UNIT 2: PROJECT IDENTIFICATION

2.1 INTRODUCTION

The identification of promising project ideas is the first step towards establishing a successful
venture. It is also the beginning of the mobilization of investment funds.

The identification of opportunities for project (investments) requires an understand of the

environment in which one operates, sensitive to emerging investment possibilities,
imaginative analysis of tangible and intangible factors, and also an element of luck. The task
is partly structured and partly unstructured; partly dependent on convergent thinking and
partly on divergent thinking; partly requiring objective analysis of quantifiable information,
partly requiring subjective evaluation of qualitative factors; and partly amenable to control,
partly dependent on fortuitous circumstances.

`The task (objective) of identification stage is to identify investment opportunities, which are
feasible and promising and which deserve further in-depth study and appraisal. To briefly
discuss the identification stage, the following points are explored.
 Generation of ideas  Preliminary screening
 Monitoring the environment  Project rating index
 Corporate appraisal  Being an entrepreneur
 Scouting for project ideas

3.2 GENERATION OF PROJECT IDEAS

‘Necessity is the mother of invention’ sounds rhythmic with projects, as they are roots of
needs and wants. These needs may be social, political, economic, commercial, technical or
environmental that drives the actions of entrepreneurs to pursue some creative actions. That is
project ideas are generated in order to satisfy the needs and wants. These actions will impact
both the macro and micro perspective of mankind.

Stimulating the flow of ideas:

Most organizations adopt a causal and haphazard approach to the generation of ideas. To
stimulate the flow of ideas, the following are helpful:

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a. SWOT Analysis – SWOT stands for strength, weakness, opportunities and threats. SWOT
analysis represents a conscious, deliberate and systematic effort by an organization to identify
their internal strengths and weaknesses and the opportunities and threats in the environment.
This analysis helps to identify opportunities that can be profitably exploited by the
organization in light of its strength and weakness. Thus, periodic SWOT analysis facilitates
the generation of ideas.

b. Clear articulation of objectives – A clear articulation and prioritization of objectives of an

organization helps in canalizing the efforts of employees and helps them to think more
imaginatively.

The operational objectives of the firm may include

1. Cost reduction
2. Productivity improvements
3. Increase in capacity utilization
4. Improvement in contribution margin
5. Expansion into promising fields

c. Fostering a conductive climate – To tap the creativity of people and to harness their
entrepreneurial urges, a conducive organizational climate has to be fostered.

3.3 MONITORING THE ENVIRONMENT

Basically a provision investment idea enables a firm (or entrepreneur) to exploit opportunities
in the environment by drawing on its competitive strengths or to minimize the external threats
Hence, the firm must systematically monitor the environment and assess its competitive
abilities. The business environment consists of all those aspects and forces in the surroundings
of business enterprises under which business operations are to be carried out effectively and
efficiently. Business external environment can broadly be divided in to two categories,
namely:
1. Macro – external environment, and
2. Micro – external environment

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Macro – external environment
The macro environment (which include the economic, political and legal, social and cultural,
and technological forces) and its important aspects studied in monitoring consists of the
following:
Economic sector - State of the economy
- Overall rate of growth
- The growth rate of primary, secondary and tertiary sectors.
- Projected national income trends, GNP trends
- Projected industry output, projected price movements
- Trends in fiscal, credit and monetary policies
- Cyclical fluctuation of the economy
- Corporate taxation and incentives
- Provisions of infrastructure
- Inflation rate, interest rate, exchange rate
- Unemployment level
- Linkage with the world economy
- Balance of payment (trade surplus/deficit)
- Budget deficit/surplus
Governmental (political - Manifestoes of party in power and the opposition
and legal) sector - Attitude towards investors
- Restrictions on areas of investment by private sector
- Restrictions on imports
- Industry policy
- Import and export policies
- International trade regulation
- Government programs and projects
- Tax framework
- Subsidies, incentives
- Financing norms
- Lending conditions of financial institutions and commercial banks
- Environmental protection laws
- Control over prices and distribution of goods
Technological sector - Emergence of new technologies
- Access to technical know-how, foreign as well as indigenous
- Transport
- Product processing
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 - Use of computers and other automations
- Receptiveness on the part of the industry
Social and cultural sector - Population trends, shift in population among regions
- Age shifts in population
- Educational profile
- Employment of women
- Attitude towards consumption and investment
- Changes in ethnic composition
- Customs, beliefs and values

Micro – External environment

The micro external environment is also known as Task environment. The micro – external
environment is mainly concerned with industry, market, competitors, etc. and the major
factors to be studied consists of:
Competition sector (analysis of the - Number of firms in the industry and the market
industry and the market) share of the top few
- Degree of homogeneity and differentiation among
products
- Exit and Entry barriers
- Comparisons with substitutes in terms of quality,
price and functional performance
- Marketing policies and practices
- Capacity utilization
- Product life cycle
- Foreign opportunities

Supplier sector - Availability and cost of raw materials and sub-

assemblies
- Availability and cost of energy
- Availability and cost of money
- Exit and entry of suppliers
- Power of suppliers

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3.4 CORPORATE APPRAISAL

A realistic appraisal of corporate strengths and weakness is essential for identifying

investment opportunities, which can be profitably exploited. The broad areas of corporate
appraisal and the important aspects to be considered under them are as follows:
Market and distribution:
Corporate resource and personnel:
 Market image
 Corporate image
 Product line
 Clout with governmental and regulatory
 Market share
agencies
 Distribution network
 Dynamism of top management
 Customer loyalty
 Competence and commitment of employees
 Marketing and distribution costs
 State of industrial relations
Production and operations:
Finance and accounting:
 Conditions and capacity of plant and
 Financial leverage and
machinery
borrowing capacity
 Availability of raw materials,
 Cost of capital
sub-assemblies and power
 Tax situation
 Degree of vertical integration
 Relations with shareholders and
 Locational advantages
creditors
 Cost structure
 Accounting and control system
Research and development:
 Cash flow and liquidity
 Research capability of the firm
 Track record of new product development
 Laboratories and testing facilities
 Coordination between research and operation

3.6 SCOUTING FOR PROJECT IDEAS

Good project ideas – the key to success – are elusive. So a wide variety of sources should be
tapped to identify them. Here are some suggestions in this regard.
 Analyze the performance of existing industries
 Examine the inputs and outputs of various industries

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  Analyze possible extension of existing lines of manufacture by backward or forward
integration linking
 Analyze inter-linkage with other industries, indigenous or transnational
 Review import and exports
 Study plan outlays and governmental guidelines
 Look at the suggestions of financial institutions and developmental agencies
 Investigate local materials and resources
 Analyze economic and social trends
 Study new technological developments
 Draw clues from consumption abroad
 Analyze sectors successful in other countries with similar economic background and
levels of development, capital, labour and natural resources.
 Study new technological developments
 Explore the possibility of reviving sick units
 Identify unfulfilled psychological needs
 Attend trade fairs
 Hope that the chance factor will favor you
 Brain storming

3.7 PRELIMINARY SCREENING

By using the suggestions made in the preceding sections, it is possible to develop a long list of
project ideas. Some kind of preliminary screening is required to eliminate ideas which are not
promising. For this purpose, the following aspects may be looked in to:
 Compatibility with the promoter’s objectives
 Consistency with governmental priorities
 Availability of inputs
 Adequacy of market
 Reasonableness of cost
 Acceptability of risk level

Project preliminary screening is like pouring all the ideas into a filtering funnel. In the first
instance, all possible project ideas are listed (identified). Then some of them are eliminated

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and few projects are screened for further analysis. After detailed study of few limited projects,
one project will be selected at the end.
3.8 PROJECT RATING INDEX

When a firm evaluates a large number of project ideas regularly, it may be helpful to
streamline the process of preliminary screening. For this purpose, a preliminary evaluation
may be translated into a project rating index. The steps involved in determining the project
rating index are as follows:
1. Identify factors relevant for the project rating
2. Assign weights to these factors (the weights are supposed to reflect their relative
importance)
3. Rate the project proposal on various factors, using a suitable rating scale. (Typically a
5-point or a 7-point scale is used for this purpose.
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.

Example of project rating index

Assume that the following factors are identified to be relevant for project rating
Factors Factor weight

- Technical know-how 0.20

- Input availability 0.15
- Reasonableness of cost 0.20
- Adequacy of market 0.05
- Stability 0.10
- Dependence of firm’s strength 0.20
- Consistency with government priorities 0.10

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If the firm uses five rating scale, determine the rating index for the project
Factor Rating Factor
weight 5 4 3 2 1 Score
Technical know-how 0.20  0.80
Input Availability 0.15  0.45
Reasonableness of costs 0.20  1.00
Adequacy of market 0.05  0.20
Stability 0.10  0.50
Dependence of firm’s strength 0.20  0.40
Consistency with gov’t priorities 0.10  0.50
Rating index 3.85
What is the purpose of rating index? Project rating index enables to identify (from the list) the
project(s) that can be studied further in detail. If the policy of the firm is to further study the
projects whose rating index is 3.50 and above, the above project will enter the next phase of
the project.
- Determine the rating index by adding the product of factor weight and rating scale.