Project Planning, Analysis and Management Generation and Screening of Project Ideas

Generation and Screening of Project Ideas This is the first step in project planning. The key is “ enter the right business at the right time”. But , how to do it? It requires -- imagination -- sensitivity to environmental changes -- realistic assessment of one’s capacity. It is -- partly structured and partly unstructured -- partly dependent on convergent thinking and partly divergent thinking -- partly objective analysis and partly subjective evaluation -- partly amenable to control and partly dependent on circumstances It has to be admitted “ it is a difficult task”. Please identify some successful people you have come across as above.

Generation and Screening of Project Ideas Generation of ideas– how to do it? Stimulating the flow of ideas Step 1 SWOT analysis. The aim is to get new ideas from the employees and connected people. Step 2 Clearly defining the objectives -- cost reduction -- productivity improvement -- capacity utilisation increase -- improvement in contribution margin -- expansion in to promising fields Step 3 Fostering a conducive atmosphere

Generation and Screening of Project Ideas Monitoring the Environment It involves studying the following factors: -- Economy -- Government Policy -- Technology -- Social factors -- Competition -- Supply

Generation and Screening of Project Ideas Monitoring the Environment Economy Present state of the economy Overall rate of growth Cyclical fluctuations Linkage with global economy Trade surplus/ deficit of the country Balance of Payment situation of the country

Generation and Screening of Project Ideas Monitoring the Environment Government Sector Industrial Policy 2. Government Programme and Projects 3. Taxation policy 4. Incentive policy 5. Foreign Trade Policy 6. Exchange Control Regulations 7. Financing norms and lending climate from financial institutions

Generation and Screening of Project Ideas Monitoring the Environment Technology -- rate of change of technology -- access to technical know-how -- receptiveness to change in technology

Generation and Screening of Project Ideas Monitoring the Environment Social Sectors -- population growth -- age shift -- income distribution -- education profile -- employment of women -- attitude towards consumption and investment

Generation and Screening of Project Ideas Monitoring the Environment Competition -- number of competitors and the pattern of market share -- nature of products offered by them -- entry barriers for new entrants -- comparison of the proposed product with that of competitors -- marketing practices

Generation and Screening of Project Ideas Monitoring the Environment Suppliers -- material -- men -- energy and power -- finance Can you think of some examples of successful projects in the past on the above factors? Then follows corporate appraisal

Generation and Screening of Project Ideas Corporate Appraisal Marketing and Distribution -- market image -- product line -- market share -- distribution net work -- customer loyalty -- cost of marketing and distribution

Generation and Screening of Project Ideas Corporate Appraisal Technology Plant and Machinery Vertigal integration Locational advantage Cost aspects

Generation and Screening of Project Ideas Corporate Appraisal Research and Development Research capabilities Infrastructural facilities for research Coordination between research and operations Corporate Resources and Personnel Corporate image Liaison with Government and other agencies Capability and dynamism of top management Competency and commitment of employees Industrial relations Finance and accounting Financial leverage Cost of capital Taxation system Relationship with share holders and creditors Accounting and control systems Cash flows and liquidity How to identify investment opportunities?

Generation and Screening of Project Ideas Three popular tools can be put to use: Porter Model Experience Curve Life Cycle Approach

Generation and Screening of Project Ideas Porter Model Developed by Michael Porter. Mainly discusses the profit potential of the industry. According to the theory, profit potential depends on the following: Threat of new entrants Rivalry among existing companies Pressure from substitute products Bargaining powers of buyers Bargaining power of suppliers The company applies the above model and identifies level of threat to profitability and goes for new project ideas. Exercise– Please identify some industries who have embarked on new projects to meet the above threat.

Generation and Screening of Project Ideas Experience curve This tool is based on the principle that “ investments aimed at reducing the cost is essential for the long term survival and profitability of the company”. What are the factors contributing to reduction in cost over a period? Learning effects 2. Technological improvement 3. Economies of scale

Generation and Screening of Project Ideas Experience curve– an exercise --A recent news item Sesa Goa to buy Dempo’s mining assets for Rs 1750 cr. Brief details of the buy Sesa Goa is a large iron ore exporting company, also diversified in to manufacture of pig iron and metallurgical coke. It belongs to Vedanta Group. It has mining operations in Karnataka and Orissa. It has metallurgical and pig iron plants of large size in Goa. VS Dempo and co Pvt Limited, is a Goa based company. One of the largest iron ore exporters form Goa. The company’s assets include processing plants, barges, trans-shippers and loading capacities at Marmugoa port. Miners in Goa have lower costs as mines are located near the port, and so avoid road and rail charges. What could have been the motive of Sesa Goa to go for this project?

Generation and Screening of Project Ideas L&T makes Rs1037 cr by exiting Ultra tech. Brief details Larsen and Toubro as all of us know is a giant in engineering and construction activity. Recently the company was in the news as a bidder for Satyam through its group company. The company had a cement division under the name of Ultra Tech Cement, which was sold in 2004 to Grasim Industries of Aditya Birla group. The reason for the sale was said as strategy for focusing on core Business. Under the sale agreement, L&T retained 11.49% (14.3 million) shares of Ultra Tech with a commitment to sell before 31st December 2009. The shares were shown in the books at Rs10.00 each as on 31.3.2008. The shares have now been sold at Rs.725/- each for Rs.1037/- crores.

Generation and Screening of Project Ideas Questions to be answered What is the reason for L&T exiting the cement business and selling it to Gracim When a division of a company is sold, what is it called? When they have another 6 months time to sell the shares as per the agreement, what could be the reason for timing the sale now?

Generation and Screening of Project Ideas Life cycle Approach This tool is based on the principle that every industry has a life cycle. Depending upon the stage where the company is presently placed, the investment has to be chosen. What are the stages of life cycle? Birth (pioneering) Growth Maturity or stabilisation Decline ( to be carefully managed ) Death ( to be totally avoided ) What is the answer to avoid situations 4 and 5 ? To EVOLVE

Generation and Screening of Project Ideas Project ideas may come from different sources Some of the important sources are: Analysis of performance of existing industries Examination of inputs and out puts of various industries Review of imports and exports Plan outlays of Governments and other major companies Leads given by Financial Institutions and others Identifying unfulfilled needs (psychological or otherwise) Trade fairs 8. Some times chance factor also provide ideas

Generation and Screening of Project Ideas Preliminary screening This will involve the following aspects Compatibility with the promoter Consistency with Government priorities Availability of inputs Adequacy of the market Cost Acceptability of risk level Then the projects are rated. A project rating index is developed.

Generation and Screening of Project Ideas Preliminary screening Project Rating Index When a company has a number of workable project ideas, it should develop a mechanism to study them objectively and crystalise on one. The company identifies important parameters to be considered and assigns a weight to each parameter. Rates each idea on the various factors using a suitable rating scale. (normally 5 point to 7 point scale). For each factor, the factor rating is multiplied by the weight assigned and the score obtained. Then all the scores for various factors are added and the project score is obtained. For all the project ideas scores are obtained and indexed, to choose one. This system is called Project Rating Index

Generation and Screening of Project Ideas A typical project rating index will look as under Factor Factor Rating Factor weight VG G A P VP score 5 4 3 2 1 Input availability 0.25 * 0.75 Technical know-how 0.10 * 0.40 Adequacy of market 0.15 * 0.75 Reasonableness of cost 0.05 * 0.20 Complementary relationship with other products 0.05 * 0.20 Stability 0.10 * 0.40 Dependence on firm’s strength 0.20 * 1.00 Consistency with Govt priorities 0.10 * 0.30 Rating index 4.00

Generation and Screening of Project Ideas Hurdle rate What it is? It can be defined as a point of obstacle. A point beyond which, the proposal is risky. In project rating index, a minimum scoring point is fixed as obstacle score, indicating any score below the same is not to be Considered. The ratings obtained by various ideas are compared with the hurdle rate and the best scoring idea is chosen.

Generation and Screening of Project Ideas Project Rating Index An exercise ITC has recently launched a project to produce a bathing soap called “vivel”. In the light of what we have so far seen, please answer the following with regard to this project: What is the core activity of ITC? What type of strategy is this project? What could have been the motive for this project? Do you see any risk factors in this project? What are the positive factors in this project? Please construct a scoring model for this project

Generation and Screening of Project Ideas Net Present Value (NPV) Another important point considered in project screening is the NPV. How this is possible? Imperfections in real market (product and marketing) create entry barriers for new firms. If entry barriers are strong, it will prevent new players and there by provide prospects of positive NPV. It depends on the under noted factors: Economies of scale Product differentiation Cost advantage Marketing reach Technology edge Government Policy

Generation and Screening of Project Ideas Exercise For crystalsing on a project for implementation, a company needs to do four major analysis to ensure viable implementation of the project. From what we have seen so far, please spell out the four areas of analysis. Market viability Technical feasibility Commercial viability Financial feasibility