Chapter Two

Generation and Screening of Project Ideas

Q1. Generation of Ideas
Barring truly new ideas which are based on significant technological
breakthroughs, most of the project ideas involve combining existing fields of
technology or offering variants of present products or services. The typical route
may be described as follows: Someone with specialized technical knowledge or
marketing expertise or some other competence feels that he can offer a product or
service which can cater to a presently unmet need or serve a market where demand
exceeds supply or effectively compete with similar products or services because
of certain favorable features like better quality or lower prices.
I. Stimulating the Flow of Ideas: Often firms adopt a somewhat casual and
haphazard approach to the generation of project ideas. To stimulate the
flow of ideas, the following are helpful:
• SWOT Analysis: SWOT is an acronym for strengths, weaknesses,
opportunities, and threats. SWOT analysis represents a conscious,
deliberate and systematic effort by an organization to identify
opportunities that can be profitably exploited by it. Periodic SWOT
analysis facilitates the generation of ideas.
• Clear articulation of objectives: The operational objectives of an
organization may be one or more of the following:
• Cost reduction
• Productivity improvement
• Increase in capacity utilization
• Improvement in contribution margin
• Expansion into promising fields
A clear articulation and prioritization of objectives help channel
employees' efforts and stimulate them to think more imaginatively.
• Fostering a conducive climate: To tap people's creativity and harness
their entrepreneurial urges, a conducive organizational climate must
 be fostered. Ex: motivating employees through awards, incentives,
and promotions to think and work more creatively.
Q2. Monitoring The Environment
The firm must systematically monitor the environment and assess its competitive
abilities. For purposes of monitoring, the business environment may be divided
into six broad sectors. The key sectors of the environment are as follows:
1. Economic Factor:
i. State of economy
ii. Overall rate of growth
iii. Growth rate of primary, secondary and tertiary sectors
iv. Cyclical fluctuations
v. Inflation rate
vi. Linkage with the world economy
vii. Trade surplus/deficits
viii. Balance of payment situation
ix. Industrial policy
2. Government Factor
i. Government programmes and projects
ii. Tax frame work
iii. Subsidies, incentives, and concessions
iv. Import and export policies
v. Financing norms
vi. Lending condition of financial institutions and commercial banks
3. Technological Factor:
i. Emergence of new technologies
ii. Access to technical know-how, foreign as well as indigenous
iii. Receptiveness on the part of the industry
4. Socio-demographic Sector:
i. Population trends
ii. Age shifts in the population
iii. Income distribution
iv. Educational profile
v. Employment of women
vi. Attitudes toward consumption and investment
5. Competition Sector:
i. Number of firms in the industry and the market share of the top few
(four or five)
ii. Degree of homogeneity and differentiation among products
iii. Entry barriers
iv. Comparison with substitutes in terms of quality, price, appeal, and
functional performance
v. Marketing policies and practices
6. Supplier Sector:
i. Availability and cost of raw materials and sub-assemblies
ii. Availability and cost of energy
iii. Availability and cost of money

Q3. Corporate Appraisal

A realistic appraisal of corporate strengths and weaknesses is essential for
identifying profitable investment opportunities. The broad areas of corporate
appraisal and the important aspects to be considered under them are as follows:
1. Marketing and Distribution
• Market image
• Product line
• Market share
• Distribution share
• Customer loyalty
• Marketing and distribution costs
2. Production and Operations
 • Condition and capacity of plant and machinery
• Availability of raw materials, sub-assemblies and power
• Degree of vertical integration
• Locational advantage
• Cost structure
3. Research and development (RND)
• Research capabilities of the firm
• Track record of new product developments
• Laboratories and testing facilities
• Coordination between research and operations
4. Corporate Resources and Personnel
• Corporate image
• Clout with governmental and regulatory agencies
• Dynamism of top management
• Competence and commitment of employees
• State of industrial relations
5. Finance and Accounting
• Financial leverage and borrowing capacity
• Cost of capital
• Tax situation
• Relations with shareholders and creditors
• Accounting and control system
• Cash flows and liquidity

Q4. Profit Potential of Industries: Porter Model

Micheal Porter has argued that the profit potential of an industry depends on the
combined strength of the following five basic competitive forces:
1. The Threat of New Entrants: New entrants add capacity, inflate costs, push
prices down, and reduce profitability. The threat from new entrants is low if
the entry barriers confer an advantage on existing firms and deter new
entrants. Entry barriers are high when:
 ➢ The new entrants have to invest substantial resources to enter the
industry
➢ Economics of scale are enjoyed by the industry
➢ Existing firms control the distribution channels, benefit from product
differentiation in the form of brand image and customer loyalty, and
enjoy a kind of proprietary experience curve.
➢ Switching costs- these are essentially one-time costs of switching from
the products of one supplier to another- are high.
➢ The government policy limits or even prevents new entrants.
2. Rivalry Between Existing Firms: Firms in an industry compete on the basis
of price, quality, promotion, service, warranties, and so on. Generally, a
firm's attempts to improve its competitive position provoke retaliatory action
from others. If the rivalry between the firms in an industry is strong,
competitive moves and countermoves dampen the average profitability of
the industry. The intensity of rivalry in an industry tends to be high when:
➢ The number of competitors in the industry is large.
➢ At least a few firms are relatively balanced and capable of engaging
in a sustained competitive battle.
➢ The industry growth is sluggish, prodding firms to strive for a higher
market share.
➢ The level of fixed cost is high, generating strong pressure for all firms
to achieve higher capacity utilization levels.
➢ The industry confronts high industry barriers.
3. Pressure from Substitute Products: In a way, all firms in an industry face
competition from industries producing substitute products. Performing the
same function as the original product, substitute products may limit the profit
potential of the industry by imposing a ceiling on the price that can be
charged by the firms in the industry. The threat from substitute products is
high when:
➢ The price-performance trade-off offered by the substitute products is
attractive
➢ The switching cost for prospective buyers are minimal.
➢ The substitute products are being produced by industries earning
superior profits.
4. Bargaining Power of Buyers: Buyers are a competitive force they can
bargain for price cuts, ask for superior quality and better service and induce
 rivalry among competitors. If they are powerful, they can depress the
profitability of the supplier industry. The bargaining power of a buyer group
is high when:
➢ Its purchases are large relative to the sales of the seller
➢ Its switching costs are low
➢ It poses a strong threat of backwards integration.
5. Bargaining Power of Suppliers: Suppliers, like buyers, can exert a
competitive force in an industry as they can raise prices lower quality, and
curtail the range of free services that they provide. Powerful suppliers can
hurt the profitability of the buyer industry. Suppliers have strong bargaining
power when:
➢ Few suppliers dominate and the supplier group is more concentrated
than the buyer group.
➢ There are hardly any viable substitutes for the products supplied.
➢ The switching costs for the buyers are high.
➢ Suppliers do present a real threat to forward integration

Q5. Scouting for Project Ideas

Good project ideas the key to success are indefinable. So, a wide variety of sources
should be tapped to identify them.
i. Analyze the Performance of Existing Industries: It is essential to study
the existing industries in terms of their profitability and capacity utilization.
This analysis of profitability and break-even levels of various industries
indicates promising investment opportunities which are profitable and
relatively risk-free.
ii. Examine the Inputs and Outputs of Various Industries: An analysis of
the inputs required for various industries may throw up project ideas.
• Existing opportunities for procuring materials or supplies including
transportation costs are to be considered.
• Several firms produce internally some components/parts which can
be supplied at a lower cost by a single manufacturer.
• Similarly, a study of the outputs of the existing industries may reveal
opportunities for adding value through further processing of main
outputs, by-products, and waste products.
 iii. Review Imports and Exports: An analysis of import statistics for a period
of five to seven years is helpful in understanding the trend of imports of
various goods. An examination of statistics is useful in learning about the
export possibilities of various products.
iv. Study Plan Outlays and Governmental Guidelines: A very valuable
source of information to estimate the scope for further investment is the
guidelines to industries published annually by the department of industrial
development. This publication provides information about the structure and
location, production performance, licensed and installed capacity, exports,
and future scope of various industries.
v. Suggestions of Financial Institutions and Developmental Agencies: In a
bid to promote the development of industries in their respective states, state
financial corporations, state industrial development corporations, and
prepare feasibility reports, and offer suggestions to potential entrepreneurs.
The suggestions of these agencies are helpful in identifying promising
projects.
vi. Investigate Local Materials and Resources: A search for project ideas may
begin with an investigation into local resources and skills. Various ways of
adding value to locally available materials may be examined. Similarly, the
skills of local artisans may suggest products that may be profitably produced
and marketed.
vii. Analyze Economic and Social Trends: Changing economic conditions and
consumer preferences provide new business opportunities. Hence, the
demand for time-saving products like prepared food items, ovens, and
powered vehicles has been increasing. Another change that can be seen is
the increasing desire for leisure and recreational activities. This has caused
growth in the market for recreational products and services.
viii. Draw Clues from Consumption Abroad: Entrepreneurs willing to take
higher risks may identify projects for the manufacture of products or supply
of services which are new to the country but extensively used abroad.
Automatic vending machines, entertainment parks, pre-fabricated houses,
and fast-food restaurants are examples of projects belonging to this category.
ix. Explore the Possibility of Reviving Sick Units: A significant proportion of
sick units can be nursed back to health by sound management, infusion of
further capital, and provision of complementary inputs.
 x. Identify Unfulfilled Psychological Needs: For well-established, multi-
brand product groups like bathing soaps, detergents, cosmetics, and
toothpaste, the question to be asked is not whether there is an opportunity to
manufacture something to satisfy an actual physical need but whether there
are certain psychological needs of consumers which are presently unfulfilled.
To find out whether such an opportunity exists, the technique of spectrum
analysis is useful.
xi. Attend Trade Fairs: National and international trade fairs provide an
excellent opportunity to get to know about new products and developments.
xii. Stimulating Creativity for Generating New Product Ideas: New product
ideas may be generated by thinking along the following lines: modification,
rearrangement, reversal, magnification, reduction, substitution, adaptation,
and combination.

Q6. Preliminary Screening

By using the suggestions made in the preceding section, it is possible to develop a
long list of project ideas. Some kind of preliminary screening is required to
eliminate ideas which prima facie are not promising. For this purpose, the
following aspects may be considered for preliminary screening.
i. Compatibility With the Promoter: The idea must be compatible with the
interest, personality, and resources of the entrepreneur. A real opportunity
has three characteristics:
i) It fits the personality of the entrepreneur - it squares with his
abilities, training and proclivities,
ii) it is accessible to him,
iii) It offers him the prospect of rapid growth and high return on the
invested capital.
ii. Consistency With Governmental Priorities: The project idea must be
feasible to the national goals and governmental regulatory framework. The
question to be raised in this context are:
➢ Is this consistent with national goals and priorities?
➢ Are there any environmental effects contrary to governmental
regulations?
➢ Can the foreign exchange requirements of the project be easily
accommodated?
 ➢ Will there be any difficulty in obtaining the license for the project?
iii. Availability Of Inputs: The resources and inputs required for the project
must be reasonably assured. To assess this, the following questions need to
be answered:
➢ Are the capital requirements of the project within manageable limits?
➢ Can the technical know-how required for the project be obtained?
➢ Are the raw materials required for the project available domestically at
a reasonable cost? If the raw materials have to be imported, or will
there be a problem?
It may be noted that Indian business has been traditionally faced with i) shortages
of certain inputs like power, foreign exchange, and important raw materials, and
ii) fluctuating supplies of agricultural raw materials like cotton, jute and oil seeds.
Of course, in recent times the situation has improved in some ways i) power
generation has increased significantly, ii) foreign exchange is now available more
easily, and iii) supplies of certain basic industrial raw materials have been
augmented substantially.
iv. Adequacy Of the Market: The size of the present market must offer the
prospect of adequate sales volume. Further, there should be potential for
growth and a reasonable return on investment. To judge the adequacy of the
market the following factors have to be examined.
• Total present domestic market
• Competitors and their market shares
• Export markets
• Sales and distribution system
• Projected increase in consumption
• Barriers to the entry of new units
• Economic, social, and demographic trends favorable to
increased consumption
v. Reasonableness Of Cost: The cost structure of the proposed project must
enable it to realize an acceptable profit with a competitive price. The
following should be examined in this regard.
• Costs of material inputs
• Labor costs
• Factory overheads
 • General administration expenses
• Selling and distribution costs
• Service costs
• Economies of scale
vi. Acceptability Of Risk Level: The desirability of a project is critically
dependent on the risk characterizing it and the following factors should be
considered:
• Vulnerability to business cycles
• Technological changes
• Competition from substitutes
• Competition from imports
• Governmental control over price and distribution