chapter generation and screening of project ideas
TRANSCRIPT
CHAPTER 3
GENERATION AND SCREENING OF PROJECT IDEAS
AbstractAbstract The search for promising project ideas is The search for promising project ideas is
the first step towards establishing a the first step towards establishing a successful venture.successful venture.
The chapter would discuss certain broad The chapter would discuss certain broad considerations and guidelines helpful in considerations and guidelines helpful in generation and screening of project generation and screening of project ideas.ideas.
The objective is to identify investment The objective is to identify investment opportunities which are prima facie opportunities which are prima facie feasible and promising.feasible and promising.
OUTLINE
• Generation of ideas
• Monitoring the environment
• Corporate appraisal
• Profit potential of industries : Porter model
• Scouting for project ideas
• Preliminary screening
• Project rating index
• Sources of positive net present value
• On being an entrepreneur
Generation of Ideas
To stimulate the flow of ideas, the following are helpful
SWOT analysis
Clear articulation of objectives
• Cost reduction
•Productivity improvement
•Increase in capacity utilization
•Expansion in promising fields
Fostering a conducive environment
Socio-economic GovernmentalC
ompetitor
GeographicSupplier
Tec
hnol
ogic
al
Business Environment
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:
• Porter model
• Life cycle approach
• Experience Curve
Porter Model
According to Michael Porter the profit potential of an industry depends on the combined strength of the five basic competitive forces as shown below
Forces Driving Industry Competition
Potential Entrants
SuppliersTHE INDUSTRYRivalry AmongExisting Firms
Buyers
Substitutes
Threat of New Entrants
Bargaining Power of Buyers
Bargaining Power of Suppliers
Threat of Substitute Products
Rivalry among Existing FirmsRivalry among Existing Firms
The number of competitors in the The number of competitors in the industry is largeindustry is large
The industry growth is sluggish, prodding The industry growth is sluggish, prodding firms to strive for a higher market sharefirms to strive for a higher market share
The levels of fixed costs is high , The levels of fixed costs is high , generating strong pressures for all items generating strong pressures for all items to achieve a higher capacity utilization to achieve a higher capacity utilization levellevel
The industry confronts high exit barriersThe industry confronts high exit barriers
Pressure from Substitute Pressure from Substitute productsproducts
Substitute products may limit profit Substitute products may limit profit potential of the industry potential of the industry
The risk is high when: The risk is high when: Price – performance trade off offered by Price – performance trade off offered by
substitutesubstitute
products is attractiveproducts is attractive The switching costs for prospective The switching costs for prospective
buyers are minimalbuyers are minimal
Bargaining power of buyers Bargaining power of buyers and suppliersand suppliers
Buyers are a competitive forceBuyers are a competitive force Buyers can bargain for price cut, ask Buyers can bargain for price cut, ask
for superior quality , better service and for superior quality , better service and induce rivalry among competitorsinduce rivalry among competitors
Suppliers have strong bargaining Suppliers have strong bargaining power when a few suppliers dominate power when a few suppliers dominate and hardly any viable substitutes for and hardly any viable substitutes for the products is availablethe products is available
Life Cycle Approach
Many industrial economists believe that most products evolve through a life cycle that has four stages:
• Pioneering stage(- NPV)
• Rapid growth stage(+ NPV)
• Maturity and stabilisation stage(neutral NPV)
• Decline stage (- NPV)
Investment in the pioneering stage, per se, may have a low return and negative NPV. However, it may create options for participating in growth.
Most products evolve through a life cycle. The broad stages and
the investment returns in these stages are as follows:
StageStage Investment ReturnInvestment Return
PioneeringPioneering May have negative NPV May have negative NPV
but may create options but may create options
for participating in for participating in
growth stagegrowth stage Rapid growthRapid growth Positive NPVPositive NPV
MaturityMaturity NPV – neutralNPV – neutral
DeclineDecline NegativeNegative
Experience Curve
The experience curve shows how the cost per unit behaves with respect to
the accumulated volume of production
10 20 40 80
100
80
60
40
Accumulated volume of production
Cos
t p
er u
nit
( P
r es e
nt
valu
e)
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
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 materials and resources
Analyse economic and social trends
Study new technological developments
Draw clues from consumption abroad
Explore the possibility of reviving sick units
Identify unfulfilled psychological needs
Attend trade fairs
Stimulate creativity for generating new product ideas
Hope the chance factor will favour you
Preliminary Screening
Compatibility with the promoter
Consistency with governmental priorities
Availability of inputs
Adequacy of market
Reasonableness of cost
Acceptability of risk level
Project Rating Index
The steps involved in determining the project rating index are
as follows:
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 this purpose.)
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
Construction of a Rating Index
Factor Factor Rating Factor Weight Score
VG G A P VP 5 4 3 2 1
Input availability 0.25 0.75Technical know-how 0.10 0.40Reasonableness of cost 0.05 0.20Adequacy of market 0.15 0.75Complementary relationship with other products 0.05 0.20Stability 0.10 0.40Dependence on firm’s strength 0.20 1.00Consistency with governmental priorities 0.10 0.30
Rating Index 4.00
Sources of Positive NPV
It appears that there are six main entry barriers that result in positive NPV projects. They are as follows:
• Economies of scale
• Product differentiation
• Cost advantage
• Marketing reach
• Technological edge
• Government policy
The Questions Every Entrepreneur Must Answer
According to Amar Bhide the following are the question that every entrepreneur must answer:
Are my goals well defined?• Personal aspirations
• Business sustainability and size
• Tolerance for risk
Do I have the right strategy?
• Clear definition
• Profitability and potential for growth
• Durability
• Rate of growth
Can I executive the strategy
• Resources
• Organisational infrastructure
• The founder’s role
Qualities and Traits of a Successful Entrepreneur
It appears that a successful entrepreneur has the following qualities and traits :
Willingness to make sacrifice
Leadership
Decisiveness
Confidence in the project
Marketing orientation
Strong ego
Open-mindedness
On Entrepreneurship
An internationally acknowledged authority on development economics, Nobel Laureate Sir Arthur Lewis commented as follows on the role of entrepreneurship.
“ “ I have devoted a lifetime to the study of I have devoted a lifetime to the study of developing economies. I have examined developing economies. I have examined strategies of development, the role of strategies of development, the role of foreign trade, of savings and investment, the foreign trade, of savings and investment, the most helpful role of government, and a most helpful role of government, and a myriad of other factors. I am now convinced myriad of other factors. I am now convinced that nothing matters more than the work that nothing matters more than the work ethic and entrepreneurial spirit of the ethic and entrepreneurial spirit of the population.”population.”
SUMMARY Identification of promising investment opportunities requires imagination, Identification of promising investment opportunities requires imagination,
sensitivity to environmental changes, and a realistic assessment of what the firm can sensitivity to environmental changes, and a realistic assessment of what the firm can do.do.
To stimulate the flow of investment ideas, the following are helpful: (i) SWOT To stimulate the flow of investment ideas, the following are helpful: (i) SWOT analysis, (ii) clear articulation of objectives, and (iii) conducive climate.analysis, (ii) clear articulation of objectives, and (iii) conducive climate.
The business environment which needs to be monitored regularly to identify The business environment which needs to be monitored regularly to identify investment opportunities, may be divided into six broad sectors: economic sector, investment opportunities, may be divided into six broad sectors: economic sector, government sector, technological sector, socio-demographic sector, competition government sector, technological sector, socio-demographic sector, competition sector, and supplier sector.sector, and supplier sector.
A realistic appraisal of corporate strengths and weaknesses is essential for A realistic appraisal of corporate strengths and weaknesses is essential for identifying investment opportunities which can be profitably exploited. The broad identifying investment opportunities which can be profitably exploited. The broad areas of corporate appraisal are: market and distribution, production and operations, areas of corporate appraisal are: market and distribution, production and operations, research and development, corporate resources and personnel, and finance and research and development, corporate resources and personnel, and finance and accounting.accounting.
According to Michael Porter the profit potential of an industry depends on the According to Michael Porter the profit potential of an industry depends on the combined strength of the following five basic competitive forces (i) threat of new combined strength of the following five basic competitive forces (i) threat of new entrants, (ii) rivalry among existing firms, (iii) pressure from substitute products, entrants, (ii) rivalry among existing firms, (iii) pressure from substitute products, (iv) bargaining power of buyers, and (v) bargaining power of sellers. Good project (iv) bargaining power of buyers, and (v) bargaining power of sellers. Good project ideas – the key to success are elusive. So a wide variety of sources should be tapped ideas – the key to success are elusive. So a wide variety of sources should be tapped to identify them.to identify them.
It is possible to develop a long list of project ideas. For the preliminary screening of It is possible to develop a long list of project ideas. For the preliminary screening of these ideas, the following aspects may be looked into: compatibility with the these ideas, the following aspects may be looked into: compatibility with the promoter, consistency with governmental priorities availability of inputs, adequacy promoter, consistency with governmental priorities availability of inputs, adequacy of market, reasonableness of cost, and acceptability of risk level. When a firm of market, reasonableness of cost, and acceptability of risk level. When a firm evaluates a large number of project ideas regularly, it may be helpful to streamline evaluates a large number of project ideas regularly, it may be helpful to streamline the process of preliminary screening by employing a project rating index.the process of preliminary screening by employing a project rating index.
It appears that there are six main entry barriers which result in positive NPV It appears that there are six main entry barriers which result in positive NPV projects: economies of scale, product differentiation, cost advantage, marketing projects: economies of scale, product differentiation, cost advantage, marketing reach, technological edge, and government policy.reach, technological edge, and government policy.
Every entrepreneur must answer the following questions: Are my goals well Every entrepreneur must answer the following questions: Are my goals well defined? Do I have the right strategy? Can I execute the strategy?defined? Do I have the right strategy? Can I execute the strategy?
It appears that a successful entrepreneur has the following qualities and traits: It appears that a successful entrepreneur has the following qualities and traits: willingness to make sacrifices, leadership, decisiveness, confidence in the project, willingness to make sacrifices, leadership, decisiveness, confidence in the project, marketing orientation, and a strong ago.marketing orientation, and a strong ago.