Project Definition and Concept

Definition
Defining a project is not an easy task. How ever, still some definitions are forwarded to
provide a conceptual basis to understand projects as a whole. One of such defines
projects as a complex set of activities where resources are used in expectation of returns
and which lends itself to planning, financing and implementing as a unit. The benefits
from a project should exceed the resources scarified. In addition, the benefits and
resources, are usually, but not necessarily, measured in money terms.

Projects usually have a specific starting point and a specific ending dates. A project
intends to accomplish specific objective(s). It usually has a well defined sequence of
investment and production activities and a specific group of benefits that can be
identified, quantified and valued either socially or monetarily. The other feature of
projects is that they have a boundary which makes them distinguishable from one
another. In addition, a project normally has a specific geographical location.

Although many people use the terms “project” and “program” interchangeably, a project
is different from a program. Where as a project refers to an investment activity where
resources are used to create capital assets that produce benefits over time and has a
specific beginning and an ending with specific objectives, a program is an on going
development effort or plan. In short, a program is a wider concept than a project. It may
include one or more projects at various times whose specific objectives are linked to the
achievement of higher level of common objectives. For instance, a health program may
have sanitation, clean water, upgrading human resource, etc projects under it.
Types of Projects
In order to fully understand the characteristics of a project analyst must understand the
type of project he is dealing with. Projects could have different facets and could be
classified in different dimensions. Some of the common dimensions of classifying
projects include:
Ownership: - Governmental, private and NGO run projects. The basic difference among
these is the implementing entity. Their objectives are also usually different. Private

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projects are meant to earn a return for a specific group (the implementers), in money
terms. Their costs and benefits hence are measurable in money terms. Their costs and
benefits hence are measured and compared in monetary terms. On the other hand,
governmental and NGO projects are meant to provide benefits for a wider population not
the implementers of the project. The outputs of these projects are not usually measurable
in terms of money.
Duration: - Projects could be short term or long term. Example Hydro electric is a long
term project and crop production is a short term project.
Outputs and measurability: - Some projects produce goods (factory) other service
(power supply) and yet others produce knowledge (research projects). The output of
some projects is measurable (such as tons of cement) and others have an out put that can
not be measured (such as health projects, education projects, infrastructure projects…)
Spatial setting: - Rural projects versus urban projects
Industry: - industrial, agricultural…
Intensity of inputs: - labor intensive, capital intensive …
The project analyst should understand the type of project he is analyzing. This is because
the approaches used in preparing, appraising and implementing a project are heavily
affected by its nature. Hence, the projects profile in terms of the above facets should be
clearly described.
Project parameters
Regardless of the nature of the project however, there are common parameters with
which a project’s success depends on and its results are measured with. These basic
project parameters are quality, cost, and time. Quality refers to the extent to which the
project meets the specifications set at the time of preparing it. Cost relates to whether the
project is implemented with in the budget or not. Time is whether the project is
completed before or on the deadline.(It has to do with the project schedule) A
successfully managed project then is one completed at the specified level of quality, with
in the schedule and with in the budget. In addition to the above, client satisfaction is
another measure of project success as it determines sustainability of the project.
Especially in social and development projects sustainability is ensured only when the
beneficiaries are satisfied by the services the project is provides them. This makes them

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committed in maintaining and sustaining the results. For instance, a district health center
would sustain only when the beneficiaries (the community) are willing to pay or at least
to contribute for the cost being incurred to run the health center.

Projects and Plans

Development strategies are packages of ways and means by which available resources are
put in their best use in achieving specified objectives such as eradication of poverty. They
are plans a country uses to achieve its long-term and medium-term objectives. They have
many programs under them. The programs constitute projects that convert the resources
to future benefits. The projects refer to the actual commitment of scarce resources takes
place. Hence project selection is meaningful only when it is consistently placed within a
broader development framework. This framework is also the basis under which the
project’s costs and benefits will be assessed.

In order to simplify project planning and selection the development plans and policy
should be elaborated properly. They should outline the desired socio-economic patterns
of development and the objectives to be achieved in the long-term and medium term.
Such development plans and sectoral programs should not only assist the planning and
selection of development projects also they should guide the emphasis of private projects
towards the attainment of the country goals. For instance, a country trying to following an
export led development strategy will design as many projects as possible on infrastructure
that foster exports and provide incentives to private investors to design projects on the
production of exportable commodities.

Projects and their impact on Development

As discussed above projects are points where actual resources are executed to achieve
objectives (whether governmental or private.) They are the powerful means to achieve
developmental objectives. They are the means by which what was desired to be achieved
and what was abstract become tangible. That is why they some-times are called “cutting-
edge” of development.

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Every country strives to improve the living standards of its population. This is achieved
through increases in the production of goods and services. Projects mainly aim on
addressing the required expansion of goods and services. How ever, in this process huge
funds are invested at the implementation (some times in the early life of the project too)
and net benefits are reaped after wards until termination of the project.

From the national growth perspective projects are considered to be the forces of social
and economic transformation. A country’s social and economic plans are transformed to
tangible changes through projects. Hence, projects should aim at the greatest
development impact. As a policy instrument they channel foreign funds (FDI), mobilize
scarce resources and allocate them among competing needs. The net result is projects
increase production of goods and services. How ever, at their implementation phase they
increase the costs of suppliers (that provide the goods used in implementing the projects)
and reduce the aggregate consumption by the society. In the long run they could have
positive effects on:
i. Employment
ii. Aggregate consumption
iii. Savings and investment
iv. Income distributions
v. Balance of payments
vi. Self-reliance

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 The Project Cycle
A project cycle is the sequence of events a project follows. These events or phases should
be considered as iterative steps not as a linear set of sequential steps. Some stages may be
performed in parallel and at times some stages may overlap. The phases and stages in the
project cycle usually differ among the different funding agencies such as the UN and the
World Bank. How ever, the major activities and the activities one performs from
inception of a project until it becomes operational are basically the same regardless of the
methodology he has followed. In this material the UNIDO (United Nations Industrial
Development Organization) approach is followed. According to the UNIDO manual the
development of an industrial project from the stage of the initial idea until the project
becomes operational comprises of three major phases viz. the pre investment phase,
investment phase and operational phase. Each of these major phases in turn contains
several stages with in them.

On the other hand, UNEP (United Nations Environmental Program) follows a five phased
cycle. These are identification, preparation and formulation, review and approval,
implementation, and evaluation. Other organizations have different project phases. How
ever, regardless of the different prescriptions the activities performed in a project cycle in
every organization are more or less the same.
Here below are stages according to UNIDO project cycle.
1. Pre-Investment Phase: - This could be considered as the most important phase
as failure to properly conduct the pre-investment in a project ultimately leads to
failure of the project. As a result costs should not be obstacles for adequate
examination and appraisal of a project at this stage. It contains several stages from
project identification through opportunity studies to the investment decisions
(appraisal report.) The division of the pre-investment phase in to stages avoids
proceeding directly from the project idea to the final feasibility study with out
examining the project idea step by step or being able to present alternative
solutions. It also cuts out many superfluous feasibility studies that presumably
have little chance of reaching the investment phase. The following are the stages
(Activities) during the pre-investment phase:

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i) Opportunity Studies: -
This is the identification of investment opportunities. It could be conducted at
the sector level or the enterprise level. At the sector approach is associated
with the compilation of area, industrial, resource based studies and the
preparation of industrial master plans. The enterprise approach is a micro level
analysis where a review of investment ideas of industrialists, investment
promotion offices and financial institutions is conducted. The instrument used
to quantify the parameters, information, and data required to develop a project
idea to a project proposal is the opportunity study.

Opportunity studies comprise only aggregate estimations such as the

estimated demand for milk in the coming 15 years, not detailed analysis or the
total cost of a comparable project.
ii) Pre-feasibility studies
This is the intermediary stage between the opportunity studies and the
feasibility studies. Its major purpose is to filter project ideas that should not
pass through feasibility studies and to ensure whether all the possible
alternatives are taken. It saves the huge costs that would have been incurred in
conducting feasibility studies on in executable or unviable projects.
The structure of the pre-feasibility study should be the same as that of the
feasibility studies.

It is the screening stage where projects are screened before they are
considered for detailed feasibility studies. The screening is effected through
assessments of the project in terms of its financial, economic and
environmental impacts. In addition the technical executability of the project in
terms of the available technology, location, raw materials and human resource
should be considered. How ever, in conditions where there is complete
knowledge about project conditions, the pre-feasibility study can be bypassed
by making the opportunity studies well-prepared and comprehensive.

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iii) Feasibility Studies:-
A feasibility study should provide all the data necessary for an investment
decision. The commercial, technical, financial, economic and environmental
pre-requisites for an investment projects should there fore be defined and
critically examined on the basis of alternative solutions already set in the pre-
feasibility study. This stage requires a detailed assessment of the market
strategies, possible market shares, the corresponding production capacities,
the plant location, existing raw materials, appropriate technology and
mechanical equipment and, if required, environmental impact assessment. In
the financial part the study covers the scope of the investment, including the
net working capital required, the production and marketing costs, the sales
revenues and the return on invested capital.

There is no uniform approach on how to conduct the feasibility study, but it

should indicate whether the project will result in financial and economic
profits. Unlike the pre-feasibility studies the amounts used in feasibility
studies should be conducted with greater accuracy in an iterative optimization
process, with possible assessment of risk factors and risks. As a result all the
assumptions made, the data used, and solutions selected should be properly
explained to make the project more comprehensible to the promoters and
investors. Even when it is found to be infeasible i.e. does not lead to
investment recommendations that fact should be properly stated and
explained.
iv) Appraisal and appraisal 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 and
evaluation of expected risks, costs and gains. The better the quality of the
feasibility study the easier will be the appraisal work. The project appraisal
report is indicative of whether the money expended since the inception of the
project is well spent.

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 The project appraisal carried out by the financial institutions focuses on the
health of the institution to be financed, the returns obtained by the equity
holders, and the protection of creditors. The appraisal criteria centers on the
technical, commercial, market, managerial, organizational, financial and
economic aspects. The cash flow tables, income statements, and balance
sheets are projected. The working capital requirements, debt-servicing plans
of an enterprise are developed. The appraisal reports apart from the project
consider the industries in which it will be carried out and its implications for
the economy as whole. Project appraisal may also need field works for data
verification.
v) Support or Functional Studies: - These are required as prerequisites for or in
support of the pre-feasibility and feasibility studies particularly for large-scale
investment proposals. It usually covers specific aspects of the project. Though
the nature of support studies vary depending on its type and nature they may
include:
 Market studies
 Raw materials and factory supply studies
 Laboratory and pilot-plant tests
 Location studies
 Environmental impact assessment
 Equipment selection
2. The Investment Phase: -
This is the phase where the project is actually implemented, changed from
paper work to actual work. This stage provides wide scope for consultancy
and engineering work. It could be classified to the following stages:
 Establishing the legal, financial and organizational basis for the
implementation of the project
 Technology acquisition and transfer including basic engineering
 Detailed engineering design and contracting including tendering,
evaluation of bids and negotiation.
 Acquisition of land construction work and installation

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  Pre-production marketing including the securing of supplies and
setting up the administration of the firm.
 Recruitment and training of personnel
 Plant commissioning and start-up.
The above phases should be properly planned and efficiently managed to
avoid delays in the start-up and for the successful implementation of the
project. To this end careful scheduling is a must to that effect various tools
such as Critical Path Method (CPM) and Project evaluation and review
techniques (PERT) could be applied. Unlike the pre-investment phase, in this
stage more emphasis is given for the time factor is more critical than quality
of the project in order to keep the project with in the forecasts of the
feasibility study.
3. The Operational Phase: -
This is the phase where the project actually produces goods and services. This
is the period the project fetches benefits for the stake holders of the project.
The success and failure of this phase largely depends on the analysis and
studies done at the pre-investment stages. Rectification of the project at this
phase is very difficult and costly.

The problems of this phase should be analyzed from the long-term and short-
term perspectives. The short-term relates to the initial period after the
commencement of operations when a number of problems may arise as the
application of production techniques, operation of equipments, or inadequate
labor productivity. These problems usually originate from the implementation
phase. The long-term problems relate to chosen strategies and the associated
production and marketing costs. The long term problems relate to the
projections made at the investment phase.

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 UNIDO PROJECT LIFECYCLE

Pre-selection
Pre-feasibility study

Identification Preparation
Opportunity study Feasibility study

Support Studies
Expansion Pre investment
Innovation phase
Operating Appraisal
phase Appraisal
Replacement Investment Report
phase
Rehabilitation Negotiations and
contracting

Engineering Design
Commissioning and
startup
Construction
Pre-production marketing

Training

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 2.1 The Baum Cycle (World Bank):

For analytical simplicity the project cycle is divided into following stages:
1. Project identification.
2. Project preparation.
3. Project appraisal.
4. Project implementation.
5. Project evaluation
1. Project identification: Pre feasibility studies.
In this initial stage projects that contribute towards achieving specified
development, objectives are identified. A project idea may originate from
multiple sources. Many of the most important projects in developing
countries emerge from political commitments of national leaders, as
responses to crisis, emergencies and external threats or to foreign
governments polices and assistance agency priorities. Others are new
experiments emerging from previous project failures or from expansion
and replication of successful projects tested locally or proven feasible in
other developing countries or form the discovery of critical economic and
social bottlenecks or shortages, The work of voluntary agencies, non-
profit organizations and foundations in such fields as health care,
education, family planning, social services and housing has been a
catalyst for new ideas. Developing nations are required to link informal
processes with formal national planning systems very closely. Generally,
project ideas are born at two levels, the macro-level and the micro level

At the macro-level project ideas emerge from:

i. National, sectoral or regional plans and strategies
supplemented by special studies, conducted with the explicit
aim of translating national and sectoral programs into specific
projects.

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 ii. Constraints in the development process due to shortage of
essential infrastructure facilities, problems in the balance of
payments etc.
iii. Government’s decision to correct social and regional
inequalities or to satisfy basic needs of the people through
development projects.
iv. A possible external threat that necessitates projects aiming at
achieving, for instance self-sufficiency in basic materials,
energy, transportation etc.
v. Unusual calamities such as droughts, floods, earthquakes,
hostilities etc. and
vi. Government’s decision to create locally project-implementing
capacity like laying a road, construction of a mud dam etc.
Project ideas may also originate from multi-lateral or bi-lateral
development agencies and as a result of regional or international
agreements in which a country participates.

At the micro-level project ideas emanate from:

i. Identification of unsatisfied demand or needs.
ii. Existence of unused or underutilized natural or human
resources and the perception of opportunities for their efficient
use.
iii. Need to remove shortages in essential materials, services or
facilities that constrain the development effort.
iv. Initiative of private or public enterprises in response to
incentives provided by the Government.
v. Necessity to complement or expand investments previously
undertaken and
vi. Desire of local groups or organizations to enhance their
economic independence and improve their welfare.

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Project proposals could also originate from foreign firms either in
response to government investment incentives for because they consider
local production a better way to secure a substantial share of the
domestic market for their products.

Preliminary screening:
Project planning is a process of elimination of inferior alternatives. Once
some project ideas have been put forward, the first step is to select one
or more of them as potentially viable. This calls for a quick preliminary
screening by experienced professionals who could also modify some of
the proposals. At this stage the analyst should eliminate proposals that
are technically unsound and risky; have no market for the output; have
inadequate supply of inputs; are costly in relation to benefits; assume
over ambitious sales and profitability etc.

Pre feasibility study:

Following the preliminary screening, promising project options should be
investigated in a systematic manner to suggest which are to be
eliminated. Sophisticated analysis of the technical, economic, social and
institutional aspects of the project is postponed to a later stage. However,
the report should indicate which of these aspects deserve particular
attention during the subsequent step. These reports are called ‘pre
feasibility’ or ‘pre investment’ studies. To enable the relevant authorities
to decide on the merits of various project options, the study should
contain:
a) The structure and objectives of the project
b) The nature and size of the demand for the output or the needs
that it would satisfy.
c) Availability of materials and human inputs.

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 d) Basic alternative technologies available and their means and
drawbacks.
e) Approximate investment and operation costs.
f) Rough estimates of financial and economic returns
g) Any major factor that is likely to have an impact on the project
and.
h) What further information on the technical, financial, economic
or institutional aspects of the project should be acquired
through special studies and surveys.

2. Project preparation: Feasibility studies.

Pre feasibility study if indicates that the project is, prima facie, promising
and further work is justified, the project enters the next stage for more
detailed and sophisticated analysis supported, by accurate information.
Technical and non technical, should receive the attention they deserve
without postponing any consideration to a later stage.
Project preparation is the most important stage in project are made at
this stage employing the right criteria and some of them are virtually
irreversible. Even if technically feasible, it will be expensive and time
consuming to change drastically the basic components of the project at
the stage of appraisal This implies that economic analysis has a key role
in project preparation.
For instance, accounting or shadow prices that basic policy objectives
and resource constraints are most meaningfully used at this stage.
Project preparation necessitates a teamwork approach with professionals
investigating different aspects of the coordination of an expert working as
team leader.

Time spent on project preparation is not lost time. There is a trade-off

between project preparation and implementation. The better a project is
prepared, the easier and faster its implementation and lowers the

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probability of cost over runs. Where a project is to be financed by
multilateral or bilateral or bilateral aid agencies, their specific
requirements and standards of project preparation should be taken into
account.

There are no basic economic choices to be made in project analysis. The

economic dimension of the project reflected in its basic objectives and it
is responsibility of authorities to make such choices. There are two key
areas where the analyst has choices to be made, the technological area
and institutional area. Some economic aspects relating to employment
and income distribution may be placed under these areas if they are not
included in the basic objectives. The feasibility study should give due
consideration to the strong interrelation linkages to ensure mutual
support between the technical and the objectives of the project.

Technological choices
In the technological sphere the choices to be made through comparative
consideration of alternatives, vary from project to project. It is the
function of professionals to scrutinize the merits of each alternative.
Certain technical aspects that seek alternatives considerations may be:
a) Building a new plant or facilities as against improving the
capability of existing one.
b) Indigenous against imported technologies, labor intensive
against capital intensive one and technologies with high initial
costs but low maintenance requirements against those with
low initial costs but high maintenance needs and
c) Possibility of implementing the project in stages and the merits
of one big plant in the center versus a number of smaller
regional ones.

Institutional choices

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Professionals may consider many institutional aspects where alternatives
are feasible like:
a) Consider the merits of establishing a new agency to implement and
operate the project as against using an existing one.
b) Comparative advantages of various degrees of centralization and
decentralization of functions and decision-making
c) Evaluate alternative types of owner ship and control such as public
, private, co-operative, joint venture, domestic, foreign etc. and
d) Compare alternatives in the supply of inputs (e.g. estate farming
vs. out growers) and the supply chain of out put.

The projects’ impact on people

Feasibility study should pay attention to the beneficiaries of and
sufferers from the project that are aimed at specific groups such as low
cost housing, an irrigation project displacing pastor lists, out growers
supplying a sugar mill with cane etc. probable harmful effects of the
project on the environment and ecological consequences should be
described with suggestions to remedy them.
The assumption that project beneficiaries readily co-operate and change
their habits and practices may prove to be wrong. It might be necessary
to modify the structure, technology and the institutional set up of the
project to fit the local conditions than trying to change people’s values
and habits. Projects relating to rural population with traditional and
orthodox culture are more vulnerable to sociological factors. Feasibility
study should include information on local traditions, attitudes, skills,
nutrition, work schedules, housing, local administration, labour unions,
social hierarchy etc.

3. Project Appraisal and Investment decision.

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Appraisal is the comprehensive and systematic assessment of all aspects
of the proposed project. The appraisers are usually the central economic
authorities responsible for drafting the overall development strategy and
entrusted with major decisions on matters relating to this strategy. The
project is reviewed to confirm that it accords with the broad development
objectives and fits into the development process of the country. The
project is viewed from different perspectives: technical, commercial,
financial, economic, managerial and organizational. It is too ensured that
the project represents a high priority use of country’s resources and in
combination with other polices, contributes the maximum possible
towards achieving national development objectives.

4. Project implementation, supervision and follow-up:

It is the stage the conclusions reached and decisions made are put into
action. Detailed designs and specifications should be drawn, tender
documents to be prepared, bids should be invited and evaluated, orders
for inputs have to be placed, contract to be signed, workers to be hired
and put to work, materials to be moved to site etc. it is not well-prepared
and evaluated but studiously executed projects that deliver the envisaged
benefits. The project planning and execution require high level of
managerial skills and adequate administrative capacities, which many
developing countries have proved to be lacking. Many countries are not
so expert at implementation as they are at planning. Any plan is only as
good as it achieves. Some implementation problems are changes in the
economic and political situation of the country or the world market while
others are project specific.
The execution of the project should be supervised closely and progress
should be reported regularly to ensure that the implementation is
progressing without deviating from the envisaged path. The follow up
exercise or ex-post evaluation is considered as continuation of

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supervision to assess whether the objectives of the project have been
reached.
Project evaluation:
This aspect is dealt with in detail at a later stage during the course
study.
Chapter Two Project Identification
This stage is about finding potential projects that will result in positive
net present value or that provide benefits for the society. This is the
starting stage in the project cycle. Projects usually start as new ideas
which are carefully examined and if found feasible and desirable are
translated in to projects. Such initiation of project ideas is called project
conception. Project conception is forming or developing ideas regarding a
required intervention in a specific area to address a problem or take
advantage of opportunities. Projects can be conceived on the basis of:
 Needs – to avail certain goods and services to peoples in a
locality.
 Market demand – domestic or overseas
 Resource availability – to make profitable use of available
resources
 Technology – to make use of available technology
 Natural calamity
 Political considerations
The individuals who can initiate project ideas from the above sources
include:
1. Technical specialists
Technical specialists can initiate project ideas from their experiences of
through their research findings. This usually is common in
manufacturing firms where mechanical and industrial engineers working
there generate new expansion and/or new industrial projects. These

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projects usually either improve the products being produced currently or
produce new products.
2. Local leaders
Social and community projects could emanate from the suggestions
made by local leaders regarding the problems prevailing in the area.
Local leaders could also initiate project ideas from already identified or
implemented projects. For instance, project ideas on irrigation could be
initiated from an already constructed hydro-electric dam.
3. Entrepreneurs
Entrepreneurship includes the characteristics of perception of
managerial competence and motivation to achieve results. These
characteristics make entrepreneurs are the major sources of industrial
and commercial projects. Although entrepreneurship skills have been
passed on from one generation to another along family and socio-
economic circles, it has been recognized that programs for
entrepreneurship development will help individuals to come up with
useful ideas.
4. Governments
Government guidelines such as national development plans that spell
out what the government is likely to do to achieve its targets in different
sectors of the economy are the sources of many projects by the
government and entrepreneurs.
Tips to find good project ideas
Identifying good project ideas that can be translated to viable projects
requires looking in to a wide variety of sources. Some of the sources to
look in to in finding good project ideas include:
a. Analyzing the performance of the existing industries
Analysing the exiting firms in an industry in terms of their profitability
and capacity utilization can indicate of promising investment
opportunities. Analysis of the capacity utilization of the existing firms

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can be used to assess the possibilities for further investment. Such
studies become more useful if they are made region wise, particularly for
products with high transportation costs. This makes the analysis more
dependable because the chance that the product will be supplied from
distant areas is minimal.

b. Examine the inputs and outputs of existing industries

Analysis of the inputs being used by existing industries could be sources
of project ideas relating to supplying these inputs. Profitable
opportunities exist when:
 Materials and parts are being supplied from distant areas
with lags and high transportation costs
 Several firms are internally producing some components
which can be supplied at a lower cost by a single
manufacturer which can employ economies of scale.
Analysis of the out puts of firms will provide project ideas on further
processing of the products. In addition, the analysis of out puts can
throw up ideas on utilization of wastes products and byproducts.
Production of ethanol from the by product of sugar factories is a good
example in this case.
c. Review of imports and exports
Review of the imports of a country over the years provides possibilities of
import substitution. Such projects have numerous benefits for the
country in terms employment creation, forward and back ward linkages,
and improving balance of payments. Analysis of exports presents the
export possibilities. Many of the plastic factories in our country could be
mentioned in this instance.
d. Government plans and guidelines

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The national development plan of a country is good indicator of a
government’s likely expenditures in the future. Hence, careful review of
the government’s national and sectoral development plans and strategies
can identify profitable projects with an added advantage of facilitating a
country’s development goals.
e. Investigation of local resources and skills
A search for project ideas may start with the analysis of the local
resources and skills. Then projects that can profitably utilize the skill
and resources will be designed. The weaving skills of those making
traditional clothes could be a source of project idea if one plans to use
the skill for mass production of the clothes.
f. Analyze social and economic trends
Future demand for a good or a service is hugely affected by the social
and economic changes of a society. Therefore, close investigation of the
economic trends and social changes on consumption patterns provide
many business opportunities. The changes in the settlement and
working pattern of Addis residents some how have resulted in trash
collection services.
g. Drawing clues from consumptions abroad
Entrepreneurs may identify projects for the production of products or
supply of services which are new to the country but extensively used
abroad. Packed water production by Apex bottling and other
manufactures can be taken as an example here.
Other sources include: exploring the possibility of reviving a sick firm,
attending trade fairs and looking in to the suggestions being made by
banks and trade and industry agencies.
Opportunity Studies and Preliminary Screening
By using the above methods a long list of project ideas can be developed.
How ever, those projects that are not promising should be eliminated

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through a screening process. This preliminary screening weighs a project
in terms of the following variables:
Compatibility with the Promoter
The idea should be compatible with the interest, personality and
resources of the entrepreneur. A real opportunity should fit the
personality of the promoter-abilities, training and priorities; accessible
and offers a prospect of rapid growth and high return on invested capital.

Compatible with Governmental Priorities

The project idea should be with in the government’s regulatory
framework. In addition, it should be in line with the country’s goals to
ensure its sustainability.
Availability of Inputs The resources and inputs required for the project
must be reasonably assured. These inputs include: capital requirements
of the project, technical know-how, raw materials, power and foreign
exchange.
Adequacy of Markets The size of the market for the goods or services
produced by the project must offer adequate sales volume. In this regard,
both the current and predicted demand levels should be assessed. In
general assessment of the market adequacy should consider:
 Total present domestic market
 Competitors and their market share
 Export markets
 Sales and distribution system
 Projected increase in consumption
 Barriers to entry
 Economic, social and demographic trends
 Patent protection

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Reasonableness of Costs The cost of the proposed project should be
commendable considering the benefits expected from it. The following
costs are considered in this regard:
 Cost of material inputs and labor
 Factory overheads
 Administrative expenses
 Service costs and
 Economies of scale
Acceptability of Risk Level The desirability of a project is critically
dependent on the risk characterizing it. The following factors are used in
assessing the risk level of a project:
 Vulnerability of business cycle
 Technological changes
 Competition from substitutes and imports
 Government control over price and distributions
Pre-feasibility Studies
Since formulation of the feasibility study is costly and time consuming
task, further assessment of the project idea is made in a feasibility study.
It is an intermediate stage between the project identification and a
detailed feasibility study. The principal objectives of it are to determine:
 All possible project alternatives are examined
 The project concept justifies a detailed analysis of a
feasibility study
 The project idea on the basis of available
information should be considered either non-viable or
attractive enough
 The environmental situation at the planned site and
the potential impact of the projected production process are
in line with national standards.

23
The difference between the feasibility study and the pre-feasibility study
is in the extent of detail of the information obtained. The structure of the
pre-feasibility study should be the same as the structure of the feasibility
study. How ever, detailed review of the available alternatives must take
place at this stage since it is costly and time consuming to do this in the
feasibility stage. In particular, the review should cover the various
alternatives identified in terms of:
 Project or corporate strategies and scope of the
project
 Market and marketing concept
 Raw materials and factory supplies
 Location, site and environment
 Engineering and technology
 Organization and overhead costs
 Human resource
 Project implementation schedule and budgeting
In general, the pre-feasibility study involves subjective judgment of the
project in terms of:
Availability of an adequate market: - judgments relating to the number
of potential customers, needs of the customers, strength of the
competitors, availability and access to sales and distribution network
and export possibilities.
Project growth potential: - assessment of indicators on projected
increase in the number of customers, increase in the rate of acceptance
of the products, the general economic, social and political trend which
could affect the growth potential of the project.
Investment costs: - Costs of raw materials transportation costs,
distribution costs, labor costs, production costs and investment costs are
usually considered. If the above costs are very high sustainability of the
project is questionable.

24
Demand and supply factors:- This involves the projection of both short
term and long term requirements of the project’s out put and examining
the implications of these on the project’s capacity. Many projects fail
because they have started with a very large capacity only to operate at a
much lower capacity. On the other hand, increasing the capacity of the
project shortly after it starts operation is very costly.
Social and environmental considerations: - the project should also
conform to the social considerations of the locality in which it is
implemented. In addition; especially in industrial projects, due
consideration should be given to the environmental effects of it on the
surrounding.

Project Preparation
Feasibility Studies
Feasibility studies are detailed analysis of the project in different
dimensions that lead to an investment decision. It provides information
required for the project appraisal. It is similar in content with the pre-
feasibility study except it is done in detail with greatest accuracy in an
iterative optimization process. It usually includes seven major parts viz:
market analysis, technical analysis, organizational analysis, financial
analysis, economic analysis, social analysis and environmental analysis.

Final estimates on investment production cost and the subsequent

calculations of financial and economic profitability are made at this
stage. How ever these estimates will be meaningful only when the scope
of the project is properly defined. Other wise an essential component of

25
the project with its related cost could be omitted. The project scope
should serve as the supporting structure during further project work.

The scope of the project should clearly define the boundaries of the
project. It should include the battery limits of the project and should
include cost computations, estimates and projections related to the
supply of inputs, the delivery of outputs, and ancillary investments. It
should embrace all the activities scheduled to take place at the plant
site, the ancillary operations relating to production, extraction, sewerage
and the treatment of pollutants. In addition, off-site transport and
storage of inputs and out puts(including wastes, by-products, wastes
and emissions) and off-site ancillary operations such as housing,
schemes, education, training, and recreational facilities must be
considered in setting the project scope. Improperly set project plans
result in inaccurate investment, marketing, and production cost
estimates.

Feasibility studies should be conducted only if the necessary financing

facilities, as determined by the studies, can be identified with a fair
degree of accuracy. Hence, possible financing must be considered as
early as the feasibility stage.
Data for pre-Investment Studies
Estimates of the major components in the feasibility study and then in
the appraisal process, investment, marketing and production costs, are
made by the following means:
 Calling for tenders based on specifications and bills of
quantities. This is the most accurate method.
 Using prices from similar projects to calculate costs
based on specifications and bills of quantities.

26
  Using the unit cost parameters derived from
comparable operational projects.
 Estimating the totals for groups of equipments or
functional project parts based on costs of comparable
existing projects.
Investment cost estimates based on cost parameters and lump-sums
should be adjusted for:
 Inflation and changes in foreign exchange rates
 Differences in local conditions
 Differences in laws and regulations
 Accessibility of the construction site
 Error factor
Material and labor costs can be obtained from locally or through tenders
from suppliers in the case of imports. The prevailing labor legislation and
the skills of local labor have to be accounted for. When estimating input
requirements the following parameters should be considered: marketing
concept; production program; work program (number of shifts per day,
working days,…) type of technology and equipment; skills of labor and
staff; quality of material inputs; and environmental laws.
Important data sources include banks, data banks (if available)
equipment manufacturers, and international organizations.
Non-Numeric Models Project Selection Models
Feasibility study is not conducted for every project. There are conditions
where feasibility studies will not be conducted for project selection. These
are:
1. Sacred Cow:- In this model a project is suggested by a senior and
powerful individual in an organization and the idea is passed to
the officers below. Such projects may not pass rigorous analysis.
Many projects in the public sector of developing countries have
been initiated using this approach.

27
 2. Operating Necessity: - In this model projects are initiated to keep
the system in operation. Projects are initiated and funded with out
much analysis when threatening situations such as flood happen.
3. Competitive Necessity: - Projects initiated to maintain a
competitive edge over other organizations. Such projects are key to
the survival of the organization.
4. Product line extension:- This approach is used when a project is
intended to develop and distribute a new product or products.
Usually such projects are intended to fill a gap or to strengthen a
weak link or to take the organization in to a new direction. Usually
such projects are usually judged favorably.
5. Comparative Benefit Model: - This model is used when a firm has
several projects which must be considered and some ranking
given. In this model the projects are sorted out in to good, fair and
poor. This is done according to some development merit list. The
projects are again ranked with in each category using a merit list.
In this way an organization will come up with a priority order of
available projects.

Market Analysis
Marketing Research
It mainly deals in the analysis of demand [end-use trading] and
competition, consumer behavior and consumer needs, competitive
products and marketing instruments and the impact of social, ecological
and economic factors. The research work proceeds step by step, in line
with the planning process, as reflected in the following figure. Any errors
made in the research phase would result in wrong marketing concepts,
and may place the whole project in jeopardy.
Objectives and Scope of Research:

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There are three principal requirements of demand and market analysis.
1. Market-project relations should be made transparent
2. Strategic constraints and problems should be identified
3. Strategic options for the project should be outlined.
Sources of Data for research
There are basically two options:
Desk Research: - The overall quantitative estimates are based
entirely upon the results of desk research. It is the assessment of
existing information contained, for example, in statistics and reports
that were originally collected or prepared for other purposes.

Field Survey- refers to the assessment of information directly by

interviews, tests and observation. Here the more detailed quantitative
findings and those of qualitative nature emerge from this. No field
survey should be undertaken before the full potential of desk research
has been exhausted.

Most marketing studies include data on the following:

1. General economic indicators relating to product demand like
population level, growth rate, per capita income and consumption,
GDP per capita and growth rate- income distribution.
2. Government policies-production-consumption-imports-exports-
restrictions-duties-taxes-incentives-credit controls-forex
regulations
3. Present level of domestic production-value-volume-intended
production for internal consumption.
4. Present imports, value and volume
5. Imports of substitutes and near substitutes
6. Critical inputs and complementary products

29
7. Production targets in national economic plans, substitutes and
complementary products.
8. Present levels of exports and
9. Consumer habits, responses and trade practices.
The period to be covered by a demand and market studies varies. In
one case, data over 10 years may be adequate because of abnormal
fluctuations during the period. In another case data may be coverable
for three or four consecutive years. One year should not be used as a
basis for projections.
Steps in marketing research
The first step of demand and market analysis is to determine the
target market of the project and to describe and analyze the structure
of this market. It is important to assess and describe significant
relations between the elements of marketing system, which is the
structure of the industry [suppliers, types of enterprises, organization
of the industry or branch], consumer profiles, patterns of employment
and competition and structure of distribution.
1. Determine the target market –structure of the industry, customer
profiles and competition.
2. Customer analysis-needs and behavior, what-why-when-how
much and where to buy.
3. Market segmentation-based on geographical, rural, urban,
linguistic, socio, demographic, age sex, income education,
psychological, purpose, status etc.
4. Market analysis-actual market volumes, future market volume and
market share of the enterprise.
5. Export market analysis-plant capacity, economics of scale, price
and quality
6. Analysis of the channels of distribution-relative measures and
demerits.

30
 7. Analysis of competitors- their aims and their SWOT.
8. Analysis of the socio-economic, environment and life cycle of a
sub-sector [group of enterprises producing same or similar
product] in the context of world economy or economy of a country.
Projecting marketing data to cover quantitative and qualitative data
about supply and demand in the market, market share and competitive
situation. Some of the techniques used for demand forecasting are: a].
the trend method, b]. the consumption level method, c]. the leading
indicators method and d] Regression method.
MARKET ANALYSIS
Market analysis indicates the demand potential of the output of the
project. Such a potential is determined by examining a number of factors
such as demographic statistics of the areas or regions where the outputs
will be sold, the income levels of the people in these regions and what is
contained in the development plans of these plans.

For all investment projects, including those with the primary objective of
resource utilization, market analysis is the key activity for determining
the scope of an investment, the possible production programs, the
technology required and often also the choice of a location. Market
analysts have a clear understanding of the quantity and quality of the
products and by-products involved and of possible alternatives with
regard to economic size, as determined by the input requirements, as
well as by technological and location constraints.

The demand or market analysis must be carefully structured and

planned in order to obtain the required information with in the time and
cost limits, and to determine the possible marketing and production
strategies required to attain the basic or corporate objectives. Planning of
marketing research requires an understanding of the marketing system,

31
the determination of the objectives and scope of research, and proper
structuring of the market to be analyzed.

In general, the first step in the market analysis is the preparation of a

detailed estimate of the actual market volume and the market potential
or maximum possible demand of the total market. The second step is to
project the future market volume on the basis of the marketing data. The
targeted market share of the enterprise or the project then is estimated.
The targeted market share provides the basis for the projection of sales
quantities, and therefore for the production program, plant capacity and
derived requirements for materials and inputs, labour, investment etc.
Export Markets
The possibility of extending the market to other countries should be
explored for most projects of any size, as export sales have to be taken
into consideration in determining plant capacity.

International competition is furthered especially through economies of

scale, for example, in production or marketing, through comparative
location advantages, the development of international cooperation,
access to technologies etc. On the other hand, international marketing
may be hampered by high shipping and warehouse costs, sensitivity to
terms of delivery, different national product requirements and trade
barriers. Such as import restrictions, foreign exchange control and
stringent industrial standards.

Fore products that developing countries are contemplating, or have just

started, manufacturing and these would be the majority of goods and
services from developing countries the starting-point should be an
analysis of past imports in to the home country, the unit cost of such
imports, the exporting countries and the characteristics of the imported

32
product. such information is necessary, even from the view point of
domestic production, to test the competitiveness of product.

First, the price and quality of the product in the international market
should be determined, secondly, the geographical divisions of possible
exports should be defined in the context of a particular product. The
export market survey can start with certain principal markets to be
penetrated initially and gradually extended to other countries as plant
capacity is expanded to meet increased market demand.

The possibility of extending the market to other countries should be

explored for most projects. Export surveys could range from projections
of past imports in an external market with general projections for the
future to a detailed demand forecast in any particular external market
using the forecasting techniques.
Analysis of the Channels of Distribution
Sales or distribution channels are the chain connecting producers and
end-users. This mediation function is usually performed by specialized
enterprises, agencies or representatives, using their own marketing
instruments. In addition, these channels are also lines of information
between manufacturers and consumers. Either separately or in
combination, the three main routes to the end-customer are as follows:
through wholesalers to retailers; through retailers only; directly to
consumers. The choice of distribution channels should be based on the
results of the market research.
Distribution through wholesalers
This channel performs a particularly valuable function where many
different articles are involved, and when distribution must be made to
many small retail outlets. The advantages of this distribution channel
are as follows:

33
  The wholesaler often accepts large commodity consignments to
hold in stock or inventory;
 The wholesaler reaches a majority of the small shopkeepers;
 The transport problems of the manufacturer, invoicing and credit
control are comparatively simple;
 Relatively few salespersons are needed by the manufacturer
Distribution through retailers
Distribution may be unrestrictive or selective, the former being feasible
for some branded articles such as cigarettes, which are bought by a very
wide variety of consumers at frequent intervals, and for certain
unbranded items which are similarly purchased. Selective distribution is
suitable for products of high quality, branded and advertised nationally
or regionally, and which may require skilled installation with after-sales
service; some consumer durables are likely to be distributed thus.
Distribution directly to consumers
Direct sale is the usual channel for industrial products and capital
goods, for which it is ordinarily most cost-effective, although the
appointment of distributors can be necessary in certain industries.
Analysis of the Competitors
Assessing the project situation must also take in to account the
intentions of competitors. In analyzing the competitors, it is essential to
focus on important individual competitors or on groups displaying
similar behavior. In a second step the analysis will have to e further
elaborated, giving special attention to the following questions.
 How do the competitors use their marketing tools?
 Which target groups (segments) do they work on and how
extensively?
 In which segments have they special strengths and what are their
weaknesses?
Analysis of the Socio-economic Environment

34
The market research should include an analysis of the industrial sub
sector concerned, as well as an assessment and analysis of the relevant
economic and social environment of the project. The sub sector analysis
should provide an answer to the following main question:

What are the key success factors in a competitive environment, and what
significant opportunities and risks are sector-specific? The analysis
should in principle concentrate on the life cycle of the sub sector, its
profitability and the wider socio-economic environment of which the
industrial sub sector is a part.

A sub sector comprises a group of enterprises manufacturing products

that could almost replace each other. It should be noted that because of
technological innovations, for example, an industry in the maturity
phase may become a sub sector in the growing phase again.
Analysis of the wider socio-economic environment
The objective of the analysis of the wider socio-economic environment is
to determine social and socio-economic aspects relevant to the
preparation and evaluation of the project strategy and marketing
concept. Such aspects may reflect the society and its culture, social and
economic policies, and related regulations, customs and habits. They
are relevant to the extent that they have an impact on project
opportunities and risks.
Life cycle of a sub-sector: A sub-sector comprises a group of
enterprises manufacturing products that could almost replace each
other.
The following are the examples of sub-sectors in different phases: solar
energy [start-up]; electronics components [growth]; cars and food
[maturity or saturation]; and shipbuilding [shrinkage]. Identifying the
phase of the life cycle is important because it also implies conclusions
regarding the present and future development of the market potential,

35
the market volume and the market share. To be successful, different
strategies will have to be applied for each individual phase of the life
cycle.
Internal Analysis
In cases of existing companies planning for expansion, modernization-all
areas like production, finance personnel management to cover and
SWOT analysis.
Projection of marketing Demand
DEMAND FORECASTING TECHNIQUES
A. Employment of demand forecasting techniques
Utmost caution should be exercised in the use of demand forecasting
techniques, in order to avoid misleading results.
Important points:
 Characteristics should be precisely defined. For example
distinction between different gases [oxygen, carbon dioxide] must
be made in the analysis.
 A fairly large number of observations should be taken while
finding averages, norms, standards, trends and co-efficients as a
measure of statistical tests of significance.[ 4 year period is not a
valid for long-term forecast].
 Data and coefficients associated with one market cannot be
applied to others. For example, income elasticity of demand for low
income groups is not the same for high-income groups
 Assumptions made in the analysis, the formulation of coefficients
and correlations must be distinctly expressed with out reservation.
 The selection of statistical techniques for analysis should be
appropriate to the nature of product, market, and data patterns.
 Reference data should be used with the necessary adjustment.
 Weighted averages should be preferable

36
Consideration of competition from domestic and foreign suppliers
Forecasting of demand and projections of supply of a product are a
matter of judgment, since they depend on the availability of a product
through increased domestic production or imports. In countries where a
system of industrial licensing or governmental approval operates, it is
possible to project estimates of manufacturing capacity to a reasonable
degree. In other cases, an independent assessment of domestic
manufacture of a particular product has to be made. Imports of products
are influenced by government policies.
Projection of exports
The possibility of extending the market to other countries may be
possible through expansion of plant capacity. Though a project may be
conceived primarily as an import-substitution measure but it may have
export capability either immediately on commencement of production or
with in a reasonable period during which productive skills can be
developed.

In case of evaluation of export markets, particularly for the products

currently exported, starting point is the collection and evaluation of data
relating to the quantities exported, units, unit prices for exports, the
importing country and the product quality, brand name and use of a
particular selling agency. A further survey then has to be undertaken of
the size of the market in importing countries and other countries that are
similar in terms of development, import policies, shipping costs etc.

In the case of products that developing countries are contemplating or

just started manufacturing, the starting point should be analysis of past
imports into the home country, the unit cost of such imports, the
exporting countries and the imported product features. Secondly, the
geographical divisions of possible export markets should be defined. If
proposed product is considered tot be internationally competitive in

37
terms of quality and technological input, the global market should be
tackled step by step.

For some products, economies of scale may prove a determining factor in

defining export markets. A plant intended to start production of 50,000
cars cannot expect to compete in external markets with other
manufacturers of who produce 300,000 cars. However, the possibility of
exporting trucks is much greater, as economies of scale may allow

operation at a much lower level of production.

In the case of intermediate products, their export could be determined by

transport costs, and comparable quality. For capital goods, export
markets have to be gauged in terms of the possible acceptability of
particular products by principal users and the stress is on quality, prices
and availability of spares and after-sales services.

After outlining the geographical divisions of possible export markets, a

market survey may need to be undertaken in selected countries. Export
surveys could range from projections of past imports in an external
market and a demand forecast fore future.

Information on imports and its sources into developed countries can be

obtained with less difficulty. Most developed countries have agencies to
collect economic data on possible export markets. In the case of
developing countries, visits to selected countries may be necessary for
collecting information.
Total demand
Total demand, present and projected, should therefore cover both
domestic and export markets and relate to the phasing of market
penetration for a particular product. The demand study should include
in terms of pricing, quality, technology and consumer preferences for

38
particular brands. An effective demand survey can determine the plant
capacity and market strategy to be followed.
Market penetration
An essential feature of demand projections is an estimate of the market
penetration for a particular product and would be related to the degree of
competitiveness, either domestic or foreign; consumer response; and the
amount of substitution that would be possible. The conditions of market
penetration such as product quality, packaging, marketing and
distribution arrangements and after-sales services for machinery and
other products must be defined to achieve a sales and income target.
Where a particular product is to be manufactured in a country for the
first time and a system of licensing and import controls is operating,
consumer reaction and possibility of product substitution would be
determinant factors.
Techniques
Trend (extrapolation) method
The trend method, a quite common technique is based on the
extrapolation of past data, and involves the determination of a trend and
the identification of its parameters. Two of the alternative trend curves
for forecasting are indicated below.
Arithmetic (linear) trend. The equation is:
Y = a + bT
Where Y is the variable being forecast and T is to be estimated.
Exponential (semi-log) trend. The equation is:
Y = aebT
or = inY = In a + bT
This trend assumes a constant growth rate ‘b’ within each period.
The first step in measuring a trend is to take a moving average of two to
three years, in order to correct for major annual fluctuations. Where
such a moving average results in a smooth curve, a growth pattern will

39
be discernible. It is, however, possible that fluctuations will cover a
period longer than a year (for example, the demand for power-generating
equipment when attributable to an intensified programme for expanding
capacity). Correction should be made for such fluctuations. Figures for
one year are sometimes missing, in which case statistical interpolation
may be necessary.
Consumption-level method
The consumption-level method considers the level of consumption, using
standard and defined coefficients, and can be usefully adopted for
consumer products. Thus the demand for cars can be estimated by
determining the ratio of cars per 1,000 inhabitants, or the coefficients of
car ownership among identified income levels, industrial units and
Government. Once the total requirements are known, the actual car
population is subtracted from the total to arrive at the new demand.
Replacement requirements can be added to this forecast.

A major determinate of consumption level is consumer income,

influencing, inter-alia, the household budget allocations which
consumers are willing to make for a given product. With few exceptions,
product consumption levels demonstrate high degrees of correlation
differ between products. An example of products being negatively
correlated with income levels is the consumption of such items as
cheaper varieties of cloth and paper by the poor.

End-use or consumption coefficient method

The end-use or consumption coefficient method is particularly suitable
for assessing intermediate products. It involves the following.
 All possible uses of a product are identified; including, for example,
input to other industries, direct consumption demand, imports
and exports;

40
  The input-output coefficient of the product and the industries
using the product are obtained or estimated. It is then possible to
derive the demand for a product, that is, for consumption plus its
exports and net of imports, from the projected out put levels of the
consuming industries.
In order to forecast the demand for methanol, for instance, industries
using methanol would initially be identified. These would include the
formaldehyde. Fertilizer and pharmaceutical industries. The planned
manufacturing programmes of these three industries would define the
future requirements of methanol, after allowing for demand from other
users (who would be grouped together).

A similar approach could be adopted for some items of machinery, such

as compressors or industrial turbines. The technique can also be used
for consumer products and for mixed types of product. For example, the
demand for cement can be assessed by estimating the requirements of
cement for various construction activities, such as private and public
housing, dams, public works and other types of construction.

The end-use method utilizes consumption coefficients, and is therefore

also called the consumption coefficient method. When identified, the
coefficient appropriate for a consumption goal is multiplied by the size of
the activity to arrive at the forecast consumption level.

Regression models
In the regression technique, forecasts are made on the basis of
relationship estimated between the forecast (or dependent) variable and
the explanatory (or independent) variables. Different combinations of
independent variables can be tested with data, until an accurate

41
forecasting equation is derived. Unfortunately, projection of the
independent variables is difficult.
Leading indicator method
The leading indicator method is a variant of the consumption-coefficient
and regression methods. Leading indicators are variables that react to
change before, and which can be used to predict, other variables. Thus
the demand for electric fans might be found to lag, for instance, two
years behind the housing investment of various agencies. To use these
indicators for forecasting purposes, at first the appropriate leading
indicators would have to be identified, and then the relationship between
them and the variable being forecast is determined.
Project Strategy
A project strategy is a set of objectives and principles defined for a
project with a view to determining the allocation of resources over a
period of time. The project strategy is central to both the preparation and
the evaluation of an investment project, and to the design of a proper
marketing concept. It also has a determining impact on the choice of
location, technical plant parameters [capacity, technology etc] and
resource requirements. One of the tasks of marketing research will be to
examine a preliminary project strategy from the marketing point of view,
and to identify alternative strategies.
Determination of the marketing strategy
In the feasibility study alternative marketing strategies should be
assessed because it will have an impact on the project parameters
[scope, type of project, technology and location etc] and must be related
to the project strategy.
a]. Competition strategy: This strategy aims at gaining market
shares from competitors. The firm with a greatest market share in
general changes to a competitive strategy later than the smaller ones.
The following competitive strategies can be distinguished- aggressive

42
 price strategy-dumping prices; imitation strategy-competitors
marketing efforts; profile strategy--focusing on quality performance
and brand name.
b]. Market expansion strategy: This strategy is geared towards the
creation of new markets or to demand intensification [more
consumption]. The following aspects are necessary for this strategy—
the current phase of sub-sector life cycle; the possibilities of
influencing market; structure of production costs vis-à-vis the
competitors; sale price and building up of a special image.
Marketing Concept
The marketing concept comprises the marketing strategy and the
operative measures required to implement the project strategy and reach
the project or corporate objectives. The marketing strategy to be
considered involves the following dimensions: identification of target
groups and of the products likely to win their favour; and determination
of competition policies, that is whether allow price strategy or
differentiation strategy should be pursued to defeat competition.
Production Program and Plant Capacity
Production Program
After having determined the required sales program, a feasibility
study should define the detailed production program. A production
program should indicate the levels of output to be achieved during
specified periods, which should be related to specific sales forecasts.
With in the overall plant capacity, there can be various levels of
production activity during different stages. Full production may not
be practicable for most projects during the initial production
operations. Owing to various technological, production and
commercial difficulties, most projects experience initial problems,
which lead to gradual growth of sales and market penetration. Even if

43
full production were to be achieved in the first year, marketing and
sales might prove a bottleneck.
Determination of production program
Depending on the nature of the industry and local factor situations,
production and sales target of 40-50 percent of overall capacity for the
first year should be reasonable. It is only towards the third or fourth
year that full production levels can be achieved and operating ratios
effectively determined and adequately planned for. Growth of skills in
operations can also be a limiting factor in a number of industries,
particularly the engineering goods industry, and production has to be
tailored to the development of such skills and productivity. Full
capacity may be achieved in such cases only after some years.

The determination of a production program during the initial

production years vary considerably from project to project. This can
be illustrated by type of industries like Cement [single product], oil
refinery [multiple product], engineering workshop [batch-order job
production], and motor cars [assembly and mass manufacture]. In the
first case, the growth of sales may not be a problem but production
problems may be critical. In the second case, both production and
sales problems may arise. In the third case, a production aspect
present’s difficulties, obtaining a satisfactory order book would be
critical. In fourth case, the sales aspects in relation to price would be
dominant.
Input requirements: Once a production program defines the levels of
output in terms of end-products, intermediate products, the specific
requirements of material and labour should be quantified in each
stage. For this purpose, a material- flow diagram should be prepared,
showing the materials and utilities balances at various stages of
production. The input requirements and costs have to be assessed for
basic materials, semi-processed and bought-out items; major factory

44
supplies [auxiliary materials and utilities]; other factory supplies; and
direct labour requirements.

Detailed estimates in this regard should be prepared for the stages of

initial as well as full production. It is also necessary to provide for
wastage, damage or rejection elements in preparing the material
consumption estimates and for reserve labor needs. Sales program
should serve as planning base for determining the production
program and scheduling the cash flow table. For this purpose, the
different envisaged capacity utilization rates should be inserted.
Technology: An important factor in determining the production
program and plant capacity is the technology and know-how to be
utilized in the project. Specific processes are often related to certain
levels of production or become technically and economically feasible
only at such levels. This is particularly applicable to the chemical
industry, where certain processes can be utilized far more effectively
at specific levels of production, but the principle can be extended to
other industries.

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