In this article we will discuss about:- 1. Initial Selection of Project Ideas 2. Pre-Investment Study (PIS) 3. Pre-Project Activities 4. SWOT Analysis 5. Market Appraisal 6. Sources of Data 7. Market Survey 8. Charts and Layouts in Technical Analysis.
Initial Selection of Project Ideas:
Before a project idea is considered for detailed study, the promoter must verify the following:
1. Project must match with the promoter’s profile of qualifications, experience, interest etc.
2. Rough estimate of project cost and promoter’s capability to mobilize the necessary resources to the proposed project.
3. Clear idea about market size and growth potential.
4. The availability of inputs and proximity of market for final products.
5. Costs involved in production, administration and marketing.
6. Availability of technology, plant and machinery.
7. Risks involved with the project.
Once the entrepreneur comes to a conclusion that the project can be taken up for detailed study, he can start with conducting of feasibility study.
Pre-Investment Study (PIS):
It is prepared for establishing the prima facie project viability with sufficient back up for the purpose of owner/ promoter’s internal evaluation. PIS will be the basic guideline for the preparation of detailed Techno-Economic Feasibility Report (TEFR) which is prepared for meeting the requirement of financial institutions or banks. So PIS report is not a bankable report but TEFR is.
It is necessary that advance actions are to be taken before the zero date not taking the character of pre-project activities. Pre-project activities, however, are those which define the scope of the main project activities and fixation of all performance targets leading to the fixation of zero date.
There are some pre-project activities which are sequential, unless one is completed the other cannot start. There are also others which are independent.
The steps which could be taken before zero date of a project which constitute pre-project activities are:
1. Identification of project/product
2. Selection of location
3. Determination of plant capacity
4. Site selection, soil survey, plot plans
5. Selection of collaborators/sourcing of technology
6. Manpower planning, recruiting key personnel.
SWOT Analysis of a Project:
In the initial selection of project opportunities by an existing company, a more intensive analysis of the companies resources and environment could be made to identify specific project opportunities on the basis of the companies’ existing activities. An existing company which seeks to identify new project opportunities should undertake and evaluate its strength and weaknesses as well as opportunities and threats in the external environment, which is called ‘SWOT analysis’.
The analysis focuses on the following issues i.e., the aspects to be considered in a SWOT analysis:
1. Internal financial resources available for investment for new project after taking into account the need for replacement expenditures, increase in working capital, repayment of borrowings and dividend obligations. This would indicate the extent of internal financial resources required.
2. Current facilities available in areas of production, technological capabilities and intense R & D. This will enable the tie up with new technological collaboration.
3. Sources of raw material, their reliability, adequacy of power supply and other utilities, transport and communication facilities.
4. Present cost structure of existing products and their contribution to profitability.
5. Market share distribution network, company’s image in market place, likely changes in the structure of competition.
6. Resourcefulness and competence of top management, age and profile of executives, employee motivation level and the state of employer-employee relations.
7. Impact of regulatory legislations, changes in government policies in industrial licensing, foreign exchange control, collaboration and ties up with foreign companies, import-export policies etc.
8. Likely effect on the cost structure of companies products due to new technologies/methods/process of production and likely changes in the structure of competition, possible substitutes existing or emerging consumer tastes and preferences.
9. Anticipated growth in world and national economy and its major sectors like agriculture, industries, transport, communication etc.
Market Appraisal of a Project:
Market appraisal is the finding out the aggregate demand of the proposed product or service to be generated. It also refers to the market share of the proposal under consideration. In a market appraisal the starting point is the estimation of the size of the market.
The viability of the project depends critically on the estimated sales and sources therefor are to be determined. Demand forecasting technique is adopted from the data. A wide variety of information is required to be collected for market appraisal.
These mainly relate to the following:
1. Consumption trends and supply positions
2. Production possibilities and constraints
3. Cost structure
4. Elasticity of demand
5. Consumer behaviour, distribution channels, marketing policies
Consumer profile data, government policies, plans etc., import export controls, credit controls and a variety of data are required for market analysis.
Sources of Data:
Data required for market analysis are obtained from both primary and secondary sources. Market survey provides primary data and is collected to meet the specific purpose on one time basis. Secondary data on the other hand are those collected in some other situations and now found relevant for market analysis. Secondary data offers clues and leads for further investigations.
Important sources of data (mostly secondary) for market analysis are provided by publications, journals, survey reports, bulletins, industry information, census data, annual reports, techno- economic surveys, stock exchange directions and a host of other publications. It must however be ensured that the accuracy, reliability and relevance of data has to be ensured.
Feasibility Study Report on Project:
Before a project investment is finalized, the entrepreneur will conduct a feasibility study to confirm about the techno-commercial strength of project and prepares a report called ‘feasibility study report’. It is not very elaborate, but contains substantial information for selection of the project.
The report normally contains the following details:
1. Study of the configuration of the project idea in all aspects
2. Identifying the type and size of the project with justification
3. Study of location
4. Study of demand of products/services
5. Survey of material requirements
6. Project schedule
7. Project cost and sources of finance
8. Profitability and cash flow analysis
9. Cost benefit analysis
10. Identifying and quantifying risk element
11. Social costs and benefits
12. Study of economic, political and legal environments.
The above report is also called ‘pre-investment study report’. It is prepared for establishing the prima facie project’s viability with sufficient backup for the purpose of evaluation of investment proposal by the entrepreneur. This report is a base for preparation of ‘detailed project report’.
Market Survey for Projects:
Before undertaking any new project it is customary to undertake a market survey. Perhaps the best known form of market research is the market survey. This is not only used to forecast the level of demand for a product, but may be used for a wide range of other purposes as well, including testing buyers reactions to different product configurations and packaging, and identifying links between purchasing behaviour and other variables, like buyers’ age, sex, social status and income.
If the aim is to estimate the level of demand, a sample of buyers is asked direct questions about their intentions with respect to purchasing the product within a specified future period. That information is used in conjunction with other evidence about the potential market to construct an estimate of the total volume of sales.
The effectiveness of this technique depends upon a number of variables:
1. First, it depends upon the number of potential buyers. If the number is very large, only a small sample can be reached for a reasonable cost. It may be possible to construct a truly representative sample, in which case the results from that sample can be extrapolated in order to forecast for the market as a whole. Market surveys are, of most use when the number of potential buyers is small so that a very high proportion of them can be questioned.
2. The second variable which determines the usefulness of market surveys is the clarity of buyers’ in intentions. If buyers themselves are vague about their own intentions they will be unable to provide useful information to the market researcher.
3. Other factors which will affect the cost-effectiveness of market surveys are:
(a) The cost of identifying and contacting buyers.
(b) Buyers’ willingness to disclose their intentions.
(c) Buyers’ propensity to carry out their intentions.
This analysis suggests that market surveys will be of most value for industrial products, for consumer durables and for other products where buyers plan their purchases in advance. Market surveys may also be useful for new products where there is no past data on sales, so that time-series analysis or estimation is not possible. A project investment decision is made only if economical feasibility report suggests that basing on market survey.
Charts and Layouts in Technical Analysis:
The important charts and layout drawings involved in the technical analysis of a project are briefly described below:
1. General Functional Layout:
This shows the general relationship between buildings, equipment and other civil works. The layout should seek to allow traffic flow in one direction to the extent possible, with minimum crossings. Go-downs, workshops and other services must be functionally situated with respect to the main factory buildings.
2. Material Flow Diagram:
This shows the flow of materials, utilities, intermediate, final and by-products and emissions.
3. Production Line Diagrams:
These show how the production would progress along with the key information for main equipment.
4. Transport Layout:
This shows the distances and means of transport outside the production line.
5. Utility Consumption Layout:
This shows the principal consumption point of utilities (like water, gas, compressed air, etc.) and their required qualities and quantities.
6. Communication Layout:
This shows how the various parts of the project will be connected with telephone, telex, intercom, video etc.
7. Organizational Layout:
This shows the organizational setup of the project along with information on personnel required for various departments and their inter-relationships.
8. Plant Layout:
The plant layout is concerned with the physical layout of the factory.
The important considerations in preparing the plant layout are:
(a) Consistency with production technology
(b) Smooth flow of goods from one stage to another
(c) Proper utilization of space
(d) Scope of expansion
(e) Minimization of production cost
(f) Safety of personnel