Project Management- Unit II

Project Management
Generation & Screening of Project
Ideas

2
Introduction
• A project may be seen as an investment activity
where financial resources are expended to
create capital assets that produce benefits over
extended period of time.
• Project identification is the initial phase of the
project development cycle.
It begins with the conceiving of ideas or intentions
to set up a project.
These ideas are then transformed into a project.

 Generation of ideas
 Monitoring the environment
 Corporate appraisal
 Profit potential of industries : Porter model
 Scouting for project ideas
 Preliminary screening
 Project rating index

Generation Of Idea
• Barring truly new ideas
• Stimulation the flow of ideas
most people adopt somewhat casual and haphazard
approach to the generation of project ideas. To
stimulate the flow of ideas, the following are helpful:
SWOT Analysis
• Clear Articulation of Objectives
• Forecasting a conductive climate

© Centre for Financial Management,
Bangalore Competitor
Business Environment

Monitoring the Environment
Economic Sector
– State of the economy
– Overall rate of growth
– Growth rate of
primary, secondary
and tertiary sector
– Cyclical fluctuations
– Linkage with the
world economy
– Trade surplus /
deficits
– Balance of payment
situations
Governmental Sector
– Industrial policy
– Government
programmes and
projects
– Tax framework
– Subsidies, incentives,
and concessions
– Import and export
policies
– Financing norms
– Lending conditions of
financial Institutions
and commercial banks

Monitoring the Environment contd….
• Technological Sector
– Emergence of new technologies
– Access to technical know-how, foreign as well as indigenous
– Receptiveness on the part of industry
• Socio-demographic Sector
– Population trends
– Age shifts in population
– Income distribution
– Educational profile
– Employment of women
– Attitudes toward consumption and investment

Monitoring the Environment contd….
• Competition Sector
– Number of firms in the industry and the market share of the top few
(four or five)
– Degree of homogeneity and differentiation among products
– Entry Barriers
– Comparison with substitutes in terms of quality, price, and functional
performance
– Marketing policies and practices
• Supplier Sector
– Availability and cost of raw materials and sub - assemblies
– Availability and cost of energy
– Availability and cost of money

Corporate Appraisal
• Marketing and Distribution
• Production and Operations
• Research and Development
• Corporate Resources and Personnel
• Finance and Accounting

Corporate Appraisal contd….
• Marketing and Distribution
– Market Image
– Product line
– Market size
– Distribution Network
– Customer Loyalty
– Marketing and Distribution costs
• Production and operations
– Condition and capacity of plant and machinery
– Availability of raw materials, sub-assemblies, and power
– Degree of vertical integration
– Location advantage
– Cost structure

• Research and Development
– Research capabilities of the firm
– Track record of new product developments
– Laboratories and testing facilities
– Coordination between research and operations
• Corporate Resources and Personnel
– Corporate image
– Clout with governmental and regulatory agencies
– Dynamism of top management
– Competence and commitment of employees
– State of industrial relations

• Finance and Accounting
– Financial leverage and borrowing capacity
– Cost of capital
– Tax situation
– Relations with shareholders and creditors
– Accounting and control system
– Cash flows and liquidity

13
For projects to be properly conceived, the
characteristics below must be clearly defined:
– Objectives
– Expected outputs
– Intended beneficiaries
– Planned lifespan
– Extended outcome of the project
– Principle stakeholders
– Financial plan and source of financing
Essential characteristics of projects

14
– Individuals
– Groups of individuals (community)
– Local leaders
– NGOs
– Policy makers
– Planners
– International development agencies
– Government pronouncements
Project ideas may be due to:
• prevailing problems in a given area.
• availability of resources in a given location.
Project ideas conceived by:

15
• Clear project identification allows you to
answers questions like:
a) How do the projects come about?
b) Where do projects come from?
c) Why are projects where they are?
Project identification

16
There are two major approaches to project
identification
(a) Top-down approach
(b) Bottom-up approach
Approaches to project identification

17
• Projects are identified based on demands from
beyond the community.
• This may include directives from:
– international conventions (such as Kyoto
Protocol/climate change)
– international institutions or NGOs that have
determined particular priorities and thus projects
– national policy makers identifying projects that
pertain to party manifestos and/or national plans.
Top-Down Approach

18
• It may be a rapid response to disasters like floods,
war outbreak because there is limited time and
chance to consult the beneficiaries.
• It can be effective in providing important services
like education, health, water, roads etc.
• It can contribute to wider national or international
objectives and goals
– and therefore potentially be part of a wider benefit
(as in the case of trans-boundary resources, such as
climate, water or others)
Advantages of Top-Down Approach

19
• Does not help in modifying strongly established ideas and
beliefs of people.
• Assumes external individuals know better than the
beneficiaries of the service.
• Communities have little say in planning process rendering
approach devoid of human resource development.
• Community develops dependency syndrome on outside
assistance and does not exploit their own potential.
• The development workers (change agents) become
stumbling blocks to people-led development
– tendency to impose their own biases, etc. on people.
Limitations of Top-Down Approach

20
• In this approach community/beneficiaries
are encouraged to identify and plan the
projects themselves with or without
outsiders.
Bottom-Up Approach

21
• Interveners accomplish more with limited resources
since people tend to safeguard what they have provided
for themselves.
• Develops people’s capacity to identify problems and
needs and to seek possible solutions to them.
• Provides opportunities of educating people.
• Helps people to work as a team and develop a “WE”
attitude - makes project progressive and sustainable.
• Resources are effectively managed; dependence
reduces, there is increased equity, initiative,
accountability, financial and economic discipline.
Advantages of Bottom-Up Approach

22
• Not always effective for projects that require
urgency to implement
• Time-consuming and requires patience and
tolerance.
• People sometimes dislike approach because they do
not want to take responsibility for action.
• The agency using this approach is never in control
and cannot guarantee the results it would want.
• The priorities of communities may not fit with
national or international priorities that seek to have
a broader impact
Limitations of Bottom-Up Approach

23
1. The household (socio-economic) survey
• Studies social and economic situations of a given area
e.g. climate, geographical set-up, economic
activities, political set up, education system,
culture, diet, social services, physical infrastructure
etc.
• Uses questionnaires, interviews, documentation, and
direct observation.
• Data is collected, processed and analyzed and projects
are then identified
Top-down approaches to project
identification

24
2. Rapid appraisal
• Called Rapid Rural Appraisal (RRA) when carried out
in a rural areas, and Rapid Urban Appraisal (RUA) in
an urban area.
• Method collects and assesses data quickly using any
data collection techniques.
• Primary purpose is to acquire the information in the
shortest time possible and it lowers the cost.
– It is rapid because investigation, assessment and
identification of projects are done at the same
time.
identification

25
• Rapid appraisal uses the following data
collection techniques:
– Analysis of secondary data sources
– Interviews
– Direct observation at site
– Visualization of Resources like social
organizational maps and time series maps.

26
3. Needs Assessment Survey
• Also referred to as situation analysis
(SITAN).
It involves:-
– Fact finding about problems or needs in a
given area or community.
– Finding out what is lacking in a given area
or community.
– Investigating a situation in a given area.
identification

27
NAS is carried out to:
• find out the problem in a given community so as
to identify the most appropriate solution
(s)/project (s) to solve the problem (s) in question.
• analyze the causes of the problems and seek likely
solutions to the problems leading to project
identification.

28
1. Animation
• Process of stimulating people to become more aware
and conscious of problems they suffer from.
to gain confidence in their ability to deal with these
problems and take initiatives to improve situation.
• Animation makes the community better understand
and be prepared to overcome its problems and take
decisions with full responsibility.
• Carried out by Animators / Helpers / Change agents.
(Internal Animators if they come from within the
community or External Animators if from outside.)
Bottom-up approaches to project
identification

29
2. Facilitation/Community action
• an attempt to assist people to get over
problems by (say) training them in certain
skills, providing them with the needed
information e.g. market information, linking
them up with relevant agencies and
organizations to improve access to the
needed resources etc.
identification

30
3. Participatory Appraisal
Project identification should be participatory,
and should involve local communities in
identifying and prioritizing their needs.
The DTPC (District Tourism Promotion
Council) should consider the views of the
communities during the screening and
selection of various project proposals and the
selection of the preferred proposals for
implementation.
identification

31
• PRA (participatory rural appraisal) when carried out in
rural areas; and PUA (participatory urban appraisal)
when carried out in urban areas
• PRA/ PUA can be described as a family of approaches,
methods and behaviors that enable people to express
and analyze the realities of their lives and conditions, to
plan for themselves what action to take, and to monitor
and evaluate the results.
• The key to PRA/PUA is that the only external
involvement is in facilitation. The communities
themselves determine the issues, priorities and courses
of action.

32
• The process of project identification ends with the
formulation of a problem statement.
• It takes the form of:
– Listing all the problems/needs in the
community/area/ organization.
– Prioritizing the problems and selecting 1 – 3 core
(major) problems.
– Finding out the root causes of the problems.
– Sitting the likely effects of the problems on the
community.
– Suggesting the probable solutions to the problems.
– Identifying the (projects) from the solutions.
The problem statement

33
• Is the technology appropriate to the project’s objectives or
local capabilities?
• Is the risk involved manageable?
• Is the demand for the expected outputs adequate, and does
the project actually have a comparative advantage?
• Will the supply of raw materials or skills be adequate?
• Is the design in agreement with the institutional and
managerial capabilities available?
• Will the recurrent costs be adequately met given the
available financial resources?
• Is there adequate commitment by the intended
beneficiaries and support from District and central
government authorities?
The screening process of projects, inter alia,
responds to the following concerns:

34
• Is the project has negative effects on the environment?
And if yes, can the effects be mitigated?
• Is the project culturally acceptable by the community
• Is the project sustainable?
The screening process of projects, inter alia,
responds to the following concerns (cont.):

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

Profit potential
of industries :
PORTER MODEL
THE INDUSTRY
Rivalry Among Existing Firms
Substitutes
Suppliers Buyers
Potential
Entrants
Bargainin
g Power
of
Suppliers
Threat of
New
Entrants
Bargaining
Power
Buyers
Threat Of
Substitute
Product
Forces Driving Industry Competition

Threat of New Entrant
• Add capacity, inflate costs, push prices down
and reduce profitability.
• This threat is low when:
– High investment for entering the market.
– Economies of scale in the industry.
– Existing firms control the distribution channels.
– Switching cost is high.
– Govt. policies limits or prevents new entrants.

Rivalry between Existing Firms
• Competition within on the basis of price, quality,
promotion, service, warranties etc.
• High rivalry will lead to low profit margins.
• Rivalry is high when:
– Large no of competitors.
– Few firms are balanced and have the capacity to
engage in battle.
– Industry growth is stagnant.
– The industry has high exit barriers.
– High level of fixed costs.
– Product is a commodity or near-commodity.

Pressure from Substitute Products
• All industries face problem from substitute
products.
• Performs same function as original product thus
limiting the profit potential.
• Threat from substitute product is high when
– The price-performance trade off offered by substitute
product is high.
– Switching cost is low.
– Substitute products produced by industries earning
superior profits.

Bargaining Power of Buyers
• Buyers can bargain for quality, price cut,
better service and induce rivalry among
competitors.
• Powerful buyers can depress the profitability
of supplier industry.
• Bargaining power is high when:
– High volume of purchase.
– Switching costs are low.
– Strong threat of backward integration.

Bargaining Power of Suppliers
• Suppliers can raise prices, lower the quality
and curtail some free services.
• Powerful supplier can impact the profitability
of buyer.
• Bargaining power is high when:
– Few suppliers in the market.
– Hardly any substitute available.
– Switching cost is high.
– Threat of forward integration.

Life Cycle Approach
Many industrial economists believe that most products evolve through
a life cycle that has four stages:
•Pioneering stage
—Technology and product is new.
—Only few entrants survive.
•Rapid growth stage
— Significant expansion in profits.
•Maturity and stabilization stage
•Decline stage
—Due to changing in consumer preferences.
—Encroachment of new products.
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
 Pioneering
 Rapid growth
 Maturity
 Decline
Investment Returns
 May have negative
NPV but may create
options for participating in
growth stage
 Positive NPV
 NPV - neutral
 Negative

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
 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

What is SWOT analysis
A technique that enables a group or individual
to move from everyday problems and
traditional strategies to a fresh prospective.
SWOT analysis looks at your strengths and
weaknesses, and the opportunities and
threats your business faces.

 The SWOT Analysis framework is a very
important and useful tool to use in marketing
Management and other business applications
 As a basic tool its mastery is a fundamental
requirement for the marketer, entrepreneur or
business person.
 A clear understanding of SWOT is required for
business majors.

SWOT
Analysis
Oppurtunity
Threats
Strengths
Weakness
 Technique is credited to
Albert Humphrey who
led a research project at
Stanford University in the
1960s and 1970s.
 Planning tool used to
understand Strengths,
Weaknesses,
Opportunities, &
Threats involved in a
project / business.
 Used as framework for
organizing and using data
and information gained
from situation analysis of
internal and external
environment.
What is SWOT Analysis?

STRENGTHS
Characteristics of the business or a
team that give it an advantage over
others in the industry.
Positive tangible and intangible
attributes, internal to an
organization.
Beneficial aspects of the
organization or the capabilities of
an organization, process
capabilities, financial resources,
products and services, customer
goodwill and brand loyalty.
Examples - Abundant financial
resources, Well-known brand name,
Economies of scale, Lower costs [raw
materials or processes], Superior
management talent, Better
marketing skills, Good distribution
skills, Committed employees.

WEAKNESSES
Characteristics that place the firm at
a disadvantage relative to others.
Detract the organization from its
ability to attain the core goal and
influence its growth.
Weaknesses are the factors
which do not meet the standards
we feel they should meet.
However, weaknesses are
controllable. They must be
minimized and eliminated.
Examples - Limited financial
resources, Weak spending on R & D,
Very narrow product line, Limited
distribution, Higher costs, Out-of-
date products / technology, Weak
market image, Poor marketing skills,
Limited management skills, Under-
trained employees.

OPPORTUNITIES
Chances to make greater profits in
the environment - External attractive
factors that represent the reason for
an organization to exist & develop.
Arise when an organization can
take benefit of conditions in its
environment to plan and execute
strategies that enable it to
become more profitable.
Organization should be careful and
recognize the opportunities and
grasp them whenever they arise..
Examples - Rapid market growth,
Rival firms are complacent, Changing
customer needs/tastes, New uses for
product discovered, Economic boom,
Government deregulation, Sales
decline for a substitute product .

!
THREATS
External elements in the
environment that could cause
trouble for the business - External
factors, beyond an organization’s
control.
Arise when conditions in external
environment jeopardize the
reliability and profitability of the
organization’s business.
Compound the vulnerability when
they relate to the weaknesses.
Threats are uncontrollable. When a
threat comes, the stability and
survival can be at stake.
Examples - Entry of foreign
competitors, Introduction of new
substitute products, Product life cycle
in decline, Changing customer
needs/tastes, Rival firms adopt new
strategies, Increased government
regulation, Economic downturn.

S W
TO
To help decision makers
share and compare
ideas.
To bring a clearer
common purpose and
understanding of
factors for success.
To organize the
important factors
linked to success and
failure in the business
world.
To provide linearity to
the decision making
process allowing
complex ideas to be
presented
systematically.

Job Holder
• When supervisor has issues with
work output
• Assigned to a new job
• New financial year – fresh targets
• Job holder seeks to improve
performance on the job
1
Business Unit
2
• When the team has not met its
targets
• Customer service can be better
• Launching a new business unit to
pursue a new business
• New team leader is appointed
Company
• When revenue, cost & expense
targets are not being achieved
• Market share is declining
• Industry conditions are unfavorable
• Launching a new business venture
3
Who needs SWOT Analysis?

Workshop Sessions
Brainstorming Meetings
Strategic Planning
Product Evaluation
Competitor Evaluation
Personal Development Planning
Decision Making
Product Launch
Changing Jobs
Who needs SWOT Analysis?
SWOT Analysis is also
required for / during...

3. Prepare Action Plans2. Perform SWOT Analysis
& Document
1. Analyse Internal &
External Environment
How to conduct SWOT Analysis?

1. Analyse Internal & External Environment
.

Carry your findings forward - Make sure that the
SWOT analysis is used in subsequent planning.
Revisit your findings at suitable time intervals.
Create a workshop
environment - Encourage an
atmosphere conducive to the
free flow of information. Allocate research & information gathering
tasks - Background preparation can be
carried out in two stages – Exploratory and
Detailed. Information on Strengths &
Weaknesses should focus on the internal
factors.
Select contributors -
Expert opinion may be
required for SWOT
Establish the objectives - Purpose of
conducting a SWOT may be wide /
narrow, general / specific.
Evaluate listed ideas against
Objectives - With the lists compiled,
sort and group facts and ideas in
relation to the objectives. List Strengths,
Weaknesses,
Opportunities, &
threats
2. Perform SWOT Analysis & Document

3. Prepare Action Plan
Things that MUST be addressed immediately
Once the SWOT analysis has been completed, mark each point with:
Things that can be handled now
Things that should be researched further
Things that should be planned for the future

Pitfalls of SWOT Analysis
Can be very subjective. Two people rarely come up with the same final
version of a SWOT. Use it as a guide and not as a prescription.
May cause organizations to view circumstances as very simple due to
which certain key strategic contact may be overlooked.
Categorizing aspects as strengths, weaknesses, opportunities & threats
might be very subjective as there is great degree of uncertainty in market.
To be effective, SWOT needs to be conducted regularly. The pace of
change makes it difficult to anticipate developments.
The data used in the analysis may be based on assumptions that
subsequently prove to be unfounded [good and bad].
It lacks detailed structure, so key elements may get missed.
.

Tips & Exercise
Do’s
 Be analytical and specific.
 Record all thoughts and ideas.
 Be selective in the final evaluation.
 Choose the right people for the
exercise.
 Choose a suitable SWOT leader or
facilitator.
 Think out of the box
 Be open to change
Don’ts
х Try to disguise weaknesses.
х Merely list errors and mistakes.
х Lose sight of external influences and
trends.
х Allow the SWOT to become a blame-
laying
exercise.
х Ignore the outcomes at later stages of
the
planning process.
TIPS
.

Preliminary Screening
• It is possible to develop a long list of project ideas, a
preliminary screening is required to eliminate ideas which
prima facie are not promising. The following aspects can be
looked into:
– Compatibility with the promoter
• Idea must be compatible with the interest, personality and resources of the
entrepreneur.
– Consistency with governmental priorities
• Project idea must be feasible with national goals and govt. regulatory framework.
– Availability of inputs
• Resources and inputs required must be reasonably assured.
– Adequacy of market
• Size of the market should compliment the prospect of sales volume.
– Reasonableness of cost
• Cost structure may enable it to realize an acceptable profit with a price.
– Aacceptability of risk level

Pre-feasibility Study
Generation of Ideas
Initial Screening
Is the Idea Prima Facie Promising ?
Plan Feasibility Study
Yes
Terminate
No
Conduct Market
analysis
Conduct Technical
Analysis
Conduct Financial Analysis
Conduct Economic and Ecological analysis
Is the project is worth while ?
Prepare funding proposal Terminate
NoYes
P
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y
W
o
r
k
A
n
a
l
y
s
i
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a
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i
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n

DPR – Detail Project report
Preparation of detailed project report is further step in firming up
the proposal. When an investment proposal has been approved
on the basis functional report and the proposal is a major
proposal, it would be necessary to detailed project report to
firm up the proposal for the capital cost as well as the various
facilities. It includes...
• Examination of technological parameters.
• Description of the technology to be used.
• Broad technical specification.
• Evaluation of the existing resources.
• Schedule plan.
• General layout.
• Volume of work.

DPR – Detail Project report contd……
Hence these reports are to be made before investment is made into project.
Thus formulation of investment is based on the studies made. These can
be considered as pre-investment decision. Detailed project report is
prepared only for the investment decision-making approval, but also
execution of the project and also preparation of the plan. Detailed project
report additionally includes below mentioned contents in addition to
Feasibility study reports:
• Project description.
• Planning and implementation of the project.
• Specifications.
• Layouts and flow diagrams.

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  0.75
Technical know-how 0.10  0.40
Reasonableness of cost 0.05  0.20
Adequacy of market 0.15  0.75
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
governmental priorities 0.10  0.30
Rating Index 4.00

Overview
• Situational Analysis & Specifications of Objective.
• Collection of Secondary Information.
• Conduct of Market Survey.
• Characterization of the Market.
• Demand Forecasting.
• Uncertainties in Demand Forecasting.
• Market planning.
72

Key Step in Market & Demand Analysis and
Their Inter-relationship
Situational
Analysis and
Specifications of
Objectives
Collection of
Secondary
Information
Conduct of
Market Survey
Characterization of
the Market
Demand
Forecasting
Market Planning

SITUATIONAL ANALYSIS AND
SPECIFICATIONS OF OBJECTIVES
 Get a “feel” for the relationship between the product and it’s market,
the project analyst may informally talk to customers, competitors,
middlemen and other in the industry.
 Look at the experience of the company to learn about the purchasing
power of customer, action & strategies of competitors.
 The objectives of market & Demand analysis, to answer the
following question : (for air coolers)
 Who are the buyers of air cooler?
 What is the total current demand for air coolers?
 What price will the customer be willing to pay for the improved air
cooler.
 What price & warranty will ensure its acceptance?
 What are the prospects of immediate sales? etc.

Collection of Secondary Information
 Secondary Information is information that has been gathered in some
other context and is already available.
 Secondary information provides the base and starting point for the
market & Demand analysis.
 Examples of secondary information available:
 General Sources of Secondary Information
 Industry Specific Sources of Secondary Information
 Evaluation of Secondary Information
75

General Sources of Secondary
Information
• Census of India
• National Sample Survey Reports
• Statistical Abstracts of Indian Union
• Economic Survey
• Guidelines to Industries
• Annual Survey of Industries
• Monthly Bulletin of RBI
• Publications of Advertising Agencies etc.

Industry Specific Sources of
Secondary Information
Industry Title Publisher
Automobiles Annual Reports of Association of
Indian Automobile Manufacturers,
Automobile Ancillary Industry
(Yearly)
Indian Automobile
Manufacturers Association.
Army and Navy Building,
Mahatma Gandhi Road,
Mumbai-23
Chemical Fertilizer Statistics Fertilizer Association of India,
JN University, New Delhi-57
Metallurgical Iron and Steel Control Bulletin
(Quarterly)
Ministry of Steel and Mines
Textiles Indian Textile Bulletin
Man Made Fibres
Textile Commissioner, Mumbai
Associatoin of Synthetic Fibre
Industry, 84 Veer Nirman Road,
Mumbai-20

Evaluation of Secondary Information
• Who gathered the information? What was the
objective?
• When was the information gathered? When was it
published?
• How representative was the period for which the
information was gathered?
• What was the target population?
• How was the sample chosen?
• How representative was the sample?
• How accurately was the information edited, tabulated
and analyzed?
• Was statistical analysis properly applied?

Conduct of Market Survey
The market survey may be a census survey or a sample
survey.
 Census survey are employed principally for intermediate
goods & investment goods when such goods are used by a
small number of firms.
• Steps in a Sample Survey
– Define the Target Population
– Select the Sampling Scheme and Sample Size
– Develop the Questionnaire
– Recruit and Train the Field Investigators
– Obtain Information as Per the Questionnaire from the
Sample of Respondents
– Scrutinizes the Information Gathered
– Analyze and interpret the Information
79

Conduct of Market Survey
Some Problems:
– Heterogeneity of the Country
– Multiplicity of the Languages
– Design of Questionnaire
80

Characterization of the Market
 Effective Demand in the Past and Present
Apparent Consumption = Production + Imports – Exports – Change in
stock level
 Breakdown of Demand
– Nature of Product (Generic name for products e.g. steel)
– Consumer Groups (Industrial & domestic)
– Geographical Division (after sales etc.)
 Price
– FOB, CIF, landed price, average wholesale price and average retail price.
 Methods of Distribution and Sales Promotion
 Consumers
– Demographics and sociological (Age, Gender, Income, Profession, Residence)
– Attitudinal (Preferences, Intentions, Habits, Attitudes, Responses)
 Supply and Competition
– Supply from foreign or domestic
– Competition with substitutes or near substitutes
 Government Policy
– Policies, plans, legislations etc 81

Demand Forecasting
Predicting the future
Qualitative forecast methods
– subjective
Quantitative forecast methods
– based on mathematical formulas
Depend on
– time frame
– demand behavior
– causes of behavior

Demand Forecasting
Qualitative Methods
– These methods rely essentially on the judgment
of experts to translate qualitative information into
quantitative estimates
– Used to generate forecasts if historical data are
not available (e.g., introduction of new product)
– The important qualitative methods are:
• Jury of Executive Method
• Delphi Method
83

Jury of Executive Opinion Method
Rationale
– Upper-level management has best information on latest
product developments and future product launches
Approach
– Small group of upper-level managers collectively develop
forecasts – Opinion of Group
Main advantages
– Combine knowledge and expertise from various
functional areas
– People who have best information on future
developments generate the forecasts
84

Jury of Executive Opinion Method
Main drawbacks
– Expensive
– No individual responsibility for forecast quality
– Risk that few people dominate the group
– Subjective
– Reliability is questionable
Typical applications
– Short-term and medium-term demand forecasting
85

Delphi Method
 Rationale
– Eliciting the opinions of a group of experts with
the help of mail survey
– Anonymous written responses encourage honesty
and avoid that a group of experts are dominated by
only a few members
86

Delphi Method
 Approach
Coordinator
Sends Initial
Questionnaire
Each expert
writes response
(anonymous)
Coordinator
performs
analysis
Coordinator
sends updated
questionnaire
Coordinator
summarizes
forecast
Consensus
reached?
YesNo
87

Delphi Method
Main advantages
– Generate consensus
– Can forecast long-term trend without availability of
historical data
Main drawbacks
– Slow process
– Experts are not accountable for their responses
– Little evidence that reliable long-term forecasts can be
generated with Delphi or other methods
Typical application
– Long-term forecasting
– Technology forecasting
88

Time Series Projection Methods
• These methods generate forecasts on the basis of an
analysis of the historical time series.
• Assume that what has occurred in the past will
continue to occur in the future
• Relate the forecast to only one factor - time
The important time series projection methods are:
– Trend Projection Method
– Exponential Smoothing Method
– Moving Average Method
89

Advantages
• It uses all observations
• The straight line is derived by statistical procedure
• A measure of goodness fit is available
Disadvantages
• More complicated
• The results are valid only when certain conditions are
satisfied
Trend Projection Method
90

Formula for Linear Relationship
• Yt = a + bt
– Yt = demand for the year t
– t = time variable
– a = intercept of the relationship
– b = slope of the relationship

Exponential Smoothing
 Exponential smoothing, forecasts are modified in the
light of observed errors.
 If the forecast value for year t, Ft, is less than the
actual value for year t, St, the forecast for the year
t+1, Ft + 1 ..
Ft + 1 = Ft + α et
Where Ft + 1 = forecast for year t+1
α = smoothing parameter (between 0-1)
et = error in the forecast for year t = St ‾ Ft

Solution of problem for Exponential
Smoothing

Moving Average
 Naive forecast
– demand in current period is used as next period’s forecast
 Simple moving average
– uses average demand for a fixed sequence of periods
– stable demand with no pronounced behavioral patterns
 Weighted moving average
– weights are assigned to most recent data
 According to the moving average method
St + S t – 1 +…+ S t – n +1
Ft + 1 =
n
where Ft + 1 = forecast for the next period
St = sales for the current period
n = period over which averaging is done

Example
Data Forecast Forecast for t+1
t St Ft F(t+1) = (St + St-1 + St-2 + S t-3)/4
1 28
2 29
3 28.5
4 31
F5 29.1
5 34.2 29.1 F6 30.7
6 32.7 30.7 F7 31.6
7 33.5 31.6 F8 32.9
8 31.8 32.9 F9 33.1
9 31.9 33.1 F10 32.5
10 34.3 32.5 F11 32.9
11 35.2 32.9 F12 33.3
12 36 33.3

Weighted Moving Average
WMAn =
i = 1
 Wi Di
where
Wi = the weight for period i,
between 0 and 100
percent
 Wi = 1.00
 Adjusts moving
average
method to
more closely
reflect data
fluctuations
n

Weighted Moving Average Example
MONTH WEIGHT DATA
August 17% 130
September 33% 110
October 50% 90
WMA3 =
3
i = 1
 Wi Di
= (0.50)(90) + (0.33)(110) + (0.17)(130)
= 103.4 orders
November Forecast
97

Causal Methods
 Causal methods seek to develop forecasts on
the basis of cause-effects relationships
specified in an explicit, quantitative manner.
– Chain Ratio Method
– Consumption Level Method
– End Use Method
– Leading Indicator Method
– Econometric Method
98

Chain Ratio Methods
 Market Potential for heated coats in the U.S.:
– Population (U) = 280,000,000
– Proportion of U that are age over 16 (A) = 75%
– Proportion of A that are men (M) = 50%
– Proportion of M that have incomes over $65k (I) = 50%
– Proportion of I that live in cold states (C) = 50%
– Proportion of C that ski regularly (S) = 10%
– Proportion of S that are fashion conscious (F) = 30%
– Proportion of F that are early adopters (E) = 10%
– Average number of ski coats purchased per year (Y) = .5
coats
– Average price per coat (P) = $ 200
99

Chain Ratio Methods
 Market Potential for heated coats in the U.S.:
Market Sales Potential =
U x A x M x I x C x S x F x E x Y
= 280 Million x 0.75 x 0.50 x 0.50 x 0.50 x 0.10 x
0.30 x 0.10 x200
= $7.88 Million
100

Consumption Level Method
This method is used for those products that are
directly consumed. This method measures the
consumption level on the basis of elasticity
coefficients.
101

 Income Elasticity: This reflects the responsiveness
of demand to variations in income. It is calculated
as:
E1 = [Q2 - Q1/ I2- I1] * [I1+I2/ Q2 +Q1]
• Where
E1 = Income elasticity of demand
Q1 = quantity demanded in the base year
Q2 = quantity demanded in the following year
I1 = income level in the base year
I2 = income level in the following year
102

Price Elasticity: This reflects the responsiveness of
demand to variations in price. It is calculated as:
EP = [Q2 - Q1/ P2- P1] * [P1+P2/ Q2 +Q1]
• Where
EP = Price elasticity of demand
Q1 = quantity demanded in the base year
Q2 = quantity demanded in the following year
P1 = price level in the base year
P2 = price level in the following year
103

 Suitable for estimating demand for intermediate
products
 Also called as consumption coefficient method
Steps
1. Identify the possible uses of the products
2. Define the consumption coefficient of the product
for various uses
3. Project the output levels for the consuming
industries
4. Derive the demand for the project
End Use Method
104

End Use Method
 This method forecasts the demand based on the
consumption coefficient of the various uses of the
product.
Projected Demand for Indchem
Consumption
Coefficient
Projected Output
in Year X
Projected Demand for
Indchem in Year X
Alpha
Beta
Kappa
Gamma
2.0
1.2
0.8
0.5
10,000
15,000
20,000
30,000
Total
20,000
18,000
16,000
15,000
69,000
105

Leading Indicator Method
 This method uses the changes in the leading
indicators to predict the changes in the
lagging indicators.
 Two basic steps:
1. Identify the appropriate leading indicator(s)
2. Establish the relationship between the leading
indicator(s) and the variable to forecast.
106

Econometric Method
An advanced forecasting tool, it is a mathematical
expression of economic relationships derived from
economic theory.
Economic variables incorporated in the model
1. Single Equation Model
Dt = a0 + a1 Pt + a2 Nt
Where
Dt = demand for a certain product in year t.
Pt = price of the product in year t.
Nt = income in year t.
107

Econometric Method
2. Simultaneous equation method
GNPt = Gt + It + Ct
It = a0 + a1 GNPt
Ct = b0 + b1 GNPt
• Where
GNPt = gross national product for year t.
Gt = Governmental purchase for year t.
It = Gross investment for year t.
Ct= Consumption for year t.
108

Advantages
• The process sharpens the understanding of
complex cause – effect relationships
• This method provides basis for testing
assumptions
Disadvantages
• It is expensive and data demanding
• To forecast the behaviour of dependant
variable, one needs the projected values of
independent variables
Econometric Method
109

Uncertainties in Demand Forecasting
Data about past and present markets.
– Lack of standardization:- product, price, quantity,
cost, income….
– Few observations
– Influence of abnormal factors:- war, natural
calamity
 Methods of forecasting
– Inability to handle unquantifiable factors
– Unrealistic assumptions
– Excessive data requirement 110

Uncertainties in Demand Forecasting
 Environmental changes
– Technological changes
– Shift in government policy
– Developments on the international scene
– Discovery of new source of raw material
– Vagaries of monsoon
111

Coping With Uncertainties
 Conduct analysis with data based on uniform
and standard definitions.
 Ignore the abnormal or out-of-ordinary
observations.
 Critically evaluate the assumptions
 Adjust the projections.
 Monitor the environment.
 Consider likely alternative scenarios.
 Conduct sensitivity analysis
112

Market planning
Current marketing situation
- Market, Competition, Distribution, PEST.
Opportunity and issue analysis - SWOT
Objectives- Break even, % market share…
Marketing strategy- target segment,
positioning, product line, price, distribution,
sales promotion, advertising...
Action program- Quarter 1, Q2, Q3….
113

Project Management- Unit II

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Project Management- Unit II

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