Chapter3 generationandscreeningofprojectideas
- 1. CHAPTER 3 GENERATION AND SCREENING OF PROJECT IDEAS
- 2. 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
- 3. Generation of Ideas To stimulate the flow of ideas, the following are helpful SWOT analysis Clear articulation of objectives Fostering a conducive environment
- 5. Corporate Appraisal Marketing and distribution Production and operations Research and development Corporate resources and personnel Finance and accounting
- 6. 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
- 7. 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
- 8. 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.
- 9. Most products evolve through a life cycle. The broad stages and the investment returns in these stages are as follows: Stage Investment Return Pioneering May have negative NPV but may create options for participating in growth stage Rapid growth Positive NPV Maturity NPV – neutral Decline Negative
- 10. 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
- 11. 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
- 12. Preliminary Screening Compatibility with the promoter Consistency with governmental priorities Availability of inputs Adequacy of market Reasonableness of cost Acceptability of risk level
- 13. 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
- 14. 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
- 15. 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
- 16. 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
- 17. 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
- 18. 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 developing economies. I have examined strategies of development, the role of foreign trade, of savings and investment, the most helpful role of government, and a myriad of other factors. I am now convinced that nothing matters more than the work ethic and entrepreneurial spirit of the population.”
- 19. SUMMARY Identification of promising investment opportunities requires imagination, sensitivity to environmental changes, and a realistic assessment of what the firm can do. To stimulate the flow of investment ideas, the following are helpful: (i) SWOT analysis, (ii) clear articulation of objectives, and (iii) conducive climate. The business environment which needs to be monitored regularly to identify investment opportunities, may be divided into six broad sectors: economic sector, government sector, technological sector, socio-demographic sector, competition sector, and supplier sector. A realistic appraisal of corporate strengths and weaknesses is essential for identifying investment opportunities which can be profitably exploited. The broad areas of corporate appraisal are: market and distribution, production and operations, research and development, corporate resources and personnel, and finance and accounting. 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 entrants, (ii) rivalry among existing firms, (iii) pressure from substitute products, (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 to identify them.
- 20. 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 promoter, consistency with governmental priorities availability of inputs, adequacy 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 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 projects: economies of scale, product differentiation, cost advantage, marketing reach, technological edge, and government policy. Every entrepreneur must answer the following questions: Are my goals well defined? Do I have the right strategy? Can I execute the strategy? It appears that a successful entrepreneur has the following qualities and traits: willingness to make sacrifices, leadership, decisiveness, confidence in the project, marketing orientation, and a strong ago.