PROJECT PREPARATION (FORMULATION)

Dr. Kahsu Mebrahtu Areaya (Assistant Professor)

Mekelle University
College of Business and Economics
School of Management
Department of Management
Post Graduate Program (MBA)
Chapter Objectives

 After studying this chapter, you should be able to

understand :
 Market analysis,
 Technical and institutional analysis,
 Financial analysis,
 Social cost-benefit,
 Gender analysis,
 Environmental analysis, etc.

Project Management by Dr. Kahsu Mebrahtu 2

Areaya, MU,CBE, School of Management ,
Department of Management
PROJECT PRE-FEASIBILITY AND
FEASIBILITY STUDY

 The starting point for preparing any project approved in

principle is the pre-feasibility study carried out at the
identification stage
 Pre feasibility study is the assessment of a project whether
there is a need for further study (to screen out the bad and
the not-so promising ideas).
 The written culmination of the pre-feasibility exercise is called
project identification brief
 Project identification brief identifies the constraints and the means for
overcoming them and makes the rough and ready assessment of the
costs and benefits.

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MU,CBE, School of Management , Department of
Management
…PROJECT PRE-FEASIBILITY AND
FEASIBILITY STUDY
 OBJECTIVES OF PRE-FEASIBILITY
STUDY
 To examine possible alternatives that are
emanated in pre feasibility studies
 To determine whether future analysis is
justifiable
 To undertake supporting studies, such as
environmental impact, laboratory test, equipment
selection, etc.
Project Management by Dr. Kahsu Mebrahtu 4
Areaya, MU,CBE, School of Management ,
Department of Management
FEASIBILITY STUDY FOR
COMMERCIAL PROJECTS
 Commercial projects are those that are
primarily conceived for generating
maximum profit through customer
satisfaction
 Feasibility study provides relevant information in
for the final investment decision (accept or reject)
based on a thorough and comprehensive analysis
of the projects technical, financial, economic,
social and institutional aspects.
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of Management , Department of
…Feasibility Study
 Commercial project feasibility study includes:
1. Market and Demand analysis
2. Raw materials and supplies study
3. Location, site, and environmental assessment
4. Production program and plant capacity
5. Technology and engineering study
6. Organization and Management
7. Project charts and layouts
8. Structures and Civil works
9. Financial Analysis
10. Economic Analysis
11. Environmental Analysis
12. Implementation (Work) scheduling
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Mebrahtu Areaya, MU,CBE, School
of Management , Department of
MARKET AND DEMAND ANALYSIS

 The major objective of market analysis is to

determine whether there is a gap between
demand and supply, i.e.,
 is there a market for the product?

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Mebrahtu Areaya, MU,CBE, School
of Management , Department of
…Market Analysis
 Customer Analysis and Market Segmentation, it involves
 Analysis of what, why, how, when, how much, and where
customer purchase a product.
 Market structure of the product (Consumer goods or capital
goods market)
 Market segmentation (i.e. Uniform customer behaviour such as
children and adult market; organizational and Individual market,
etc)
 Market Analysis (market volume, market potential, market share,
sales, production program inputs, etc)
 Export market so as to meet international standards
 Imports Project Management by Dr. Kahsu 8
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of Management , Department of
…Market Analysis
 Analysis of the Channels of Distribution
 Identify the various possible chains
connecting producers and end users. These
are often:
 Whole sellers distribution
 Retailers distribution
 Direct to customers

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Mebrahtu Areaya, MU,CBE, School
of Management , Department of
…Market Analysis
 Analysis of Competitors
 Assess how competitors use market-mix (i.e., the 4 P's).
 General information about competition (sales, market share, etc)
For example,
Market Share
 Shell --------------------------- 40%
 Agip --------------------------- 10%
 Total --------------------------- 20%
 Mobil -------------------------- 30%
 This helps as a profile of reaction and main strength and weakness of
competitors to compare with own situation.
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of Management , Department of
…Market Analysis
 Analysis of the Socio-Economic Environment
 Society and culture
 Social and economic policies
 Customs and habits
 Ecology and environmental protection plans
 Inflation and Demography
 Politics and Laws
 Development of domestic and international trade,
etc.
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Mebrahtu Areaya, MU,CBE, School
of Management , Department of
…Market Analysis
 Marketing Strategy
 Market share and Price strategy:
 Cost Leadership
 Differentiation
 Marketing Targeting
 4 P's (Product, Place, Promotion, and Price)
 Product market relations strategy:
 Market Penetration
 Market development
 Diversification
 Competition and Market Expansion, etc

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Mebrahtu Areaya, MU,CBE, School
of Management , Department of
…Market Analysis
 Marketing Cost
 The marketing cost arises from the
marketing strategy, such as packaging,
storage, salaries, commission, discounts,
promotion and advertisement, transport,
insurance, distribution, supplies, market
research, etc.

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Mebrahtu Areaya, MU,CBE, School
of Management , Department of
…Market Analysis
 Demand Projection
 In feasibility study current demand is determined
and the future potential demand will be forecasted
with the help of different techniques:
 Techniques of Demand Projection(Reading
Assignment) :
 Trend Analysis
 Average Annual Rate of Growth Method
 Regression Analysis
 Consumption Coefficient

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Mebrahtu Areaya, MU,CBE, School
of Management , Department of
…Market Analysis
 Decision:
 After the market and demand analysis, the analyst
should decide on the feasibility of the project
based on the signal of the market and demand
study.
 Is there a demand for the output of the project in
the market?
 What is the demand and supply gap? Etc.

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Mebrahtu Areaya, MU,CBE, School
of Management , Department of
RAW MATERIALS AND
SUPPLIES STUDY
A. Classification of Raw Materials and Supplies
1. Raw Materials (Unprocessed and Semi-processed):
 Agricultural product
 Livestock and Forest products
 Marine products and Fishery
 Mining
 Quarrying, Etc.
2. Processed and Industrial Materials and Components
3. Factory Supplies:
 Electricity, Fuel, Water, etc
 Recycled waste
4. Spare parts
5. Supplies for Social and external needs, etc.

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Mebrahtu Areaya, MU,CBE, School
of Management , Department of
… RAW MATERIALS AND
SUPPLIES STUDY
Factors affecting project input requirements:
1. Socio-Economic Factors
This refers to the social and cultural background of the society where
the project is planned to be located. For example, meat factory should
not be opened where meat is not eaten.
2. Commercial and Financial (Business) Factors
The project input requirement depends on the type of raw materials used,
productivity of workers, market demands for a given product, product
mix, availability of fund, etc.
3. Technical Factors
The project input requirement depends on the type of the industry,
technology and production process, machinery and equipment, project
life, etc.
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Mebrahtu Areaya, MU,CBE, School
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… RAW MATERIALS AND
SUPPLIES STUDY
 Decision:
 After the raw materials and supplies study,
the analyst should decide on the abundance
of the supply of raw materials and supplies.

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Mebrahtu Areaya, MU,CBE, School
of Management , Department of
LOCATION, SITE, AND
ENVIRONMENT
 The location of the project is highly affected
by the nature of the project itself.
1. Rooted Projects :are projects rooted at certain area
(proximity to an input) because it is better to transport end
products (outputs) than raw materials
2. Tied Projects :are projects that are tied to the market
(proximity to the market) because the transportation of the
final product is uneconomical
3. Foot Loose Projects: are projects that can be located anywhere. They
are neither tied to the market nor rooted to the raw materials. For
example, candy industry.
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Mebrahtu Areaya, MU,CBE, School
of Management , Department of
Key Decisions in Location, Site, And
Environment Assessment

A. Location Analysis (Location Selection)

B. Site Selection
C. Cost Estimates

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Mebrahtu Areaya, MU,CBE, School
of Management , Department of
… Key Decisions in Location, Site,
And Environment Assessment
A. Location Analysis (Location Selection)
 The strategic orientation of choice of location
includes:
1. Proximity to market and raw materials
2. Natural Environment Assessment
 Climate conditions (temperatures, rainfall, hurricane, dust, wind, etc).
 Effect on agriculture, industry, transport, construction, management, etc.
 Ecological requirement, such as avoiding contaminating water smoke.

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Mebrahtu Areaya, MU,CBE, School
of Management , Department of
…A. Location Analysis (Location
Selection)
 3. Environmental Impact Assessment
 Assessment of environmental consequences of the newly planned or
existing project and of any related activities.
 Assessment of environmental conflicts that is potential conflicts with
existing and future neighbouring industries, urban settlements
 4. Socio - Economic Policies
It involves in the study of:
 Government regulations and restrictions
 Local government policies: that is concessions, incentives, restrictions,
fiscal and legal regulations, procedures, utility supplies, building
regulations, taxes ,etc
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Mebrahtu Areaya, MU,CBE, School
of Management , Department of
…A. Location Analysis (Location
Selection)
5. Infrastructure Conditions: It studies,
 Technical infrastructure
 Transport and communication
 Social infrastructure (Police, Court, etc)
 Factory supplies (electricity, water, fuel, etc)
 Availability of human resources
 Infrastructure services (construction, erection, garages, etc)
6. Effluent and Waste Disposal: It studies,
 Gaseous effluent such as smoke
 Noise, heat, vibration
 Liquid or solid effluent

Decision: In line with the location analysis criteria, select the location that best fits among
alternatives.

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Mebrahtu Areaya, MU,CBE, School
of Management , Department of
… Key Decisions in Location, Site,
And Environment Assessment
B. Site Selection
 During site selection, the following requirements and conditions
should be assessed:
 Site requirements such as ground condition, soil condition, site
preparation and development, etc.
 Construction requirement such as requirements by the municipality.
 Land conditions that are infrastructure, such as an out let to the main
road.
 Effluent and waste disposal
 Human resources
 Social infrastructures such as school, hospital, market, police, court,
etc.
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Mebrahtu Areaya, MU,CBE, School
of Management , Department of
…B. Site Selection

 Socio - economic condition that is society may resist

certain areas not to be used for project location.
 Strategic Aspects: Project site analysis should give certain
allowance for project expansion.
 Cost of Land: Land can be acquired through purchase,
lease or concession, which depends on the law of the land.
The analyst should select land with optimal cost.

 Decision: Based on the site selection requirements, select

the site, which best fits.
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Mebrahtu Areaya, MU,CBE, School
of Management , Department of
… Key Decisions in Location, Site,
And Environment Assessment
 C. Cost Estimates
The major costs with regard to location and site selections
are:
 Cost of mitigating the environmental problems, that is cost
of devices to mitigate
 Cost of land
 Transport such as cost of transporting output and raw
materials to the market and the plant respectively, items
for construction purpose.
 Others such as housing costs and benefit packages for
employees, etc Project Management by Dr. Kahsu 26
Mebrahtu Areaya, MU,CBE, School
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PRODUCTION PROGRAM AND
PLANT CAPACITY
 The production program and plant capacity study involves in:
 A. Determination of Production Program
 Market requirement
 Input requirement
 Technology requirement
 B. Determination of Plant Capacity
1.Feasible (Normal) Capacity- capacity assuming limiting factors
2. Maximum (Nominal or Designed) Capacity
 Designed capacity assumes technically feasible condition without
taking in to consideration any real world problems and constraints like
machine break down.

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Mebrahtu Areaya, MU,CBE, School
of Management , Department of
TECHNOLOGY AND
ENGINEERING STUDY
 Technology and engineering study covers:
 A. Production program and plant capacity
 B. Technology choice
 C. Technology acquisition and transfer
 D. Plant lay out and basic engineering
 E. Machinery and equipment selection
 F. Civil engineering works
 G. Maintenance and replacement requirement
 H. Estimate of investment costs.
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Mebrahtu Areaya, MU,CBE, School
of Management , Department of
ORGANIZATION AND HUMAN
RESOURCES
• This involves :
 Design of the organizational structure
 Estmating Human Resource (Manpower)
Requirement
 Recruitment and Training

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Mebrahtu Areaya, MU,CBE, School
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 Outdoor lighting
Landscaping

STRUCTURES AND CIVIL WORKS

 This involves :
1)Site preparation and development
 Grading and levelling the site
 Demolition and removal of existing structures
 Relocation of existing pipelines, cables, roads, power line, etc
 Connection of the site to the public utilities net work, etc
2) Buildings and structures
 Factory or process buildings
 Administrative buildings
3) Outdoor works
 Supply and distribution of utilities
 Outdoor lighting
 Landscaping

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Mebrahtu Areaya, MU,CBE, School
of Management , Department of
PROJECT CHARTS AND
LAYOUTS
• This involves:
 General Functional Layout
 Material Flow Diagram
 Production Line Diagram
 Transport Layout
 Utility Consumption Layout
 Communication Layout
 Organizational Layout
 Plant Layout
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Mebrahtu Areaya, MU,CBE, School
of Management , Department of
FINANCIAL ANALYSIS
This involves deciding :
 Cost of project
 Means of financing
 Estimates of sales and production
 Cost of production
 Working capital requirement and its financing
 Estimates of working results (Projection of profit)
 Break-Even Point
 Projected cash flow statements
 Projected balance sheet

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Mebrahtu Areaya, MU,CBE, School
of Management , Department of
ECONOMIC ANALYSIS
 Economic analysis is made in order to rectify the
economic viability of the project. This analysis is
undertaken from the point of view of the nation or
the economy as a whole.
 Economic analysis can therefore be seen as a cost-
benefit analysis from the national perspective.
 Economic viability is concerned with public
‘profitability’(unlike the private profitability
under the financial analysis)
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Mebrahtu Areaya, MU,CBE, School
of Management , Department of
ENVIRONMENTAL ANALYSIS
• Environmental impact assessment thus
studies the unintended consequence of a
project. Its purpose is to identify, examine,
asses, and evaluate the likely and probable
impacts of a proposed development project
on environment and, thereby, to work out
the remedial action plans to minimize the
incidence of adverse impact.
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of Management , Department of
WORK (IMPLIMENTATION) SCHEDULE

 It reflects the plan of work concerning

installation as well as initial operation. Its
purpose is:
 To anticipate likely problems to arise during
the installation phase and suggest possible
means for coping with them.
 To establish the phasing of investments taking
into account the availability of finances.
 To develop a plan of operations covering the
initial period (the running-in period).
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of Management , Department of
Thank You !!!