Project Identification

Project identification is an important step in project formulation. These are conceived

with the objective of meeting the market demand, exploiting natural resources or creating
wealth. The project ideas for developmental projects come mainly from the national
planning process, where as industrial projects usually stem from identification of
commercial prospects and profit potential.
As projects are a means to achieving certain objectives, there may be several alternative
projects that will meat these objectives. It is important to indicate all the other
alternatives considered with justification in favour of the specific project proposed for
consideration.
Sectoral studies, opportunity studies, support studies, project identification essentially
focuses on screening the number of project ideas that come up based on information and
data available and based on expert opinions and to come up with a limited number of
project options which are promising.

Project Formulation
Project Formulation Concept
“Project Formulation” is the processes of presenting a project idea in a form in which it
can be subjected to comparative appraisals for the purpose of determining in definitive
terms the priority that should be attached to a project under sever resource constraints.
Project Formulation involves the following steps:
 ● Opportunity Studies:

An opportunity study identifies investment opportunities and is normally undertaken at

macro level by agencies involved in economic planning and development. In general
opportunity studies there are three types of study – Area Study, sectoral and Sub-sectoral
Studies and Resource Based Studies. Opportunity Studies and Support studies provide
sound basis for project identification.

● Pre feasibility Studies

A pre-feasibility study should be viewed as an intermediate stage between a project

opportunity study and a detailed feasibility study, the difference being primarily the
extent of details of the information obtained. It is the process of gathering facts and
opinions pertaining to the project. This information is then vetted for the purpose of
tentatively determining whether the project idea is worth pursuing furthering. Pre-
feasibility study lays stress on assessing market potential, magnitude of investment, ,
technical feasibility, financial analysis, risk analysis etc. The breadth and depth of pre
feasibility depend upon the time available and the confidence of the decision maker. Pre
feasibility studies help in preparing a project profile for presentation to various
stakeholders including funding agencies to solicit their support to the project. It also
throws light on aspects of the project that are critical in nature and necessitate further
investigation through functional support studies.

● Feasibility Study
Feasibility Study forms the backbone of Project Formulation and presents a balanced
picture incorporating all aspects of possible concern. The study investigates
practicalities, ways of achieving objectives, strategy options, methodology, and predict
likely outcome, risk and the consequences of each course of action.
A feasibility study is not an end in itself but only a means to arrive at an investment
decision. The preparation of a feasibility study report is often made difficulty by the
number of alternatives (regarding the choice of technology, plant capacity, location,
financing etc.) and assumptions on which the decisions are made. The project feasibility
studies focus on
- Economic and Market Analysis
- Technical Analysis
- Market Analysis
- Financial Analysis
- Economic Benefits
- Project Risk and Uncertainty
- Management Aspects

Demand and Market Analysis

In the recent years the market analysis has undergone a paradigm shift. The demand
forecast and projection of demand supply gap for products / services can no longer be
based on extrapolation of past trends using statistical tools and techniques. One has to
look at multiple parameters that influence the market. Demand projections are to be made
keeping in view all possible developments. Review of the projects executed over the
years suggests that many projects have failed not because of technological and financial
problems but mainly because of the fact that the projects ignored customer requirements
and market forces.
In market analysis a number of factors need to be considered covering – product
specifications, pricing, channels of distribution, trade practices, threat of substitutes,
domestic and international competition, opportunities for exports etc. It should aim at
providing analysis of future market scenario so that the decision on project investment
can be taken in an objective manner keeping in view the market risk and uncertainty.

● Project Appraisal

The project appraisal is the process of critical examination and analysis of the proposal
in totality. The appraisal goes beyond the analysis presented in the feasibility report. At
this stage, if required compilation of additional information and further analysis of
project dimensions are undertaken. At the end of the process an appraisal note is prepared
for facilitating decision on the project implementation.
The appraisal process generally concentrates on the following aspects.
• Market Appraisal: Focusing on demand projections, adequacy of marketing
infrastructure and competence of the key marketing personnel.
• Technical Appraisal: Covering product mix, Capacity, Process of manufacture
engineering know-how and technical collaboration, Raw materials and consumables,
Location and site, Building, Plant and equipments, Manpower requirements and Break-
even point.
• Environmental Appraisal: Impact on land use and micro-environment, commitment of
natural resources, and Government policy.
• Financial Appraisal: Capital, rate of return, specifications, contingencies, cost
projection, capacity utilization, and financing pattern.
• Economic Appraisal: Considered as a supportive appraisal it reviews economic rate of
return, effective rate of protection and domestic resource cost.
• Managerial Appraisal: Focuses on promoters, organization structure, managerial
personnel, and HR management.
• Social Cost Benefit Analysis (SCBA): Social Cost Benefit Analysis is a methodology
for evaluating projects from the social point of view and focuses on social cost and
benefits of a project.

● Detailed Project Report (DPR)

Once the projects are appraised and the investment decisions are made a Detailed Project
Report (DPR) is prepared. It provides all the relevant details including design drawings,
specifications, detailed cost estimates etc. and this would act as a blue print for project
implementation.

Generation and Screening of a Project Idea

Generation and Screening of a Project Idea begins when someone with specialized
knowledge or expertise or some other competence feels that he can offer a product or
service.

 Which can cater to a presently unmet need and demand

 To serve a market where demand exceeds supply
 Which can effectively compete with similar products or services due to its better
quality/price etc.
An organization has to identify investment opportunities which are feasible and
promising before taking a full fledged project analysis to know which projects merit
further examination and appraisal.
Tasks involved in Generation and Screening of a project
idea
(1) Generation of ideas – A panel is formed for the purpose of identifying
investment opportunities. It involves the following tasks which must ne carried out
in order to come up with a creative idea-
(a) SWOT analysis – Identifying opportunities that can be profitably exploited.
 (b) Determination of objectives – Setting up operational objectives like cost
reduction, productivity improvement, increase in capacity utilization,
improvement in contribution margin/
(c) Creating Good environment- A good organizational atmosphere motivates
employees to be more creative and encourages techniques like brainstorming,
group discussion, etc. which results in development of creative and innovative
ideas.

(2) Monitoring the Environment – An Organization should systematically monitor

the environment and assess its competitive abilities in order to profitably exploit
opportunities present in the environment. The key sectors of the environment that
are to be studied are:-
(a) Economic Sector –
i. State of economy
ii. Overall rate of Growth
iii. Growth of primary, secondary and tertiary sectors
iv. Inflation rate
v. Linkage with world economy
vi. BOP situation
vii. Trade Surplus/Deficit

(b) Government Sector –

i. Industrial policy
ii. Government programmes and project
iii. Tax framework
iv. Subsidies, incentives, concessions
v. Import and export policies
vi. Financing norms

(c) Technological Sector –

i. State of technology
ii. Emergence of new technology
iii. Receptiveness of the industry
iv. Access to technical know how

(d) Socio – demographic sector –

i. Population trends
 ii. Income distribution
iii. Educational profile
iv. Employment of women
v. Attitude towards consumption and investment

(e) Competition Sector –

i. No. of firms and their market share
ii. Degree of homogeneity and production differentiation
iii. Entry barriers
iv. Marketing policies and prices
v. Comparison with substitutes in terms of quality/price/appeal etc.

(f) Supplier Sector – Availability and cost of raw material, energy and money

(3) Corporate Appraisal – It involves identification of corporate strengths and

weaknesses. The important aspects that are to be considered are :-
(a) Market and Distribution –
i. Market image
ii. Market share
iii. Marketing and Distribution cost
iv. Product line
v. Distribution Network
vi. Customer loyalty

(b) Production and Operations –

i. Condition and capacity of plant and machinery
ii. Availability of raw materials and power
iii. Degree of vertical integration
iv. Location advantage
v. Cost structure – Fixed and Variable costs

(c) Research and Development-

i. Research capabilities of a firm
ii. Track record of new product developments
iii. Laboratories and testing facilities
iv. Coordination between research and other departments of the
organization
 (d)Corporate Resources and Personnel-
i. Corporate image
ii. Clout with government and regulatory agencies
iii. Dynamism of top management
iv. Competence and commitment of employees
v. State of industrial relations

(e) Finance and Accounting

i. Financial leverage and borrowing capacity
ii. Cost of capital
iii. Tax situation
iv. Relations with shareholders and creditors
v. Accounting and control system
vi. Cash flows and liquidity

(4) Looking for Project Ideas

Various sources to look for good project ideas include:-

i. Trade fairs and exhibitions

ii. Studying Government plans and guidelines.
iii. Suggestion of financial institutions and development agencies
iv. Investigating local materials and resources
v. Analyzing performance of existing industries
vi. Analyzing social and economic trends
vii. Analyzing new technological developments
viii. Studying the consumption pattern of people abroad
ix. Stimulating creativity to produce new ideas
x. Reducing exports and imports

(5) Preliminary Screening- It refers to elimination of project ideas which are

not promising. The factors to be considered while screening for ideas are:-
i. Compatibility with the promoter: The idea must be consistent with
the interest, personality and resources of entrepreneur.
 ii. Consistency with Government priorities: The idea must be feasible
with national goals and government regulations.
iii. Availability of inputs: Availability of power, raw material, capital
requirements, technology.
iv. Adequacy of Market: Growth in market, prospect of adequate sale,
reasonable Return on Investment.
v. Reasonableness of cost: The project must be able to make reasonable
profits with respect to the costs involved.
vi. Acceptability of risk level: The desirability of the project also
depends upon risks involved in executing it. In order to access risk the
following factors must be considered:-
 Project’s vulnerability to business cycles
 Change technology
 Competition from substitutes
 Government’s control over price and distribution
 Competition from imports

(6) Project Rating Index: It is a tool used for evaluating large number of
project ideas. It helps in streamlining the process of preliminary screening.
Hence a preliminary evaluation may be converted in project rating index.

Steps to calculate project rating index –

 Identifying the factors relevant for project rating
 Assigning weights to these factors according to their relative
importance(FW)
 Rate the project proposal on various factors using suitable rating
scale(FR)
(5 point scale or 7 point scale)
 For each factor multiply the factor rating with factor weight to get
factor scores….. (FR * FW = FS)
 All the factor scores are added to get the overall project rating index.

NOTE: Organization determines a cut off value and the project below
this cut off value are rejected.
(7) Sources of the Net Present Value: In order to select a profitable and
feasible project, a project manager must carry out a fundamental analyses of
the product and factor market to know about entry barriers which lead to
positive net present value. There are six entry barriers which result in a
positive NPV project. They are-
i. Economies of scale
ii. Produce differentiation
iii. Cost advantage
iv. Marketing reach Technological edge
v. Government policy

(8) Entrepreneurial Skills: An individual must possess the following traits

and qualities in order to be a successful entrepreneur-
i. He must be willing to make sacrifices
ii. He must be able to make quick and rational decisions
iii. He must a good Leader
iv. He must have confidence in the project
v. He must be able to exploit market opportunities
vi. He must have strong ego in order to survive ups and downs of a
business.