Definition of Project Identification

Introduction

An entrepreneur has an infinitely wide choice with respect to his project in different dimensions such as product/service, market, technology, equipment, scale of production, time phasing and location. Hence, the identification of investment opportunities (projects) calls for understanding the environment in which one operates, sensitivity to emerging investment possibilities, imaginative analysis of a variety of factors and also chance of luck. This chapter is concerned with the scouting and screening of project ideas, steps in the project identification process and also consideration involved in identifying the new projects by an existing company.

Project Ideas

It is the first and foremost task of an entrepreneur to find out suitable business which is feasible and promising and which merit further examination and appraisal. Therefore, he has to first search for a sound workable business idea and give a practical shape to his idea. while doing so, the entrepreneur has to tackle the various problems from time to time to achieve the ultimate success. Since the good project ideas are elusive, a variety of sources should be tapped to stimulate the generation of project ideas.

Sources of Project Ideas

Project ideas could originate from the various sources viz.,

Success story of a friend/relatives

Experience of others in manufacture/sale of product

Examining the inputs and outputs of industries

Plan outlays and government guidelines

Suggestions of financial institutions and developmental agencies

Investigation of local materials and resources

Economic and social trend of the economy

New technological developments

Project profiles and industrial potential surveys

Visits to trade fairs

Unfulfilled psychological needs

Possibility of reviving sick units

The various sources from which the project idea can be generated are explained below:

Analyse the Performance of Existing Industries

A study of existing industries in terms of their profitability and capacity utilisation is helpful. The analysis of profitability and break even level of various industries indicates promising investment opportunities. Opportunities which are profitable and relatively risk free. An examination of capacity utilisation of various industries provides information about the potential for further investment. Such a study becomes more useful if it is done regionwise, particularly for products which have high transportation costs.

Examine the Inputs and Outputs Of Industries

An analysis of the inputs required for various industries may throw up project ideas. Opportunities exist when (I) materials purchased parts, or supplies are presently being procured from different sources with attendant time lag and transportation costs and (ii) several firms produce internally some components/parts which can be supplied at a lower cost by a single manufactures who can enjoy economies of scale.

A study of the output structure of existing industries may reveal opportunities for further processing of output or even processing of waste.

Examine Imports and Exports

An analysis of import statistics for a period of five to seven years is helpful in understanding the trend of imports of various goods and the potential for import substitution. Indigenous manufacture of goods currently imported is advantageous for several reasons:

it improves the balance of payments situation

it provides market for supporting industries and services

it generates employment

Likewise, an examination of export statistics is useful in learning about the export possibilities of various products.

Plan Outlays and Government Guidelines

The government plays a very important role in our economy. Its proposed outlays in different sector provides useful pointers toward investment opportunities. They indicate the potential demand for goods and service required by different sectors.

Suggestions of Financial Institutions and Developmental Agencies

In a bid to promote development of industries in their respective states, state financial corporations state industrial development corporations and other developmental bodies conduct studies, prepare feasibility reports and offer suggestions to potential entrepreneur. The suggestions of these bodies are helpful in identifying promising projects.

Investigate Local Materials and Resources

A search for project ideas may begin with an investigation into local resources and skills, various ways of adding value to locally available materials may be examined. Similarly, the skills of local artisans may suggest products that may be profitably produced and marketed.

Analyse Economic and Social Trends

A study of economic and social trends is helpful in projecting demand for various goods and services. Changing economic conditions provide new business opportunities. A great awareness of the value of time is dawning on the public. Hence the demand for time saving products like prepared food items, ovens and powered vehicles has been increasing. Another change that we are witnessing is that the desire for leisure and recreational activities has been increasing. This has caused a growth in the market for recreational products and services.

Identify Unfulfilled Psychological Needs

For well established, multi brand product groups like bathing soaps, detergents, cosmetics and tooth pastes, the question to be asked is not whether there is an opportunity to manufacture something to satisfy an actual physical need but whether there are certain psychological needs of consumers which are presently unfulfilled. To find whether such an opportunity exists, the technique of spectrum analysis may be followed. This analysis is done somewhat as follows.

Important factors influencing brand choice are identified respect of the factors identified in step gaps which exist in relation to consumer psychological needs are identified.

Visit to Trade Fairs

Attending the National and International trade fairs provides an excellent opportunity to know about new products and new development.

The abovesaid sources of project ideas may be generated by the Government agencies, credit institutions, non governmental organisations and also by public.

The Govt. have largest resources and have the necessary information to generate project ideas and it plays a predominant role in this sphere. The government has the required facilities and manpower to conduct detailed studies which may lead to making investment decisions. Banks and other financial institutions are actively involved in sharing the social responsibility of achieving the national objectives of economic development. The co-operatives and non governmental organisations as well as individual entrepreneurs are now actively participated in identification of projects.

The awareness of involving the people or the beneficiaries in project identification is now increasing fast. Since the local people have the first hand knowledge of the potentials and problems of the area to which they belong, more realistic project identification has become possible with their involvement. It needs no emphasis the project ideas would be generated in better manner both in the qualitative as well as quantitative terms when the knowledge and ideas of the Govt. functionaries, people, the financial institutions and other experts are pooled together.

Purpose and Need for Project Identification

The entire economic management planning is based on two fundamental assumptions. i.e. a) limited means and b) unlimited ends. A planner has to select few important needs to cut it into size of his/her means. This may be treated as fixing the priority is called identification of project. It helps in elimination process. Identification and selection of a project is a scientific process. This process is based on certain essential conditions. It may differ from project to project. The essential conditions which should be taken into consideration for identification and selection of production projects are as follows:

Project should be in conformity with the economic needs of the area.

It should take into account the depriving factors which might have adverse impact.

The input-output ratio should be optimum.

The purpose of the project is to increase the production and employment of the area.

Thus, the abovesaid conditions will differ due to resources availability, use pattern and other relevant conditions of the area. Besides that, project should also consider certain national priorities.

Steps in Project Identification

Project ideas are like other ideas which don’t take concrete shape immediately. There are several stages of making propositions their considerations and scrutiny for their soundness.

An idea is first born, it is under incubation for sometime and subsequently it begins to take some definite shape. The project ideas to develop take almost the same course. This project identification may be broadly divided into four stages, viz.,

Conceptual stage - where project ideas are generated

Screening stage - at which unviable ideas are eliminated

Identification stage - at which viable projects are selected

Pre-feasibility state - at which pre-feasibility studies are taking up.

Conceptual Stage

A number of project ideas may be generated either by those officials or non-officials and entrepreneurs individually or collectively who are conversant with the area. In this context, one has to examine the potentialities of development and the problems, needs and aspirations of the people of the concerned area.

Screening Stage

In the second stage project ideas generated above are screened in a preliminary exercise to weed out the bad or unviable ideas. All project ideas would not pass the screening test. Some project ideas may be imaginary to warrant any serious consideration.

The third & fourth stages may be called as investment opportunity study. This study is necessarily preliminary and the broad one and has a limited objective of providing planners with a choice of projects from which they can make a selection. Pre-feasibility study is an intermediate stage between an investment opportunity study and a detailed feasibility study and these can be differentiated mainly on the basis of information required for respective stages.

Screening of Project Ideas

After gathering the project ideas from the various sources as aforesaid, it is essential to eliminate ideas which prima facie are not promising. This process of eliminating the irrelevant and unviable ideas is called screening of project ideas. It can be done with the help of testing the following conditions of the propositions.

Compatibility with the promoter

Consistency with governmental priorities

Availability of inputs

Adequacy of market

Reasonableness of cost

Acceptability of risk level etc.

The project idea must be compatible with interest personality and resources of the entrepreneur. It should be accessible to him and also it offers him the prospects of rapid growth and high return on invested capital.

The project idea must satisfy or go along with the governmental priorities, National goals and governmental regulatory framework.

No contrary environmental effects to governmental regulations

Easily accommodating foreign exchange requirements  No difficulty in obtaining license.

The resources and inputs required for the project must be reasonably assured. This feature of the project can be assessed with the help of determining the following points relating to a project.

Capital requirement within manageable limit

Obtaining technical know-how

Availability of raw materials at a reasonable cost

Obtaining power supply

Identifying the adequacy of market is the key factor to select, the viable project idea. To judge the adequacy of market the following factors have to be examined.

Total present domestic market

Competitors and their market shares

Export market

Quality price profile of the product

Sale and distribution system

Projected increase in consumption

Barriers to the entry of new units

Economic social and demographic trends favourable to increased consumption

Patent protection

Reasonableness of cost is another factor to screen the project ideas. The cost structure of the proposed project must enable it to realise an acceptable profit with a competitive price. The following cost factors must be carefully considered to design a viable cost structure.

Cost of material inputs, labour costs, factory overheads.

General administration expenses, selling and distribution costs.

Service costs, economics of scale etc.

Acceptability of risk level is another factor which helps to screen the project ideas and hence determine the desirability of a project.

Methodology for Project Identification

To make a viable project it should be linked with the actual circumstances prevailing in the area. Without knowing the basic information relating to socio-economic conditions of the area, it is difficult to draw a suitable project for the area. Development needs and potentials vary from area to area. For specific area, before drawing a project, local condition and other relevant factors must be taken into consideration. Most of the project fail because they were not based on local problems. Assumptions based on macro level information may fail to watch at micro level. Survey is a technique to unearth the hidden information which are vital to identify the basic requisites of project i.e. need, resources and priorities. It also helps in making right choice between different alternatives. Secondly it presents lot of information to be used as bench mark information which will help at the later stage for evaluation of the project.

Project Identification for an Existing Company

Existing companies essentially large scale company form of organisations are continuously developing various projects for their developmental purposes. While doing so, the existing company has to make a more intensive analysis of its resources and environment and conceive of projects on the basis of its existing activities. An existing company which seeks to identify new project opportunities should undertake a “SWOT” analysis. It is an acronym law of strengths and weaknesses and opportunities and threats. This analysis evaluate all these four characteristics of existing company.

A brief summary of the points required for SWOT analysis is given below:

Availability of internal financial reasons for new projects after taking into account the need for replacement expenditure, increase in working capital, repayment of borrowings and dividend payments.

Capability of raising external financial resources.

Availability of production facilities.

Technological capabilities of the company.

Availability of different sources of raw materials and its utilisation.

Availability of infrastructural facilities.

Cost structure and profit margins of the company.

Distribution network of the company

Market share of the company.

Capability of top management of the company.

State of industrial relations in the company.

Impact of corporate laws on the growth of the company especially (MRTP ACT) etc.,

Likely changes in the governmental policies.

Possibility of evolving new technology and its impact on the cost structure of the company.

Existence and severity of competition.

Changes in the customers preferences, tastes etc.

By considering the abovesaid information keenly the SWOT analysis helps to provide the basis for the corporate strategy to be followed and indicate the major areas of thrust. These may include expansion of the capacity of existing product range, vertical integration, diversification in related areas and mergers.

Summary

Thus this lesson has explained to you the significance and mode of conceiving a good project idea. It also explains to you the various sources from which the project ideas can be generated and how one should select the project idea.