Lecture V

Projects

Academic year 2012-13

Trimester IV GENERATION AND SCREENING OF PROJECT IDEAS

Scouting for Project Ideas

Analyse the performance of existing industries Examine the inputs and outputs of various industries Review imports and exports Study plan outlays and governmental guidelines Look at the suggestions of financial institutions and development agencies Investigate into local needs, materials and resources Analyse economic and social trends

Scouting for Project Ideas..contd

Study new technological developments Draw clues from consumption abroad Explore the possibility of reviving sick units Identify unfulfilled psychological/social needs Attend trade fairs Stimulate creativity for generating new product ideas Look at what the competition is doing

Often the outcome of a triggering process

Identification of opportunities requires Imagination Sensitivity to environmental changes Realistic assessment of what the firm can do Identification is often the outcome of a triggering process rather than an analytical exercise

Generation of Ideas
To stimulate the flow of ideas, the following are helpful SWOT analysis Clear articulation of objectives: it might be cost reduction, productivity improvement, etc

Fostering a conducive environment: some companies like HUL have successfully used staff suggestion schemes to motivate employees to think more creatively

How to do it?
To come out with a good business idea, the firm must systematically monitor its business environment, and assess its competitive abilities (corporate appraisal)

Monitor the Business Environment

Competitor

Corporate Appraisal

Marketing and distribution

Production and operations

Research and development Corporate resources and personnel Finance and accounting

Tools for Identifying Investment Opportunities

There are several tools or frameworks that are helpful in identifying promising investment opportunities

The more popular ones are:

1. Porter model
2. Life cycle approach 3. Experience Curve These are explained in the next 3 slides

Porter Model
According to Michael Porter the profit potential of an industry depends on combined strength of the 5 basic competitive forces driving industry competition
Potential Entrants Threat of New Entrants Bargaining Power of Suppliers
THE INDUSTRY Rivalry Among Existing Firms

Suppliers

Bargaining Power of Buyers

Buyers

Threat of Substitute Products Substitutes

Life Cycle Approach

Many industrial economists believe that most products evolve through a life cycle that has four stages:

Pioneering stage
Rapid growth stage Maturity and stabilisation stage

Decline stage

Most products evolve through a life cycle. The broad stages and the investment returns in these stages are as follows:
Stage

Investment Return

Pioneering

May have negative NPV but may create options for participating in growth stage

Rapid growth
Maturity Decline

Positive NPV
NPV neutral Negative

Experience Curve
The experience curve shows how the cost per unit behaves with respect to the accumulated volume of production 100

80

60 40
10 20 40 80

Accumulated volume of production

Experience Curve.contd
The key factors that contribute to decline in unit cost with respect to the accumulated volume of production are learning effects, technological improvements, and economies of scale Investments aimed at reducing costs are essential for long term survival & profits

Sources of Positive NPV

Economies of scale

Product differentiation
Cost advantage

Marketing reach
Technological edge

Government policy

Qualities and Traits of a Successful Entrepreneur

Willingness to make sacrifice Leadership Decisiveness

Confidence in the project

Marketing orientation Strong ego Open-mindedness

How to determine Project Rating Index

Identify factors relevant for project rating Assign weights to these factors ( the weights are supposed to

reflect their relative importance)

Rate the project proposal on various factors, using a suitable rating scale (typically a 5-point scale or a 7-point scale is used) For each factor, multiply the factor rating with the factor weight to get the factor score Add all the factor scores to get the overall project rating index Compare with a pre-determined hurdle value

Example of Construction of a Rating Index

Factor Factor Weight VG 5 G 4 Rating Index 4.00 Rating A 3 P 2 VP 1 Factor Score

Input availability Technical know-how Reasonableness of cost Adequacy of market Complementary relationship with other products Stability Dependence on firms strength Consistency with governmental priorities

0.25 0.10 0.05 0.15

0.05 0.10 0.20 0.10

0.75 0.40 0.20 0.75

0.20 0.40 1.00 0.30

Have you done the Preliminary Screening?

Among other things, you should examine the project on the following parameters and see if it works:
Compatibility of project with the promoter Consistency with governmental priorities

Availability of inputs
Adequacy of market Reasonableness of cost Acceptability of risk level

Preliminary Screening ..contd Have you done the following?

Do you need any authoritys approval, license, etc? Are you eligible? How long will it take for you to break even? Is that acceptable? How are you funding the project? What is the approximate period of repayment of debt, if any? What factors are critical for success of the project? Do you have any major gaps? How will you plug these? Have you examined the business model and economics of the competitors? How will you beat the competition?