WOLIATA SODO UNIVERSITY

COLLEGE OF BUSINESS AND ECONOMICS

DEPARTMENT OF PUBLIC ADMINISTRATION AND

DEVELOPMENT MANAGEMENT

MODULE FOR THE COURSE OF PROJECT PLANNING AND MANAGEMENT (PADM3133)

BY: TEGEGNE A. (Ass. Prof)

November, 2022
Wolaita Sodo University, Ethiopia

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 UNIT ONE

INTRODUCTION TO PROJECT

1.1. Definition of Project

A project can be defined in different ways.

A project is a complex of economic activities in which we commit scarce resources in

expectation of benefits that exceed these resources.

A project is an organizational unit dedicated to the allotment of a goal the successful completion
of a development product in time, within specified budget, in conformance with the pre-
determined performance specifications.

It (a project) is a set of finite activities that are usually prepared only once and have well
designed objectives, using a combination of human and non-human resources within limits of
time.

It consists of a series of non-routine, interrelated activities with a goal that must be completed
with a set amount of resources and within a set time limit.

So, a project is a sequence of unique, complex, and connected activities having one goal or
purpose and that must be completed by a specific time, within limited budget, and according to
specification. The following constitutes each part of the definition.

Project is a scheme or part of a scheme for investing scarce resources, which can be reasonably
evaluated and analyzed as an independent unit.

Project refers to an investment activity in which resources are committed within a given time
framework, to create assets over an extended time in expectations of benefits which exceeds the
committed resources.

Although the definitions above seem different, all definitions imply the same concept: a project
is a set of proposal for investment of resource in to a clearly identified set of actions that are
expected to produce future benefits of a specific kind, the whole series of actions being the

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subject of individual planning and examination before being adapted and implemented within a
single over all financial and managerial frameworks.

1.2. Characteristics or features of project

From the definitions, it is clear that a project:

has specific objective (private or public);

involves set of activities (planning, financing, and implementing);
involves resource use;
deals with future expectations (risk and uncertainty);
involves comparing benefits and costs to occur in the future; and
has defined period of life

In most cases, it is easier to describe than to define a project.

This definition tells us quite a bit about a project. To appreciate just what constitutes a project,
let’s look at each part of the definition.

I. Sequence of Activities

A project comprises of a number of activities that must be completed in some specified order, or
sequence. An activity is a defined as chunk of work. The sequence of the activities is based on
technical requirements, and not on management prerogatives. To determine the sequence, it is
helpful to think in terms of inputs and outputs. You need to ask questions like:

■ What is needed as input in order to begin working on this activity?

■ What activities produce those as output?

The output of one activity or set of activities becomes input to another activity or set of activities.
Specifying sequence based on resource constraints or statements. Resource constraints must not
be ignored when we actually schedule activities. The decision of what resources to use and when
to use them comes later in the project planning activities.

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ii. Unique Activities

The activities in a given project must be unique. The assumption must always be that, a project
has never happened before, and it will never happen in the future under the same conditions.
Something is always different each time the activities of a project are repeated. Usually the
variations are random in nature. For example, a part is delayed, someone is sick, a power failure
occurs. These are random events that can happen, but we can never be sure as to where, how or
with what impact the events would happen in the schedule. These random variations are the
challenge for the project manager.

iii. Complex Activities

The activities that make up a project are not simple, repetitive acts, such as mowing the lawn,
painting the house, washing the car, or loading the delivery truck. Rather, they are complex. For
example, designing an intuitive user interface to an application system is a complex activity.

iv. Connected Activities

Connectedness implies that there is a logical or technical relationship between pairs of

activities. There is an order to the sequence in which the activities that make up the project must
be completed. They are considered connected because the output of one activity is the input to
another.

v. One Goal

Projects must have a single goal. However, very large or complex projects may be divided into
several subprojects, each of which is a project in its own right. This division allows better
management control. For example, subprojects can be defined at the department, division, or
geographic level. This artificial decomposition of a complex project into subprojects often
simplifies the scheduling of resources and reduces the need for unnecessary interdepartmental
communications while a specific activity is worked on. The downside is that the projects are now
interdependent. Even though interdependency adds another layer of complexity and
communication, it can be handled.

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vii. Specified Time

Projects have a specified completion date. This date can be self-imposed by management or
externally specified by a customer or government agency. The deadline is beyond the control of
anyone working on the project. The project is over on the specified completion date whether or
not the project work has been completed.

Viii. within Budget

Projects also have resource limits, such as a limited amount of people, money, or machines that
are dedicated to that particular project. Even though these resources can be adjusted up or down
by management, they are considered as fixed resources to the project manager.

Ix. According to Specification

The customer, or the recipient of the project’s deliverables, expects a certain level of
functionality and quality from the project. These expectations can be self-imposed, such as the
specification as to the project completion date, or customer-specified, such as producing the sales
report on a weekly basis.

Although the project manager treats the specification as fixed, the reality of the situation is that
any number of factors can cause the specification to change.

1.3. Plan, Programs and Projects

Some time, people confuse a project with a program and often use interchangeably, but the terms
are not the same. Unlike a project, a program is an ongoing development effort or plan.

The plan is the written explanation of goals, objectives, targets and means to achieve it.

A plan provides the steps to be carried out in both programs and projects. Thus, it establishes the
goals, deliverables, and the level of collaboration for both programs and projects.

A plan provides a comprehensive detailed course of action directed at achieving a specified end
result. A plan may be re-evaluated as goals and milestones are accomplished or as information or
circumstances change. There therefore may be some degree of flexibility to a plan.

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A project is comprised of individual tasks that aim at specified outputs or deliverable products.
Milestones and goals are defined and measured against the output objective, costs and timetable.
Projects are well defined, short-term, with manageable risk, and resource needs that can be
estimated with reasonable accuracy. A project is defined as a temporary activity aimed at
achieving specific/narrow organization objectives.

Programs, on the other hand, are organization activities aimed at achieving broader organization
objectives by coordinating a group of projects. Thus, programs are much wider in scope
compared to projects. Objectives are comprehensive and encompass change within the
corporation such as in terms of a change in production capabilities or a change in organizational
structure or culture. Programs are defined in fluid terms, are long-term, with significant risks,
and resource costs.

The basic difference between plan, project and program is that a plan details a course of action;
a project is short-term and designed to deliver a specified output within time, cost and quality
parameters; and a program is a long-term managed portfolio of multiple projects designed to
produce outcomes.

The following comparisons may explain the difference between the two:

Basis for Comparison Project Program

Meaning A project refers to the temporary activity, A program implies a set of projects
which is undertaken to create a distinct which are linked to one another, in a
product or service, which has certain sequential manner to attain the
objectives. combined benefits.

Focus on Content Context

Time horizon Short term Long term

Concerned with Specific deliverables, i.e. product or Benefits received

service

Functional units Single Multiple

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 Tasks Technical in nature Strategic in nature

Produces Output/achieved immediately Outcome/ not achieved right after

the implementation of activities

Success Success can be measured in terms of Success is measured by the extent to

product quality, timeliness, cost which program meets out the needs
efficiency, compliance and degree of and benefits, for which it was
customer satisfaction. conducted.

1.4. Classification of projects

The project undertaking may be conducted either public sector or private sector.

The similarities between the two sectors mainly refer to management functions, while the
differences focus on the conditions or constraints in which the management operates. In other
words project managers in the private and public sectors need the same skills and use the same
set of tools.

The main distinction between public and private organizations is their ownership. Unlike
private companies, owned by entrepreneurs or shareholders, public organizations are the
collective property of members of political communities.

Here are some additional differences between public and private organizations:

 Complexity: public organizations are confronted with a wider variety of stakeholders,

each of which places demands and constraints on managers than private projects;
 Permeability: public organizations are “open systems” easily influenced by external
events than their counter private sector;
 Instability: because of political constraints determine frequent changes in politics and the
imposition of short time horizons;

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  Absence of competitive pressures: public organizations generally have few competitors.
Even when competition is present, public managers often enjoy a dominant position in
the market, such as in education and healthcare.

It is also emphasized that the goals of public organizations are vaguer than those of their private
counterparts, because organizational goals are imposed through the political process, rather than
selected by the managers themselves.

Another feature of public organizations is that they usually have more formal procedures for
decision making and are less flexible and more risk averse.

Moreover, economic efficiency cannot be used by public managers as a primary decision

criterion, due to the mission that public organizations have. This means that public managers
should follow public service ethics in their activities.

1.5. Project success criteria

Every project is constrained in different ways. Some project managers focus on scope, time, and
cost constraints. Other people focus on the quadruple constraint, which adds quality as a fourth
constraint. The scope, time, and cost limitations are sometimes referred to in project management
as the triple constraint.

To create a successful project, a project manager must consider scope, time, and cost and balance
these three often-competing goals:
1. Scope: What work will be done as part of the project? What unique product, service, or
result does the customer or sponsor expect from the project?
2. Time: How long should it take to complete the project? What is the project’s schedule?
3. Cost: What should it cost to complete the project? What is the project’s budget? What
resources are needed?
Other people focus on the quadruple constraint, which adds quality as a fourth constraint.
Quality: How good does the quality of the products or services need to be? What do we need to
do to satisfy the customer? Other also suggests these four constraints plus risk.
Risk: How much uncertainty are we willing to accept on the project?
Whatever its size, a project’s success is based on the three main criteria as shown by the
following triangle:

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 Scope

Time Budget

Therefore, project will deem to be successful if it:

Delivers the outcome with an agreed upon quality.
Does not overrun its end date.
Remains within budget (cost of resources).
Note however, that outcome, time and budget are interrelated, and during a project you may need
to do trade-offs between them. For example, if you want to get something done more quickly,
you may have to pump in more money into your project for additional resources.

1.6. Project Management: An Overview

Project management is planning, scheduling, controlling and monitoring the complex non-
routine activities that must be completed to reach the predetermined objectives of the project. It
involves the coordination of a group activity, wherein the manager plans, organizes staffs,
directs, and controls to achieve an objective, with specified time, cost and performance of the
end product.

Planning is the process of preparing for the commitment of resources in the most economical
manner. Project planning deals with specified tasks and operations of activities, which must be
performed to achieve the project goals. Any project that we may consider has an objective and
has to be implemented within a given set of rules, regulations, constraints and restrictions.
Implementation of projects needs resources or inputs. Every project converts the given inputs
into output through a process of implementation. The outputs in the short run, lead to outcomes
which, in the long run, should result in impact. Thus, a project can be defined as complex set of
non-routine activities that must be completed with a set amount of resources and within a set of
time frame.

Project analysis in project management plays a key role in the economic development of a
country. Since the introduction of the concept of planning, countries of the world, especially,

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developing countries, have been investing large amounts of money in projects related to industry,
minerals, power, transpiration, irrigation, education, etc with a view to improve the socio-
economic conditions of the people. The money invested both in industrial and social projects
keeps increasing. These projects are designed with the aim of earning adequate returns to
provide for future development. But, experience shows that there are several shortcomings in the
ultimate success of achieving the objectives of the proposed projects. One of the main reasons
for the failure of many projects in the developing countries is the inadequacy of managerial skill
for project implementation and imperfect planning and control of projects.

Controlling is the process of making events to conform to schedules by coordinating the action
of all parts of the project outlined to achieve its objectives.

1.7. Project Stakeholders

Stakeholders are the people involved in or affected by project activities. These include the
project sponsor, the project team, the support staff, customers, users, suppliers and opponents to
the project. These stakeholders often have very different needs and expectations. For example,
there are several stakeholders involved in a home construction project.

The project sponsors would be the potential new homeowners. They would be the people
paying for the house and could be on a very tight budget, so they would expect the contractor to
provide accurate estimates of the costs involved in building the house. They would also need a
realistic idea of when they could move in and what type of home they could afford given their
budget constraints. The new homeowners would have to make important decisions to keep the
costs of the house within their budget. Can they afford to finish the basement right away? If they
can afford to finish the basement, will it affect the projected move-in date? In this example, the
project sponsors are also the customers and users for the product, which is the house.

The project manager in this example would normally be the general contractor responsible for
building the house. He or she needs to work with all the project stakeholders to meet their needs
and expectations.

The project team for building the house would include several construction workers,
electricians, carpenters, and so on. These stakeholders would need to know exactly what work
they must do and when they need to do it. They would need to know if the required materials and

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equipment will be at the construction site or if they are expected to provide the materials and
equipment. Their work would need to be coordinated since there are many interrelated factors
involved. For example, the carpenter cannot put in kitchen cabinets until the walls are completed.

Support staff might include the employers of the homeowners, the general contractor’s
administrative assistant, and other people who support other stakeholders. The employers of the
homeowners might expect their employees to complete their work but allow some flexibility so
they can visit the building site or take phone calls related to building the house. Building a house
requires many suppliers. The suppliers would provide the wood, windows, flooring materials,
appliances, and other items. Suppliers would expect exact details on what items they need to
provide, where and when to deliver those items, and similar information. There are many
different stakeholders on projects, and they all have different interests. Stakeholders’ needs and
expectations are important in the beginning and throughout the life of a project. Successful
project managers develop good relationships with project stakeholders to understand and meet
their needs and expectations. Program managers often have review meetings with all their project
managers to share important information and coordinate important aspects of each project. Many
program managers worked as project managers earlier in their careers, and they enjoy sharing
their wisdom and expertise with their project managers. Effective program managers recognize
that managing a program is much more complex than managing a single project. They recognize
that technical and project management skills are not enough. In addition to skills required for
project managers, program managers must also possess strong business knowledge, leadership
capability, and communication skills.

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 CHAPTER TWO

PROJECT LIFE CYCLE

Project cycle is referred to as the various stages through which project planning proceeds from
inception to implementation. It is the project’s life span through which a project advances
from infancy to maturity. Different guidelines, manuals and foreign authors have called project
phases by different names.

2.1. United Nations Industrial Development Organization (UNIDO) Project Life Cycle

UNIDO has divided project cycles into phases and stages as follows.

1. Pre - investment phase: Identification of investment opportunity (opportunity study),

Preliminary selection stage (pre-feasibility study/Analysis of Project Alternatives), Project
formulation stage (feasibility study) and Evaluation and decision stage (evaluation report/project
appraisal and investment decision)
2. Investment phase: Negotiation and contracting stage; Project design stage, Construction
stage; Preproduction marketing stage; Training stage; Start up stage
3. Operational phase: Long-term views (expansion, innovation); Short-term views

Pre-selection
Pre-feasibility study

Preparation
Identification
Feasibility Study
Opportunity study
Support Studies
Expansion Pre
Innovation investment
Operating
phase
Appraisal
phase Report
Replacement Investment
phase Negotiations and
Rehabilitation
contracting
Project Design
Commissioning and
startup
Construction

Pre-production marketing

Training

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The delineation of each phase and each activity from the other is not clear cut/discrete line.
There are several activities undertaken in more than one phase and the transfer is very slow and
gradual. Activities are sequential but it is also possible to go back and revise some of the
activities after once passing that stage. All phases of the project cycle lend themselves to
important consultancy from different disciplines and expertise.

a. Pre - Investment Phase

Pre-investment phase comprises several stages from identification of projects to evaluation
stage. Support studies are conducted during this stage. It is easy to understand the scope of an
opportunity study. But it is very difficult to phase into various stages facilitates for studying the
possibility of investing in the project step by step.

i) Opportunity Studies

Identifying investment opportunities is the starting point in a series of investment related

activities. Potential investors, private or public, from developing and developed countries are
interested in obtaining information on newly identified variable investment opportunities. An
opportunity study must analyze the following:
1. Availability of natural resources
2. The existing agricultural pattern that serves as a basis for agro-based industries
3. Future demand
4. Imports, to identify import substitutes
5. Environmental impact
6. Possible inter-linkage with other industries
7. Possible expansion and diversification possibilities
8. General investment climate
9. Availability of cost of production factors
10. Export possibility

Opportunity studies can be general or specific.

ii) Pre Feasibility Studies

The idea of the project that is generated from the opportunity studies must be elaborated in a
more detailed study. But, a feasibility study for a definite decision is expensive and time

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consuming. So, before conducting a feasibility study, a further assessment of the project idea
might be made in pre-feasibility study. Such a study aims at determining whether:
1. All possible project alternatives have been examined,
2. The project concept justifies a detailed analysis by a feasibility study,
3. Any aspects of the project require support studies,
4. The project idea is attractive enough for a particular investor or investor group,
5. The environmental situation is in line with the national standards.

A pre-feasibility study should be viewed as an intermediate stage between a project opportunity

study and a detailed feasibility study. The structure of pre-feasibility study should be the same
as that of a detailed feasibility study. The difference is in the degree of detail: the difference is in
the degree of detail of the information. Sometimes, a comprehensive opportunity study may
justify by passing the pre-feasibility study stage.

Support Studies

Support studies cover specific aspects of an investment project in support of pre feasibility or
feasibility studies. E.g. Market studies, Raw material studies, Laboratory tests, Location studies
etc.
iii) Feasibility Study

Feasibility study aims at providing all data necessary for an investment decision or against it.
Before the final decision is taken to commit resources, the technical, economical and commercial
justification has to be provided in comprehensive and authentic terms. These should be clarity
about the location, the plant size, the material and the major inputs. Proceeding from this base,
capital outlays, production costs, and expected sales revenues and return on investments have to
be ascertained. It assists in arriving at the final decision to invest. Feasibility study is an
essential document which spells out the economic viability and the prospects of the project.
Though the contents of pre feasibility and feasibility studies are the same, more accuracy is
expected in the feasibility study.

iv)Appraisal Report (Evaluation Report)

When the feasibility study is completed, the various parties involved in the project will carry out
their own appraisal of the investment project in accordance with their individual objectives. An

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evaluation of expected risks, costs and gains of the project will be done. The project appraisal
should be considered as an independent stage of the pre- investment phase, marked by the final
investment and financing decision taken by the project promoters. Appraisal reports are
necessary for getting funds from the financial institutions. They reveal the health of the
company to be financed and the protection of its creditors.

b. The Investment Phase

The investment or implementation phase comprises of the following stages.
1. Establishing the legal, financial and organizational basis for the implementations
of the project.
2. Detailed engineering design and contracting, including tendering
3. Acquisition of technology, land, construction work and installation
4. Pre-production marketing, including the securing of supplies.
5. Recruitment and training of personnel.
6. Plant commissioning and start-up
Detailed engineering design comprises preparatory work for site preparation, the final selection
of technology and equipment, the whole range of construction planning etc. Tendering and
evaluation of bids are important to get comprehensive tenders from competitive suppliers. This
stage covers signing of contracts between the investor and the contractors, architects, suppliers of
raw materials and financing institutions. The construction stage involves site preparation,
construction of buildings and other civil works. The personnel recruitment and training stage is
very crucial for the expected growth of productivity and efficiency operations. Timely initiation
of marketing arrangements to prepare the market for the new products (pre production
marketing) and securing supplies are also very crucial for the commencement of operations of
the project.

c. The Operation Phase

The problem of the operational phase should be considered from both a short and a long-term
viewpoint. The short-term view relates to the initial period after commencement of production
when a number of problems may arise concerning such matters as the application for production
techniques, operation of equipment or inadequate labor productivity owing to a lack of qualified
staff and labor. Most of these problems have their origin in the implementation phase. The long-
term view relates to chosen strategies and the associate production and marketing costs as well as

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sales revenues. These have a direct relationship with the projections made at the pre- investment
phase. If such projections prove faulty, remedial measures will not only be difficult but may
probe highly expensive.

Expansion Studies

Though the feasibility study aims at new projects, the same techniques can be applied to the
expansion of existing projects. The expansion may be in the form of increasing the quantity of
production, changing the production program or a combination of the two. Expansion should be
treated as a new project. In order to prepare a project proposal, the data of the expansion project
must be consolidated with those of the existing project. Any other changes in location,
administration etc. should be made clear. The financial impact may be expressed in terms of the
marginal costs and benefits.

1.10.2. The Baum Cycle (adapted by the World Bank in 1970)

The Baum Cycle has five stages. The breakdown of the phases in the project cycle is artificial. In
reality the process is continuous and interactive. The phases are:
I. Identification
II. Preparation (feasibility study)- ex-ante evaluation
III. Appraisal
IV. Implementation
V. Evaluation – added after a certain period (1978). It involves ex-post evaluation.

Preparation

Identification Appraisal

Implementation
Evaluation

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1.10.3. New Project Cycle (World Bank 1994)

 Emphasis on the issue of participation

 Particularly relevant to projects where beneficiary participation is critical.
 It has four phases
- Listening- listen the stakeholders.
- Piloting- trying it in small scale.
- Demonstrating- demonstrating the pilot
- Mainstreaming- duplicating the pilot.
 Listening - Piloting- Demonstrating – Mainstreaming

UNIT TWO
GENERATION AND SCREENING OF PROJECT IDEAS

Introduction

The search for promising project ideas is the first step towards establishing a successful venture.
As the traditional adage goes, the key to success lies in getting into the right business at the right
time. While this advice is simple, its accomplishment is difficult because good business
opportunities tend to be elusive. Identification of such opportunities requires imagination,
sensitivity to environmental changes, and a realistic assessment to what the firm can do. The
task is partly structured, partly unstructured; partly dependent on convergent thinking, partly

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dependent on divergent thinking; partly requiring objective analysis of quantifiable factors,
partly requiring subjective evaluation of qualitative factors; partly amenable to control, partly
dependent on fortuitous circumstances.

Identification is often the outcome of a triggering process rather than an analytical exercise.
While the notion of identification is simple, it is difficult to develop methods or procedures for
accomplishing it as there is no well defined theory to guide this task. And as Gordon and
Pinches observed: “These difficulties become more severe as one moves up the hierarchy of
organizational decision-making levels because of the relative uniqueness (non-routineness) of
higher level decisions as compared to lower level decisions.”

With this note of caution, this unit discusses certain broad consideration and guidelines helpful in
the generation and screening of project ideas. The objective is to identify investment
opportunities which are prima facie feasible and promising and which merit further examination
and appraisal. The discussion is divided into nine section as follows:

 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

Learning Objectives

 Identify sources of project ideas

 Identify factors operating in the external and internal environments
 Assess the competitive environments using the porter model
 Scout for project ideas
 Identify sources of positive net present value
 Discuss about the qualities of entrepreneurs

2.1 Generation of Ideas

What is meant by generation of ideas?

______________________________________________________________________________
__________________________________________________________________Barring truly
new ideas which are based on significant technological breakthroughs, most of the project ideas
involve combining existing fields of technology or offering variants of present products or

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services. The typical route may be described as follows: someone with specialized technical
knowledge or marketing expertise or some other competence feels that he can offer a product or
service which can cater to a presently unmet need or serve a market where demand exceeds
supply or effectively compete with similar product or services because of certain favorable
features like better quality or lower prices. His ideas are endorsed by his associates who
encourage him and even show willingness to collaborate with him on the proposal. Finally, he
receives support from investors (like venture capitalists and financial institutions) that approve
his project and show readiness to finance it.

2.1.1. Stimulating the flow of ideas

Often, firms adopt a somewhat casual and haphazard approach to the generation of project ideas.
To stimulate the flow of ideas, the following are helpful:

SWOT Analysis. SWOT is an acronym for strengths, weaknesses, opportunities, and threats.
SWOT analysis represents a conscious, deliberate, and systematic effort by an organization to
identify opportunities that can be profitably exploited by it. Periodic SWOT analysis facilitates
the generation of ideas.

Clear Articulation of Objectives. The operational objectives of a firm may be one or more of the
following:
 Cost reduction
 Productivity improvement
 Increase in capacity utilization
 Improvement in contribution margin
 Expansion into promising fields

A clear articulation and prioritization of objectives helps in channeling the efforts of employees
and prods them to think more imaginatively.

Fostering a Conducive Climate . To tap the creativity of people and to harness their
entrepreneurial urges, a conducive organizational climate has to be fostered. Two conspicuous
examples of organizations which have been exceptionally successful in tapping the creativity of
employees are the Bell Telephone Laboratory and the 3 M Corporation. While the former
succeeded in harnessing creativity by providing an unconstrained environment the latter
effectively nurtured the entrepreneurial urges of its employees. At a more mundane level, many
organizations (Hindustan Lever is a prominent example in India) have successfully used
suggestion schemes to motivate employees to think more creatively.

2.1.2. Tools for Identifying Investment Opportunities

Can you mention some of the tools for identifying investment opportunities?

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______________________________________________________________________________
__________________________________________________________________There are
several useful tools or frameworks that are helpful in identifying promising investment
opportunities. The more popular ones are the Porter model, life cycle approach, and experience
curve.

i. Porter Model: Profit Potential of Industries

Micheal Porter has argued that the profit potential of an industry depends on the combined
strengths of the following five basic competitive forces:
 Threat of new entrants
 Rivalry among existing firms
 Pressure from substitute products
 Bargaining power of buyers
 Bargaining power of sellers
a. Threat of New Entrants. New entrants add capacity, inflate costs, push prices down, and
reduce profitability. Hence, if an industry faces the threat of new entrants, its profit potential
would be limited. The threat from new entrants is low if the entry barriers confer an advantage
on existing firms and deter new entrants. Entry barriers are high when:
 The new entrants have to invest substantial resources to enter the industry
 Economies of scale are enjoyed by the industry.
 Existing firms control the distribution channels, benefit from product differentiation in
the form of brand image and customer loyalty, and enjoy some kind of proprietary
experience curve.
 Switching costs: Essentially one-time costs of switching from the products of one
supplier to another-are high.
 The government policy limits or even prevents new entrants.
b. Rivalry between Existing Firms. Firms in an industry compete on the basis of price, quality,
promotion, service, warranties, and so on. Generally, a firm’s attempts to improve its
competitive position provoke retaliatory actions from others. If the rivalry between the firms in
an industry is strong, competitive moves and countermoves dampen the average profitability of
the industry. The intensity of rivalry in an industry tends to be high when:
 The number of competitors in the industry is large
 At least a few firms are relatively balanced and capable of engaging in a sustained
competitive battle.
 The industry growth is sluggish, prodding firms to strive for a higher market share.
 The level of fixed costs is high, generating strong pressures for all firms to achieve a
higher capacity utilization level.
 There is chronic over capacity in the industry.
 The industry’s product is regarded as a commodity or near-commodity, stimulating
strong price and service competition.
 The industry confronts high exit barriers.

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c. Pressure from Substitute Products. In a way, all firms in and industry face competition
from industries producing substitute products. Performing the same function as the original
product, substitute products may limit the profit potential of the industry by imposing a ceiling
on the prices that can be charged by the firms in the industry. The threat from substitute
products is high when:
 The price-performance trade off offered by the substitute products is attractive.
 The switching costs for prospective buyers are minimal.
 The substitute products are being produced by industries earning superior profits.

d. Bargaining power of Buyers. Buyers are a competitive force. They can bargain for price cut,
ask for superior quality and better service, and induce rivalry among competitors. If they are
powerful, they can depress the profitability of the supplier industry. The bargaining power of a
buyer group is high when:
 Its purchases are large relative to the sales of the seller.
 Its switching costs are low.
 It poses a strong threat of backward integration.
e. Bargaining power of Suppliers. Suppliers, like buyers, can exert a competitive force in an
industry as they can raise prices, lower quality, and curtail the range of free services that they
provide. Powerful suppliers can hurt the profitability of the buyer industry. Suppliers have
strong bargaining power when:
 Few suppliers dominate and the supplier group is more concentrated than the buyer
group.
 There are hardly any viable substitutes for the products supplied.
 The switching costs for the buyers are high.
 Suppliers present a real threat of forward integration.

ii. Life Cycle Approach

Many industrial economists believe that most products evolve through a life cycle which has four
stages: pioneering stage, rapid growth stage, maturity and stabilization stage, and decline stage.
Pioneering stage. During this stage, the technology and /or the product is relatively new. Lured
by promising prospects, many entrepreneurs enter the fields. As a result, there is keen, and often
chaotic, competition. Only a few entrants may survive this stage.
Rapid Growth Stage. Once the period of chaotic developments is over, the rapid growth stage
arrives. Thanks to a relatively orderly growth during this period, firms which survive the intense
competition of the pioneering stage witness significant expansion in their sales and profits.
Maturity and Stabilization Stage. After enjoying an above-average rate of growth during the
rapid growth, the industry enters the maturity and stabilization stage. During this stage, when the
industry is more or less fully developed, its growth rate is comparable to that of the economy as a
whole.

Decline Stage. With the satiation of demand, encroachment of new products, and changes in
consumer preferences, the industry eventually enters the decline stage, relative to the economy as

20
a whole. In this stage, which may continue indefinitely, the industry may grow slightly during
prosperous periods, stagnate during normal periods, and decline during recessionary periods.

Each stage presents investment opportunities that exhibit different characteristics. Investment in
the pioneering stage, per se, many have a low return and negative NPV. However, it may
possibly create options for participating in the growth stage. Investment in the growth stage is
likely to earn a high return and generate positive NPV. Investment in the maturity stage may earn
average return and be NPV-neutral. Finally, investment in the decline stage may earn meager
returns and produce negative NPV.

iii. The Experience Curve

Investments aimed at reducing costs are essential to the long-tem survival and profitability of the
firm. The experience curve is a useful tool for planning such investments. The experience curve
shows how the costs per unit behave with respect to the accumulated volume of production. The
accumulated volume of production is the total number of units produced cumulatively from the
very beginning-it should now be confused with the annual rate of production.
2.1.3. Scouting for Project Ideas

Good project ideas key to success-are elusive. So a wide variety of sources should be tapped to
identify them. Here are some suggestions in this regard:

a. Analyze the performance of Existing Industries. A study of existing industries in terms of

their profitability and capacity utilization can indicate promising investment opportunities-
opportunities which are profitable and relatively risk-free. And examination of capacity
utilization of various industries provide information about the potential for further investment.
Such a study becomes more useful if it is done region wise, particularly for products which have
high transportation costs.

b. Examine the Inputs and Outputs of Various Industries. An analysis of the inputs required
for various industries may throw up project ideas. Opportunities exist when (i) material and
purchased parts for supplies are presently being procured from distant sources with attendant
time lag and transportation cost, and (ii) several firms produce internally some components/parts
which can be supplied at a lower cost by a single manufacturer who can enjoy economies of
scale. Similarly, a study of the output of the existing industries may reveal opportunities for
adding value through further processing of the main outputs, by-products, as well as waste
products. (Remember that one person’s trash can be another person’s treasure.)

c. Review Imports and Exports. An analysis of import statistics for a period of five to seven
years is helpful in understanding the trend of imports of various goods and the potential for
import substitution. Indigenous manufacture of goods currently imported is advantageous for
several reasons: (i) it improves the balance of payments situation, (ii) it generates employment,
and (iii) it provides a market for the supporting industries and services. Likewise, an examination
of export statistics is useful in learning about the export possibilities of various products.

21
d. Study Plan Outlays and Governmental Guidelines. The government plays a very important
role in the economy of a country. Its proposed outlays in different sectors provide useful pointers
toward investment opportunities. They indicate the potential demand for goods and services
required by different sectors of the economy.

A very valuable source of information to estimate the scope for further investment is the
Guidelines to Industries published annually by the Development Ministry Agency, Government
of India. This publication provides information about the structure and location, production
performance, licensed and installed capacity, exports, and future scope of various industries.
While the government projections are often a good starting point, they must be viewed with
some caution. Often they are not well-grounded. It is helpful to remember the words of Alvin
Hanson: “No one reading the plans can fail to be impressed by the frequent unrealism of these
assumptions. So much appears to be contingent on the realization of the unrealizable.”

e. Look at the Suggestions of Financial Institutions and Developmental Agencies. In a bid

to promote development of industries in their respective states, state financial corporations, state
industrial development corporations, and other developmental bodies conduct studies, prepare
feasibility reports, and offer suggestions to potential entrepreneurs. The suggestions of these
agencies are helpful in identifying promising projects.

f. Investigate Local Materials and Resources A search for project ideas may begin with an
investigation into local resources and skills. Various ways of adding value to locally available
materials may be examined. Similarly, the skills of local artisans may suggest products that may
be profitably produced and marketed.

The National Council of Applied Economic Research (NCAER) and other bodies publish
surveys of various regions showing the potential of industrial development in various regions.
These surveys assess the resources (human and material), infrastructural facilities, and markets
for various products.

g. Analyze Economic and Social Trends A study of economic and social trends is helpful in
projecting demand for various goods and services. Changing economic conditions and consumer
preferences provide new business opportunities. For example, a greater awareness of the value
of time is dawning on the public. Hence, the demand for time-saving products like prepared food
items, ovens, and powered vehicles has been increasing. Another change that can be seen is the
increasing desire for leisure and recreational activities. This has caused a growth in the market
for recreational products and services.

h. Study New Technological Developments. There is a large network of research laboratories

in India under the umbrella of the Council of Scientific and Industrial Research, and other
bodies. New products or new processes and technologies for existing products developed by
research laboratories may be examined for profitable commercialization .

22
i. Draw Clues from Consumption Abroad. Entrepreneurs willing to take higher risks may
indentify projects for the manufacture of products or supply of services which are new to the
country but extensively used abroad. Automatic vending machines, entertainment parks, pre-
fabricated houses, and fast food restaurants are examples of projects belonging to this category.

j. Explore the Possibility or Reviving Sick Units. Industrial sickness is rampant in the
country. There are innumerable units which have been characterized as sick. These units are
either closed or face the prospect of closure. A significant proportion of sick units, however, can
be nursed back to health by sound management, infusion of further capital, and provision of
complementary inputs. Hence, there is a fairly good scope for investment in this area. Such
investments typically have a shorter gestation period because one does not have to begin from
scratch. Indeed, in many cases marginal efforts would suffice to revive such units.

k. Indentify Unfulfilled Psychological Needs. For well-established, multi-brand product groups

like bathing soap, detergents, cosmetics, and toothpaste, the question to be asked is not whether
there is an opportunity to manufacture something to satisfy an actual physical need but whether
there are certain psychological needs of the consumers which are presently unfulfilled. To find
out whether such an opportunity exists, the technique of spectrum analysis is useful. This
analysis is done in the following manner: (i)Important factors influencing brand choice are
identified. (ii) Existing brands in the market are positioned on a continuum in respect of the
factors indentified in step (i).
(iii) Gaps which exist in relation to consumer psychological needs are identified.

l. Attend Trade Fairs. National and international trade fairs provide an excellent opportunity to
get to know about new products and developments.
m. Stimulate Creativity for Generating New product Ideas New product ideas may be
generated by thinking along the following lines: Modification, Rearrangement, Reversal,
Magnification, Reduction, Substitution, Adaptation, and Combination.
n. Chance. Hope that the chance factor will favor you. Identification of investment opportunity
may be influenced by the chance factor. Two examples may be given here.

2.2. Preliminary Screening

What factors are considered while conducting preliminary screening?

______________________________________________________________________________
__________________________________________________________________By using the
suggestions made in the preceding section, it is possible to develop a long list of project ideas.
Some kind of preliminary screening is required to eliminate ideas which prima facie are not
promising. For this purpose, the following aspects may be looked into:
 Compatibility with the promoter
 Consistency with government priorities
 Availability of inputs
 Adequacy of market

23
  Reasonableness of cost
 Acceptability of risk level

i. Compatibility with the promoter

The idea must be compatible with the interest, personality, and resources of the entrepreneur.
According to Murphy, a real opportunity has three characteristics: (i) It fits the personality of the
entrepreneur-it squares with his abilities, training , and proclivities. (ii) It is accessible to him.
(iii) It offers him the prospect of rapid growth and high return on the invested capital.

ii. Consistency with Government Priorities

The project idea must be feasible given the national goals and governmental regulatory
framework. The questions to be raised in this context are:
 Is the project consistent with national goals and priorities?
 Are there any environmental effects contrary to governmental regulations?
 Can the foreign exchange requirements of the project be easily accommodated?
 Will there be any difficulty in obtaining the license for the project?

iii. Availability of Inputs

The resources and inputs required for the project must be reasonably assured. To assess this, the
following questions need to be answered:
 Are the capital requirements of the project within manageable limits?
 Can the technical know-how required for the project be obtained?
 Are the raw materials required for the project available domestically at a reasonable cost?
If the raw materials have to be imported, will there be problems?
 Is the power supply for the project reasonably obtainable from external sources and
captive power sources?

It may be noted here that Indian business has been traditionally faced with (i) shortages of certain
inputs like power, foreign exchange, and important raw materials, and (ii) fluctuating supplies of
agricultural raw materials like cotton, jute and seeds. Of course, in recent times, the situation has
improved in some ways :(i) power generation has increased significantly, (ii) foreign exchange is
now available more easily, and (iii) supplies of certain basic industrial raw materials have been
augmented substantially. However, the supply situation of power, coal, and transport facilities
still leaves much to be desired.

iv. Adequacy of the Market

The size of the present market must offer the prospect of adequate sales volume. Further, there
should be a potential for growth and a reasonable return on investment. To judge the adequacy
of the market, the following factors have to be examined:
 Total present domestic market
 Competitors and their market shares

24
  Export markets
 Quality-price profile of the product vis-à-vis competitive products
 Sales and distribution system
 Projected increase in consumption
 Barriers to the entry of new units
 Economic, social, and demographic trends favorable to increased consumption
 Patent protection

It may be emphasized here that barring recessionary aberrations, the demand for most of the
products in India has been growing secularly. This trend will continue because of the low levels
of per capita consumption in India. Fortunately, from the point of view of entrepreneurs, the
Indian economy unlike most developed, Western economies, is not a “share shift” economy
wherein the growth in demand for a product is likely to be at the expense of the demand for
others.

v. Reasonableness of Cost
The cost structure of the proposed project must enable it to realize an acceptable profit with a
price. The following should be examined in this regard:
 Cost of material inputs
 Labor cost
 Factory overheads
 General administration expenses
 Selling and distribution costs
 Service cost
 Economies of scale

vi. Acceptability of Risk Level

The desirability of a project is critically dependent on the risk characterizing it. In the assessment
of risk-a difficult task indeed-the following factors should be considered:
 Vulnerability to business cycles
 Technological changes
 Competition from substitutes
 Competition from imports
 Governmental control over price and distribution

2.3. Project Rating Index

When a firm evaluates a large number of project ideas regularly, it may be helpful to streamline
the process of preliminary screening. For this purpose, a preliminary evaluation may be
translated into a 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).

25
  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.

Table 2.1. illustrates the determination of the project rating index. Once the project rating index
is determined, it is compared with a pre-determined hurdle value to judge whether the project is
prima facie worthwhile or not.
Table 2.1. Project Rating Index
Factor Factor V G A P VP Factor
Weight G 4 3 2 1 Score
5
Input availability 0.25 x 0.75
Technical Know-how 0.10 x 0.40
Reasonableness of cost 0.05 x 0.20
Adequacy of market 0.15 x 0.75
Complementary relationship with 0.05 x 0.20
other products
Stability 0.10 x 0.40
Dependence on firm’s strength 0.20 x 1.00
Consistency with government 0.10 x 0.30
priorities
Rating Index = 4.00

After the project rating index is determined it will be compared with the predetermined hurdle
number. Assume the predetermined hurdle number is 3. The project under consideration
worthwhile as the rating index is greater than the predetermined hurdle number, otherwise it will
be not worthwhile.

2.4. Sources of Positive Net Present Value

Can you indicate some of the sources of positive present value?

______________________________________________________________________________
__________________________________________________________________
It is often taken for granted that there is an abundance of positive NPV projects which can be
identified rather easily. However, note that choosing positive NPV project is akin to selecting
under-valued securities using fundamental analysis. The latter is possible if there are
imperfections in the financial market that cause a discrepancy between security prices and their
equilibrium values (intrinsic values). Likewise, imperfections in real markets (product and factor
markets) lead to entry barriers which cause positive NPVs. Hence, an understanding of entry

26
barriers is helpful in identifying positive NPV projects. It appears that there are six main entry
barriers that result in positive NPV projects. They are as follows:

i. Economies of Scale. Economies of scale means that an increase in the scale of production,
marketing, or distribution results in a decline in the cost per unit.. when substantial economies of
scale are present, the existing firms are likely to be large in size. The more pronounced the
economies of scale, the greater the cost advantage of the existing firms. In order to exploit the
economies of scale, new entrants require a substantial investment in plant and machinery,
research and development, and market development. Such capital needs serve as an entry barrier.
The greater the capital requirement, the higher the barrier to entry. This seems to be especially
true in industries like petroleum refining , mineral extraction, iron and steel, and aluminium.

ii. Product Differentiation. A firm can create an entry barrier by successfully differentiating its
products form those of its rivals. The basis for differentiation may be one or more of the
following:
 Effective advertising and superior marketing
 Exceptional service
 Innovative product features
 High quality and dependability

iii. Cost Advantage. If a firm can enjoy cost advantages vis-à-vis its competitors, it can be
reasonably assured of earning superior returns. Cost advantage may stem from one or more of
the following:
 Accumulated experience and comparative edge on the learning curve
 Monopolistic access to low cost materials
 A favorable location
 More effective cost control and cost reduction

iv. Marketing Reach. A penetrating marketing reach is an important source of competitive

advantage. Two examples illustrate this:
 Avon Products markets its products through a worldwide network of 1,300.000
independent sales representatives. Avon’s competitors find it almost impossible to
replicate this. Thanks to such a nonpareil marketing network, Avon has been able to earn
superior returns in a highly competitive industry.
 The breadth and depth of Hindustan Lever’s distribution network is miles ahead of its
competitors. Such a marketing reach has contributed to the superior returns earned by
Hindustan Lever.

v. Technological Edge. Technological superiority enables a firm to enjoy excellent returns.

Firms like IBM and Xerox earned superior returns over extended periods of time due to inter
alia, the technological edge they had over their rivals. On the Indian scene, firms like Dr.

27
Reddy’s Laboratory and Hero Honda have performed well because of their technological
strength.

vi. Government Policy. A government policy which shelters a firm from the onslaught of
competition enables it to earn superior returns. Government policies that create entry barriers,
partial or absolute, include the following:

 Restrictive licensing
 Import restrictions
 High tariff walls
 Environmental controls
 Special tax reliefs

A number of firms in India benefited substantially from restrictive government policies which
offered considerable protection to them from potential competition, domestic as well as foreign,
for many years. The liberalization measures of recent years have, of course, dismantled, partly or
substantially entry barriers stemming from earlier government policies. Remember that what the
government can give, it can also take away.
[
Activity 3.
1. What are the tools for identifying investment opportunities?
__________________________________________________________
________________________________________________________
2. What are some of the suggestions to identify some of project ideas?
__________________________________________________________
________________________________________________________
3. What are the aspects we need to look into in the preliminary selection of
projects?
__________________________________________________________
________________________________________________________
4. What are the sources of positive NPV?
__________________________________________________________
________________________________________________________
2.5. On Being an Entrepreneur

What are the qualities and traits of an entrepreneur?

______________________________________________________________________________
__________________________________________________________________
Many persons have an entrepreneurial urge to set up their own project and be on their own.
Hence, it may not be out of place here to discuss the questions every entrepreneur must answer
and the qualities and traits of a successful entrepreneur.

2.5.1. The Questions Every Entrepreneur Must Answer

According to Amar Bhide, the following are the questions that every entrepreneur must answer:

28
 (i) Are my goals well defined?
 Personal aspirations
 Business sustainability and size
 Tolerance for risk
(ii) Do I have the right strategy?
 Clear definition
 Profitability and potential for growth
 Durability
 Rate of growth
(iii) Can I execute the strategy
 Resources
 Organizational infrastructure
 The founder’s role

2.5.2. Qualities and Traits of a Successful Entrepreneur

What qualities and traits are required to be a successful entrepreneur? It appears that a successful
entrepreneur has the following qualities and traits:
 Willingness to make sacrifices
 Leadership
 Decisiveness
 Confidence in the project
 Marketing orientation
 Strong ego
 Open mindedness

Willingness to Make Sacrifices. A new venture is often plagued with numerous difficulties
and unanticipated problems. To nurture it in such an inhospitable environment, the entrepreneur
has to be prepared to sacrifice his time, energy, and resources. He must be willing to struggle,
sacrificing personal comforts and conveniences, against seemingly endless odds. An
entrepreneurial job is not like a typical nine-to-five executive job. It tends to be far more
demanding, requiring total commitment and, sometimes, even obsessive preoccupation on the
part of the entrepreneur.

Leadership. Successful entrepreneurs generally have strong leadership qualities. They are able
to inspire ordinary persons to accomplish great feats. Even though outwardly they may show
bizarre signs (they may be whimsical, timid, or even cantankerous) they are able to fire people
with their zeal. They have the flair for galvanizing their team to successfully cope with the
challenges and frustrations inherent in a new venture.

Decisiveness. A fledgling enterprise has to accomplish many things in an atmosphere of

uncertainty. Numerous decisions have to be taken in quick succession on the basis of limited
information. The firm does not have a history to fall back on or a well-organized data base to
rely upon. Unless the entrepreneur is decisive by nature, he would not be able to cope with the

29
enormous burden of decisions making. If he procrastinates, he may court disaster. If he dilly-
dallies, he may miss valuable opportunities. The fluid situation of a new enterprise calls not only
for an ability to decide quickly but also an ability to revise the decisions to adapt the enterprise to
an environment in which it has not established proper moorings.

Confidence in the project. An entrepreneur should have unbounded faith in his project. This
helps him in instilling confidence in supplier, creditors, costumers, employees, and others.
Without unflinching conviction in the project, it would be difficult for the entrepreneur to
withstand the failures and frustrations that form the new venture diet.

Marketing Orientation. A strong marketing orientation is critical to a new venture. An

entrepreneur who is skillful in exploiting market opportunities has the best chance of success.
Irrespective of the professional guise he wears (whether it be that of an engineer, inventor,
production technologist, accountant, or any other), the entrepreneur must have marketing talent.
Edwin Land of Polaroid is widely recognized as an ideal example of disguised marketing talent.
Land, an engineering genius, had superior marketing skills and perhaps this was the most critical
factor in the outstanding success of Polaroid. Land could inspire the technical and financial
world, thanks to his marketing abilities. if an entrepreneur lucks marketing skills, he must find a
partner who can remedy this deficiency otherwise the venture will be handicapped because of its
inability to exploit the marketing opportunities.

Strong Ego. Setting up a new enterprise is like riding an emotional roller coaster. There are
days which bring jubilation and there are days which cause despondency, as the enterprise is
buffeted by environmental forces, which tend to have a strong influence on the nascent venture.
The entrepreneur needs a strong ego to bear with such ups and downs. To endure periods of
adversity and to maintain a proper perspective when events cast a shadow over the enterprise, the
entrepreneur needs a strong identify and self image.

Open-Mindedness. Entrepreneurs must be willing to revise their assumptions and projections in

the wake of anticipated developments. Entrepreneurs need to be open-minded or willing to revise
their mental models on forecasts because of the uncertain nature of their markets and their
limited initial planning. In rapidly changing markets, unforeseeable developments can make
previously sound assumptions obsolete. A related trait is the ability to manage internal conflict.
When entrepreneurs modify their course of action, they must have the same faith in the new
course of action as they had in the previous. Somehow they have to manage their minds on an on
going conflict between reservations of an objective skeptic and the faith of a believer.
2.6. Monitoring the Environment

What are the environmental factors that affect the project?

______________________________________________________________________________
__________________________________________________________________

30
Basically, a promising investment ideas enable a firm (or the entrepreneur) to exploit
opportunities in the environment by drawing on its competitive strengths. Hence, the firm must
systematically monitor the environment and assess its competitive abilities. For purposes of
monitoring, the business environment may be divided into six broad sectors. The important
aspects studied in monitoring the key sectors of the environment are as follows:

Economic Sector
 State of the economy
 Overall rate of growth
 Growth rate of primary, secondary, and tertiary sectors
 Cyclical fluctuations
 Linkage with the world economy
 Trade surplus/ deficits
 Balance of payment situation
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

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
 Education profile
 Employment of women
 Attitudes toward consumption and investment
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, appeal, and functional
performance

31
  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
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 and the
important aspects to be considered under them are as follows:

Marketing and Distribution

 Market image
 Product line
 Market share
 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

32
  Cost of capital
 Tax situation
 Relations with shareholders and creditors
 Accounting and control system
 Cash flows and liquidity

UNIT THREE
PROJECT FEASIBILITY STUDY

Some investment proposals pass through a stage of checking out the feasibility. Large projects
usually need feasibility test to be carried out before a handsome amount is committed. A
feasibility study is part of the process of project identification, preparation and selection. This
process involves the appraising of projects or groups of projects and choosing to implement
some of them. Feasibility literally means whether some idea will work or not. It knows
beforehand whether there exists a sizeable market for the proposed product/service, what would
be the investment requirements and where to get the funding from, whether and wherefrom the
necessary technical know-how to convert the idea into a tangible product may be available, and
so on. In other words, feasibility study involves an examination of the operations, financial, HR
and marketing aspects of a business on ex ante (before the venture comes into existence) basis.

Feasibility is a multivariate concept; that is, a project has to be viable not only in technical terms
but also in economic and commercial terms too. Moreover, there always a possibility that a

33
project that is technically possible may not be economically viable. After the problems of an
organization or economy have been determined and objectives and strategies agreed, concrete
steps have to be taken. The main form this takes is that of formulating appropriate development
projects to achieve plan objectives and meet the development needs of the economy. Proposals
relating to them are then put to the plan authorities for consideration and inclusion in the plan.
These proposals as pointed out above take the following forms of feasibility studies:
1. Market/Commercial viability
2. Economic feasibility
3. Financial feasibility
4. Technical feasibility
5. Social Cost Benefit analysis
6. Other feasibility considerations like legal, administrative, ecological
When projects are evaluated by government or government agencies, economic and social
feasibility is also considered. Market feasibility is also emphasized, but technical and financial
feasibility is less emphasized. The scope for scrutiny under each of these five heads would
necessarily render their careful assessment and the examination of all possible alternative
approaches. The process almost invariably involves making decision relating to technology,
scale, location, costs and benefits, time of completion (gestation period), degree of risk and
uncertainty, financial viability, organization and management, availability of inputs, know-how,
labor etc. The detailed analysis is set down in what is called a feasibility report.

3.1Market feasibility
A market, whether a place or not, is the arena for interaction among buyers and sellers. From
seller’s point of view, market analysis is primarily concerned with the aggregate demand of the
proposed product/service in future and the market share expected to be captured. Success of the
proposed project clearly hinges on the continuing support of the customers. However, it is very
difficult to identify the market for one’s product/service. After all, the whole universe cannot be
your market. You have to carefully segment the market according to some criteria such as
geographic scope, demographic and psychological profile of the potential customers etc. It is a
study of knowing who all comprise your customers, for this you require information on
consumption trends, past and present supply position, production possibilities and constraints,
imports and exports, competition, cost structure, elasticity of demand, consumer behavior,
intentions, motivations, attitudes, preferences and requirements, distribution channels and
marketing policies in use, administrative, technical and legal constraints impinging on the
marketing of the product.


The exercise of project appraisal often begins with an estimation of the size of the market.
Before a detailed study of a project is undertaken, it is necessary to know, at least roughly, the
size of the market because the viability of the project depends critically on whether the
anticipated level of sales exceeds a certain volume. Many projects have been abandoned because
preliminary appraisal revealed a market of inadequate size.

34
Requirements for market and demand analysis
A. Information requirement
The principal types of information required for market and demand analysis relate to:
1. Effective demand: to gauge the effective demand in the past and present, the starting point
typically is apparent consumption which is defined as:

Production + Imports – exports – changes in stock level

In a competitive market, effective demand and apparent consumption are equal. However, in
most of the developing countries, where competitive markets do not exist for a variety of
products due to exchange restrictions and controls on production and distribution, the figure of
apparent consumption may have to be adjusted for market imperfections. Admittedly, this is
often a difficult task.
2. Breakdown 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 nature of product, consumer group, and
geographical division.
(i) Nature of product: One generic name often subsumes many different products: steel covers
sections, rolled products, and various semi-finished products; commercial vehicles cover
trucks and buses of various capacities etc.
(ii) Consumer groups: Consumers of a product may be divided into industrial consumers and
domestic consumers. Industrial consumers may be sub-divided industry-wise. Domestic
consumers may be further divided into different income groups.
(iii) Geographical division: A geographical breakdown of consumers, particularly for products
which have a small value-to-weight relationship and products which require regular, efficient
after-sales service is helpful.
B. Price: Price statistics must be gathered along with statistics pertaining to physical quantities.
It may be helpful to distinguish the following types of prices:
(i) manufacturer’s price quoted as FOB (free on board) price or CIF (cost, insurance, and
freight) price,
(ii) landed price for imported goods,
(iii) average wholesale price, and
(iv) average retail price.
C. Methods of distribution and sales promotion: the method of distribution may vary with the
nature of product. Capital goods, industrial raw materials or intermediates, and consumer
products tend to have differing distribution channels. Further, for a given product,
distribution methods may vary. Likewise, methods used for sales promotion (advertising,
discounts, gift schemes, etc.) may vary from product to product. The methods of distribution
and sales promotion employed presently and their rationale must be studied carefully. Such a
study may explain certain patterns of consumption and highlight the difficulties that may be
encountered in marketing the proposed products.
D. Consumers: two categories of information about the consumers may be required:

35
 a) Demographic and sociological information-, information on: age, sex, income,
avocation, residence, religion, customs, beliefs, and social background, and
b) Attitudinal information- information on - preferences, intentions, attitudes, habits, and
responses.
E. Governmental policy: the role of government in influencing the demand and market for a
product may be significant. Governmental plans, policies, legislations, and fiats which have a
bearing on the market and demand of the product under examination should be studied.
These are reflected in: production targets in national plans, import and export trade controls,
import duties, export incentives, excise duties, sales tax, industrial licensing, preferential
purchases, credit controls, financial regulations, and subsidies/penalties of various kinds.
F. 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: location, present production capacity, planned expansion, capacity
utilization level, bottlenecks in production, and cost structure. Competition from substitutes
and near-substitutes should be examined because almost any good may be replaced by some
other good as a result of changes in relative prices, quality, availability, promotional
strategies, consumer taste, and other factors.


Demand estimation
The first and most difficult step in market feasibility analysis is determining the potential
demand for the product or the service we are intending to produce/render. There are different
methods of estimation.
A. Market survey
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 elasticity 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.

Market survey can be undertaken using the following steps:

1. Definition of the target population
2. Selection of sampling scheme and sample size
3. Preparation of the questionnaire
4. Recruiting and training of field investigators
5. Obtaining information as per the questionnaire from the sample of respondents
6. Editing of information gathered
7. Analysis and interpretation of data

36
B. Demand forecasting
After gathering information about various aspects of the market and demand from primary and
secondary sources, an attempt may be made to estimate future demand. Several methods are
available for demand forecasting. The important ones are qualitative and quantitative methods.
Qualitative Methods

Qualitative or judgmental forecasting does not rely on numbers to conclude forecast, but rather
on intangible factors. This method is especially common when sufficient historical data is not
available, i.e., for a new business or a less-established market environment. Groups whose
judgment is normally surveyed in preparing a qualitative forecast include the experts in the field,
the sales force and the customers. Combining historical data with the judgment of people or
groups presumed to have superior knowledge of sales only adds to the reliability and integrity of
a company's sales forecast. Some of the identified qualitative methods of sales forecasting are
Delphi method and Jury of Executives Opinion methods. These methods rely essentially on the
judgment of experts to translate qualitative information into quantitative estimates.

i. Jury of Executives Opinion Method

This method, which is very popular in practice, involves soliciting the opinions of a group of
managers on expected future sales and combining them into a sales estimate. The advantages of
this method are: (1) It is an expeditious method for developing sales forecast; (2) it permits a
variety of factors like economic climate, competitive environment, consumer preferences,
technological developments, and so on, to be included in the subjective estimates provided by the
experts and, (3). it has an immense appeal to managers who tend to prefer their judgment to
mechanistic forecasting procedures. The disadvantages of this method are: (1) the biases
underlying subjective estimates cannot be unearthed easily; (2) the reliability of this technique is
questionable.

ii. Delphi Method

This method is used for eliciting the opinions of a group of experts with the help of a mail
survey. The steps involved in this method are:

1. A group of experts is sent a questionnaire by mail and asked to express their views.
2. The responses received from the experts are summarized without disclosing the identity of
the experts, and sent back to them along with a questionnaire meant to probe further the
reasons for the extreme views expressed in the first round.
3. The process may be continued for one or more rounds till a reasonable agreement emerges
in the view of the experts.

Delphi method appeals too many organizations for the following reasons: (1) it is intelligible to
users; (2) it seems to be more accurate and less expensive than the traditional face-to-face group
meetings. While the Delphi method is appealing, there are certain questions it doesn’t answer.

37
What is the value of the expert opinion? What is the contribution of additional round and
feedback to accuracy?

Quantitative Methods

Simply stated, the word quantitative signifies an estimate of a particular, indefinite or

considerable amount of anything. Quantitative techniques rely primarily on numbers to conclude
forecasts. These numbers are multiplied, added or correlated and then placed in a formula to
predict the company's sales. You can start by building up to aggregate totals of market demand,
or start with these totals and work the numbers down into more focused forecasts for individual
products. Quantitative techniques are calculated from important numbers such as a number of
sales volume, gross national product, disposable income, and total number of buyers in the
market. These numbers have been shown to have significant value in forecasting. Among others
some of the quantitative forecasting methods include the time series methods and causal
methods.

A. Time Series Methods: these methods generate forecasts on the basis of an analysis of the
historical time series. The important time series projection methods are trend projection methods,
exponential smoothing method and moving average method.

i. Trend Projection Method

When the trend projection method is used, the most commonly employed relationship is the
linear relationship. Trend projection: it consists of determining the trend of consumption by
analyzing past consumption statistics, and projecting future consumption by extrapolating the
trend. The trend of consumption may be represented by one of the following relationships:
Linear Relationship: Yt = a + bt
Where; Yt = demand for year t,
t = the time variable,
a = intercept of the relationship
b = slope of the relationship
a, b and aj’s are constants.
This relationship may be estimated by using one of the following methods visual curve fitting
method and least squares method.
1. Consumption level method:
Useful for a product which is directly consumed, this method estimates consumption level on the
basis of elasticity coefficients, the important ones being the income elasticity of demand and the
price elasticity of demand.
a) Income elasticity of demand— The income elasticity of demand reflects the
responsiveness of demand to variations in income. It is measured as follows:
Q2−Q1
∗I 1+ I 2
I 2−I 1
Y=
Q 1+ Q2

38
Where; Y = income elasticity of demand
Q1 = quantity demanded in the base year
Q2 = quantity demanded in the following year
l1 = income level in the base year
l2 = income level in the following year
b) Price elasticity of demand - The price elasticity of demand measures the responsiveness
of demand to variations in price. It is defined as:
Q2−Q1
∗P 1+ P 2
P2−P1
Y=
Q 1+Q 2
Where, Ep = price elasticity of demand
Q1 = quantity demanded in the base year
Q2 quantity demanded in the following year
P1 = price per unit in the base year
P2 = price per unit in the following year
c) End use method
Suitable for estimating the demand for intermediate products, the end use method, also referred
to as the consumption coefficient method involves the following steps:
1. Identify the possible uses of the product.
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 product
d) Leading Indicator Method
Leading indicators are variables which change ahead of other variables, the lagging variables.
Hence, observed changes in leading indicators may be used to predict the changes in lagging
variables. For example, the change in the level of urbanization- a leading indicator may be used
to predict the change in the demand for air conditioners a lagging variable. Two basic steps are
involved in using the leading indicator method:
(i) First, identify the appropriate leading indicator(s).
(ii) (ii) Second, establish the relationship between the leading indicator(s) and the variable
to be forecast.
e) Market penetration for the product: once a reasonably good handle over the aggregate
demand is obtained, the next logical question is: What will be the likely demand for the
product of the project under examination? The answer to this question depends on ggregate
potential supply, nature of competition, consumer preferences and sales promotion efforts.
If the aggregate potential domestic supply is likely to be significantly less than the
aggregate potential domestic demand, the demand for the product of the project under
examination is likely to be very strong, provided liberal imports which may hurt domestic
manufacturers are not allowed.
The nature of competition and market-sharing arrangement (if any) has a bearing on the
demand for the product of the project under examination.

39
 Consumer preferences for competing products and the sales promotional efforts of
various competitors obviously influence the relative market shares enjoyed by them.
The promoter should be capable of creating a profile of the organization’s ideal customer. The
promoter must ask themselves: Who is our target customer? Am I operating as a Business to
Customer or Business to Business enterprise? What are our ideal customers’ sex, age, income
level and interests? Is there a distinction between our buyer and our end user? What are the target
customer segments (geographic, demographic, psychographic and behavioral)? What
products/services are they already using? On what factors are buying decisions made?

3.2. Economic feasibility

Economics is the study of costs- and- benefits. In regard to the feasibility, the study of the
entrepreneur is concerned whether the capital cost as well as the cost of the product is justifiable
vis-à-vis the price at which it will sell at the market place. For example, technically, silver can be
extracted from silver bromide, (a chemical used for processing the X-ray and photo films); but,
the cost of extraction is so high that it would not be economically feasible to do so. Likewise,
until recently cost of harnessing solar power was prohibitively high. This cost-benefit analysis
goes into financial calculations for profitability analysis that we discussed under financial
analysis. At this stage it is also useful to distinguish between the economic and commercial
feasibility; whereas economic feasibility leads one to the unit cost of the product, commercial
feasibility informs whether enough units would sell.
Economic viability and financial viability are not different for companies. However, from
national angle and from the viewpoint of the economy, as a whole, economic feasibility and
financial feasibility are not considered to be the same. Economic appraisal of a project deals with
the impact of the project on economic aggregates-on employment and foreign exchange, and on
net social benefits. Cost and benefits to the nation due to proposed project are considered in the
economic feasibility test. Tax revenue, generation of employment, savings of foreign exchange
and such other factors differentiate economic feasibility from financial feasibility. The
government and government agencies calculate the economic indicators of a project before
permitting a project or financing it.

Apart from the cost-benefit analysis as above, which we also refer to as private cost-benefit
analysis, it is also useful to do what is known as social- cost-benefit- analysis (SCBA). For
example, the entrepreneur may be getting subsidized electricity in which case private cost would
be less than social cost. Likewise, exporting units earn precious foreign exchange resulting into
social benefits being more than private earnings. Many a time, a project that is worthy on SCBA
may find greater favor with the support agencies. This tells us that there is a huge overlap
between economic feasibility for a private project and financial feasibility and social cost-benefit
analysis of a developmental project. Hence the specific considerations and technical issue of this
part of the analysis will be covered in the subsequent sub-sections.

3.3. Financial feasibility

The objective of financial analysis is to ascertain whether the proposed project will be financially
viable in the sense of being able to meet the burden of servicing debt and whether the proposed

40
project will satisfy the return expectations of those who provide the capital. Capital budgeting is
a required managerial tool for project appraisal. One duty of a financial manager is to choose
projects with satisfactory cash flows and rates of return. Therefore, a financial manager must be
able to decide whether a project is worth undertaking and be able to choose intelligently between
two or more alternatives. To do this, a sound procedure to evaluate, compare, and select projects
is needed. This procedure is called capital budgeting.

In the form of either debt or equity, capital is a very limited resource. There is a limit to the
volume of credit that the banking system can create in the economy. Commercial banks and
other lending institutions have limited deposits from which they can lend money to individuals,
corporations, and governments. In addition, the Federal Reserve System requires each bank to
maintain part of its deposits as reserves. Having limited resources to lend, lending institutions
are selective in extending loans to their customers. But even if a bank were to extend unlimited
loans to a company, the management of that company would need to consider the impact that
increasing loans would have on the overall cost of financing.

In reality, any firm has limited borrowing resources that should be allocated among the best
project alternatives. One might argue that a company can issue an almost unlimited amount of
common stock to raise capital. Increasing the number of shares of company stock, however, will
serve only to distribute the same amount of equity among a greater number of shareholders. In
other words, as the number of shares of a company increases, the company ownership of the
individual stockholder may proportionally decrease.

The argument that capital is a limited resource is true of any form of capital, whether debt or
equity (short-term or long-term, common stock) or retained earnings, accounts payable or notes
payable, and so on. Even the best-known firm in an industry or a community can increase its
borrowing up to a certain limit. Once this point has been reached, the firm will either be denied
more credit or be charged a higher interest rate, making borrowing a less desirable way to raise
capital. Faced with limited sources of capital, management should carefully decide whether a
particular project is economically acceptable. In the case of more than one project, management
must identify the projects that will contribute most to profits and, consequently, to the value (or
wealth) of the firm. This, in essence, is the basis of capital budgeting.

Capital budgeting is project decision-making as to whether a project is worth undertaking.

Capital budgeting is basically concerned with the justification of capital expenditures. Current
expenditures are short-term and are completely written off in the same year that expenses occur.
Capital expenditures are long-term and are amortized over a period of years are required by the
tax authorities
Basic Steps of Capital Budgeting
1 Estimate the cash flows (initial outflow and subsequent net inflows)
2 Assess the riskiness of the cash flows.
3 Determine the appropriate discount rate.
4 Find the PV of the expected cash flows.

41
 5 Accept the project if PV of inflows > costs. IRR > Hurdle Rate and/or payback < policy
Basic Data
Expected Net Cash Flow
Year Project L Project S
0 ($100) ($100)
1 10 90
2 60 30
3 80 50
Evaluation Techniques:
A. Payback period and discounted pay-back period
B. Net present value (NPV)
C. Internal rate of return (IRR)
D. Profitability index
Payback Period (PBP): Payback period refers to the length of time it takes to recover initial
investment of the project. Depending on the nature of net cash flows, payback period may be
computed in two ways.
a) When cash flow is in annuity form:Annuity refers to equal amount of cash flows that occur
every period over the life of the project
Initial Investment
PBP = Annual Net Cash Flows
b) When cash flows are not in annuity form
When net cash flows are not annuity, payback period is obtained by adding net cash flows for
successful years until the total is equal to initial investment.
Payback period = Expected number of years required to recover a project’s cost.
Expected Net Cash Flow
Year Project L Project S
0 ($100) ($100)
1 10 90
2 60 30
3 80 50

Payback-L = 2 + $30/$80 years

= 2.4 years.
Payback-S = 1.33 years.
Weaknesses of Payback: it ignores the time value of money. This weakness is eliminated with
the discounted payback method. It ignores cash flows occurring after the payback period.
DISCOUNTED PAY-BACK PERIOD

Since the payback period rule ignores the time value of money, some firms have modified it to
reflect the time value of money. This is the discounted payback period. This technique specifies
that the cash flow from each period has to be discounted appropriately by the firm’s cost of
capital (i.e. a risk-adjusted WACC).

42
Given a 10% weighted average cost of capital, the payback period will be:
Year Project L Project S
Cash flow Discounted cash flow Cash flow Discounted cash
0 ($100) ($100) ($100) flow
($100)
1 10 9.09 90 81.82
2 60 49.59 30 24.79
3 80 60.12 50 66.55

Discounted pay-back – project L = 2 + (41.32/60.12) = 2.7 years

Discounted pay-back – project S = 1 + (18.18/24.79) = 1.7 years

Net Present Value Method: The net present value of project is the difference between the
present value of net cash inflows and present value of initial investment.
n
CFt
NPV = ∑ (1 + k) t
t =0

0 1 2 3

100.00 10 60 80 Project L:
9.09

49.59

60.12
NPVL = $ 18.79
NPV-S = $73.16

Decision: If the projects are independent, accept both. If the projects are mutually exclusive,
accept Project S since NPVS > NPVL.
Note: NPV declines as k increases, and NPV rises as k decreases.
Internal Rate of Return (IRR)
Internal Rate of Return is the discount rate which equates the project NPV equal to zero. It is the
discount rate at which the present value of Net cash flows is equal to the present value of initial

43
investment. In other words, IRR is the rate of return on investments in the project. The
determination of IRR is purely based on project cash flows. Mathematically, at IRR,
n Ct
∑ ( 1+ r )t = Initial investment
i=1

IRR is determined using trial and error: the complexity of determining IRR is greater if net cash
flows are not in annuity form. This section illustrates the determination of net cash flows when
cash flows are annuity as well as non-annuity.

n
CFt
IRR: ∑ ( 1 + IRR ) t = $0 = NPV
t=0

0 1 2 3

-100.00 10 60 80
18.1% Project L:

8.47 18.1%
43.02
48.57 18
$ 0.06  $0
IRRL = 18.1%
IRRS = 38%
Decision: If the projects are independent, accept both because IRR > k. If the projects are
mutually exclusive, accept Project S since IRRS > IRRL. Also Note also that IRR is independent
of the cost of capital.
Advantages and Disadvantages of IRR AND NPV
Advantages
A number of surveys have shown that, in practice, the IRR method is more popular than the NPV
approach. The reason may be that the IRR is straightforward, and it uses cash flows and
recognizes the time value of money, like the NPV. In other words, while the IRR method is easy
and understandable, it does not have the drawbacks of the ARR and the payback period, both of
which ignore the time value of money.
Disadvantages
The main problem with the IRR method is that it often gives unrealistic rates of return. Suppose
the cutoff rate is 11% and the IRR is calculated as 40%. Does this means that the management
should immediately accept the project because its IRR is 40%.? The answer is no! An IRR of

44
40% assumes that a firm has the opportunity to reinvest future cash flows at 40%.If past
experience and the economy indicate that 40% is an unrealistic rate for future projects, an IRR of
40% is suspect. Simply speaking, an IRR of 40% is too good to be true! So unless the
calculated IRR is a reasonable rate for project of future cash flows, it should not be used as a
yardstick to accept or reject a project.
Another problem with the IRR method is that it may give different rates of return. Suppose there
are two discount rates (two IRRs) that make the present value equal to the initial project. In this
case, which rate should be used for comparison with the cutoff rate? The purpose of this
question is not to resolve the cases where there are different IRRs. The purpose is to let you
know that the IRR method, despite its popularity in the business world, entails more problems
than a practitioner may think.
IRR Vs NPV k NPVL NPVS
NPV 0% $50 $40
($) 5 33 29
50 10 19 20
15 7 12
20 (4) 5
40

30 Crossover Point = 8.7%

20 IRRS = 23.6%

10

0
5 10 15 20 25 k(%)

-10 IRRL = 18.1%

A. PROFITABILITY INDEX (PI)

The profitability index, or PI, method compares the present value of future cash inflows with the
initial project on a relative basis. Therefore, the PI is the ratio of the present value of cash flows
(PVCF) to the initial project of the project.

[ PI =
PV of Cash Flows
Initial Investment ]

45
In this method, a project with a PI greater than 1 is accepted, but a project is rejected when its PI
is less than 1. Note that the PI method is closely related to the NPV approach. In fact, if the net
present value of a project is positive, the PI will be greater than 1. On the other hand, if the net
present value is negative, the project will have a PI of less than 1. The same conclusion is
reached, therefore, whether the net present value or the PI is used. In other words, if the present
value of cash flows exceeds the initial project, there is a positive net present value and a PI
greater than 1, indicating that the project is acceptable. PI is also known as a benefit/cash ratio.
Project L
0 10% 1 2 3

-100.00 10 60 80

PV1 9.09
PV249.59
PV360.11
118.79

[ PI =
PV of cash flows
initial coast ]
118. 79
= = 1.10
100

Decision: Accept project if PI > 1. Reject if PI < 1.0

PROJECT DECISION ANALYSIS

Making Go/No-Go Project Decision

Virtually all general managers face capital-budgeting decisions in the course of their careers.
The most common of these is the simple “yes” versus “no” choice about a capital project. The
following are some general guidelines to orient the decision maker in these situations.
Focus on cash flows, not profits. One wants to get as close as possible to the economic reality
of the project. Accounting profits contain many kinds of economic fiction. Flows of cash, on
the other hand, are economic facts.

Focus on incremental cash flows. The point of the whole analytical exercise is to judge
whether the firm will be better off or worse off if it undertakes the project. Thus one wants to
focus on the changes in cash flows affected by the project.

The analysis may require some careful thought: a project decision identified as a simple go/no-go
question may hide a subtle substitution or choice among alternatives. For instance, a proposal to
invest in an automated machine should trigger many questions: Will the machine expand
capacity (and thus permit us to exploit demand beyond our current limits)? Will the machine
reduce costs (at the current level of demand) and thus permit us to operate more efficiently than
before we had the machine? Will the machine create other benefits (e.g., higher quality, more

46
operational flexibility)? The key economic question asked of project proposals should be, “How
will things change (i.e., be better or worse) if we undertake the project?”

Account for time. Time is money. We prefer to receive cash sooner rather than later. Use NPV
as the technique to summarize the quantitative attractiveness of the project. Quite simply, NPV
can be interpreted as the amount by which the market value of the firm’s equity will change as a
result of undertaking the project.

Account for risk. Not all projects present the same level or risk. One wants to be compensated
with a higher return for taking more risk. The way to control for variations in risk from project
to project is to use a discount rate to value a flow of cash that is consistent with the risk of that
flow. These 4 precepts summarize a great amount of economic theory that has stood the test of
time. Organizations using these precepts make better project decisions than organizations that do
not use these precepts.

CAPITAL RATIONING
Exists whenever enterprises cannot, or choose not to, accept all value-creating project projects.
Possible causes may be: banks and investors say “NO” and managerial conservatism. Analysis is
required. One must consider sets of projects, or “bundles”, rather than individual projects. The
goal should be to identify the value-maximizing bundle of projects. The danger is that the
capital-rationing constraint heightens the influence of nonfinancial considerations, such as the
following:
Competition among alternative strategies
Corporate politics
Bargaining games and psychology
The outcome could be a sub-optimal capital budget, or, worse, one that destroys value!
Some remedies are the following: Relax and eliminate the budget constraint; Manage the process
rather than the outcomes; Develop a corporate culture committed to value creation.

3.4. Technical feasibility

The technical aspects of a typical project idea can be scrutinized in detail to evaluate its technical
feasibility, as distinct from commercial, financial, economic and managerial feasibility. For the
sake of comprehensiveness we will cover Environmental Impact Analysis (EIA) also, as a part of
this analysis. While the various aspects to be examined will obviously vary from project to
project, the following summary covers the more common ones briefly.
3.4.1. Objectives:
First, the project proposal must fall within the ambit of the stated mission of the sponsor(s).
Next, the proposal must be able to further the objectives and priorities of the sponsor(s). These
must therefore be ascertained and clearly recorded, along with detailed specifications for the
output which constitute the basic frame of reference for all future decisions. The private sector
would usually expect a project to earn a high enough profit, i.e. a stated level of return on

47
investment. Only for core projects (which are intended to basically support other highly
profitable projects) may this requirement be relaxed. The public sector generally has multiple
objectives and profitability normally takes a back seat. In either case, it is essential for the project
analyst to keep the organization’s objectives - a along with their interest priorities - in sharp
focus, to ensure that his/her efforts follow the correct direction.
3.4.2. Location and site
Initially, as many locations as possible should be identified which meet the most fundamental
operational requirements of the proposed project. These should then be evaluated and an
optimum location selected using the criteria of material versus market orientation, quality
standards, infrastructural status, local laws, and socio-economic and living conditions.
Within the geographical location so selected, alternative sites are similarly identified and the
most optimal one selected after considering factors like terrain, local climate land its impact on
plant & equipment and their operation, availability and cost of land (plus its development), local
infrastructural facilities and their costs (power; water: road/ air/water transport;
telecommunications; etc.), socio-economic conditions, availability and quality of labour and
construction equipment, valid waste disposal alternatives and their costs, local living conditions,
public policies, local law, and taxes, etc.

Note: Resource-oriented projects like mining of minerals involve items like geological analysis
covering geological structure, hydrological conditions, characteristics of the resource, resource
reserves, prospecting status, and expected geological problems.

The location decision should be made after giving due consideration to various benefits and
incentives offered by governments or local bodies for setting up production or service facilities
in certain specified areas. These may include assistance in the form of or in respect of capital
loans and grants, tax, concessions, clearances, subsidies, infrastructure, etc. One way to do
this is to evolve (or use available). Location Cost Indices (LCI) for different sites. If the cost (in a
specified currency) of setting up a plant is CA at location A and CB at location B, the LCI for
location A is defined as 100 x CA/CB. If reliable values of LCI for different locations, whether
within one or more countries, are available, the selection of an appropriate location becomes a bit
easier. Such valuable information is however kept a closely guarded secret by a consulting
company and is therefore difficult to come by.

Plant Size
Determination of an optimum plant size is critical to the success of a project. A plant represents
sunk costs and any under utilization of its capacity means either reduced profits or, for levels
below the Break-Even Point, losses. The adverse impact of an extra-large capacity is felt all the
more keenly during the early years when profits are all the more important for survival. It is
therefore normally better to err on the lower side and to build a plant having a capacity that is
likely to be fully utilized quickly, rather than to go in for a large capacity in the fond hope of a
growing share of the market. In a feasibility study, one-begins by looking 'at projections of the
demand-supply gap in the market and anticipated arrives' at the possible range of project sizes
after considering various constants like availability of materials, technology, equipment, public

48
policy (for example, a large company may be precluded from setting up capacities beyond a size)
and finances, etc.. The best possible size of plant & equipment is then recommended after
analyzing the availability, economics, and practicability of different size options.

Technology
The same product or service can generally be obtained using quite different technologies.
Electricity, for example, can be generated using solar panels, coal (thermal plants), hydraulic
power plants, and nuclear power plants and so on. Basic telephone Sol-vices can similarly be
provided using manual, semiautomatic, or automatic exchanges. And, even the last-named
category is available if] various technological versions like Stronger, Crossbar, Analogue
electronic and Digital electronic. Needless to say, the latest technologies usually represent many
improvements over the existing or older ones. They may also offer certain unique features.
However, newly emerging technologies may have some inherent dangers as well.
What is important for formulating a successful project is to weigh available alternative
technologies and select the one that is most appropriate in the prevailing situation, rather than
blindly adopt the latest, state-of-the-art technology assuming that it will work since it works
elsewhere. A technology is considered appropriate only if it is assessed to be satisfactory, and
relevant, vis-à-vis the following aspects in lie specific situation of the project.
 Specifications of the task/product
 Task uncertainties and interdependence
 [Especially for public sector] Developmental imperatives (e.g. growth of employment;
maximizing use of local resources; reduction of disparities in income levels)
 Required gestation period versus the time actually available of the project.
 Source(s) and ease of availability.
 Indigenous availability of comparable technology
 Field validation status in comparable situations. If necessary, field trials may have to be set
up.
 Adaptability to the qualitative characteristics of the locally (or indigenously) available
resources including energy and efficiency in their usage
 Dependence on nonrenewable sources of energy
 Capacity of the organization to absorb/adopt the technology
 Timely availability of manpower with requisite skills for installation, operation and
maintenance
 Cost of' acquisition, installation, repairs and maintenance versus availability of funds
(local/foreign)
 Safety characteristics
 Requirement or availability of R & D facilities • Environmental and sociocultural
sensitivities
 Likelihood, and time frame, of obsolescence

Design, Layout & Plant & Machinery

The feasibility study should broadly specify the recommended design of the processes and plant
(giving essential assumptions and design calculations). It should also present a rough layout of

49
various facilities and list out all the major equipments needed, with key specifications and
available source(s) of supply. Moreover, it should consider, and evaluate alternative equipments
as well and give reasoned recommendations about them. The importance of thoroughness of
planning at this stage of the feasibility study can hardly be overemphasized. Many delays, cost
overruns, and even failures of projects can be avoided provided the design and physical
formulation of the project are based on a sufficiently deep analysis and have the support of the
owner at the highest level. Otherwise, the project is likely to encounter mid-steam changes, with
untoward consequences. There is a general impression that "minor" midstream changes would
not pose much of a problem. This is not so. A project is a multi-task entity with complex
linkages and interrelationships between its various constituents, and even "small" changes, which
may result in certain made-to-order procured equipments being rendered unsuitable and thus
throw the project schedule and costs haywire. The aim of all the efforts at this stage is to design a
viable operating entity which not only works, but works harmoniously (and with minimum costs)
in relation to the stipulated inputs and local environment. Apparent as well as latent and
relatively infrequent factors having a bearing on the effectiveness of the project must therefore
be identified and considered. Neglect of climatic and geographical aspects (e.g. monsoons,
floods, snowstorms, dust-storms, heat/cold-waves, earthquakes, typhoons, etc.) at this stage can
prove quite costly later on. It is equally important to ascertain and give due consideration to local
industrial and safety standards.

Construction Process
This needs to be tackled in the feasibility study in terms of its five aspects,
First, the methodology to be followed - viz., capital intensive or otherwise and its feasibility
under prevailing conditions. Second, whether the construction or installation is to be done in-
house, or on a turnkey basis, or by farming out a number of contracts for different work
packages, and their feasibility. A recommendation may also be made whether any special agency
(ies) should be engaged as a part of backup or contingency arrangements for critical activity
(ies). Third, the determination of such construction equipments, materials and other essential
inputs (like cement, sand, steel, stores etc.) as are to be arranged by the owner, along with their
alternatives, availability, source of supply (local/foreign), lead-times, and infra-structural
requirements (like uninterrupted supply of power, clean water, gas, steam, etc). Fourthly, the
recommended sequence and time schedule of different activities in the form of a bar-chart/PERT
network. Lastly, assessment of the financial implications of this phase based on the latest
available unit costs and with provision for inflation and contingencies.
Inputs
These relate to the operation phase of the project, but need to be identified at this stage of the
feasibility study to examine the technical feasibility of the proposed system(s). For this,
classification of the inputs into following categories will be found useful.
raw materials,
processed materials,
components & sub-assemblies,
spares and wear & tear parts,
water & steam,

50
 gas, fuels and electricity.
Next, their qualitative and quantitative requirements (including buffer stocks, where applicable),
availability, feasibility alternatives and reliable sources of supply should be carefully ascertained
and record. The problems involved in their storage and handling should be also assessed.

Infrastructural Facilities
Availability and characteristics of roads, bridges, railway facilities (like station, yards), air
transportation, waterways, ports, etc. depending upon their relevance to the assessed
requirements of the project at both implementation and operation stages need to be studied. After
studying the appropriateness of the infrastructure existing around the project location, the
infrastructural requirements at the project site itself. A large part of the land area is normally
required to be reserved for service roads, storm water mains, railways, over-ground or overhead
gas, steam, and air pipelines, water reservoirs, and even harbors for certain large-scale industrial
projects. A detailed study of all such requirements and of their implications in terms of time,
resources, and approximate costs is necessary to avoid surprises later on.
Manpower
The availability in needed numbers, of manpower of requisite skills where and when required,
has to be studied. This covers both the project implementation and the operation (&
maintenance) phases. In case imparting of training is also involved, timely availability, and costs,
of the training facilities have also to be assessed.

Environment Impact Assessment (EIA);

This study identifies the environment in which a project is to be implemented, assesses the short
-- and long-term impacts the former is likely to be subjected to as result of the project activities
during construction as well as operation phases, and generates preferred alternative courses of
action, if possible. The EIA process can prove to be of immense benefit to the project promoter,
if sincerely carried out, by ensuring that the natural resources are conserved or used efficiently
and serious problems likely to arise out of any adverse effects on community or natural systems
are duly anticipated and provided for at the planning stage itself. For identification of impacts, a
list of parameters relevant to the project is drawn up, covering natural physical resources, natural
biological/resources, and quality-of-life values including aesthetic and cultural values. For
instance, for rail/road/highway project the following parameters have been identified surface
water quality, air quality, seismology/geology, erosion, land quality, fisheries, forests, terrestrial
wild life, noise, aesthetics, archaeological/historical significance, public health, and
socioeconomic factors.

For each of these, the resulting impacts, whether beneficial or otherwise, are then identified and a
detailed Environmental Management Plan (EMP) prepared for such mitigation, protection and/or
enhancement measures, as are considered necessary,

3.5. Social cost benefit analysis

Social cost benefit analysis (SCBA) is a perfect necropsy where the identification and
determination of the best among project alternatives is made with reference to a country’s
economic and social prerogatives. It is a systematic procedure for comprehensive review of all

51
the costs, benefits, and effects of a project. Such appraisal is preformed for development and
infrastructure projects usually by emphasizing the economic, technical, operational, institutional,
and financial factors to ensure that the selected project meets all necessary requirements and is
implementable.
SCBA focuses on the following objectives:
 To contribute effectively to GDP of an economy;
 To aid in economic development;
 To justify the utilization of economy’s scare of growth;
 To maintain and protect environment from pollution;
 To educate new lines of functioning that are simple and cost effective;
 To benefit the rural poor and reduce regional imbalances;
 To justify the risks undertaken to implement and the sacrifices made in the process.

Therefore, it is important to identify the major economic, environmental, social and other factors
a project may influence directly or indirectly. For instance, introducing a coal-fired power plant
in a location previously supplied with power over long transmission lines at great cost would
introduce economic benefits in terms of lower power costs, higher supply reliability and local
employment at the power plant and support activities. Similarly, economic costs might include
the use of local land for use of the power plant and coal handling or storage activities, air
pollution from both the plant and coal handling, ground water and soil pollution from both the
plant and coal handling, ground or storage activities, air pollution from coal washing and run-off,
temperature (heat) pollution from heat rejection of cooling water, congestion of roads and or rail
corridors, reduction of investment capital for other projects, commitment of local consumption,
and various other indirect costs. Some of the local costs are usually hidden under various
concessions given to public development projects, such as capital generation by use of tax-free
bonds, use of public land subsidizing local development constructions, etc.
The net benefits equation can be written as:
NB = α ( βγδ X −βM−γδ d )
Where α = weighing factor for exchange rate stability;
β = weighing factor for impact of protective practices;
γ = weighting factor for labor availability
δ = weighting factor for adequacy of support services
UNIDO - Guidelines for Project Evaluations released during early 70s
Fundamental focus of these guidelines is net increase in the aggregate consumption of an
economy due to the project output. Other subsidiary objectives are noted as:
Changes in the distribution of domestic income;
Changes in the savings and investment levels of a community;
Change in the labor market due to project implementation, etc.
Therefore, to survey the above objectives, the guidelines advocate the following steps for the
appraiser.
Identification of direct and indirect costs and benefits that affect the aggregate
consumption of an economy;

52
 The consumption of the shadow prices of labor, foreign exchange, and investment;
The estimation of the social rate of discount, and also of relative weights to be attached to
the net benefits accruing to various groups in the economy if redistribution of income is
considered as separate objectives.
In a nutshell, the UNIDO guidelines base its arguments on:
The financial profitability of a project;
The net effect of costs and benefits on the economic situation of a country;
The opportunity cost of the investment;
The financial profitability which is similar to that used in normal commercial ventures based on
Discounted Cash Flow techniques and other standard financial management tools;
The concept of shadow prices that are associated with various types of goods and services dealt
in the project.
Diamond – Mirrleess Approach
Little and Mirrlees, through their pioneering efforts, interpret the problem of Least Developed
Countries (LDCs) as follows:
In an LDC, the foreign trade sector is considered as the public sector program. The public sector
projects are to be efficient by setting their prices equal to marginal costs. (P = MC – leaving to
room for loss). Under such a threshold pricing level only world prices should be used as ‘shadow
prices’. Distribution and efficiency be the twin important objectives of a government policy that
affects project performance. Therefore, shadow prices give risk to effect on social welfare of a
small change in quantity of an input or output. Its value depends on the welfare function being
used and the constraints imposed.

Rationale for Using World Prices as ‘Shadow Prices’

While considering shadow pricing philosophy, commodities are classified into four:
1. Traded goods for which the elasticities of demand and supply in the market are infinite;
2. Traded goods which are having definite elasticities of demand and supply in the global
markets;
3. Non-traded goods that are not being traded and will never be traded provided optimal trade
policies are employed by the economy;
4. Potentially traded goods that are not presently traded but can be traded if the trade policies
are optimal.
In all the above cases, world prices are recommended to be used as shadow prices since domestic
pricing policies keep changing.
The crux of the Diamond and Mirrlees approach is that, application of world prices as shadow
prices helps offset the fluctuations in domestic prices and justifies the project from the
economy’s point of view. They emphasis productive efficiency, trade efficiency, and optimal
operations are the key issues. This depends on the existence of optimal commodity taxes without
which the exceptions to the rule of using world prices would disappear.

3.6. Other feasibility issues

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 Ecological Feasibility
We have discussed Environmental Impact Analysis under the Technical analysis. When there are
serious ecological implications, it is worthwhile to have a separate and full-fledged ecological
feasibility. Ecological consideration is another issue to be covered in feasibility study. In recent
years, environmental concerns have assumed a great deal of significance especially for projects,
which have significant ecological implications like power plants and irrigation schemes, and for
environment polluting industries (like bulk drugs, chemicals and leather processing). The
concerns that are usually addressed include the following: What is the likely damage caused by
the project to the environment? What is the cost of restoration measures required to ensure that
the damage to the environment is contained within acceptable limits?
Legal and Administrative Feasibility
Legal and administrative feasibility is another element of the study. Clearances and Approvals:
Setting up of an industrial unit requires the entrepreneur to obtain a number of clearances and
approvals regarding land use, pollution control and safety. In this regard, you would be required
to interact with the local government authorities. Certain products may require specific
clearances from the relevant departments/authorities. Those are the issues we address under legal
and administrative clearance.

UNIT FOUR
PROJECT PLANNING

Introduction

Project Planning is foreseeing with blue print towards some predicated goals or ends. Project
plan is a skeleton which consists of bundle of activities with its future prospects; it is a guided
activity. It is a plan for which resources are allocated and efforts are being made to commence
the project with great amount of preplanning, project is a way of defining what we are hoping to
do about certain issue. The project alone is not responsible for what happens during the course of
a planning. Project is a final form of written documents that guides us as to what steps need to be
taken next.

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4.1 Nature of project planning

One cannot conceive a project in a linear manner. It involves for activities, resources, constraints
and interrelationships which can be visualized easily by the human mind and planned informally.
However, when a project crosses a certain threshold level of size and complexities, informal
planning has to be substituted by formal planning. Besides that it is an open system oriented
planned change attempt which has certain parameters and dimension. So, the need for formal
planning is indeed much greater for project work than for normal operations. The pre-defined
and outlined in detail plan of action helps those manners to perform their task more effectively
and efficiently. There are always competing demands on the resources available in a region or a
country because of the limited availability and ever expanding human needs. Planning for the
optimum utilization of available resources becomes a pre requisite for rapid economic
development of a country or a region. Project planning makes a possible to list out the priorities
and promising projects with a view to exercising national choice among various alternatives
available. It is a tool by which a planner can identify a good project and to make sound
investments decisions.
4.2. Need for project planning

One of the objectives of project planning is to completely define all work requested so that it will
be readily identifiable to each project participant. Besides that there are four basic reasons for
project planning: To eliminate or reduce uncertainty, to improve efficiency of the operation, to
obtain a better understanding of the objectives, to provide a basis for monitoring and controlling
work.
4.3. Functions of project planning

The following functions are to be performed carefully in the Project Planning process. It should
provide a basis for organizing the work on the project and allocating responsibilities to
individuals. It is a means of communication and co-ordination between all those involved in the
project. It induces the people to look ahead. It instills a sense of urgency and time consciousness
It establishes the basis for monitoring and control. In planning a project, the project manager
must structure the work into small elements that are: Manageable, Independent, Integrated and
Measurable in terms of progress. Project planning must be systematic and flexible enough to
handle unique activities, disciplined through reviews and control and capable of accepting
multifunctional inputs.

4.4. Steps in project planning

Planning decisions involves a conscious choice or selection of one alternative from among a
group of two or more alternatives. The three main steps involving project planning decisions are:
Identifying alternative ways of action which are relevant to the decision to be made, Defining
each of the alternatives. Hence, the definition involving a determination of consequences or
impact of each of the proposed alternatives, and Making a choice among the alternatives i.e., one
has to make a decision with maximum input, feedback and participation of superiors as well as

55
subordinates. Planning is a systematic attempt to achieve a set of goals within the specified time
limit under the constraints of available resource restrictions involving the least sacrifice. Broadly
speaking planning involves two differences methodologies:

4.5. Planning by incentive and Planning by direction

Planning by incentive mainly depends on the controlling of economic tools to push economic
resources towards the attainment of set goals within the specified period. Planning by direction
gives more emphasis on the direct participation of the central planning authority in the economic
activities to attain the set goal within the estimated time limit. Planning is decision making based
upon futurity. It is a continuous process of making entrepreneurial decisions with an eye to the
future, and methodically organizing the effort needed to carry out these decisions. This type of
well structured project plan helps to establish an effective monitoring and control system.
Project Planning Structure
The various activities involved in Project planning is given in the following chart as Project
Planning Structure.

Work Description and Instruction Net work Scheduling

Project Objectives Master Schedules
Management Decision making Budgets
Reports Time/Cost Performance

4.6. Planning and decentralizing

The different way of allocating the activities of a project are important means of delineating
various degrees of decentralization. These are three main ways in which project planning can be
decentralized into manageable divisions viz, Project planning by subject, Project planning by
type of plan and Planning in phases
1. Planning by subject is a simplest way of dividing the powers of planning. The planner takes
decision on related operation and planning by subject. He plans, decides and directs the part
of plan. He is the sole in charge of the plan from beginning to final completion.
2. Planning by type of plan broadly defines premises and assumptions leaving the detailing to
be done by persons at the grass root level of planning. Generally such cases involve decisions
which are routine and involve a lower degree of professional and financial risk.
3. Planning in phases - are designed by several individuals who participate at the formulation
stage. The level of people involvement is directly related to the phase and the degree of risk
involved.
4.7. Areas of project planning
Comprehensive project planning covers the following area; planning the project work: the
activities relating to the project must be spelt out in detail. They should be properly scheduled
and sequenced.

56
 Planning the manpower and organizations: The manpower required for the project must
be estimated and the responsibility for carrying out the project work must be allocated.
 Planning the money: the expenditure of money in a time-phased manner must be budgeted
 Planning the information system: The information required for monitoring the project must
be defined

4.8. Types of project plan

The planning process can be done in different ways depending on the type of plan. They can be:
a) One shot or single use plans and
b) Standing or Standard use plans
Single use plans: It includes programs schedule and special ways of operating under particular
circumstances. Single plans are meant as objectives which centre on focused and desired results.
It can also be known as short term plans, to deal with the specific problem for specific place with
prescribed time limit.

Standing plans: Standing plans are those plans which include policies, standard methods and
standard operation, procedures. They are designed to deal with recurring problems. It may be
treated as standard document to be used in different plans to deal with a set of problems. The
design procedure and steps are already described. It may require adjustment considering the unit
of operation.

4.9. Project objectives and policies

Project planning begins with the end result, the goal and works backward. Often the focus of
project planning is on questions like who does what and when before such operational planning
is done, the objectives and policies guiding the project planning exercising must be articulated. If
the project team lacks a clear goal, even excellent skills and the best equipment will not enable
the team to do a good job. Well defined objectives and policies serve as the framework for the
decisions to be made by the project manager. Throughout the life of the project, he has to seek a
compromise between the conflicting goals of technical performance, cost standard and time
target. A clear articulation of the priorities of management will enable the project manager to
take expeditious actions.

An effective project goal has the following characteristics. These characteristics are captured in
the term SMART, an acronym for the aspects of a goal commitment. These characteristics of a
project goal are specific, measurable, agreed upon, realistic and time framed. The objectives of a
project may be: Technical objectives, Performance objectives, Time and cost goals. Policies are
the general guide for decision making on individual actions. Some of the policies of a project
are: Extent of work given to outside contractors, Number of contracts to be employed and Terms
of the contract etc. Project policies must be formulated on the basis of following principles:
 It must be used upon the known principles in the operating areas;
 It should be complementary for co-ordination
 It should be definite, understandable and preferably in writing,
 It should be flexible and stable,

57
  It should be reasonably comprehensive in scope.

4.10. Tools of project planning

There are different tools available for drawing the project plan in a formal way. They may be
grouped into two categories:
1. Traditional tools and
2. Network analysis.
The common traditional tool is Gantt chart.
4.10.1. Gantt chart
It is the oldest formal planning tool designed by Henry Gantt in 1903. Under this, the activities
of project are broken down into a series of well-defined jobs of short duration whose cost and
time can be estimated. It is a pictorial device in which the activities jobs are represented by
horizontal bars on the time axis. The length of the bar indicates the estimated time for the job.
The left hand end of the bar shows the beginning time, the right hand and the ending time. The
manpower required for the activity is shown by a number on the bar. An illustrative bar chart is
shown as follows.

The project review dates are indicated by a vertical dotted line and at this time a horizontal line is
drawn beneath each bar to indicate the progress actually made up to that date. The length of the
progress line is then drawn to represent the percentage of the job that has been completed at the
review date. The merits and demerits of Gantt are below:
MERITS: 1. It is simple to understand
2. Is can be used to show progress
3. It can be used for manpower planning

DEMERITS: 1. It cannot show inter-relationship among activities on large complete projects

2. There may be physical limit to the size of the bar chart
3. It cannot easily cope with frequent changes or updating

58
 4.10.2. Network techniques

The foundation of the approach came from the Special Projects Office of the US Navy in 1958. It
developed a technique for evaluating the performance of large development projects, which
became known as PERT - Project Evaluation and Review Technique. Other variations of the
same approach are known as the critical path method (CPM) or critical path analysis (CPA). The
heart of any chart is a network of tasks needed to complete a project, showing the order in which
the tasks need to be completed and the dependencies between them. This is represented
graphically:

Example of an Activity Network

The diagram consists of a number of circles, representing events within the development
lifecycle, such as the start or completion of a task, and lines, which represent the tasks
themselves. Each task is additionally labeled by its time duration. Thus the task between events 4
& 5 is planned to take 3 time units. The primary benefit is the identification of the critical path.
The critical path = total time for activities on this path is greater than any other path through the
network (delay in any task on the critical path leads to a delay in the project). Tasks on the
critical path therefore need to be monitored carefully. The technique can be broken down into 3
stages:
1. Planning: (identify tasks and estimate duration of times; arrange in feasible sequence; Draw
diagram).
2. Scheduling: (Establish timetable of start and finish times).
3. Analysis: (establish float; Evaluate and revise as necessary).

The slack time or Total float for an activity is the time between its earliest and latest start time,
or between its earliest and latest finish time. Slack is the amount of time that an activity can be
delayed past its earliest start or earliest finish without delaying the project. The critical path is the
path through the project network in which none of the activities have slack, that is, the path for
which ES=LS and EF=LF for all activities in the path. A delay in the critical path delays the
project. Similarly, to accelerate the project it is necessary to reduce the total time required for the
activities in the critical path. Activity is an individual task needed for the completion of a
project. Duration is the length of time (hours, days, weeks, months) needed to complete an
activity. Float is the amount of time that an activity can slip past its duration without delaying

59
the rest of the project. Free float is the excess time available before the start of the following
activity.

Diagram Symbols

To Produce the Diagram

There is a single start and end event;
Time flows from left to right (so does the numbering sequence);
Events are given a unique number (activities then have a unique label i.e. head & tail event
numbers);
The network can then be drawn taking into account the dependencies identified;
Working from the start event forward, calculate the earliest times, setting the earliest time
of the first event to zero. Add the job duration time to the earliest event time to arrive at the
earliest time for the successor event. Where the successor has more than one activity
dependent on to the latest time is entered;
Workings from the finish event backwards, calculate the latest times. Set the latest time to
the earliest time for the finish event. Subtract job duration from the latest time to obtain
predecessor latest event times. Where the predecessor event has more than one arrow
emanating from it enter the earliest time;
Event slack is calculated by subtracting the earliest event time from the latest event time;
Critical path(s) are obtained by joining the events with zero event slack.

Dummy Activity: An imaginary activity that requires no time and is used to correctly maintain
the appropriate precedence relationships.

60
Critical path is the longest-duration path through the network. The significance of the critical
path is that the activities that lie on it cannot be delayed without delaying the project. Because of
its impact on the entire project, critical path analysis is an important aspect of project planning.
The critical path can be identified by determining the following four parameters for each activity:
Earliest Start time (ES): the earliest time at which the activity can start given that its precedent
activities must be completed first.
Earliest Finish time (EF), equal to the earliest start time for the activity plus the time required
completing the activity.
Latest Finish time (LF): the latest time at which the activity can be completed without delaying
the project.
Latest Start time (LS), equal to the latest finish time minus the time required to complete the
activity.Worked Example

List of activities for the network:

Task Location Dependent on Duration

A - 3
B - 6
C - 3
D A 5
E C 2
F B, D, E 6
G A 9

Calculation of Earliest Time:

Use the instructions presented in section 3.2 and the following diagram.

Calculation of Earliest Start Time

What is the earliest time for event 4?

Solution to Calculation of Earliest Start Time for Event 4

61
 Preceding
Activity Duration Calculated ET
ET
2 5 3 5 8

1 4 0 6 8

3 4 3 2 5

So the earliest start time for event 4 is day 8 (by this time all the preceding activities will have
been completed). What is the earliest time for event 5? If you are unsure, the answer is explained

Solution to Calculation of Earliest Start Time for Event 5

This solution builds on the previous one - the earliest start time for event 4 was day 8 therefore...
Preceding
Activity Duration Calculated ET
ET
2 5 3 9 12

4 5 8 6 14

So the earliest start time for event 5 is day 14 (by this time all the preceding activities will have
been completed).
Calculation of Latest Time:
Use the instructions presented above and the following diagram.

Calculation of Latest Start Time

What is the latest time for event 2?

62
Solution to Calculation of Earliest Start Time for Event 5
This solution builds on the previous one - the earliest start time for event 4 was day 8 therefore...
Activity Preceding ET Duration Calculated ET
2 5 3 9 12

4 5 8 6 14

So the earliest start time for event 5 is day 14 (by this time all the preceding activities will have
been completed).
What is the latest time of event 1? If you are unsure, the answer is explained
Solution to Calculation of Earliest Start Time for Event 5
This solution builds on the previous one - the earliest start time for event 4 was day 8 therefore.

Activity Preceding ET Duration Calculated ET

2 5 3 9 12
4 5 8 6 14
So the earliest start time for event 5 is day 14 (by this time all the preceding activities will have
been completed).
Drawing the Critical Path:

Drawing the Critical Path

Analysis of the network allows the 'float' to be calculated, this is essentially the amount of time
an action can be delayed without delaying the overall project. Activities on the critical path must
be monitored very carefully.

4.4. The Logical Framework Approach in Project planning

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4.4.1 Overview of the logical framework approach
Logic is a science that deals with the rules and tests of sound thinking and proof by reasoning
The Logical Framework is a simple tool for organizing thinking, elating Activities to expected
results, separating means from ends, setting performance indicators, allocating responsibilities,
communicating concisely & unambiguously. The Logical Framework or Log Frame Matrix is
one tool, amongst others, used for project planning & management (M&E). The Log Frame
Matrix (LFM) displays the casual relationship between the project inputs & outputs and
demonstrates how the outputs will lead to attainment of objectives and then contribute toward the
ultimate goal. A useful tool for planning more complicated projects is the logical framework
approach. The idea of this tool is that you identify all the main elements of a new proposal, and
examine how they fit together. The logical framework requires that you write down the planned
activities in a certain order that helps you to check whether one step will lead to the next, note
any assumptions that you are making, and examine whether or not they are true, identify
indicators of progress.

By Using LFM project designers/planners, managers and evaluators can define a project
hierarchy of objectives and the necessary and sufficient conditions required to achieve the next
higher-level objective/s/. The standard model log frame is a 4×4 matrix which vertically and
horizontally summarizes what the project intended to achieve, from the level of goal down to
specific activities, the performance questions and indicators that will be used to monitor progress
and evaluate overall achievements, how these indicators will be monitored or where the data can
be found, the assumptions behind the logic of how activities will eventually contribute to the
goal, plus associated risks for the project if assumptions turn out to be incorrect.

The Vertical Logic (Project Logic) is a set of means and ends interrelated in a logical fashion and
intended to define the way the project inputs are transformed into development goals. It is based
on the assumption that the achievement of ultimate project objectives (goal) proceeds through a
hierarchy of sub-objectives linked by a set of hypotheses: If we provide the following inputs and
carry out the following activities, then we produce the required outputs, If we produce those
outputs (product &/or service), then the purpose will be achieved. If the purpose is achieved,
then the goal will be realized. The statement of goal, purpose, outputs & activities (inputs)
frequently are subject to different interpretations by those involved with the project. Hence, the
HL enables to state the evidence that will signal success or failure, and the means it can be
verified. It lists the Objectively Verifiable Indicators of progress (OVIs), the Means of
Verification (MOV) and the Important Assumptions.

4.4.2 List the activities

The first step is to think of a project as a series of activities where one step leads on to the next.
The way this is normally shown is to place inputs at the bottom of the page and then to work up
towards the goal written at the top. This concept is illustrated in the following diagram where
one starts with "Inputs" at the bottom and works upward.

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Example: Emergency Project
GOAL Communities and individuals who are better able to prepare and
respond to local disasters
OBJECTIVE Widely disseminated and heeded public information campaign on how to
locally prepare and respond to disasters
OUTPUTS work-plan reflecting roles, responsibilities and a time line for action

ACTION Planning the disaster awareness public information campaign

INPUTS Volunteers, funds, materials, research on most vulnerable

4.4.3 Examine assumptions (conditions of achievement)
Whether actions lead to the desired results, depends on whether our planning assumptions are
correct. In the above example, the input "Volunteers" will only contribute to the action
"Planning the disaster awareness campaign," if our assumption about the skills and commitment
of volunteers holds true. Otherwise the action may not occur.

4.4.4 Indicators of progress

The full version of the logical framework as a planning tool also includes the indicators of
progress that you will look for once you start to implement your plan. Some examples of
indicators are given below.

4.4.5 Budgets
The next step in resource allocation is the development of a budget for each important element of
the program. Simple, accurate systems that improve budgeting and cost control are crucial.
Whatever approach is used, a budget must be flexible and anticipate inflation of costs. Many
projects experience difficulty with monetary control and have trouble accounting for funds.
Usually this is because the project has not specified the accounting system to be used from the
outset or the system chosen is not adaptable to the project situation. For example, during disaster
times, good field accounting requires a simple system that is easy to use, easy to carry, and
places the emphasis of trust on the user. It also requires training in how to use the system before
disaster strikes. Field representatives, especially in the emergency, must have an accounting
system that recognises the need for flexibility and simplicity. Several agencies have recently
begun to use simplified field-account books that have built-in impression pads, so that duplicate
or triplicate records can be prepared and maintained. This innovation reflects the agencies'
awareness that a disaster creates special accounting needs. There is a close relationship between
budgeting as a planning technique and budgeting as a control technique. In this section we are
concerned only with the preparation of budgets prior to operations. From this perspective,
budgeting is a part of planning. With the passage of time and as the organization engages in its
activities, however, the actual results will be compared with the budgeted (planned) results. This
analysis may lead to corrective action. Thus, budgeting can also be viewed as a method for
evaluating and coordinating the efforts of the organization.

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Assumptions: The mere fact that inputs are available, however, and that activities are performed
does not guarantee the production of outputs. The resources must be properly managed to
perform the right activities. Furthermore, management could be prevented from producing the
outputs if uncontrollable circumstances prevailed. Similarly, producing the outputs does not
ensure that the desired effect will follow. This relationship is based on the best judgment of the
planners and it may not be right. Besides, if this judgment was right, extraordinary
circumstances may prevent the production of the desired effect. Good project design requires that
project hypotheses and relevant assumptions must be clearly identified.

UNIT FIVE

PROJECT IMPLEMENTATION AND FINANCING

Time for action now! You will now hold a formal kick-off meeting to start the execution phase
of your project during which you will direct your team’s activities in order to produce the agreed
upon deliverables as detailed in the project plan.

5.1 Essential of project administration

For a company executing projects either regularly or for the first time it would be necessary for
the chief executive to issue what may be called project charter. It must define the project scope,
the project goals, name and authority delegated project manager, project reviewing authority and
request co-operation of all concerned in the execution of the project. An elaborate effort in this
direction may produce what is known as a project manual. To demonstrate the project manager’s
authority in a simplest and quickest way it is essential to develop a proper organization chart.

There are two systems for the management of project and they are: Project work system and
Project control system. Project work system can be designed by developing and preparing the
following tools: Work breakdown structure, Project execution plan and Project procedure manual

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etc. Similarly for effective project control system it is essential to design the tools such as project
planning, project scheduling and project monitoring.

5.2. Factory Design and layout

In creating a factory, an entrepreneur creates something which is attractive, useful and ingenious
from material resources which lack the dimension of targeted benefits. For this, the entrepreneur
uses his skills, abilities and strategies to combine a variety of material and human resources.
These potential resources manifest themselves in the selection of the factory location, in planning
and constructing the factory building, in procuring and installing machinery and equipment, in
putting up other production facilities and auxiliary services, and in recruiting and selecting men
of competence to use the physical resources for the purpose of producing goods. The term
factory design refers to the plan for a particular type of building, arrangement of machinery and
equipment, and provision of service facilities, lighting, heating, ventilation, etc. in the building.
Importance of factory design

Factory design and layout of the factory are significant aspects of the factory organizations. They
have direct relationship with the process of manufacturing, productively and value of the
product. It also influences the operational costs of the enterprise. It also boosts the morale of
workers and ensures maximum supervision.
5.3. Factors affecting factory design
The following factors influence the design of a factory: Location
1. Nature of the manufacturing process
2. Plan Layout
3. Functional Smoothness
4. Material Handling and movement
5. Cost of Building
6. Lighting, Ventilation and Service Facilities
7. Nature of Product
8. Future expansion, modernization etc.
9. Projecting the image of a factory.

The factory design and layout should be flexible so that it may be adapted easily to technological
change, modernization, diversification and expansion with minimum cost and time. Any
planning exercise requires of the planner a good knowledge of what is involved in the activity
concerned, such as the nature of the materials to be handled, their quality and the quantity, the
processes they have to be subjected to, inspection and quality control at various stages, assemble
procedures, packing etc. He could also know the sequence of operations. He should look ahead
beyond the immediate future and anticipate changes, modifications, additions, deletions etc.,
which may be forced upon his organization as a result of expansion, obsolescence,
diversification or any other reasons. Having anticipated these, provision should be made to
accommodate such changes.

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While working on factory layout plan, a very important aspect to be kept in mind is the fact that
the movement of materials from one stage of manufacture to the next should be minimal. For
this, this movement has to be streamlined. If this is not initiated, it will result in the wastage of
human effort and time, both of which have a telling effect on the efficiency of an organization
and the cost of production. In industrial life, the economic and efficient usage of all the factors of
production is the key to profitability and the ability to compete in the market.
a. Plant layout

A plant layout is “a floor plan for determining and arranging the desired machinery and
equipment of a plant, whether established or contemplated, in the one best place to permit the
quickest flow of material at the lowest cost and with the least amount of handling in processing
the product from the receipt of the raw materials to the shipment of the finished products”.
During the course of appraisal, considerable emphasis is laid on a proper and scientific plant
layout as once the plant and equipment are erected, it becomes difficult and costly to change at a
later stage. The following aspect is kept in view while evaluating the plant layout: Production
technology and product – mix, Efficient, economic and uninterrupted flow if human and
materials resources, Proper space for maintenance, Future expansion/diversification of the
project, Safety precautions particularly when explosive or bulky material is required to be
handled, Proper lighting and ventilation, Proper layout of utilities and services and provisions for
effluent disposal, where necessary, Effective supervision of work, and Proper storage and
stacking space, where required. The success of an enterprise to a greater extent depends upon the
factory design and layout. The location, layout, amenities will influence productivity and
facilitate better management. More importantly, the efficiency of the production flow depends
largely on how well the various machines, production facilities and employee amenities are
located in a plant.

b. Project design
Project design is the first stage in the execution of the project. Project design is concerned with
developing project scheduling techniques and also drawing the schedule for implementation of
the project. This is more or less a time frame for each phase in the project development. It
includes major items of project implementation such as finding of location, construction of
building, procuring plant and machinery and finally executing the production program. Project
design along with network analysis helps to develop work plan of the project and present it in the
form of diagrams representing duration of time for each work and adjustment of the time
schedule framed with reference to the problems that usually arise in the project execution.
Project design is useful to the entrepreneurs in the following ways:
 It gives a comprehensive idea about the entire project – described in every phase along with
the time schedule within which it has to be completed.
 It is a diagrammatic representation of work plan devised to execute the project, after
adjusting the usual delays that may arise4 in the implementation fo the project.
 The various constituent continent activities of the project are narrated in sequence to
highlight the various phases of the project.

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 It defines the individual activities which go into the corpus of the project and their
interrelationship with each other.
 It enables to identify and know of events which must take place for the successful
completion.
 It helps entrepreneurs in coordinating project activities.
 It serves as an effective tool of planning and implementation of a project
 It helps managers to plan the project economically.

With the advent of the computer and large-scale introduction of computer based planning and
control, network analysis can considerably enhance managerial effectiveness in the context of
any time bound action programs. Computer-based network analysis can handle these problems
economically and efficiently. The binding condition is, however, that management is serious in
effecting economies in different areas of activities; and activities and events are closely watched
for initiating corrective action in proper time. The main task of a project manager is to design
systems and manage through them. A business system refers to the total picture of men, machine,
materials and paperwork involved in the implementation of any phase of a project. System has a
planned sequence of operations for carrying out a recurring work involved in a system with
family and consistently which is called a procedure. The first step in system design for project
management is to conceive the total physical system and its natural modules. In the next step, the
connection between these modules has to be identified. Finally, a control system using
information as the media has to be developed for self control as well as forced control of the total
project. Project management system is mainly constituted by project work system and project
control system.

If the project is organized on the lines of process units or technological systems, coordination
will be extremely simplified and cooperation would be almost assured. Therefore, better result
can be obtained if the design of work is systematized. The process of systematization starts with
the development of a work breakdown structure.

c. Work breakdown structure (wbs)

Work breakdown structure, WBS in short, is a technique which breaks down a work into its
components and at the same time establishes the connections between the components on the
lines of a family tree. The work breakdown structure represents a systematic and logical
breakdown of the project into its components parts. It is constructed by dividing the project into
its major parts, with each or these being further divided into sub-parts. This is continued till a
breakdown is done in terms of manageable units of work for which responsibility can be defined.
Thus the work breakdown structure helps in: Effective planning by dividing the work into
manageable elements which can be planned, budgeted, and controlled. Assignment of
responsibility for work elements to project personnel and outside agencies. Development of
control and information system. Work breakdown structure and Project organization. The project
organization represents formally how the project personnel and outside agencies are going to
work. The work breakdown structure defines what work is to be done in a detailed manner. To

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assign responsibility for the tasks to be done, the work breakdown structure has to be integrated
with the project organization structure.

d. Project Execution Plan (PEP)

Project execution plan (PEP) refers to that exercise of matching the project hardware and
software with the executing agencies to that a viable work system emerges. Project execution
plan, in fact, includes four sub-plans. There are contracting plan, work packaging plan,
organization plan and systems and procedure plan. Project execution plan is a strategic plan – it
does not deal with the operational details of building a project. The operational details are
covered in a network plan which is developed later after the project execution plan is approved
by the owner’s plan for project execution and, therefore, it must from the basis for development
of all operational plans including network plans.
i. Contracting plan
This is the first step in the preparation of a project execution plan. Owners invariably need some
agencies with which they can share responsibilities. In the interest of developing self-regulation
systems it would be necessary to contract out those areas where the owner’s company does not
have inherent competence. At this phase of the project, the following issues must be examined:
Which type of contract to choose, which type of reimbursement to make, what conditions of
contracts to stipulate, and what payment terms to offer, are all issues that must be examined
during this phase of the project. Contract planning would involve examination of a number of
alternatives since there are so many possible arrangements in terms of sharing of responsibilities,
types of reimbursements and general conditions of contract.

ii. Work Packaging Plan

Work packing plan will be the next important step in the preparation of the project execution
plan. A work package in a project is the smallest division of work where it still retains the
characteristics of a project. This when a project is progressively divided into systems and the
system into subsystems, a stage is ultimately reached where further division into components
will strip it of its multi-disciplinary character – the work at that stage can be consideration these
packages, grouping them or keeping them as they are, in order to from viable contracts. Work
packaging enables better organization and management of projects. A work package or several
work packages may be assigned to one individual who could serve as a mini project manager.
This enables prioritization of the entire project execution effort which, in turn, ensures the closest
possible adherence to time, cost and technical performance targets. Work packaging can also
ensure that all agencies in a project think and channel their effort in one direction, i.e. towards
the completion of the packages only. Thus, design engineers, procurement engineers and
construction engineers will then give priority to their work in relation to a work package and not
according to functional convenience. Fulfillment of the requirements of a work package will
alone be considered and achievement and not the mere volume of work completed. This will lead
to a well-coordinated completion of the project. Thus, the contracting plan and work packaging
plan together produce a list of contracts with the scope of work defined in terms of self-contained
work packages.

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 iii.Organization plan

Having decided the number of contracts and their scope, the owner is now in a position to set his
own house in order. The owner can deliberate on the form of organization to be adopted so that
the interest of the project is best served. Several standard organizational arrangements are
possible, ranging from pure functional organization to pure project zed organization and an
owner has to choose his own arrangement depending on the project size, location, complexity,
work packages, type and number of contacts. It should be however, noted that an organization
can become more self-regulation if it is on taskforce or project zed. The participants in such
cases fully identify themselves with the project objectives and would regulate their behaviors on
their own, as the situation may demand.
iv. System and procedure plan
The last section of the project execution plan deals with system and procedure. A heavy
emphasis has to be placed on routine system and procedure so that no intervention is required in
the day –to-day operation of a system. There are at least eight routine sub-system of project
management for which appropriate procedures can be conceived right at the start of the project
implementation. These eight sub-systems are:
1. Contract management
2. Configuration management
3. Time management
4. Cost management
5. Fund management
6. Materials management
7. Communications management

5.4. Project execution system

Once these systems and procedures have been developed for the project, it is the duty of the
project administrator to set for smooth take off. It requires proper project execution systems
which should be more concerned about external intervention for survival than on its internal self
regulating capability. The external intervention will be of the following forms: Project direction,
project co-ordination, project communication, project organization and project control. These
terms are often construed as actions for getting results. Too often the terms are used
interchangeably to mean management. Therefore, for the successful execution and administration
of project requires direction, organization, co-ordination, communication and control all at the
same time but in varying proportion. We shall discuss the nature of significance of project
direction, communication, co-ordination in this lesson.

a) Project direction

Project direction refers to the use of authority to channel the activities of the project on desired
lines. During the initiation of start-up period of the project this direction shall be provides by
the project manager. But once the project inters the production period direction will be exercised

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by other members of the project organization of else the project will stall. Project
initiation/start-up: The need for project direction, as mentioned before, is maximum at the time
of start-up of implementation. The project manager during this period needs to provide directions
relating to: Scope of work, Specification of results of completed work, Basis of work, Division
of work – imported vs. indigenous, departmental Vs. contract etc., Schedule of work, Budget of
work, Systems and procedure for work, Co-ordination of work, Authority and accountability for
work, Control of work. The success of a project is heavily dependent on team work. All the items
from 1 to 10 are finalized with the involvement of project participants or else the directives will
appear authoritarian, and will unnecessarily invite opposition. If the directions can be formulated
through a participative approach, the some can be issued formally in the name of a project
manual with instructions for strict adherence to the same. Direction, during the project initiation
period, means not simply giving a push to the project; the direction issued at this stage will, in
fact, shape the destiny of the project.

Direction during production stage: Direction after the initiation period can be considered to be of
the administrative variety. Invariably, after the start-up period, direction is provided of a case-to-
case basis through formal documents or personal contacts. A group meeting may also be used for
this purpose. On-going directions may refer to approval of work schedules, detailed budgets,
specification, purchase orders, work orders, construction drawings, travels, miscellaneous
expenses, changes in baseline etc.

Ongoing direction

Project start-up, design review, purchase order and work orders are on-time directions. But a
project will require only when unforeseen events occur, directors otherwise will require to be
provided when problems occur during project execution. In either case, a decision has to be
made as to what should be done and the same should be authorizing for implementation. Thus,
decision making and direction are part of every-day function of any manager. Routine directions
involve five steps: Understanding the decision environment, Establishing the decision
alternatives, Evaluation of the alternatives and selection of course of action, Communication the
decision to the individual or agency who is to implement the decision and Checking up if the
decision is working so that the decision could e steered by the consequences.
b) Communication in a project

For ongoing direction a two-way communications system is essential. For that matter, the entire
process of direction, co-ordination and control in a project revolves around communication. It is
often concluded that projects are run by communications. In fact, most of management problems
are caused in whole or in part by faulty management communications. Communication has two
dimensions physical and mental, passing a memo, drawing, data, instruction, information, etc.
are the physical aspects of communication; understanding the same in the light of role
expectation, empathy, preconceived notion, language barriers, listening skills etc., are the mental
aspects of communication. While physical aspects of communication can be easily achieved, the
mental aspects often present barriers to communication. Prefer communication requires a

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conscious and determined effort. Affective communication in a project would require a
communication oriented action plan. The actions that may be taken in this regard are as below:

1. Organization or work, people and work place with communication orientation.

2. Selection and installation of appropriate communication devices
3. Project review and co-ordination meeting at predetermined frequency
4. Predetermined document distribution matrix.
5. Establishing healthy attitude towards communication by appropriate directions.
6. Installing structured reporting systems
7. Implementing routing communication systems and procedures
8. Establishing a control room
9. Using desk-top computers for communication.
Hence, in any action plan, organization of work and people is a basic project management
requirement. It is suggested that this must receive a communication orientation.
c) Project co-ordination
Co-ordination can be defined as the effort to bring parts into super relation for harmonious
functioning. A well coordinated project is as pleasing as a price of music. Co-ordination in a
project gains its importance because of the need for simultaneous working of number of
activities. Therefore, one cannot proceed simply with the execution of a project without proper
co-ordination. Home, it is the important task in the effective project execution and
administration.

Project co-ordination procedure: Co-ordination basically addresses itself to two aspects of

work –physical matching and timing. The physical aspect would refer to what is to be done, how
much is to be done and who to do it; the timing aspect would refer to when these will be done. A
schedule document which deals with all these aspect of work should be prepared to enable
proper co-ordination. The word breakdown structures provide the basic frame work for both
physical ant time co-ordination preparation of work breakdown structure, structuring the
organization, establishing a project procedure manual, housing people under one roof wherever
possible. Similarly, development of project schedules coordinated with break down structure
and organization chart sets the stage for the time co-ordination. Once the stages are so set, the
day to day co-ordination in a project is ensured through Squad check, Co-ordination meeting and
communication. A project is a group effort and in group there will always be differences of
option. But coordination is not merely smoothing out differences; it is re-integration of the parts
into a whole facing into account the subdivided functions and their interest.

1.5. Pre-requisites for successful project implementation

Time and cost over-runs of projects are very common in practice, particularly in the public
sector. Due to such time and cost over-runs, projects tend to become uneconomical, resources are
not available to support other projects, and economic development is adversely affected. This
helps to minimize time and cost over-runs and thereby improve the prospects of successful
completion of projects. A lot of things can be done to achieve this goal; the most important ones
appear to be as follows: adequate formulation, sound project organization, proper

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implementation planning, advance action, timely availability of funds, judicious equipment
tendering and procurement, Better contract management and Effective monitoring.
a. Adequate formulation

Often project formulation is deficient because of one or more of the following shortcomings:
Superficial field investigation, cursory assessment of input requirements, slip-shod methods used
for estimation costs and benefits, omission of project linkages, flawed judgments because of lack
of experience and expertise, undue hurry to get started and deliberate over-estimation of benefits
and under-estimation of costs. Care must be taken to avoid the above deficiencies so that the
appraisal and formulation of the project is through, adequate and meaningful.

b. Sound project organization

A sound organization for implementing the project is critical to its success. The characteristics of
such an organization are: It is led by a competent leader who is accountable for the project
performance. The authority of the project leader and his team is commensurate with their
responsibility. Adequate attention is paid to the human side of the project. Systems and methods
are clearly defined. Rewards and penalties to individuals are related to performance.

c. Proper implementation planning

Once the investment decision is taken – and often even while the formulation and appraisal are
being done – it is necessary to do detailed implementation planning before commencing the
actual implementation. Such planning should inter alia, seek to: develop a comprehensive time
plan for various activities like land acquisition, tender evaluation, recruitment of personnel,
construction of building, erection of plant, arrangement for utilities, trial production run, etc.
estimate meticulously the resource requirements (manpower, material, money, etc) for each
period to realize the time plan; define properly the inter-linkages between various activities of
the project; specify cost standards.

d. Advance action
When the project appears prima facie to be viable and desirable, advance action on the following
activities may be initiated: (i) acquisition of land, (ii) securing essential clearances, (iii)
identifying technical collaborators / consultants, (iv) arranging for infrastructure facilities, (v)
preliminary design and engineering, and (vi) calling of tenders
e. Timely availability of funds

Once a project is approved, adequate funds must be made available to meet its requirements as
per the plan of implementation – it would be highly desirable if funds are provided even before
the final approval to initiate advance action. Piecemeal, ad-hoc, and niggardly allocation, with
undue rigidities, can impair the maneuverability of the project team. It is a common observation
that firms which have a comfortable liquidity position are, in general, able to implement projects
expeditiously and economically. Such firms can initiate advance actins vigorously, negotiate
with suppliers and contractors aggressively, organize input supplies quickly, take advantages of

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opportunities to effect economies, support suppliers in resolving their problems so that they can
in turn redound to the successful completion of projects, and sustain the morale of project-related
personnel at a high level.

f. Judicious equipment tendering and procurement

To minimize time over-runs, it may appear that a turnkey contract has obvious advantages. Since
these contracts are likely to be gagged be foreign suppliers, when global tenders are floated, a
very important question arises. How much should we rely on foreign suppliers and how much
should we depend on indigenous suppliers? Over-dependence on foreign suppliers, even though
seemingly advantageous from the point of view of time and cost, may mean considerable
outflow of foreign exchange and inadequate incentive for the development of indigenous
technology and capability. Over-reliance on indigenous suppliers may mean delays and higher
uncertainty about the technical performance of the project. A judicious balance must be sought
which moderates the outflow of foreign exchange and provides reasonable fillip to the
development of indigenous technology.

g. Better contract management

Since a substantial portion of a project is typically executed through contracts, the proper
management of contracts should be done. The competence and capability of all the contractors
must be ensured–one weak link can jeopardize the timely performance of the contract. Proper
discipline must be inculcated among contractors and suppliers by insisting that they should
develop realistic and detailed resource and time plans which are congruent with the project plan.
Penalties – which may be graduated–must be imposed for failure to meet contractual obligations.
Likewise, incentive may be offered for good performance. Help should be extended to
contractors and suppliers when they have genuine problems–they should be regarded as partners
in a common pursuit. Project authorities must retain latitude to off-load contracts (partially or
wholly) to other parties well in time where delays are anticipated.

h. Effective monitoring

In order to keep a tab on the progress of the project, a system of monitoring must by established.
This help in anticipating deviations from the implementation plan, analyzing emerging problems,
taking corrective action. In developing a system of monitoring, the following points must be
borne in mind: It should focus sharply on the critical aspects of projects implementation. It must
lay more emphasis on physical milestones and not on financial targets. It must be kept relatively
simple. If made over-complicated, it may lead to redundant paper work and diversion of
resources. Even worse, monitoring may be viewed as an end in itself rather than as a means to
implement the project successfully.

Effective project management at national level

The effective management of project is essential for the development of economy in as much as
the development itself is the off-shoot of a series of successfully managed projects. This reveals

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that the project management is an extremely important problem area for a developing country
such as ours. Unfortunately many projects experience schedule slippage and cost overruns due to
a number of reasons. To remedy the situation, projects ought to be meticulously planned,
scrupulously implemented and professionally managed to achieve the objective of time, cost and
performance. Modern technique of project management can play a major role in streamlining the
management of projects. Projects management is a complex process bristling with a number of
variables contributing to success in a project. It is not a facile task to ensure overall effectiveness
of the project. Several factors contribute to its success. The project determinants are plenty and
many success of the projects interalia include factors which little or no management control is
possible. Discretionary factors can be controlled either within the project itself or in the larger
system, and the end products serve as the basis for the determination of degree of success.
Factor (Determinants) for effective project Management
The study of factors for effective projects management comprising both internal and external
determinant factors are taken into account. The internal factors are project managers, project
team, project management techniques, project organization structure, project monitor and
evaluation system, use of computers, detailed project engineering know how, management
reporting system, etc.
1. Internal Factors
a. Project Managers:

The project manager is the crux of the coordinating authority with various functional heads.
He/she is the seminal coordinating authority forging a lasting rapport with the financial
institutions, government and statutory bodies, etc. He/she is the main plank and fulcrum of the
project and he is a person who has been associated with the project right from the scratch to the
completion of the project. He play role like a lynch-pin. He/she encompasses into his fold the
whole gamut of the project team and also entire spectrum of clientele contractors and turnkey
consultants. The foremost aim and motto of the project manager is to accomplish the project cost
within the stipulated amount. Hence, it can be observed that the project manager plays a vital
role in the firmament of industrial project.
b. Project Team:
The project team comprises of section heads of production, electrical and mechanical who are
looking after the activities of their respective wings. The project team is a la cricket team where
we could find players adept in bowling, batting and fielding with the result al the players would
put their unstinted and indefatigable effort to translate their action of accomplishing the objective
of the team. For any project, success could be attributed to the able support of all the players and
the project manager would don the role of a captain of the cricket team or of a captain of ship.
c. Project Managerial Techniques:

The project organization structure should be in consonance with the nature of the project, its
complexity, and type of process technologies developed. Centralized policy formulation with
decentralized implementation appears best suited for project management. The organizational
structure should provide for scheduling and monitoring, contract management, materials and

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equipment procurement, on site co-ordination and control and information processing, etc.
Adequate powers should be delegated to enable on the spot decisions and thereby minimize
avoidable delays. The well designed and established project organization structure will effective
project implementation and improve project management performance tremendously.

d. Project Monitoring and Evaluation System:

A well designed and in built project monitoring and evaluation system will minimize project
slippage. A project management information system with the help of computer net works and
methods would enable project monitoring and control at various levels and that would naturally
enhance the project management performance.
e. Use of Computers:

Project management software package are used to meet deadlines, to reduce costs and ultimately
to optimal utilization of resources. They offer services like planning, coordinate and monitor
product launches, plant commissioning, and erection, maintenance, and construction activities.
They also identify crucial problematic areas and sound warnings on possible delays and
contingencies and also to take instant and remedial measures to arrest the lapses before assuming
hiatus in the project management. They generate instant reports in project status, keep track of
project progress and trends to achieve targets and also allocate the resources in order to achieve
realistic goals. Undoubtedly, the usage of computers saves precious time and money. The
application of computers will enhance and uplift the overall project management effectiveness.

f. Management Reporting System:

The management information and reporting systems ensures monitoring or the project progress
and also identifies the specific information requirement of the project. To achieve this objective
every project should develop requisite reporting formats for input and output of data, proper
information flow and communication systems and setting up adequate date processing and
storage systems necessary for the purpose. The well knit management reporting system will go a
long way I assisting speedy implementation of projects’ performance.

2. External Factors
a. Support from financial institutions:

The financial institutions support is an important determinant of project management

performance though achieving the project objectives of time, cost and quality. This study has
grasped the fact that there is average time delay of 6 to 7 months in obtaining finance. The
financial institutions has a role to play in project identification, appraisal, implementation and
monitoring and provision of adequate funds to projects as and when it is required will avoid
delay in implementing the projects.

b. Early Clearance from Government Department:

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The simplification of bureaucratic rigmarole and red-tapism of the government departments in
project approval and sanctioning for public sector projects and liberalization of industrial
licensing, foreign exchange regulation provision, MRTP clearance, environmental clearance etc.
for private and joint sector projects would minimize and reduce the time delay in clearing such
approvals thus ensuring early implementation of industrial projects so as to trigger fillip to the
project management success.

c. Detailed Project Engineering Know-how:

Detailed and scientific projects engineering know-how is sine-quinine to have optimum

utilization of the project cost. The latest development in design and engineering technology
could be applied for cost effectiveness. All these goes to ensure effective project implementation
for improving the performance of the project management.
d. Construction Management:

Construction management plays a unique part in the matter of industrial project management.
The construction management includes under its fold the construction of factory and office
buildings and erection and construction of factory sheds and plant commissioning etc. These
ought to be constructed according to the project schedule so as to minimize project delays.
e. Project Consultants:

Project management consultants are professionally qualified who are fully equipped to perform
services to the project management organization in the entire gamut of erection, commissioning
and implementing the industrial projects. A delay in project consultant’s performance of his hob
would mean procrastination of the project, for which ultimately client suffers more than the
consultants pay a vital role in the various stages of the project right from the stage of
commissioning of the project. He is also abundantly responsible for closely monitoring the
progress of the project. He is also abundantly responsible for closely monitoring the progress of
the project at every phase of the project. The unstinted and unflappable support of the project
consultants would naturally brighten the project’s success.

5.2. Financial management and budget planning for projects

Preliminary and Capital Issue Expenses

Expenses incurred for identifying the project, conducting the market survey, preparing the
feasibility report, drafting the memorandum and articles of association and incorporating the
company are referred to as preliminary expenses. Expenses borne in connection with the raising
of capital from the public are referred to as capital issue expenses. The major components of
capital issue expenses are underwriting commission, brokerage, fees to managers and registrars,
printing and postage expenses, advertising and publicity expenses, listing fees, and stamp duty.

Pre-operative Expenses
Expenses of the following types incurred till the commencement of commercial production are
referred to as pre-operative expenses these include (i) establishment expenses, (ii) rent, and

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taxes, (iii) traveling expenses, (iv) interest and commitment charges on borrowings, (v) insurance
charges, (vi) mortgage expenses, (vii) interest on deferred payments, (viii) start-up expenses, and
(ix) miscellaneous expenses. Pre-operative expenses are directly related to the project
implementation schedule. So, delays in project implementation, which are fairly common, tend
to push up these expenses. Pre-operative expenses incurred up to the point of time the plant and
machinery are set up may be capitalized by apportioning them to fixed assets on some acceptable
basis. Pre-operative expenses incurred from the point of time the plant and machinery are set up
are treated as revenue expenditure. The firm may, however, treat them as deferred revenue
expenditure and write them off over a period of time.

Provision for Contingencies

A provision for contingencies is made to provide for certain unforeseen expenses and price
increase over and above the normal inflation rate which is already incorporated in the cost
estimates. To estimate the provision for contingencies, the following procedure may be followed:
(i) Divide the project cost items into two categories, viz, ‘firm’ cost items and ‘non-firm’ cost
items (firm cost items are those which have already been acquired or for which definite
arrangements have been made). (ii) Set the provision for contingencies at 5 to 10 percent of the
estimated cost of non-firm cost items. Alternatively, make a provision of 10 percent for all items
(including the margin money for working capital) if the implementation period is one year or
less. For every additional one-year, make an additional provision of 5 percent.

Margin Money for Working Capital

The principal support for working capital is provided by commercial banks and trade creditors.
However, a certain part of the working capital requirement has to come from long-term sources
of finance. Referred to as the ‘margin money for working capital’ this is an important element of
the project cost. The margin money for working capital is sometimes utilized for meeting over-
runs in capital cost. This leads to a working capital problem (and sometimes a crisis) when the
project is commissioned. To mitigate this problem, financial institutions stipulate that a portion
of the loan amount, equal to the margin money for working capital, be blocked initially so that it
can be released when the project is completed.

Initial Cash Losses: Most of the projects incur cash losses in the initial years. Yet, promoters
typically do not disclose the initial cash losses because they want the project to appear attractive
to the financial institutions and the investing public. Failure to make a provision for such cash
losses in the project cost generally effects the liquidity position and impairs the operations.
Hence prudence calls for making a provision, overt or covert, for the estimated initial cash
losses.

Means of Finance: To meet the cost of the project, the means of finance that are available
include Share capital, Term loans, Bonds, Deferred credit, Incentive sources, and Miscellaneous
sources.

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1. Share Capital. There are two types of share capital; namely, equity capital (through the
issuance of common stock) and preference capital (through the issuance of preferred stock).
Equity capital represents the contribution made by the owners of the business, the equity
shareholders, who enjoy the rewards and bear the risks of ownership. Equity capital being a risk
capital carries no fixed rate of dividend. Preference capital represents the contribution made by
preference shareholders and the dividend paid on it is generally fixed.
2. Term Loans. They are provided by financial institutions and commercial banks. Term loans
represent secured borrowings which are a very important source (and often the major source) for
financing new projects as well as for the expansion, modernization, and renovation schemes of
existing firms.

3. Bond capital. Bonds are instruments for raising debt capital. The typical example of bonds is
debentures. There are two broad types of debentures; namely, non-convertible debentures and
convertible debentures. Non-convertible debentures are straight debt instruments. Typically they
carry a fixed rate of interest. Convertible debentures, as the name implies, are debentures, which
are convertible, wholly or partly, into equity shares. The conversion period and price are
announced in advance.

4. Deferred Credit. Many a time the suppliers of the plant and machinery offer a deferred credit
facility under which payment for the purchase of the plant and machinery can be made over a
period of time.

5. Incentive Sources. The government and its agencies may provide financial support as an
incentive to certain types of promoters or for setting up industrial units in certain locations.
These incentives may take the form of seed capital assistance (provided at a nominal rate of
interest to enable the promoter to meet his contribution to the project), or capital subsidy (to
attract industries to certain locations), or tax deferment or exemption for a certain period.

6. Miscellaneous Sources. A small portion of the project finance may come from miscellaneous
sources like unsecured loans, public deposits, and leasing and hire purchase finance. Unsecured
loans are typically provided by the promoters to bridge the gap between the promoters’
contribution (as required by the financial institutions) and the equity capital the promoters can
subscribe to. Public deposits represent unsecured borrowings from the public at large. Leasing
and hire purchase finance represent a form of borrowing different from the conventional term
loans and debenture capital.

Planning the Means of Finance

The various means of finance that can be tapped for a project have been described above. How
should you go about determining the specific means of finance for a given project? The
guidelines and considerations that should be borne in mind for this purpose are as follows:

1. Norms of Regulatory Bodies and Financial Institutions. In some countries, the proposed
means of finance for a project must either be approved by a regulatory agency or conform to
certain norms laid down by the government or financial institutions in this regard. The primary
purpose of such regulations is to impart prudence to project financing decisions and provide a

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measure of protection to investors. In addition, the norms of financial institutions, which often
provide substantial assistance to projects significantly shape and circumscribe project financing
decisions.

2. Key Business Considerations. The key business considerations which are relevant for the
project financing decision are cost, risk, control, and flexibility.

a. Cost. In general, the cost of debt funds is lower than the cost of equity funds. Why? The
primary reason is that the interest payable on debt capital is a tax-deductible expense whereas the
dividend payable on equity capital is not.

b. Risk. The two main sources of risk for a firm (or project) are business risk and financial risk.
Business risk refers to the variability of earnings before interest and taxes and arises mainly from
fluctuations in demand and variability of prices and costs. Financial risk represents the risk
arising from financial leverage. It must be emphasized that while debt capital is cheap it is also
risky because of the fixed financial burden associated with it. Generally the affairs of the firm
are, or should be, managed in such a way that the total risk borne by equity shareholders, which
consists of business risk and financial risk, is not unduly high. This implies that if the firm is
exposed to a high degree of business risk, its financial risk should be kept low. On the other
hand, if the firm has a low business risk profile, it can assume a high degree of financial risk.

c. Control. From the point of view of the promoters of the project, the issue of control is
important. They would ordinarily prefer a scheme of financing which enables them to maximize
their control, current as well as potential, over the affairs of the firm, given their commitment of
funds to the project.

d. Flexibility. This refers to the ability of a firm (or project) to raise further capital from any
source it wishes to tap to meet the future financing needs. This provides maneuverability to the
firm. In most practical situations, flexibility means that the firm does not fully exhaust its debt
capacity. Put differently, it maintains reserve-borrowing powers to enable it to raise debt capital
to meet largely unforeseen future needs.

Production Costs: There are three major categories of manufacturing costs. These are
1. Direct materials cost: - The acquisition costs of all materials that are identified as part of the
cost object and that may be traced to the cost object in an economically feasible way.
Acquisition costs of direct materials include inward delivery charges, tax, and custom duties.
Direct material often does not include minor items such as glue or tacks. Why? because the
cost of tracing insignificant items do not seem worth the possible benefits of having more
accurate product costs. Such items are called supplies or indirect materials and are classified
as part of the indirect manufacturing costs.
2. Direct labor. The compensation of all labor that can be identified in an economically
feasible way with a cost object. Examples are the labor of machine operators and assembler.
Indirect labor costs are all factory labor compensation other than direct labor compensation.
These are labour costs that are impossible or impractical to trace to a specific product. They

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 are classified as part of the indirect manufacturing cost. Examples include wages of janitors,
and plant guards.
3. Indirect manufacturing costs (manufacturing overhead). All manufacturing costs that
cannot be identified specifically with or traced to the cost object in an economically feasible
way. Other terms used are factory overhead, factory burden, manufacturing overhead, and
manufacturing expenses. Examples of factory overhead (when products are cost object)
include power, supplies, indirect labour, factory rent, insurance, property taxes, and
depreciation.

5.3. Project Human Resource Management

The management of people is a challenging task because of the dynamic nature of people. No
two people are similar. People are responsive. It is “the people” who is going to make the
difference in whatever type of organization. All Decisions that affect the workforce affect the
Organization’s HRM function. Progressive HRM Practices have a significant effect on
Organizational Performance. Human Resource Management refers to the philosophy, policies,
procedures and practices related to the management of people within an organization. Human
Resource Management involves: HR Acquisition (Recruiting, selecting, Orienting), HR
Development (Training, PA, compensation, motivation, employee relations), HR Utilization
(Knowledge, Skill and Abilities) and HR Exit (Voluntary and involuntary separations).

Project human resource management includes the processes required to make the most effective
use of the people involved with a project. Project Human Resource Management includes the
processes that are important to organize and manage the project team. The Project team is
comprised of the people who have assigned roles and responsibilities of completing the project.
The type and number of project team members can often change as the project progresses. In
projects, HRM has some peculiarities and problems. These include Project staffing problems
(e.g. diversity, availability), Performance appraisal problems, Motivation problems and Job
Description etc… Managing people under projects is more difficult because of the following.

Dual responsibility, Split Authority, Imbalance of authority and responsibility, The temporary
nature of projects and Lack of managerial capacity. In addition to technical capacity, project
managers need to have managerial capacity. This includes: Efficiency combined with
effectiveness, Non mechanistic approach to problem solving, Conflict management, Team
Building, Interpersonal skills, Motivation and leadership, Time Management, Change
Management, and Diversity Management. Generally a project contains both the technical staff
the support staff. The structure of the staff depends on the three types of the project structure. A
project manager is expected to manage not only the core and support teams but also other
stakeholders. These include: Sponsors, End users, Sub-contractors, Suppliers and Other line
departments.
5.3.1 Managing People in Projects
A. Looking inwards and downwards: this is managing yourself and your team to maximize your
and their contribution. This includes: Providing SMART project goals, Creating a supportive
culture, Celebrating success and Providing purpose and direction.

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B. Looking Upwards and Outwards: this refers to managing the project sponsor, clients or any
other external stakeholders to ensure their commitment and fulfill their expectations. This
involves: Building credibility, Networking, Securing stakeholders’ agreement and Marketing
the project.
C. Looking Forwards and Backwards: is about proper planning and continuous planning of the
future and monitoring and evaluation of the past. This involves: continuous planning and
review, keeping the whole team involved, Seeking and providing feedback and anticipating.

5.3.2. Project Staffing Problems: Anxieties about the possible loss of employment ,
Frustration due to authority ambiguity problems, Conflicts when there are no formal procedures,
role definitions and job descriptions, Conflicts are perceived more seriously by project staff ,
Project personnel feel abandoned from both sides (from the project and mother organization).
Project Human Resource Processes: Project Human resource planning, acquiring the
project team, developing the project team, managing the team.
Planning: Define Human Resource requirements of project (Number and Kind)
Identifying and documenting project roles, responsibilities, and reporting relationships

Roles and Responsibilities: Responsibility Assignment Matrixes, A Responsibility Assignment

Matrix (RAM) is a matrix that maps the work of the project, to the people responsible for
performing the work, can be created in different ways to meet unique project needs.

Responsibility Assignment Matrix (RAM): Human Resource Responsibilities, creating project

team directory, negotiating with resource managers for best resources, creating project job
descriptions for team members, understanding the team’s and other stakeholders’ needs for
training related to their work on the project, and making sure they get the training, creating a
formal plan for the team, management and other stakeholders; how they will be involved in the
project and what roles they will perform – a staffing management plan.
Organizational Charts: these could be Functional, matrix and project type
Staffing Management Plan: Closely aligned with Roles and Responsibilities assignment,
Identify all project stakeholders, Identify their needs, expectations and objectives, Determine the
roles of each stakeholder on the project, Determine the skills and knowledge of each stakeholder,
Assess the overall impact of stakeholders on the project and Determine how stakeholders should
be managed

Planning Issues: Project interfaces: Organizational /formal and informal relationships among
different units/. Technical /formal and informal relationships among different technical
disciplines/. Interpersonal /formal and informal relationships among different individuals
working in the project/. Staffing Requirements: Kinds of competencies needed, Kinds of
individuals or groups needed, Time frames, Constraints - factors that limit team’s options,
Organizational constraints: e.g. Matrix strength, Collective bargaining agreements, Template -
Previous projects, Staffing management plan, How resources will be brought onto and taken off
the team, Appropriate reassignment procedures may, Reduce costs by eliminating “fill in” work,
Improve morale by reducing employment uncertainties.

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Acquiring the Project Team: Acquiring qualified people for teams is crucial. The project
manager has to work hard in recruiting the best . Staffing plans and good hiring procedures are
important, as are incentives for recruiting and retention

Acquisition Issues: Staffing pool description: Team must consider characteristics of potential
staff, such as… Previous experience, personal interests, personal characteristics, availability,
competencies and proficiency. Negotiations, with… Functional managers, other project
management teams Pre assignment, Specific staff promised in proposal, Internal service project,
staff assigned in charter
Development: The main goal of team development is to help people work together more
effectively to improve project performance. It takes teamwork to successfully complete most
projects

Project Management: Project managers must lead their teams in performing various project
activities. Regular performance assessment is also needed. After assessing team performance and
related information, the project manager must decide: If changes should be requested to the
project: if corrective or preventive actions should be recommended; if updates are needed to the
project management plan or organizational process assets.

Development Issues: Team Building, Leadership Styles, Motivation Theories, Conflict

Resolution and Problem Solving are some of the common focus areas for staff development. “To
be effective, Reward and Recognition systems must make the link between project performance
and reward clear, explicit and achievable”. Projects may need their own Reward and Recognition
system. Other Important Issues of project human resource management are conflict management,
motivation, reward and recognition, overcoming distance issues. Project human resource
management includes the processes required to make the most effective use of the people
involved with a project, Planning, Acquiring, Developing and Managing. Human Resource is
very critical for the Success of the Project. Methods of clearly putting roles and responsibilities
and key issues to be considered for the success of the project are important.

Project Team Building: A team is a group of people working together towards a common
goal”. A team is two or more people working together, encouraging and supporting each other,
achieve in an efficient way, mutually agreed up on and appropriate goals. Team building is
deliberate action focusing on encouragement of effective working practices and diminishing of
difficulties among team members. Team members share a common goal or goals. Team
members have individual tasks and roles that help to achieve group goals. Team members co-
operate with and respect one another, and tolerate individual differences. In team, seek
consensus, accept different points of view, work together and support one another. The team
leader is facilitator of the collective style.

Behavioral aims of team building: Reticent, communicative, Secretive & reserved, open,
conflict, cooperation, Apprehensive, trusting, Impersonal, mutual concern, Avoidance of

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responsibility, self- responsibility, Sterility, creativity, alienation, commitment, Role confusion,
Individual centered, role clarity, team centered.

Characteristics of Effective Teams

1. High level of interdependence among team members

2. Team leaders have good people’s skills and are committed to team approach
3. Each team member is willing to contribute
4. Team develops a relaxed climate for communication
5. Team members develop a mutual trust
6. Team and individuals are prepared to take risks
7. Team is clear about goals and established targets
8. Team members roles are defined
9. Team members know how to examine team and individual errors with out personal attacks
10. Team has capacity to create new ideas.
11. Each team member knows he can influence the team agenda
12. Leadership role is shared and rotates among team members depending on the situation at
hand
Motivation and Team Building: Know what activates human behaviors, know what directs
human behavior towards some goal, motivate different peoples differently, apply concept of
methodological individualism, because team is made up of individuals. Discovery and invention
are results of individual motivation.

Communication in Project Teams: Follow these principles when you communicate in Team
(they are called the 7 Cs)-Clarity, Completeness, Conciseness, Concreteness, Correctness,
Consideration, Courtesy.

UNIT SIX

PROJECT CONTROLLING, MONITORING AND CLOSING

Introduction

Once the project has been launched, it is essential to control the projects to achieve the desired
results. In this process the control becomes closely inter-wined in an integrated managerial
process. Project control involves a regular comparison of performance against targets, a search
for the causes of deviation and a commitment to check adverse variances.
6.1. Introduction to Project control

Project control serves two major functions: It ensures regular monitoring of performance. It
motives project Personnel to strike for achieving projects objectives steps in Projects Control.
There are two important steps in the project control; Establishment of controls and On-going
controlling activities using above controls. It is nothing but controlling a project when it enters
the production period using the controls established during the initiation period.

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Control during the production period involves four steps, there are
1. Setting targets for what should be achieved,
2. Measuring of what is happening including anticipation of what may happen.
3. Comparison between what should happen and what is happening or likely to happen.
4. Taking corrective actions to make things happen, as they should these four steps should
fellow each other till the work is completed.

Projected Control themes

The Projects Control can be exercised on different aspects. Such as on the progress of the
activities, on the performance of project activities, on project Schedule and on Projects Cost

Problems of project Control

Effective control is critical for the realization of project objectives. Control of projects in practice
tends to be ineffective. There are three main reasons for poor control of projects viz.,
Characteristics of the project- Largeness and complexities Maintenance of non-routine
activities Co-ordination and communication problem. People Problems- Managers do not have
required experience & training lack of competence and inclination to control projects. Poor
control and information system: Delay in reporting performance inappropriate level of detail
unreliable information.

Gantt Charts/Bar chart

In dealing with complex projects pictorial representation showing the various jobs to be done,
and the time and money they involve is generally helpful. One such pictorial charges, also
known is the bar chart, was developed by Henery Gantt around 1900. It consists of two
coordinate axes, one representing the time elapsed and the other, jobs or activities performed.
The length of a bar indicates the duration the job or activity take for completion. Generally, in
any project some jobs can be taken up concurrently and some will have to be completed before
others can begin. Hence, in a bar chart representing a projects, some of the bars run parallel or
overlap each other times-wise (these correspond to concurrent jobs) and some run serially with
one bar beginning after another bar ends (corresponding to an activity that succeeds a preceding
activity). For example activities A, B and C can start at the sometime and proceed concurrently
or in parallel, though they take different time intervals for their completion. Activity D, however,
cannot begin until activity A is over. The bars representing A and D therefore run serially.

Let us consider a specific example. A piece of equipment is made of two parts A and B which
are to be assembled together before they are dispatched. Part A is of cast steel, which requires a
pattern and a mould. Part B is a machined item made on special machine M which needs to be
purchased and installed. Parts A requires special hear-treatment before assembly. The assembly
needs to be tested with a specially constructed rig before dispatch.
The time scale for each activity is as follows:
Preparing a pattern for casting 4 Weeks
Preparing a mould 2 Weeks
Costing the cleaning operation of A 1 Weeks
Heat-treatment of A 2 Weeks

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 Obtaining and installing machine M 7 Weeks
Machine part B 5 Weeks
Assembling part A and B 3 Weeks
Preparing the test rig 4 Weeks
Testing the assembly 2 Weeks
Packing for dispatch 1 Weeks
The various activities are shown along the ordinate or the vertical axis and the time elapsed along
the horizontal axis.

6.1.1.1. Weaknesses in Bar Charts

Interdependent of activities:

In a program where there are a large number of activities that can be started with a certain degree
of concurrency, the bar chart cannot show clearly the interdependent among the various efforts
or activities. This is a serious deficiency. The mere fact to or more activities are scheduled for
simultaneous or overlapping times does not necessarily make them related or interdependent, or
completely independent. Such activities as preparing a pattern, preparing a mould, costing and
cleaning, and heat-treating have to run sequentially, i.e., one activity must be completed before
the other can begin. The bars representing these activities are not allowed to overlap. On the
other hand, installing machine M and preparing the test rig can proceed simultaneously because
they are completely independent activities and hence the bars representing them can run parallel
to each other. However, this is exactly the weakness of the bar chart, because two parallel bars
need not necessarily stand for independent activities, as the following example will show.
Suppose a project involves digging foundation, erecting side boards or shuttering, and pouring
concrete. The time consumed is shown against each activity:
Digging foundation 20 Weeks
Erecting side boards 14 Weeks
Pouring concrete 16 Weeks
If the activities are not allowed to run in parallel but in strict sequence, the total time taken for
the completion of the project is 50 weeks. As we can easily see, erection of the sideboards can
start after the completion of, say, one-half of foundation digging. Similarly, poring of concrete
can start, say, 5 Weeks after the erection of side boards. According to this plan, the side board
erectors still have 4 weeks of work after the excavation job is over. However, if due to certain
unexpected difficulties the excavation is delayed by 1 or 2 weeks, how will reflect on the
sideboard erection or the concrete pouring job? This is not revealed by the bar chart.

Project progress:
A bar chart cannot be used as a control device since it does not show the progress of work.
Knowledge of the amount of work in progress or jobs completed is absolutely necessary in a
dynamic program. Changes in plans are a necessary part of a large project and a bar does not
offer much assistance under such circumstances. However, a conventional bar chart can be
modified to give this additional information.. Suppose 16 weeks have elapsed after he project

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started: be the progress made in the project can be depicted by partially filling in the blank bars.
Foundation digging, is weeks behind schedule.
Uncertainties
One of the most important deficiencies of the bar chart is its inability to reflect the uncertainty or
tolerances in the duration times estimated for various activities. The modern day space system
programs or other complex projects are largely characterized by extensive research, development
and technological progress. The traditional knowledge or practices play a very insignificant role.
In such situations, the completion of various stages or jobs cannot be forecast with exactness.
Uncertainty about a test becoming successful or a sudden break though in technology to know-
how will always provide situations which will make rescheduling of various events a necessary
part of the project and give it a dynamic character which is not reflected in a bar chart.

Milestone Charts

Because of the shortcomings or the inadequacies of the chart in meeting the requirements of the
modern day management, efforts have been made to modify it by adding new elements. One
such modification is milestone chart. Another important modification, relatively successful, has
formed a link in the evolution of the Gantt chart into the PERT or CPM network. This
modification is called the milestone system. Milestones are key events or point time, which can
be identified when, completed as the project progresses. In the Gantt chart a bar which represents
a long-term job is broken down to several pieces, each of which stands for an identifiable major
event. Each event is numbered and an explanatory table given identifying the number with the
event. These are specific event (points in time) which management has identifies as important
reference points during the completion of the project. This work breakdown increases the
awareness of the interdependent between tasks. While the milestone chart was definitely an
improvement on the bar chart, it still had one great deficiency, i.e., it did not clearly show the
interdependent between events. In a milestone chart the events are in chronological, but not
logical, sequence. A natural extension of the milestone chart was the network where the events
are connected by arrows in a logical sequence.

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Critical path method (CPM)

The critical path analysis is an important tool in production planning and scheduling. Gantt
charts are also one of the tools of scheduling but they have one disadvantage for which they are
found to be unsuitable. The problem with Gantt chart is that the sequence of operation of a
project or the earliest possible date for the completion of the project as a whole cannot be
ascertained. This problem is overcome by this method of Critical Path Analysis. CPM is used for
scheduling special projects where the relationship between the different parts of project is more
complicated than of a simple chain of task to be completed on after the other. This method
(CPM) can be used at one extreme for the very simple job and at other extreme for the most
complicated tasks. A CPM is a route between two or more operations which minimizes (or
maximizes) some measures of performance. This can also be defined as the sequence of
activities, which will require greatest normal time to accomplish. It means that the sequences of
activities, which require longest duration, are singled out. It is called at critical path because
longest duration is singled out. It is called as critical path because any delay in performing the
activities should be taken should be taken up first.

According to John L. Burbidge, “One of the purposes of critical path analysis to find the
sequence of activities with the largest sum of duration times, and thus find the minimum time
necessary to complete the project. This critical series of activities is known as the ‘Critical path”.
Under CPM, the project is analyzed into different operation or activities and their relationship
are determined and shown on the network diagram. So, first of all a network diagram is drawn.
After this the required time or some other measure of then combined to develop a schedule
which minimizes or maximizes the measure of performance for each operation. Thus CPM

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marks critical activities in a project and concentrates on them. It is based on the assumption that
the expected time is actually the time taken to complete the object.
Main objects of CPM

The main objects of CPM are: to find difficulties and obstacles in the course of production
process, to assign time for each operation, to ascertain the starting and finishing times of the
work, to find the critical path and the minimum duration time for the project as a whole.
Situation where CPM can be effectively used: CPM techniques can be used effectively in the
following situation: In production planning, location of and deliveries from a warehouse, road
systems and traffic schedules and communication network.

Advantages of CPM

The application of CPM leads to the following advantages: It provides an analytical approach to
the achievement of project objective which are defined clearly. It identifies most critical
elements and pays more attention to these activities. It assists avoiding waste of time, energy and
money on unimportant activities. It provides a standard method for communicating project
plains, schedules and cost. Thus CPM technique is a very useful analysis in production planning
of very large project. There are so many modern techniques that have developed recently for the
planning and control of large projects in various industries especially in defense, Chemical and
construction industries. Perhaps, the PERT is the best known of such techniques. PERT is a time-
event network analysis technique designed to watch how the parts of a program fit together
during passage of time and events. The special project office of the U.S. Navy developed the
technique in 1958. It involves the expected of any operation can never by determined expected
time of any operation can never by determined exactly.
Major feature of PERT or Procedure or Requirement for PERT

The following are the main feature of PERT: All individual tasks should be shown in a network.
Events are shown by circles. Each circle representation event a subsidiary plans whose
completion can be measured at a given time. Each arrow represents and activity the time
consuming element of a program, the effort that must be made between events. Activity time is
the elapsed time required to accomplish element an event. In the original PERT, three-time
values are used as follows: Is
t1 (Optimistic time) : It is the best estimate of time if everything goes exceptionally well
t2 (Most likely time): It is an estimated time what the project engineer believes necessary
to do the job or it is the time which most often is required if the activity is repeated a
number of times.
t3 (Pessimistic time) : It is also an activity of under adverse conditions. It is the longest
time and rather is more difficult to ascertain.
The experiences have shown that the best estimate of time out of several estimates made by the
projects engineer is:

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 t1 + 4t2 + t3
t=
6
and the variance of t is given by-
t3 t1
V (t )=
6
Here it is assumed that the time estimate follows the Beta distribution.
The next step is the compute the critical path and the slack time. A critical path or critical
sequence of activities is one, which takes the longest time to accomplish the work and the least
slack time.

Advantage of PERT
PERT is a very important of managerial planning and control at the top level concerned
with overall responsibility of a project. PERT has the following merits.
Pert forces managers and subordinate manger’s to make a plan for production because
time event analysis is quite impossible without planning and seeing how the pieces fit
together.
PERT encourage management control by exception. It concentrates attentions on critical
element that may need correction.
It enables forwards-working control, as a delay will affect the succeeding events and
possibly the whole project. The production manager can somehow make up the time by
shortening that of some other time.
The network system with its sub-systems creates a pressure for action at the right spot and
level and at the right event.
PERT can be effectively used for re-scheduling the activities.

Limitations in using PERT

The uses of PERT techniques are subject to the following limitations:
It is a time-consuming and expensive technique.
It is based on Beta Distribution and the assumption of Beta Distribution may not always be
true.
PERT is not suitable when program is nebulous and a reasonable estimate of time schedule
is not possible.
It is not useful for routine planning of recurring events such as mass production because
once a repetitive sequence is clearly worked out; elaborate and continuing control is not
required.
The expected time and the corresponding variance are only estimated values.
Difference in PERT and CPM
Although these techniques (PERT and CPM) use the same principles and are based on
network analysis yet they in the following respects from each other:
PERT is appropriate where time estimate arte uncertain in the duration of activities as
measured by optimistic time, most likely time, and pessimistic time, where as CPM
(Critical Path Method) is good when time estimates are found with certainty. CPM

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 assumes that he duration of every activity is constant and therefore every activity is
critical or not.
PERT is concerned with events, which are the beginning or ending points of operation
while CPM is concerned with activities.
PERT is suitable for non-repetitive projects while CPM is designed for repetitive
projects.
PERT can be analyzed statistically whereas CPM not.
PERT is not concerned with the relationship between time and cost, whereas CPM
established a relationship between time and cost is proportionate to time.

6.2. Project closing process

The last major phase of a project's life cycle is the close-out. Closing a project should be a fairly
routine process.

Key elements
The key elements to project close-out are: accepting the project's products indicated by user sign-
off, completing the Post Implementation Evaluation Report (PIER), disbursing the resources—
staff, facilities, and automated systems, conducting a lessons learned session, completing and
archiving project records, recognizing outstanding achievement, celebrating project completion.
These activities are particularly important on large projects with extensive records and resources.
This section does not address processes for transitioning the technical support into maintenance
and operation. These tasks are diverse and unique to the specific development environment of a
project. The first step of the close-out process is the user's acceptance of the system. This is a
critical and important step, as the user decides when the project is completed. Acceptance is
based upon the success criteria defined in the very early concept and planning stages of the
project. This acceptance should be formal, meaning that user sign-offs should be obtained.

What is a Post Implementation Evaluation Report?

A Post Implementation Evaluation Report (PIER) documents the history of a project. It provides
a record of the planned and actual budget and schedule. The report also contains
recommendations for other projects of similar size and scope. The PIER will be stored on the
State’s database on IT projects. Additional specifications for the PIER and the project database
can also be stored. The PIER Table of Contents should look like the following:
PIER
 Schedules
 Successful risk assessment and mitigation techniques, i.e. What risks occurred and
what techniques were used to mitigate these risks
 Processes used for change control, quality, and configuration management
 Techniques used for project communication
 Techniques for handling customer expectations
 Success factors and how they were met

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  Financial data
 Recommendations to future project managers
 Lessons Learned (from lessons learned session)
Identifying and Addressing Success
Be certain that successes as well as problems on the project are identified in the PIER. Be certain
to include new ideas that were very successful on the project. Make recommendations on how
these processes might be adapted for other projects. Share the project successes with other
organizations. In the same way that problem identification can lead to improvements, successes
must be shared so they can be repeated. Where possible, successes should be translated into
procedures that will be followed by future projects.

Who Prepares the Report?

The project manager has responsibility for preparing the report. The project manager gets input
from the entire project team, the users, and other major stakeholders. People performing
different functions on the project will have a different outlook on the successes and failures and
on possible solutions. If every project member cannot be consulted, at least ensure that a
representative from each major area of the project participates. The users’ overall view of the
project and its final product is also a major focus of the project. It is this view, along with the
view of the major stakeholders that lives on after closure has been completed.
Collecting Project Data
Following preparation of the Post Implementation Evaluation Report, the project database is
archived. Historic project data is an important source of information to help improve future
projects. Typically, the following project data is archived: Project identification and evaluation
report, project plan and project Management Control Documents (correspondence, relevant
meeting notes, status reports, and contract files), technical documents, and information that had
been placed under configuration management

All the hard copy records should be stored following standard guidelines. Many of the technical
records and automated versions will be turned over to stakeholders responsible for maintenance
and operation of the system. Summary technical information should be electronically stored for
historical access. The project archive includes a description of the files being submitted, the
application (including version) used to create the archived materials, and a point of contact if
further information is needed.

Where is the Archive Maintained?

The units sponsoring the project usually maintain an archive of projects that includes only
project summary information. The more detailed information is archived at the organization.
How is the Archived Material Used?
Building a repository of past projects serves as both a reference source for estimating other
efforts and as a training tool for project managers. Project archives can be used when estimating
projects and in developing metrics on probable productivity of the development teams. Use of
past performance metrics provides the best source for future estimates. When sufficient project

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data is collected over time, the state may be able to develop an experience database that will help
to make strong estimates and develop realistic project plans.
Recognition of Success
Celebrate the success of completing a project!
There is fairly universal recognition that positive reinforcement, or rewarding behavior, is an
effective management tool. Since it is a goal within the project promoters to execute all projects
successfully, it is important to recognize teams that have met this goal. When success in a project
is achieved, be certain to provide some recognition to the team. If individuals are singled out for
significant achievements, don’t forget to recognize the entire team as well.
What is Success?
Success is defined at the early stages of planning the project. In this project management
methodology, success factors are developed as part of the concept phase. Success is not tied only
to budget and schedule. Many projects can be considered a tremendous success even though the
project did ultimately cost more than had been anticipated.
Some key questions that determine success are:
 Were the success factors achieved?
 Do the stakeholders and end-users view in a positive manner the project product?
 Was the project well-managed?
 Did the team work well together and know what was going right and wrong?
Informal Recognition
There are many ways to reward people for a job well done. The reward might be an informal
after work gathering or a lunch-time celebration. If people are willing to chip in, you could
provide mugs that commemorate the event.
Formal Recognition
Management may also want to express recognition of a successful team effort by praising the
team at a key meeting or a large gathering of staff. People are proud to have senior management
appreciation stated, and such recognition sets the stage for future successful work. Formal
recognition can also be achieved through coordination with the Kansas Information Technology
Office for articles in industry periodicals and by updating the project data that is circulated to the
legislature.

Conduct a Lessons Learned Session

In addition to communicating the closure of a project in writing, it is also advisable to have a
mechanism for group review. A “lessons learned” session is a valuable closure mechanism for
team members, regardless of the project's success. Some typical questions to answer in such a
session include: Did the delivered product meet the specified requirements and goals of the
project? Was the user/client satisfied with the end product? Were cost budgets met? Was the
schedule met? Were risks identified and mitigated? Did the project management methodology
work? What could be done to improve the process?
The lessons learned session is typically a large meeting that includes Project team, stakeholder
representation - including external project oversight, executive management, maintenance and
operation staff. Such a session provides official closure to a project. It also provides a forum for

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public recognition and offers an opportunity to discuss ways to improve future processes and
procedures.

Document Lessons Learned

One purpose of the PIER is to document lessons learned. This means that problems encountered
by the project team are openly presented. Problem identification on completed projects provides
a method to discuss the issue in hopes of eliminating its occurrence in future endeavors. It is
important, however, that the problem discussions do not merely point a finger away from the
project team. Responsibility and ownership for problem areas are critical to developing useful
recommendations for future processes. Problems that were encountered should be prioritized
with focus on the top five to ten problems. One should not document every problem. Since
problems or sensitive issues may be discussed in the PIER and Lessons Learned, it is helpful to
have all contributing parties review the materials prior to formally submitting the document. It is
useful to have the reviews in an interactive forum where all parties can discuss their
recommendations for improvement. The PIER can then present a complete view of the project.

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