Project Planning, Analysis and Management Generation and Screening of Project Ideas

Generation and Screening of Project IdeasThis is the first step in project planning.The key is “ enter the right business at the right time”.But , how to do it?

It requires-- imagination -- sensitivity to environmental changes-- realistic assessment of one’s capacity.

It is-- partly structured and partly unstructured-- partly dependent on convergent thinking and partly divergent thinking-- partly objective analysis and partly subjective evaluation-- partly amenable to control and partly dependent on circumstances

It has to be admitted “ it is a difficult task”.

Please identify some successful people you have come across as above.

Generation and Screening of Project IdeasGeneration of ideas– how to do it?Stimulating the flow of ideasStep 1SWOT analysis. The aim is to get new ideas from the employees and connected people.

Step 2Clearly defining the objectives-- cost reduction-- productivity improvement-- capacity utilisation increase-- improvement in contribution margin-- expansion in to promising fields

Step 3Fostering a conducive atmosphere

Generation and Screening of Project IdeasMonitoring the Environment

It involves studying the following factors:-- Economy

-- Government Policy

-- Technology

-- Social factors

-- Competition

-- Supply

Generation and Screening of Project IdeasMonitoring the EnvironmentEconomy

•Present state of the economy

•Overall rate of growth

•Cyclical fluctuations

•Linkage with global economy

•Trade surplus/ deficit of the country

•Balance of Payment situation of the country

Generation and Screening of Project IdeasMonitoring the EnvironmentGovernment Sector

1. Industrial Policy

2. Government Programme and Projects

3. Taxation policy

4. Incentive policy

5. Foreign Trade Policy

6. Exchange Control Regulations

7. Financing norms and lending climate from financial institutions

Generation and Screening of Project IdeasMonitoring the EnvironmentTechnology-- rate of change of technology

-- access to technical know-how

-- receptiveness to change in technology

Generation and Screening of Project IdeasMonitoring the EnvironmentSocial Sectors-- population growth

-- age shift

-- income distribution

-- education profile

-- employment of women

-- attitude towards consumption and investment

Generation and Screening of Project IdeasMonitoring the EnvironmentCompetition

-- number of competitors and the pattern of market share

-- nature of products offered by them

-- entry barriers for new entrants

-- comparison of the proposed product with that of competitors

-- marketing practices

Generation and Screening of Project IdeasMonitoring the EnvironmentSuppliers

-- material

-- men

-- energy and power

-- finance

Can you think of some examples of successful projects in the past on the above factors?

Then follows corporate appraisal

Generation and Screening of Project IdeasCorporate AppraisalMarketing and Distribution

-- market image

-- product line

-- market share

-- distribution net work

-- customer loyalty

-- cost of marketing and distribution

Generation and Screening of Project IdeasCorporate Appraisal

TechnologyPlant and MachineryVertigal integrationLocational advantageCost aspects

Generation and Screening of Project IdeasCorporate AppraisalResearch and DevelopmentResearch capabilitiesInfrastructural facilities for researchCoordination between research and operations

Corporate Resources and PersonnelCorporate imageLiaison with Government and other agenciesCapability and dynamism of top managementCompetency and commitment of employeesIndustrial relations

Finance and accountingFinancial leverageCost of capitalTaxation systemRelationship with share holders and creditorsAccounting and control systemsCash flows and liquidity

How to identify investment opportunities?

Generation and Screening of Project IdeasThree popular tools can be put to use:

Porter Model

Experience Curve

Life Cycle Approach

Generation and Screening of Project IdeasPorter Model

Developed by Michael Porter.Mainly discusses the profit potential of the industry.

According to the theory, profit potential depends on the following:

1. Threat of new entrants2. Rivalry among existing companies3. Pressure from substitute products4. Bargaining powers of buyers5. Bargaining power of suppliers

The company applies the above model and identifies level of threat to profitability and goes for new project ideas.

Exercise– Please identify some industries who have embarked on new projects to meet the above threat.

Generation and Screening of Project IdeasExperience curve

This tool is based on the principle that“ investments aimed at reducing the cost is essential for the long term survival and profitability of the company”.

What are the factors contributing to reduction in cost over a period?1. Learning effects2. Technological improvement3. Economies of scale

Generation and Screening of Project IdeasExperience curve– an exercise --A recent news item

Sesa Goa to buy Dempo’s mining assets for Rs 1750 cr.Brief details of the buySesa Goa is a large iron ore exporting company, also diversified in to manufacture of pig iron and metallurgical coke.It belongs to Vedanta Group. It has mining operations in Karnataka and Orissa. It has metallurgical and pig iron plants of large size in Goa.

VS Dempo and co Pvt Limited, is a Goa based company. One of the largest iron ore exporters form Goa.

The company’s assets include processing plants, barges, trans-shippers and loading capacities at Marmugoa port.

Miners in Goa have lower costs as mines are located near the port, and so avoid road and rail charges.

What could have been the motive of Sesa Goa to go for this project?

Generation and Screening of Project IdeasL&T makes Rs1037 cr by exiting Ultra tech.Brief details

Larsen and Toubro as all of us know is a giant in engineering and construction activity.Recently the company was in the news as a bidder for Satyam through its group company.

The company had a cement division under the name of Ultra Tech Cement, which was sold in 2004 to Grasim Industries of Aditya Birla group.The reason for the sale was said as strategy for focusing on core Business.

Under the sale agreement, L&T retained 11.49% (14.3 million) shares of Ultra Tech with a commitment to sell before 31st December 2009.

The shares were shown in the books at Rs10.00 each as on 31.3.2008.The shares have now been sold at Rs.725/- each for Rs.1037/- crores.

Generation and Screening of Project IdeasQuestions to be answered

What is the reason for L&T exiting the cement business and selling it to Gracim

When a division of a company is sold, what is it called?

When they have another 6 months time to sell the shares as per the agreement, what could be the reason for timing the sale now?

Generation and Screening of Project IdeasLife cycle ApproachThis tool is based on the principle that every industry has a life cycle.

Depending upon the stage where the company is presently placed, the investment has to be chosen.

What are the stages of life cycle?

1. Birth (pioneering)

2. Growth

3. Maturity or stabilisation

4. Decline ( to be carefully managed )

5. Death ( to be totally avoided )

What is the answer to avoid situations 4 and 5 ?To EVOLVE

Generation and Screening of Project IdeasProject ideas may come from different sourcesSome of the important sources are:

1. Analysis of performance of existing industries

2. Examination of inputs and out puts of various industries

3. Review of imports and exports

4. Plan outlays of Governments and other major companies

5. Leads given by Financial Institutions and others

6. Identifying unfulfilled needs (psychological or otherwise)

7. Trade fairs

8. Some times chance factor also provide ideas

Generation and Screening of Project IdeasPreliminary screeningThis will involve the following aspects1. Compatibility with the promoter

2. Consistency with Government priorities

3. Availability of inputs

4. Adequacy of the market

5. Cost

6. Acceptability of risk level

Then the projects are rated. A project rating index is developed.

Generation and Screening of Project IdeasPreliminary screeningProject Rating IndexWhen a company has a number of workable project ideas, it should develop a mechanism to study them objectively and crystalise on one.

The company identifies important parameters to be considered and assigns a weight to each parameter.

Rates each idea on the various factors using a suitable rating scale.(normally 5 point to 7 point scale).

For each factor, the factor rating is multiplied by the weight assigned and the score obtained.

Then all the scores for various factors are added and the project score is obtained.

For all the project ideas scores are obtained and indexed, to choose one.

This system is called Project Rating Index

Generation and Screening of Project IdeasA typical project rating index will look as underFactor Factor Rating Factor weight VG G A P VP score 5 4 3 2 1Input availability 0.25 * 0.75Technical know-how 0.10 * 0.40Adequacy of market 0.15 * 0.75Reasonableness of cost 0.05 * 0.20Complementary relationship with other products 0.05 * 0.20Stability 0.10 * 0.40Dependence on firm’s strength 0.20 * 1.00Consistency withGovt priorities 0.10 * 0.30 Rating index 4.00

Generation and Screening of Project IdeasHurdle rate

What it is?

It can be defined as a point of obstacle.A point beyond which, the proposal is risky.

In project rating index, a minimum scoring point is fixed as obstacle score, indicating any score below the same is not to be Considered.

The ratings obtained by various ideas are compared with the hurdle rate and the best scoring idea is chosen.

Generation and Screening of Project IdeasProject Rating IndexAn exerciseITC has recently launched a project to produce a bathing soap called “vivel”.

In the light of what we have so far seen, please answer the following with regard to this project:

1. What is the core activity of ITC?2. What type of strategy is this project?3. What could have been the motive for this project?4. Do you see any risk factors in this project?5. What are the positive factors in this project?6. Please construct a scoring model for this project

Generation and Screening of Project IdeasNet Present Value (NPV)

Another important point considered in project screening is the NPV.How this is possible?

Imperfections in real market (product and marketing) create entry barriers for new firms.

If entry barriers are strong, it will prevent new players and there by provide prospects of positive NPV.

It depends on the under noted factors:

1. Economies of scale2. Product differentiation3. Cost advantage4. Marketing reach5. Technology edge6. Government Policy

Generation and Screening of Project IdeasExercise

For crystalsing on a project for implementation, a company needs to do four major analysis to ensure viable implementation of the project.

From what we have seen so far, please spell out the four areas of analysis.

1. Market viability2. Technical feasibility3. Commercial viability4. Financial feasibility