Project identification and Project selection

This presentation covers the topic of project identification and project selection. It sheds light on the meaning of the project, meaning of project identification, classification of projects, types of opportunities, dimensions of project identification, criteria for project selection and constraints involved in project selection. Enjoy learning!

1. Project identification Prepared by- Amanda Bvera

2. Meaning of a project A project is an envisioned workplan devised by the entrepreneur or the top level management for the start or initiation of a new business venture. The project typically consists of a specified set of objectives to be achieved within a specified period of time. It contains all the details about the project/venture including its expected outcomes and anticipated profits. It is the job of every entrepreneur to find such promising project ideas. The identification of opportunities for project investments requires an understanding of the environment in which one operates, sensitivity to emerging investment possibilities, imaginative analysis of tangible and intangible factors and also an element of luck.

3. Meaning of project identification Project identification is the first step of a new venture. It is therefore very crucial to entrepreneurs to identify projects. An entrepreneur has an infinitely wide choice with respect to this project. The important dimensions of choice are: product/service, market, technology, equipment, scale of production, location, incentives, and time phasing. The task of identifying a feasible and promising project is somewhat difficult. Moreover, it is interrelated with the government policies, infrastructural development and skills of the people. Project identification is concerned with collection, compilation, and analysis of economic data for the eventual purpose of locating possible opportunities for investment and with the development of such opportunities.

4. Types of opportunities: Opportunities according to Drucker are of three kinds which are as follows: Additive opportunity Complementary opportunity Breakthrough opportunity This is explained as under: Additive opportunities are those opportunities which enable the decision-maker to better utilise the existing resources without in any way involving a change in the character of the business. These opportunities involve minimum disturbance to the existing state of affairs and hence the least amount of risk. Complementary opportunities involve the introduction of new ideas and as such do lead to certain amount of change in the existing structure, hence there is a considerable amount of risk. Breakthrough opportunities involve fundamental changes in both the structure and character of the business. The element of risk in these opportunities are the greatest as compared to complementary and additive opportunities.

5. Objectives of a project The various objectives for the start of a particular project can be stated as under: To increase profit To reduce losses To become more competitive To provide help after disaster To train people in a new area To create employment To introduce innovation in the market To improve the rural and backward areas To reduce the level of imports To encourage export oriented production in the country To improve the standard of living of the people. To alleviate poverty and improve welfare measures

6. Classification of projects Projects can be classified in a number of ways depending upon the nature, type, magnitude of resources and the cause of the project. Some of the popular classifications of projects include: Quantifiable and non-quantifiable projects Sectoral projects Techno-economic analysis Financial Institutions This is explained as under: Quantifiable and non-quantifiable projects: The projects in which a quantitative analysis of costs, resources involved, level of investment deployed and benefits derived from the project can be undertaken are called as quantifiable projects. Projects for which such a quantifiable analysis of costs and benefits cannot be performed are called as non-quantifiable projects.

7. Sectoral projects: Sectoral projects are those projects that can be classified on the basis of the sector that it belongs to, such as follows: Agricultural & Allied Mining & Quarrying Industrial units Food, gas, water Electricity, power, petroleum Transport, trade and commerce Education and health Techno-economic analysis: Under this category, the projects can be classified into three types: Demand based and raw material based: These are projects which are undertaken either on the basis of market demand or because of the excess availability of the raw materials. Capital intensive & Labour intensive: These are projects undertaken on the basis of the type of inputs used, whether it is capital oriented or labour oriented. Magnitude: On the basis of magnitude the projects can be classified as small scale, medium scale and large scale enterprises. Financial Institutions: On the basis projects are classified as follows: New projects Replacement projects Diversification projects Modernization projects

8. Dimensions of project identification Any project when going through the screening process is analysed in terms of its efficiency with respect to three dimensions, namely: Input analysis Output analysis Cost & Benefit analysis Let us look into each dimension in detail: Input Analysis: The input analysis is mainly concerned with the internal factors associated with the project. These are more or less regarding the costs associated with venturing into a new economic and creative opportunity. The following factors are analysed and evaluated under input analysis: Availability of sufficient factors of production. Availability of sufficient amount of capital.

9. Availability of both skilled and unskilled labour. Ability to raise capital for the purpose of investment. Nature and type of location for the venture. Type and selection of the product or service. Nature and size of the risk involved in the project. The level of experience and expertise in the particular field/ industry under consideration. The amount of funds that can be invested into the project. Estimating all the hidden costs and expenditures involved in the project. Thus the input analysis puts it into perspective how much a particular project consumes in terms of implementation costs and the amount of risk involved in the venture at different stages of the venture. Output Analysis: The next component is the output analysis, this analysis revolves around the aftermath of the project implementation. Here the emphasis shifts from to “How to execute a project ?” to “What can be expected from the implementation of the project ?”. This output analysis is a more result-oriented analysis as it considers the estimation of output, expectation of profits to the firms and the returns to shareholders. The following factors are considered in the output analysis: The expected profits that can be generated from the project and the returns that can be earned by the investors. The reception of the product/service by the society and expected demand for the commodity.

10. A detailed analysis of market trends, the targeted segments of the population for who the product is made, is considered under output analysis. Availability of sufficient distribution channels and warehousing facilities of safe and clean storage of output. Minimizing the loss incurred by the firm by optimizing the production of output. Determination of the break-even point of production and sales of the output. Comping up with an accurate pricing mechanism for the product/service. Setting up of feedback mechanisms to guarantee continuous customer satisfaction. Adding more value to the product at factor prices. Safeguarding the employees from low morale and upgrading technology to maintain sales. Thus the output analysis puts into perspective how much a particular project can give back to the entrepreneur and to the team involved in its production. Cost and benefit analysis: The last component of project identification is the cost and benefit analysis. This analysis aims at ascertaining a relationship between the costs incurred and benefits derived from venturing into a particular project opportunity. Here a close look is taken into how much costs were involved and what were the benefits derived from it and also how close is this estimate to the predefined budget estimate of the entrepreneur or the firm. The more proximate the two are, it shows successful management and financial prudence by the firm as the firm was able to optimize production, minimize loss and generate substantial profits. Thus, cost-benefit analysis is a close look at the performance of the firm.

11. Importance of project identification The importance of project identification is highlighted in the following points: They become catalytic agents of economic development. They boost production and generate employment. The commitments to a project are non-reversible. The project consists of benefits that are of a long term nature. A project causes substantial financial outlays. Project identification causes the necessary changes in society overtime. Project identification is the most crucial step of the project planning cycle and employs a significant amount of resources as part of its exercise. Projects provide the framework of the future pattern of activities and services of the enterprises. They also initiate development of basic infrastructure and environment. Projects accelerate the process of socio-cultural development.

12. SWOT ANALYSIS SWOT Analysis is a logical, analytical, research tool used by entrepreneurs or the top level management to analyse the feasibility of a particular project. It consists of four components: Strengths Weaknesses Opportunities Threats This can be explained as under: Strengths: Characteristics of a business which give it advantages over its competitors. Weaknesses: Characteristics of a business which make it disadvantageous relative to its competitors. Opportunities: Elements in a company’s external environment that allow it to formulate and implement strategies to increase profitability. Threats: Elements in the external environment that could endanger the integrity and profitability of the business.

13. Project selection Project selection is the process of selecting a promising project idea from a list of various project ideas based on certain conditions that are set by the entrepreneur or the firm. Project selection is the second step after project identification in the project planning cycle. After gathering a large number of project profiles, the entrepreneur should consider the following criteria for selecting a particular project: Investment size Location Technology Equipment Marketing

14. Investment size: Professional managers, who have worked in multinational companies or large Indian companies, should think of starting medium-sized or large-sized units only. The investment size should be Rs. 3 to 5 crore. They should not commit the common mistake of restricting the project size to less than Rs. 2 crores, so that they have to go to all the financial institutions. In fact, under the present circumstances, it will be much easier to get projects cleared by the all-India institutions, requiring even lesser promoter’s contribution. Location: A new entrepreneur should locate his project to the extent possible, in and around the state headquarters. There are many backward areas around such cities. It is necessary to have such a location so to attract competent managers. This will also facilitate liaison with the State Electricity Board, State Industrial Development Corporation and various other agencies. Technology: The first project should not be for a product which required high technology, necessitating foreign technical collaboration. It is better to go in for a product with a proven technology that is indigenously available. It makes life easier to begin with. Equipment: The entrepreneur should select the best equipment as per advice of experienced technical consultants. He should not compromise on the quality of the equipment. Many entrepreneurs enter into some sort of a deal with the equipment manufacturers for a “kick-back” and in the process sacrifice quality. One should not be short-sighted and come to grief by going in for poor quality equipment. Marketing: It is not advisable to get into a project particularly the first, which would mean survival amidst cut-throat competition involving direct selling to the ultimate customer. One should go in for products with a limited number of industrial customers.

15. Constraints involved in project selection The various constraints faced by the entrepreneur during project selection, can be divided into 2 components: External constraints Internal constraints External constraints: These include all the factors outside the project such as the social taboos, social structures, government policies, the market conditions, the industrial receptivity and so on. It depends upon the competitor’s strategy and the degree of competition and stress faced by the industrial units in a free and perfectly competitive market environment. It depends upon the economic conditions prevailing in the market. Whether the economy is in boom or depression what are the hopes and optimism of the producers and consumers. It depends on the political climate of the country whether the country is in a politically unstable condition, is it in a war or experiencing a revolution, etc.

16. Internal constraints: These refers to the availability of the factors of production such as land, labour, and capital. The problems associated with the nature and type of the industry and the particular product or service. The mindset of the management, whether it is a competitive or a conservative management. The required location and the cost of social overheads. The ability to raise funds for the project and availability of funds to invest as seed capital. Conclusion: It can thus be said that project identification is an important dimension of entrepreneurship. Also, more important is its classification which goes towards the emergence of three dimensions- inputs, outputs and social costs and benefits and finally the economic development of the country.

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