MBA (Trimester) Module Title : Project Finance and Management Term V UNIT I: – Project Finance and Management : Generation and Screening of Ideas

Generation of Ideas To stimulate the flow of ideas, the following are helpful  SWOT analysis  Clear articulation of objectives  Fostering a conducive environment

Socio-economic Governmental Competitor Geographic Supplier Technological 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 Suppliers THE INDUSTRY Rivalry Among Existing Firms Buyers Substitutes Threat of New Entrants Bargaining Power of Buyers Bargaining Power of Suppliers Threat of Substitute Products

Life Cycle Approach Many industrial economists believe that most products evolve through a life cycle that has four stages: Pioneering stage Rapid growth stage Maturity and stabilisation stage Decline stage 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:Stage Investment Return Pioneering Pioneering May have negative NPV May have negative NPV but may create options but may create options for participating in for participating in growth stage growth stage Rapid growth Rapid growth Positive NPV Positive NPV Maturity Maturity NPV – neutral NPV – neutral Decline Decline Negative Negative

Experience Curve  The experience curve shows how the cost per unit behaves with respect to the accumulated volume of production Accumulated volume of production Cost per unit ( Present value)  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 Input availability Technical know-how Reasonableness of cost Adequacy of market Complementary relationship with other products Stability Dependence on firm’s strength Consistency with governmental priorities Rating Index4.00

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