Project Management (Lalit Shivhare)
Project Management (Lalit Shivhare)
Project Management (Lalit Shivhare)
Shivhare
: Project Planning and Phases
Long-Term Effects
Irreversibility
Substantial outlays
Phases of Capital Budgeting
Complex Process:
1. Planning
2. Analysis
3. Selection
4. Financing
5. Implementation
6. Review
Planning phase
Broad Investment strategy
Generation of Ideas
Preliminary screening of project
proposals
Analysis
If preliminary screening suggests that project is
viable, a detailed analysis is undertaken
Facets/Aspects of Project Analysis:
a. Marketing: Potential Market and Market
Share
b. Technical: Technical Viability and Choice of
Technology
c. Financial: Risk Vs. Return
d. Economic: Social Benefits and costs
e. Ecological: Environmental damage and
Restoration measures
Analysis (Contd.)
Gathering, preparing and summarising
relevant information
Stream of costs and benefits associated
with the project are identified
Selection
Out of the various project proposals, the
project which gives the optimum benefits as
compared to cost is selected.
To select the project that gives optimum
benefits, appraisal criteria is used:
1. Non-Discounting criteria
2. Discounting criteria
Important Criteria of Selection
1. Non-Discounting Criteria:
a. Payback period
b. Accounting rate of return
2. Discounting Criteria:
a. Net Present Value
b. Internal Rate of Return
c. Benefit Cost Ratio
Financing
Once a project is selected, Capital Structure
decision is to be taken to finance the
project
Capital structure decision comprises of mix
of:
1. Equity: Paid-up capital, Share premium and
retained earnings
2. Debt: Term loans, debentures and working
capital advances
Capital structure decision
The mix of equity-debt and the source of
finance is influenced by the following key
business considerations: (FRICT)
1. Flexibility
2. Risk
3. Income
4. Control
5. Taxes
Implementation
Setting up of manufacturing facilities:
1. Project and Engineering Designs
2. Negotiations and contracting
3. Construction
4. Training
5. Plant commissioning
Implementation (Contd.)
For expeditious implementation at a
reasonable cost:
1. Adequate formulation of the Project
2. Use the principle of Responsibility
Accounting
3. Use of Network Techniques
Review
Performance review to be done
periodically – compare actual
performance with projected
performance
It helps in:
1. Future decision-making
2. Take Corrective action
3. Investors are cautioned
Feasibility Study
The first four phases of capital
budgeting – Planning, Analysis,
Selection and Financing constitute the
feasibility study of the project
Resource Allocation
Framework
Project management/Capital Budgeting
is basically managing the resource
allocation process
For optimum resource allocation,
strategic planning is required which
identifies valuable investment
opportunities
Investment Strategies
Strategy: The determination of the basic
long-term objectives of an enterprise and the
adoption of courses of action and the
allocation of resources necessary to carry out
these objectives
It is matching the firm’s strengths and
weaknesses with the opportunities and
threats present in the external environment
Strategic Planning
Optimal match between the capabilities of the
business and the opportunities in the
environment
Cross-Sectional relationships between existing
assets and growth opportunities
Time-series relationships between current
growth opportunities and future growth
opportunities
Impact of new investments on the Risk profile
of the business
Strategy
Growth:
1. Concentration
2. Vertical Integration: a. Forward and
b. Backward
3. Diversification: a. Concentric
b. Conglomerate
Strategy (Contd.)
Stability
Contraction:
1. Divestiture
2. Liquidation
Strategy (Contd.)
Concentration: When a business house
estimates growth in the market size of
its existing product, it expands the
capacity of its product.
Vertical Integration:
elsewhere
d. Dogs: - Low market share and low
growth rate
- Close down
BCG Matrix: Conclusion
Cash Cows generate funds and Dogs
release funds if divested
Stars and Question Marks require
additional funds
Hence the funds released should be
allocated to Stars and Question Marks
General Electric Stoplight
Matrix
It evaluates businesses in terms of:
1. Business Strength and
2. Industry Attractiveness
- Business which are favourably placed justify
high commitment of funds
- Business which are placed unfavourably call
for divestment
- Business which are placed in between call
for modest investment
Mckinsey matrix
Two Dimensions:
1. Competitive position and
2. Industry Attractiveness
- Criteria are used and weights are suggested
- Winners justify larger commitment of
resources, losers call for divestments and
Question Mark, Average Business and Profit
Producer call for moderate commitment of
funds
Criteria and weights
Industry Attractiveness
Criteria Weight
Industry Size 0.10
Industry growth 0.30
Industry Profitability 0.20
Capital Intensity 0.05
Technological Stability 0.10
Competitive Intensity 0.20
Cyclicality 0.05
Criteria and weights
Competitive Position
Criteria Weight
Market Share 0.15
Technological Knowhow 0.25
Product Quality 0.15
After-sales service 0.20
Price Competitiveness 0.05
Low Operating Costs 0.10
Productivity 0.10
Interface between Strategic
Planning and Capital Budgeting
Capital Budgeting should be squarely
related to Corporate Strategy
Generation of Project Ideas
A good project idea will lead to a successful
project
The key is right business at the right time
Identification of good project ideas
requires:
a. Imagination and creativity
b. Awareness about environmental change and
reaction to this change
c. Realistic assessment of what the business
can do
Generation of Ideas (Contd.)
It involves:
1. New ideas based on invention and
discovery
2. Observe whatever exists, use
combinations and generate ideas
Considerations and Guidelines
for Generation of Ideas
Stimulate the flow of ideas:
a. SWOT analysis: Should be periodic
b. Clear Articulation and prioritization of
Objectives: This will channelise the efforts
of employees to think imaginatively
c. Fostering a conducive climate: This will
bring out the creativity and entrepreneurial
urge of people
Considerations and Guidelines
(Contd.)
Monitoring the Environment - Key Aspects
to be studied:
1. Economic Sector
2. Governmental Sector
3. Technological Sector
4. Socio-demographic Sector
5. Competition Sector
6. Supplier Sector
Considerations and Guidelines
(Contd.)
Corporate Appraisal: Key Aspects to
be considered:
1. Marketing and Distribution
2. Production and Operations
3. Research and Development
4. Corporate Resources and Personnel
5. Finance and Accounting
Considerations and Guidelines
(Contd.)
Tools for identifying investment
opportunities:
1. Porter Model: Michael Porter - Profit
potential of an Industry depends on the
combined strength of :
a. Threat of new entrants
b. Rivalry among existing firms
c. Pressure from substitute products
d. Bargaining power of buyers
e. Bargaining power of sellers
Tools
2. Life Cycle Approach: A product has
four stages:
a. Pioneering Stage
b. Rapid Growth Stage
c. Maturity and Stabilisation Stage
d. Decline Stage
Life Cycle Approach
Each stage presents investment opportunities
Investment in the pioneering stage have a
low return but if one survives, has option to
participate in growth stage
Investment in the growth stage have a high
return
Investment in the maturity stage have
average return
Investment in the decline stage has low
returns
Tools (Contd.)
3. The Experience Curve: - Investments should
be aimed at reducing costs for long-term
survival and profitability
- Curve shows how the cost per unit behaves
products
Considers two factors: