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.