CHAPTER THREE

IDENTIFICATION AND FORMULATION OF PROJECTS

3.1 Definitions of Project Ideas

Project idea is the statements of how a certain problem can be overcome /overwhelmed or a
particular objective can be achieved.
The search for promising project ideas is the first step towards establishing a successful venture.
Identification of investment opportunities requires imagination/thoughts, sensitivity to
environmental changes, and realistic assessment of what the investor can do.
A very common method for project formation is someone with specialized technical knowledge
or marketing expertise who feels that he/she can offer a product or service to satisfy unmet
need or serve a market where demand exceeds supply or effectively compete with similar
products or services because of certain favorable features like better quality or lower prices.

To stimulate the flow of project ideas, SWOT analysis is helpful. It analyzes strengths,
weaknesses, opportunities and threats; SWOT analysis represents a conscious, deliberate, and
systematic effort by an organization or an expert to identify opportunities that can be profitably
exploited by it. Periodic SWOT analysis facilitates generation of idea.

3.2 Methods of Project Identification

According to Ministry of Economic Development and Cooperation, there are five methods for
identifying projects. They are the following:
1. Analyze Major Development Problems
Development of a country depends heavily on the way of handling the problems related to
development.
The development possibilities of the country together with the problems that confront with the
development should be analyzed thoroughly. The ideas for development and problems have to
be listed down in their order of priority. Examining Problems in relation to housing,
transportation, health, education, entertainment, telecom, and others is the most appropriate
method to identify project ideas.
2. Analyze National Objectives

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 The stated objectives of the government (country) have to be analyzed to formulate projects.
The objectives of the country can be achieved only by formulating suitable projects. The national
objectives are always emerged on the basis of the social needs. In other words, a proper analysis
of the social needs is inheritable for identifying suitable projects.

That is any interested groups (NGO’s, investors, countries, individuals…) need to analyze
objectives of a government/country.
3. Economic Analysis
The nature and type of trade in a country provides a number of opportunities for establishing
projects. Information on imports, exports etc. may be obtained from trade reports. Such reports
may also shed light to the possible accessibility to the trade sector of other countries and the
investment opportunities in other countries. This information may pave the way for the
establishment of a number of projects inside and outside a country.
4. Natural Resource Survey
A survey on the natural resources of a country may facilitate for identifying a number of projects.
A country may also have a lot of unidentified natural resources. A part of the resources that
have already been known to the people might not have been properly exploited. Thus surveys on
both identified and unidentified resources are important sources of project opportunities.
Especially, agricultural and mineral projects depend heavily on natural resource surveys.
5. Socio-Spatial Approach to Project Identification
This approach for identifying projects usually employs the following:
A. Participatory Approach: The participatory approach of formulating projects is on the belief
that the projects should be formulated with the participation of the people.
This approach emphasizes that the first step in the project planning cycle is to consult the
people about the development needs of their area. Then, a situational analysis of major
development bottlenecks will be done with the participation of the people. As a result, many key
projects, which are very essential for the people, could be identified. Since these projects are
formulated with the participation of the people, they will have more acceptability and
commitment of the community.

B. Area-based functional Analysis: This approach is to identify package projects or

complementary projects for a particular area, village, district, or community. These projects

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usually aim at addressing problem of social and spatial inequalities. They may be part of the
overall development plan of the region or the country.
3.3 Sources of Project Ideas
The following are some suggestions for trapping the sources of good project idea.

1. Analyze the performance of existing industries

A study of existing industries in terms of their profitability and capacity utilization is helpful.
The analysis of profitability and breakeven level of various industries and an examination of
capacity utilization of various industries indicate promising investment opportunities.

2. Examine the inputs and outputs of various industries

An analysis of inputs may throw up project ideas. If inputs required by firms in a country or
certain locality are purchased from distant sources or if some firms produce their inputs
internally that can be supplied at a lower cost investment opportunity is there. Similarly, a
study of output may reveal opportunities for adding value through further processing of main
products, by-products, as well as waste products. ‘One person’s trash may be another person’s
treasure.

3. Review of Imports and Exports

An analysis of import statistics from period of 5 to 7 years is helpful in understanding the trend
of imports and the potential for import substitution. Local production of such goods may
improve the balance of payment situation and create employment opportunities.

4. Study Plan Outlays and Government Guidelines

The government’s proposed outlays in different sectors, its priority areas in the development
process, and its attitude towards private investment will lead to a number of investment
opportunities. Various incentives offered by the government will also be helpful for formulating
projects.

5. Look at the suggestions of Financial Institutions and Developmental Agencies

Financial institution and development agencies offer suggestions to potential entrepreneurs. The
suggestions of these agencies are helpful in identifying promising projects.
6. Investigate local materials and resources

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A search for local materials will lead to a number of project opportunities. We may come across
unexplored raw materials and unexploited labor skills.

7. 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. The demand for timesaving products like fast food, ovens etc. have been
increasing.
8. Study new technological development
New products or new processes and technologies for existing products developed by researchers
may offer investment opportunities.
9. Draw clues from consumption abroad
Products or supply of services which are new to the country but extensively used abroad may be
good ideas for investment.

10. Explore the possibility of reviving sick units

There may be a number of units, which have been characterized as sick. A significant proportion
of sick units can be nursed back to health, by sound management, infusion of further capital, and
provision of inputs. Hence, there is a fairly good scope for investment in this area.

11. Identify unfulfilled psychological needs

Though goods are available in the market, there may be customers who are not satisfied with
the available products. The available products may not be suitable for satisfying the particular
passions and desires of certain customers. A study on such unsatisfied needs may open doors
for investment.
12. Attend Trade Fairs and Exhibitions
National and international trade fairs provide excellent opportunities to get to know about new
products and developments.
13. Stimulate creativity for generating new product ideas
New product ideas may be generated by thinking along the following lines: Modification,
Rearrangement, Magnification, Combination and Substitution.
14. Chance factors

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 You may come across various investment opportunities accidentally, particularly while you are
on a journey.
15. Unusual events
These include factors such as drought, flood, earthquake, hostilities/conflicts etc.

3.4 Points to be considered in Preliminary Screening

Using the above mentioned sources and methods, it is possible to develop a long list of project
ideas. But, all the ideas generated may not be promising. Therefore, a preliminary screening is
required to eliminate ideas which are not promising. In order to do a preliminary screening the
following aspects/factors have to be taken into account.
a) Potential demand for products in reaction to population increase, national income increase
(hence personal income) or due to the novelty of the product.
There should be a potential for growth and a reasonable return on investment. Therefore, the
overall situation of the market should be paid attention in the selection of a project idea. The
total present domestic market, export market, competitors and their market shares, sales and
distribution system, and projected increase in consumption are some of the factors that influence
the marketing aspect of the project. In other words, the project under consideration must make
sure that adequate market will be available for the product of the project.
b) Imports and possible import substitution.
c) Export possibilities
There must be potential for export if the local market saturates.
d) Experience of other countries with similar development, resource and economic background.
e) Possibility for interlink-age with domestic/foreign industries.
f) Possibility for product line extension through integration with other existing set-ups:
i. Horizontal Integration – combination of organizations producing essentially similar
products or existing at the same stage of production, marketing or distribution. The most
common approach is to buy out competitors.
ii. Vertical Integration – combination of different types of organizations along the supply
chain: Vertical Integration is divided in to two as Backward and Forward Integration.
 Backward Integration: when an organization starts to produce materials or components needed
to produce a finish product it currently produces e.g. when a bakery starts to process flour

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  Forward Integration: when an organization engages in supply of inputs or starts to produce
finished goods/services based on the inputs it supplies e.g. when a flour mill starts baking bread
g) Possibility for diversification:
i. Conglomerate diversification – widening product range by adding products unrelated to
existing ones e.g. when a college is engaged in transportation/bottling affairs.
ii. Concentric diversification – widening product range by adding products related to existing
ones in terms of processing, input or other requirements e.g. when a college diversifies to
distance education or when a food processing plant enters into processing drinking items.
h) Availability of production factors / inputs
The resources and inputs required for the project must be reasonably assured. A number of
projects in some of the developing countries face with shortages of inputs like power, foreign
exchange, and important raw materials. Therefore, the project under consideration needs the
assurance of following inputs:
- The capital requirements of the project should be within the manageable limits.
- The technical knowhow should be obtained.
- Raw materials should be available and
- The power supply and infrastructural facilities should be adequate.
Reasonableness of Cost
Availability of inputs at exorbitant/inflated rates will never help the project to be successful.
Therefore, the initiators of proposed project must see that they can get the necessary inputs at
reasonable costs. The costs of materials, labor costs, factory overheads, administrative and
selling costs, and service costs must be affordable and within the limits of the project cost
structure. Thus, it is better to select a project for which the inputs are available at reasonable cost
and drop a project for which materials and other inputs are available only at a high cost.
i) Compatibility with the Promoter
In choosing from the project ideas, it has to be borne in mind that the ideas must be compatible
with the interest, personality, and resources of the entrepreneur. A project idea is said to be
compatible when:-
- It fits the personality-ability and training-of the entrepreneur / investor
- It is accessible / manageable to him and
- It offers him the prospect of rapid growth and high return on invested capital.
j) Consistency with Government Priorities

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 The project idea under consideration must be capable of meeting the national goals and be
within the framework of the regulation of the government. Some of these regulations are:
environmental regulations, foreign exchange restrictions, and the procedure for giving
licenses. The project must be within the environmental impacts regulations and should never be
contrary to such regulations. The foreign exchange requirement of the project must be within the
foreign exchange regulations of the country.
It should also be checked whether the project is able to obtain license from the government or it
falls under business areas that are restricted by the government.
- General investment climate of the country
- Industrial policies of the government
k) Acceptability of Risk Level
The desirability of a project is critically dependent on the risk characterizing it. A project that
is exposed to low risk is always desirable / advisable. In the assessment of risk, the factors to be
considered are;
(1) Technological changes
(2) Competition from substitutes (think of the five force model/Industry Analysis)
(3) Competition from imports and
(4) Governmental control over price and distribution, etc.

3.5 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:
1. Identify factors relevant for the project rating
2. Assign weights to these factors (the weights are supposed to reflect their relative
importance)
3. Rate the project proposal on various factors, using a suitable rating scale. (Typically a 5-
point or a 7-point scale is used for this purpose.
4. For each factor, multiply the factor rating with the factor weight to get the factor score.

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 5. Add all the factor scores to get the overall project rating index.

Example of project rating index

Assume that the following factors are identified to be relevant for project rating
Factors Factor weight
- Technical know-how 0.20
- Input availability 0.15
- Reasonableness of cost 0.20
- Adequacy of market 0.05
- Stability 0.10
- Dependence of firm’s strength 0.20
- Consistency with government priorities 0.10

If the firm uses five rating scale, determine the rating index for the project
Factor Factor Rating Factor
weight 5 4 3 2 1 Score
Technical know-how 0.20 ü 0.80
Input Availability 0.15 ü 0.45
Reasonableness of costs 0.20 ü 1.00
Adequacy of market 0.05 ü 0.20
Stability 0.10 ü 0.50
Dependence of firm’s strength 0.20 ü 0.40
Consistency with gov’t priorities 0.10 ü 0.50
Rating index 3.85
What is the purpose of rating index? Project rating index enables to identify (from the list) the
project(s) that can be studied further in detail. If the policy of the firm is to further study the
projects whose rating index is 3.50 and above, the above project will enter the next phase of the
project.

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