Project

Identification
DR. SAVITA

1. Learning Outcome

After completing this module students will be able to:

1.​ Understand the concept of Project Identification

2.​ Understand the sources of project ideas
3.​ Know about the stages of Project Identification
4.​ Understand the dimensions of a project
5.​ Know the need and process of project identification

2. Introduction and Concept of Project Identification: Project

identification is the first step in setting up an enterprise. Identification of
a suitable project is very crucial decision as the ultimate success of an
entrepreneur depends upon the right selection of the right project.
Project identification is concerned with the collection of data, compilation
and analysis of economic data for the eventual purpose of locating
possible opportunities for investment and development. So project
identification is finding out business opportunities which are feasible and
promising.

In the words of Albert Einstein “Everything that can be counted does

not necessarily count, everything that counts cannot necessarily be
counted”

According to Thomas [Link] “Opportunity never knocks on the door.

You have to knock on opportunity‟s door and they are all around”

A lot of opportunities exist in the environment; the only thing we have

to do is to grab them. First of all, environment is to be analyzed for
perceiving the opportunities available and after that proper identification
of opportunities, it has to be done in the given environment. The next step
is to select the best from the available. Now the question arises „Why it is
necessary to identify and select an opportunity‟? The simplest way to
answer this question is to appreciate the need for project identification.

According to Peter F. Drucker “opportunities are of three types:

additive, complementary and break-through”.

These are explained below:

 (A) Additive opportunities are those opportunities which make it able to
the decision maker to better utilize the existing resources without
involving a change in any character of business.

(B) Complementary opportunities involve the introduction of new ideas

and as such lead to changes in the existing structure up to some extent.

(C) Break through opportunities involve a fundamental change both in

the nature and character of business. So in the case of additive
opportunities least amount of risk is involved as it involves least amount of
changes in the existing state of affairs. But the element of risk is more in
the other two types i.e. complementary and breaks through opportunities,
as they involve changes in existing structure as well as nature and
character of business.

3. Sources of Project Ideas: As Prasanna Chandra stated in his book

“Projects- Planning, Analysis, Selection, Financing, Implementation, and
Review” are the keys to success. So a wide variety of sources should be
tapped to identify them. Identifying a new project is not an easy job
because the success of a project depends upon the idea of a project. There
are different sources and methods which help to develop a wide range of
ideas such as performance of existing industries, price trends, availability
of raw material and skilled labour , government policies and guidelines,
new technological developments, trade fairs, unfilled psychological needs
etc.
●​ Study the performance of existing industries: A study of existing
industries provides information about the opportunities available in
that field. An analysis of the profitability and break-even point of
different industries will offer sufficient information about the
financial position of different industrial sector. So entrepreneur can
easily find out the capacity utilization and profitability and future
demand of those industries.
●​ Export/Import agencies: Export /Import agencies‟ statistical data
also provide information about the trends of export/Import of
various goods. Five to seven years study of data is helpful in drawing
a conclusion. If study shows higher proportion of import of a
particular product and shows increasing trend of that product then
it means import substitution can be produced. If study shows
increasing trend in an export of product then it indicates high
export potential for that product.
●​ Availability of Raw material and skilled labour: Availability of raw
material and skilled labour at competitive prices required for various
industries may throw up project ideas.
●​ Government policies and rules regulations: In any country
government plays a very important role. Government plans of
expenditure in different sectors provide useful information about
possible investment opportunities. The department of industrial
development and government of India, publishes guidelines on
industries which is an important source of information to identify
the scope for new investments.
●​ Study of economic, social and price trends: A study of the price,
economic and social trends of the economy is also very helpful in
projecting the demand for various goods and services. Greater the
demand of the product, greater is the scope of its expansion.
●​ Trade fairs: for the purpose of knowing about new products and
developments, National and International trade fairs are the
important source for the entrepreneurs to identify latest projects.
●​ New Technological developments: The main cause of commercial
exploitation is setting up research laboratories that are engaged in
identifying new products or processes which in turn provide
avenues for doing so.
●​ Possibility of revival of sick units: There are number of industrial
units in India which has been recognized as sick industrial units. If
internal factors involved behind the sickness/ weakness of industrial
units and that unit still have the capacity to become a financially
sound then a capable entrepreneur can take over that sick unit,
survive it and convert into financially sound unit with their
entrepreneurial skills.
●​ Draw clues from consumption abroad: entrepreneur may identify
the project which are new to domestic market but extensively used
abroad, if he is ready to take higher risk. Entertainment parks, fast
food restaurants, big malls are few examples coming under this
category.
●​ Identified unfilled psychological needs: For some of well established
branded products, there may be unsatisfied psychological needs.
 New products of a branded group being introduced and accepted by
consumers show that unfilled psychological needs to the customers.
●​ Various government and non-government sources: Various
publications of Government, research organization, consultancy
organizations, banks, export import promotion councils, and
international agencies contain data which may indicate prospective
ventures. An analysis of balance sheet and working results of existed
companies will be useful in knowing the industrial sectors that are
performing well.

4. Stages/Steps of project identification: Project identification involve

following stages/steps, such as:

1.​ Environmental scanning

2.​ Generation of ideas
3.​ SWOT Analysis
4.​ Preliminary evaluation
5.​ Corporate appraisal
6.​ Profit potential of different projects
7.​ Project selection
8.​ Project objectives

1. Environmental scanning: The environmental scanning covers both

scanning of external environment as well as internal environment. The
scanning of external environment includes identification of the
opportunities and threats to the organizations whereas internal
environment include the study of strengths and weaknesses of the
organizations. So environment is an aggregate of all conditions whether
external or internal that surrounds and affects business. While scanning of
business environment, an entrepreneur should take into consideration the
different types of environment such as Economic environment,
Technological environment, Competitive environment,
Socio-demographic environment and Governmental environment.

2. Generation of ideas: It is primarily concerned with the germination of

project idea. Entrepreneur may develop few ideas which he/she may
think, suit to the existing environment. The project idea may be
discovered from both internal and external resources.

3. SWOT Analysis: SWOT Analysis means Strengths, Weaknesses,

Opportunities, and Threats. It is a method which enables the organization
to identify opportunities that can be profitably exploited by it. SWOT
analysis helps the entrepreneur in stimulating the flow of ideas.

4. Preliminary evaluation: An entrepreneur may have many project

ideas. So some sort of preliminary evaluation is required to eliminate
those project ideas which are not feasible:
●​ The project idea should confirm to the government regulatory
framework. It should be compatible with the national goals,
priorities and policies of the government.
●​ There must be a sizeable market available to consume the product
made from the new project.
●​ The idea must be compatible with the interest, personality and
resources of the entrepreneur. In simple words it should be
compatible with men, money, material and market at the disposal of
entrepreneur. In the words of Murphy “A real opportunity has three
characteristics: (a) It fits the personality of the entrepreneur-it
squares with his abilities, training, and proclivities, (b) It is accessible
to him and (c) It offers him the prospect of rapid growth and high
return on invested capital”.
●​ The material needed for the project must be easily and economically
available. Because success of the project depends upon availability of
resources.
●​ Cost factor should be taken into consideration. The entrepreneur
must be in a position to realize an acceptable profit level.
●​ Indian economy from the view point of entrepreneur is still
underdeveloped. It can absorb a lot more entrepreneurs. So entering
an already stagnant market will not be a very good idea. So
entrepreneur must analyze the risk factor before entering into a
market.
●​ Inherent risk in the project such as changes in demand,
technological changes, variation in business cycle, entry of
 substitutes, and competition from imports should be properly
examined before starting a project.

5. Corporate appraisal: After preliminary evaluation, corporate appraisal

of project should be conducted in order to make sure the availability of
raw material, equipment, selling and distribution costs and customer
behavior in relation to that project. The important aspect to be considered
in this respect are as follows:

(a) Raw material availability: The entrepreneur should ensure the

availability of raw material. For this he should investigate the sources of
raw material, various suppliers of raw material, inviting price quotation
from suppliers, credit period allowed by suppliers and terms and
conditions of supply of raw materials.

(b) Production, operations and equipment availability: Before

implementing the project, the entrepreneur should investigate the
availability of plant and equipment which is required for the production of
that product. To achieve this he must study the comparative features of
various manufacturers in terms of price, Guarantees and Warranties after
sale service, Technical and skilled staff requirement, operative capacity,
location and layout, cost structure, repair and maintenance of equipment
and condition of plant and machinery.
 (c) Marketing and Research and Development: In this segment the
entrepreneur has to study the market share, product line, distribution
network, marketing and distribution cost, advertising and publicity
programme for the product, market practices such as credit policy,
product positioning, laboratories and testing facilities available,
co-ordination between research and operations.

(d) Financial and Human resources: They include financial leverage, cost
of capital, cash flows and liquidity, tax situation, corporate stage,
competence and loyalty of employees, state of industrial relations and
relation with shareholders and creditors.

(e) Consumer and Consumer behavior: The entrepreneur should analyze

the categories of consumers such as industrial, foreign and retailer,
comparative qualities of own product with competitive products,
purchasing power of consumer, consumption pattern, consumer priorities
and identification of customers‟ needs.

6. Profit potential and prioritize project list: Before entering a new

venture a person must look into the profit potential of that project and
compare it with the other identified projects. So in this step he needs to
prioritize the list of projects, taking some things kept into mind such as:

●​ Competition among existing firms

●​ Bargaining power of buyers and suppliers
 ●​ Existence of substitute products
●​ Threat of new entrants
●​ Divisional key performance indicators
●​ Time and ease to complete each projects
●​ Resources required for each project and
●​ Five year corporate plans and goals

7. Project selection: After studying profit potential of each project and

preparing prioritization list, entrepreneur will come to know the overall
rating of the different project ideas. The project with maximum rating will
be the most feasible in comparison to other projects. The process involved
in selecting a project out of some prospects is also described as “Zeroing
in process”. While selecting a project, the entrepreneur should keep in
mind about the Location, Technology, Size of investment, Equipment, and
Marketing of project.

8. Project objectives: project objective starts where project

identification ends. Objectives are the foundations on which the project
design is built. Project objectives are concerned with defining in a precise
manner what the project is expected to achieve and to provide a measure
of performance for the project. The essential requirements of project
objectives are:

●​ It should be simple.
●​ It should be realistic and attainable.
 ●​ It should be specific.
●​ It should be consistent with available resources.
●​ It should be consistent with organizational plan, policies and
procedures.
●​ It should be measurable, tangible and verifiable.

So above are the various stages/steps in project identification which can

surely help an entrepreneur in identifying and selecting a right project
suitable to his/her capabilities and shills, resources and market needs.

5. Dimensions of project: Project identification cannot be complete

without identifying its characteristics. Every project has three basic
dimensions: (a) inputs (b) outputs (c) social costs and benefits.

(a) Inputs: This characteristic of a project define what the project will
consume in terms of raw material, energy, manpower, finance and
organizational set up.
(b) Outputs: This characteristic of project define what the project will
generate in the form of goods and services, employment, revenue etc.
(c) Social costs and benefits: Every project has an impact on the society.
So it is essential to evaluate carefully the sacrifice which the society will
be required to make and the benefits that will accrue to the society from a
given project.
 The inputs to set up a project can come from different sources such as
governmental agencies, credit and financial institutions and
non-governmental organizations such as chambers of commerce and
industry, inter-institutional groups, technical consultancy organizations
and international collaborations.

6. Need of project identification: Project identification is very important

.We needed project identification due to following reasons.
(a) Identified projects become the accelerator agents of economic
development.
(b) These initiate the development of basic infrastructure and
environment.
(c) They have long term beneficial consequences.
(d) Projects provide guidelines for future pattern of activities and
services to be undertaken by an enterprise.
(e) In the course of time, identified projects bring necessary changes in
the society.
 (f) Project commitments are normally not revised.
(g) Projects also lead to socio-cultural development of the people.

7. Process of project Identification: Project Identification involves the

assessment and evaluation of a number of characteristics of project such
as input, output, social cost and benefits, location and consultancy
services etc. Now we will discuss these one by one:

1.​ Inputs: In the process of identification of suitable project, first of all

SWOT analysis are to be done in respect of the resources available at
the disposal of entrepreneur. The various input resources refer to
raw materials, energy, manpower, finance and organizational
structure.
2.​ Outputs: The study of output characteristics helps in determining as
to what the project will generate in the form of goods and services,
employment, revenues etc. The quantity and quality of all these
outputs should be clearly analysed before the proposed project is
undertaken.
3.​ Social costs and benefits: Every project has an impact on the society.
So it is essential to evaluate carefully the sacrifice which the society
will be required to make and the benefits that will accrue to the
society if the proposed projects are undertaken.
4.​ Location: It is also essential to take into account the tentative choice
of the location where the project proposed to be set up. In case of
medium and large scale projects, the location is normally decided on
 the basis of project requirements. The selection of the project
should be made in the basis of promoter‟s background and
inclination.
5.​ Counseling services: For selecting a suitable project, different
sources like government agencies i.e Entrepreneurship development
centers, Small industries service institute, Technical consultancy
organizations. Credit and financial institutions, Non government
agencies i.e Chamber of Commerce and industry, Inter-institutional
groups, Technical consultancy organizations and International
collaborations are providing very useful counseling services to the
entrepreneurs.

8. Problems faced by entrepreneur in Project Identification: While

identifying the project, an entrepreneur has faced many problems. These
can be classifying into two categories as internal and external problems.

1. Internal problems: Internal problems arise due to the restrictions or

management system which will ultimately be responsible for the
implementation of a project. These are as follows:

(a) Trusting on outside consultants: In order to prepare feasibility report

in the formulation of their projects, an entrepreneur has to trust outside
consultants. Inability in the form of preparing feasibility report is a major
problem in the early implementation of project.
 (b) Project goals and objectives: Generally objectives of the project are
decided by top management personnel and management team is not
much involved with the determination of project objectives. So this is
another major problem for the project team to achieve the unrealistic
objective which is formulated by the top management.

(c) Cost constraints: Every entrepreneur cannot develop project

management systems, organization structure, network analysis and other
elements within the budgeted cost and time schedule for early
implementation of project.

(d) Resources constraints: Availability of resources that is both physical

and non-physical resources is the major problems for the entrepreneurs
when the project is in progress. Physical resources include finance,
manpower, facilities and inventories and the non-physical resources
include patents, secret processes, unique experience and skills.

2. External problems: External problems include project environment

comprising things, people and situation outside a project. It also include
the size, nature, location, extent of the project constitute the environment
of the project, government policies and the state of capital market.

(a) Non-compliance to the socio-economic objectives: Factors like size,

nature, location and the extent of the project shall create a problem for
the entrepreneurs when the project does not comply with the
socio-economic objectives of the economy.

(b) Troublesome procedure of finance: Financial institution and banks

are the major important external source to the entrepreneurs for
financing their projects. Complicated procedures and documentation
system of financial institutions and banks make delay in getting financial
sanctioning for their projects. Scarcity of funds is the main problem for
the entrepreneurs while implementing the projects timely.

(c) Government policies and regulations: While implementing the

projects, government policies and rules-regulations are another major
hurdle for the entrepreneurs. Delay is taking place in getting approval for
licence, foreign collaboration, Control of Capital Issues clearance,
environmental clearance, foreign exchange permit, capital goods approval
and import goods clearance.

9. Summary:

Project identification is concerned with the collection of data,

compilation and analysis of economic data for the eventual purpose of
locating possible opportunities for investment and development. So
project identification is finding out business opportunities which are
feasible and promising. In order to grab the opportunities, first of all,
environment is to be analyzed for perceiving the opportunities available
and after that proper identification of opportunities, it has to be done in
the given environment. The next step is to select the best from the
available. A wide variety of sources should be tapped to identify best
opportunities. Identifying a new project is not an easy job because the
success of a project depends upon the idea of a project. There are
different sources and methods which help to develop a wide range of
ideas such as performance of existing industries, price trends, availability
of raw material and skilled labour, government policies and guidelines,
new technological developments, trade fairs, unfilled psychological needs
etc. While identifying the project, an entrepreneur faces many problems.
These problems may be internal problems like trusting on outside
consultants, project goals and objectives, cost constraints, resources
constraints etc. and external problems like troublesome procedure of
finance, government policies and regulations etc.
Learn More
Suggested Readings:

1.​ Project Management: A Development Perspective, Goyal B.B., Deep &

Deep Publications.
2.​ Project Management: A Managerial Approach, Jack R. Meredith,
Wiley Publications
3.​ Project Planning and Control, Mohsin M., Vikas Publishing House.
4.​ Project Management, Chaudhary, S., Tata Mc Graw Hill Publications.
5.​ Project Management, Maylor, Pearson Education
6.​ Projects: Planning, Analysis, Selection, Implementation & Review,
Prasanna Chandra, Tata McGraw-Hill Publishing
7.​ United Nations Industrial Development Organization, Guide to
Practical Project Appraisal–Social Benefit Cost Analysis in
Developing Countries, Oxford