CHAPTER THREE

PROJECT IDENTIFICATION
Objectives of the Chapter:
Dear learners, welcome to the third chapter of project analysis and evaluation. At the
end of this chapter, you will be able to:

 Know how to identify suitable project ideas

 Identify the different sources of project ideas
 Know how to select the most viable
project ideas and who is responsible to
identify it
 Describe the difference between
project concepts and profile
 Explain the concept of project prioritization and ranking

3.1 Concepts of Project Identification

Project identification is the process of searching for and subsequently finding potential projects
that might be realized to generate benefits in excess of costs that accrue to the society and
contribute towards the attainment of development objectives. The generation of promising
investment (and/or project) ideas is among the major stages in the project cycle. It is the first
stage in the project planning process.
Project identification is made in rather general terms with broader scope at the first glance and
then, the idea will be progressively developed. According to the UNIDO model, opportunity
studies and/or assessments of existing investment opportunities are considered very essential and
hence, should precede the task of identification. Opportunity studies generally provide useful
insights about possible/potential areas for investments. Generally speaking, a range of alternative
project ideas needs to be considered, and even alternative versions of the same project may be
conceived. The search for promising project ideas is the first step towards establishing a
successful venture. Identifying suitable project ideas is the most important and crucial step in the
whole process of project preparation.

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As the traditional adage goes, the key to success lies in getting into the right business at the right
time. While this advice is simple, its accomplishment is difficult because good business
opportunities tend to be elusive. Identification of such opportunities requires imagination,
sensitivity to environmental changes, and realistic assessment of what the firm can do.

The task is partly structured, partly unstructured; partly dependent on convergent thinking, partly
dependent on divergent thinking; partly requiring objective analysis of quantifiable factors,
partly requiring subjective evaluation of qualitative factors; partly amenable to control, partly
dependent on fortuitous circumstances. Identification is often the outcome of a triggering process
rather than an analytical exercise. While the notion of identification is simple, it is difficult to
develop methods or procedures for accomplishing it as there is no well-defined theory to guide
this task.

As these difficulties become more severe as one moves up the hierarchy of organizational
decision-making levels because of the relative uniqueness (non-routineness) of higher level
decisions as compared to lower level decisions. With this note of caution, this chapter discusses
certain broad considerations and guidelines helpful in the generation and screening of project
ideas. The objective is to identify investment opportunities which are prima facie and promising
and which merit further examination and appraisal.

3.2 Sources of Project Ideas

It is the first and foremost task of an entrepreneur to find out suitable business which is feasible
and promising and which merit further examination and appraisal. Therefore, he has to first
search for a sound of workable business idea and give a practical shape to his idea. While doing
so, the entrepreneur has to tackle the various problems from time to time to achiever the ultimate
success. Since the good project ideas are elusive, a variety of sources should be trapped to
stimulate the generation of project ideas. Project ideas can originate from a number of sources-
from national, sectorial or regional plans or strategies from operating agencies & intended
beneficiaries. In practice, project ideas often result from;

Unsatisfied demanded /need and the most effective means to meet them.

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 Problems/constraints in the development process due to shortage of essential
facilities, services or material.
Unused /under-utilized material or human resources for their conversion towards
more productive purpose
Need to complement other investments that have already taken place.
Initiative/response to government incentives of local, private or public entrepreneurs
who wish to take advantage of the opportunities they perceive.
Government’s desire to respond to local political or social pressure originating from
growing economic, social or regional inequalities
Personal experience & knowledge of field officers on the needs & potentials, this
requires-imagination, creativity, ability & commitment to analyze the economic &
national resource
Perception of market potentials through the review of statistical data &
available surveys concerning:
Products which the country has a combative advantage due to natural
restores. Products which substitute previously imported goods.
Products for which there is export market potential.

3.1.1. Classification of Source of Project Idea

A. Macro Vs micro level
[Link]. Macro source of the project
Project establishment depends on external factors called as macro factors
exclusively. Government, fiscal policy, monetary policy, and other regulatory
policies come under these sources.

1. Government as a policy maker: In the planned economy, the government plays

a major role in the industrial development. The government prepares plans for
the industrial and overall development of the country, spells out priorities for the
economy and lays the framework for development and resource allocation.

Individual entrepreneurs who are in search for profitable projects ventures to locate
their project opportunities within the overall framework for development lay out by

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the government. If export promotion and import substitution are the priority areas
identified by the government, entrepreneurs tend to look for projects in such priority
areas. If the government announces it policy of development of backward areas,
entrepreneurs may find it easier and advantageous to set up their identified projects
in such declared areas as this will help them to avail both financial and non-financial
incentives offered by the government for projects set up in backward areas.

The government lays down certain industrial priorities for the country development.
These priorities depend up on the thrust areas relevant to the state development. The
thrust areas keep on changing, as the government keep on change its development
plans. The government adopts industrial licensing policy to control new investments
in areas which are saturated or areas that are to be encouraged.

Fiscal policy: The policy under which the government influence the economic
activity of the country through the medium of budgets. The government presents
details of public revenue and public expenditure through budgets. Fiscal policy is the
policy under which the government uses its expenditure and revenue programs to
produce desirable effects and to avoid undesirable effect on national income, output,
employment, resource allocation/reallocation and so on.

Monetary policy: Monetary policy is concerned with the quantity of money and its
regulation in an economy.

The monetary policy of a country is formulated by the government and is carried

out through the agency of the Central Bank of the country (National Bank of
Ethiopia in case of Ethiopia). Monetary policy is designed to control and regulate
the volume of money in circulation. It has its influence over the credit policy of
banks. The main objectives of monetary policy are to control inflation/defilation, to
make available the quantity of money in accordance with the requirements of
economic development and to ensure stability of exchange rate of money.

2. Other Regulatory Policies: Apart from the above mentioned policies,

Government also uses the following control measures to affect the desired

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 patter of resource allocation.

Industrial licensing policy

Control over capital issues
Control over foreign
exchange and foreign
collaboration
Export promotion and
import controls
Control over monopolies
and restrictive trade
practices
Control over pricing and
distribution of
commodities

[Link]. Micro Source of the project

Success of the project depends on the internal and specific factors related to a
particular industry as such. Availability of raw materials, availability of skilled
labor, import/export of goods, price trend and so on come under the micro sources of
the project. In general, at micro level project ideas can be generated from various
sources. Some of these are discussed below.

Availability of Raw Materials: Easy availability of good quality of raw materials at

fair prices is a definite indication that some projects that can make use of those raw
materials may be through of. For example in an areas where agriculture in
the predominant activity and where agricultural produces (like cereals, vegetables
and fruits) are available in plenty, the potential can be made use of by setting up
food processing industries. Availability of minerals may give lead to chemical
industries.

Availability of skilled labor: Based on the locally available skilled labor force,

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suitable industries that can make better use of the skilled manpower can be
identified.

Analysis of the performance of existing industries; A study of existing industries

in terms of their profitability utilization can indicate promoting investment
opportunities which are profitable and relatively risk free. An examination of
capacity utilization of various industries provides information about the potential for
further investments. Such study is more useful if it is done region wise. Particularly
for products which have high demand for consumption and wide scope for
production.

Examination of the input-outputs of various industries: The analysis of inputs

required for various industries may throw some project ideas. Opportunities exist
when
{1] Materials, purchased parts, or supplies are presently procured from distance
sources with considerable time lag and transportation cost and
[2] Several firms produce internally some components parts which can be supplied
at lower cost by a single producer who can enjoy economics 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 produce, by products as
well as waste products.

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 of various goods and the
potential for import substitution. Indigenous manufacture of goods currently
imported is advantageous for several reasons.

[1] It improves the balance of payments situation.

[2] It generates employment, and
[3] it provides market for the supporting industries and services. Likewise an
examination of export statistics is useful in learning about the export possibilities of
various products.

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Investigation of local materials and resources; A search for project ideas may
begin 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,
Infrastructure facilities and market for various products.

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 businesses opportunities. For
example a greater awareness of the value of time is dawning on public. Hence the
demand for time saving products like prepared food items, ovens and powered
vehicles has been increasing.

The other change that can be seen during analysis is the increasing desire for the
leisure and recreational activities. This has caused a growth in the market for
recreational products and services.

Study of new technological developments: New products are the new process and
technologies for existing products developed by the research laboratories may be
examined for profitable communication.

Exploring the possibility of reviving sick units: Industrials sickness is spread in

many countries. There are innumerable bossiness units which have been
characterized as sick. These units either closed are have reached the prospect of
closure. A significant proportion of sick units however can be nursed back to health
by sound management, fusion of further capital and provision of complementary
inputs. Hence there is a fairly good scope investment in this area.

Identification of unfulfilled psychological needs:

For well-established multi brand product groups like bathing soaps, 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

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there are certain psychological needs of the consumers which are presently
unfulfilled.
a. Attending trade fairs: National and international trade fairs provide an excellent
opportunity to know about new product and developments.

b. Stimulating creativity for generation’s new product lines: New product

ideas may be generated by thinking along the following lines: Modifications,
rearrangements, reversal, magnifications, reductions, substitutions, adoptions
and combinations.

c. Price Trend: The trend in the price of various products/services may give an
indication about the demand-supply relationship. If the general price level is
rising during the past few years and if the rise in price level of a particular
product is steeper than the rise in general price level, it may indicate a
demand-supply gap. Further detailed study may be undertaken to ascertain
the extent of demand-supply gap.

d. Data from Various Sources: Various publications of Government, banks

and financial institutions, consultancy organizations, manufacturer’s, export
promotion councils, research institutions and international agencies contain data
and statistic which may indicate prospective ventures.

Who Identify Project Ideas?

There are quite large number of institutions and/or groups that often identify
investment opportunities (or generate project ideas) in the society. These entities
may be private firms, public enterprises, government units, local or international
development agencies, financial institutions, as well as profit seeking or not-for-
profit organizations. Listed below are the major groups that are involved, by and
large, in the identification of projects in the society:
Technical specialists
Technical specialists can initiate project ideas from their experiences of through
their research findings. This usually is common in manufacturing firms where
mechanical and industrial engineers working there generate new expansion and/or

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new industrial projects. These projects usually either improve the products being
produced currently or produce new products.

Local leaders
Social and community projects could emanate from the suggestions made by local
leaders regarding the problems prevailing in the area. Local leaders could also
initiate project ideas from already identified or implemented projects. For instance,
project ideas on irrigation could be initiated from an already constructed hydro-
electric dam.

Entrepreneurs
Entrepreneurship includes the characteristics of perception of managerial
competence and motivation to achieve results. These characteristics make
entrepreneurs the major sources of industrial and commercial projects. Although
entrepreneurship skills have been passed on from one generation to another along
family and socio-economic circles, it has been recognized that programs for
entrepreneurship development will help individuals to come up with useful ideas.

Governments
Government guidelines such as national development plans that spell out what the
government is likely to do to achieve its targets in different sectors of the economy
are the sources of many projects by the government and entrepreneurs.
Others
In addition to the above list down economic units the following agents are also
becomes source of project ideas;
Small producers organizations/producers’
unions; Large scale individual private sector
producers; Product marketing organizations;
Private sector companies
(local/multinational); State owned enterprises
& organizations;
Government ministries, authorities, agencies, and

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 commissions;
Development banks (local as well as foreign);
International development agencies, aid agencies, and self-aid associations;
Local governments and state, regional, and sub-regional authorities;
Local political & pressure groups such as opposition
parties; Local and/or international NGOs;
Credit institutions (such as credit unions, savings and loan associations,
saving banks, commercial banks) and cooperatives; and so on.

3.2. Project Concepts and Profiles

3.2.1. Project concepts
A project concept is a complete documentation of the proposed project but
needs to be implemented yet. The term "concept" means that it is under
planning and processing for implementation. A full blown project concept
consist of following documentation such as; project feasibility studies (technical,
financial, environmental, etc.), detailed drawings/plans & specifications, detailed
estimates for project cost, environmental permit, social acceptability of the project and
other requirements for fund
sourcing. A project concept is also called project proposal and can
only be called "Project" when it is funded and under implementation.

The Feasibility, or Concept, stage of the project is the first development stage
undertaken after determining the reasons and benefits for undertaking a project. This
usually consists of a study, where an Initial Project Definition is developed in
outline, demonstrating that the project is feasible, and identifying how the project
should be structured in order to deliver the benefits expected of it.

Reasons for undertaking a concept study before implementing a project. It will:

Be the opportunity to consider all options for achieving the project's objectives.
Develop consistently, alternative scopes and options for the project before
determining the Best Value solution to proceed with.
Have only committed a relatively small amount of money to understand the project

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and its chances of success, before committing larger sums of money associated with
project implementation.
Identify the most significant risks facing the project, should it proceed to implementation.
Test the identified project scope and definition against the reasons for
undertaking the project.
Be the time of the project where most value can be added, through the
creativity and experience of those involved, where ideas can be considered and
tested in a safe environment.
Test the sponsor's level of commitment and enthusiasm to see the project through,
when the resulting conclusions and recommendations are presented.
Be following recognized Best Practice in project management. Research has
demonstrated that project pre-planning activity, when carried out properly, is the
biggest factor determining success for a project.
3.2.2. What is a Project Profile?
A project profile is a simplified description of an eventual project. In addition to
defining the purpose and ownership of the project, it presents a first estimate of the
activities involved and the total investment that will be required, as well as the
annual operating costs and, in the case of income generating projects, the annual
income.

It is simplified in a number of senses; costs may still not be well defined, minor
items may be excluded, and assumptions as to the demand for the output of the
investment, whether it be a childcare facility, a bridge, or canned vegetables, are
probably just that - assumptions.

What is the Purpose of the Profile?

The project profile serves a number of important purposes. These are discussed briefly below.
a) It helps to ensure that the members of the community or group involved
understand the probable implications of their proposal in terms of investment
and operating costs, labor requirements, scale of operations and other factors. It
is often not until the proposed project is debated publicly and written down in
front of everyone that these elements really emerge. Up to this point, group

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 members may just have felt that it would be 'good' to have a new access road
to the village, without really understanding what that might entail - both for the
village as a whole and for them personally.
b) It helps eliminate wasted effort in preparing detailed projects that are
incoherent, lacking support among the applicants, or which fail to meet basic
tests of viability. If human and financial resources to support project
formulation are limited - which is usually the case - this aspect of the profile in
acting as a 'filter' is very important. If the community can only receive funds to
support one full project preparation per year, it is best not to waste those
resources on a project that has no chance of success.
c) The participation of group members in the preparation and assessment of the
profile is an important stage in the ownership process for the specific project, as
well as increasing the confidence of the participants in their ability to identify
and develop real solutions to their problems (or responses to opportunities). For
communities and groups, which have always relied on outsiders telling them
what should be done, such confidence building is a valuable contribution to the
social capital of the community.
d) Together with the other stages in the Rural Invest approach, it contributes to a
more successful implementation process. Experience has shown that projects
developed through Rural Invest, and which have had participatory project
profile development exercises, present fewer problems during the subsequent
implementation process. In part this seems to occur because the applicants
understand more clearly the objectives and operation of the project. Other
factors may include their increased confidence and ownership in the project,
and the relationship developed with the local technicians.
The Principal Elements of a Project Profile
The project profile, as prepared with the applicants, consists of five parts. The last
part has two variations: one exclusively for income generating projects (5a); and the
other for non-income generating projects (5b). With the exception of Part 1 (the
Introduction) it is not essential that the components be completed in the same order
as presented. Many groups prefer to define the investment before tackling general

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costs or income, but this is not required. An example layout for the components is
presented in Annex 1 to this manual, and can be used as a guide when drawing out
the tables on a blackboard or large sheet of paper.

Part 1: Background Information: This section provides general information about

the applicants, the location of the project and its characteristics, as well as a brief
summary of the objectives and justification for the investment, including the demand
anticipated for the product or service resulting from the project when operating. The
purpose of Part 1 is to allow anyone not familiar with the project to understand -
preferably in no more than 1 page - the background to the proposal. Agreement
should be obtained from the applicants as to the general purpose and characteristics
of the eventual project as well as who would likely be involved in its operation and
management.

Part 2: Investment. In this section the applicants are asked to list the various
elements that will have to be obtained (purchased or supplied by the group) for the
investment to be realized. For each item (except land - see Section 4 of this manual)
it is also necessary to estimate the average working life of the item and who is to
provide it (loan, donation, contribution of the community). A simple calculation is
then made to determine the average annual cost of each item.

Part 3: Operating Costs and Income per Activity: This section describes income
and costs directly resulting from carrying out activities made possible by the project,
and which change according to the scale of activity (i.e. the greater the activity, the
greater the costs and income). If the project is a simple one, there may only be a
single activity, for example the grinding of grain (in the case of a local mill).
However, in other cases there could be several activities; for example a dairy plant
may produce cheese, butter and yoghurt.

The section is primarily of relevance to income-generating projects, although there

are some circumstances where it may prove useful to list operating costs and even

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income for other types of projects as well (e.g. where there is a user charge for a
health clinic). To adequately complete this section, it is necessary for the group to
understand the concepts of production units, sales units and production cycles,
which are discussed further in Section 4 of this manual.

Part 4: General and Maintenance Costs: Some types of costs are not associated
with the scale of production, but are a consequence of the project in general. These
may include such expenses as: hiring a manager, nurse, or other employee; operating
a vehicle; local land or property taxes; or office expenses. They will also include the
costs of maintaining (but not replacing) equipment and other goods purchased or
built at the investment stage - for example maintaining an access road, or repairing
fences used to protect a reforested area.
Part 5a: Preliminary Estimate of Viability (income generating projects only).
This section is used to perform the simple calculations required to make the
preliminary estimate of project viability. The key calculations are:
 Annual Net Income: To determine if projected income is higher
than direct and general costs
 Annual Net Income less Annual Investment Costs : To determine
if annual net income (above) is sufficient to also cover
replacement of the investment as it reaches the end of its useful
life

 Number of Years of Net Income Needed to Cover the

Investment: To determine if the annual net income is high
enough to pay back the investment cost within a reasonable
period of time.
Part 5b: Preliminary Beneficiary Estimates (non-income generating projects).
This section relates the overall cost of establishing and running the project to the
number of beneficiaries and also considers how operating costs will be paid for. Key
calculations are:
Investment Cost per Beneficiary: The total expected investment cost divided by
the number of direct beneficiaries (users and suppliers) and indirect beneficiaries (all

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 those potentially affected by the project).
Annual Operating Cost per Beneficiary: The total annual operating cost
(including maintenance and repairs) divided by the number of direct and indirect
beneficiaries.
The preliminary identification of future sources of funds for project operation and
upkeep is also a very important part of profile preparation for non-income
generating projects. Obtaining investment funds is often much easier than finding
resources to cover annual costs once the project is underway. Any part of this cost
not assured from outside sources will have to be met by the users of the project
and/or the surrounding community.
[Link] and Ranking
The need for project prioritization appears when an organization has two or more
either independent or dependent (portfolio) projects that are performed in parallel. In
order to ensure the achievement of strategic goals and objectives, that organization
needs to focus on right projects among the variety.
Prioritization Process

Project Prioritization Process is a structured and consistent activity that aims to analyze
the current operational environment to identify any projects running in parallel within the same
portfolio, develop a scoring model including ranking criteria, and apply that model to
prioritizing the projects in order to determine the execution order that ensures the highest
efficiency of the overall portfolio. The process serves as a framework for managing the
effectiveness of parallel projects.

In simple terms, the process of prioritizing projects is an activity for defining what
projects within a portfolio to perform in what sequence. It is an attempt to make the
project portfolio more effective through identifying the most effective way of
implementing the projects. Here’s a broader definition:

The process of project prioritization is complex and iterative so it can be repeated

several times within the same portfolio lifespan. It is deliverable-oriented meaning
that it produces some certain result that is vital for success of further portfolio

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management. The process ranks projects within the same operational environment in
order to address multi-modal capacity and linkage gaps that may exist between the
environmental components.
We divide the prioritization process into the following key steps:
Collection – you must collect and gather all the data about your projects.
Ranking – you must develop and use a ranking model that includes criteria
for prioritizing.
Verification – you must approve the ranked projects.

Establish Ranking Criteria

Below we suggest a list of measures you can use as ranking criteria for prioritizing
parallel or portfolio projects. Please note the list is not full and can be supplemented
with more items (for example, Safety, Integration, Connectivity, Mobility, Cost-
effectiveness, Implement ability, etc.). In this publication we describe the key
criteria only. If needed you can develop your own criteria when doing your project
prioritization process.

Efficiency. The measure of efficiency shows a project’s ability to produce the

desired outcome with the minimized possible consumption of the resources available
to the project. If the project is able to turn inputs into output consuming fewer
resources, then this project appears to be efficient. Common formula for calculating
project efficiency is:
Actual

Output
———————————– x
100%,
Standard Output
Changeability. It proves a project’s ability to realize the planned changes as well as
to adequately react to any new changes that seem to be vital and important to project
success. As the higher changeability is, as the greater impact the project has to the
changing environment. This means your project is highly adaptable to the changes
so the project gains more chances to produce the desired outcome under preset or

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altering requirements.

Manageability. This item determines how much a project can be led and directed
using existing controls. The measure is characterized by:

Planning

Monitoring
Leading

Controlling
These characteristics determine whether your projects are manageable. Higher
manageability entails higher effectiveness.
Coordination. This metric proves whether a project is well coordinated and whether
it follows the adopted management plan. It relates to project effectiveness. The
project manager coordinates the project effectively if this person is able to ensure
that the project resources are used and consumed in pursuit of the specified goals
and objectives. Remember: your project gets higher value if it is highly
“coordinately”.

Sustainability. It indicates whether a project is able to maintain continued

development, without significant deterioration of the existing environment. Your
project is sustainable if it generates the desired results without reducing its current
productive capacity. Sustainable projects should obtain higher ranking.

Develop A Ranking Model

Now it is time to develop a scoring model that explains how you will do the ranking
process. It means you need to decide which criteria to use and what data is required
for the evaluation. We suggest you use all the criteria listed here. Also you can
develop your own measures that fit into your specific portfolio. Remember: as more
criteria you use, as more accurate and appropriate project ranking you are likely to
get.
Now regarding the data required for ranking. Here’s a list of the data sources you

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need to review to get the data required for project analysis and ranking:
Current project status against plan (you can gain this data from status reports and
meetings)
Deliverables accepted/unaccepted at any given point in
time Scope creep data
Stakeholder involvement level (can be retrieved from Stakeholders
Matrix) User requirements
Project goals and objectives and their
status Issue and risk logs
Team training and capabilities
Other important papers and records that explain the current performance
of every individual project.

You must gather as much information on your portfolio projects as possible in

order to get a clear picture of what’s going on in the portfolio environment. Below
we give a project score table example.

In this example, Project 3 gets higher score (320) as compared to Project 1 (222) and
Project 2 (253). The Score column of the table is used as the basis to set priorities
for the projects. Actually Project 3 gains the highest priority while the rest two
projects obtain lower priority.
Please note we do not explain here how to calculate the data in the table. It is the
matter of your project portfolio management team to decide what scoring approach
or methodology to use for evaluating by the criteria. In the given example, we used
our own method.

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1.6. Identification of Commercial Project Ideas
Project ideas are generated through different sources like customers, competitors,
and employees. Sometimes they are discovered through accident. Project manager
should try to enhance people's creativity, scan the entire business environment and
appraise the company’s strengths and weaknesses to generate a large number of
ideas. Techniques like attribute listing, brainstorming, and Delphi technique are
useful for improving the creativity at individual and group level.
A business idea is a concept which can be used for commercial purposes. It
typically centers on a commodity or service that can be sold for money, according to
a unique model.

Stimulating the flow of ideas or tools and techniques to identify new projects
1 SWOT ANALYSIS
SWOT Analysis: SWOT is an acronym of Strengths, Weaknesses, Opportunities and
Threats and as these titles suggest it is not purely a method used for controlling
areas of planning and risk, but it is also used to highlight areas of the project that
could be maximized to the benefit of the whole project or individual areas where
some competitive advantage may be gained. It is used to evaluate particular
activities of the project in order to optimize their potential as well as to evaluate
risks in order to determine the most appropriate way of mitigating those risks.

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SWOT analysis 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 idea.
2 CORPORATE APPRAISAL
9. A realistic appraisal of corporate strengths and weaknesses is essential for
identifying investment opportunities which can be profitably exploited. The broad
areas of corporate appraisal and the important aspects to be considered under them
are as follows:
*Marketing and Distribution
*Market image
*Product line
*Market share
*Distribution network
*Customer loyalty
*Marketing and distributions costs

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*Production and Operations
*Condition and capacity of plant and machinery
*Availability of raw material, sub-assemblies, and power
*Degree of vertical integration
*Location advantage
*Cost structure
*Research and Development
*Research capabilities of the firm
*Track record of new products developments
*Laboratories and testing facilities
*Coordination between research and operations
*Corporate Resources and Personnel
*Corporate image
*Relation with governmental and regulatory agencies
*Dynamism of top management
*Competence and commitment of employees
*State of industrial relations
*Finance and Accounting
*Financial leverage and borrowing capacity
*Cost of capital
*Tax situation
*Relations with shareholders and creditors
*Accounting and control system
*Cash flows and liquidity.
3 MICHAEL FIVE PORTERS MODEL
There are several useful tools or frameworks that are helpful in identifying
promising investment opportunities. The most popular one is Porter model, which is
discussed below. Porter Model: Profit
Potential for Industries Michael Porter
has argued that the profit potential of an industry depends on the combined strength
of the following five basic competitive forces:

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1. Threat of new entrants: New entrants add capacity, inflate costs, push
prices down, and reduce profitability. Hence, if an industry faces the
threat of new entrants, its profit potential is limited. The threat from new
entrants is low if the entry barriers confer an advantage on existing firms
and deter new entrants.

1 Rivalry between existing firms: Firms in an industry compete on the basis

of price, quality, promotion, service, warranties, and so on. Generally, a
firm’s attempts to improve its competitive position provoke retaliatory
action from others. If the rivalry between the firms in an industry is
strong, competitive moves and countermoves dampen the average
profitability of the industry.

2 Pressure from substitute products: All firms in industry face competition

from industries producing substitute products. Performing the same
function as the original product, substitute products may limit the profit
potential of the industry by imposing a ceiling on the prices that can be
charged by the firms in the industry.

3 Bargaining power of Buyers: Buyers are a competitive force. They can

bargain for price cut, ask for superior quality and better service, and
induce rivalry among competitors. If they are powerful, they can depress
profitability of the supplier industry.

4 Bargaining power of suppliers: suppliers, like buyers, can exert a

competitive force in an industry, as they can raise prices, lower quality,
and curtail the range of free services that they provide. Powerful suppliers
can hurt the profitability of the buyer industry.

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