UNIT 2

Project Identification

Generally; Project Identification is a process of generating a few ideas about

the possible projects. The project ideas can be discovered from various
internal and external sources. It is apprehensive with the collection,
compilation and analysis of economic data for the eventual purpose of locating
probable opportunities for investment. Actually, Project identification means
identifying some possible projects having a good market.

Steps in Project Identification – For identifying the feasible projects, the

prospective entrepreneur has to go through the following steps.

Conceiving project ideas – This is the first vital stage in project identification.
Profit making is the chief drive behind every business or enterprise.

Choosing the right line of business – To ensure the success of the
business, the potential entrepreneur has to spend substantial time and energy
on choosing the right line of activities.

Opportunity seeking – A number of business opportunity may be obtainable;

however, seeking the right business opportunity depends upon the
entrepreneur’s capabilities, his strengths and weaknesses and also on his
preferences.

Decision-making process – This final step in project identification involves

making important decisions regarding the project to be undertaken. Project
identification cannot be complete without identifying the characteristics of the
project.

OR
Generation and Screening of
Project Ideas
Before any project is executed by an entrepreneur it must be discovered.
Although various projects and ideas are available in the market it requires
efforts and techniques to look for them. Similarly scanning each and every
project available in the market in a sheer waste of time.

Above all, looking for projects related to our business niche is the best way
to look for projects. Attractive projects also attract various investors
and investment is crucial for the execution of the projects.

However, a creative mindset is required to generate new ideas. It also

helps to look at existing projects more creatively.

Certain tasks are involved in generation and screening of project ideas in

general and in this post we are going to learn about these involved tasks.

Tasks associated with generation and

screening of a project idea
Tasks which are associated with the Generation and Screening of a Project
Ideas are:
Generation of Ideas

Generation of ideas is a crucial and first important step before proceeding

further. Therefore a group of people meet and to identify investment
opportunities. A creative idea must be found out by the team to go with it
further.

Certain tasks or structures can be carried out by the team in order to come
up with new innovative, creative ideas. Certain techniques can be followed in
order to ensure effective idea generation, some of them are:
 SWOT Analysis: In short SWOT analysis refers to identification and
analysis of the 4 components of our organisation which are namely
Strength, Weakness, Opportunity and Threats. As a result, SWOT-analysis
helps us to identify key issues and opportunities for our organisation and it
comprises an analysis of your internal operations as well.
Performing a SWOT analysis will help us tap opportunities and generate ideas
and moreover we may be capable to have the first-mover advantage over
others.

 Determining the objectives: determining the objectives that need to

be carried out is also an important step towards idea generation.
Determining objectives will help us think in a particular way and direction
so that our objectives can be fulfilled. It also saves us from duplication of
efforts because it provides us with clarity in the thought
process. Directional thinking saves both time and effort.

 Generation of the atmosphere: creativity comes from within but the

process of creativity can support by creating an atmosphere which helps in
making the process better and informed. 
Creating an environment can boost the morale of employees and also
motivate them to be more creative. Techniques can also be used to do so like
interactive group activities, brainstorming sessions etc. It will help in the
generation of more creative and innovative ideas.

Monitoring the Environment 

The next task to execute comes out to be the monitoring of the environment.
The environment should be systematically monitored by the organisation
in order to assess its competitive abilities. Doing so will help us gain an
advantage over others to exploit the opportunities available in the
environment.

The process of scanning and monitoring cannot do blindly without first

knowing what to do. A plan to execute is must. Certain areas mentioned
below which must studied and monitored in order to tap opportunities:

 Economic sector
 Technology sector
 Government sector
 Competition of firm
 Demographics of audience

Corporate Appraisal
The next big thing to do is the identification of corporate strength and
weakness. This scanning and identification of strength and weakness are
termed as the corporate appraisal. It also considers certain aspects to look
upon:

 Market and distribution

 Production
 Operations
 Finance and accounting
 Research and development 
 Human resources
Scouting for Project Ideas

The process for scouting for project ideas is now to be executed. But before
the process begins one must know that from where is he going to scout
ideas from. He must be aware of some popular sources to look for ideas.
Some of the potential sources are mentioned below.

 Plans of government
 Trade fairs 
 Exhibitions
 Stimulation of creativity
 Local material and resources
 Financial institutions
 Development agencies
 Latest technologies
Also Read: Creative Business ideas in India

Preliminary Screening
Preliminary screening refers to the first look at any project. Scanning the
project from an overview perspective and obtaining pointers so that further
research can be done on these points. This is the first step after a project
comes to us.

This al serves as an elimination stage where those ideas which do not sound
promising are eliminated. This also makes sense because if at an early stage,
we know about an unpromising project, we will not further invest
our precious time and resources in that project.

Some factors are to be considered while performing preliminary screening for

our project. Some of them are: 
Project Rating Index 
Project rating index seems to be important when it comes to handling a large
number of possible project ideas. A tool which helps us to evaluate a large
number of project ideas. It also helps us to simplify the process
of preliminary screening. It makes sure that our efforts are in the right
direction and also helps us save time. There are certain steps involved in the
calculation of the project rating index.

 Identification of relevant project rating factors

 Assigning weight to factors( based upon importance )
 Rating of different project proposals on selected factors
 Multiply factor rating of projects with factor weights
 Add all factor scores
 Overall project rating of the project is obtained
After the project rating for different projects is obtained the time comes to
decide with which projects we can proceed and which others to reject.
Usually, a benchmark score is defined and any project before that level is
rejected. The projects which meet the benchmark scores can be considered
for further evaluation.

Also Read: Components of Technical Analysis in Business

Sources of Positive NPV

NPV stands for Net Present Value. To select a feasible and profitable project
a project manager should conduct a fundamental analysis of the product and
also study the market to know about the entry and exit barriers which lead
to positive net present value.

Entry barriers refer to the restrictions on issues which may hinder our entry
to the market. Studying about entry barriers and finding ways to overcome
them is crucial. Some of the major entry barriers are:

 Product differentiation
 Cost leadership
 Economies of scale
 Market reach
 Government policies
 Technology
Being an Entrepreneur/ Skills of the Entrepreneur

An entrepreneur is a person who sets up a business or multiple businesses,

taking on financial risks in the hope of profit. They are considered as
initiators. Entrepreneurs also support the development of the economy by
contributing to the GDP of the country. 

Skills are very important when it comes to being an entrepreneur. Being an

entrepreneur is not easy. It demands one to have knowledge of business, the
right mindset and the most crucial elements of the ability and courage to
take risks. Risk-taking is very important because the greater the risk is the
greater are the chances of making profits. 

Entrepreneurs are not born but are made. It requires to acquire a number of
skills over a period of time to become an entrepreneur. Some of the skills
required to become an entrepreneur are mentioned below:
 Willing to make sacrifices
 Leadership qualities
 Quick decision making
 Rationality in thinking
 Believe in the project or whatever he is doing
 Able to tap opportunities 
 Strong willpower to handle ups and downs in business
 Risk-taker
 Team player
Also Read- Market and Demand Analysis in Business

Conclusion
Every successful business is once an idea. But not every idea becomes a
successful business. We all have got ideas with which we want to execute as
a business. But before going any further every idea must go through
various stages of processing to find out whether the idea we want to
execute is actually worthwhile or not.

Market and Demand Analysis

In most cases, the first step in project analysis is to estimate the potential size of
the market for the product proposed to be manufactured (or service planned to b
offered) and get an idea about the market share that is likely to be captured. Put
differently, market and demand analysis is concerned with two broad issues:

1) What is the likely aggregate demand for the product/service?

2) What share of the market will the proposed project enjoy?

Given the importance of market and demand analysis, it should be carried-out in an

orderly and systematic manner:

1) Situational analysis and specification of objectives,

2) Collection of secondary information,
3) Conduct of market survey,
4) Characterization of the market,
5) Demand forecasting,
6) Market planning.

1) Situational Analysis and Specification of Objectives: In order to get a “feel” of the

relationship between the product and its market, the project may informally talk to
customers, competitors, middlemen, and others in the industry. Wherever possible,
h may look at the experience of the company to learn about the performances and
purchasing power of customers, actions and strategies of competitors and practices
of the middlemen.

If such a situational analysis generates enough data to measure the market and get a
reliable handle over projected demand and revenues, a formal study need not be
carried- out, particularly when cost and time considerations so suggest.

2) Collection of Secondary Information: Secondary information is the information

that has been gathered in some other context and is already available. Primary
information, on the other hand, represents information that is collected for the first
time to meet the specific purpose on hand. Secondary information provides the
base and the starting point for the market analysis.

General Sources of Secondary Information

i) Census of India,
ii) National sample survey reports,
iii) Plan reports,
iv) Statistical abstract of the Indian union,
v) India year book,
vi) Statistical year book,
vii) Economic survey of industries,
viii) Annual survey of industries,
ix) Annual reports of the development wing, Ministry of Commerce and Industry,
etc.

3) Conduct of Market Survey: Secondary information, though useful, often does not

provide a comprehensive basis for market and demand analysis. It needs to be
supplemented with primary information gathered through a market survey, specific
to the project being appraised.

The market survey may be census survey or a sample survey. In a census survey,
the entire population is covered. The word ‘population’ is used here in a particular
sense. It refers to the totality of all units under consideration in a specific study.

The market survey, in practice, is typically a sample survey. In such a survey a

sample of population is contacted or observed and relevant information is gathered.
On the basis of such information, inferences about the population may be drawn.

The information sought in a market survey may relate to one or more of the
following:
i) Total demand and rate of growth of demand,
ii) Demand in different segments of the market,
iii) Income and price elasticities of demand,
iv) Motives for buying,
v) Purchasing plans and intentions,
vi) Satisfaction with existing products,
vii) Unsatisfied needs,
viii) Attitudes toward various products,
ix) Distributive trade practices and preferences,
x) Socio-economic characteristics of buyers.

4) Characterization of the Market: Based on the information gathered from

secondary sources and through the market survey, the market for the product/
service may be described in terms of the following:

i) Effective Demand in the Past and Present: To gauge the effective demand in the
past and present, the starting point typically is apparent consumption which is
deemed as:

Production + Imports - Exports - Changes in stock level

The figure of apparent consumption has to be adjusted for consumption of the

product by the producers and the effect of abnormal factors. The consumption
series, after such adjustments, may be obtained for several years.

ii) Break-down of Demand: To get a deeper insight into the nature of demand, the
aggregate (total) market demand may be broken-down into demand for different
segments of the market. Market segments may be defined by:
a) Nature of product.
b) Consumer group, and
c) Geographical division.

iii) Price: Price statics must be gathered along with statistics pertaining to physical
quantities. It may be helpful to distinguish the following types of prices.
a) Manufacturer’s price quoted as FOB (Free on Board) price or CIF (Cost,
Insurance and Freight) price,
b) Landed price for imported goods,
c) Average wholesale price and
d) Average retail price.
iv) Methods of Distribution and Sales Promotion: The method of distribution may
vary with the nature of the product. Capital goods, industrial raw materials or
intermediates and consumer products tend to have different distribution channels.
Likewise, methods used for sales promotion (advertising, discounts, gift schemes,
etc.) may vary from product to product.

v) Consumers: Consumers may be characterized along two dimensions as follows:

Demographic and Sociological   Attitudinal
Age   Preferences
Sex   Intentions
Income   Habits
Profession   Attitudes
Residence   Responses
Social background   

vi) Supply and Competition: It is necessary to know the existing sources of supply
and whether they are foreign or domestic. For domestic sources of supply,
information along the following lines may be gathered;
a)Location,
b)Present production capacity,
c)Planned expansion,
d)Capacity utilization level,
e)Bottlenecks in production and
f)Cost structure.

Competition from substitutes and near-substitutes should be specified because

almost any product may be replaced by some other product as a result of relative
changes in price, quality, availability, promotional effort and so on.

vii) Government policy: Thee role of the government in influencing the demand
and market for a product may be significant. Governmental plans, policies, and
legislations, which have a bearing on the market and demand of the product under
examination, should be spell-out. These are reflected in:
a) Production targets in national plans,
b) Import and export trade controls,
c) Import duties,
d) Export incentives,
e) Excise duties,
f) Sales tax,
g) Industrial licensing,
h) Preferential purchases,
i) Credit controls, financial regulations and
j) Subsides/ penalties of various kinds.

5) Demand Forecasting: On the basis of analysis and interpretation of information

gathered about various aspects of market and demand from primary and secondary
sources, an attempt is made to forecast the future demand of the proposed product
or service. There are various methods of demand forecasting available to the
market analyst.

Methods of Demand Analysis

The various methods of forecasting demand may be grouped under the following
categories:

1) Opinion Polling Method: In this method, the opinion of the buyers, sales force
and experts could be gathered to determine the emerging trend in the market. The
opinion polling methods of demand forecasting are of three kinds:
i) Consumers Survey Methods: The most direct method of forecasting demand in
the short-run is survey method. Surveys are conducted to collect information about
future purchase plans of the probable buyers of the product. Survey methods
include:
a) Complete Enumeration Survey: Under the Complete Enumeration Survey, the
firm has to go for a door to door survey for the forecast period by contacting all the
households in the area.
b) Sample Survey and Test Marketing: Under this method some representative
households are selected on random basis as samples and their opinion is taken as
the generalized opinion. This method on random basis as samples and their opinion
is taken as the generalized opinion. This method is based on the basic assumption
that the sample truly represents the population. A variant of sample survey
technique is test marketing. Product testing essentially involves placing the product
with a number of users for a set period. Their reactions to the product are noted
after a period of time and an estimate of likely demand is mad from the result.
c) End–use Method: In this method, the sale of the product under consideration is
projecting on the basis of demand survey of the industries using this product and
intermediate product. In other words, demand for the final product is the end use
demand of the intermediate product used in the production of this final product.
ii) Sales Force Opinion Method: This is also known as Collective Opinion Method.
In this method, instead of consumers, the opinion of the salesman is sought. It is
sometimes referred as the “grass roots approach” as it is a bottom-up method that
requires each sales person in the company to make an individual forecast for his or
her particular sales territory. These individual forecasts are discussed and agreed
with the sales manager. The composite of all forecasts then constitutes the sales
forecast for the organization.
iii) Delphi Method: This method is also known as Expert opinion method of
investigation. In this method instead of depending upon the opinions of buyers and
salesmen, firms can obtain views of the specialists or experts in their respective
fields. Opinions of different experts are sought and their identity is kept secret.
These opinions are than exchanged among the various experts and their reactions
are sought and analyzed. The process goes on until some sort of unanimity is
arrived at among all the experts. This method is best suited in circumstances where
intractable changes are occurring.

2) Statistical or Analytical Methods: Statistical methods are considered to be

superior techniques of demand estimation because:
i) The element of subjectivity in this method is minimum,
ii) Method of estimation is scientific,
iii) Estimation is based on the theoretical relationship between the dependents and
independents variables,
iv) Estimates are relatively more reliable and
v) Estimation involves smaller cost.

The statistical methods, which are frequently used, for making demand projections
are:

i) Thread Projection Method: An old firm can use its data of past years regarding its
sales in past years. These data are known as time series of sales. A trend line can
be fitted by graphic method or by algebraic equations. Equations method is more
appropriate. The trend can be estimated by using any one of the following
methods.
a) Graphical Method: A trend line can be fitted through a series graphically. Old
values of sales for different areas are plotted on a graph and a free hand curve is
drawn passing through as many points as possible. The direction of this free hand
curve shows the trend. The main draw back of this method is that it may show the
trend but not measure it.
b) Least Square Method: The least square method is based on the assumption that
the past rate of change of the variable under study will continue in the future. It is a
mathematical procedure for fitting a line to a set of observed data points in such a
manner that the sum of the squared difference between the calculated and observed
value is minimized. This technique is used to find a trend line which best fit the
available data. The trend is then used to project department variable in the future.
This method is very popular because it is simple and in expensive.
c) Time Series Methods: Time series forecasting methods are based on analysis of
historical data (time series; a set of observations measured at successive times or
over successive periods). They make the assumption that past patterns in data can
be used to forecast future data points.

Moving averages (simple moving average, weighed moving average); forecast is

based on arithmetic average of a given number of past data points.
Components of Time series Demand
• Average: The mean of the observations over time.
• Trend: A gradual increase or decrease in the average over time.
• Seasonal Influence: Predictable short-term cycling behavior due to time of day,
week, month, season, year, etc.
• Cyclical Movement: Unpredictable long-term cycling behavior due to business
cycle or product/service life cycle.
• Random Error: Remaining variation that cannot be explained by the other four
components.

d) Exponential Smoothing: It is one of the methods of trend projection methods.

Exponential smoothing is distinguishable by the special way it weights ach past
demand. The pattern of weights is exponential in form. Demand for the most recent
period is weighted most heavily; the weights placed on successively older periods
decrease exponentially. In other words , the weights decrease in magnitude the
future back in time the data are weighted ; the decrease is non-linear (exponential).

ii) Regression method: This is a very common method of forecasting demand.

Under this method a relationship is established between quantity demanded
(dependent variable) and independent variables such as income, price of the good,
prices of the related goods etc. Once the relationship is established, we drive
regression equation assuming relationship between dependent and independent
variables. Once the regression equation is derived the value of Y i.e. quantity
demanded can be estimated for any given value of X.

iii) Simultaneous equations Methods of Forecasting: The econometric model

forecasting involves estimating several simultaneous equations, which are,
generally, behavioral equations, mathematical identities and market-clearing
equations.

The econometric model technique is also known as simultaneous equations method

and complete system approach to forecasting. This technique uses sophisticated
mathematical and statistical tools.

iv) Barometric Method: It is also known as ‘leading indicators forecasting’.

National bureau of Economic Research of U.S.A. has identified three types of
indicators, coincidental indicators and Lagging indicators.

The analyst should establish relationship between the sales of the product and the
economic indicators to project the correct sales and to measure to what extent these
indicators affect the sales. To establish relationship is not easy task especially in
case of new product where there is no past record.

6) Market Planning: The market plans usually have the following components:

i) Current Marketing Situation: This part of the marketing plan deals with the
different dimensions of the current situation. It examines the market situation,
competitive situation, distribution situation and the macro-environment. In other
words, it paints a pen-picture of the present.

ii) Opportunity and Issue Analysis: In this section a SWOT (Strength, Weakness,
Opportunity, Threat Analysis) is conducted for Alpha and the core issues before
the product are identified.

iii) Objectives: Objectives have to be clear cut, specific and achievable.

iv) Marketing Strategy: The marketing strategy covers the following: target
segment, positioning, product line, price, distribution, sales force, sales promotion
and advertising.

v) Action Programme: The last component of market planning is the action

programme. Action programmes operationalize the strategy.