference to know whether the plans are working out properly or not.
Financial institutions examine the project to ensure economic justification of
investment details. They study the marketing scope of the project and also its worth to
the national economy by analysing the consumption pattern and the potential demand for
the project.
6.4.7 Market/Commercial Aspects

In setting up an industrial project, estimation of demand for the product/group of
products proposed to be manufactured by a promoter is the first important step. Ideally,
the market analysis should give a comprehensive account of the market opportunity, as
well as of the marketing strategy appropriate for converting the opportunity into a reality.
Marketing strategy in this context could be defined as an ever-evolving design or
blueprint consisting of a set of inputs like product quality, price, design, dealer/agency
discounts, distribution network/channels, packaging, etc.
To be of maximum benefit to a promoter, whether new or already established,
market analysis should cover the following major aspects:
(i) Analysis of market opportunity and specifying marketing objectives. This
involves a scientific assessment of: (a) total size of the market for a product;
and (b) the share that could be secured by a firm, existing or new.
(ii) Planning the process of marketing the product.
(iii) Organisation of the marketing process.
(iv) Control of the implementation of the marketing plan which facilitates taking
corrective action when the actual results deviate from the estimates or
expectations.
An intensive scanning and analysis of the proposed environment in which the
industrial unit has to function should form the basis for analysing market opportunities as
well as for specifying the marketing strategy. This is because the ever-changing
environment in which the industry sector functions, restricts or expands the opportunities
available to and the threats to be faced by an industrial unit.
Market opportunities expressed in terms of demand forecasts and market shares
are based on a host of factors outside the control of the promoter, whereas marketing
strategy and marketing process are largely under his control. Hence, the formulation of a
detailed marketing plan, specification of a proper marketing strategy, and the manner in
which the marketing process should be undertaken would enable the promoter to cope
with the uncertainties in the marketplace more effectively than otherwise. It is also a fact
that the estimated market share of a promoter and his marketing strategy influence and
reinforce each other and should never be viewed in isolation.
Answers to the following questions would indicate the safeguards that may be
necessary to take in the likely weak areas in the project:
(a) What is the management culture in which the entrepreneur has been brought
up?
(b) Is the entrepreneur’s approach to project planning scientific and consistent with
the requirements of the proposed project?
(c) In the initial stages of project planning, is the entrepreneur enlisting the support
of mere helpers or of professional managers?
(d) How has the entrepreneur drawn the organisational structure of the unit? Does
it show ad hocism or indicate that he has tried to merely fulfil certain legal/other

obligations or is it purposeful and does it indicate a good deal of foresight on
Notes
his part?
The difference between an entrepreneur and manager has been dealt with earlier.
6.4.8 Political and Labour Considerations

Financial institutions also pay attention to political environment and labour
conditions of the area where the project is to be located. Strikes, lockouts, industrial
peace and communal harmony in the area play a decisive role in examining success or
failure of the project.
The lending institutions examine the project to study its soundness on technical,
economic, commercial and managerial grounds. If the appraisal report is found
satisfactory, the loan application will be favourably considered. The manager then
communicates his decision to the borrower and terms and conditions will be negotiated.
The most important areas for the borrower and lender to negotiate are: timing in relation
to negotiations method of financing based on certificates of work done, repayment
schedule, rates of interest, commitment fees, security options, and monitoring and
control requirements.
6.4.9 Technical Collaboration Arrangements

The Government of India has issued an illustrative list of industries where no foreign
collaboration, financial or technical, is to be allowed in view of indigenous technology
base having been well-established. However, looking to the need for constant
upgradation of production technology in line with that of developed countries, the
Administrative Ministries and Foreign Investment Promotion Board (FIPB) may permit
import of technology in those field where:
Ɣ Indigenous technology developed for items in the list is too closely held and is
not available for use by new entrepreneurs on competitive terms;
Ɣ Technology is required for updating of existing technology in India to meet
domestic requirements efficiently or to be competitive in the export market; and
Ɣ Such import is required for the manufacture of items with substantial exports,
backed by buyback guarantees.
The terms in the collaboration agreement are examined in detail by the appraising
institutions with reference to the technical know-how, engineering services, procurement
of imported equipment, price comparison with indigenously available equipment,
performance guarantee by the collaborators, penalties for non-performance specified in
the agreement, deputation of foreign exports during construction, initial and
post-operation period, provision for training of Indian technicians, etc. The reputation of
the collaborators and past experience concerning tie-up arrangements with them, the
competitiveness of the terms of collaboration in relation to the requirements of the project,
the reasonability of financial collaborations and other costs by way of down-payment and
royalties as also restrictive clauses in regard to marketing areas, etc., are also looked
into and worked upon by the appraiser.
In the case of financial collaborations, the terms relating to the right of participation
of foreign collaborator in management and future issues of share capital are also critically
examined and considered. The financial standing and reputation of collaborators, where
necessary, are checked through the Indian Consulates/Missions abroad as also through
the India Investment Centre.
Research and development is also studied in-depth and it is ensured that during the
validity of the collaboration period, the borrower is allowed free access to the latest

developments that may take place at the collaborators’ end. The collaborators are also
Notes
required to agree for providing facilities to the borrower in establishing his own up to date
R&D organisation, both in terms of equipment and manpower.
Conclusion
To sum up, project appraisal is a science as well as an art. While the basic
principles of appraisal could be mastered in a short time span, the successful practice of
the art of carrying out appraisal requires keen observation, a knack for details, objectivity,
decision making. It is also necessary to took ahead of the project. Project appraisal is a
key to broad based, balanced industrial growth of the country. In a way, it calls for a
judicious judgement and perspective outlook. It is, therefore, amply viewed as a
composite process of development.
Annexure
I. Technical Appraisal Report of a Small-scale Unit

A technical appraisal report prepared by the Technical and Consultancy Department
of a bank is given below for the study of the readers.
Name of Unit: K.C. Industries, Mumbai
Background of Proponent, Product and Technical Know-how
Proponent is a proprietary SSI concern engaged in the manufacture of “Drawn
Copper Conductors” utilised by electrical equipment manufacturers since the past two
decades. It is learnt that the proponent was enjoying working capital facility with the…
Bank in the past. It is essential to verify the proponent’s report from... Bank to its own
satisfaction. The proponent has approached us for financial assistance towards working
capital requirements.
Proprietor is Shri… and he is also interested in a similar units as partner in the firm
XYZ… Corporation. It is learnt that this unit has been recently floated.
Technical know-how involved in ‘Copper Wire/Strip-drawing activity’ is available with
the proprietor and the employed technicians.
Location
Proponent’s factory is situated at ownership in … Mumbai. Aggregate built-up area
of both the galas is 120 sq. mt. (app.) and is sufficient for the manufacturing activity.
Branch to verify the title of factory premises/gala to its own satisfaction.
Proponent is registered as SSU and has received the necessary permissions from
the municipal authorities along with sufficient power connection of 80 kw. The proponent
has employed 25 persons on a single-shift basis and is expected to employ an additional
20 persons for working on a double-shift basis. Sufficient water supply is expected at the
factory premises.
Infrastructural facilities are satisfactory in general.
Raw Materials
The required raw materials are Electrolytic Grade Copper Rods which are available
from the local market and M.M.T.C. Raw material prices are susceptible to change.
Marketing
The proponent’s product is being manufactured and sold directly to ..., against firm
and repeat orders.
The proponent has registered annual sales of ` 28.36 lakh (appr.) and ` 93 lakh
(appr.) during year SY 2043 and 2044 respectively.
The present position of orders on hand aggregates to ` 22.70 lakh.
The proponent is expected to register a projected annual sales of ` 135.25 lakh
Notes
during the SY 2045 under normal conditions.
Plant and Machinery
The proponent’s machinery and equipment is as per attached annexure and annual
production capacity is estimated at 60 mt on a double shift basis.
The initial hot drawing operation is being done by a third on job basis.
Working Capital
The proponent’s working capital requirements or inventory level for estimated
annual sales of ` 135.25 lakh during the current year SY 2045 are given below:
Project Management
Period Total
` in lakh
1. Raw material paid stock 30 days 7.25
2. Work-in-process and finished Negligible N.A.
3. Sales receivable from first-class party 75 days 27.75
35.00
Notes:
1. Normal margins to be stipulated.
2. Transactions with sister concerns to be viewed with care.
Profitability
Estimates towards cost of production are satisfactory in general.
The proponent is expected to register a pre-tax profit of ` 5.40 lakh for the estimated
annual sale of ` 135.25 lakh during the current year SY 2045 under normal conditions.
Variable cost is estimated at 86% of the sales prices.
Comments
1. The proponent’s operations are technically feasible and economically viable.
2. Working capital facility may be considered in the light of observations made
hereinabove and as per usual banking norms.
Technical Officer
Technical and Industrial,
Consultancy Division,
Head Office.
II. Project Appraisal for Term Lending a Project Viability

To enable the appraiser to arrive at a decision at this stage a product viability score
table has been developed which is given below. The credit appraiser may accept or
reject a proposal on the basis of score obtained from this table:
Product Viability Score Table for Project Appraisal
1. Product has widespread use.
2. Customers are restricted to a special class.
3. Product satisfies basic need.
4. Luxury product.
5. Product will sell itself. Repeat sales likely.
6. Intensive sales effort required.

7. Some amount of sales effort required.

Notes
8. Large international and domestic market.
9. Export market only.
10. Domestic market only.
11. Market not crowded. Competitors relatively small.
12. Large competitors dominate the market.
13. Product needed both in good times and bad.
14. Demand will fall fast in bad times.
15. Steady demand of the product in all seasons.
16. Demand is seasonal.
17. Product is protected. No possible threat from international competition.
18. Product is open to international competition can be imported any time.
19. No single competitor can affect market share substantially by reducing price.
20. Powerful competitors can capture substantial market by reducing price.
21. New product — can be protected by patent.
22. Product design difficult to protect. Can be copied easily.
23. Raw materials widely available domestically.
24. Mostly imported raw materials are required.
25. Raw materials available domestically but are closely controlled.
26. Raw materials are in short supply.
27. Project is located within a reasonable distance from the source of raw
materials.
28. Project is far away from the source of raw materials.
29. Skilled workers are locally available.
30. Skilled workers are to be brought from other areas involving high wages.
31. Technology of production is reasonably stable.
32. Produce and process of production can be easily modified in response to new
technology.
33. Technological advances in the product and process are very rapid.
34. Product does not create environmental hazards. No control is likely.
35. Product creates environmental hazards. Controls are likely to be imposed.
36. Market is within the command area of the factory involving low transportation
costs and low inventory of finished stocks at various distribution points.
37. Market is widely dispersed involving high transportation cost and large
inventory of finished stocks at various distribution points.
38. Project located in backward area:
(i) Are the markets for raw materials and other inputs stable or is there
likelihood of a sudden supply shortage?
(ii) Range of substitutes already available in the market and the possibility of
future substitutes concession by government.
(iii) Price structure of similar products in the market and the sensitivity of
consumers to a variation in price.
(iv) Who are the major buyers; government or private consumers?
39. Project not located in backward area.
Instructions: Attributes of a product are given in the above table. Tick the most
appropriate ones. Award the following marks against each attribute ticked:
Serial no. of attribute Marks to be awarded
Notes
(a) 1, 3, 5, 8, 11, 12, 15, 17, 19, 23, 27, 29, 3 for each attribute.
31, 34, 36
(b) 2, 4, 7, 10, 16, 21, 24, 25, 32, 35, 38 2 for each attribute.
(c) 6, 9, 12, 14, 18, 20, 22, 26, 28, 30, 1 for each attribute.
33, 37, 39
Add up the total scores and then decide the viability or otherwise of the product
in the following manner:
Most viable Viable Non-viable
50 — 40 39 — 40 Below 30
6.5 Summary
Project appraisal is a science as well as an art. Though it can be understood in a
short time span. Its practice requires observation, objectivity and decision making ability.
It is a key to balanced growth of a country. It requires judicious judgement as well as
perspective outlook. In short, it is a composite process of development.

1. Project appraisal is a _____ tool.
(a) Technical
(b) Economical
(c) Scientific
(d) Financial
2. The _____ of the plant is an important factor that determines the viability of the project.
(a) Type
(b) Quality
(c) Size
(d) Nature
3. _____ pollution is a serious problem that industry has to confront with.
(a) Environmental
(b) Bacterial
(c) Waste
(d) Microbial

1. Explain the definition, meaning and scope of appraisal.
2. Describe the steps followed in the project appraisal process.
3. Give a brief account of operational aspect of appraisal.
6.8 Key Terms

Ɣ Project Appraisal: It is the assessment of project in terms of economic, social
and financial viability.

Ɣ Labour Considerations: Strikes, lockouts, Industrial peace and communal

Notes
harmony.

1. (c) Scientific
2. (c) Size
3. (a) Environmental

1. Chandra, P. (2002), Project, Tata McGraw Hill.

Notes
Unit 7: Generation of Ideas
Structure:
7.1 Introduction
7.1.1 Idea Synergy
7.2 The Birth of an Idea
7.2.1 Choosing an Idea
7.2.2 An Illustration: Choice of a Product
7.2.3 Selection of Product
7.2.4 The Adoption Process
7.2.5 Check List for Choosing Ideas
7.3 Summary
7.6 Key Terms
Objectives
Ɣ Understand importance of well trained entrepreneurs and intrapreneurs
Ɣ Discuss concept of an idea and its selection
Ɣ Explain global product development
7.1 Introduction
Industrialisation is widely recognised not only as one of the important means to
usher in socio-economic transformations and achieving industrial self-sufficiency but also
for the accelerated development of agriculture, transport, trade, services and other
potential sectors through the forward and backward linkages. It is a process which
accelerates economic growth; effects structural changes in the economy, particularly in
respect of resource utilisation, production functions, income generation, occupational
pattern, population distribution and foreign trade; and induces social change. Jawaharlal
Nehru had emphasised that “Real progress must ultimately depend on industrialisation.
Throughout the world, industrialisation has indeed become the magic word of the
mid-twentieth country.”
Industralisation is brought about by well-trained entrepreneurs. Entrepreneurship is
one of the most important factors of industrialisation in the process of economic growth.

Generation of Ideas 85
7.1.1 Idea Synergy Notes

What a company requires to succeed in this age of innovation is a “rich talent pool
and a culture of innovation” that allows cross-pollination of ideas from a wide array of
scientific disciplines and understanding of end-users of technology.
Although, competition for the best and brightest is fierce, companies must put in
place an ‘innovation culture’ that offers the right ambience and ample freedom to attract
top talent. It can act as a facilitator for pursuing excellence, and a fertile ground for
sprouting ideas, insights and dreams. The talent could be encouraged to take risks and
think differently to generate disruptive ideas, think collaboratively and apply the
discoveries and insights to important business and societal issues.
The foundation of an innovative culture begins with the talented people a company
employs and the opportunities available to work with the best-of-the-best. A bright mind
can create wonderful ideas, but for inventions to have any impact on society, that bright
mind needs to be linked with the society by a community of thinkers worldwide.
Innovation has a rippling effect. When we innovate, we raise the standard of living
for all. Collectively, we all need to ask some tough questions. Are we creating an
environment in which innovation can flourish? Where do we stand versus competitors on
skills, investment, policy environment, and openness? What must we do to improve? And
we won’t find the answers if we treat these as rhetorical questions and relegate them to
think tank and ivory towers. Countries, companies and individuals must start innovating
in order to compete and win in a globally integrated economy. Today, the world is our
lab!!
7.2 The Birth of an Idea

The big idea is the concept around which the entire advertising campaign revolves
and behind the creative concept is the execution of the idea. For example, the Pepsi
campaign is about the indifference of today’s generation towards the adult race.
Creative ideas are not limited to advertising. Creative people are found in business,
in science in engineering as well as advertising. Any creative concept, as DDB Needham
Worldwide sees it, should have relevance, originality and impact. Ideas need to mean
something important to the audience.
The essence of a creative idea is originality. Frequent usage of the same creative
idea leads to a cliché. But then not everyone is lucky or talented to find one creative idea.
Even though copy-cat advertising is detested, it remains a dominant advertising
form. And then the concept should have impact, breaking the fence of indifference and
focusing the audience’s attention on the message and the product.
According to Edward de Bono, “You cannot dig a hole in a different place by digging
the same hole deeper”. Creating ads is an alternating process of expansion and
contraction. In other words, you need to be generating a variety of approaches, a number
of different ideas (Lateral Thinking). And you need to weed out the strong few and prune
them to shape. Pruning needs good analytical skills – see what’s wrong with a headline
and fix it, take an idea and think it through and so on (Vertical Thinking). The trick is to
keep your strategy in your mind like a lighted torch while you find your way through the
dark.
But how do I think creative? The popular techniques used are free association,
brainstorming and list making. Free association is the process of letting one idea suggest
another, one image beget two.

A topic is given and you start writing down rapidly whatever comes to mind as it
Notes
comes to mind. A more organised approach than free writing is list making. You use
phrases more than whole sentences and keep them all subsumed under a given
category.
One could use a product-oriented, product feature, positioning or Unique Selling
Proposition strategy. Or your strategy be consumer-oriented, brand-oriented, lifestyle-
oriented.
One creative process suggested by Alex Osborn, the former head of the BBDO
agency is something like:
Ɣ Orientation: pointing up the problem
Ɣ Preparation: gathering pertinent data
Ɣ Analysis: breaking down the relevant material
Ɣ Ideation: piling up alternative ideas
Ɣ Incubation: letting up, inviting illumination
Ɣ Synthesis: putting the pieces together
Ɣ Evaluation: judging the resulting ideas.
The creative person has typical traits such as:
Personal Characteristics: Independent, self-assertive, persistent, self-disciplined,
with a high tolerance for ambiguity, risk taking. Creative people reach conclusions
through intuition than logic. They make novel associations and have a good sense of
humour. They soak up experience like sponges.
Most of the creative chaps cannot fit into an office environment or the world at large.
These days, ad agencies are experimenting with new ways to manage the creative
process, encouraging whatever it takes to develop ideas and yet keep the work on
schedule and on target. Chiat-day is recreating itself as a virtual office “which means an
office that can be anywhere – you could work on a mountain top or in the middle of a
busy city.
All the above are the characteristics of a creative person. But then, being creative
begins with thinking that you are creative!
7.2.1 Choosing an Idea

Establishing yourself as a successful entrepreneur depends, in part, upon choosing
a good idea. That idea must not only be good for the market, but good for the project and
good for the entrepreneurs. It should also be manageable by you without much
dependence on others. Importantly, the idea should give satisfactory results to you.
As an entrepreneur, when you are searching for an idea worthy of your commitment,
don’t pursue one idea at a time. Develop five or ten in parallel until one emerges so
appropriate that it begins to dominate your thoughts and fantasies. To adopt one idea at
a time has several disadvantages. First, because you are constantly receiving random
information from what you read and from people you talk to, having a number of
back-burner ideas gives you a greater likelihood of finding uses for information you pick
up. Secondly, if you are pursuing a single idea by feigning commitment before you feel it,
you may put yourself into a tight corner. It is very hard to be objective when you are down
to your last idea.
Choosing an idea is quite difficult and the entrepreneur has to weigh objectively his
intrinsic capabilities in finalising an idea.
In the idea stage, suggestions for new products are obtained from all possible
sources: customers, competitors, R&D, distributors, and company employees.

Frequently, one of the creative problem-solving techniques discussed below are used to
Notes
develop marketable ideas. The suggested ideas need to be carefully screened to
determine which are good enough to qualify for a more detailed investigation.
Established objectives and defined growth areas provide a basis for developing these
criteria.
Product Idea
It had been an exhausting day. Mansukhbhai had spent all morning cycling to and fro, hawking his
home made goods in the lanes and bylanes of the crowded city. Now he sat outside a pan shop,
trying to snatch a few minutes rest before starting another round. As he sat there, he noticed how
the customers at the pan shop kept growing, in number and impatience. Mansukhbhai saw the
time it took to make each pan, the panwallah trying to attend to a dozen people at the same time.
It occurred to him that if pan could be packaged and sold, it would instantly find a ready market.
And an idea was born. A man of the masses, with only his native shrewdness to guide him, had hit
upon a marketing idea in a million. The kind that takes a genius to think of. That man was
Mansukhbhai Mahadevbhai Kothari. The man behind Pan Parag Pan Masala.
7.2.2 An Illustration: Choice of a Product

Sanitary Napkin: The product was first introduced in the late 60s, and the concept of
a sanitary napkin was popularised through the 70s while the 80s introduced new
variations like the beltless napkin and tampons.
Since the very concept of a sanitary napkin was so new to India, one realised that
conventional retailing alone was not enough to sell the product. What was important was
educating women about the product and about personal hygiene, so the manufacturers
started schools, screening firms on menstruation and how to cope with it. This was
followed up by free sampling.
Estimated to be a growing A 30 crore industry (that’s an astonishing 180 million
pieces), with a growth rate of more than 15 per cent, manufacturers are unanimous that
this is still just the tip of the iceberg. It is likely to scale new heights in the 90s. And, the
entry of Procter & Gamble with the much publicised dry weave technology for Whisper,
the market is expected to double at the turn of the century.
The market leaders and pioneer in the field is undoubtedly Johnson & Johnson with
Carefree, Stayfree, OB tampons and now, Freshday, Pantyliners. As things stand, the
consumer does not yet have a real choice in terms of wide price variations, for instance.
But the market is poised for a boom and even smaller manufacturers who admit that they
earn 50 per cent of their income from his one product category alone are doing well,
though they are not advertising or retailing their product.
Starting with the base, which is still the belted napkin, the pyramid narrows to the
apex consisting of products like tampons (3 per cent of the market share) and pantyliners.
There is still a tremendous potential for expansion even at the base. The women
population needing sanitary napkins is estimated to be around 20 crore, of which 5 crore
lives in urban centres. There is thus scope for (A 840 crore industry) 500 crore pieces
alone in urban centres. At that time, big cities were prime targets for expansion and the
rural market remained untapped. Given this scenario, the 90s will see many new brands
and consequently more brand wars, hopefully resulting in the ideal napkin at the right
price, for the consumer. And this is what is happening in this industry.
Observations
With the constant awareness campaign, the entrepreneurs have targeted the
consumers and made an impact on them. The product has a ready market. Technology
is available. Raw material is in plenty. With the widenings of the market the demand for

the product has increased manyfold. It is profitable. It is healthier, comfortable and
Notes
socially accepted. Market is vast but tricky. The product is tempting entrepreneurs/
manufactures to step into this field.
7.2.3 Selection of Product

At this stage, the entrepreneur is concerned with identifying a particular product that
he hopes to market successfully at a reasonable profit. Therefore, the selection of the
right product is very essential for being successful in the business venture. The right
product here means that which can be marketed at a reasonable profit which will go
towards growth business. Various factors influence the entrepreneur in selecting the right
product. These decisive factors are: (i) whether import restrictions or the items selected
are banned items would considerably weigh favourably or otherwise in the selection of
the products. This is because in the case of banned items the domestic market offers
considerable scope for selling as the demand for such a product would not be met by
import.
Thus, if the item selected fall in the category of banned import items, the
entrepreneur would favour it the category of banned import items, the entrepreneur
would favour it and in the case of unrestricted import of the items, he would definitely not
show his favour for selecting such a product. (ii) If the entrepreneur himself or his
partners have gathered, substantial amount of experience in the manufacture and
marketing of certain products, then the selection of such a product would be to their
advantage. Therefore, most often the items selected are of those lines of products in
which the entrepreneur or his colleagues have gathered enough experience. The line in
which they are not experienced obviously would not be favoured much as it will entail
uncertain situations very often. (iii) The selection of the product will also be based upon
the degree of profitability that generally rules in the market. Such information can be
obtained from the banks or the financial corporations or the market itself. The selection,
therefore, will depend upon the information compiled for the particular line of product for
its profitability. (iv) Many concessions are available from the government for producing a
product which serves as an import substitute or even essential item, hence if a particular
product enjoys a substantial amount of incentives, concessions, liberal taxation policies,
obviously the entrepreneur will select that item to enjoy these advantages conferred on
the production of this particular type of product. (v) Many products belong to the priority
industries or small-scale sector also; certain products are listed by the government for
purchasing exclusively from the small-scale sector. As a result if a particular product
belongs to this category, the selection of such a product would be advantageous for the
entrepreneur; therefore, these factors also must receive due consideration before the
selection of a product. (vi) The market for the product also plays a significant role in the
selection of the product. If the product also has an export market, it widens the scope of
marketing, hence such a product has its own advantages in the success of the enterprise.
(vii) Certain products are permitted for production only if the licence is obtained from the
appropriate authority while others belong to the delicensed category. In the case of a
licensed product, obtaining a licence is obtained a licence would be a difficult proposition
or the capacity required for the entire industry may also have been created fully by the
government. As a consequence, impossibility of seeking further permission for the
production of such a product. A product belonging to licensed category or de-licensed
category also is considered before selecting the product. (viii) Many products enjoy
specific advantages in regard to the scale of manufacture or carry locational advantages,
e.g., if produced in a free trade zone or in the backward areas with special incentives and
concessions which are made available for manufacturing such a product. Selection of a
product therefore depends upon these factors. (ix) If a product belongs to an ancillary

unit and serves as a major component for the parent industry, it provides a ready demand,
Notes
hence selection of this type of product entails easy marketability.
Fig. 7.1: Product Planning and Development Process
Source:Adapted from Robert D. Hisrich and Michael P. Peters, Marketing Decisions for New and
Mature Products.
(Columbus, Ohio: Charles E. Merrill Publishing Co., 1984).
Finally, at this stage, the selection of product would also be weighed in favour or
against depending upon whether or not the machinery and the raw materials required
would be imported or indigenous. Similarly, the section would also be based upon the
skill and unskilled labour position as well as the technical know-how which is available
indigenously or would require foreign collaboration.
The study of the project idea is the starting point of the feasibility analysis. The study
is undertaken to identify the logic of the project, the tasks which must be performed for
achieving the objectives, and the inputs, outputs and process involved in each activity.
The ultimate aim is to identify the characteristics of the project. A project idea poses a
problem, on the one hand and seeks a solution of the problem, on the other. In order that
the solution may be an appropriate one, it is necessary to examine and appreciate the
nature and extent of the problem and to clearly identify its dimensions.
Box 7.1: Global Product Development and PLM
Product development today is more complex than ever. Outsourcing, globalisation, the internet
and a strong customer focus are all adding to existing intense time and cost pressures. As a result,
the product development process must now engage a variety of cross-functional participants in a
value chain that includes suppliers, partners and customers in multiple geographic locations.
PLM has emerged as the primary means by which to improve product development processes
across the value chain to deliver the most business value.
But it is important to recognize that PLM is unique from other enterprise systems such as CRM,
SCM and ERP. PLM is about products, not transactions. It should not be approached as simply an
extension of your company’s existing enterprise transaction infrastructure.

PLM requires the ability to create high fidelity digital products, collaborate cross-functionally in an
Notes
organisation and throughout the digital product value chain, and control and manage product
information and product development processes throughout the product’s life cycle.
In other words, it is about building great products to build great products you need a PLM solution
that enables you to seamlessly create, collaborate and control.
An Integral Product Development System

PTC has tightly integrated its three core products — Pro/Engineer Wildfire, Windchill PDMLink
and Windchill ProjectLink — into the flexible, integral system discrete manufacturers need.
PTC’s Product Development System is designed to automate PLM business processes while
managing inter-dependencies across different forms of product information, so that all players in
the Digital Product Value Chain understand how their inputs affect an overall product.
The result is a highly differentiated solution with a broad capability footprint and a clean, integral
architecture, thereby lowering risk and total-cost-of-ownership and speeding up timeto-value.
Pune — A Strategic Location for PTC
A Subsidiary of Parametric Technology Corporation U.S.A. PTC Software (India) Pvt. Ltd., has
been a part of Pune’s technology landscape for over ten years, and is today a strategic Research
and Development Centre.
The Pune facility houses more than 500 engineers, spanning product design and development.
Quality Assurance, integration, technical writing, content localisation and technical support. Over
the years, PTC has learnt what it takes to build products, and the team in Pune is constantly
focused on building better technology and quality, ensuring the continuing success of global
customers such as Airbus, Boeing, Cummins, Ferrari, HP, Intel, John Deere, L&T, Motorola, Nike,
Rolex, Tata Motors, Toyota, TVS, Whirlpool and many others.
7.2.4 The Adoption Process

The adoption of an innovation demands planned management of change
(overcoming the resistance to change). An adoption process is a process bringing about
a change in a buyer’s attitudes and perception. Consumer adoption process covers the
steps that a consumer usually goes through in determining the feasibility of buying new
products: (1) Awareness, (2) Interest, (3) Evaluation or mental trial, (4) Trial (physical),
(5) Adoption.

1. Awareness: A person learns about a new idea, product or practice. He has

Notes
general information about it, e.g., through advertisement. He has, however, limited
knowledge about special qualities, usefulness, performance, etc., regarding the
innovation. He merely knows about its existence.
2. Interest: He now develops an interest in the innovation. He demands more
detailed information about the new product, its utility, its performance, and so on. He
listens with interest to Jingles on the radio or TV ads, reads press ads, and learns more
about it from others, and is now inclined to actively seek the desired information from
salespersons, opinion leaders, peers, friends, etc.
3. Evaluation: The accumulated information and evidences are weighed by the
person in order to assess the basic soundness or worth of the innovation. He tries to
weight the value of the new product and the extent to which it is good for him. In a sense,
he conducts a mental trial of the new product.
4. Trial: The person now is ready to put the idea into practice. Competent personal
assistance is necessary to put the innovation to use.
5. Adoption: It is the final stage in which he makes a decision to buy. The person
now decides to adopt the new idea, product or practice for continued use. If
post-purchase experience is good, he becomes a repeat buyer and a talking
advertisement of the innovation.
Conclusion
The search for a business idea is a continuous process. The entrepreneur will have
to undertake constant checking of the new product through its life cycle. And, keep a
consant tap on the markets, consumer needs and their changing styles, research and
development as an ongoing source of information regarding business idea as well as
appropriate technology.
7.2.5 Check List for Choosing Ideas

Fit with your skills and experience
Ɣ Do you believe in the product or service?
Ɣ Does the need it fits mean something to you personally?
Ɣ Do you like and understand the potential customers?
Ɣ Do you have experience in this type of business?
Ɣ Do the basic success factors of this business fit your skills?
Ɣ Are the tasks of the enterprise the ones you will enjoy doing yourself?
Ɣ Are the people the enterprise employ will enjoy working with and supervising?
Ɣ Has the idea begun to take over your imagination and spare time?
Ɣ Is the idea innovative to the extent of social benefit?
Ɣ Are you expecting a good return?
Fit with the Market
Ɣ Is there a real customer need?
Ɣ Can you get a price that gives you good margins?
Ɣ Would customers believe in the product coming from your company?
Ɣ Does the product or service you propose produce a clearly perceivable
customer benefit which is significantly better than that offered by competing
ways to satisfy the same basic need?
Ɣ Is there a cost-effective way to get the message and the product to the
customers?
Fit with the Enterprise
Notes
Ɣ Is there a reason to believe your enterprise could be very good at the
business?
Ɣ Does it fit the enterprise culture?
Ɣ Can you imagine who might sponsor it?
Ɣ Does it look profitable (high margin — low investment)?
Ɣ Will it lead to large markets and growth?
What to do when your idea is rejected?
Frequently, as an entrepreneur, you may find that your idea has been rejected
and/or is not successful as envisaged. There are a few things you can do:
1. Give up and select a new idea.
2. Listen carefully, understand what is wrong, improve your idea and your
presentation, and try again.
3. Find someone else to whom you present your idea by considering:
— Who will benefit most if it works and can they be a sponsor?
— Who are the potential customers and will they demand the product?
— How can you get to the people who really care about entrepreneurial
ideas?
7.3 Summary
The search for business ideas is a continuous process, entrepreneur will have to
undertake constant checking of the new product through its life cycle. He has to keep a
constant watch on markets, consumer needs and R&D.

1. Choosing an _____ is quite difficult as entrepreneur has to be objective.
(a) Plan
(b) Customer
(c) Market
(d) Idea
2. The right product means that it can be marketed at _____ profit.
(a) Reasonable
(b) No-profit
(c) Higher profit
(d) Gross profit
3. The search for a business idea is a _____ process.
(a) One time
(b) Time bound
(c) Timeless
(d) Continuous

1. Give an account of birth of an idea and its selection.
2. How does one select a product, explain giving an example.

3. Explain the facets of adoption process.

Notes
7.6 Key Terms
Ɣ Idea: It is a concept around which the entire creative concept revolves.
Ɣ Idea selection: One has to weigh objectively the intrinsic capabilities in
finalising.
Ɣ Feasibility analysis: Study undertaken to identify the logic of the project, tasks
to be performed and input involved.

1. (d) Idea
2. (a) Reasonable
3. (d) Continuous

1. Machiraju, H. (2001), Project Finance, Vikas Publishing House.
2. Finnerty, J. (1996), Project Finance, Wiley.

Notes
Unit 8: Demand Forecasting
Structure:
8.1 Introduction
8.1.1 Marketer’s Concept of Demand
8.1.2 Market Potential
8.1.3 Demand Forecasting
8.1.4 Rules of New Product Development Operation
8.2 Summary
8.5 Key Terms
Objectives
Ɣ Understand marketers’ concept of demand
Ɣ Discuss demand forecasting
Ɣ Explain rules of new product development operation
Ɣ Talk about market potential
8.1 Introduction
Estimation of demand potential is the starting point of techno-economic analysis.
Demand forecasting helps to firm up the qualitative parameters of the project and also
provides a basis for selecting the optimal strategy for the project. The forecasting may be
for a short period extending up to a year i.e., short-run forecast or may cover only a
particular industry i.e., industry forecast. Or it may be personal or specific forecasts
relating to certain commodities or areas. Other factors of a forecast may be relating to the
nature of product, viz., new or established product or the classification of product, viz.,
capital goods, consumer goods or services, etc., or the special features particular to the
product, viz., market competition, risks associated with the product, etc.
Demand under the free market economy is one of the universal constraints, i.e.,
limitations on freedom of action, encountered by all marketers.
Modern marketers first resort to market segmentation on the basis of demography,
socio-economic factors as well as behavioural characteristics of buyers. Once the market
segments are identified, marketers has to find out the significance of the market
segments by measuring demand in each segment. Demand in a segment is based on
three factors: (1) Purchasing power; (2) Market potential; and (3) Sales potential for the
products of the enterprise. Let us examine these demand concepts and briefly review
techniques for estimating the demand.

Demand Forecasting 95
Demand for a product begins with wants and desires of buyers (individuals, family,
Notes
or organisation). Effective demand for a product needs purchasing power (income,
assets and credit) as well as buying motives i.e., willingness to buy a product. When the
effective demand for all buyers is added up, the result is the total market demand for the
product.
Demand for a product may be defined as the quantity bought by buyers over a
certain time span, in a given marketing environment, and under a given marketing
programme or marketing mix.
8.1.1 Marketer’s Concept of Demand

Market demand is influenced not merely by price but by many other factors which
are not constant as supposed in economics. Market demand is influenced by other
variable factors such as marketing mix, and marketing environment, e.g., competition,
buyer’s behaviour, general economic conditions, fashion trends, government regulations,
etc. In order to measure industry or market demand under many independent variables,
marketers must consider two significant variables: (1) Market potential/market forecast;
and (2) Sales potential/sales forecast. Market (industry) potential (demand) is a function
(result) of three variable factors: (1) Aggregate or total purchasing power;
(2) Environmental variables; and (3) Marketing efforts of all organisations offering the
product. Purchasing power has two aspects: (1) Ability to buy; (2) Willingness to buy.
Ability to buy is represented by national per capita income, and disposable and/or
discretionary income of buyers. Willingness to buy is influenced by environmental factors
as well as marketing effort of the industry.
Market (Industry) Demand: Market potential or demand is some theoretical upper
limit of sales for an entire industry. It is a function which specifies the quantity of goods
bought by customers under different possible composite marketing mixes. These
marketing mixes are offered by all the companies in the industry. Industry potential is the
level of demand which would be realised if the industry employed unlimited marketing
effort.
Company Demand: Company Demand is the volume of sales expected under
given environmental conditions for a specific firm. It is a function of the firm’s strategic
marketing effort and specifies the amount of sales turnover which would be realised by a
company under different levels of company’s selling efforts.
Market (Industry) Forecast: In indicates the customer demand under the expected
level of marketing effort which can be put forward by all the sellers within an industry.
Company Sales Forecast: It is the estimated sales turnover under a defined
marketing programme. The sales forecast is the planned level of sales based upon a
given marketing strategy.
Demand Measurement
Market (Industry) Demand Company Demand
Market Market Company Sales Company Sales

Potential Forecast Potential Forecast

Notes Market Demand in a

Certain Period
(Market or Industry Demand)

Market
Potential
Market
Forecast
Market
Minimum
Expected
Effort
Industry Marketing Efforts
Fig. 8.1: Market or Industry Demand
Note: 1. Market potential is the maximum possible level of market or industry demand. It points
out the total possible sales available in a given area to all sellers of a product (service)
during a stated period of time, and under stated marketing environment. Additional
marketing efforts have little influence in stimulating further market demand.
2. Market (industry) Forecast will indicate the anticipated level of the industry market
demand that will probably occur on the basis of expected level of marketing efforts put in
by industry as a whole under the given marketing environment.
3. The relationship between market (industry) potential and market (industry) forecast is
depicted in the figure given above.
Companys Sales Volume

in the Stated period
Company (Sales) Demand

Sales
Potential
Sales
Forecast
Sales
Minimum
Planned Level
Planned Level
Fig. 8.2 Sales (Company) Demand
Note: 1. Company demand is also called sales possibilities. It is the market share of a company.
The market share of a company is directly in proportion to the amount of its marketing
efforts.
2. Sales potential or company potential is that portion of the market potential that a
particular company can reasonably expect to achieve.

3. Sales forecast is the portion of the sales potential that the company makes a concerted
Notes
effort to achieve. If 100 p.c. of sales potential is not profitable the sales forecast will be a
certain fraction of the sales potential.
4. Sales forecast or company forecast is a prediction of the sales volume actually expected
by the company during the stated period, usually one year. It is based on an assumed
marketing programme for exploiting available market potential. It is an estimated sales
volume under a given plan of marketing action.
Marketing of Products of Small-Scale Industries
Government Large Wholesale Consumer

Industries Trade
Retail Trade
SIDO NSIC Defence Stores P&T
Exports
Fig. 8.3. Interaction among Basic Types of Forecasts.
Note: 1. We have forecasts at three levels of activity: (1) economy (nation), (2) market (industry)
and (3) sales (company).
2. In each sector we have two basic factors: the potential, i.e., total possible activity and the
forecast (estimated probable or possible activity).
3. Interaction of potential and forecast within the market and sales sectors is indicated in
the Fig. 8.3.
4. A common approach to sales forecasting is:
(a) A national economic forecast.
(b) National economic forecast is used to secure industry sales forecast.
(c) Industry sales forecast is further used to determine specific company sales forecast
and product sales forecast.
5. Company demand is the company’s share of the market demand.
6. The sales forecast is the foundation of all budgeting and corporate operational plans.
7. Company demand describes estimated company sales at alternative levels of company
marketing effort. Marketer chooses one of these levels. The chosen level is called
company sales forecast.
8.1.2 Market Potential

In estimating the size of a market for a new product we may have the following
steps to be taken in a sequence:
1. Define the Market Population: The market is defined by laying down regional
limits and by demographic features of potential buyers, e.g., age, sex, income,
occupation, etc., in the case of consumer goods market.

2. Estimate of Consumption Units: In each market segment we have to count the
Notes
number of buyers. It is not difficult to do so.
3. Estimate of Purchasing Power of Buyers: National income data can give per
capita income figures, disposable income figures. Ability to spend assumes great
importance in the case of durable and costly consumer good such as car, refrigerator,
T.V., V.C.R., air conditioner, electrical appliances, microwave Cooking System, etc.
4. Estimate of Willingness to Spend as a function (result) of Planned
Marketing Effort: Will or inclination to spend is governed by psychological factors of
buyers such as buying motives and preferences as well as the influence of marketing
effort made to stimulate the buyer’s mind in favour of purchase decision.
5. Estimate of the Rates of Purchase and Product Usage: Ability to purchase,
will to purchase and expected marketing effort will give us the idea about heavy and
medium or light users as well as big customers who demand special attention.
6. Total Market Potential: We can multiply the total estimated number of
consuming units by the rate of purchase and product usage and the sum total is the total
market potential.
Note 1. It is assumed that a company is monopolist and sole supplier of a new product. On the
basis of level of planned marketing effort, we can easily have sales forecast for that
company.
2. In a competitive market, when a company is considering market potential for its new
product, it will have to first estimate its market share which is itself the function (result) of
planned marketing effort. From the estimate of market potential, the company can have
sales forecast for the chosen marketing progamme. For instance, in 1996-97, the total
market demand for TV sets is forecast at 90 lacs units for a year in India. The demand for
TV sets of the Videocon enterprise would be 27 lacs TV sets on the basis of its expected
market share at about 30 p.c. of the total. Of course, it is assumed that TV market will
have intense competition and the Videocon is ready to meet the challenge.
8.1.3 Demand Forecasting

After gathering information from multiple sources about various aspects of the
market and demand, one may attempt estimating future demand. The methods available
for demand forecasting may be broadly divided into three types.
1. Mechanical extra polation methods, which seek to identify trends and
movements which will determine the future behaviour.
2. In econometric analysis, relationships are expressed in the form of
mathematical models.
3. Other methods are judgement method and technical co-efficient method. The
several methods of demand forecasting available are not mutually exclusive,
but complementary. Hence, it may be desirable to use more than one method.
Conclusion
Demand forecasting involves determination of market characteristics, quantitative
market analysis and appraisal of project demand potential. The identification of market
characteristics is essential to arrive at realistic demand estimates and also to undertake
quantitative market analysis. On the basis of their structural features markets may be
divided into several distinct group such as monopoly, oligopoly, monopolistic competition,
pure competition, monopsony, etc.
The quantitative market analysis is made to estimate the industry demand of goods
and services which a project may be expected to produce and to give necessary
information for developing project demand forecasts. The analysis is done in three

stages: (a) Situation analysis; (b) Data collection and compilation; and (c) Interpretation
Notes
and presentation.
Situation analysis establishes the parameters of the quantitative analysis. It involves
a study of the feasibility appraisal of the project with a view to establishing the specific
purpose of undertaking the market analysis and identifying the dimensions of the
demand forecasts. It also helps in assessing and eventually determining the desired
alternatives of the demand forecasts.
Demand forecasting also involves the collection, compilation and interpretation of a
large variety of statistical data. For projecting future trends, it is essential to know about
past events, the situation at present and about the factors likely to affect the future course
of events. Personal observation, desk research and market surveys are the commonly
used ways and means for collecting authentic data.
8.1.4 Rules of New Product Development Operation
Strategy
1. Manage product development like any other process, with cost-quality-time
targets.
2. Determine the manpower and money up-front to ensure that resources are
available.
3. Integrate the process with all the other functions instead of running it as a black
box.
4. Use gateways along the way to ensure that all critical performance parameters
are met.
5. Put innovation at the heart of every new product.
6. Develop only those products that have the best chances of success in the
market place.
7. Translate every new product from the lab to the market in a short time without
affecting costs.
8. Benchmark the performance of the prototype against the best-in-class
standards. And check manufactur ability.
Operation
1. Use cross-functional development teams for simultaneous, instead of serial,
processing
2. Benchmark against the best on different product and performance parameters
3. Use infotech to facilitate real-time collaboration of geographically-dispersed
team-members.
4. Check the manufactur ability of the product continuously during the
development process
Creativity
1. Provide skunwork projects the freedom to experiment and to make mistakes
2. Set up systems to ensure that the ideas keep flowing and are converted into
product concepts
3. Encourage innovation initially, narrowing down the focus as the resource
hungry stages arrive
4. Build hierarchies of decision-making, not reporting-lines, in development teams

Notes 8.2 Summary

Demand forecasting involves determination of market characteristics, quantitative
market analysis and appraisal of project demand potential. The identification of market
characteristics is essential to arrive at realistic demand estimates and also to undertake
quantitative market analysis. On the basis of their structural features, markets may be
divided into several distinct groups such as monopoly, oligopoly, monopolistic
competition, pure competition, monopsony, etc.

1. A demand for a product may be defined as the quantity bought by _____ for a
certain time span.
(a) Marketers
(b) Sellers
(c) Producers
(d) Buyers
2. The quantitative market analysis is made to estimate industry demand of goods
and _____.
(a) Process
(b) Analysis
(c) Services
(d) Techniques

1. “Demand potential is the starting point of techno-economic analysis.” Discuss.
2. What do you understand by marketers’ concept of demand?
3. Give a brief account of demand forecasting.
8.5 Key Terms

Ɣ Demand: Quantity bought by buyers at a time from a given market.
Ɣ Company Demand: The volume of sales expected under given environmental
conditions for a specific firm.
Ɣ Market Potential: Estimation of a size of the market for a new product.

1. (d) Buyers
2. (c) Services

1. Anthony, R. (1998), Management Control, Tata McGraw Hill.

Market Planning 101
Notes
Unit 9: Market Planning
Structure:
9.1 Introduction
9.2 The Principal Marketing Functions
9.3 Responsibilities of Management
9.4 Applying the Marketing Concept
9.5 Segmentation of Market
9.6 Market Assessment
9.7 A System
9.8 Project Rating Index
9.9 Summary
9.12 Key Terms
Objectives
Ɣ Understand principal marketing functions
Ɣ Discuss responsibility of top management
Ɣ Explain the differences between Production-oriented and Marketing-oriented
Organization
Ɣ Talk about market assessment
9.1 Introduction
Marketing is one of the critical areas where MSMEs face problems. In the global
arena, they do not have the strategic tools and the means for their business development,
unlike the large enterprises. Constant changes in the market dynamics due to
technological changes and globalization have had a profound impact on the
competitiveness of the MSMEs. The whole gamut of marketing strategy for any product is
required to be addressed whether it is product differentiation, incremental feature of the
product, branding issue, customized and tailor-made services, clientele building, postsale
servicing, etc. The existing scheme of support requires to be harmonized and
rationalized to have a focused approach. The existing marketing support institutions
would also be revisited with a view to strengthening the marketing infrastructure for the
MSME sector and mainstream it to the major consuming areas and patterns.
Marketing is an essential input for the success of small-scale industries which
produces a wide range of products numbering over 6,000. Marketing management is a
key to the success of small-scale sector. It is a key factor in determining the success of
an industrial concern. Traditionally, marketing has consisted of “those efforts which effect

transfers in ownership of goods and care for their physical distribution”. In economic
Notes
terms, marketing covers those activities which relate to the creation of time, place and
possession of activities. Marketing is defined as the process of exchange between seller
and buyer. P. Kotler defines marketing as a “human activity directed at satisfying needs
and process”. The American Marketing Association defines market as “the performance
of business activities that direct the flow of goods and services from producer to
consumer or user”.
PRODUCTS OF MSEs Food
More than 6,000 products Products
Others
36% 22%
Rubber and Electrical and Metal Basic Metal Chemical and

Plastic Machinery Products Industry Chemical
Products Parts 6% 8% 10% Products 2%
6%
The salient features of marketing are:

(i) It is a creative function;
(ii) It promotes trade and employment;
(iii) It coordinates finance, production and distribution, and also determines and
directs the scale and value of the total efforts;
(iv) There is an emphasis on what the consumer wants; and
(v) There is an emphasis on the social goods, on increasing employment, on
giving the consumer the chance to decide.
The small industries in India generally suffer from many ailments where marketing is
concerned.
The most important are:
(i) Lack of brand names and places of respectability for the goods of small-scale
industry.
(ii) Identification of proper markets and consumers;
(iii) Research and market investigations and services;
(iv) Standardisation and quality improvement;
(v) Introduction of goods in foreign markets; and
(vi) Raw materials.
Marketing mechanism in small-scale industries involves all the activities undertaken
in the transferring of goods and titles thereto from producer to consumers. The efficiency
of marketing determines the sales and profits of the small-scale industries. In fact,
small-scale industries are able to prosper with a very significant marketing system. The
marketing mechanism differs from one industry to another. While, tiny industry and
ancillary units opt for simple mechanism, some others opt for full-scale marketing
mechanism, usually adopted by medium and large-scale units. In some other cases,

Market Planning 103
marketing of goods is entrusted to marketing agencies, specialised in such operations.

Notes
The significance of marketing for small-scale industry is the very basis of its industrial
activity. Thus, marketing is the key factor for the success of small-scale industries.
9.2 The Principal Marketing Functions

A marketing function may be defined as a major specialised activity or group of
activities performed in the marketing of goods and services. Although the performance of
a specific function may be inescapable, it is frequently transferable; in other words it has
to be performed by someone regardless of his official title and responsibilities. Another
characteristic of a function is that, whereas its purpose may be unchanging, its content, in
terms of the number and kinds of activities involved, may be subject to constant change.
Newer and better ways of doing things and carrying out traditional functions are
continually being developed.
Traditionally, some seven or eight so-called marketing functions have been listed
and normally include: (a) the exchange functions of buying and selling, (b) the physical
distribution functions of transporting, warehousing and handling goods between producer
and customer, (c) what are usually described as the ‘facilitating’ functions which take in
product standardisation and simplification, commercial and market information, financing
and risk-bearing. (It is questionable whether risk-bearing, in the true entrepreneurial
sense of committing one’s own resources to a speculative venture, really belongs in any
list of marketing functions, risk-bearing is a responsibility jointly undertaken by the
managers of a business or solely by the chief executive).
This kind of analysis is inadequate as a description of modern marketing activities
since it fails to distinguish clearly between major functions and the specialised activities
which comprise the different functions. Under the modern marketing concept there are
four principal functions – marketing research and information, product planning, selling
and distribution, and advertising and promotion. Chart sets out those major functions and
the specialised activities involved in each.
Chart I: The Principal Marketing Functions
Specific Function Activities involved

Marketing Information and Economic, business, trade, industry, consumer, user, product,
Research sales and advertising research and analysis.
Information handling the data processing. Marketing operations
research. Competitive intelligence.
Product Planning Determining and developing the company’s product mix.
Matching the products’ specifications, packaging, pricing,
performance and servicing to customer needs through product
and service improvements and new product Development.
Sales and Distribution Field selling/Selection of Distribution channels/
Warehousing/Transport/Sales Analysis/Sales Reporting/Sales
Forecasting/Sales Budgets and Quotas /Merchandising /Sales
Communications
Advertising and Promotion Advertising to the customer or user in all media (press,
television, cinema, radio, outdoor posters, etc.). Consumer
promotion, directed at the customer or user, e.g., reduced price
offers, branded pack offers, premiums, competitions,
couponing, etc. Point-of-purchase display material. Trade
promotion, e.g., incentive schemes, display competitions, sales
contests.
Extracted from Marketing in a Competitive Economy by Lesile Rodger.

Notes 9.3 Responsibilities of Management

The major responsibilities of general management are to establish marketing
objectives, to make policy decisions and communicate those decisions to the managers
of the operating (or implementing) divisions of the company; to establish standards for
measuring and guiding the overall performance of the company. The responsibilities of
operational or line management are to plan programmes, methods and procedures and
implement the decisions necessary to achieve the stated objective; to organise and
coordinate the activities and resources necessary to carry-out the programmes; and to
see that operating results conform as nearly as possible to agreed plans and standards
of performance.
The production division is responsible for the manufacturing aspect of marketing –
organising men, materials, machines and time to produce the requisite qualities and
quantities at specified times and at a designated cost to meet market requirements and
sales forecasts. Quality control, production programming, raw materials procurement are
included here.
The financial or accounting division of the company is concerned with the financial
aspects of marketing – budgetary control, standard costing and profit planning. Business
is based on the rigorous discipline of money and a major criterion of performance, but not
necessarily the only one, must be profit earned. Nothing that a company produces makes
money for the company until it is sold and paid for.
The marketing division is responsible for the sales, marketing research,
product-planning and development, distribution and promotional aspects of marketing,
for the detailed implementation of marketing and advertising plans and programmes and
for achieving designated marketing goals. In some companies the sales and distribution
functions are separated from the research, product planning and promotion functions —
the latter group sometimes being designated as ‘marketing services’. This does not
matter so long as both the sales division and the ‘marketing services’ division are
coordinated by the same individual, irrespective of the latter’s title, i.e., Marketing
Director, Sales Director or Commercial Director.
Finally, the Personnel and Administration Division of the company, if this is
separated from general management, is responsible for those aspects of marketing
dealing with job evaluation, selection and recruitment, executive training and general
administrative procedures laid down in company policy.
The line-up of top management and the four basic operating divisions of a company
as described above is depicted in Fig. 9.1.
Marketing is nothing more nor less than the profitable matching of total company
resources against market requirements and opportunities. Production requirements are
dependent upon the solution given to this commercial equation; in other words, a
company should make what can be profitably sold. What is absolutely certain is that, if it
remains unsold, it cannot yield a profit. In the parts, the business functions has been
more concerned with matching, total company resources against production
requirements, that is the company has attempted to sell what it wanted to make. The task
of marketing management is to identify, assess and realise market opportunities and
potentials.
Marketing management is responsible for creating customers by persuading them
through advertising and personal salesmanship that the company’s products or services
match their indicated needs and preferences more closely than competitors’ offerings, by
developing products and services through technical and market research which appear
to offer profitable sales opportunities, and at a price, time and place the customers want.

Market Planning 105
The key elements in the marketing of any product or service are illustrated in the
Notes
flow chart (Fig. 9.1).
TOP MANAGEMENT
General planning and direction of business. Formulation of overall strategy, objectives and
goals. Determination and communication of policies. Setting performance standards and
auditing performance.
Production Finance Marketing Administration

Organisation and Profit planning. Marketing plans. Job evaluation.
programming of Budget Marketing research. personnel selection
manufacturing control.Standard Product planning and and recruitment.
inputs (men, costs. Financing of development. Sales Executive training and
materials, company operations. and distribution. development,
machines, time) Credit control. Advertising and Administration
and .outputs promotion. routines and
(products). Quality procedures.
control. Raw
material
procurement
Fig. 9.1: The Responsibilities of Top Management and the Four Opening Divisions of a
Company
Fig. 9.2: Three Aspects of a Product
The marketing process starts with knowledge of the customer and his needs and
ends with a customer purchase and the satisfaction of those needs. Through technical
product research and customer research, generalized needs are translated into specific
product sales opportunities. Product planning identifies and specifies the particular

product-price-package combinations to exploit these opportunities. Products are
Notes
engineered or formulated (a number of variations of a single prototype may be made up),
screened and tested with customers for overall acceptance and performance. Final
decisions have to be taken on packaging design, pricing and trade terms. Assuming that
one product stands out as eminently suitable in all major respects, the next step is to
prepare a marketing plan, in writing, setting down all the relevant facts about the product,
the market, and the competition, the company’s marketing objectives and sales goals
and the means by which they are to be achieved.
A Splendid Team Effort
Marketing Objectives
Environmental Scanning
1. Internal 2. External
Estimated Expected Results
Developing Marketing Strategies
A. Reinforcing
1. Favourable Internal Climate
2. Communication
3. Motivation
B. Creating Mandatory Consumption
C. Redefining Markets
D. Redefining Markets
Creation of a Programme
Feedback Loop
Constant Measurement and Review
9.4 Applying the Marketing Concept

The marketing concept is applicable to all business organisations irrespective of
size or nature of the goods and services marketed. Differences in the types of goods
supplied, in the size and characteristics of the consumer or user markets for the various
classes of goods, in the purposes for which they are acquired and in the methods by
which they are distributed, do not invalidate the universal applicability of the marketing
concept to business.

Market Planning 107
As between large and small firms, and as between producers of consumer goods
Notes
and producers of industrial goods, there may be differences in the permissible scale of
marketing effort and in the specific types of marketing technique that are appropriate to
the particular industry or market. A far more fundamental difference, irrespective of size
or type of business, is the attitude of management. The following chart attempts to
highlight some of the major differences that might be expected to be reflected in business
operations according to whether management ends to think in terms of production or in
terms of marketing.*
The Basic Differences Between Production-oriented and Marketing-oriented Organisation
Business Function or Company Perspective

Activity Production Marketing
Top Management Technological considerations Customer considerations paramount.
predominate. Production and Marketing personnel in highest level
engineering personnel in highest executive positions.
level executive positions.
Objectives Internal influences predominate. External market influences
Business objective is to match total predominate. Business objective is to
company resources against match total company resources
production on technical efficiency against market requirements and
and method. Want to be known for opportunities. More emphasis on
technical or production know-how. market strategy and planning.
Want to be regarded as style and
market Leader.
Manufacturing Production less flexible. The Flexibility in production so as to
company sells what can be made. match product to sales opportunities.
The company manufacture what can
be profitably sold.
Marketing Aims to fulfil existing needs and Seeks to create markets and develop
develop workable products to meet saleable products. Company’s future
these needs. Company’s future bound up with markets yet to be
bound up with markets already identified and developed, and with
supplied, and products already in products not yet in existence.
existence. Marketing function not Marketing considered to be
considered to be as valuable as coordinate with manufacturing,
manufacturing, engineering or finance and other major business
finance. functions.
Research Leads in technical and scientific Leads in analytical and marketing
research. Marketing intelligence research. Market intelligence system
system relatively Undeveloped. well developed.
Product Planning Based on technical research, Based on market research.
suggestions for new or improved Suggestions for new or improved
products system from functional products stem from research into
performance and applications are customer needs. Performance and
prime considerations. Engineering applications are prime considerations
consideration tend to Predominate. regarded to be almost as important.
Laboratory testing more prominent Sales and market testing an integral
than sales or market. part of planning. Packaging viewed
Packaging viewed as a shipping as a sales tool in terms of its user
and protective device. Chief convenience and advertising and

concern in engineering, materials promotional effectiveness.
Notes
handling and packaging machinery.
Sales Salesman regarded as an Salesman regarded as an
Organisation order-getter for the factory. order-maker who keeps the factory
running and provides employment to
production workers. Salesman
accorded high status in the company
and more likely to be promoted to top
management positions.
Salesman lacks the professional Salesman given formal and
status of the engineer, chemist, continuous internal and on-the-job
lawyer or accountant. Less likely to training. Motivation of sales
be promoted to top management. organisation given high priority. Chief
Salesman lacks formal training. sales executive regarded as part of
Tends to get left to his own devices the management team.
as the man ‘out there’. Motivation of
the salesman minimal.
Advertising and Emphasis on cost rather than on the Advertising and promotion is an
Promotion value of this contribution to the total integral part of the company’s
selling effort. Advertising and marketing effort and a basic cost.
promotion regarded as an extra Outstanding advertising and
cost, not a basic cost like machines, promotion considered to be as
raw materials, research equally important to the successful
laboratories, etc. Not regarded as running of a business as outstanding
one of the skills required to run a manufacturing technique, technical
modern business successfully. research ability or financial and legal
skills.
Advertising and promotion not Advertising and promotion regarded

looked upon as an important source as a potential source of competitive
of competitive differential differential advantage, particularly
advantage. when the differences in own and
competitive products become less
and less distinguishable.
* F.F. Mayseer, Modern Marketing Management: An Integrated Approach; McGraw-Hill

Book Co. Inc., 1961, pp. 10-11.
The chart has been adapted from the author’s origin.
9.5 Segmentation of Market

Economies of scale are in favour of large marketers when the product is of mass
appeal. Small industries are not required to take up such a gigantic task. That is why they
have to think in terms of meeting the needs of a segment of the market. Segmentation
may be done in a variety of ways.
Some of the variables which assist in the segmentation of the market are age
groups, sex, income, occupation, education, religion, geographical situations, climatic
conditions, usage rate and buyer classes.
9.6 Market Assessment

Successful innovation is a necessary condition for effective marketing. “Innovate or
perish” is a current slogan which has a rich meaning for business operating in an

Market Planning 109
economy with customer-oriented marketing. An innovation is considered as a successful

Notes
invention. An innovation is the act of developing a novel idea into a process or product.
For an innovation to be successful, the new product or new process must be feasible and
must have commercial acceptability. The successful innovation passes through three
stages: (1) idea or invention, (2) implementation of the idea, and (3) market acceptance.
Implementation refers to the development of the idea or invention from its conceptual
stage to an output – a developed product or service. Market acceptance is the third stage
and it is the most critical to any successful innovation. A firm can control partially the first
two stages. However, the acceptance decision is an external factor and it depends upon
consumers and their reactions. Markets rely on all modes of promotion or marketing
comunications to exert influence on consumer behaviour and induce the potential
customers to adopt the innovation.
In this changing world, attitudes, habits, preferences, values and trends change. A
change in income, for instance, alters the demand pattern to unrecognisable dimensions.
There are a number of variables which have a direct bearing on the demand pattern of
product. It is therefore, necessary to gather data and information on these variables to
the extent possible with a view to making sound decisions. A sound decision based on
sound facts should certainly reduce risk. This is role of marketing research.
Marketing research is needed to determine the kind of product you should
manufacture on the basis of the needs, uses and preferences of the consumers; what
size, package and presentation will be most effective in persuading the consumer to
choose your products; the number of units that may be sold; the time and season for
peak sales, optimum price, sales promotion methods; and so on.
In other words, marketing research involves a study of consumer preferences,
habits and attitudes; it helps, you to decide how your immediate market operation should
be directed. It also involves an examination of trends so that in findings indicate the future
pattern of the market and assist you in planning your future programmes.
In a free economy, the consumer has the right to choose; and the prerequisites of
his choice are free competition and enough production to meet the demand – that is, the
demand does not exceed the supply. His second right is to be informed of the products,
its characteristics and its capacity to satisfy his needs. His third right is that the product
must meet his specific needs. His fourth right is to safety in the use of the product. Finally,
he has the right to have the benefit of technological progress in terms of the satisfaction
of his needs at reasonable cost. Therefore, any marketing research programme must
begin with ascertaining the needs, habits and preferences of consumers.
9.7 A System
Marketing is a system of integrated activities defined to develop strategies and plans
including marketing mixes to the satisfaction of customer wants to selected market
segments or targets. It is an ongoing process involving a set of multidirectional as well as
multidimensional activities. Matketing is a matching process by which a producer
provides marketing mix (product, price, promotion and physical distribution) that meets
consumer demand of a target market within the limits of society.
Promotion is the process of marketing communication involving information,
persuasion and influence. Promotion is a systematic attempt to move forward from a
stage of awareness to purchase action.
Of late, marketing management has been given much importance, especially by the
SSI sector. This could be attributed to the vastly different market situations existing now.
The demand for most products then exceeded the supply and anybody having the

resources could normally do well. In a competitive environment small-scale industries
Notes
face marketing problems from stage-tostage.
Some of the factors which contribute to marketing problems of the small-scale
industry could be identified as under:
(i) increasing competition from within the small-scale sector as well as from large
industries with established brand names and marketing set-up;
(ii) consumer awareness, even in rural and semi-urban areas, for quality goods;
(iii) the need to set-up distribution networks for reaching out widely dispersed
markets;
(iv) inability of the SSI units to exploit the export markets.
Considerable difficulty is being experienced by small-scale industrial units in
marketing their products due to their size, limited scale of operations and inability to
set-up an adequate network of retail outlets. With a view to facilitating the marketing
efforts of small-scale units, it is considered desirable to encourage the operations of
marketing organisations specially engaged in promotion of sales of products cottage, tiny
and small-scale industrial units. Any requests from such marketing organisations for
financial assistance to meet their working capital needs should, therefore, be favourably
considered by banks with due regard to the performance of such organisations in respect
of recycling of bank credit.
The requirement, therefore, of systematic marketing efforts for survival and growth
of small-scale industries, cannot be overemphasized. Basically, marketing involves:
— finding out what consumers want;
— planning and developing a product or a service to satisfy these wants;
— determining the best way to price, promote, and distribute that product or
service.
The various activities required to be looked into in detail for arriving at a sound
marketing strategy comprise product planning, market segmentation, market research,
sales promotion, advertising, pricing and distribution. However, depending upon the
product, the market and the environmental conditions, the intensity of usage of these
activities will differ.
Marketing begins with the choice of a product and its planned production.
Product planning concerns itself with the creation of a product which is in demand in
the market. It includes:
(i) Selection and development of a new product
(ii) product differentiation
(iii) packaging
(iv) branding
(v) value analyst, and
(vi) product modification

Market Planning 111
STAGE III
GRAPH Notes
MATURITY
STAGE IV
STAGE II DECLINE
GROWTH
STAGE I
INTRODUCTION
Fig. 9.3
Chart 2: Stages of Development in Management Marketing
Production Orientation Sales Orientation Customer/Market

Orientation
Market is viewed as Market as dependent variable Market and the firm are
dependent variable production and sales department mutually interdependent; firm
capacity as the independent capacity as the independent is highly dependent on
variable variable. Sales Dept ė market; it is an extension of
Production Dept. ė Market Market the market Market ė Firm
Emphasis is on the production Emphasis is on own products Emphasis is on the customer
process — on technical unit. of the firm — on sales. needs and wants — on
Focus is on problems of demand. Focus is on
manufacturing/finance. problems of marketing.
Marketing means: Sell what Marketing means: ‘A good Marketing means: ‘Targeting
is produced. product does not sell by itself. on customer needs/present or
It has to be pushed. future purchasing patterns of
Customers have to be demand’.
manipulated.’ Prevalent in a situation of
Prevalent in a situation of relative affluence or during
Prevalent in a situation of
surplus production, surplus buyer’s market.
absolute scarcity, or during
seller’s market. capacity, or when the market Prevalent in the developed
has not been surveyed and affluent countries since
properly. 1955.
Prevalent in the West during
Prevalent in the West Prior to
1930-1950 and when demand
1930.
declined in certain industries
Prevalent in areas, e.g.,
developing nations at a Customer satisfaction is the
production economy stage. focus of marketing universe.
Production was the centre of Salesmanship and promotion

the universe acted as the focus of It is assumed that goods are
marketing universe. bought and not sold and profit
It was assumed that best
product could attract buyers It is assumed that goods are is through customer
automatically. Consumer not bought. satisfaction only.
choice could be based on They have to be sold at any
quality in relation to price. cost, and profit is through
sales volume.

Notes
No need of aggressive Special selling efforts and If demand clicks with supply,
salesmanship and publicity. promotion to capture and no special selling efforts are
Company sells what it can maintain demand. necessary, problem is only of
make. distribution, i.e., serving of
demand. Company makes
what it can sell.
Note: Since 1965 under environmental approach, marketing concept has been widened in the
West. Government, market and pressure groups influence the firm and its marketing strategy. The
firm has to adopt socially responsible marketing strategies. It has to cater to the needs of
consumers as well as society – market needs in a social framework. It has to ensure quality of life,
e.g., absence of food, air and water pollution. Consumerism and government should achieve
consumer protection and environmental protection. The firm now aims at benefits for both sides,
i.e., customer satisfaction and profitability. Societal or social marketing concept appeared in
many affluent countries from 1965. It is slowly spreading over also in other developing countries.
It is now said that the so-called affluent countries have become really effluent countries.
Developing countries should not be effluent countries.
Table ‘A’: Promotion Strategy
Push Strategy Pull Strategy Push-pull Strategy

It is called a pressure strategy. It is called a suction strategy. In consumer goods market
Emphasis is on personal Emphasis is on extensive very large companies
selling at all stages in advertising to generate generally adopt a push-pull or
distribution. consumer demand. a combination strategy to sell
We have aggressive and high Product is literally pulled their products. Salesmen are
pressure salesmanship. through the marketing channel employed to push products,
by consumer. through the marketing
channels.
Conditions favouring push
strategy: Salesmen are mere order Extensive advertising is also
takers and distributing agents. employed to accelerate sales
1. Quality product with
Less emphasis on personal and to increase the market
unique product
selling at all stages in share.
features and talking
points for salesmen. distribution. Lower trade We need extensive promotion
margins are offered to expenditures and only very big
2. High-priced product.
resellers. national companies can resort
3. Higher profit margins to to combination strategy.
resellers. Lower retail prices but higher
turnover rates All tools of promotion work
Advertising plays a minor role together as a total
in push strategy. Heavy emphasis on consumer
advertising and large communication process.
investment required.
Note: 1. Strategy lays down plan of action to secure an advantage over competitors,,
demonstrate attractiveness to buyers and try to achieve fuller exploitation of company
resources.
2. Pull strategy gives emphasis on mass promotion. Push strategy gives emphasis on
personal selling.
3. Conditions indicating a favourable opportunity to promote are: 1. a favourable trend in
demand, 2. major product differences, 3. hidden qualities (purity in drugs, cleaning
power in detergents, flavour in foods), emotional buying motives to change the
psychological climate or buyer’s predisposition. Promotion strategy is expected to

Market Planning 113
exploit such opportunities partly through information, partly through motivation and
Notes
partly using promotion as a form of non-price competition.
4. In the push strategy, the middlemen has an active role for creating demand. In the pull
strategy he is responsible for serving demand.
Table ‘B’: Promotion Plans
Advertising Plan Publicity Plan Personal Selling Sales Promotion

Plan Plan
An advertising plan A publicity plan A personal selling A sales promotion plan
covers advertising: covers: plan covers: covers:
1. Targets. 1. Targets and 1. Sales targets. 1. Sales promotion
2. Objectives. objectives. 2. Objectives targets.
3. Strategy 2. Schedule of 3. Strategies. 2. Objectives.
4. Appeal. company 4. Major appeals 3. Strategies.
products and 4. Schedules of
5. Copy theme. 5. Budget.
events with events.
6. Media schedule. news value. 6. Methods of
7. Budget. measuring 5. Budget.
3. Media
8. Methods for personal selling 6. Methods of
possibilities.
measuring results. measuring the
4. Budget. results of sales
advertising
results. 5. Means of promotion.
measuring the
results of
publicity.
Note: 1. Objectives indicate where a firm wants to go: strategy shows the way or means of going
there and achieving objective.
2. Promotion plans should be: 1. relevant, 2. practical, 3. complete and detailed. They
should include specific costs and schedules of activities.They should be coordinated.
They should allocate definite responsibilities and give necessary authority to those who
are required to carry-out each part of the plan.
3. Typical promotion objectives are: (1) increase sales, (2) improve market share, (3)
create or improve brand recognition, acceptance, insistence, etc.,
4. inform and educate the market, (5) create a competitive difference, (6) create a
favourable climate for future sale. Please note that promotion is only one tool to achieve
these objectives.
4. A strategy is a plan for achieving objectives through the use of scarce resources in the
face of intelligent competition.

Table ‘C’: Types of Communication (Promotion) Influencing Various
Notes
Stages in Buyer Behaviour
Components or Dimensions Movement toward Types of Communication

of Attitude Purchase Relevant at each Stage
(Six-stage Sequence)
1. The Conative (Behavioural Points-of-purchase Material,
Dimension Retail Store Advertising,
It is the region of drives or Special Deals, ‘Last Chance
motives, i.e., activated Offer’, Price Appeals,
unsatisfied wants. Testimonials, Source
6 Credibility, i.e., expertness
Advertisements and sales
Purchase and trustworthiness of the
promotion must stimulate and
direct desires so as to Conviction source, personal selling,
motivate the consumer to buy interpersonal communication,
a product. The buyer should word-of-mouth communication
be made ready to respond are essential in evaluation and
and he should have the adoption stages. Believability
conviction that the purchase of company as a
would be wise. Purchase is communicator is called source
the last step converting this credibility
attitude into actual purchase.
2. The Affective (feelings and Competitive Advertising,
Emotions) Dimension Argumentative Advertising
It is the region of feelings and Copy, Image Advertising,
emotions. Consumer moves Status, Glamour Appeals
from knowledge to liking and stress on changing emotions
preference, he develops a and feelings of buyers.
favourable attitude toward the 4 Opinion leaders are used as a
product (liking) and then Preference good source of information
develops the point of 3 and opinion – to change
preference. Promotion tools Liking attitude of buyers through
must stress the affective interpersonal communication.
aspect of behaviour, i.e., the
area of feelings and emotions
must be tapped.
Advertisements and sales
promotion will change
emotions and feelings.
3. The Cognitive Dimension Announcements Advertising,
It is the region of awareness Descriptive Advertising Copy,
and knowledge. 2 Classified Advertisements,
Promotion tools must Slogans, Jingles, Sky Writing,
Knowledge
emphasize the cognitive Television, Radio
1 Advertisements.
aspects of buyer behaviour in
Awareness Mass media must be adopted
order to create awareness and
knowledge. Advertising to create awareness, provide
provides adequate information knowledge and information.
and facts.

Market Planning 115
Note: 1. Buying process involves six-stage sequence related to three basic psychological states:
Notes
(1) The cognitive dimension (Awareness and Knowledge), (2) The affective dimension
(Liking and Preference), and (3) The conative dimension (Conviction and Purchase).
2. A firm does not have separate strategies of advertising, selling and sales promotion. It
has one promotional mix and this mix is an integral part of the overall marketing plan.
The elements of promotion mix are no independent strategies. Each one supports the
other. They are complementary tools of promotion. Taken together advertising, personal
selling and sales promotion are the “Three Musketeers” of marketing programmes.
Their motto is: “All for one and one for all”. An integrated marketing mix means this, and
nothing short of this can be thought by a marketer.
3. Promotional plan should be in harmony with overall corporate objectives, policies,
organisation and its competence. Promotional plan should be evaluated against specific
promotional objectives as well as against the rest of the marketing mix.
4. The proper coordination and integration of selling, advertising and sales promotion
produces a far more efficient programme than an attempt to carry-out these activities
without regard to their effects upon each other.
5. Movement towards purchase is upwards. It starts from awareness and ends at
purchase action or decision.
6. The company reputation, created through advertising and other forms of mass
communication, can enhance the effectiveness of the salesman.
Company image is the personality or reputation of the company as perceived by
customers, prospects, supplied shareholders, and the general public.
Company image is created by communications, particularly through public relations.
9.8 Project Rating Index

PRI is an evaluation method that helps management to carry out the process of
preliminary screening.
In this method, management identifies factors for rating projects and assigns a
weight to each factor.
The projects are then measured against these factors and assigned a score. If the
project gets the score below the desired value, the project is rejected.
Construction of Rating Index
Factors Factor Rating Factor

Weight Score
VG-5 G-4 A-3 P-2 VP-1
Technical know-how 0.25 ¥ 0.75
Adequacy of market 0.15 ¥ 0.45
Input availability 0.10 ¥ 0.40
Consistency with 0.20 ¥ 0.80
government policies
Reasonableness of cost of ¥ 0.60
raw materials
Rating Index 3.00
The steps involved in determining the project rating index are:
1. Identify factors relevant for project rating.
2. Assign weights to these factors according to their importance.

3. Rate the project proposal on various factors, using a suitable rating scale.
Notes
4. For each factor, multiply the factor rating with the factor weight to get the factor
score.
5. Add all the factor scores to get the overall project rating index.
9.9 Summary
Marketing is one of the critical areas. Constant changes in the market dynamics due
to technological changes and globalization have a profound impact on competitiveness.
Marketing planning is key to the success of small scale sector. The process starts with
knowledge of the customer and his needs and ends with customer purchase and
satisfaction.

1. Marketing is essentially input for the success of _____ scale industries, it
produces a wide range of products.
(a) Large
(b) Small
(c) Medium
(d) Intermediate
2. Human activity is directed at satisfying _____ and process.
(a) Greed
(b) Taste
(c) Needs
(d) Hunger

1. “Market planning is essential for the success of small scale industry.” Discuss.
2. Explain the principle marketing functions.
3. What are the differences between production oriented and marketing oriented
organization?
9.12 Key Terms

Ɣ Marketing: Process of exchange between seller and buyer (‘human activity
directed at satisfying needs and process ‘— P. Kotter).
Ɣ Marketing function: Major specialized activity performed in marketing of
goods and services.
Ɣ Innovation: The act of developing a novel idea into a process or product.
Ɣ Marketing system: It is an ongoing process involving a set of multi-
dimensional activities.

Market Planning 117
9.13 Check Your Progress: Answers Notes

1. (b) Small
2. (c) Needs

1. Chandra, P. (2002), Project, Tata McGraw Hill.
2. Meredith, J. (2000), Project Management, John Wiley.
3. Desai, V. (2014), Project Appraisal, Himalaya Publishing House Pvt. Ltd.

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Capital Expenditure 1

MODULE I: PLANNING OF PROJECTS Notes

Unit 1: Capital Expenditure

1.2 Capital Investment Appraisal

Amity Directorate of Distance and Online Education

Expected Year 1 ` 7,500 3,000 4,000

Net Cash Year 2 ` 5,500 5,000 6,000

Inflow Year 3 ` 3,000 10,000 7,000

Amity Directorate of Distance and Online Education

Following the previous example,

Amity Directorate of Distance and Online Education

Amity Directorate of Distance and Online Education

Amity Directorate of Distance and Online Education

1.2.1 Net Present Value vs. Internal Rate of Return

Amity Directorate of Distance and Online Education

N = The life of the project in number of years

= ` (8,333.33 + 6.857.71 + 5,556.83 – 20,052)

Amity Directorate of Distance and Online Education

1.3 Internal Rate of Return (IRR)

1.3.1 Capital Rationing — A Linear Programming Approach

Amity Directorate of Distance and Online Education

Amity Directorate of Distance and Online Education

1.5 Check Your Progress

Amity Directorate of Distance and Online Education

1.6 Questions and Exercises

1.7 Key Terms

1.8 Check Your Progress: Answers

1.9 Further Readings

Amity Directorate of Distance and Online Education

Unit 2: Phases of Capital Budgeting

Amity Directorate of Distance and Online Education

2.1.1 More than mere Accounting

2.2 Total Systems Approach

Amity Directorate of Distance and Online Education

2.2.1 Budget Objectives

Sales Budget Cash Budget Production

Selling and Capital Budget for Prime

Stock Budget Administration

Accounting Variance Analysis Action by Management at all

Fig. 2.1: Budgetary Control System

2.2.2 Budgetary Control

Amity Directorate of Distance and Online Education

(1) (2) (3) (4) (5)

1. Sales budget is the

Fig. 2.2: Types of Budgets

2.2.3 Advantages of Budgetary Control

Amity Directorate of Distance and Online Education

2.2.4 Steps in Budgetary Control

2.2.5 Programmes, Budgets, Controls

BEING AWARE OF OPPORTUNITY IN THE LIGHT OF BACKGROUND

STEP 1 OBJECTIVES OR GOALS

CORORATE PLANNING PREMISES IN WHAT ENVIRONMENT – INTERNAL

IDENTIFY ALTERNATIVES - WHAT ARE THE MOST FAVOURABLE

COMPARE WHICH ALTERNATIVE OFFERS BEST CHANCE TO REACH

CHOOSE AN ALTERNATIVE SELECTING THE COURSE OF ACTION TO BE

FORMULATE SUPPORTING PLANS SUCH AS PLANS TO BUY MACHINERY,

NUMERISE PLANS BY MAKING BUDGET - DEVELOP SUCH BUDGETS AS

2.2.6 Conscious Budgeting

Amity Directorate of Distance and Online Education

A Check List for Effective Budgeting

Amity Directorate of Distance and Online Education

Amity Directorate of Distance and Online Education

2.4 Check Your Progress Notes