CHAPTER THREE: PROJECT IDENTIFICATION

3.1. Project Idea – Meaning

The identification of promising project ideas is the first step towards
establishing a successful venture. It is also the beginning of the mobilization
of investment funds.
The identification of opportunities for project (investments) requires an
understanding of the environment in which one operates, sensitive to
emerging investment possibilities, imaginative analysis of tangible and
intangible factors, and also an element of luck. The task is partly structured
and partly unstructured; partly dependent on convergent thinking and partly
on divergent thinking; partly requiring objective analysis of quantifiable
information, partly requiring subjective evaluation of qualitative factors; and
partly amenable to control, partly dependent on fortuitous circumstances.
This stage is about finding potential projects that will result in positive net
present value or that provide benefits for the society. This is the starting
stage in the project cycle. Projects usually start as new ideas which are
carefully examined and if found feasible and desirable are translated in to
projects. Such initiation of project ideas is called project conception. Project
conception is forming or developing ideas regarding a required intervention
in a specific area to address a problem or take advantage of opportunities.
Identification of project idea requires imagination, sensitivity to
environmental changes and realistic assessment of what the firm can do.
Theoretically an investor has an infinitely wide choice with respect to
investment opportunities.
3.2. Project Concepts and Profiles
Once a project idea has been conceived, the next stage is to describe the
idea so that it can be prioritized and move on to the next stage in the
process. This may involve the preparation of a project identification report or
project concept or profile. Whenever it is developed it is essential to have a
clear idea of what the proposed project is supported to be and what are
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hopes to achieve. It should include answers to the questions given in the
following box.
Project Profile or Concept
I. Justification and Purpose
 What goal is the project contributing to?
 What is the purpose of the project?
 What problem is the project addressing?
 What is the justification of the project?
 What demands, needs or opportunities is the project addressing?
II. Beneficiaries and Stakeholders
• Who will benefit from the project?
• Who has a share or s take in the project?
• How have project beneficiaries and other stakeholders participated in the
identification of the project?
• Which institutions are the targets of the project?
III. Resource and Institutions
• What potential resources may be available for implementing the project?
• Which organizations are to be involved in project planning and
implementations?
IV. Policies and Plans
• How does the project proposal fit into any sector or regional plans?
• Does the project fit into current policies? Impacts
• What are the likely major positive and negative social impacts of the
project?
• What are the likely positive and negative environmental impacts of the
project?
V. Support
• What is the level of political and administrative support for the project?
• Does the project have the support of beneficiaries and/or local
communities?
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vi. Risks
• What are the chances of the project achieving its objective?
• What are the main risks associated with the project?
• What assumptions have been made, e.g., what support is needed for
others?
3.3. Process of Project Identification
1. Generation of project idea: The generation of project ideas by
formal and informal institutions and individuals.
‘Necessity is the mother of invention’ sounds rhythmic with projects, as they
are roots of needs and wants. These needs may be social, political,
economic, commercial, technical or environmental that drives the actions of
entrepreneurs to pursue some creative actions. That is project ideas are
generated in order to satisfy the needs and wants. These actions will impact
both the macro and micro perspective of mankind.
Stimulating the flow of ideas
To enhance the flow workable project ideas firms often adopt a somewhat
casual and haphazard approach to the generating of project idea. However,
to stimulate the flow of ideas the following are approach or mechanism are
found to be very much helpful:
a. SWOT Analysis
b. Clear Articulation of Objectives
c. Set up of working environment
a. SWOT Analysis:
Existing companies’ essentially large scale company form of organizations is
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 project on the basis of its
existing activities. An existing company which seeks to identify new projects
opportunities should undertake a SWOT analysis. SWOT Analysis is an
acronym for strength, weakness, opportunities and threats. SWOT analysis
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represents a conscious deliberate and systematic effort by an organization to
identify opportunities that can be profitably exploited by it. Periodic SWOT
analysis facilitates the generation of ideas.
This analysis evaluates all these four characteristics of existing company or
organization. A brief summary of the points required for SWOT analysis is
given below.
 Availability of internal financial resources 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 and capability of top management of the
company,
 State of industrial relations in the company, impact of corporate laws on
the growth of the company, likely changes in the government policies
 Possibility of evolving new technology and its impact on the cost
structure of the company existence and severity of competition changes in
the customer’s preference, tests, etc.
By considering the above said information keenly the SWOT analysis helps to
prove 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.
b. Clear Articulation of Objectives of a Firm
Firm’s objectives may be one or more of the following:
 Cost reduction
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  Productivity improvement
 Increase in capacity utilization
 Improvement in contribution margin
 Expansion in to promising fields
A clear articulation and prioritization of objectives are helpful in guiding the
efforts of employees and encourage them to think more imaginatively.
c. Fostering productive working environment: in order to tap the
creativity of people and to harness their entrepreneurial urges, productive
organizational climate has to be fostered
2.Description of Project Idea: An actual written description of the project
idea or concept, summarizing the main elements of the proposed project to
use in the screening raking and prioritization of project ideas.
3. Screening: An initial review of project ideas and concepts to see if they
should be advanced or abandoned at an early stage.
4. Prioritization: The ranking and selection of projects against a set
of criteria to identify the “best projects to move actively into the designed
stage and development.
3.4. Sources of Project Ideas
There are multiple sources of project idea. Project ideas will contribute to the
realization of development objectives. Good project idea, the key to success,
is elusive. So a wide variety of sources should be trapped to identify them.
 Some projects may be “resource based” and originate from the
opportunity to make profitable use of available resources.
 Some projects may be “market based” arising from an identified demand
in home or overseas markets.
 Some projects may be “need-based” where the purpose is to try to make
available to all people in an area of minimal amounts of certain basic
material requirements and services
For our practical purpose, the sources of project ideas are mainly classified
into two types. The classifications are as follows.
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 3.4.1. Macro sources
Macro sources otherwise called Sector Sources. In this level, it will require an
analysis of the overall investment potential in developing countries. It refers
to the source of project idea, which is reflected from national, regional and
Sectoral level sources. For example,
 Lack of foreign exchange (trade deficit) requires export oriented
projects or import substitution oriented projects.
 Natural disaster such as drought, earthquake or flood requires
resettlement projects and flood control projects like dam
At a higher macro-level, project ideas could be obtained from various
sources as mentioned below.
i. Project Ideas from Government Policy and Plan: From time to time,
governments produce guidelines such as the national development plans,
seasonal papers which spell out the direction of what the government is
likely to do to achieve certain targets in various sectors of the economy and
guidelines to various organizations and individuals. The information
contained in these documents is useful in generating ideas for new projects.
For example, if government intends to start a number of new schools in a
given area, then a number of projects which are related to the requirements
of such schools would be considered. Most governments in the world are
moving away from directly initiating and implements new projects. The
emphasis is on local participation of the people in all development matters.
Hence, project idea can be obtained from government development plan
documents such as:
 National policies, strategies and priorities as may be articulated by
government from time to time;
 National, sectoral, sub–sectoral, or regional plans and strategies
supplemented by special studies, sometimes called opportunity studies,
conducted with the explicit aim of translation of national and sectoral, sub–
sectoral and regional programs into specific projects;
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  General surveys, resource potential surveys, regional studies, master
plan and statistical publications, which indicate directly or indirectly
investment opportunities.
 Government decision to correct social and regional inequalities or to
satisfy basic needs of the people through development projects.
 Government decisions to create project-implementing capacity in such
areas as construction industry, tourism industry, textile industries etc.
 A possible external threat that necessitates projects aiming at achieving,
for example, self – sufficiency in basic material, energy, transportation, etc.
 Unusual events such as droughts, floods, earth – quakes, hostilities, etc.,
 Constraints on the development process due to shortage of essential
infrastructure facilities, problems in the balance of payments, etc.
Information contained in such types of seasonal papers provide clear
guidelines to individuals or organizations who wish to start industrial
projects, especially small and medium sized ones and would like to be
supported by the government and other national institutions. However,
individual and institutions that are using government policy guidelines as a
source for project ideas must make sure that they operate within the overall
national policy framework as contained in the relevant documents.
ii. Project ideas from Technical Specialists: For many industrial projects,
ideas will usually tend to come from technical specialists who by virtue of
their experience and/or research findings will give useful information which
may lead to the manufacturing of new products or improving the existing
products.
iii. Project Idea from Local Leaders: For community or social projects,
local leaders will usually have important ideas, which they, together with the
local people, have identified as being important in improving the welfare of
the people. In the case of social projects, depending on which one is to
identify, there may be a number of other projects which are linked to the
identified project. For example, a project for constructing a dam for the
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generation of hydroelectric power will bring about suggestions for the start
of an irrigation project, a fishing project and other related projects.
iv. Project Ideas from Entrepreneurs: For commercial and industrial
projects, entrepreneurship is an important source of ideas. Entrepreneurship,
according to Srivastava (1981), includes the characteristics of perception of
managerial competence and motivation to achieve results. Although
entrepreneurship skill have been passed on from one generation to another,
along family and social-economic circles, it has been recognized that
programs for entrepreneurship development will help individuals to come up
with useful ideas which can be translated into viable projects.
project ideas can also be obtained from other sources such as general
surveys, resource potential surveys, constraints on the development process
due to shortage of essential infrastructure facilities, problems in the balance
of payments, a possible external threat that necessitates projects aiming at
achieving, for example, self–sufficiency in basic material, energy,
transportation; unusual events such as droughts, floods, earth quakes,
hostilities, multilateral or bilateral development agencies and as a result of
regional or international agreements in which the country participate and so
on.
3.4.2. Micro sources
The Micro Approach is mainly concerned with a review of investment ideas of
industries, investment offices and financial institutions in both developing
and developed countries. Specific project opportunity studies are concerned
with the initial identification of general investment opportunities in the form
of products with the potential form of domestic manufacture. A specific
project opportunity study may be defined as the transformation of project
into a broad investment position. The specific opportunity study should
consider the following factors.
 Natural resource available
 Existing agriculture pattern
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  Future demand
 Imports in order to identify area for import substitution
 Environment impact
 Possibilities for diversification.
 The general investment climate
 Industry policy Availability of cost of production factors
 Export possibilities
 Possible inter linkage with other industries.
Micro – Level project ideas can be generated from various sources,
including:
i. Analysis of the Performance of Existing Industries: a study of
existing industries in terms of their profitability and capacity utilization can
indicate 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 done region wise, particularly for
products which have high demand for consumption and wide scope for
production.
ii. Examination of the Input-outputs of Various Industries: the analysis
of the inputs required for various industries may throw up project ideas.
Opportunities exists when (i) materials, purchased parts, or supplies are
presently being procured from distant sources with considerable time lag
and transportation cost, and (ii) several firms produce internally some
components/ parts which can be supplied at a lower cost by a single
producer who can enjoy economies of scale. Similarly, a study of the output
of the existing industries may reveal opportunities for adding value through
further processing of the main outputs, by-products, as well as waste
products.
iii. Review of Imports and Exports: Analysis of import statistics for a
period of five to seven years is helpful in understanding the trend of imports
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of various goods and the potential for import substitution. Indigenous
manufacture of goods currently imported is advantageous for several
reasons: (i) it improves the balance of payments situation, (ii) it generates
employment, and (iii) it provides a market for the supporting industries and
services. Likewise, an examination of export statistics is useful in learning
about the export possibilities of various products.
iv. Investigation of 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
might be profitably produced and marketed. Such assessment may
consider issues such as the human and material resources, infrastructural
facilities, and market for various products.
v. Analysis of Economic and Social Changes: A study of economic and
social trends is helpful in projecting demands for various goods and
services. Changing economic conditions and consumer preferences provide
new business opportunities. For example, a greater 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 can be seen is the increasing desire for
leisure and recreational activities. This has caused a growth in the market
for recreational products and services.
vi. Study of New Technological Developments: New products or new
process and technologies for existing products developed by research
laboratories may be examined for profitable commercialization.
vii. Drawing Clues from Consumptions abroad: - Entrepreneurs willing
to take higher risks may identify projects for the manufacture of products
or supply of services which are new to the country but extensively used
abroad. Automatic vending machines, entrainment parks, and fast food
restaurants are examples of projects belonging to this category.
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Viii. Exploring the Possibility of Reviving Sick Units -Industrial
sickness is rampant in many countries. There are innumerable business
units which have been characterized as sick. 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.
ix. Identification of unfulfilled Psychological Needs: For well-
established multi-brand product groups like bathing soap, detergents,
cosmetics, and tooth paste, the questions to be asked is not whether there
is an opportunity to manufacture them for satisfying an actual physical
need but whether, there are certain psychological needs of the consumers
which are presently unfulfilled. To find out whether such an opportunity
exists, the technique of spectrum analysis is useful. This analysis is done in
the following manner (i) important factors influencing brand choice are
identified, (ii) Existing brands in the market are positioned on a continuum
in respect of the factors identified in step (i); (iii)Gaps which exists in
relation to consumer psychological needs are identified.
x. Attending Trade Fairs- National and international trade fairs provide
an excellent opportunity to know about new products and developments.
xi. Stimulating creativity for generating new product lines፡ - New
product ideas may be generated by thinking along the following lines:
Modification, rearrangements, Reversal, Magnifications, Reductions,
Substitutions, Adaptations and combinations. Even though there are
enormous sources of project ideas as discussed above, the variety of
projects makes it impossible to prepare an exhaustive list of sources from
where project ideas emanate; much depend on the experience and
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 imaginative of those entrusted with the task of initiating development
projects. Micro-level analysis can further new project idea generation
through:
 identification of unsatisfied demand or needs
 indicating the existence of unused or underutilized natural or human
resources and the perception of opportunities for their efficient use
 the need to remove shortages in essential materials, services or facilities
that constrain development efforts;
 the initiative of private or public enterprises in response to incentives
provided by the government;
 The necessity to complement or expand investments previously
undertaken.
 The desire of local groups or organization to enhance their economic
status and improve their welfare.
 Analyze possible extension of existing lines of manufacture by backward
or forward integration linking
 Analyze inter-linkage with other industries, indigenous or transnational
 Look at the suggestions of financial institutions and developmental
agencies
 Analyze sectors successful in other countries with similar economic
background and levels of development, capital, labor and natural
resources.
3.5. Preliminary Screening
By using the suggestions made in the preceding sections, it is possible to
develop a long list of project ideas. Some kind of preliminary screening is
required to eliminate ideas which are not promising.
Factors to be considered:
 Compatibility with the promoter
 The idea must be compatible with the interests, personality and
resources of the entrepreneur
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  It should offer him/her the prospect of rapid growth and high return on
invested capital
 Consistency with government priorities
 Is the project consistent with national goals and priorities?
 Are there any environmental effects contrary to governmental
regulations?
 Will there be any difficulty in obtaining the license for the project?
 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
a problem?
 Can the power supply for the project reasonably be obtained?
 Adequacy of markets: The size of the present market must offer the
prospect of adequate sales volume. Further there should be a potential for
growth and a reasonable return on investment. To judge the adequacy of
the market the following factors need to be examined:
 Total present domestic market
 Competitors and their market shares
 Export markets
 Quality-price profile
 Sales and distribution systems
 Projected increase in consumption
 Barriers to entry of new units
 Economic, social, and demographic trends favourable to increased
consumption
 Patent protection
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  Reasonableness of cost of production: the cost structure of the
proposed project must enable it to realize an acceptable profit. The
following should be examined:
 Cost of material inputs
 Labour costs
 Factory overheads
 General administrative expenses
 Selling and distribution expenses
 Service costs
 Economies of scale
 Social cost and benefits
 Acceptability of risk level
3.6. Project Rating Index (Prioritization & Ranking)
When a firm evaluates a large number of project ideas regularly, it may be
helpful to streamline the process of preliminary screening. For this purpose,
a preliminary evaluation may be translated into a project rating index. The
steps involved in determining the project rating index are as follows:
1. Identify factors relevant for the project rating
2. Assign weights to these factors (the weights are supposed to reflect their
relative importance)
3. Rate the project proposal on various factors, using a suitable rating scale.
(Typically a 5-point or a 7-point scale is used for this purpose.
4. For each factor, multiply the factor rating with the factor weight to get
the factor score.
5. Add all the factor scores to get the overall project rating index.
Factors Factor Rating Facto
weigh r
t VG(5 G(4 A(3 P( VP( score
) ) 2) 1) s

Input availability 0.25  0.75

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Technological know how 0.10  0.40

Reasonableness of cost 0.05  0.20

Adequacy of markets 0.15  0.75

Complimentary relation with 0.05  0.20

other products

Stability 0.10  0.40

Dependence on firm’s 0.20  1.00

strength

Consistency with 0.10  0.30

government priorities

RATING INDEX 4.00

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