Chapter two

Project life cycle:

Project preparation and analysis

- There are five cycle/stages of project:

A) Project identification/ initiation

B) Project preparation/planning
C) Project appraisal
D) Project implementation/ execution
E) Project evaluation/ Closure

A) identification/initiation/formulation

• This is where a project starts.

• The purpose of this phase is to define the project in a larger sense.
• Here, the project manager starts with a kick-off meeting with a client(s) to understand the
goals and objectives and most importantly, their expectations from it.
• It’s essential that he goes through all the details and ask as many questions as possible to
develop a better understanding of the project.
• In the initiation phase, they answer the following questions :

• Why this project?

• Is the project feasible?
• What are the boundaries of the project?
• How does the end-result look like?
• Once the project is given a green light, the project manager creates a project initiation
document (PID) where he outlines the purpose and requirements of a project.

Tip: Always include at least one developer in a meeting so that he can answer and
provide guidance while dealing with the more technical questions related to a project.

Project identification involves the following:

_create an idea
_identify the project vision and objectives
_define the complete scope of the project
_list all of critical project deliverables
_state the customers and project stakeholders
_list any risks, issues and assumptions
_Document the overall implementation plan
_Create an organizational structure for the project

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B) Preparation phase

• Project Preparation consists of all the work necessary to ensure that a proposed project is
feasible and appropriate and that it can be successfully implemented.

• The process ensures the identification and elimination of key risks at the earliest possible
time and maximizes development opportunities by ensuring that projects are well
conceptualized.

• What work does preparation consist of?

• The identification of funding sources,

• Community and stakeholder consultations,
• The development of project concepts,
• Socio-economic studies,
• Assessments of site suitability (e.g. topography, geotechnical and environmental
conditions),
• Land availability negotiations and agreements,
• Participative planning,
• Estimates for capital and operational costs and applications to funders or
implementation partners.
- Preparation work is social, technical and financial in nature.

Why is preparation important?

• Systematic and effective Project Preparation is important for a range of reasons outlined
below:

• Project risks are managed and controlled.

• Scarce resources are optimally utilized and are only allocated to viable projects.
• Projects are well conceptualized/intellectualized and planned.
• Integration of development with local needs
i.e. Development is appropriately tailored (made to fit very well) to local needs and is integrated
in nature.

• Often government departments, municipalities or other funding agencies do not have the
in-house personnel to undertake all the activities required for project preparation and
typically the assistance of outside specialists is required.

• It is therefore usually necessary that preparation funds are available, and specialists are
identified

• It is also necessary that this process be effectively managed.

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In short: - If the pre-feasibility study indicates that the projects is, prima facie (something which
appears to be true when you first consider it), promising and further work is justified,
the project enter the stage of preparation.

• Once project ideas have been identified and selected for further examination, the process
of project preparation and analysis starts.

• Project preparation must cover the full range of technical, institutional, economic, and
financial conditions necessary to achieve the project’s objective.

• Critical element of project preparation is identifying and comparing technical and

institutional alternatives for achieving the project’s objectives.

• Different alternatives may be available and therefore, resource endowment (labor or

capital) would have to be considered in the preparation of projects.

• Preparation thus require feasibility studies that identify and prepare preliminary
designs of technical alternatives, compare their costs and benefits, and investigate in
more details the more promising alternatives until the most satisfactory solution is finally
worked out.

• This stage involves the Feasibility studies.

• The major difference between the pre-feasibility and feasibility studies is the amount of
work required in order to determine whether a project is likely to be viable or not.

• If the preliminary screening suggests that the project is prima facie worthwhile, a detailed
analysis of the marketing, technical, financial, economic, and ecological aspects are
undertaken.

• Feasibility study provides a comprehensive/inclusive review of all aspects of the project

and lays the foundation for implementing the project and evaluating it when completed.

• After feasibility study has undertaken, the feasibility report should be provided.

• feasibility report should contain the following elements:

1. Market analysis
2. Technical analysis(materials & Inputs, Technology and engineering works, construction,
infrastructure)
3. Organizational analysis
4. Financial analysis
5. Economic analysis
6. Social analysis, and
7. Environmental analysis

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 I. Market and demand analysis
In most cases, the first step in project analysis is to estimate the potential size of the market
proposed for to be manufactured.

• To put it differently, market and demand analysis is concerned with two broad issues;

• What is the likely aggregate demand for the product? For many similar pjts
• What share of the market will the project enjoy? for single pjts
• These are very important questions in project analysis

• Market and demand analysis calls for in-depth study and assessment of various factors
like:

• Patterns of consumption,
• Growth,
• Income and price elasticity of demand,
• Composition of the market…d/t interest
• Nature of competition, and
• Availability of substitute so on and so forth
• Yet, in many cases project feasibility studies seems to make a short shrift of market and
demand analysis. …inadequate time/attention for analysis.

• It is not uncommon to find cursory/brief statement like "the market is attractive" or "the
demand is expected to exceed supply".

• Given the importance of market and demand analysis, it should be carried out in an
orderly and systematic manner.

• The key step in such analysis are as follows:

• Situational analysis and specification of objectives

• Collection of secondary information
• Conduct market survey
• Characterization of the market
• Demand forecasting
1. Situational Analysis and Specification of Objectives

In order to get a feel for the relationship between the product and its market, the project analyst
may informally talk to customer, competitors, middlemen, and others in the industry.

Project analyst may look at the experiences of the company to learn about the preferences and
purchasing power of customers, actions and strategies of competitors and practices of the
middlemen/distributors, whole sellers and retailers/.

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 • If such a situational analysis generates enough data to measure the market and get a
reliable projection of the demand and revenues, a formal study may not need to be
undertaken, particularly when time and cost consideration so suggest.

 In most cases, of course a formal study of market and demand is warranted/necessary.

• Suppose, there are Old air cooler vs. New air cooler
• The project initiator and implementer needs information about where and how to market
the new air cooler.
The objectives of market and demand analysis in this case may be to answer the
following questions:
- Who are the buyers of air cooler?
- What is the total current demand for air cooler?
- How is the demand temporarily distributed (pattern of sales over the year) and
geographically?
- What is the break-up of demand for air coolers of different size?
- What prices will the customers be 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 are most suited for the air cooler? What trade margin
will induce distributors to carry it?
- What are the prospects of immediate sales?

2. Collection of Secondary Information

• To answer the above questions, secondary and/or primary sources is necessary.

• Secondary information is information that has been gathered in some other context and is
already available.
• Primary information represents those information which are collected for the first time to
meet the specific purpose on hand.
• Secondary information provides the base and the starting point for market and demand
analysis.
• It leads gathering of primary information required for further analysis.
The important source of secondary information useful for market and demand analysis
in Ethiopia are mentioned below.
• census of Ethiopia
• national sample survey reports
• statistical abstracts
• annual survey of industries/agriculture and export
• economic survey
• annual report by national bank of Ethiopia
• bulletin on import and export
• other publications
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3. Conduct of market survey

• For undertaking a market survey there is a need to have a sample, which represents the
entire market.

• Thus, sampling is the process of drawing a limited number of subjects from a larger
population or universe.

• Since, the researchers cannot survey the entire population that they are interested, they
usually draw a sample of subjects from the population for investigation.

Steps in a Sample Survey

Typically a sample survey consists of the following steps:

1. Define the target population: in defining the target population the important terms
should be carefully and unambiguously defined.

 The target population may be divided into various segments which may have differing
characteristics.

 For example, all television owners may be divided into three to four income bracket.

2. Select the sampling scheme and sample size: there are several sampling schemes, simple
random sampling, cluster sampling, sequential sampling, stratified sampling, systematic
sampling and non-probability sampling.

• Each scheme has its advantage and limitations.

• The sample size has a bearing on the reliability of the estimates – the larger the
sample the greater reliability.

3. Develop the questionnaire: the questionnaire is the principal instrument for

eliciting/getting response/ information from the sample of the respondent.

 The effectiveness of the questionnaire as a device for eliciting the desired information
depends on its length, the type of questions, and the wording of questions.

 Developing the questionnaire require a detailed understanding of the product, and its
usage, imagination, insights into human behavior, appreciation of subtle linguistic
nuances/tones, and familiarity with the tools of descriptive and inferential statistics to
be used later for analysis.

 Since the quality of the questionnaire has an important bearing on the results of
market survey, the questionnaire should be tried out in a pilot survey and modified in the
light of problems/ difficulties noted.

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4. Recruit and train the field investigators:

 Recruiting and training of field investigators must be planned well since it can be time
consuming.

 Great care must be taken for recruiting the right kind of investigators and imparting
the proper kind of training to them.

5. Obtain information as per the questionnaire from the sample respondent:

 The respondents are kindly to respond what is asked

6. Scrutinize the information gathered:

 Information gathered should be thoroughly scrutinized to eliminate data which is

internally inconsistent and which is of dubious validity.

7. Analyze and Interpret the Information:

 Information gathered in the survey need to be analyzed and interpreted with care and
imagination.

 After tabulating it as per a plan of analysis, suitable statistical investigation may be

conducted, wherever possible and necessary.

 Results of data based on sample survey will have to be extrapolated/inferred to the

target population.

 Here it should be noted that the results of the market survey can be affected by:

i. Non representativeness of sample

ii. Imprecision/inaccuracy and inadequacies in the questions
iii. Failure of the respondent to comprehend/understand the questions
iv. Deliberate distortion in the answer given by the respondent
v. Slip shod/mistaken scrutiny of data
vi. Incorrect and inappropriate analysis and interpretation of data
Other data collection methods:
 Respondent may be interviewed personally, telephonically, or by mail for obtaining
information.
 Personal interview ensure a high rate of responses.
 They are, however, expensive and likely to result in biased responses because of the
presence of the interviewer.
 Mail survey are economical and evoke/suggest fairly candid/honest responses.
 The response rate, however, is often low.

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 Telephonic interview, common in western countries have very limited applicability in
Ethiopia because telephone tariffs are high and low telephone connection.
4. Characteristics of the market
- Based on the information gathered from secondary sources through the market survey,
the market for the product may be described in terms of the following:
• Effective demand in the past and present
• Breakdown of demand,
• Price
• Methods of distribution and sales promotion
• Consumers
• Supply and competition
• Government policy
a) Effective demand in past and present
• To gauge/measure the effective demand in the past and present, the starting point
typically is apparent consumption which is defined as:

• Production + Imports – Exports, sometimes adjusted for changes in inventories.

• In a competitive market, effective demand and apparent consumption are equal.

• However, in most of the developing countries, where competitive markets do not exist for
a variety of products, effective demand and apparent consumption are not equal.
b) Breakdown of demand/market segmentation

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c) Price

 Price statistics must be gathered along with statistics pertaining to physical quantities.

 It may be helpful to distinguish the following types of prices.

i) Manufacturer's price quoted as FOB (Free on board) price or CIF (Cost, insurance
and freight) price
ii) Landed price for imported goods
iii) Average wholesale price, and
iv) Average retail price
d) Method of distribution and sales promotion

 The method of distribution may vary with the nature of product.

 Capital goods, industrial raw materials or intermediates, and consumer products tend to
have differing distribution channels.

 Likewise, methods used for sales promotion (advertising, discount, gift schemes etc.)
may vary from product to product.

 The method of distribution and sales promotion employed presently and their rationale
must be specified.

 Such a study may explain the difficulties that may be encountered in marketing the
proposed products.

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e) Consumers

• Consumers may be categorized as follows:

• Age

• Sex

• Income

• Profession

• Residence

• Social background

f) Supply and Competition

• It is necessary to know the existing source of supply and whether they are foreign or
domestic.

• For domestic sources of supply, information along the following lines may be gathered
location, present production capacity, planned expansion, capacity utilization level,
bottlenecks in production and cost structure.

• Competition from substitute and near substitute should be special because almost any
product may be replaced by some other product as a result of relative changes in price,
quality, availability, promotional effort and so on.

g) Government Policy

• The role of government in influencing the demand and market for a product may be
significant.

• Governmental plans, policies, legislation and fiats/sanctions which have a bearing on the
market and demand of the product under examination should be spelt out.

e.g. Boeing 737 max 8

5. Demand forecasting

• After gathering 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 method is available to the market analyst.

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 This may be broadly divided into two categories: Qualitative and quantitative
methods.

A. Qualitative Methods

• These methods rely essentially on the judgment of experts to translate qualitative

information into quantitative estimate.

• The important qualitative methods are:

i) Jury of executive opinion method:

 Very popular in practice, involves soliciting/asking the opinions of a group of

managers/executive on expected future sales and combining them into a sales estimate.

 A group of managers/executives meet and collectively develop a forecast

The advantages of this method are:

-It is an expeditious/quick method for developing a demand forecast

-It permits consideration of a variety of factors like competitive environment, consumer

preferences, technological developments, and so on to be included in the subjective estimates
provided by the experts.

The disadvantages of this method are:

-The biases underlying subjective estimates cannot be unearthed/found easily

-The reliability of this technique is questionable

ii) Delphi method:

 This method is used for eliciting (to get response) the opinions of a group of experts with
the help of a mail survey.

 The steps involved in this method are:

 A group of experts are sent a questionnaire by mail and asked to express their views.

 The responses received from the experts are summarized without disclosing the identity
of the experts, and sent back to the experts, along with a questionnaire meant to
probe/investigate further the reasons for extreme views expressed in the first round

 The process may be continued for one or more rounds till a reasonable agreement
emerges in the views of experts

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Delphi method appeals to many organizations for the following reason

 It seems to be more accurate and less expensive than the traditional face-to-face group
meetings.

While the Delphi method is appealing, there are certain question marks:

• What is the value of expert opinion?

• What is the contribution of additional rounds and feedback to accuracy?

B. Quantitative Methods

• This method broadly comprises of two techniques of forecasting demand: these are time
series projection and causal methods.

a) Time series projection methods: this method generates forecasts on the basis of an
analysis of the historical time series.

The important time series projection methods are as follows:

i) Trend projection method:

- The trend projection method involves determining the trend of consumption by
analyzing the past consumption statistics and projecting future consumption by
extrapolating the trend.

- Various trend relationships could be identified including the following:

-Linear relationship: Yt=a+bT

Where Y is the variable to be forecasted and T is to be estimated.

-Exponential (Semi-log) relationship: Yt = a e^bT Or ln Y =bT+ln a

This method assumes that there is a constant growth rate b within each period.

-Polynomial relationship: Yt= c+ bx+ax^2

-Cobb Douglas Relationship: Yt = AL^a K^1-a

ii) Exponential smoothing method: exponential smoothing forecast are modified on the light of
observed errors.

• Assume the forecast value of Yt is Ft and actual value is At

• Assume the forecast value of Yt+1 is Ft+1

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 • If the forecast value for year t, Ft, is less than the actual value for year t, At, the forecast
for the year t+1, Ft+1, is set higher than Ft.

• If the forecast value for year t, Ft, is higher than the actual value for year t, At, the
forecast for the year t+1, Ft+1, is set less than Ft

In general

• Ft+1= Ft +a et

Where:

• Ft+1 = forecast for year t+1

• Ft = forecast for year t
• a = Smoothing parameter (which lies between 0 and 1)
• et= error in the forecast for year t = At-Ft
Example:

• Assume the wheeler manufacturing company experienced irregular demand. The actual
demand at yt is about 420 bikes and the demand forecast is about 320 at yt. Then find the
demand forecast of the next period?

• Ft+1= Ft +aet
• et = At – Ft = 420-320 = 100.
• Ft+1= 320 +0.7 (100), assume a (smoothing coefficient) = 0.7
= 320 + 70
= 390
• What will be the demand forecast of Ft+2 if the actual demand for Yt+1 is about 440?
Assume smoothing coefficient is 0.7.
iii) Moving average method:

• according to this method, the forecast for next period represents a simple arithmetic,
average or a weighted arithmetic average of the last few observation.

• In this method, the average of the demand from several of the most recent periods is
taken as the demand forecast for the next time period.

• The number of past periods to be used in the calculations is selected. E.g: 3 or 5 periods.

• Example:

• An XYZ refrigerator supplier has experienced the following demand for refrigerator
during past five months.

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 Month Demand

February 20

March 30

April 40

May 60

June 45

• Find out the demand forecast for the month of July using five period moving average and
three period moving average?

b) Causal methods

• This method is used to produce a demand forecasting models based on the existence of a
strong cause and effect relationship between explanatory variables (i.e. independent
variables) and the demand variable it self (dependent variable).

• The causal method comprises of:

i) Chain ratio method:

• Is an estimation method used by multiplying a base number by a chain of related

percentages.

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Example:

Market potential for beer in Ethiopia:

1. total population (p)= 107 million

2. proportion of P that consumes beer (R) = 95%
3. proportion of (R) that consumes Bedele beer (C) = 70%
4. Average number of bottles of beer consumed per Bedele consumer per week (L) = 2 bottles
5, Average price per bottle of beadle beer (A) = $0.5
The market sales potential for Bedele beer = PxRxCxLxA

= 107 million x .95 .70 x 2 x 14 Birr = 1,992,340,000 Birr

ii) Consumption level method:

• This method is used for those products that are directly consumed.

• This method measures the consumption level on the basis of elasticity coefficients.

• The important ones being the income elasticity of demand and the price elasticity of
demand.

• Viewing projected income level and income elasticity of demand relationship, demand
forecasting may be made as under:

• D* = D (1+ M*.em) where

• D* = Projected per capita demand

• D = per capita demand
• M* = projected relative/percentage change in per capita
income
• em = income elasticity of demand
iii) Leading indicator method:

• Leading indicators are events that are prelude to, and can thus help predict, another
events.

• Example: suppose the product is window glass for houses.

• It may well be that increase or decrease in the number of construction permits for new
houses will be reflected in corresponding increase or decrease in the number of sheets
glass ordered several months later.

• In equation, Sales of glass in 3 months = 210.9 + 26.7 * number of housing starts this
month.

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iv) End use method:

• This method focuses on forecasting the demand for intermediary goods.

• The demand for the good in different uses is taken into consideration.

• The list of several users/firms of the product under forecasting is prepared first, who are
then asked about their individual purchasing patterns and then from such information the
complete product demand forecast is ascertained.

• Example: Cement may be used for constructing houses, hotels, bridges, etc.

Milk is commodity which can be used as an intermediary good for the production of ice-cream
and other dairy products.

V) Regression analysis

• In this method, past demand data is used to establish a functional relationship between
two variables.

• One variable is known or assumed to be known; and used to forecast the value of other
unknown variable (i.e. demand).

Example:

Future sale = variables to be determined

Independent variable = Advertising cost

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Example:

Assume the wheeler manufacturing company experienced irregular demand. The actual demand
at yt is about 420 bikes and the demand forecast is about 320 at yt. Then find the demand
forecast of the next period?

Ft+1= Ft +aet

et = At – Ft = 420-320 = 100.

Ft+1= 320 +0.7 (100), assume a (smoothing coefficient) = 0.7

= 320 + 70

= 390

Quiz

What will be the demand forecast of Ft+2 if the actual demand for Yt+1 is about 440? Assume
smoothing coefficient is 0.7.

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