Project Identification, Analysis, and Appraisal PDF

Addis Ababa University College of Business & Economics School of Commerce Department of Project Management Project Identification, Analysis & Appraisal: Module (MAPM 522) January, 2015 Contents MODULE OBJECTIVES...

Addis Ababa University College of Business & Economics School of Commerce Department of Project Management Project Identification, Analysis & Appraisal: Module (MAPM 522) January, 2015 Contents MODULE OBJECTIVES................................................................................................................iv UNIT 1................................................................................................................................................... 1 PROJECT IDENTIFICATION.............................................................................................. 1 Introduction............................................................................................................................. 1 Objectives......................................................................................................................... 1 Overview of Project & Project Cycle.............................................................................. 2 Identification of Projects for Business Firms........................................................................ 3 Purpose and need for project identification.......................................................................... 3 Steps in project identification................................................................................................ 4 Sources of project ideas............................................................................................. 5 Screening project ideas............................................................................................ 10 Methodology for project identification................................................................... 13 Project identification for an existing company....................................................... 14 Identification of Development Projects............................................................................... 15 Ttop-down approach............................................................................................................. 16 Bottom-up approach................................................................................................. 18 2. Facilitation/Community action...................................................................................... 19 3. Participatory appraisal..................................................................................................... 19 1.3.3. The screening of projects........................................................................................... 21 Case Studies:....................................................................................................................................... 22 Summary............................................................................................................................................. 24 Self Assessment Questions................................................................................................................ 24 UNIT 2................................................................................................................................................. 25 MARKET AND DEMAND ANALYSIS........................................................................... 25 2.1. INTRODUCTION...................................................................................................... 25 Objectives.............................................................................................................................. 25 Overview of Feasibility Study..................................................................................... 26 Market and Demand Analysis..................................................................................... 29 Situational Analysis and Specification of Objectives.............................................. 31 Collection of Secondary Information.......................................................................... 33 Conduct of Market Survey........................................................................................... 35 Characterization of the Market.................................................................................. 38 Demand Forecasting..................................................................................................... 40 Market Planning.......................................................................................................... 53 Summary............................................................................................................................................. 55 Self assessment questions................................................................................................................... 56 UNIT 3................................................................................................................................................. 57 TECHNICAL ANALYSIS.................................................................................................. 57 Introduction........................................................................................................................... 57 Summary............................................................................................................................................. 68 Self Assessment Questions................................................................................................................ 68 UNIT 4................................................................................................................................................. 69 FINANCIAL ANALYSIS & PROJECT FINANCING..................................................... 69 4.1 Introduction................................................................................................................... 69 Objectives.............................................................................................................................. 69  When to Undertake Financial Analysis......................................................................70 Identification and Quantification of Costs and Benefits.............................................71 Measuring Relevant Cash Flows..................................................................................74 Project Appraisal Techniques.......................................................................................83 Financial Analysis under Conditions of Risk and Uncertainty................................100 PROJECT FINANCING...........................................................................................111 Summary...........................................................................................................................................123 Self Assessment Questions..............................................................................................................124 UNIT 5...............................................................................................................................................125 ECONOMIC EVALUATION OF PROJECTS................................................................125 Introduction.........................................................................................................................125 Objectives.....................................................................................................................126 The Rationale for Economic Analysis........................................................................126 The Essential Elements of an Economic Analysis.....................................................137 Determining Economic Values....................................................................................139 The Economic Valuation of Foreign Exchange..........................................................160 The Valuation of Primary Factors of Production (Land, Labor, and Natural Resource).....175 The Social Discount Rate.............................................................................................183 Summary...........................................................................................................................................187 Self Assessment Questions..............................................................................................................188 UNIT 6...............................................................................................................................................189 MANPOWER / PERSONNEL ANALYSIS....................................................................189 Introduction.........................................................................................................................189 Objectives....................................................................................................................189 Summary...........................................................................................................................................197 Self Assessment Questions..............................................................................................................197 UNIT 7...............................................................................................................................................198 PROJECT APPRAISAL....................................................................................................198 Introduction.........................................................................................................................198 Objectives....................................................................................................................198 What Can Project Appraisal Deliver?........................................................................199 Appraising a Development Project.............................................................................201 7.3. Project Appraisal in Relation to Technical, Economic, Financial, Social, and Environmental Analyses.....................................................................................................207 Summary...........................................................................................................................................212 Self Assessment Questions..............................................................................................................212  GENERAL INTRODUCTION Dear learners, welcome to the Module Project Identification, Analysis and Appraisal. The module covers private and public sector projects identification, analysis and appraisal techniques. As resources are generally scarce, the ideas generated as a project should be appraised for their feasibility in terms of various issues of importance. The techniques of project financial and economic analysis and impact assessment are becoming increasingly important as methods for choosing between projects where resources, both financial and human, are limited. The use of recognized assessment techniques for project proposals has become mandatory as part of the selection and justification process for projects funded by the international financial institutions such as the World Bank, the International Finance Corporation, the African, Asian and Inter-American Development Banks as well as regional banks and other donor agencies. However, while financial and economic issues relating to resource allocation for projects, development programs and policies are all important, project initiators/ promoters/ are increasingly concerned with other issues – including the commercial, technical, environmental, human resource, etc. issues of projects. iii MODULE OBJECTIVES After completing this module, students will be able to:  generate sound project ideas with a good prospect of feasibility;  describe the role of market analysis and the steps to be followed for doing it;  identify the aspects to be analyzed to make projects technically sound;  explain the financial analysis of projects under conditions of certainty and uncertainty;  explain the economic analysis of projects and the rationale for doing it;  describe organization and human resource aspects of projects;  appraise and select projects ideas whose feasibility has been prima facie confirmed. iv  UNIT 1 PROJECT IDENTIFICATION Introduction In this chapter, you will be introduced about project identification and project idea generation processes. The project idea may emerge from challenges and problems to be solved or from ample resources to be utilized or from government development efforts or from entrepreneurial efforts of investors. The detailed steps within this first phase of the project life cycle will also be discussed. Objectives After completing this unit, learners should be able to:  know the importance of conceiving a good project idea;  ascertain the different sources from which a project idea can be generated;  identify the steps involved in project identification and selection;  apply the top-down & bottom-up approaches of identifying development projects. 1  Overview of Project & Project Cycle   Activity 1.1 Describe the common features of all projects and the different phases/ stages/ of project life cycle. A project is a one-shot, time limited, goal directed, major undertaking, requiring the commitment of varied skills and resources. It has also been described as a combination of human and non- human resources pooled together in a temporary organization to achieve a specific purpose. The purpose and the set of activities which can achieve that purpose distinguish one project form another. Every program, project or product has certain phases of development. The different phases of development in an investment proposal or project is called life cycle. A clear understanding of these phases permits entrepreneurs, managers and executives to have better control over existing and potential resources in the achievement of the desired goals. There are several project cycle models as discussed in Project Management Context module. Project identification is the initial phase of the project cycle.  It begins with the conceiving of ideas or intentions to set up a project.  These ideas are then transformed into a project. 2  Identification of Projects for Business Firms An entrepreneur has an infinitely wide choice with respect to his project in different dimensions such as product/ service, market, technology, equipment, scale of production, time phasing and location. Hence, the identification of investment opportunities (projects) calls for understanding the environment in which one operates, sensitivity to emerging investments possibilities, and imaginative analysis of a variety of factors. It is the first and foremost task of an entrepreneur or a firm to find out suitable business which is feasible and promising and which merit further examination and appraisal. Therefore, it has to first search for a sound and workable business idea and give a practical shape to its idea. While doing so, the entrepreneur has to tackle the various problems from time to time to achieve the ultimate success. Since the good project ideas are elusive, a variety of sources should be trapped to stimulate the generation of project ideas. Purpose and need for project identification The entire economic management planning is based on two fundamental assumptions, i.e. (a) limited means and (b) unlimited ends. A planner has to select few important needs to cut it into size of his/ her means. This may be treated as fixing the priority called identification of project. It helps in elimination process. Project identification and selection is a scientific process. This process is based on certain essential conditions. It may differ from project to project. The essential conditions which should be taken into consideration for identification and selection of production projects are as follows: o project should be in conformity with the economic needs of the area; o it should take into account the depriving factors which might have adverse impact; 3  o the input-output ratio should be optimum; o the purpose of the project is to increase the production and employment of the area. Thus, the above said conditions will differ due to resources availability, use pattern and other relevant conditions of the area. Besides, project should also consider certain national priorities. Steps in project identification Project ideas are like other ideas which don’t take concrete shape immediately. There are several stages of making propositions their considerations and scrutiny for their soundness. An idea is first born; it is under incubation for some time and subsequently begins to take some definite shape. The project ideas to develop take almost the same course. This project identification may be broadly divided into four stages, viz. A. conceptual stage – where project ideas are generated; B. screening stages – at which unviable ideas are eliminated; C. identification stage – at which viable projects are selected; D. prefeasibility state – at which prefeasibility studies are taking up. Conceptual Stage A number of project ideas may be generated either by those officials or non-officials and entrepreneurs individually or collectively who are conversant with the area. In this context, one has to examine the potentialities of development and the problems, needs and aspirations of the people of the concerned area. 4 Screening Stage In the second stage project ideas generated above are screened in a preliminary exercise to weed out the bad or unviable ideas. All project ideas would not pass the screening test. Some project ideas may be imaginary to warrant any serious consideration. The third and fourth stages may be called as investment opportunity study. This study is necessarily preliminary and is a broad one and has a limited objective of providing planners with a choice of projects from which they can make a selection. Prefeasibility study can be differentiated from opportunity study and a detailed feasibility study mainly on the basis of information required for respective stages. Sources of project ideas  Project ideas could originate from various sources, viz.  success story of a friend/relatives;  -experience of others in manufacture/scale of product;  examining the inputs and outputs of industries;  plan outlays and government guidelines;  suggestions of financial institutions and developmental agencies:  investigation of local materials and resources;  economic and social trend of the economy;  new technological developments; 5   project profiles and industrial potential surveys;  visits to trade fairs;  unfulfilled psychological needs;  possibility of reviving sick units. The various sources from which the project idea can be generated are explained below: 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 indicates promising investment opportunities which are profitable and relatively risk free. An examination of capacity utilization of various industries provides information about the potential for further investment. Such a study becomes more useful if it is region wise, particularly, for products which have high transportation costs. Examine the inputs and outputs of industries An analysis of the inputs required for various industries may throw up project ideas. Opportunities exist when (I) materials purchased parts or supplies are presently being procured from different sources with attendant time lag and transportation costs and (ii) several firms produce internally some components /parts/ which can be supplied at a lower cost by a single manufactures who can enjoy economies of scale. A study of the output structure of existing industries may reveal opportunities for further processing of output or even processing of waste. 6 Examine imports and exports An analysis of import statistics for a period of five to seven years is helpful in understanding the trend of imports of various goods and the potential for import substitution. Indigenous manufacture of goods currently imported is advantageous for several reasons:  it improves the balances of payments situations;  it provides market for supporting industries and services;  it generates employment. Likewise, an examination of export statistics is useful in learning about the exports possibilities of various products. Plan outlays and government guidelines The government plays a very important role in our economy. Its proposed outlay in different sector provides useful pointers toward investment opportunities. They indicate the potential demand for goods and service required by different sectors. Suggestions of financial institutions and developmental agencies In a bid to promote development of industries in their respective states, state financial corporations, state industrial development corporations and other developmental bodies conduct studies, prepare feasibility reports and offer suggestions to potential entrepreneurs. The suggestions of these bodies are helpful in identifying promising projects. 7 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. 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 provide new business opportunities. A great awareness of the value of time is dawning on the public. Hence the demand for time saving products like prepared food items, ovens and powered vehicles has been increasing. Another change that we are witnessing is that the desire for leisure and recreational activities has been increasing. This has caused and growth in the market for recreational products and services Explore the possibility of reviving sick units Industrial sickness may be rampant in the country. These units are either closed or face the prospect of closure. A significant proportion of sick units, however, can be nursed back to health by sound management, infusion of further capital and provision of complementary inputs. Hence, there is a fairly good scope for investment in this area. Such investments typically have a shorter gestation period because one does not have to begin from scratch. Indeed, in many cases marginal efforts would suffice to revive such units. 8 Identify unfulfilled psychological needs For well established, multi brand product groups like bathing soaps, detergents, cosmetics and tooth pastes, 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 whether such an opportunity exists, the technique of spectrum analysis may be followed. This analysis is done somewhat as follows. (i) Important factors influencing brand choice are identified (ii) respect of the factors identified in step (iii) gaps which exist in relation to consumer psychological needs are identified. Visit to trade fairs Attending National and International trade fairs provides an excellent opportunity to know about new products and new development. The above said sources of project ideas may be generated by government agencies, credit institutions, non-governmental organizations and the public. The government has the largest resources and the necessary information to generate project ideas and it plays a predominant role in this sphere. The government has the required facilities and manpower to conduct detailed studies which may lead to making investment decisions. Banks and other financial institutions are actively involved in sharing the social responsibility of achieving the national objectives of economic development. The co-operatives and non- governmental organizations as well as individual entrepreneurs are now actively participating in identification of projects. The awareness of involving the people or the beneficiaries in project identification is now increasing fast. Since the local people have the first hand knowledge of the potentials and problems of the area to which they belong, more realistic project identification has 9 become possible with their involvement. It needs no emphasis the project ideas would be generated in better manner both in the qualitative as well as quantitative terms when the knowledge and ideas of the Gove. Functionaries, people, financial institutions and other experts are pooled together.  Activity 1.2  1. Identify at least 10 advantages of exports to the national economy. 2. Identify two products you are currently consuming. What do you think they lacking to fully satisfy you?  3. Mention some projects undertaken in your localities and discuss the way they have been identified.  Screening project ideas After gathering the project ideas from the various sources aforesaid, it is essential to eliminate ideas which prima facie are not promising. This process of eliminating the irrelevant and unviable ideas is called screening of project ideas. It can be done with the help of testing the following conditions of the propositions: A. compatibility with the promoter B. consistency with governmental priorities C. availability of inputs D. adequacy of market E. reasonableness of cost F. acceptability of risk level etc. 10 Compatibility with the entrepreneur The idea must be compatible with the interest, personality and resources of the entrepreneur. A real opportunity may fulfill the following three characteristics: 1. it fits the personality of the entrepreneur; 2. it is accessible to the entrepreneur and 3. it provides the prospect of rapid growth and high return on invested capital. Consistency with government priorities The project idea must be feasible given the national goals and governmental regulatory framework. You may need to ask yourself: Is the project consistent with national goals and priorities? Is there any environmental effect contrary to governmental regulations? Can the foreign exchange requirement of the project be easily accommodated? Will there be any difficulty in obtaining the license for the project? and the like. Availability of inputs The resources and inputs required for the project must be reasonably assured. To assess this, the following questions need to be answered:  are the capital requirements of the project within manageable limits?  can the technical know - how required for the project be obtained?  are the raw materials required for the project available domestically at a reasonable cost? If the raw materials have to be imported, will there be problems?  is the power supply for the project reasonably obtainable from different sources? 11 Adequacy of the market The size of the present market must fit the prospect of adequate sales volume. Furthermore, there should be a potential for growth and a reasonable return on investment. To judge the adequacy of the market, the following factors have to be examined:  total present domestic market;  competitors and their market shares;  sales and distribution system;  projected increase in consumption;  barriers to the entry of new units;  economic, social and demographic trends favorable to increased consumption;  patent protection. Reasonableness of cost The cost structure of the proposed project must enable to realize an acceptable profit with a price. The following points should be reminded in this regard:  cost of material inputs;  labor costs;  factory overheads;  general administration costs;  selling and distribution costs;  service costs;  economies of scale 12  Acceptability of risk level The desirability of a project is critically dependent on the risk characterizing it. In the assessment of risk, the following factors should be considered: vulnerability to business cycles; technological Changes; competition from substitutes; competition from imports; governmental control over price and distribution; shifts in consumer preferences.   Activity 1.3 Identify at least five projects. Evaluate them based on the screening factors discussed above and rank the projects based on your analysis to select the one which suits you most.  Methodology for project identification To make a viable project, it should be linked with the actual circumstances prevailing in the area. Without knowing the basic information relating to socio-economic conditions of the area, it is difficult to draw a suitable project for the area. Development needs and potentials vary from area to area. For a specific area, before drawing a project, local conditions and other relevant factors must be taken into consideration. Most of the projects fail because they were not based on local problems. Assumptions based on macro level information may fail to watch at micro level. Survey is a technique employed to unearth the hidden information which is vital to identify the 13 basic requisites of project i.e. need, resource and priorities. It also helps in making right choice between different alternatives. Secondly, it presents lot of information to be used as bench mark information which will help at the later stage for evaluation of the project. Project identification for an existing company Existing companies which are essentially large scale company form of organizations are continuously developing various projects for their developmental purposes. While doing so, the existing company has to make a more intensive analysis of its resources and environment and conceive of projects on the basis of its existing activities. An existing company which seeks to identify new project opportunities should undertake a “SWOT” analysis. It is an acronym law of strengths and weakness as well as opportunities and threats. This analysis evaluates all these four characteristics of existing company. A brief summary of the points required for SWOT analysis is given below:  availability of internal financial reasons for new projects after taking into account the need for replacement expenditure, increase in working capital, repayments of borrowings and dividend payments;  capability of raising external financial resources;  availability of production facilities;  technological capabilities of the company;  availability of different sources of raw materials and its utilization;  availability of infrastructural facilities;  cost structure and profit margins of the company;  distribution network of the company;  market share of the company;  capability of top management of the company;  state of industrial relations in the company; 14   impact of corporate laws on the growth of the company;  likely changes in the governmental policies;  possibility of evolving new technology and its impact on the cost structure of the company;  existence and severity of competition;  changes in the customers preferences, tests etc., By considering the above said information keenly, the SWOT analysis helps to provide the basis for the corporate strategy to be followed and indicate the major areas of thrust. These may include expansion of the capacity of existing product range, vertical integration, diversification in related areas and mergers. Identification of Development Projects Development projects usually refer to projects undertaken by government and NGOs. Clear identification of these projects allows you to answers questions like: a) How do the projects come about? b) Where do projects come from? c) Why are projects where they are? There are two major approaches to project identification a) Top-down approach b) Bottom-up approach 15  Ttop-down approach Projects are identified based on demands from beyond the community. This may include directives from: a) international conventions (such as Kyoto Protocol/climate change); b) international institutions or NGOs that have determined particular priorities and thus projects; c) national policy makers identifying projects that pertain to party manifestos and/or national plans. The project identification alternative ways are the following: 1. The household (socio-economic) survey:  studies social and economic situations of a given area e.g. climate, geographical set-up, economic activities, political set up, education system, culture, diet, social services, physical infrastructure etc;  uses questionnaires, interviews, documentation, and direct observation;  data is collected, processed and analyzed and projects are then identified. 2. Rapid appraisal It is rapid because investigation, assessment and identification of projects are done at the same time.  Called Rapid Rural Appraisal (RRA) when carried out in a rural areas, and Rapid Urban Appraisal (RUA) in an urban area.  Method collects and assesses data quickly using any data collection techniques.  Primary purpose is to acquire the information in the shortest time possible and it lowers the cost. 16  Rapid appraisal uses the following data collection techniques:  analysis of secondary data sources;  interviews;  direct observation at site;  visualization of Resources like social organizational maps and time series maps. 3. Needs assessment survey (NAS)  It is also referred to as situation analysis. It involves:  fact finding about problems or needs in a given area or community;  finding out what is lacking in a given area or community;  investigating a situation in a given area. NAS is carried out to:  find out the problem in a given community so as to identify the most appropriate solution (s)/project (s) to solve the problem (s) in question;  analyze the causes of the problems and seek likely solutions to the problems leading to project identification. Advantages of top-down approach  It may be a rapid response to disasters like floods, war outbreak because there is limited time and chance to consult the beneficiaries.  It can be effective in providing important services like education, health, water, roads, etc.  It can contribute to wider national or international objectives and goals and therefore potentially be part of a wider benefit (as in the case of trans-boundary resources, such as climate, water or others). 17 Limitations of top-down approach  Does not help in modifying strongly established ideas and beliefs of people;  Assumes external individuals know better than the beneficiaries of the service;  Communities have little say in planning process rendering approach devoid of human resource development;  Community develops dependency syndrome on outside assistance and does not exploit their own potential;  The development workers (change agents) become stumbling blocks to people-led development (there is tendency to impose their own biases, etc. on people). Bottom-up approach In this approach, community beneficiaries are encouraged to identify and plan the projects themselves with or without outsiders. 1. Animation  Process of stimulating people to become more aware and conscious of problems they suffer from. It enables to gain confidence in their ability to deal with these problems and take initiatives to improve situation.  Animation makes the community better understand and be prepared to overcome its problems and take decisions with full responsibility.  Carried out by Animators / helpers / change agents, viz. internal animators if they come from within the community or external animators if from outside. 18 2. Facilitation/Community action It is an attempt to assist people to get over problems by (say) training them in certain skills, providing them with the needed information e.g. market information, linking them up with relevant agencies and organizations to improve access to the needed resources etc. 3. Participatory appraisal Project identification should be participatory and should involve local communities in identifying and prioritizing their needs. There should be consideration of the views of the communities during the screening and selection of various project proposals and the selection of the preferred proposals for implementation.  PRA (participatory rural appraisal) when carried out in rural areas and PUA (participatory urban appraisal) when carried out in urban areas  PRA/ PUA can be described as a family of approaches, methods and behaviors that enable people to express and analyze the realities of their lives and conditions, to plan for themselves what action to take, and to monitor and evaluate the results.  The key to PRA/PUA is that the only external involvement is in facilitation. The communities themselves determine the issues, priorities and courses of action. Advantages of bottom-up approach  Interveners accomplish more with limited resources since people tend to safeguard what they have provided for themselves;  Develops people’s capacity to identify problems, needs and to seek possible solutions to them;  Provides opportunities of educating people; 19   Helps people to work as a team and develop a “WE” attitude, i.e. makes project progressive and sustainable;  Resources are effectively managed; dependence reduces, there is increased equity, initiative, accountability, financial and economic discipline. Limitations of Bottom-Up Approach  Not always effective for projects that require urgency to implement  Time-consuming and requires patience and tolerance.  People sometimes dislike approach because they do not want to take responsibility for action.  The agency using this approach is never in control and cannot guarantee the results it would want.  The priorities of communities may not fit with national or international priorities that seek to have a broader impact  Activity 1.4 Identify some projects worth implementing in your locality by applying top-down and bottom-up approaches. The problem statement The process of project identification ends with the formulation of a problem statement. It takes the form of: 20  listing all the problems/needs in the community/area/ organization;  prioritizing the problems and selecting 1 – 3 core (major) problems;  finding out the root causes of the problems;  sitting the likely effects of the problems on the community;  suggesting the probable solutions to the problems;  Identifying the (projects) from the solutions. The screening of projects The screening process of projects responds to the following concerns:  Is the technology appropriate to the project’s objectives or local capabilities?  Is the risk involved manageable?  Is the demand for the expected outputs adequate, and does the project actually have a comparative advantage?  Will the supply of raw materials or skills be adequate?  Is the design in agreement with the institutional and managerial capabilities available?  Will the recurrent costs be adequately met given the available financial resources?  Is there adequate commitment by the intended beneficiaries and support from District and central government authorities?  Is the project has negative effects on the environment? And if yes, can the effects be mitigated?  Is the project culturally acceptable by the community  Is the project sustainable? 21  Case Studies: Case Study 1: Project Identification Based Countries Strategies: African Development Bank Group (August 2008): Project linkages with country strategy and objectives The Tanzania mainland’s National Strategy for Growth and Reduction of Poverty, known by its Kiswahili acronym, ‘MKUKUTA’ covers the period 2005-2010. It identifies three clusters of broad outcomes: i) economic growth and poverty reduction; ii) improvement of the quality of live and social wellbeing; and iii) governance and accountability. Goal 3 of Cluster (ii) addresses increased access to clean, affordable and safe water, sanitation, decent shelter and a safe and sustainable environment. Zanzibar’s Strategy for Growth and Reduction of Poverty (MKUZA) has been developed as a response to similar development needs. Zanzibar Development Vision 2020 provides the over- arching framework to reduce poverty. The Zanzibar Poverty Reduction Plan (ZPRP 2007-2010), Cluster 2, Social Services and Well Being, includes amongst others goals for i) increased access to clean, safe and affordable water and ii) improved sanitation and sustainable environment. The Joint Assistance Strategy for Tanzania (JAST) is a compact between Government and Development Partners (DPs) for managing development co-operation. It came into force in 2006. The efforts to harmonize aid management systems on the mainland with those on Zanzibar are at an advanced stage. 22 Case Study 2: Project Identification Based on Local Problems: UNDP (2006): Lare (a community in Kenya-Africa) is a dry area with no permanent rivers. It receives an average of 700 millimeters of rainfall a year but this varies widely from one year to another. It is also unevenly distributed among the seasons. Farmers in Lare have identifies four major constraints to agricultural production, with scarcity of water as a major one. Before 1998, about 70 percent of all households in the area experienced shortages of water. In addition, not only was there insufficient water, but it was also of poor quality and caused a high incidence of water born diseases. In 1999, a project involving nine collaborating institutions was initiated to address rainwater harvesting practices and water treatment along with other technologies required by the farmers. The two case studies discussed above represent different factors for project identification. In case of Case 1 project consideration was given to the linkage of the project to the overall country strategy. This is taken as the main justification for the identification of a given project as a priority need of the country. In Case 2 project the local situation of the community was taken as the means for the project identification. Depending on the country’s strategy alone sometimes may lead to wrong conclusion. The country strategy may be outdated such that may lack to capture the changes that have occurred since the time of its formulation. The reality on the ground particularly the conditions in the target community may not warrant the feasibility of the project and can lead to the failure of implementation. On the other hand many NGOs in developing country are focusing on target community needs in the identification of projects without recognition of the country strategy. This again can lead to the question of sustainability of the implemented projects due to lack of acceptance of the endeavors by the local and national 23 governments. Therefore, the identification stage needs to look at projects both from national and local perspectives. Summary  This unit has explained to you the significance and mode of conceiving good project ideas. It has also explained to you the various sources from which project ideas can be generated and how one should select project ideas.  It is the first and foremost task of an entrepreneur to find out suitable business which is feasible and promising and which merit further examination and appraisal.  Since good project ideas are elusive, a variety of sources should be scouted to stimulate the generation of project ideas.  We may use top-down or bottom-up approaches to identify development projects. Self Assessment Questions 1. Give an outline about the project opportunities available in different sectors of the economy. 2. Explain the purpose of using project identification process. 3. What are the purposes of situational analysis in top-down approach of identifying development projects? 4. In the situation of financial crisis, how would you fix the priority of various investment proposals? Categorize your various proposals under priority I, II, III. 5. What kinds of projects can be identified by examining the inputs and outputs of various industries? 24  UNIT 2 MARKET AND DEMAND ANALYSIS 2.1. INTRODUCTION When project analysis has failed to anticipate the outcome of a project investment, a common reason appears to have been simply poor project preparation. Practice has shown that as a bitter consequence of poor project preparation too many industrial projects suffer in terms of low capacity utilization, heavy costs overruns, deteriorated financial profitability, omission of a necessary component, optimistic projection (Yield, date), optimistic calendar for implementation, etc One of the aspects of project preparation that needs to be carefully done is market and demand analysis. This unit includes the different concepts of market & demand analysis. Objectives After completing this unit, learners should be able to  explain the reasons for doing feasibility study;  briefly describe the components of feasibility study;  describe the key steps to be followed in market and demand analysis such as situational analysis, gathering secondary information, conduct of market survey, market characterization, demand forecasting and market planning. 25  Overview of Feasibility Study  Activity 2.3.1  1. Explain the reasons for doing feasibility study. 2. For what types of projects we may not require feasibility study? 3. What aspects of projects are analyzed during feasibility study?   Definition of Feasibility Studies A feasibility study looks at the viability of an idea with an emphasis on identifying potential problems and attempts to answer one main question: Will the idea work and should you proceed with it? Before you begin writing your business plan, you need to identify how, where, and to whom you intend to sell a service or product. You also need to assess your competition and figure out how much money you need to start your business and keep it running until it is established. Feasibility studies address things like where and how the business will operate. They provide in- depth details about the business to determine if and how it can succeed, and serve as a valuable tool for developing a winning business plan. Why are feasibility studies so important? A company is incorporated for the purpose of setting up a project. The promoters obviously have, to start with, some broad idea about the proposed industrial activity. They make mental picture as to how the idea when translated into reality would result in a profitable project, given the demand supply pattern, probable cost of production etc. It is quite likely that the originators 26 get attracted by the favorable aspects of the project known to them, while they may have overlooked the dark side of the picture, which can only be revealed by a detailed objective study. Too many projects have floundered, at considerable loss to the investors and indeed to the national economy through waste of scarce resources because the investment decisions were taken without objective and in depth techno-economic feasibility studies. The need for such careful studies is further underscored on two counts:  In modern times, business operations are complex requiring carefully prepared plans.  The shareholders, creditors, term leader etc., insist on as complete an analysis of the scheme as possible without their co-operation, it would not be possible to translate the idea into action. This feasibility study helps the promoter to make the investment decisions correctly and to obtain funds without many difficulties. It allows the promoters to anticipate the problems likely to be encountered in the execution of the project and phases them in a better position to answer the queries that may be raised by the financial institutions and others who would have to be involved in the project. The information you gather and present in your feasibility study will help you:  list in detail all the things you need to make the business work;  identify logistical and other business-related problems and solutions;  develop marketing strategies to convince a bank or investor that your business is worth considering as an investment and  serve as a solid foundation for developing your business plan. 27 The components of a feasibility study  Description of the Business: The product or services to be offered and how they will be delivered.  Market Feasibility: Includes a description of the industry, current market, anticipated future market potential, competition, sales projections, potential buyers, etc.  Technical Feasibility: Details how you will deliver a product or service (i.e., materials, labor, transportation, where your business will be located, technology needed, etc.).  Financial Feasibility: Projects how much start-up capital is needed, sources of capital, returns on investment, etc.  Organizational Feasibility: Defines the legal and corporate structure of the business (may also include professional background information about the founders and what skills they can contribute to the business).  Conclusions: Discusses how the business can succeed. Be honest in your assessment because investors won't just look at your conclusions they will also look at the data and will question your conclusions if they are unrealistic. Format of feasibility report Though it may vary from project to project, the sketch of feasibility report of the project may cover the following:  Introduction  Summary and Recommendations  Project capacity, chemistry of the product, specifications, properties, application and uses. 28  Market potential  Process and know-how  Plant and machinery  Location of the unit  Plot plan and building  Raw materials availability  Utilities requirements  Effluents treatment  Personnel requirement  Capital cost  Working capital  Mode of finance  Manufacturing cost  Financial analysis  Implementation schedule Market and Demand Analysis Activity 2.3.1  For projects undertaken for commercial motive, market and demand analysis is done before other parts of feasibility study. Why? 29 In most cases, the first step in project analysis is to estimate the potential size of the market for the product proposed to be manufactured (or service planned to be offered) and get an idea about the market share that is likely to be captured. Put differently, market and demand analysis is concerned with two broad issues: What is the likely aggregate demand for the product/service? What share of the market will the proposed project enjoy? These are very important, and yet difficult questions in project analysis. Intelligent and meaningful answers to them call for an in-depth study and assessment of various factors like patterns of consumption growth, income and price elasticity of demand, composition of market, nature of competition, availability of substitutes, reach of distribution channels, so on and so forth. Yet, in many cases, project feasibility studies seem to make a short shrift of market and demand analysis. It is not uncommon to find cursory statements like “the market is attractive” or “the demand is expected to exceed supply” as substitutes for a thorough market and demand analysis in project evaluation exercises. Given the importance of market and demand analysis, it should be carried out in an orderly and systematic manner. The key steps involved in market and demand analysis are depicted in the figure 2.1. This unit discusses these steps. It is organized into six sections as follows:  situational analysis and specification of objectives;  collection of secondary information;  conduct of market survey;  characterization of the market;  demand forecasting;  market planning. 30 Figure 2.1: Key Steps in Market and Demand Analysis and their Inter-relationships. Situational Analysis and Specification of Objectives In order to get a “feel” of the relationship between the product and its market, the project analyst may informally talk to customers, competitors, middlemen, and others in the industry. Wherever possible, he may look at the experience of the company to learn about the preferences and purchasing power of customers, actions and strategies of competitors, and practices of the middlemen. If such situational analysis generates enough data to measure the market and get a reliable handle over projected demand and revenues, a formal study need not be carried out, particularly when cost and time considerations so suggest. In most cases, of course, a formal 31 study of the market and demand is warranted. To carry out such a study, it is necessary to spell out its objectives clearly and comprehensively. Often this means that the intuitive and informal goals that guide situational analysis need to be expanded and articulated with greater clarity. A helpful approach to spell out objectives is to structure them in form of questions. Of course, in doing so, always bear in mind how the information generated will be relevant in forecasting the overall market demand and in assessing the share of the market that the project will capture. This will ensure that questions not relevant to the market and demand analysis will not be asked unnecessarily. To illustrate, suppose that a small but technologically competent firm has developed an improved air cooler based on a new principle that appears to offer several advantages over conventional air cooler. The chief executive of the firm needs information about where and how to market the new air cooler. The objectives of the market and demand analysis in this case may be to answer the following questions: who are the buyers of air coolers? what is the total current demand for air coolers? how is demand distributed temporally (pattern of sales over the year) and geographically? what is the break-up of demand for air coolers of different sizes? what price will the customers are willing to pay for the improved air cooler? how can potential customers be convinced about the superiority of the new cooler? what price and warranty will ensure its acceptance? what channel of distribution is more suitable for air coolers? 32  Collection of Secondary Information Information may be obtained from secondary and primary sources. Secondary information is information that has been gathered in some other context and is already available. Primary information, on the other hand, represents information that is collected for the first time to meet the specific purpose on hand. Secondary information provides the base and starting point of market and demand analysis. In induces what is known and often provides leads and clues for gathering primary information required for further analysis. Several sources of information including census data, national sample survey reports, plan reports, statistical abstracts, industry specific sources of data, etc. Quantitative secondary data Most quantitative secondary data is from statistical survey research that has already been conducted. Common institutions that conduct this type of research and make it freely available to the public are state or federal government agencies, academic institutions and trade associations. Syndicated marketing research firms also collect quantitative data, which they then make available for purchase. Government agencies: Government agencies often collect data on people and also social trends. These include Census, Economic Survey, Industry survey, etc Academic institutions: Many academic institutions conduct research as part of their mission. An individual academic who plans on publishing the results might conduct this research. In this case the research would be available when the article is published. However, many academic institutions also have research centers that produce research. 33 Trade associations: These organizations are focused on specific industries or occupations and are supported by dues paid by their members. Larger associations will often conduct research that their members would be unable to conduct on their own. Syndicated marketing research firms: These companies collect quantitative data which they then sell to anyone willing to purchase. Qualitative secondary data Secondary data, other than statistical information, is also available to researchers. However few government agencies, trade associations or academic institutions conduct qualitative research. As a result, non-profit organizations will need to gather their own qualitative secondary data. To do so they will use general interest and lifestyle publications, business publications and online sources such as websites, blogs and social networking pages. General interest publications: One of the responsibilities of marketing is to keep the organization aware of changes in the external environment. The best way to do so is to always read or watch the general news. This is an excellent way to hear about new competitors, changes in legislation and economic news. The marketer should analyze this information while always asking the question, ‘What does this mean for my organization?’ Lifestyle publications: Many publications, whether in print or online, are targeted at groups with specific psychographic interests. Reading these publications is an excellent means of learning what is important to people who have shared psychographic traits. For example, an organization may have been formed to support environmental awareness among teenagers. Before the organization can write a promotional message that appeals to teens, they need to be 34  aware of how language is used by young people. If they are specifically focusing on reaching young males into extreme sports, they would want to read magazines geared towards this group. By reading the same magazines, the organization will learn more about this groups ’ interests and how best to communicate with them. Online sources: Blogs and social networking pages give organizations a way to learn more about the values and attitudes of different groups of people. Most blogs focus on a specific interest or concern, such as the environment, music, health care policy or which bar is the best for a rowdy night out. By participating in blogs, the organization can become aware of the preferences of individuals who are their current or potential customers. Organizations can also use social networking pages, such as face book, twitter, etc to find any reference to their organization and then read what is said about them.   Activity 2.5.1  1. What is situational analysis and why do we make situational analysis before we start formal market study? 2. Identify at least four benefits of secondary information? Conduct of Market Survey Secondary information, though useful, often does not provide a comprehensive basis for market and demand analysis. It needs to be supplemented with primary information gathered through a market survey. Market surveys are an important part of market research that measure the feelings and preferences of customers in a given market. Varying greatly in size, design, and purpose, market surveys are one of the main pieces of data that companies and organizations use in 35 determining what products and services to offer and how to market them. The market survey may be a census survey or a sample survey. Steps in a sample survey 1. Determine and define the nature, extent, and size of your market. Before conducting a survey in a given market, you need to know what market you're targeting. Choose geographic and demographic parameters, identify customers by types of product, and get an idea of how many people there are in the market. Narrow your market research to a short list of desired data: buying habits, for example, or average income. 2. Find out where and when you can reach customers in your market. You might conduct a survey at the mall or on the street, via telephone, online, or through the mail. Your results may change based on the time of day and year. Choose a method and time that best suits your research. 3. Choose a sample size and sampling technique. Your sample size should be as large as possible to maximize the accuracy, trustworthiness of your results. You may want to create sub-samples—e.g., "males," "18-24 year-olds," etc.—to decrease the risk of biasing your results towards certain types of people. Your sampling method must be the one more suitable to pick representative sample items from the population. 4. Develop a questionnaire to be used for the study. Go over the questionnaire with others in your management team to make sure that the questionnaire provides the information required based on your objectives. Make sure it is worded appropriately to make it out rightly comprehensible for particular respondents. Make sure it is not too complex for entering the data or tabulating the data after the questionnaires are 36  complete. Your questions should be pointed and specific. Do not ask the same thing in two different ways. Try to use as few words as possible. If you are asking about preferences, you may want to ask respondents to rank their feelings numerically or using keywords. If you are asking about money, use ranges of values. If your answers are descriptive, decide how to group these responses after the survey is complete so that they can be grouped in categories. 5. Enter or tabulate the data from the questionnaire. You may use a software program such as SPSS or you may tabulate the data by hand. 6. Scrutinize, analyze and interpret information. Information gathered should be thoroughly scrutinized to eliminate data which is internally inconsistent. Sometimes data inconsistency may be revealed only after some analysis. Data analysis and interpretation is critical in analyzing the market. What does this information mean? Can one use the data in a constructive way to define the problem and then establish a plan? In quantitative research, this step most often involves statistics. In the marketplace one can find many statistical packages (computer-based) to analyze the data.   Activity 2.6 1. Describe the difference between researcher administered market survey and self administered market survey. Under what circumstances do we use each type of market survey? 2. How do we prepare a successful questionnaire? 37  Characterization of the Market Based on the information gathered from secondary sources and through market survey, the market the product or service may be described in terms of the following: i. Effective demand in past and present To gauge the effective demand in the past and present, the starting point typically is apparent consumption which is defined as: Apparent consumption = Import during the year + Production during the year - Change in Inventory - Export during the year The figure of apparent consumption has to adjusted for consumption of the product by the producers and the effect of abnormal factors. In a competitive market, effective demand and apparent consumption are equal. ii. Breakdown of demand To get a deeper insight in to the nature of demand, the aggregate demand may be broken down in to demand for different segments of the market. Market segments may be defined by (i) nature of product, (ii) consumer groups, and (iii) geographical division iii. Price Price statistics must be gathered along with statistics pertaining to physical quantities. It may be helpful to distinguish the following types of prices: (a) Manufacturer’s price quoted as FOB (free on board) price or CIF (cost, insurance and freight) price, (b) landed price for imported goods, (c) average wholesale price, and average retail price. 38 iv. methods of distribution and promotion The methods employed presently and their rationale must be specified. The methods of distribution may vary with the nature of product. Capital goods, industrial raw materials and consumer products tend to have differing distribution channels. Likewise, method used for promotion (advertizing, discounts, gift schemes, etc) may vary from product to product. v. Consumers Consumers may be characterized along two dimensions as follows: (i) demographic and sociological: age, sex, income, profession, residence, etc. (ii) attitudinal: preferences, intentions, habits, attitudes, responses, etc. vi. supply and competition It is necessary to know the existing sources of supply and whether they are foreign or domestic. Competition from substitutes and near-substitutes should be specified. vii. Government policy The role of government in influencing the demand and market for a product may be significant. Government plans, policies, legislations, etc which have a bearing on the market and demand for the product under examination should be spelt out. They are reflected in: production targets in national plans, imports and export trade controls, import duties, export incentives, excise duties, VAT, industrial licensing, preferential purchases, credit controls, subsidies/ penalties, etc. 39  Demand Forecasting After gathering the information about various aspects of the market and demand from primary and secondary sources, an attempt may be made to estimate future demand. A wide range of forecasting methods is available to the market analyst. To facilitate proper and reliable appraisal of investment proposal, we require a reasonably accurate forecast of demand. Starting with qualitative methods like survey of collective opinions, buyers' intention, Delphi approach and its variant, a number of quantitative methods are used for compiling and computing demand forecasts as detailed below: a) Collective Opinion Survey Sales personnel are closest to the customers and have an intimate feel of the market. Thus they are most suited to assess consumers reaction to company's products. Herein each salesperson makes an estimate of the expected sales in their respective area, territory, state and/or region, These estimates are collated, reviewed and revised to take into account changes in design/features of products, changes in selling prices, projected advertising and sales promotion campaigns and anticipated changes in competitors: marketing policies covering product, people, price, promotion and place. Opinions of all managers involved at various levels of sales organization are also included in the survey. Thus "collective opinion survey forms the basis of market analysis and demand forecasting. Although this method is simple, direct, first hand and most acceptable, it suffers from following weaknesses: 40  i. estimates are based n personal judgment which may not be free from bias; ii. adding together demand estimates of individual salespersons to obtain total demand of the country maybe risky as each person has knowledge about a small portion of market only; iii. sales person may not prepare the demand estimates with the requisite seriousness and care; iv. owing to limited experience, usually in their employment, salesperson may not have the requisite knowledge and experience. This method may be useful for long-term forecasts. It is also used for new products or new variants of existing products. b) Survey of Customers Intention Another method of demand forecasting is to carry out a survey of what consumers prefer and intend to buy. If the product is sold to a few large industrial buyers, survey would involve interviewing them. If it is a consumer durable product, a sample survey is carried out for questioning a few representative consumers about what they are planning or intending to buy. It is neither realistic nor desirable to query all consumers either through direct contact or through printed questionnaire by mail. These surveys serve useful purpose in establishing relationships between:  demand and price  demand and income of consumers  demand and expenditure on advertisement etc This method is preferred when bulk of the sales is to institutions and industrial buyers and only a few of them have to be contacted. 41 Disadvantages are that customers may not know total requirements; in some cases they are not certain about quantity to be purchased. Besides during shortages there is a tendency to inflate their requirements. Survey method is not useful for households - interviewing them is not only difficult out but also expensive. They are not able to give precise idea about their intentions particularly when alternative products are available in the market. c) Delphi method Delphi method is a group process and aims at achieving a `consensus' of the members. Here in experts in the field of marketing research and demand forecasting are engaged in:  analyzing economic conditions;  carrying out sample surveys of market;  conducting opinion polls. Based on what is presented above, demand forecast is worked out in following steps: i. coordinator sends out a set of questions in writing to all the experts co-opted on the panel who are requested to write back a brief prediction; ii. written predictions of experts are collated, edited and summarized together by the coordinator; iii. based on the summary, coordinator designs a new set of questions and gives them to the same experts who answer back again in writing; iv. coordinator repeats the process of collating, editing and summarizing the responses; v. steps 3 and 4 are repeated by the coordinator to experts with diverse backgrounds until consensus is reached. If there is divergence of opinions and hence conclusions, coordinator has to sort it out through mutual discussions. Coordinator has to have the necessary experience and background as he 42 plays a key role in designing structured questionnaires and synthesizing the data. Direct interaction among experts is avoided nor their identify is disclosed. Procedure also avoids inter - personnel conflicts nor strong-willed experts are able to dominate the group. This method is also used for technology forecasting. d) Nominal group technique This is a further modification of Delphi method of forecasting. A panel of seven to ten experts is formed and allowed to interact, discuss and rank all the suggestions in descending order as per the following procedure: i. experts sit around a table in full view of one another and are asked to speak to each other. ii. facilitator hands over copies of questionnaire needing a forecast and each expert is expected to write down a list of ideas about the questions. iii. after everyone has written down their ideas, Facilitator asks each expert to share one idea out of own list with the group. The idea shared is written on the `flip chart' which everyone can see. iv. experts give ideas in rotation until all of them are written on the `flip chart'. No discussion takes place in this phase and usually 15 to 25 ideas emerge from this format. v. in the next phase, experts discuss ideas presented by them. Facilitator ensures that all ideas have been adequately discussed. During discussions similar ideas are combined and paraphrased appropriately. This reduces the number of ideas. vi. after completing group discussions, experts are asked to give in writing ranks to ideas according to their perception of priority. 43 e) Simple average method Among the quantitative techniques for demand analysis, simple Average Method is the first one that comes to one's mind. Herein, we take simple average of all past periods - simple monthly average of all consumption figures collected every month for the last twelve months or simple quarterly average of consumption figures collected for several quarters in the immediate past. Thus, Simple Average = Sum of Demands of all periods Number of periods f) Moving average method Method of Simple Average is faulted on account of the fact that all past periods are given same importance whereas it is justifiable to accord higher importance to recent past periods. Moving Average Method takes a fixed number of periods and after the elapse of each period, data for the oldest time period is discarded and the most recent past period is included. Whatever the period selected, it must be kept constant - it may be three, four or twenty periods by once it decided, we must continue with same number of periods. Simple Average = Sum of Demands of Chosen periods Number of chosen periods g) Weighted moving average In Moving Average Method, weighted given to the selected number of periods is same. This has been refined to include the Weighted Moving Average which allows varying weights for demands in old periods. Depending upon the age of the period, with-age can be varied: Weighted Moving Average = W1 x D1 + W2D2 +............ + Wn x Dn where W1, W2 Wn are the weights for the different periods in percentages so that W1+W2+........................................ +Wn =1 44 This method has the advantage that it allows forecaster to compensate for some known trend in demand or seasonality of demand by carefully fitting appropriate coefficients of weighted to those periods. The weights have to be decided by the forecast analysts and this decision is critical to the accuracy of demand forecast. h) Exponential smoothing methods With the advent of computers and availability of software packages, Exponential Smoothing Methods have become popular. Besides, they do not require much data storage and computing. These methods are distinguished from the weighted average method by the way it assigns weights to each past period. Pattern of weights assigned is exponential in form viz., demand for the most recent period and for each successive older periods, weights decrease exponentially. The decrease in weights in non-linear. For example, a first order smoothing is given by the expression: Successive weights are w(1-w), w(1-w), etc 45 For w = 0.3, these successive coefficients will be 0.3, 0.21, 0.147 etc When forecast have to be worked out successively for different periods, it is a simple computation as below: Choice of coefficient of smoothing is critical: i. a value of 0.7 to 0.9 may be more appropriate for new products or for items for which demand is shifting significantly ii. a value of 0.1 to 0.3 denotes stable trend in demand and when demand is somewhat unstable iii. value of 0.4 to 0.6 may be used for obtaining more accurate forecasts. These methods are simple and with the speed and accuracy of computers, are being increasingly used for determining `quick and easy' forecasts within reasonable budgets. i) Adaptive exponential smoothing If demand is not stable or there is no known pattern of demand, Adaptive Exponential smoothing may be more appropriate. In this method value of 'w' is not fixed. After setting it initially, it is 46 allowed to fluctuate over time in line with the changes in demand pattern. Once again, decision of demand forecaster in assigning different values to 'w' is critical. j) Exponential smoothing with trend and seasonal data So far all the methods of forecasting have assumed the entire demand as a time series. In case there is a trend for a component of the demand, it can be forecast exponentially, as a separate exercise. Similarly seasonal component can be forecast separately. Thereafter composite forecast can be obtained by synchronizing together the constant component, trend and seasonal components. If the constant component of demand is 800, it can be adjusted for the trend component is 100, the forecast inclusive of trend component will be 900. Now let us assume that the seasonal factor is 90%. The overall composite forecast will be 0.9 x 900 = 810 k) Double exponential smoothing Sometimes there; is too much 'noise' in a stable time series. In such cases, use of Double Exponential Smoothing is suggested. It smoothes the first order exponential smoothing forecast as below: This method has been used extensively in forecasting demands of drugs in pharmaceutical industry. 47 l) Trend projection method It helps to forecast about the future based on what has happened in the past. It is more suitable when changes have a certain pattern and the same pattern is expected in the future too. This method is becoming a very simple task with advancement of computer spreadsheet technologies. When the trend projection method is used, the most commonly employed relationship is the linear relationship. Y= a + bx y= demand for the year (dependent variable) x= time variable (Independent variable) a = intercept of the relationship b= Slope of the relationship Mathematical computations are used to determine 'a' and 'b' based on a given set of data.  xy  nxy b=  x2  nx 2 a = y  b(x) m) Regression Analysis Past data are used to establish a functional relationship between two variables. For example, demand for consumer goods has a relationship with disposable income of individuals and family; demand for tractors is linked to the agriculture income and demand for cement, bricks etc is dependent upon value of construction contracts at any time. Forecasters collect data and build relationship through co-relation and regression analysis of variables. 48 n) Econometric models Econometric models are more complex and comprehensive as they interweave different factors together simultaneously. For example, demand for passenger transport is not only dependent upon the population of the city, geographical area, industrial units, their location etc. It is not easy to locate one single economic indicator for determining the demand forecast of a product. Invariably, a multi-factor situation applies. Econometric models, although complex, are being increasingly used for market analysis and demand forecasts. Errors in demand forecasting There is a Chinese proverb which says, "To predict is hazardous, especially the future". Nevertheless, in industry, we cannot survive without predictions and forecasts, without scenaring building and analogies. Owing to fierce competition emerging in the market place, accuracy of forecasts is becoming a definite competitive advantage as it improves planning and decision. Already it is hazardous to take short term marketing decisions without undertaking opinion polls, forecasts of customer' preferences, trends etc. Forecasting error may be defined as the numeric difference between forecasted demand and actual demand. Any method of forecasting yielding larger errors is less desirable. Following aspects are important in measuring the effectiveness of any method of forecasting: a) Mean absolute deviating It is a measure of the forecast error without regard to the direction of the error, negative or positive. It is given by the expression: Mean Absolute Deviation = Sum of absolute values of forecast errors for all periods Number of periods 49 Absolute values of forecast errors mean values are taken without algebraic sings. Mean Absolute Deviation (MAD) is the average of the Absolute Values of Forecast Errors. Forecast errors are, by themselves, normally distributed and there is a relationship between MAD & Standard Deviation. If the forecast is reasonably accurate, forecasts errors will be quite smooth. The above measure is then referred' to as Smoothed Mean Absolute Devoting (SMAD). In such events, Standard Devoting = 1.25 SMAD b) Bias Bias is a less commonly used measure of forecast errors. It takes into account the direction of errors and sum of errors is the algebraic sum f deviating and is expressed as: Bias = Algebraic sum of forecast errors of all periods Number of periods If forecasts are repeatedly overestimates, bias will have a positive value. Similarly, if forecasts are consistently underestimates, Bias will have a negative value For a very accurate forecast, both MAD and bias will be zero. It is preferable to choose a method of forecasting wherein MAD can be controlled and brought nearer to zero. Lowering MAD will reduce Bias also. c) Costs of forecast errors Important decisions - short-term, medium and long-term, are based on forecasts. Large errors of forecasts can lead to costly mistakes, particularly, when used for evaluating investment proposals which are long-term and nearly irreversible. Errors may be either in direction or in magnitude. In some situations, errors in direction can be critical while in other cases, error in magnitude may be more damaging. It is always difficult to complete the exact cost of forecast errors. It is advisable that such estimating of cost be undertaken, however approximate it may be. 50 Demand forecasts forming basis for production and inventory management can be evaluated on the basis of their impact on the overall manufacturing costs, thanks to powerful computing facilities available, we can work out the entire simulating and find out the possible reduction in cost that we could achieve if we had more accurate ' demand forecast. d) Costs and accuracy of forecasts It is perhaps easy to visualize a relationship between percentage error of forecast and the costs involved in selecting, adopting, operating & maintaining that particular method of forecasting. If we use qualitative methods of forecasting, these would entail less effort and expense but would also yield forecasts with higher percentage error. If we use time-series and other mathematical techniques, costs would increase but it would also reduce the percentage or errors. Similarly, using more sophisticated statistical tools shall further improve the accuracy of forecasts. Correspondingly, cost of operating and maintaining these forecasting techniques will vary as shown in the graphologists would be low when errors are low but costs would increase if we have to base our planning and decision making on of accosts with larger margin of errors. Optimal region, corresponding to minimum overall costs, would be somewhere in the middle of the Total Cost Curve - usually nestling between simple and sophisticated statistical techniques which can be complied on a computer. 51   Activity 2.8.1  1. What should be the decision criteria for selecting a suitable method for demand forecasting? 2. Collective opinion survey' method of demand forecasting has often resulted in faulty forecasts. What are the pitfalls of this method? 3. How can we optimize the conflicting factors of cost and accuracy of demand forecasting? 52  Market Planning A marketing plan usually has the following components 1. Current marketing situation  Where is your organization now?  Who are your customer groups? What are their needs and requirements? How large and diverse are they?  What kinds of products and services do you currently provide?  How do you reach your customer groupings?  Do you have any competition?  What factor(s) in your environment has an effect on your organization? 2. Opportunity and issue analysis (S.W.O.T. analysis). This identifies key issues and opportunities for your organization and it comprises an analysis of your internal operations  Strengths  Weaknesses Also those external factors which affect your organization  Opportunities  Threats 3. Objectives. Having identified the key issues affecting your organization you can make some decisions about future objectives. These guide the development of strategies and action plans. 53   Objectives should meet certain criteria e.g. financial and marketing which will be customer focused.  They should be clearly stated, measurable and listed in order of importance  They should be attainable and consistent with your organization’s culture. 4. Marketing strategy. This is the game plan that needs to be implemented to achieve the objectives. It addresses the following:  Who are you now targeting?  What do you want your position to be in terms of new product/service/ delivery?  Do you want to change your organization profile and will you need to rebrand your organization?  Will you change the way you promote and advertise yourself?  Will there be any changes in how you reach your customer groupings?  Any changes in staff?  Is there a need for more research? 5. Action program. This describes:  What will be done?  When will it be done?  Who will do it?  How much will it cost? 6. Budget and controls.  The Budget is essentially a cash flow statement and profit/loss statement to support the marketing plan 54   Control mechanisms and procedures should be established to monitor the progress of the plan to determine if anything needs changing. It would include a contingency plan in case something adverse should happen.   Activity 2.9.1  Explain SWOT analysis in relation to market planning. Identify two hypothetical business firms which plan to introduce new products and make SWOT analysis for these firms.  Summary  Market and demand analysis is the assessment of the level of demand for the product to be produced by the project.  It is usually considered as the first screening stage of feasibility based on which products with unsatisfactory market acceptance shall be rejected.  Given the importance of market and demand analysis, it should be carried out in an orderly and systematic manner. The key steps in such analysis are: i) situational analysis and specification of objectives, ii) collection of secondary information, iii) conduct of market survey, iv) characterization of the market, v) demand forecasting, and vi) market planning. 55 Self assessment questions 1. Describe the relationships and differences between business plan and feasibility study. 2. For the last 10 years your employer has enjoyed great success by using a simple moving average of three periods to do their demand forecasting. Four months ago the forecast was grossly inaccurate and it has been as bad or worse since then. As you examine the data you notice that a trend line appears to fit the data from the last four months. Now it is time for next period's forecast. Which forecasting method should you use and why? 3. Secondary information often doesn't provide complete basis for market analysis. It needs to be supplemented by market survey. Why? 4. Describe the main advantages and limitations of market survey data. 5. One aspect of marketing strategy is positioning. What is positioning & how do companies apply positioning strategy? 56  UNIT 3 TECHNICAL ANALYSIS Introduction In this section, we will examine how the technical aspects of a typical project idea can be scrutinized in detail to evaluate its technical feasibility as distinct from commercial, financial, economic and managerial feasibility. For the sake of comprehensiveness, we will cover Environmental Impact Analysis (EIA) also as a part of this analysis. While the various aspects to be examined will obviously vary from project to project, the following summary covers the more common ones briefly. Objectives After completing this unit, learners should be able to:  discuss Location and site analysis of projects:  briefly describe plant size determination;  describe technology and engineering issues of projects;  explain the raw materials and supplies issues of a project;  identify and explain the infrastructural requirements of a project;  describe the environment impact assessment of projects. 3.2.1. Objectives: First, the project proposal must fall within the ambit of the stated mission of the sponsor(s). Next, the proposal must be able to further the objectives and priorities of the sponsor(s). These must, therefore, be ascertained and clearly recorded, along with detailed specifications for the output (product/service). Together, these constitute the basic frame of reference for all future decisions. 57  The private sector would usually expect a project to earn a high enough profit, i.e. a stated level of return on investment. Only for core projects (which are intended to basically support other highly profitable projects) may this requirement be relaxed. In contrast, the public sector generally has multiple objectives and profitability normally takes a back seat. In either case, it is essential for the project analyst to keep the organization’s objectives along with their interest priorities - in sharp focus to ensure that his/ her efforts follow the correct direction. 2. Location and site: Initially, as many locations as possible should be identified which meet the most fundamental operational requirements of the proposed project. These should then be evaluated and an optimum location selected using the criteria of material versus market orientation (see note below), quality standards, infrastructural status, local laws, and socio- economic and living conditions. Within the geographical location so selected, alternative sites are similarly identified and the most optimal one selected after considering factors like terrain, local climate land its impact on plant & equipment and their operation), availability and cost of land (plus its development), local infrastructural facilities and their costs (power; water: road/ air/water transport; telecommunications; etc.), socio-economic conditions, availability and quality of labor and construction equipment, valid waste disposal alternatives and their costs, local living conditions, public policies, local law, and taxes, etc. [Note: Resource-oriented projects like mining of minerals involve items like geological analysis covering geological structure, hydrological conditions, characteristics of the resource, resource reserves, prospecting status, and expected geological problems. 58  The location decision should be made after giving due consideration to various benefits and incentives offered by governments or local bodies for setting up production or service facilities in certain specified areas. These may include assistance in the form of or in respect