Chapter Two

Project preparation
2. Project preparation
After identifying promising project idea
the next step is project preparation.
Project preparation involves the analysis
of a number of factors like,
1. Market and Demand
2. Technical issues
3. Institutional aspect
4. Social aspect
5. Financial analysis
6. Environmental analysis
 2.1. Market and Demand Analysis
This is about analyzing and estimating the
potential size of the market or beneficiaries
The market and demand analysis is
concerned with two issues,
o What would be the aggregate demand of the
proposed product/service in future?
o What would be the expected market share of
the proposed project?
Market and Demand Analysis (Cont…)
To address these and related issues we
need information about,
◦ Current consumption level and its trend
◦ Past and present supply positions
◦ Imports and exports (when necessary)
◦ Production possibilities and constraints
◦ Distribution channels
◦ Cost structure
◦ Elasticity of demand
Market and Demand Analysis (Cont…)
The nature of customers,
◦ their attitudes,
◦ and preferences
Structure and nature of competition
Marketing policies of competitors
Constraints (Administrative, technical, and
legal, etc.)
The analysis of demand and market should
be well structured and planned.
◦ so as to obtain relevant information within the
time and cost limit.
Market and Demand Analysis (Cont…)

Thus, the analyst is advised to follow the

following steps.
◦ Situational analysis
◦ Collection of necessary information
◦ Characterization of the market
◦ Demand forecasting
◦ Market planning
3.1.1. Situational analysis
This is used in order to have general
picture and basic information about the
industry (market) and /or the sector in
general.
For that purpose we may informally talk to
◦ Customers,
◦ Competitors,
◦ Middlemen, and
◦ others in the industry (sector)
 Situational analysis (Cont …)
We may learn from the past experience
about,
◦ Their preferences
◦ Purchasing power
◦ Action and strategies of competitors
If the situational analysis generates enough
data to measure the market and
If we can make a reliable projection of the
demand and revenue, a formal study may
not be necessary
 Situational analysis spec (Cont …)
Example
Suppose ABC Flour Factory is considering
to expand its business activity by producing
Biscuit.
In undertaking the situational analysis there
is a need to clearly define the specific
/operational objective of the project
Situational analysis (Cont …)
Then after most relevant issues related to
the defined objective are raised
These are issues like:
◦ Who are the potential customers of the product?
◦ What is the total current demand for biscuit in
the town/in the region?
◦ How the demand is currently distributed?
◦ What is the current price of the product? And
◦ what price will the consumers be willing to pay
for the product?
 Situational analysis (Cont …)
Do consumers need new biscuit product ?
What is the nature of distribution?
what market channels are most suited for the
product?
What are the possible sales of the product ?

If the satisfactory answer could be obtained

form the above analysis no further study is
necessary as a part of demand and market
analysis
3.1.2. Collection of necessary Information
Most of the time the situational analysis may
not provide all the necessary information.
Thus, further study may be needed,
Further investigation require collecting
necessary information, from,
◦ Secondary sources
◦ Primary sources
Secondary Information: Secondary
information provide the basis and starting
point for the market and demand analysis
Collection of Information (Cont…)
Some of the sources of secondary
information are,
◦ Census data
◦ National sample survey
◦ Records of different organization and market
agents
◦ Plan report
◦ Newspapers, etc.
However, the relevance, accuracy, reliability
of the data has to be carefully scrutinized
 Collection of Information (Cont…)
Primary Information:
Market survey: is commonly undertaken to
collect primary information needed to
analyze the market
The market survey may provide
information like,
◦ Demand in different segments of the market
◦ Customer preference, motives for buying
◦ Customers purchasing plans
Collection of Information (Cont…)
◦ Level of satisfaction with existing products
◦ Their perception towards various products
◦ Existing trade practice
◦ Socio-economic characterization of buyers
The information obtained from both
primary and secondary sources is used to
characterize the market and to estimate
future demand.
3.1.3. Characterization of the market
On the basis of the collected data and its
analysis the market may be described in terms
of the following aspects
a) Effective demand in the past and present:
This is measured by the actual consumption
level
b) Breakdown of demand :
This is about breaking-down the entire market
into demand of different sections of the market
It will give us a better and detailed picture
about different groups of customers
Characterization of the market (Cont…)
The market can be segmented on the basis
of different characteristics like,
◦ Geographic location
◦ Demographic characteristics,
◦ Psychographics and many other characteristics
Segment analysis is required because the
nature of demand (consumption) vary from
one segment to another.
Characterization of the market (Cont…)

c) Prices: It is important in order to

distinguish different types of prices like,
◦ Manufacturing price
◦ Whole sale price
◦ Retail price
d) Methods of distribution: method of
distribution varies with the nature of the
product
◦ It involves examining the available method of
distribution that can be considered
Characterization of the market (Cont…)
That is, the market is characterized in
terms of the availability and nature of
distribution.
e) Suppliers: characterized the market in
terms of supply of resources/product
◦ Sources of supply
◦ Location of suppliers
◦ Present capacity
Characterization of the market (Cont…)
◦ Planned expansion (if any)
◦ Problems in production
◦ Cost consideration (if possible)
f) Government policy: The market is
characterized in terms of the prevailing
government policy regarding the market.
3.1.4. Demand forecasting
On the basis of information from verities of
sources, estimation or forecasting of future
demand should be carried-out
Knowledge about future demand is useful
in planning
◦ Production schedule
◦ Inventory control (management)
◦ Advertisement activity
◦ Investment outlay
Demand forecasting (Cont…)
There are different forecasting techniques
which can be broadly divided in to two
categories
◦ Qualitative method
◦ Statistical methods
a) Qualitative Methods
These methods are more difficult to
describe Because,
◦ it does not exist explicit model or
◦ No method that can serve as a reference point
Demand forecasting (Cont…)
There is no model that can be used to
replicate the initial forecast with a given set
of data
In general it is considered as the “rule of the
thumb” technique
This method relies on the judgment of
experts to translate qualitative information
into quantitative estimates.
Some of the qualitative methods are,
◦ Jury of Executive Methods
◦ Delphi Method
Demand forecasting (Cont…)
Jury of executive opinion methods: this
method involves soliciting the opinion of a
group of managers/ experts on expected future
sale and combining them into a sales estimate.
Delphi method: This method involves
converting the views of a group of experts,
(do not interact directly to each other), into a
forecast through an iterative process.
That is, there is no direct contact between
experts selected for this purpose.
 Demand forecasting (Cont…)
Steps commonly used are,
A group of experts are sent questionnaires by mail
or by some convenient means and are asked to
express their view about the future demand
The responses collected from each of them are
summarized and sent back to the experts, along
with questionnaire meant to provide further reason
for the their view expressed in the first round.
The process may continue two or more rounds till
a reasonable agreement emerges in the view of
experts.
 Demand forecasting (Cont…)
b) Statistical Methods
This method employs explicit models
or methods that can be replicated by
another analyst
◦ That is, the result of statistical method can
be replicated by different researchers.
Statisticalmethod is more analytical
and uses empirical data. The statistical
methods are categorized into,
◦ Time Series
◦ Econometrics model
Demand forecasting (Cont…)
i. Time Series Model: Uses only the time
series history of the variable to predict the
future value.
The focus of time series analysis is to
identify the components of change in the
historical data.
Traditionally these components are,

Trend: It is a long term increase or decrease

in the variables
◦ The time series of human population of Ethiopia
exhibited an upward trend
Demand forecasting (Cont…)
Seasonality Component:
Represents changes that occur at regular
interval.
◦ A large increase in meat sales in the month of
April-May and fall in the month of February-
March would be an example of seasonality.
Cyclical Component: refers to sustained
periodic of high values followed by low
values.
◦ Business cycle is a good example
Demand forecasting (Cont…)
Random fluctuation: Variables that do
not follow any pattern
Various methods can be used to
determine trend, seasonality, and cyclical
pattern using time-series data.
However, by definition changes in the
variable due to random factor are not
predictable.
 Demand forecasting (Cont…)
To forecast using time-series analysis it is
necessary to specify a mathematical model
that represents the generation process.
There are a number of forecasting method.
Some of them are,
Linear Trend projection method: very
popular in practice, the trend projection
method involves extrapolating the past
trend on the future.
Demand forecasting (Cont…)
Exponential smoothing: in this method,
forecasts are modified in the light of
observed errors.
Moving average method: in this method,
the forecast for the next period represents
a simple arithmetic average or a weighted
arithmetic average of the last few
observations.
Demand forecasting (Cont…)
ii. Econometrics models : This is also a
statistical method that employs an explicit
structural models to explain the underlining
economic relations.
◦ This method seeks to develop forecast on the
basis of cause and effect relationship specified
in an explicit, qualitative manner.
◦ This approach enable us to analyze the causal
relationship between variables.
 3.1.5. Market Planning
On the basis the previous analysis planning
of marketing activities will be developed.
The marketing plan has the following
components
◦ Current market situation
◦ Opportunity and issue analysis
◦ Objective
◦ Marketing strategy
◦ Action plan (market program)
 Market Planning (Cont…)
a) Current market situation: It explains the
different dimension of the current market
conditions
It deals with
◦ The size of the market and customer buying
behaviour in that market
◦ Competitive situation : It describes major
 Competitors,
 their marketing objectives,
 and future plan if available , and
 lists of closely substitute products
 Market Planning (Cont…)
Distribution situation: It explain the nature of
the product distribution and available
marketing channel and outlet
Macro environment: This explain the possible
effect of social, political, economic,
technological and other external variable on
the market.
b) Opportunity and issues: In this section a
SWOT analysis is conducted in order to identify
◦ Market opportunity
◦ Strength of the firms product
◦ Its weaknesses and potential threat
 Market Planning (Cont…)
c) Objective (market objective): This has to be clearly
stated and it has to be short and measurable as much
as possible
d) Marketing strategy: To achieve the above stated
objective the plan should specify the appropriate
strategy.
The market strategy involves determining
◦ Target segment
◦ Product line
◦ Product positioning
◦ Price
◦ Distribution
◦ Promotion activity
 Market Planning (Cont…)
i. Target segment: Select and target a
particular segment.
That is, divide the market or the
community into a distinct group and target
one or more particular group to address the
issue.
ii. Product positioning: This refers how the
product or service is placed in the minds of
the target segment.
How it will be different from other similar
products in the mind of customers.
Market Planning (Cont…)
iii. Product Line: How the product will be
launched. That is,
◦ Will it be launched as a single product (variant) or
◦ More than one variant
iv. Price (service charge): This involves
selection of the appropriate pricing strategy.
(What will be the pricing strategy?)
v. Distribution: Planning of how the product
will reach to the target market?
◦ Company outlets
◦ Whole sellers etc. are planned ahead
Market Planning (Cont…)
vi. Promotion and advertisement: How
awareness about the planned new product or
services is created among potential customers?
vii. Action program (action plan): Time bounded
action plan indicating
◦ what activities,
◦ when,
◦ by whom will be carried out should be include in
the market plan.
The steps in demand and market analysis is
depicted in the following schema/diagram
Market and Demand Analysis
 3.2. Technical Analysis
Why technical analysis?
It is under taken,
◦ To ensure that the project is technically feasible
◦ To select the appropriate technology
◦ To facilitate the most optimal formulation of the
project in terms of
 technology
 size and
 location
Technical Analysis (cont…)
The technical analysis is concerned with
I. Inputs and outputs of real goods or
services
II. The technical process of production
III. The task of engineering to design
◦ the functional and
◦ physical layout of the plant
IV. The determination of investment
expenditure and other related costs
Technical Analysis (cont…)
v. planning of the acquisition and adaption
of the selected technology and the
corresponding know – how
In this regard we need to also identify
◦ the appropriate technologies and
◦ its implication in terms of
 costs,
 use of local raw materials,
 environmental impact and other factors
 Technical Analysis (cont…)
Effective technology transfer requires
acquiring the technology and know – how
on suitable terms and conditions,
Making sure that necessary skills are
available or developed
Make sure that skills development needs
are planned through training program
The required machinery and equipment
are determined in relation to the
technology to be utilized,
 Technical Analysis (cont…)
Generally, the selection of technology
should be based on
◦ A detailed study and evaluation of alternative
technologies
◦ The organization’s investment strategy, and
◦ Suitability to socio – economic and ecological
conditions
Technical Analysis (cont…)
How to evaluate technology?
Technology can be evaluated in terms of
the following aspects:
◦ The use of local raw materials
◦ The utilization of local man power
◦ Its impact on the environment (maintain
ecological balance)
◦ Whether the technology is harmonious with
social and cultural conditions
 Technical Analysis (cont…)
Generally, the technical analysis is
primarily concerned with:
◦ Material inputs and utilities
◦ Manufacturing process and technology
Machines and equipment
◦ Plant capacity
◦ Location and site
◦ Structure and civil works
◦ Project charts and layouts
◦ Work schedule
Thank you