UNIT - 3

1
Unit I – Basic Concept

THE PROJECT
• A project is a unique endeavor to produce a set of
deliverables within clearly specified time, cost and
quality constraints.

• Projects are different from standard business

operational activities as they:

– Are unique in nature.

– Have a defined timescale.
– Have an approved budget.
– Have limited resources.
– Involve an element of risk.
– Achieve beneficial change.

PROJECT MANAGEMENT By: Dr. Prateek Gupta

Unit I – Basic Concept

THE PROJECT: Definition

Project can be defined as a temporary

endeavor undertaken to accomplish a unique
objective at goal.
- Project Management Institute (PMI)

PROJECT MANAGEMENT By: Dr. Prateek Gupta

Unit I – Basic Concept

THE PROJECT
A project is accomplished by performing a set of activities.

Ex:- Construction of a House

Activities involved:-

– Digging of foundation pits,

– Construction of Foundation,
– Construction of walls,
– Construction of roof,
– Fixing of doors and windows,
– Fixing of sanitary, fittings, wiring, fuel and power etc.

Other Examples: Writing a Book, building a dam etc.

PROJECT MANAGEMENT By: Dr. Prateek Gupta

Unit I – Basic Concept

Characteristics of Project
• Temporariness
• Uniqueness (Non-routine Activities)
• Complexity (Require Team Work due to set of activities)
• Life Cycle (Conceptualization, Design, Implementation, commissioning)
• Risk an Uncertainty
• Ready to Change in response to change in environment
• Involve resources (Financial, Human, Management)
• Optimality (Aim to optimum utilization of resources)
• Multidisciplinary (Knowledge and expertise of different people)
• Involve conflicts
• Forecasting based
• Definite Time limit

PROJECT MANAGEMENT By: Dr. Prateek Gupta

Unit I – Basic Concept

Categories of Project
Based on the type of Activity:

• Industrial Projects
Production of Source Goods (generally time limited)

• Non-Industrial Projects
Generally made by the Government for societal benefits like (generally on going
process)

– health care project,

– educational project,
– irrigation project,
– soil conservation project,
– soil conservation project,
– highway project,
– water supply project etc.

PROJECT MANAGEMENT By: Dr. Prateek Gupta

Unit I – Basic Concept

Categories of Project
Based on the location of the Project:

• National Projects
With in the national boundaries.

• International Projects
Beyond the national boundaries, Generally made by both the Government and
private sector

– Fully owned abroad

– Joint Venture abroad
– Merger & Acquisition abroad

PROJECT MANAGEMENT By: Dr. Prateek Gupta

Unit I – Basic Concept

Categories of Project
Based on the Completion (Time) of the Project:

• Normal Projects
No Constraints on time.

• Crash Projects
To be completed with in the stipulated time (ex: Canal Lining before monsoon)

PROJECT MANAGEMENT By: Dr. Prateek Gupta

Unit I – Basic Concept

Categories of Project
Based on Ownership of the Project:

• Private Sector Projects

with objectives of profit maximization

• Public Sector Projects

with objectives of development of the country

• Joint Sector Projects

with objectives of both

PROJECT MANAGEMENT By: Dr. Prateek Gupta

Unit I – Basic Concept

Categories of Project
Based on Size of the Project:

• Small Projects
up to Rs. 1 crore

• Medium Projects
In between Rs. 1 crore – Rs. 100 crore

• Large Projects
above Rs. 100 crore

(As per the directives of the Govt. of India)

PROJECT MANAGEMENT By: Dr. Prateek Gupta

Unit I – Basic Concept

Categories of Project
Based on Need of the Project:

• New Project
• Balancing Project
• Expansion Project
• Modernization Project
• Replacement Project
• Diversification Project
• Backward integration Project
• Forward Integration Project

PROJECT MANAGEMENT By: Dr. Prateek Gupta

Unit I – Basic Concept

Types of Project
• Infrastructure or construction projects.

• Research Projects (Business Model, Model of an Economy, analysis of a large

project etc.)

• Reengineering Projects (For making changes like implementation of

Intranet)

• Procurement Projects (Outsourcing, Imposing new rules etc.)

• Business Implementation Projects (Installing e-commerce, developing

new process etc.)

• Other Projects
– To reach at Moon
– New Labor
– Creation of artificial body part
– Creation of new weapon

PROJECT MANAGEMENT By: Dr. Prateek Gupta

Unit I – Basic Concept

Overview of Projects

PROJECT MANAGEMENT By: Dr. Prateek Gupta

Unit I – Basic Concept

New product development projects

The justification for these projects is to develop something

that will be sold:

They are undertaken to solve someone else’s problem.

The product of the project is the thing that will be sold. The
product might be software, an airplane engine, the airplane
itself, a camera, a training program, whatever. From a financial
perspective, the profit to be generated from the product is a
key decision in project selection decisions.

PROJECT MANAGEMENT By: Dr. Prateek Gupta

Unit I – Basic Concept

Project-is-the-product projects

There is no direct justification for these projects:

They are undertaken to provide support to someone else’s

project. The product of the project is the work of the project.
Most consulting projects fall into this category as do non-profit
fund-raisers. From a financial perspective, the profitability of
the project itself is a key decision in project selection
decisions.

PROJECT MANAGEMENT By: Dr. Prateek Gupta

Unit I – Basic Concept

Infrastructure projects

The justification for these projects is to fix a problem :

That prevents the organization from doing something as well

as it could (this includes creating the capacity to do something
it can’t). The product of the project is the ability to do
something. Most internal projects fall into this category: IT,
organizational development, strategic planning, etc. From a
financial perspective, it is often hard to justify these projects
since they deliver no direct benefits.

PROJECT MANAGEMENT By: Dr. Prateek Gupta

Unit I – Basic Concept

Project Management

PROJECT MANAGEMENT By: Dr. Prateek Gupta

Unit I – Basic Concept

Why Projects Fail???

• Failure to align project with organizational

objectives
• Poor scope
• Unrealistic expectations
• Lack of executive sponsorship
• Lack of project management
• Inability to move beyond individual and
personality conflicts
• Politics

PROJECT MANAGEMENT By: Dr. Prateek Gupta

Unit I – Basic Concept

Why Projects Succeed!!!

• Project Sponsorship at executive level

• Good project charter (deed)
• Strong project management
• The right mix of team players
• Good decision making structure
• Good communication
• Team members are working toward common
goals

PROJECT MANAGEMENT By: Dr. Prateek Gupta

Unit I – Basic Concept

Is Project Management required???

• Today’s complex environments require

ongoing implementations
• Project management is a method and
mindset and a disciplined approach to
managing chaos
• Project management provides a framework
for working amidst persistent change

PROJECT MANAGEMENT By: Dr. Prateek Gupta

Unit I – Basic Concept

Definition of Project Management

Project Management is the skills, tools and

management processes required to undertake
a project successfully. It incorporates:

– A set of skills.
– A suite of tools.
– A series of processes.

PROJECT MANAGEMENT By: Dr. Prateek Gupta

Unit I – Basic Concept

Components of Project Management

PROJECT MANAGEMENT By: Dr. Prateek Gupta

Unit I – Basic Concept

Project Management

• Project management is about organization.

• Project management is about decision making

• Project management is about changing

people’s behavior

• Project management is about creating an

environment conducive to getting critical
projects done!

PROJECT MANAGEMENT By: Dr. Prateek Gupta

Unit I – Basic Concept

Planning the Project

• The Project Life Cycle

• Organizing the Project Team
• Project Plans

PROJECT MANAGEMENT By: Dr. Prateek Gupta

Unit I – Basic Concept

Planning the project:

PROJECT DEVELOPMENT CYCLE
The Project Life Cycle refers to a logical sequence of activities to
accomplish the project’s goals or objectives.

Closure
Execution
&
Planning
Controlling

Initiation

PROJECT MANAGEMENT By: Dr. Prateek Gupta

Unit I – Basic Concept

PROJECT DEVELOPMENT CYCLE

1) Initiation

In this first stage, the scope of the project is defined along with the approach
to be taken to deliver the desired outputs. The project manager is appointed
and in turn, he selects the team members based on their skills and
experience. The most common tools or methodologies used in the initiation
stage are:

• Project Charter,
• Business Plan,
• Project Framework (or Overview),
• Business Case Justification, and
• Milestones Reviews.

PROJECT MANAGEMENT By: Dr. Prateek Gupta

Unit I – Basic Concept

PROJECT DEVELOPMENT CYCLE

1. Initiation

PROJECT MANAGEMENT By: Dr. Prateek Gupta

Unit I – Basic Concept

PROJECT DEVELOPMENT CYCLE

2) Planning

The second phase should include a detailed identification and assignment of

each task until the end of the project. It should also include a risk analysis
and a definition of a criteria for the successful completion of each
deliverable.

The governance process is defined, stake holders identified and reporting

frequency and channels agreed. The most common tools or methodologies
used in the planning stage are Business Plan and Milestones Reviews.

PROJECT MANAGEMENT By: Dr. Prateek Gupta

Unit I – Basic Concept

PROJECT DEVELOPMENT CYCLE

2. Planning

PROJECT MANAGEMENT By: Dr. Prateek Gupta

Unit I – Basic Concept

PROJECT DEVELOPMENT CYCLE

3) Execution and controlling

The most important issue in this phase is to ensure project activities are
properly executed and controlled. During the execution phase, the planned
solution is implemented to solve the problem specified in the project's
requirements.

In product and system development, a design resulting in a specific set of

product requirements is created. This convergence is measured by
prototypes, testing, and reviews. As the execution phase progresses, groups
across the organization become more deeply involved in planning for the
final testing, production, and support. The most common tools or
methodologies used in the execution phase are an update of Risk Analysis
and Score Cards, in addition to Business Plan and Milestones Reviews.

PROJECT MANAGEMENT By: Dr. Prateek Gupta

Unit I – Basic Concept

PROJECT DEVELOPMENT CYCLE

3. Execution and Controlling

PROJECT MANAGEMENT By: Dr. Prateek Gupta

Unit I – Basic Concept

PROJECT DEVELOPMENT CYCLE

4) Closure

In this last stage, the project manager must ensure that the project is
brought to its proper completion. The closure phase is characterized by a
written formal project review report containing the following components: a
formal acceptance of the final product by the client, Weighted Critical
Measurements (matching the initial requirements specified by the client with
the final delivered product), rewarding the team, a list of lessons learned,
releasing project resources, and a formal project closure notification to
higher management.

No special tool or methodology is needed during the closure phase.

PROJECT MANAGEMENT By: Dr. Prateek Gupta

Unit I – Basic Concept

PROJECT DEVELOPMENT CYCLE

4. Closure

PROJECT MANAGEMENT By: Dr. Prateek Gupta

Unit I – Basic Concept

Planning the project:

Project Plans

PROJECT MANAGEMENT By: Dr. Prateek Gupta

Unit I – Basic Concept

Planning the project:

Project Plans
• Estimating Time Accurately
• Scheduling Simple Projects
• Gantt Charts – Scheduling Projects with Dependent
Stages
• Critical Path Analysis and PERT – Scheduling Complex
Projects
• The Planning Cycle – A Planning Process for Middle-
Sized Projects

(will discuss in Unit IV in detail)

PROJECT MANAGEMENT By: Dr. Prateek Gupta

Unit I – Basic Concept

Planning the project:

Organizing the Project Team

• Project Leader
• The Team
• Work Methods and Procedures
• Work Plan

PROJECT MANAGEMENT By: Dr. Prateek Gupta

Unit I – Basic Concept

Planning the project:

PROJECT ORGANIZATIONS

PROJECT MANAGEMENT By: Dr. Prateek Gupta

Unit I – Basic Concept

TYPES OF PROJECT ORGANIZATIONS

• There are two fundamentally different ways of

organizing projects within the parent
organization
– The project as part of the Functional Organization
– The project as a free-standing part of the parent
organization (pure Project)
• A third type, called a Matrix Organization is a
hybrid of the two main types

PROJECT MANAGEMENT By: Dr. Prateek Gupta

Unit I – Basic Concept

The Project as Part of the Functional Organization

The project Team is staffed from the same department

(function based).

For Example: If project is finance based; team will be from

finance department same as IT, Marketing etc.

If a project is very large then it will be broken down in

different parts (function based) and the staff will be a
appointed based on the specific function.

PROJECT MANAGEMENT By: Dr. Prateek Gupta

Unit I – Basic Concept

The Project as Part of the Functional Organization

Example: Production based Project

PROJECT MANAGEMENT By: Dr. Prateek Gupta

Unit I – Basic Concept

Advantages of the Functional Organization

– Maximum flexibility in the use of staff

– Individual experts can be utilized by many different projects
– Specialists in the division can be grouped to share knowledge
and experience
– The functional division also serves as a base of technological
continuity when individuals choose to leave the project
– The functional division contains the normal path of
advancement for individuals whose expertise is in the
functional area

PROJECT MANAGEMENT By: Dr. Prateek Gupta

Unit I – Basic Concept

Disadvantages of the Functional Organization

– The client is not the focus of activity and concern

– The functional division tends to be oriented toward the
activities particular to its function
– Occasionally, no individual is given full responsibility for the
project
– There are often several layers of management between the
project and the client
– There is a tendency to sub-optimize the project

PROJECT MANAGEMENT By: Dr. Prateek Gupta

Unit I – Basic Concept

Pure Project Organization

• A pure project organization is separate from the

parent system. It is a self contained unit with its
own technical staff, administration, and tied to the
parent organization only by periodic reports and
oversight.
• The project Team is staffed from the whole
organization. This is not based on specific function.
Such projects are also called as based on product
organization structure.

PROJECT MANAGEMENT By: Dr. Prateek Gupta

Unit I – Basic Concept

Pure Project (Product) Organization

PROJECT MANAGEMENT By: Dr. Prateek Gupta

Unit I – Basic Concept

Advantages of Pure Project Organization

– The project manager has full line authority over the project and all
members of the project work force are directly responsible to the project
manager
– When the project is removed from the functional division, the lines of
communication are shortened
– When there are several successive projects of a similar kind, the pure
project organization can maintain a permanent cadre of experts who
develop skills in specific technologies
– A project team that has a strong and separate identity and develops a
high level of commitment from its members
– Because the authority is centralized, the ability to make a swift decision is
enhanced and unity of command exists
– Pure project organizations are structurally simple and flexible, which
makes them relatively easy to understand and implement and the
organizational structure tends to support a holistic approach to the
project

PROJECT MANAGEMENT By: Dr. Prateek Gupta

Unit I – Basic Concept

Disadvantages of Pure Project Organization

– Each project tends to be fully staffed which can lead to a duplication of
effort in every area from clerical staff to technological support
– There is a need to ensure access to technological knowledge and skills
that results in an attempt by project managers to stockpile equipment
and technical assistance
– The functional division is a repository of technical lore, but it is not
readily accessible to team members of the pure project team
– Pure project groups seem to foster inconsistency in the way in which
policies and procedures are carried out
– In a pure project organization, the project takes on a life of its own
– There tends to be concern among team members about “life after the
project ends”

PROJECT MANAGEMENT By: Dr. Prateek Gupta

Unit I – Basic Concept

The Matrix Organization

The matrix organization is a combination of

functional and pure project
– A matrix organization can take on a wide variety of specific
forms
• “Project” or “strong” matrix organization most resembles the pure
project organization
• The “coordination” or “functional” or “weak” matrix most
resembles the functional form
• The “balanced” matrix lies in between the others
• Rather than being a stand alone organization, like the pure project,
the matrix project is not separated from the parent organization

PROJECT MANAGEMENT By: Dr. Prateek Gupta

Unit I – Basic Concept

The Matrix Organization

PROJECT MANAGEMENT By: Dr. Prateek Gupta

Unit I – Basic Concept

Advantages of The Matrix Organization

– The project is the point of emphasis
– Because the project is overlaid on the functional divisions, the
project has reasonable access to the reservoir of technology in
all areas
– There is less anxiety about what happens when the project is
completed
– Response to client’s needs is as rapid as in the pure project
organization
– Matrix management gives the project access to representatives
from the administrative units of the parent firm
– The matrix organization allows a better company-wide balance
of resources to achieve goals
– There is a great deal of flexibility in precisely how the project is
organized within the matrix
PROJECT MANAGEMENT By: Dr. Prateek Gupta
Unit I – Basic Concept

Disadvantages of The Matrix Organization

There are also disadvantages to using the matrix organization;
most involve conflict between the functional and project
managers:
– The balance of power between the project and functional areas is very
delicate
– The movement of resources from project to project may foster political
infighting
– Problems associated with shutting down projects can be as severe as in
a pure project organization
– The division of authority and responsibility in a matrix organization is
complex, and uncomfortable for the project manager.
– Matrix management violates the management principle of unity of
command. Project workers have at least two bosses, their functional
heads and the project manager.

PROJECT MANAGEMENT By: Dr. Prateek Gupta

Unit I – Basic Concept

Mixed Organizational Systems

• Divisionalization is a means of dividing a large

organization into smaller more flexible units
• This enables the parent organization to capture
some of the advantages of small, specialized
organizational units while retaining some of the
advantages that come with larger size units
• Pure functional and pure project organizations
may coexist in a firm

PROJECT MANAGEMENT By: Dr. Prateek Gupta

Unit I – Basic Concept

Mixed Organizational Systems

• Advantages of a mixed organization:

– The hybridization of the mixed form leads to flexibility
– The firm is able to meet special problems by appropriate
adaptation of its organizational structure
• Disadvantages include:
– Dissimilar groupings within the same accountability center tend
to encourage overlap, duplication, and friction because of
incompatibility of interests
– Conditions still exist that result in conflict between functional
and project managers

PROJECT MANAGEMENT By: Dr. Prateek Gupta

Unit I – Basic Concept

The Project Team

• To staff a project, the project manager works from a

forecast of personnel needs over the life cycle of the
project
– A work breakdown structure (WBS) is prepared to
determine the exact nature of the tasks required to
complete the project
– Skills requirements for these tasks are assessed and like
skills are aggregated to determine work force needs
– From this base, the functional departments are contacted
to locate individuals who can meet these needs
– Certain tasks may be subcontracted

PROJECT MANAGEMENT By: Dr. Prateek Gupta

Unit I – Basic Concept

The Project Team

• There are some people who are more critical to the

project’s success than others and should report
directly to the project manager or the project
manager’s deputy:
– Senior project team members who will be having a long-
term relationship with the project
– Those with whom the project manager requires
continuous or close communication
– Those with rare skills necessary to project success

PROJECT MANAGEMENT By: Dr. Prateek Gupta

Unit I – Basic Concept

Human Factors and The Project Team

• Meeting schedule and cost goals, without

compromising performance is a technical
problem, with a human dimension
– Project professionals tend to be perfectionists
– Pride in workmanship leads the team member to
improve (and thus change) the product
– These changes cause delays in the project

PROJECT MANAGEMENT By: Dr. Prateek Gupta

Unit I – Basic Concept

Human Factors and The Project Team

• Motivating Project Team Members:

– The project manager often has little control over the
economic rewards and promotions of project team
members, but this does not mean he/she cannot
motivate members of the team
– How are technical employees motivated?
• Recognition
• Achievement
• The work itself
• Responsibility
• Advancement
• The chance to learn new skills
PROJECT MANAGEMENT By: Dr. Prateek Gupta
Unit I – Basic Concept

Human Factors and The Project Team

• Empowerment of project teams is also a

motivational factor:
– 1. It harnesses (attach) the ability of the team
members to manipulate tasks so that project
objectives are met. The team is encouraged to find
better ways of doing things
– 2. Professionals do not like being micromanaged.
Participative management does not tell them how to
work but given a goal, allows them to design their
own methods
– 3. The team members know they are responsible and
accountable for achieving the project deliverables

PROJECT MANAGEMENT By: Dr. Prateek Gupta

Unit I – Basic Concept

cont…
– 4. There is a good chance that synergistic solutions
will result from team interaction
– 5. Team members get timely feedback on their
performance
– 6. The project manager is provided a tool for
evaluating the team’s performance

Chapter 4-27
PROJECT MANAGEMENT By: Dr. Prateek Gupta
Unit I – Basic Concept

THANKS

59
PROJECT MANAGEMENT By: Dr. Prateek Gupta
What is Project Scope Management and
Why is it Important?
It’s every project manager’s dream that the project goes on smoothly from initiation to
completion, without delays and exceeding budgets. But, that rarely happens in reality.

Even if you discuss and plan out all the details in advance with all the project stakeholders
involved, there’s always something that changes the scope of the project during its course. In
fact, scope creep is a huge concern for project managers, affecting 52% of the projects.

By managing the scope of the project, you can document everything required to achieve the
project goal and avoid issues like scope creep.

Table of contents

• What is Project Scope management

• Importance of Project Scope Management
• How is Project Scope defined
• What is the Scope Statement in Project Management
• 6 Process in Project Scope Management
• Tips for Effective Project Scope Management
• Closing Thoughts

What is project scope management?

Project scope management is a process that helps in determining and documenting the list of
all the project goals, tasks, deliverables, deadlines, and budgets as a part of the planning
process. In project management, it is common for a big project to have modifications along the
way.

With the scope in the project management defined right in the beginning, it becomes much
easier for teams to manage and make the required changes.

Importance of project scope management

For a project manager, managing the expectations of the stakeholders and clients is one of the
most challenging tasks. With a definite project scope, managers can easily stay on track and
ensure that all the deadlines are being followed throughout the project life cycle.

A well-defined project scope management helps avoid common issues like:

• Constantly changing requirements

• Pivoting the project direction when you are already mid-way
• Realizing that the final outcome isn’t what was expected
• Going over the discussed budget
• Falling behind the project deadlines
Effective project scope management gives a clear idea about the time, labor, and cost involved
in the project. It helps to distinguish between what is needed and what isn’t needed for
accomplishing the project. Scope in project management also establishes the control factors of
the project to address elements that might change during the project lifecycle.

Overcome Project Pain-Points With Kissflow Project

How is the project scope defined?
Project scope is a part of the project planning process that documents specific goals,
deliverables, features, and budgets. The scope document details the list of activities for the
successful completion of the project.

The scope is defined by understanding the project requirements and the client’s expectations.
The scope statement usually contains,

• project deliverables
• exclusions
• project constraints and
• assumptions.

Scope statement in project management

The project’s scope statement is also called its scope document or statement of work.

The project scope statement

• Details all the boundaries of the project while also establishing the responsibilities of
the team,
• Defines all the procedures that need to be followed for verifying and approving the
finished work, and,
• Gives team members a definitive guideline for making project-related decisions.
When documenting the scope of a project, team members and stakeholders have to be as
specific as possible to avoid scope creep, a situation where some parts of the project end up
taking more time and effort than initially discussed due to miscommunication or poor planning.

With effective project management, teams are able to ensure that the project is finished on
deadline and the final product aligns with the initial requirements.

Project scope management process

Let’s discuss the six process involved in accurately identifying the project scope
management:

1. Planning scope management

In the first process in project scope management, you create a scope plan document that you
can refer to in the later stages. The document mainly helps in defining, managing, validating,
and controlling the project’s scope.

It includes:

• Detailed project scope statement

• Breakdown of all the project requirements
• Expected project deliverables
• Change control process

The document doesn’t have to be very detailed, it just has to fit the purpose. You can also use
a previous project’s scope management plan as a reference for this.

2. Collecting requirements

The next step is to workout stakeholder requirements and expectations. You will be required
to document all the project requirements, expectations, budgets, and deliverables through
interviews, surveys, and focus groups.
This is a rather important step because more often than not, stakeholders can have unrealistic
requirements or expectations and the project managers would be required to step in to find a
solution that is acceptable by everyone from avoiding project delays.

At the end of the collection requirements stage, you should have the following:

• Functional as well as non-functional requirements

• Stakeholder requirements
• Business requirements
• Support and training requirements
• Project requirements

3. Defining the scope

At this step, you need to turn your requirements into a well-detailed description of the service
or product that you are trying to deliver through the project. You will then have a project scope
statement that you can then refer to throughout your project.

While it is important to list what is in the scope of the project, it is just as important to note
down what is out of the project scope. Any kind of inclusions to the scope would then have to
go through the entire change control process to ensure the team is only working on things that
they are supposed to work on.

With a defined scope, you get a reference point for your project team and anyone else involved.
In case there is something that is not involved in the scope, it doesn’t need to be completed by
the team.

4. Making a project breakdown structure

A project breakdown structure is a document that breaks down all the work which needs to be
done in the project and then assigns all the tasks to the team members. It lists the deliverables
that need to be completed and their respective deadlines as well.

You can use project management software for this step of the process to assign and prioritize
tasks which will make it easier to track the entire progress of the project and avoid any
unnecessary bottlenecks.

5. Validating scope

In this step, the scope and deliverables that you have recorded need to be sent to project
executives and stakeholders to get the necessary approvals. Scope validation needs to be done
before starting the project to ensure that if something goes wrong then it is easy to find where
it went wrong.

6. Controlling scope

Project managers need to ensure that as the project begins, it always stays within the defined
scope. In case there are some things that need to change, then the proper change control process
should be followed.
5 Tips for Effective Project Scope Management
• Ensure to create a Work Breakdown Structure (WBS) as it will provide a breakdown
of the scope statement into smaller, more manageable parcels.
• To avoid unnecessary work and stress, avoid ambiguity in your scope. Define it as
clearly as possible.
• Make the process of defining scope a collaborative process to prevent
misinterpretations of requirements.
• Ensure that the scope document is not altered during project execution to avoid any
increase in scope beyond what was initially discussed.
• Finally, take your time to consult all relevant stakeholders and define project scope, as
it cannot change once finalized.

Closing Thoughts
Setting a defined project scope allows teams to manage their entire work in a streamlined way.
With the help of project management software like Kissflow Project, an effective project scope
helps start the project on the right foot and makes sure it is delivered in a timely manner and
within budget while meeting the end-user expectations.

Kissflow Project

• is simple, friendly, and intuitive to use,

• frees you from constantly tracking tasks and teammates,
• offers multiple views to visualize your projects
• provides “Done”, “In-Progress”, and “On Hold” states for clarity on project status,
• gives you access to powerful reports to make data-driven decisions, and
• reminds you when tasks near their deadlines.

There’s a whole lot more to Kissflow Project. Sign up for free today to get acquainted with its
simple yet powerful project management capabilities!
 PROJECT
MANAGEMENT

UNIT - II

By
Dr. Prateek Gupta
Unit II – Project Formulation

The Project Process

PROJECT MANAGEMENT By: Dr. Prateek Gupta

Unit II – Project Formulation

PROJECT MANAGEMENT By: Dr. Prateek Gupta

Unit II – Project Formulation

PROJECT MANAGEMENT By: Dr. Prateek Gupta

Unit II – Project Formulation

Project Identification

PROJECT MANAGEMENT By: Dr. Prateek Gupta

Unit II – Project Formulation

Project Identification

• Collection, compilation and analysis of data to locate potential

opportunities for starting business and development of such
opportunities

• Opportunity is a business concept, which if turned into a

tangible product or service, by the enterprise, will result into
profit. It is all about creating values

• The search of a good idea:

– Generate your own idea
– Develop someone else’s idea

PROJECT MANAGEMENT By: Dr. Prateek Gupta

Unit II – Project Formulation

Importance of Project Identification

• It has long term consequences (make or break)
• Involves commitment which can not be easily reversed
• Ideas are put into action
• Projects are catalytic agents for economic development
• Involves creative use of resources- manpower, capital, raw
materials etc.
• Generates value addition and build-up national capital
• Brings socio-cultural development
• Leads to development of infra-structure and environment

PROJECT MANAGEMENT By: Dr. Prateek Gupta

Unit II – Project Formulation

Steps in Project Identification

Idea Preliminary Project

Generation Screening feasibility

Detailed
Support study
Project Report

PROJECT MANAGEMENT By: Dr. Prateek Gupta

Unit II – Project Formulation

Project Identification
Idea Generation or Investment Opportunities
Idea generation is the process of grouping logical thoughts
based on some factors.

Importance:

• Launch of new business / product

• Continuous growth of Organization
• Survival in the competitive Market
• Development of Society

PROJECT MANAGEMENT By: Dr. Prateek Gupta

Unit II – Project Formulation

Project Identification
Source of Idea Generation
• Performance of existing Industry
• Examining the inputs and Outputs of various Industry
• Review Trade (Local and International)
• Availability of Material and Labour at Low cost
• Price Trend
• Demand and supply Gap
• Government guidelines (legal issues)
• Economic and social Trends
• Study of New Technology and Developments

PROJECT MANAGEMENT By: Dr. Prateek Gupta

Unit II – Project Formulation

Project Identification
Pre-Feasibility Study / Preliminary Screening

1. A series of steps to know whether or not a complete

detailed feasibility study should be made.
2. Preliminary screening is done with a view to avoid
unnecessary cost and efforts in detailed study.

Collection of data without spending much money

and time:

• Interview with Government Officials

• Interview with Beneficiaries (customers)
• Libraries and other sources of data collection

PROJECT MANAGEMENT By: Dr. Prateek Gupta

Unit II – Project Formulation

Project Identification
Error in Pre-Feasibility Study

Drop Error:

When a good idea is rejected (Loss of Profit)

Go Error:

When a bad idea is selected (heavy loss)

PROJECT MANAGEMENT By: Dr. Prateek Gupta

Unit II – Project Formulation

Preliminary Screening Project rating Index Method

PROJECT SCORE SHEET (UNWEIGHTED)
SECTION I - BASIS OF PROJECT DECISION
Definition Level (Rating) Weight Factor Score
CATEGORY 0 1 2 3 4 5 Score (out of 1) Weight X Rating
Element
A. BUSINESS STRATEGY
A1. Building Use
A2. Business Justification
A3. Business Plan
A4. Economic Analysis
A5. Facility Requirements
A6. Future Expansion/Alteration Considerations
A7. Site Selection Considerations
A8. Project Objectives Statement

B. OWNER PHILOSOPHIES
B1. Reliability Philosophy
B2. Maintenance Philosophy
B3. Operating Philosophy
B4. Design Philosophy

C. PROJECT REQUIREMENTS
C1. Value-Analysis Process
C2. Project Design Criteria
C3. Evaluation of Existing Facilities
C4. Scope of Work Overview
C5. Project Schedule
C6. Project Cost Estimate

Definition Levels
0 = Not Applicable, 1 = Complete Definition, 2 = Minor Deficiencies, 3 = Some Deficiencies , 4 = Major Deficiencies, 5 = Incomplete or Poor Definition

PROJECT MANAGEMENT By: Dr. Prateek Gupta

Unit II – Project Formulation

Steps in Project rating Index Method

• Identify relevant factors (Useful to the project).

• Assign weight to each factor on the basis of importance.
• Rate each factors on the rating scale
• Multiply the factor rating with factor weight (get factor score)
• Make a sum of weighted factor score (get rating index)
• Reject if value is less than desired value
• Accept if value is more than desired value

PROJECT MANAGEMENT By: Dr. Prateek Gupta

Unit II – Project Formulation

Feasibility Study / Detailed Feasibility study

To identify the selection or rejection of the project by spending money and
time on the basis of primary data in formal way.

Objectives:

• It guarantees the success of the project

• It works as basic ‘Terms of reference’
• Describes nature and complexity
• Gives an idea about investment in project
• Idea of risk involved
• Idea about economic and social benefits

PROJECT MANAGEMENT By: Dr. Prateek Gupta

Unit II – Project Formulation

Components of Detailed Feasibility study

• Market and Demand Analysis

• Technical Analysis
• Financial Analysis
• Social cost-benefit Analysis
• Environmental and other Risk analysis

PROJECT MANAGEMENT By: Dr. Prateek Gupta

Unit II – Project Formulation

Support Study / Functional Study

An in depth investigation into any one or a couple of critical aspects of a
project, to help the feasibility study

It may be done:
• Before Pre-feasibility Study
• Before feasibility Study
• After Pre-feasibility Study
• After feasibility Study

Example: Launching of new cola in a market

with a critical factor pricing.

A support study is required to study

specifically price of other competitive
products and cost of self

PROJECT MANAGEMENT By: Dr. Prateek Gupta

Unit II – Project Formulation

Pre- Feasibility Study Vs Feasibility study

Factors Pre-Feasibility Study Feasibility Study
Objective Whether or not the To determine the true
project idea needs profitability
further investigation

Scope Overview study Detailed Study

Type of Data Secondary Data Mix of Primary and
(informal sources) Secondary data
( both formal and
informal sources)

Time involved Low High

Cost involved Low High
Accuracy Low High

PROJECT MANAGEMENT By: Dr. Prateek Gupta

Unit II – Project Formulation

Detailed Project Report (DPR)

A formal written document containing the process of project

formulation and briefing the project scope.

PROJECT MANAGEMENT By: Dr. Prateek Gupta

Unit II – Project Formulation

Project Formulation

PROJECT MANAGEMENT By: Dr. Prateek Gupta

Unit II – Project Formulation

What is Project Formulation?

Stages of Project Formulation

Project Report

PROJECT MANAGEMENT By: Dr. Prateek Gupta

Unit II – Project Formulation

What is Project Formulation?

• Taking a first look carefully and critically at the project idea

• Carefully weighing its various components

• Analyzing with the assistance of specialists or consultants

• Assessment of the various aspects of an investment

proposition

• It is an important stage in the pre-investment phase

PROJECT MANAGEMENT By: Dr. Prateek Gupta

Unit II – Project Formulation

Stages of Project Formulation

1. Feasibility Analysis

2. Techno-Economic Analysis

3. Project Design and Network Analysis

4. Input Analysis

5. Financial Analysis

6. Cost-Benefit Analysis

7. Pre-Investment Analysis

PROJECT MANAGEMENT By: Dr. Prateek Gupta

Unit II – Project Formulation

1. Feasibility Analysis

• First stage in project formulation

• Examination to see whether to go in for a detailed investment
proposal or not
• Screening for internal and external constraints

Conclusion could be:

• The project idea seems to be feasible

• The project idea is not a feasible one
• Unable to arrive at a conclusion for want of adequate data

PROJECT MANAGEMENT By: Dr. Prateek Gupta

Unit II – Project Formulation

2. Techno-Economic Analysis:

Screens the idea to-

Estimate of potential of the demand for goods/services

Choice of optimal technology

This analysis gives the project a platform for preparation of

detailed project design

PROJECT MANAGEMENT By: Dr. Prateek Gupta

Unit II – Project Formulation

3. Project Design and Network Analysis

• It is the heart of the project entity

• It defines the sequence of events of the project

• Time is allocated for each activity

• It is presented in a form of a network drawing

• It helps to identify project inputs, finance needed and cost-

benefit profile of the project

PROJECT MANAGEMENT By: Dr. Prateek Gupta

Unit II – Project Formulation

4. Input Analysis

• Its assesses the input requirements during the construction

and operation of the project

• It defines the inputs required for each activity

• Inputs include materials, human resources

• It evaluates the feasibility of the project from the point of

view of the availability of necessary resources

• This aids in assessing the project cost

PROJECT MANAGEMENT By: Dr. Prateek Gupta

Unit II – Project Formulation

5. Financial Analysis:

• It involves estimating the project costs, operating cost and fund

requirements

• It helps in comparing various project proposals on a common

scale

• Analytical tools used are discounted cash flow, cost-volume-

profit relationship and ratio analysis

• Investment decisions involve commitment of resources in

future, with a long time horizon

• It needs caution and foresight in developing financial forecasts

PROJECT MANAGEMENT By: Dr. Prateek Gupta

Unit II – Project Formulation

6. Cost- Benefit Analysis

• The overall worth of a project is considered

• The project design forms the basis of evaluation

• It considers costs that all entities have to bear and the

benefit connected to it

PROJECT MANAGEMENT By: Dr. Prateek Gupta

Unit II – Project Formulation

7. Pre-investment Analysis

• The results obtained in previous stages are consolidated to

arrive at clear conclusions

• Helps the project-sponsoring body, the project-implementing

body and the external consulting agencies to accept/reject
the proposal

PROJECT MANAGEMENT By: Dr. Prateek Gupta

Unit II – Project Formulation

Constraints in project formulation

• Lack of a viable / feasible project idea

• Lack of realistic/ achievable objectives

• Lack of necessary resources / infrastructure to convert idea

into reality

• Policies of government / Legal restrictions

• Lengthy and cumbersome procedures to get finance, start

business

PROJECT MANAGEMENT By: Dr. Prateek Gupta

Unit II – Project Formulation

Project Formulation

PROJECT MANAGEMENT By: Dr. Prateek Gupta

Unit II – Project Formulation

Market and Demand Analysis

PROJECT MANAGEMENT By: Dr. Prateek Gupta

Unit II – Project Formulation

Market and Demand Analysis

PROJECT MANAGEMENT By: Dr. Prateek Gupta

Unit II – Project Formulation

Market and Demand Analysis

PROJECT MANAGEMENT By: Dr. Prateek Gupta

Unit II – Project Formulation

Market and Demand Analysis

Provides a detailed analysis of all market condition and

helps in estimating future revenue from the project.

Estimations are made regarding:

• Size of the potential market
• Patterns of consumption
• Market composition
• Level of competition
• Aggregate demand (product /
service) for a period
• Variation in demand
The objective of this analysis is to see the idea generated is feasible from the point
of view of market potential
PROJECT MANAGEMENT By: Dr. Prateek Gupta
Unit II – Project Formulation

Market and Demand Analysis

Objective Specification

Collection of Data Market Survey

Market Description Demand Forecasting

Market Planning

PROJECT MANAGEMENT By: Dr. Prateek Gupta

Unit II – Project Formulation

Market and Demand Analysis

Objective Specification

First Step:
Specify Objectives

Example:
If the objective is to forecast long term demand to see the
feasibility of project, the questionnaire should be set
focusing on future not on current.

PROJECT MANAGEMENT By: Dr. Prateek Gupta

Unit II – Project Formulation

Market and Demand Analysis

Collection of Data

Primary Data Secondary Data

• Internal
• External

• Survey Method
• Experimental Method

PROJECT MANAGEMENT By: Dr. Prateek Gupta

Unit II – Project Formulation

Market and Demand Analysis

Primary Data Obtained from present

and past data of the
firm.

• Internal
• External

Obtained from opinions

of the dealers, feedback
of the sales personnel,
consumers etc.

PROJECT MANAGEMENT By: Dr. Prateek Gupta

Unit II – Project Formulation

Market and Demand Analysis

Includes interviews,
telephonic interviews
Primary Data and mail survey with
customers and
middlemen.

• Survey Method
• Experimental Method

Includes:
• product testing (product performance done on limited scale),
• psychological techniques (test of subconscious emotions of customers) and
• consumer panel technique (interviewing the same group of consumers on
permanent basis).

PROJECT MANAGEMENT By: Dr. Prateek Gupta

Unit II – Project Formulation

Market and Demand Analysis

Secondary Data

May be collected from:

• Central Statistical Organization (CSO)

• Census of India
• Centre for Monitoring Indian Economy (CMIE)
• Market Analysis and Research Group (MARG)
• Journal of FICCI
• Others

PROJECT MANAGEMENT By: Dr. Prateek Gupta

Unit II – Project Formulation

Market and Demand Analysis

Market Survey

Gathering all possible information (primary data) by conducting interviews.

Helpful in:

• Determining the total market demand

• Determining the Demand growth rate in different
segments of the market
• Understanding the inner motives of the customers
• Measuring the unsatisfied need of the customers.

PROJECT MANAGEMENT By: Dr. Prateek Gupta

Unit II – Project Formulation

Market and Demand Analysis

Steps in Market Survey

• Defining the Target Market (setting the population)

• Selecting the sample
• Developing the Questionnaire (Structured / unstructured)
• Training the surveyors
• Recording the information
• Interpreting the information (testing with the help of statistical tool)

PROJECT MANAGEMENT By: Dr. Prateek Gupta

Unit II – Project Formulation

Market and Demand Analysis

Market Description

Based on the information obtained from secondary data and market survey, the
project manager try to draw the picture of whole market.

includes study of

• Competition in Market
• Market Segments
• Price Statistics
• Methods of distribution
• Sales Promotion
• Consumers interest

PROJECT MANAGEMENT By: Dr. Prateek Gupta

Unit II – Project Formulation

Market and Demand Analysis

Demand Forecasting

An art of predicting demand for a product or service at some future date on the
basis of certain present and past behavior patterns of some related events.

Characteristics:

• Accuracy
• Simplicity
• Economy
• Timeliness
• Availability

PROJECT MANAGEMENT By: Dr. Prateek Gupta

Unit II – Project Formulation

Market and Demand Analysis

Methods of Demand Forecasting

Survey of buyer’s intention To ask customers what they are planning to buy

Collective Opinion Method Salesmen are required to estimate expected sales (territories wise)

Expert Opinion Method Opinion form the experts of the respective fields

Controlled Experiments Use of experiments to control variation with use of variables

Study of General Economic Environment Study of change in economic environment and its impact

Statistical Method Trend Projection, Graphical Method, Regression analysis

PROJECT MANAGEMENT By: Dr. Prateek Gupta

Unit II – Project Formulation

Market and Demand Analysis

Statistical Methods
of
Demand Forecasting

Data of past is available and ‘no

The input data (like change’ is forecasted in near
sales) and the output • Trend Projection future. A trend will be identified
by plotting the past data on
data (to be affected by • Graphical Method graph and set a trend.
any factor) is to be • Regression Analysis
plotted on graph.

A relationship is
established between
demand and the
independent variables
(like income, prices etc.)

PROJECT MANAGEMENT By: Dr. Prateek Gupta

Unit II – Project Formulation

Market and Demand Analysis

Market Planning

4 Ps

On the basis of all the points discussed before, the 4 Ps will be designed i.e.
PRODUCT, PRICE, PLACE, PROMOTION

PROJECT MANAGEMENT By: Dr. Prateek Gupta

Unit II – Project Formulation

Project Technical Analysis

PROJECT MANAGEMENT By: Dr. Prateek Gupta

Unit II – Project Formulation

Project Technical Analysis

Includes an in-depth study of all technical aspects related to

basis manufacturing operations, detailed design,
assembling etc.

Selection of Right Technology which can produce a Right

Quality product at Right Cost.

PROJECT MANAGEMENT By: Dr. Prateek Gupta

Unit II – Project Formulation

Project Technical Analysis

Objectives

• Primary
o To see whether the project idea is feasible or not from
technical point-of-view or not.

• Secondary
o To find out the most optimal formulation of the project
technology, size location etc.
o To find out the cost of project, so that profitability can
be calculated.

PROJECT MANAGEMENT By: Dr. Prateek Gupta

Unit II – Project Formulation

Project Technical Analysis

Activities in Technical Analysis

• Technology Selection
• Material And Utilities Input Requirement
• Flexibility in Product Mix
• Plant Capacity
• Location and Site for the Project
• Selection of Machinery and Equipments

PROJECT MANAGEMENT By: Dr. Prateek Gupta

Unit II – Project Formulation

Project Technical Analysis

Technology Selection

Is based on:

• Plant Capacity
• Availability of Materials and Input and their
requirement
• Investment Outlay
• Production cost
• Use by Other Units (must be successful earlier)
• Flexibility (in product mix)
• Latest Developments (new version)
• Appropriateness

PROJECT MANAGEMENT By: Dr. Prateek Gupta

Unit II – Project Formulation

Project Technical Analysis

Material And Utilities Input Requirement

Defining the input requirement and searching availability of those, there

are four categories of Inputs:

• Raw Materials (Agriculture Products, Minerals Products, live-stock etc.)

• Processed Industrial materials and Components (base

metals, semi-processed products, etc.)

• Auxiliary Materials and Factory Supplies (chemicals, additives,

Packaging materials, oils, grease, cleaning material etc.)

• Utilities (Services like power, water, telephone etc.)

PROJECT MANAGEMENT By: Dr. Prateek Gupta

Unit II – Project Formulation

Project Technical Analysis

Flexibility in Product Mix

As a product varies according to color, quality, sizes etc., the

technology must be according to the product mix.
Example

A shirt manufacturer is required to manufacture shirts of

• Different design
• Different color
• Different sizes etc.

PROJECT MANAGEMENT By: Dr. Prateek Gupta

Unit II – Project Formulation

Project Technical Analysis

Plant Capacity / Production Capacity

The volume that can be manufactured during a stipulated time. The

factors are as:

• Technological Requirement (To set minimum economic size. For ex:

as in a cement plant minimum capacity should be 300 tones per day)

• Input Constraints (raw materials, power supply, foreign exchange etc.)

• Market Condition (Current demand and future prospects)

• Initial Investment (over plant)

PROJECT MANAGEMENT By: Dr. Prateek Gupta

Unit II – Project Formulation

Project Technical Analysis

Location and Site Selection

include:

• Nearness to Raw Materials and Market (based on costing and

availability)

• Availability of Infrastructure (Power, Water, communication,

Transportation, etc.)

• Availability of Labour (and cost of labour)

• Government Policies
• Other ( impact on society, climate conditions etc.)

PROJECT MANAGEMENT By: Dr. Prateek Gupta

Unit II – Project Formulation

Project Technical Analysis

Machinery and Equipments

Depend upon:

• Type of Plant
• Plant Capacity
• Technology selected
• Cost of Machinery and Equipments
• Justification on the basis of Capital Budgeting process

PROJECT MANAGEMENT By: Dr. Prateek Gupta

Unit II – Project Formulation

Project Technical Analysis

Other Factors

• Civil works, Charts and Layouts

• Work Schedule

PROJECT MANAGEMENT By: Dr. Prateek Gupta

Unit II – Project Formulation

Project Technical Analysis

Civil works, Charts and Layouts

Civil works denote the application of all the point discussed above in
technical manner.
Charts and layouts are the ways of presentation or forecasting (sort of
structured plan in a stipulated manner).

PROJECT MANAGEMENT By: Dr. Prateek Gupta

Unit II – Project Formulation

Project Technical Analysis

Various Charts and Layouts

General Functional Layouts

(shows the relationship between equipments, buildings, and civil works. This is
to facilitate smooth movements of Raw Materials, W-I-P, Finished Goods
etc.)

PROJECT MANAGEMENT By: Dr. Prateek Gupta

Unit II – Project Formulation

Project Technical Analysis

Various Charts and Layouts

Material Flow Diagram

(shows the flow of material, utilities, intermediate products, by products, final
products and their quantities.)

PROJECT MANAGEMENT By: Dr. Prateek Gupta

Unit II – Project Formulation

Project Technical Analysis

Various Charts and Layouts

Production Line Diagram

(Shows the progress of production)

PROJECT MANAGEMENT By: Dr. Prateek Gupta

Unit II – Project Formulation

Project Technical Analysis

Various Charts and Layouts

Transport Layout
(shows the distances means of transport outside the production line)

PROJECT MANAGEMENT By: Dr. Prateek Gupta

Unit II – Project Formulation

Project Technical Analysis

Various Charts and Layouts

Utility Consumption Layout

(shows the principle commodities ‘ consumption (water, gas, power etc.)

PROJECT MANAGEMENT By: Dr. Prateek Gupta

Unit II – Project Formulation

Project Technical Analysis

Various Charts and Layouts

Communication Layout
(shows how the project is connected with telephone, internet, intercom etc.)

PROJECT MANAGEMENT By: Dr. Prateek Gupta

Unit II – Project Formulation

Project Technical Analysis

Various Charts and Layouts

Organizational Layout
(shows the organizational setup with inter-relationship)

PROJECT MANAGEMENT By: Dr. Prateek Gupta

Unit II – Project Formulation

Project Technical Analysis

Various Charts and Layouts

Plant Layout
(shows the physical layout of the plant)

PROJECT MANAGEMENT By: Dr. Prateek Gupta

Unit II – Project Formulation

Project Technical Analysis

Work Schedule

Reflects the plan of work concerning installation as well as initial

operations. The purposes are:

• To anticipate problems like 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 operations covering the initial period.

PROJECT MANAGEMENT By: Dr. Prateek Gupta

Unit II – Project Formulation

Project Technical Analysis

Cost of Project

PROJECT MANAGEMENT By: Dr. Prateek Gupta

Unit II – Project Formulation

Cost of Project
includes:

• Land and site development

• Buildings and civil works
• Plant and Machinery
• Technical know-how and engineering fees
• Expenses on foreign technicians and training of Indian technicians abroad
• Miscellaneous Fixed Assets
• Preliminary and Capital Issue expenses
• Pre-operative expenses
• Margin money for working capital
• Initial cash losses

PROJECT MANAGEMENT By: Dr. Prateek Gupta

Unit II – Project Formulation

Project Technical Analysis

Financial Projections

PROJECT MANAGEMENT By: Dr. Prateek Gupta

Unit II – Project Formulation

Financial Projections
Balance Sheet

Cash Flow Statement

Means of Finance and time

phasing
Cost of Project & Time
Phasing Interest and Loan
repayment

Depreciation
Estimates of
working results Interest on WCA
Cost of Production

Working Capital Tax Factor

needs

Working capital
Production Plans Advance (WCA)

Projected Sales

PROJECT MANAGEMENT By: Dr. Prateek Gupta

Unit II – Project Formulation

Project Financing & means of Finance

Will be discussed later!!!!

PROJECT MANAGEMENT By: Dr. Prateek Gupta

Unit I – Basic Concept

END OF UNIT - II
THANKS

76
PROJECT MANAGEMENT By: Dr. Prateek Gupta
 CHAPTER 10
THE PROJECT MANAGER
LEARNING OBJECTIVES
Understand that people are the key to project success
Responsibilities of the project manager
Skills needed to successfully manage projects
Techniques for developing those skills
Approaches to effective delegation
Ways the project manager can manage and control
changes

2
REAL WORLD EXAMPLE
Vignette: Meet the Newest Entrepreneur – The Project Manager
According to William Dauphiman at Price Waterhouse, “Project
management is going to be huge in the next decade”
“Everything has become projects, and that is the way we do
business” - Fannie Mae’s CIO
“Project management is the wave of the future” - newsletter
from General Motors
“Project management Salaries are Hot News” - PMI

3
REAL WORLD EXAMPLE

Vignette: A Question of Timing

Project managers often need temporal skills that
enable them to:
 Recapture past information and incorporate it into
current problem-solving strategies
 Predict the future for scheduling purposes or
contingency planning
 Create a vision for the future
 Cognitively bring the past or future closer to the present
4
 RESPONSIBILITIES OF THE PROJECT
MANAGER
The project manager’s responsibility is to ensure the
customer is satisfied that the work scope is completed
in a quality manner, within budget, and on time.

Provides leadership in planning, organizing, and

controlling the work effort
Coordinates the activities of various team members
Does not try to do it alone
Involves the project team to gain their commitment
5
RESPONSIBILITIES OF THE PROJECT
MANAGER (CONT.)
Planning
Clearly defines the project objective and reaches
agreement with the customer
Communicates this objective to the project team

6
RESPONSIBILITIES OF THE PROJECT
MANAGER (CONT.)
Organizing
Secures the appropriate resources
Decides which tasks should be done in-house and
which by subcontractors or consultants
Assigns responsibility and delegates authority
Creates an environment in which individuals are
highly motivated

7
 RESPONSIBILITIES OF THE PROJECT
MANAGER (CONT.)
Controlling
Tracks actual progress and compares it with planned
progress
Takes immediate action if progress or costs change

8
 SKILLS OF THE PROJECT MANAGER
The project manager is a key ingredient in the success
of a project.
Strong leadership ability
Ability to develop people
Excellent communication skills
Good interpersonal skills
Ability to handle stress
Problem-solving skills
Time management skills
9
 LEADERSHIP ABILITY
Leadership is getting things done through others.

Inspire the people assigned to the project

Create vision of the result and benefits of the project
Participative and consultative leadership style
Establishes the parameters and guidelines for what
needs to be done
Does not tell people how to do their jobs
10
LEADERSHIP ABILITY (CONT.)
Involves and empowers the project team
Involves individuals in decisions affecting them
Empowers individuals to make decisions within their
assigned areas
Understands what motivates team members and
creates a supportive environment
Does not create situations that cause individuals to
become discouraged
Fosters motivation through recognition
11
LEADERSHIP ABILITY (CONT.)
Sets the tone of trust, high expectations, and
enjoyment
Has high expectations of themselves and of each
person on the project team
Is optimistic and positive
Encourages the same positive attitude
Is highly motivated and sets a positive example
Has self-confidence and inspires confidence
Leads by making things happen
12
 ABILITY TO DEVELOP PEOPLE
Committed to the training and development of people
Uses the project to add value to each person’s experience
base
Believes that all individuals are valuable to the
organization
Stresses the value of self-improvement

13
ABILITY TO DEVELOP PEOPLE (CONT.)
Provides opportunities for learning and development
by encouraging individuals to assume the initiative,
take risks, and make decisions
Provides assignments that require individuals to
extend their knowledge
Identifies situations in which less experienced people
can learn from more experienced people
Has people attend formal training sessions
May provide coaching
14
 COMMUNICATION SKILLS
Effective and frequent communication is crucial.
Communicate regularly with the project team,
subcontractors, customer, and own upper
management
A high level of communication is especially
important early in the project
Good oral and written communication skills
Spend more time listening than talking

15
 COMMUNICATION SKILLS (CONT.)
Establish ongoing communication with the customer
Communication should be timely, honest, and
unambiguous
Effective communication establishes credibility
and builds trust
Provide timely feedback to the team and customer
Create an atmosphere that fosters timely and
open communication

16
INTERPERSONAL SKILLS

Good interpersonal skills are essential

Develop a relationship with each person on the
project team
Try to learn about the personal interests of each
individual without being intrusive
Should use open-ended questions and do a lot of
listening
Empathize with individuals when special
circumstances arise
17
INTERPERSONAL SKILLS (CONT.)
Maintain relationships throughout the duration of the
project
Use good interpersonal skills to try to influence the
thinking and actions of others
Use good interpersonal skills to deal with
disagreement or divisiveness

18
ABILITY TO HANDLE STRESS

Cannot panic; remain unruffled

Able to cope with constantly changing conditions
Act as a buffer between the project team and the
customer or upper management
Have a good sense of humor
Stress is likely to be high when a project is in
jeopardy of not meeting its objective

19
PROBLEM-SOLVING SKILLS
Early identification of a problem or potential problem
is important
Encourage project team members to identify
problems early and solve them on their own

20
TIME MANAGEMENT SKILLS

Have self-discipline
Be able to prioritize
Show a willingness to delegate

21
DEVELOPING THE SKILLS NEEDED TO BE A
PROJECT MANAGER
Gain experience — work on as many projects as
you can; each project presents a learning
opportunity
Seek out feedback from others
Conduct a self-evaluation and learn from your
mistakes
Interview project managers who have skills that
you want to develop
Participate in training programs
22
DEVELOPING THE SKILLS NEEDED TO BE A
PROJECT MANAGER (CONT.)
Join organizations, such as the Project
Management Institute
Read and subscribe to journals
Volunteer and contribute to the community or a
specific cause to develop leadership skills
Learning and development are lifetime
activities—there’s no finish line

23
 DELEGATION
Involves empowering the team to achieve the
objective and empowering each team member to
accomplish the expected results
Allow individuals to successfully carry out assigned
tasks
Give team members the responsibility to accomplish
job objectives and the authority to make decisions and
take actions
Give team members accountability for accomplishing
results
24
DELEGATION (CONT.)

Requires effective communication skills

Provide a clear understanding of what is expected
in terms of specific results, but do not tell the
individuals how to do the task
Select the team members who are best qualified
to perform each task and then empowering them
to do it
Have confidence in each member of the team
25
 DELEGATION (CONT.)
Common barriers to effective delegation
Project manager has a personal interest in the task
Project manager thinks she can do it better or faster
herself
Project manager lacks confidence in the capability of
others
Project manager is afraid he will lose control of the
work and not know what is going on
Team members fear criticism for mistakes or lack
self-confidence
26
 MANAGING CHANGE
Despite the best laid plans, changes will still occur.
Changes may be:

Initiated by the customer

Initiated by the project team
Caused by unanticipated occurrences during the
performance of the project
Required by the users of the project results
27
MANAGING CHANGE (CONT.)

The later in the project that changes are

identified, the greater their effect
Aspects most likely to be affected are budget and
completion date
At the start of the project, procedures need to be
established regarding how changes will be
documented and authorized

28
 MANAGING CHANGE (CONT.)
Whenever a customer requests changes:
Have project team members estimate the effects on cost
and schedule
Be sure team members won’t casually agree to changes
that may require additional person-hours
Develop open communication and a climate of trust
Have users participate up front in the decision to
change

29
 Chapter 3
Project Appraisal

Although, we are familiar with tools such as Gantt chart,, PERT, CPM, IRR, NPV and
others associated with project management. Yet when it comes to real project scenario, we
find practical problems which could bring deviations. This is not to suggest that the tools
and techniques are inadequate, but assumptions on which the project reports are prepared
are either invalid or unrealistic. A review of the Ministry of Programme Implementation
has shown that about 70% of project time or cost overruns are due to unrealistic
assumptions at the project formulation stage.
stage. It is therefore necessary to pay attention to
this, often overlooked, but vital aspect of project formulation. Project appraisal is the
process of analyzing the technical feasibility and economic viability of a project proposal
with a view to financing their costs. Project appraisal enables to take a decision on
investment with long term effects. During the appraisal stage, measurement of costs and
benefits are difficult as these are spread over a long term with high degree of uncertainty.
uncertainty
The figure below shows types of appraisal generally required for a project

Technical

Economical Social

Project
Appraisal
Financial Legal

Institutional Commercial

66
Meanings of Project Appraisal

Technical Appraisal

Determines whether the technical parameters are soundly conceived, realistic and technically
feasible. Technical feasibility analysis is the systematic gathering and analysis of the data
pertaining to the technical inputs required and formation of conclusion there from. The
availability of the raw materials, equipment, hard/software, power, sanitary and sewerage
services, transportation facility, skilled man power, engineering facilities, maintenance, local
people etc., depending on the type of project are coming under technical analysis. This
feasibility analysis is very important since its significance lies in planning the exercises,
documentation process, risk minimization process and to get approval.

Checklist

- Physical scale
- Technology used & Type of equipments & Suitability conditions
- How realistic is the implementation schedule
- Labour intensive method or others
- Cost estimates of Engineering Data
- Escalation are taken care of or not
- Procurement arrangement
- Cost of operation & Maintenance
- Necessary raw material & Inputs
- Potential impact of project on human & physical Environment
-
Financial Appraisal

To determine whether the financial costs and returns are properly estimated and whether the
project is financially viable. Following minimum details are determined in the financial
appraisal;

1. Total Cost
2. O & M Expenditure
3. Opportunity costs
4. Other costs
5. Returns on Investment over project life
6. NPV
7. CBR
8. IRR

Institutional Appraisal

To determine whether the implementing agencies as identified in the report are capable for
effective implementation, monitoring, and evaluation of the scheme. Managerial competence,
integrity, knowledge of the project, the promoters should have the knowledge and ability to
plan, implement and operate the entire project effectively. The past record of the promoters is
to be appraised to clarify their ability in handling the projects.
Checklist

67
 • Whether the entity is properly organised do the job
• Strength to use capability and take initiatives to reach the objectives
• Openness to new ideas and willingness to adopt long term approach to extend over
several projects
•
Commercial Appraisal

The demand and scope of the project among the beneficiaries, customer friendly process and
preferences, future demand of the supply, effectiveness of the selling arrangement, latest
information availability on all areas, government control measures, etc. The appraisal
involves the assessment of the current demand/market scenario, which enables the project to
get adequate demand. Estimation, distribution and advertisement scenario also to be here
considered into.

Environmental Appraisal

To see any detrimental environmental impacts and how to minimise the impacts.
Environmental appraisal concerns with the impact of environment on the project. The factors
include the water, air, land, sound, geographical location etc.

Economic Appraisal

How far the project contributes to the development of the sector, industrial development,
social development, maximizing the growth of employment, etc. are kept in view while
evaluating the economic feasibility of the project.

Legal Appraisal

To determine whether the project satisfies the legal issues related to land acquisition, title
deed, environmental clearance etc.

Project Appraisal - A Methodology

Approach

The cost and returns, estimated after discussions with concerned Engineers, are projected
for its life period of ten to fifteen years for which the loan is taken. The Net Present Value
(NPV) shows the percentage recovery of the capital cost within its project life period. The
Internal Rate of Return (IIR) indicates the percentage returns of the individual projects over
a fixed period for town.

Once the cost estimate is made and the cost of construction is known, the annual returns are
assessed. With the expenditure, construction period and the returns per annum are known,
the financial appraisal of the project-including the annuity of loan repayment is assessed.
Depending on the financial viability of the project.

Appraisal involves a careful checking of the basic data, assumptions and methodology used in
project preparation, an in-depth review of the work plan, cost estimates and proposed
financing, an assessment of the project's organizational and management aspects, and finally
the viability of project. It is mandatory for the Project Authorities to undertake project
68
appraisal or at least give details of financial, economic and social benefits. Projects are
examined for technical, institutional/organizational/managerial, financial and economic point
of view depending on nature of the project. On the basis of such an assessment, a judgment is
reached as to whether the project is technically sound, financially justified and viable from the
point of view of the economy as a whole.

The concerned Technical Section in consultation with other technical sections undertake the
technical appraisal, wherever necessary. This covers engineering, commercial, organizational
and managerial aspects, while the Economic Appraisal Section carries out the pre-sanction
appraisal of the development projects from the financial and economic points of view.
Economic appraisal of a project is concerned with the desirability of carrying out the project
from the standpoint of its contribution to the development of the national economy. Whereas
financial analysis deals with only costs and returns to project participants, economic analysis
deals with costs and returns to society as a whole. The rationale behind the project appraisal is
to provide the decision-makers with financial and economic yardsticks for investment in the
projects.

The techniques of project appraisal includes discounted techniques that takes into account the
time value of money and include (a) Net Present Value (NPV), (b) Benefit Cost Ratio (BCR),
(c) Internal Rate of Return (IRR) (d) Sensitivity Analysis. Economic viability of the project is
invariably judged at 12 percent discount rate/opportunity cost of capital. However, in case of
financial analysis, the actual rate of interest i.e. the rate at which capital is obtained is used.
For the government-funded projects, the discount rate is fixed by the Government. In case the
project is funded by more than one source, the financial analysis is carried out on the
weighted average cost of capital (WACC) for each project. Normally, if the project is
financed through foreign grants, the financial analysis is undertaken at zero discount rate.
However, the economic analysis is undertaken at 12% discount rate.

Many investment projects are addition to existing facilities/activities and thus benefits and
costs relevant to the new project are those that are incremental to what would have occurred if
the new project had not been added. During the operating life of a project, it is very important
to measure all costs and benefits as the difference between what these variables would be if
no project (without project) were undertaken and what they will be should the project be
implemented (with project). It is very common error to assume that all costs and benefits are
incremental to the new project when, in fact, they are not. Hence, considerable care must be
taken in defining a “ base case” which realistically sets out the profile of costs and benefits
expected if no additional investment is undertaken.

Social Costs –Benefits Analysis

Social Cost-Benefit analysis is an appraisal system that helps selecting socially

remunerative projects for implementation. Every project tends to use up resources pre-
empting its allocation in other uses. The inputs used up in the projects constitute the social
cost of the project. The process of Social Cost-Benefit Analysis consists of determining the
social feasibility or profitability of a project by expressing its social benefits and social
costs in terms of a common counting device or numeral. If the social benefits of a project
exceed its social costs, it is qualified for implementation. Projects emanate from different
sources, such as individuals, firms or institutions, and Governments at the state and the

69
central levels. In instances when the state is not the owner, the traditional yardstick of
commercial or financial profitability is used for selection of projects. In these cases the
primary criterion is the profit potential for promoter or the owner. But this may not
necessarily result in socially most profitable project. But then can decision makers
overlook this vital aspect of project evaluation, especially in a developing country?

A project has to be formulated and implemented in a social environment. Its impact on the
society in general and to the community in the near vicinity, in particular, is a major
concern to be taken into account at the time of project formulation. This includes land
acquisition, rehabilitation, loss of livelihood, adequate compensation, building up harmony
with the community, through close interaction. All these areas are importance. Yet very
few projects have considered it necessary to take these factors into account. Techno-
economic parameters are only guidelines for project formulation. But then a project cannot
be implemented in a vacuum. It needs an elaborate support system. The Project Manager
has to seek outside intervention for the support system. This where, a manager who is
essentially aware of the multiple dimensions of a project will be better suited to exercise
appropriate control over projects. We may think of the river linking project in India. The
project is yet to reach the pre-feasibility stage, and already there is a public opinion
building against it. Due to this increased social awareness, project formulation
methodology has to take account the social impact of the project. This is a time consuming
process. Often project authorities are made to rush through project preparation stage,
without spending adequate time on project pre-feasibility study, ultimately leading to time
and cost overrun. Projects often face uncertain future, due to intense public opposition and
prolonged litigation. Public servants are often required to face the vagaries of public
opposition, It is well known that a project has both time and cost dimensions. These two
dimensions are interlinked. A time delay often means a cost overrun, and a cost overrun
can also lead to time delay, because of budgetary constraints. Time and cost are the
dimensions in which projects are measured. But then there are web of other interconnected
activities which also impact on the project time and cost flow. Thus the main emphasis on
a project, even at the formulation stage is not the technical parameters alone but on the
control and coordination aspects.

Appraisal Methods

There are appraisal techniques that take into account the variations in the expected
inflows and outflows of the project that the project must inevitably face during its life
cycle. The crux of these methods lies in their consideration of time.
Project Analysis as per Cash Flows

It is common knowledge that projects do not earn the same level of profit every year.
In some years, profits are high; in others they are low. In many years, it can be expected
that the project will earn no profit at all. The question that confronts planners and
administrators is how to examine projects that have different time sequence of costs and
benefits, and therefore of profit/losses. Table 1 can be taken as the starting point for
examining this question.

Table 1 shows the costs and benefits of a hypothetical project over its life cycle of seven
years. In the first year, costs are greater than the benefits; in later years, benefits exceed
costs.

70
 Two questions arise with respect to Table 1

Table 1: Costs and Benefits over 7 years (in 000 rupees)

Year Difference
Costs Benefits between
benefits and
costs
0 250 0 -250
1. 250 290 40
2 250 290 40
3. 255 300 55
4. 260 335 75
5. 260 335 75
6. 260 335 75
Total 1785 1895 110

1. From the table 1, it is seen that the overall profitability of a project cannot be assessed
on a year-to-year basis. Expected profits of this project as shown in the table vary
between years. Also, if a year-to-year assessment is attempted, it will be a time-
consuming exercise, and may not be able to give any definite conclusion as to its
profitability. So, the task for the planners is to reduce the flows into a single figure
that can indicate the earning capacity or the profitability of the project in question.
How should this be done?

2. How should the “value” of money over time be treated? Should the value of
Rs.75,000 that is likely to be the level of net profits in the fourth year of the project
(see Table 2) be taken at its face value, or be adjusted to take note of the fall in the
value of money from inflation as well as the uncertainty that is implicit in any
consideration of the “future”. What is the method by which the problem of time can
be resolved?

The method of dealing with the flows of costs and benefits over time in project analysis is
called time-discounting. This is a method of reducing to a comparable base the costs and
benefits of a project that accrue at different intervals. The underlying thesis in this
concept is that the value of money is different at different points of time; for instance
Rs.1,000 received today is not of equal worth to a similar amount ten years from now. In
other words, costs which have to be paid in the distant future have, at present, a lower
significance or value than those to be paid now. Similarly, the benefits which accrue
from a project now are of a greater value than those accruing later. Calculation of the
present value of costs and benefits involves the use of a discount factor, which is nothing
but a rate at which the future is to be discounted. Discount rate represents the present
value of the future.

71
 To repeat: the crux of time-discounting is that the value of money is different at different
points in time. One thousand rupees received today cannot be equal in worth to Rs.1,000
received in one year’s time. Inflation and uncertainty reduce the value of money over
time.

How can the time-discounting method be applied to projects?

In order to explain the application of the time-discounting method, it is useful to briefly

recall the manner in which compound interests are calculated. Assume that there is an
amount of Rs.100 that is expected to earn interest at 8 percent per annum. In one year, the
amount of Rs.100 will increase at this rate to Rs.108.00 [=100(1+(8/100)];
[={100(1+(8/100)}2 ] and in two years, this amount will be Rs.116.00 [=100(1+8/100)}2],
and in three years the amount will increase to Rs.125.90 [=100((1+8/100)}3}], and so on.
The formula that is used is conveniently written as:

F = P(1+r)n

Where F = future worth

P = present worth
R= rate of interest
n = number of years
or

Future worth (F) = P (1+r) ----------------------- Year (1)

= P (1+r) 2 ----------------------- Year (2)
= P(1+r) 3 ----------------------- Year (3)
= P (1+r) n ----------------------- Year (n)

Compounding is nothing other than finding out the future worth of the present at a given
rate of interest. Discounting is just reverse of compounding. In discounting, the expected
future values are given and their present values have to be determined at a given discount
rate. This involves using the inverse of the compounding formula:

P = F x 1/(1+r)n

Present worth (P) = F x 1 ----------------------- Year (1)

(1+r)

=Fx 1 ----------------------- Year (2)

(1+r) 2

=Fx 1 ----------------------- Year (3)

(1+r) 3

=Fx 1 ----------------------- Year (n)

(1+r) n

Time-discounting is used for calculating the profitability of the project when cash
flows spread over a medium to long term with differing costs and incomes. It is thus

72
 important for practitioners to be acquainted not only with the mechanics of discounting, but
when, and under what conditions, they should use higher or lower discount rates. When the
future carries greater risk and uncertainty, and the fear of inflation or deteriorating
economic situations, a higher discount rate is generally used. Conversely, a lower discount
rate would suffice when the economic and social situations are stable, and no dramatic
changes are expected to take place in the future.

Three methods are discussed here. These are (1) net present value, (2) benefit cost
ratio, and (3) internal rate of return.

Net Present Value Method

The net present value method can be used by taking the following steps

Step 1. Estimate the cash inflows and outflows on a year-to-year basis.

Step 2. Work out the net cash flows for individual years.
Step 3. Find out for individual years the discount value of 1 at the given
discount rate
Step 4. Multiply the net cash flows for each year by the corresponding
discount factor.
Step 5. Add up the present values

It can be seen from the example in Table 2 below that at a 12 percent rate of discount
the net present values of the project are negative (-15.1). The project, therefore, cannot be
accepted. If, however, a lower discount rate is used, say 8 percent, the net values of the
project would turn positive, and the project may gain acceptability. The net values at 8
percent discount rate are shown in Table 3.

Table 2: Computing the Net Present Values (1) (in ` 1,000))

Year Costs Benefits Benefits-costs Values of 1 at Discounted Net

(outflo (inflow) (Net Cash 12% Discount Cash Flows
ws) Flows) Rate
Step 1 Step 2 Step 3 Step 4
0 250 0 -250 1.00 -250
1 250 290 40 0.892 35.7
2 250 290 40 0.797 31.9
3 255 300 55 0.712 39.2
4 260 335 75 0.635 47.6
5 260 335 75 0.567 42.5
6 260 335 75 0.507 38.0
1,185 1,295 -15.1
Step 5

73
Table 3: Computing the Net Present Values (2) (in ` 1000)

Benefits-Costs Values of 1 at Discounted

Year (Net Cash 8% Discount Net Cash
Flows) Rate Flows
Step 2 Step 3 Step 4
0 -250 1.00 -250
1 40 0.92 37.2
2 40 0.86 34.4
3 55 0.79 43.5
4 75 0.74 54.8
5 75 0.68 51.0
6 75 0.63 47.2
18.1

Benefit-Cost Ratio

The benefit-cost ratio is a ratio calculated by dividing the sum of discounted benefits by
discounted costs. Steps for calculating the benefit-cost ratio are:

Benefit – Cost Ratio = Sum of Discounted Benefits

Sum of Discounted Costs

Step 1. Estimate the cash inflows and outflows on a year-to-year basis

Step 2. Find out for individual years the discount value of 1 at the given
discount rate.
Step 3. Multiply the cash inflows and cash outflows for each year by the
corresponding discount factor.
Step 4 Add up the discounted values of cash inflows and outflows
separately.
Step 5. Divide the discounted values of cash inflows by cash outflows to
obtain the benefit-cost ratio.

74
 The computation of benefit-cost ratio is shown in Table 4.

Table 4 :Computing the benefit-cost ratio

Y Discounted Values
Costs Discount
e Benefits
(outfl Factor at
a (inflows) Costs Benefits
ows) 8%
r
Step 1 Step 2 Steps 3 and 4
0 250 0 1 250 0
1 250 290 0.93 232.5 269.7
2 250 290 0.86 215 249.4
3 255 300 0.76 193.8 228
4 260 335 0.73 189.8 244.55
5 260 335 0.68 176.8 227.8
6 260 335 0.63 163.8 211.05

Total 1421.7 1430.5

Step 5: Benefit Cost Ratio= 1430.5/1421.7 = 1.00619

The benefit-cost ratio in the above example is greater than 1, indicating that the sum of
the discounted benefits is greater than the sum of the discounted costs. If the ratio has been
less than 1, as indeed it is at 12 percent discount rate, it would not be advisable to accept the
project. Also, as in the case of the NPV, the higher the benefit-cost ratio of a project, the better
it is in terms of profitability.

Internal Rate of Return

The internal rate of return is a rate of discount at which the net present values of a project are
zero. Or, expressed differently, it is a rate at which the discounted costs and discounted
benefits become equal. The rate represents the “effective interest earned on the investment in
the project.” In the words of Gittinger. It is the maximum interest that a project could pay for
the resources used if the project is to recover its investment and operating costs and still
breakeven.

Internal Rate of Return = A rate at which the discounted costs are equal to discounted
benefits

Unlike the two other methods discussed earlier where the present values or the benefit-cost
ratios are calculated on the basis of the given discount rates, in the case of the internal rate of
return, a rate at which the discounted costs would become equal to discounted benefits has to
be found out. The higher the IRR, the stronger is the project.

75
 The calculation of the internal rate of return involves the following steps.

Step 1. Estimate the cash inflows and cash outflows on a year-to-year basis
Step 2. Work out the net cash flows for individual years.
Step 3. Select any random discount rate and compute the net present values.
Step 4. If the NPV thus arrived at is positive, then select a higher discount
rate at which the NPV may come close to zero. If, however, the NPV
is negative, then select a lower discount rate at which the NPV may
come close to zero.

Step 5. Repeat the exercise until a discount rate that reduces the net present
values to zero is found.

An example using the figures given in Table 5 may once again to be taken to illustrate the
computation of the internal rate of return.

Table 5: Computing the Internal Rate of Return (1)

Costs
(Cash Benefits
Net Cash Net Present Values
Year outflow (Cash
Flows Discounted
s) inflows)

Step 1 Step 2 Step 3 Step 4

8% 12%
0 250 0 -250 -250 -250
1 250 290 40 37.2 35.7
2 250 290 40 34.4 31.9
3 255 300 55 43.5 39.2
4 260 335 75 54.8 47.6
5 260 335 75 51.0 42.5
6 260 335 75 47.2 38.0
Total 18.1 -15.1

In this example, the initial discounting of the net cash flows (Step 3) has been done at 8
percent, which gives a positive net present value of 18.1. Step 4, that is, discounting at 12
percent, turns the net values to a negative figure of 15.1, suggesting that the rate at which the
discounted net values would turn zero must lie somewhere between 8 and 12 percent.

It would thus be noted that the calculation of the internal rate of return requires repetitive
computations and is often taxing. An alternative to the use of repetitive computations is
“interpolation”, which is a technique of finding the intermediate values between any two

76
figures, or any two discount rates in the present context. The equation for interpolation is as
follows:

Internal rate of return = Lower discount rate +

Difference
Between the Net present value
Discount rates lower discount rate
X -----------------------------
Sum of the net present
Values at the two
Discount Rates (ignore sign)

Or
Internal rate of return = 8+ (12 – 8) 18.1 …………(1)
(18.1)-(-15.1)
= 8+ (4) x 18.1 ……………….. (2)
33.2
= 8 + (4) (.54) ……………….. (3)

= 8 + 2.1
= 10.1 rate of discount

This is the way in which the internal rate of return is calculated. As mentioned earlier,
projects with higher IRRs are considered financially safer and stronger. Evidently, it would be
inadvisable to accept projects whose IRRs are lower than the prevailing lending or borrowing
interest rates in the capital market of the country.

It would be mentioned that the internal rate of return is the most widely used method for
appraising development projects. Most international and bilateral aid agencies rely on this
method as a guide to decisions on projects in question, of course, among several other
considerations. The main advantage of the IRR is that it is less subject to maneuvering than
either the net present value or the benefit-cost ratio methods. In their cases, almost everything
about projects depends on the discount rates: by changing the discount rates, results as desired
by the planners or administrators can be obtained. This is not possible to be done in the case of
the internal rate of return where, if favorable results were to be sought on a particular project,
the entire stream of costs and benefits of the project will need to be changed.

Another example of assessing a water supply project for a town by IRR is illustrated below

77
Key Questions

a) Will the project have a positive cash flow at any time during the project life?
b) In the case of income – generating projects: what is the projected net profit and when
will project break even?

Key Issues

1. To calculate the incremental net benefit because only the net benefits with the project in
excess of those which would have accrued without the project should be taken in to
account. If the project results in cost reductions, they should be considered as incremental
net benefits.
2. To determine the project life. It is usually the economic life of the major investment item
which is shorter than the technical life due to technological obsolescence.
3. To assess the debt-servicing capacity of the project during the entire project life in order
to ensure that the project will be capable of meeting its financial obligations at any time.
Cash flow analysis calculates the expected net cash flow as the differences between
receipts and expenses for each year over the project life. Receipts and expenses for each
year over the project life. Receipts and expenses comprise all monetary transactions (cash
inflows and out flows) irrespective of an impact on real income. A continuous project
implementation and later operation requires a positive net cash flow at any time.

In case of an income – generating project, the commercial profitability of the project has to be
assessed by estimating all revenue and costs. Revenue and costs comprise all transactions that
generate or reduce real income irrespective of cash flows. The commercial profitability is only
given, if a net profit is likely to be achieved at the end of the project life or, in the case of a
continuous operation, after an respected point in time depending on the project type. Funding
assistance is usually required to finance the capital investments needed to get project started

Case Study: APPRAISAL OF A TOWN LEVEL WATER SUPPLY PROJECT

Pricing and cost recovery in water supply projects has become almost unworkable for the small
and medium towns due various reasons. Irregular supply, enormous maintenance and high
energy costs, inadequate water treatment, poor recovery, inadequate pricing of water supply to
consumers, provision of underground drainage, sewage treatment are some the intricate
reasons for not providing minimum supply of water as per the normative standards. Water
Supply project implemented by Tiruppur Area Development Corporation, JUSCO and a few
city corporations have become sustainable and income generative. Increased efficiency and full
cost recovery by billing, metering, technical designs, automation of metering, etc. would help.
Billing system covering variable charges for economically weaker sections, commercial, high
income groups etc., need to be adopted suitably. Appropriate service providers like SPV could
be used. Therefore, a small example of how a town level water supply project can be
remunerative even with minimum pricing is illustrated below;

78
 Minimum Data
1. PROJECT: Supply of Water to a residents of a town consisting of 10,000 houses
2. Capital Expenditure : Rs. 7 crores
3. Cost of Capital : 10%
4. Operations and maintenance Rs. 25 lakhs per annum
5. Average revenue from each house hold Rs. 150 per month or Rs1.8 crore/year
6. Life of the project: 10 years

With the above data available with us, we can now work out Net Present Values, Benefit Cost
Ratio and IRR based on the incomes and expenditure over the period of 10 years as below

ANALYSIS OF NET COST BENEFIT OF THE WATER SUPPLY PROJECT

Years
Particular 1 2 3 4 5 6 7 8 9 10 Total
s

Increment 1.8 1.8 1.8 1.8 1.8 1.8 1.8 1.8 1.8 1.8
al Revenue
(Rs in
Crores)

Incremental 0.25 0.25 0.25 0.25 0.25 0.25 0.25 0.25 0.25 0.25
cost
(Rs in
Crores)
Net cash 1.55 1.55 1.55 1.55 1.55 1.55 1.55 1.55 1.55 1.55
flow
(Rs in
Crores)
PVIF at 0.909 0.826 0.751 0.683 0.621 0.564 0.513 0.467 0.424 0.386
10%
PV of cash 1.41 1.28 1.16 1.06 0.96 0.87 0.80 0.72 0.66 0.60 9.62
flows at
10%
PVIF at 0.833 0.694 0.579 0.482 0.402 0.335 0.279 0.233 0.194 0.162
20%
PV of cash 1.29 1.08 0.90 0.75 0.62 0.52 0.43 0.36 0.30 0.25 6.5
flows at
20%

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BCR at 10%=9.62/7=1.37

IRR -10%+(20-10)X(9.62-7)/ (9.62-6.5)

IRR-18.40%

Return on investment=18.4%-10%= 8.4%

Project Appraisal Report

The appraisal of a project would provide the project authorities the following information for
taking decision;

I. Does it meet the immediate and long-term objectives?

II. How does the project compare with other competing projects?

Project appraisal leads to overall assessment of the project’s chances for success based on the
findings of the feasibility analysis. It seeks to establish what will occur, who will gain and lose,
when the project’s impacts will occur and the efficiency of the project investments in relation
to the benefits derived. The form of the project appraisal process depends on a variety of
factors, such as the scale and complexity of the given project, the nature of the organization
involved, the availability of professional staff, the importance attached to non-economic
factors and so forth. A project appraisal report should cover the following topics.

1. Description of the project proposal and its objectives;

2. Description of the current baseline conditions.
3. Economic and financial appraisal
4. Socio-cultural assessment
5. Environmental assessment
6. Overall assessment of the project proposal (findings of the project appraisal process)
7. Conclusions and recommendations
8. Preliminary framework for project monitoring and evaluation.

Hassan - A Case Study of Good Appraisal

Hassan town in Karnataka State is chosen as a model town for taking up such an exercise. This
integrated Infrastructure Plan Programming for Hassan, through its local body i.e., the
municipality, is a well knit package of many programmes-services and remunerative-integrated
into one cohesive unit, instead of disjointed projects planned without any inter relation among
them.

The exercise was taken up to find ways and means of increasing the local body’s internal
resources while at the same time looking to lending agencies for financial assistance towards
schemes for provision of infrastructure facilities and other remunerative schemes designed for
resource augmentation and asset creation. It is now proposed to study the existing service levels
and finances, identifying the gaps, exploring the possibilities of increasing the revenue and
reducing the expenditure to bolster up the savings. The next step would be to estimate the funds
80
required to take up the service and remunerative projects and assess the capability of the
municipality to borrow and finally prioritise the schemes to meet its purpose.
It was followed up with the discussions on the markets, shops, parks and play fields in the town
some of which are remunerative. So with the views expressed on service and remunerative
projects gathered from the public, discussion with the municipal officials, officials of the other
departments, Boards such as Water-Supply and Drainage, Housing, Slum Clearance, were taken
up in two or three informal group meetings to arrive at the possible proposals for meeting the
problems and the needs of the community. This was followed by the spot visits to the places
identified for action.

Estimates were then prepared for the identified projects. In the case of remunerative projects
they were tested for their financial viability. Along with the

Projects costs, the operation and maintenance cost, the resulting annuity payments of loan with
interest were also worked out. The already existing municipal budget with receipt, expenditure,
existing debt service ratio (Ratio of loan repayment to total receipts excluding grant) is projected
for the next five years and to these are added new projects, their income, expenditure with new
debt service ratio of existing and new projects and the net financial status.

Alternative Scenarios:

a) Revenues can be increased through traditional and innovative methods.

b) Expenditure can be reduced.
c) New projects can be undertaken to generate more funds.
d) Cutting down some projects itself or pruning down some items of one project
or more, to bring down the capital cost requirements.
e) If grants are available for service projects, to work out some loan grant mix.

So different scenarios were tried with various permutation and combinations of the five
principles enunciated above to bring the debt service ratio below 25 percent and at the
same time aim at surplus balances.

81
Checklist :Financial Appraisal of a Infrastructure Development Project-
Corrective Actions-Flow chart

Financial Appraisal

Remunerative Project
Component

Total Cost of the O & M Costs Cost of Any

Project/Investmen Depreciation other
t Costs

Total Costs

Benefits/Returns from
Remunerative
Projects

Premiums/ Deposits Income Renting or Any other

from renting/leasing from sale of Leasing of Incomes
of commercial Sites and New Bus from the
shopping/ centres services Stand/Park remunerativ
Project etc e project

Incomes over
the next 25
years

Cash Flow Analysis for 25 Years

Calculation of NPV/IRR/CBR-
Decision to select the project

82
 QUIZ

Chapter 3
1. Project appraisal enables
a. To know cost benefits
b. Technical feasibility
c. Economic & Environmental viability
d. All of the above

2. As a result of poor project appraisal

a. We may end up with no demand for the project
b. We may incur losses
c. We will save money
d. a & b

3. Project appraisal gives an indication about the

a. Total viability of the project
b. Financial, Economic & Social benefits only
c. Only technical viability
d. None of the above
[

4. The appraisal techniques used are

a. NPV & IRR
b. BCR
c. Sensitivity analysis
d. All of the above

5. Economic viability of the project is judged normally at discount rate of

a. 4%
b. 25%
c. 12%
d. 40%

6. Financial analysis takes into account discount rate of

a. Actual borrowed rate of interest of the capital
b. 20%
c. 3%
d. None of the above

83
7. In case the project is funded by more than one source, the financial analysis is
carried out using
a. Weighted average cost of capital for each project
b. More than the weighted average
c. Less than the weighted average
d. None of the above

8. Project is acceptable if
a. NPV is positive
b. NPV is negative
c. NPV is Zero
d. None of the above

9. Project is acceptable if BCR is more than 1

a. True
b. False

10. Internal Rate of Return (IRR) indicates

a. Net return on investment in the project
b. No return on investment in the project
c. None of the above
d. Only b

11. Social cost benefit analysis helps

a. Selecting financially remunerative project
b. Selecting socially remunerative project
c. In knowing whether social benefits exceed its social cost
d. b & c

12. Time discounting of cash flows means

a. Calculation of the present value of cost & benefits during the project life
b. It is the method of reducing to a comparable base the costs & benefits that accrue
at different intervals
c. a & b
d. None of the above

84
13. The formula for calculation of present value is
PV=FV/ (1+R)n where PV=present value
FV=Future value
R=Rate of Interest
n=Number of years

a. True
b. False

14. Benefit cost ratio = Sum of the discounted benefits

Sum of the discounted cost

a. True
b. False

15. Internal rate of return

a. Is the rate of discount at which net present values of a project are zero
b. Rate at which the discounted costs are equal to discounted benefits

c. Lower discount rate difference between net present value of

+ the discount rates x the lower discount rate
Sum of the net present
Value of the two
Discount rates
(Ignore sign)
d. All of the above

16. What is the Internal Rate of Return (IRR) of a project?

a. The time period needed to pay back the investment from a project when future
income is discounted.
b. The inherent discount rate or investment yield rate produced by the project over a
pre-defined period of time.
c. The rate of negative risk that can be accepted for a project without turning the
Expected net present value negative.
d. The expected benefit from a project’s deliverable calculated as a percentage of the
original investment over a specified time period.

85
17. Which is not true in regard of RoI (Return on Investment) for a project?
a. It defines the cumulated net income from an investment at a given point in time or
during a defined period.
b. It includes investment, direct and indirect costs and may include allowances for
capital cost, depreciation, risk of loss, and/or inflation.
c. It is most commonly stated as a percentage of the investment or as a
dimensionless index figure.
d. It is the time when cumulated net income is equal to the investment.

18. A project being evaluated by an agency has a cost of capital of 12%. Initial
investment is Rs 1,00,000 benefits as below

Year Benefit

Year 1 25,000

Year 2 40,000

Year 3 40,000

Year 4 50,000

The value of the BCR is

a. 1.75
b. 1.145
c. 2.3
d. 0.45

19. Rule for BCR for a project is

a. BCR > 1 accept
b. BCR = 1 in different
c. BCR < 1 reject
d. All of the above

20. Assumed is a discount rate of 5% per year. Looking at the present values of the
benefits of these projects in the first 3 years, what is true?
a. Both projects are equally attractive
b. The first project is more attractive by app. 7%.
c. The second project is more attractive by app. 5%.
d. The first project is more attractive by app. 3%

86
 TEMPLATE (Indicative)
Project Appraisal
Sl No. Name of the Project
1
Need for the Project
2 project proposal and its objectives; Proposal

Objectives
3 Immediate and long-term benefits? Immediate objectives

Long term objectives

4 Description of the current baseline conditions. What would happen in the
absence of project?

Study Area/Location

Environmental Impact

Beneficiaries

Social costs

Legal issues

Demand

Other Constraints

Favourable conditions

Etc.

5 Project comparison with other competing Eg. Alternative options: based

projects? on feasibility analysis
6 Economic and financial appraisal • Total Cost
• O& M Expenditure
• Opportunity costs
• Other costs
• Returns on Investment
over project life
• NPV
• CBR

87
 • IRR

• Medium and Long

term benefits
• Financial viability
• Recovery of costs

7 Institutional Appraisal Eg. Capability in terms of

expertise, personnel, skills,
worth, past experience etc.,
8 Legal Assessment Eg. Land, title deed,
clearances, NOC etc.
9 Technical appraisal 1. Technology used & Type
of equipments &
Suitability conditions
2. Hardware, software, Skills,
Knowledge, personnel etc.
3. How realistic is the
implementation schedule
4. Labour intensive method
or others
5. Cost estimates of
Engineering Data
6. Etc.
10 Socio-cultural assessment Social benefits, community
development etc.
11 Environmental assessment Environmental impact,
benefits, hazards, risks,
clearances etc.
12 Overall assessment of the project proposal
(findings of the project appraisal process)
13 Conclusions and recommendations
14 Preliminary framework for project monitoring
and evaluation.
15 Remarks if any

88
3. The Project Life Cycle (Phases)
The project manager and project team have one shared goal: to carry out the work of the project
for the purpose of meeting the project’s objectives. Every project has a beginning, a middle
period during which activities move the project toward completion, and an ending (either
successful or unsuccessful). A standard project typically has the following four major phases
(each with its own agenda of tasks and issues): initiation, planning, implementation, and
closure. Taken together, these phases represent the path a project takes from the beginning to
its end and are generally referred to as the project “life cycle.”

Initiation Phase
During the first of these phases, the initiation phase, the project objective or need is identified;
this can be a business problem or opportunity. An appropriate response to the need is
documented in a business case with recommended solution options. A feasibility study is
conducted to investigate whether each option addresses the project objective and a final
recommended solution is determined. Issues of feasibility (“can we do the project?”) and
justification (“should we do the project?”) are addressed.

Once the recommended solution is approved, a project is initiated to deliver the approved
solution and a project manager is appointed. The major deliverables and the participating work
groups are identified, and the project team begins to take shape. Approval is then sought by the
project manager to move onto the detailed planning phase.

Planning Phase
The next phase, the planning phase, is where the project solution is further developed in as
much detail as possible and the steps necessary to meet the project’s objective are planned. In
this step, the team identifies all of the work to be done. The project’s tasks and resource
requirements are identified, along with the strategy for producing them. This is also referred to
as “scope management.” A project plan is created outlining the activities, tasks, dependencies,
and timeframes. The project manager coordinates the preparation of a project budget by
providing cost estimates for the labour, equipment, and materials costs. The budget is used to
monitor and control cost expenditures during project implementation.

Once the project team has identified the work, prepared the schedule, and estimated the costs,
the three fundamental components of the planning process are complete. This is an excellent
time to identify and try to deal with anything that might pose a threat to the successful
completion of the project. This is called risk management. In risk management, “high-threat”
potential problems are identified along with the action that is to be taken on each high-threat
potential problem, either to reduce the probability that the problem will occur or to reduce the
impact on the project if it does occur. This is also a good time to identify all project stakeholders
and establish a communication plan describing the information needed and the delivery method
to be used to keep the stakeholders informed.

Finally, you will want to document a quality plan, providing quality targets, assurance, and
control measures, along with an acceptance plan, listing the criteria to be met to gain customer
acceptance. At this point, the project would have been planned in detail and is ready to be
executed.

Implementation (Execution) Phase

During the third phase, the implementation phase, the project plan is put into motion and the
work of the project is performed. It is important to maintain control and communicate as needed
during implementation. Progress is continuously monitored and appropriate adjustments are
made and recorded as variances from the original plan. In any project, a project manager spends
most of the time in this step. During project implementation, people are carrying out the tasks,
and progress information is being reported through regular team meetings. The project manager
uses this information to maintain control over the direction of the project by comparing the
progress reports with the project plan to measure the performance of the project activities and
take corrective action as needed. The first course of action should always be to bring the project
back on course (i.e., to return it to the original plan). If that cannot happen, the team should
record variations from the original plan and record and publish modifications to the plan.
Throughout this step, project sponsors and other key stakeholders should be kept informed of
the project’s status according to the agreed-on frequency and format of communication. The
plan should be updated and published on a regular basis.

Status reports should always emphasize the anticipated end point in terms of cost, schedule,
and quality of deliverables. Each project deliverable produced should be reviewed for quality
and measured against the acceptance criteria. Once all of the deliverables have been produced
and the customer has accepted the final solution, the project is ready for closure.

Closing Phase
During the final closure, or completion phase, the emphasis is on releasing the final
deliverables to the customer, handing over project documentation to the business, terminating
supplier contracts, releasing project resources, and communicating the closure of the project to
all stakeholders. The last remaining step is to conduct lessons-learned studies to examine what
went well and what didn’t. Through this type of analysis, the wisdom of experience is
transferred back to the project organization, which will help future project teams.

Example: Project Phases on a Large Multinational Project

A U.S. construction company won a contract to design and build the first copper mine in
northern Argentina. There was no existing infrastructure for either the mining industry or large
construction projects in this part of South America. During the initiation phase of the project,
the project manager focused on defining and finding a project leadership team with the
knowledge, skills, and experience to manage a large complex project in a remote area of the
globe. The project team set up three offices. One was in Chile, where large mining construction
project infrastructure existed. The other two were in Argentina. One was in Buenos Aries to
establish relationships and Argentinian expertise, and the second was in Catamarca—the
largest town close to the mine site. With offices in place, the project start-up team began
developing procedures for getting work done, acquiring the appropriate permits, and
developing relationships with Chilean and Argentine partners.
During the planning phase, the project team developed an integrated project schedule that
coordinated the activities of the design, procurement, and construction teams. The project
controls team also developed a detailed budget that enabled the project team to track project
expenditures against the expected expenses. The project design team built on the conceptual
design and developed detailed drawings for use by the procurement team. The procurement
team used the drawings to begin ordering equipment and materials for the construction team;
develop labour projections; refine the construction schedule; and set up the construction site.
Although planning is a never-ending process on a project, the planning phase focused on
developing sufficient details to allow various parts of the project team to coordinate their work
and allow the project management team to make priority decisions.

The implementation phase represents the work done to meet the requirements of the scope of
work and fulfill the charter. During the implementation phase, the project team accomplished
the work defined in the plan and made adjustments when the project factors changed.
Equipment and materials were delivered to the work site, labour was hired and trained, a
construction site was built, and all the construction activities, from the arrival of the first dozer
to the installation of the final light switch, were accomplished.

The closeout phase included turning over the newly constructed plant to the operations team
of the client. A punch list of a few remaining construction items was developed and those items
completed. The office in Catamarca was closed, the office in Buenos Aries archived all the
project documents, and the Chilean office was already working on the next project. The
accounting books were reconciled and closed, final reports written and distributed, and the
project manager started on a new project.

Text Attributions

This chapter of Project Management is a derivative the following texts:

• Project Management by Merrie Barron and Andrew Barron. © CC BY (Attribution).

• Project Management From Simple to Complex by Russel Darnall, John Preston,
Eastern Michigan University. © Creative Commons Attribution 3.0 Licence.
What is a Feasibility Study/Report
What is a Feasibility Report/Study?

What you should include when putting together a feasibility study/report:

• A feasibility report is a testimony that attempts to create some sort of action. Feasibility
reports are created to persuade/help the decision makers to choose between available
options. Remember that your option is not the only one, the decision makers will
probably have many to choose from. A feasibility report also determines whether or not
the investigated task can be done with the amount of resources available OR how many
resources will be necessary in order to complete the task. A feasibility may be useful in
a lot of different situations such as event planning, finances, or even remodeling your
home.

What is a feasibility study?

A feasibility study is a way to evaluate the practicality and desirability of a project. Before a
company invests time and money into a project, they need to know how successful the project
will be before investing. Sometimes companies want to understand input costs, the amount of
research that will need to be done, or even the marketability of a project. With input prices, it
is essential that companies understand, (even before they put time and research into the
project), how much it would cost to go through with their product. Companies also like to know
if they put time into research and go through with their change or promotion of a product, how
the public/people will react to the change. Will people be fighting over the new product or will
it fall through? The purpose of feasibility studies is to provide companies information and
analysis on whether or not you or your company should pursue this course of action.

Feasibility reports are usually used to sway decision makers towards one direction or the other.
Many times there is only one course of action but, there needs to be a second course of action.

Questions to Consider for Your Report:

What to consider in creating feasibility studies/reports?
It remains important to consider alternatives when you are creating a feasibility study. Decision

makers in companies want to understand why they have to

make a choice, and then why they should choose this certain option. Feasibility reports need to
include detailed information on the problem that has presented itself to provide decision makers
with a reason to consider further options.

Is your argument important and appropriate?

When deciding on whether or not your feasibility study is important you must first recognize
the target audience or reader. For professional organizations people want your argument or
study to be based around needs or aims of the organization and their future. In professional
settings, it is believed that those guiding points or criteria should be known by the people
judging your study. In other words, make the study reasonable and have it relate to what you
are looking at implementing or the change you want to see happen.

Facts can make your argument important. However, decision makers want to know that your
sources are reliable. They want to be assured that the information they are receiving is from a
credible source in the industry. This may turn out to be the most important aspect of any
feasibility study and report. Due simply to the fact that any information you gather, no matter
the presentation, can be ruined if you’re lacking information about your sources or in the worst
case if your sources are not credible.

What to consider about your alternatives?

It is important to understand how your alternatives compare to the criteria you set in place. In
most cases your readers will want to understand how your results compared to others. This
allows them to make an educated decision based simply around facts and results. Anderson
considers this to be the heart of any feasibility report.

What have you found against your alternatives?

Based on experiments and finding results about possible alternatives and how they fare, it is
important to draw conclusions about the alternatives. This is not made to bash other options or
products, but is made to set your product or idea apart. You should include general knowledge
or conclusions about what each product does well. This remains an important part because once
again decision makers need a basis for comparison, they need a reason to select your idea
compared to the alternatives and may already be set in place, or in the near future.

What should you throw into a conclusion?

Include in your conclusion how you’re going to go implement your ideas for the company and
how it will enrich the company. Explain why the company should choose your course of action.
Compare statistics and data and help the readers understand the logical choice and the course
of action that would aid in selecting one option over the other. Explain your expertise on the
subject matter and help them realize that your idea is the choice they are looking for. Based on
your experiences they will most likely take your side if you present the argument efficiently.
The company will select your course of action, based on the key points you outline in your
feasibility study.

Important Features of a Basic Feasibility Report

Below are the seven elements of a feasibility report:

• Introduction – You need to persuade the decision maker to even consider any sort of
alternative. You need to convince them to even read your report first. Tell them what
they will gain personally or as an organization by considering your work.
• Criteria/Constraints – You must specifically map out the criteria of what the ideal
outcomes are. This will allow you to make practical and logical decisions. You can
present the criteria in your feasibility report in one of two ways. First, you can separate
the criteria into its own section. This is best when you have a extensive report and you
need to go in-depth with the explanation. Second, you can incorporate the criteria
throughout your report as the criteria become relevant. However, it is important to
realize that whichever strategy you chose make sure that the criteria is introduced early
in the report. It is also very important to map out the constraints of your suggested
solutions. This will show the audience that you understand and acknowledge the fact
that no solution is perfect. This will also make sure that the audience makes the decision
in their best interest.
• Method – It is very important to present facts that are accurate and relevant. You should
state the reliable sources you used and what method they came from (internet,interview,
book, etc.). Without a credible research method or credible sources your document itself
will lack credibility.
• Overview of Alternative Options – You must underline the key features of each
possible option. Make sure they are easy to understand and presented in a friendly
layout. Keep in mind that the goal is to allow your audience to make the best decision.
• Evaluation – This should be the bulk of your report, you must evaluate the options
using the criteria you created. Add graphs, charts, etc. to show that you have studied
your options, and have come up with statistics that back up your reasons as to why your
alternative beats the competition.
• Conclusions – You need to state the conclusion you have came up with. How did you
evaluate the alternatives? And then from there, which alternative best fit your
organization.
• Recommendations – You need to use your experience and knowledge in order to state
which option you think should be adopted.
 • Note: All seven element outlined do not need to be included in the feasibility report
depending on audience, circumstance, mission, etc. Also the elements do not need to
be in the exact order outlined above. Specifically the conclusion should be mentioned
more than just at the end of the report. It should also be summarized in the beginning
of the report and in the case the the feasibility report is long, it can be mentioned in the
middle as well.

Executive Summary
An executive summary should be included at the beginning of the report. In 2-3 pages, the main

points of the feasibility study are summarized

for a quick review by busy administrators and school board members. The executive summary
provides the reader with an overview of the feasibility study and will help them see the entire
picture before they read the details. Some decision-makers may only read the executive
summary. Thus, the executive summary should be concise and include the major findings of
the study followed by a recommendation.

Introduction
The purpose of the introduction of a feasibility report is two-fold:

• To answer the readers’ question: “Why do we need to look into these alternatives-do
they matter?”

In order to answer this question, it is necessary to identify the problem that your report will
help resolve or what your report is aimed at accomplishing.

• To talk about the other options that you have looked at and analyzed, as well as to tell
how you went about researching and analyzing them.

Note: Usually, the introduction to a feasibility report briefly discloses some of the important
conclusions and the most feasible options for change. Other elements of a report of this nature,
such as the criteria, method, or any other kind of general background, may also be concisely
noted and mentioned in this portion of the report.

Criteria/Constraints
What to consider in your feasibility study/report. As you begin formulating what you would
like to consider you should realize that usually criteria works around one or more of the
following questions.

Will your plan or course of action really do what is desired?

This is often seen on the technical sides. What you have to ask yourself is whether or not your
implementation or change really makes that much of a difference. Lets say you are looking to
improve an aspect of your company. Will your change really improve the proficiency and speed
of what their trying to do. Or will you find in your study that the change actually slows down
production or the efficiency of the company’s workers. This is important to predict beforehand
because sometimes an improvement in the workplace is not always an improvement in how a
company works. But many of these factors you will not notice until after you complete your
study. And in the worst case you may not see negative ailments until after the plan is
implemented.

What will it take to implement your course of action?

Even though your plan of action may seem correct and efficient on paper, it may not be practical
towards your line of work. You must take into account the circumstances that arise in every
aspect of a professional setting. What you may find is that in one field your plan may be
extremely successful, but in another may be a bust. This can also take place from company to
company. As you work at different companies along the same field, you will begin to
understand what can be successful in one workplace that may not work in another. Sometimes
you have to take into account the amount of changes that will need to be implemented for your
plan. Do you need to go through extensive changes in operations, or make upgrades to current
equipment or materials that are currently in use or in stock? Sometimes the amount of money
that needs to be put into a new project may be much more than the actual amount of benefit
that would be received from the changes. You must consider your plan as a cost-benefit
analysis.

Cost of implementation.

This may become the biggest factor in any

business decision. How much will it cost? In not only business, but any professional field, the
benefits must outweigh the costs in any decision. This is even the case when deciding to work
on one aspect of a project compared to the other. When forming criteria for a feasibility report,
you must understand the costs if all went as planned. Then you might even want to find out
what the cost would be if you had minor or major setbacks. It is important to understand the
costs because unless the benefits outweigh the costs, a company will most likely not go through
with your proposed plan of action. Also it is important to look into the future of the company.
Maybe your plan of action will not be beneficial for the first year in existence, but what about
the years following that? This must be considered because like any other decision in business,
the original fixed cost may be high but the marginal gains may be high. In that case it may be
a good decision for the company to make a change if it is beneficial for the future. Think about
health care companies. Would it be beneficial for a company to invest in new equipment even
though the upright payment is very high?

Is your idea/product desirable?

This is as simple as is your plan going to sell. Will people want to overextend themselves for
change, or will they reject what you are trying to do? Sometimes a change or solution must be
more than just effective and affordable. You must consider the consumers and people that will
be changing. Sometimes many feasible courses of action do not succeed simply because they
create effects that drive the consumers away. Because of this, the product or plan does not sell.
These undesirable side effects can be as simple as tearing away employee morale. Sometimes
even though a plan is promoting and expected to increase productivity, how will the employees
react? Many times companies overlook how their employees are going to react to change. But
the fact of the matter is that the only way to increase production is to keep employees happy.
If they are not pushed to improve the company and their own status then they simply will not
find change necessary.

Method
Things to keep in mind:

This section of your feasibility report is one of substantial magnitude and importance. This part
of your paper demonstrates to the reader what you discovered, through your research, actually
matters and has reliability. By telling your audience how you came to know what you have
found out and know now, you are demonstrating to them that your results are trustworthy and
that they truly hold significance in meaning. With strong methods for finding out your facts,
your readers will then feel comfortable and confident to make the necessary changes.

It’s all about the source

The question of what sources to use completely varies from study to study. There are several
different types of sources that you could use to find your facts-it all just depends on what you
are trying to find answers to. Sources can include (but are not limited to):

• Academic journals or reports

• Library research
• Phone calls
• Face-to-face interviews
• Meetings with those who are knowledgeable about the topic or are in your
company/organization
• Surveys (Survey Monkey!)
• Usability Testing
• Lab testings

How much is enough?

The length and density of content will vary from each report to the next. You should take into
consideration your audience as well as the context and purpose, for which your paper is written.
The main goal is to purely get the point across to the readers that what you are reporting has
validity, by describing how the means of attaining your information are sound and secure.
Make sure that your writing is reader-centered and that they would be satisfied. Doing thus will
ensure that your method is long and descriptive enough.

Where does it fit?

The placement of this section of your report will also depend on the type of report that you are
writing. If there are only a couple of different methods used throughout your research, it might
be a good idea to fit them into the beginning of your report, writing a paragraph for each
technique. If you have several, unrelated methods, however, it would be good to place those
paragraphs throughout the report, where they would best accompany your analysis or data.

Important note

Sometimes, if it is really obvious how you went about your research, then there might not even
be a need to talk about your methods. It is key, though, that your readers always have a clear
understanding of the way you obtained your facts and that they are worth trusting.

Revision Checklist
Once your feasibility study is complete analyze the checklist to ensure every topic has been
addressed.

Introduction

1. Does it tell your readers why you conducted this study?

2. Does it provide background information the readers will need or want?
3. Does it identify the action or alternatives you investigated?
4. Does it persuade readers to use this study as a valid document?

Criteria

1. Does it identify the standards by which the action or alternatives were evaluated?

Method

1. Does it explain the way you obtained the facts and ideas presented in the report?
2. Does it persuade the readers that this method would produce reliable results?

Overview of Alternatives

1. Does it present a general description of each alternative?

Evaluation

1. Does it evaluate the action or alternative in terms of criteria?

 2. Does it present the facts and evidence that supports each evaluative statement?

Conclusions

1. Does it explain the significance from the reader’s viewpoint of your facts?
2. Does it state the conclusion plain and simple?
 UNIT II

ENVIRONMENTAL
APPRAISAL
DR. SMITA SINGH
ASSISTANT PROFESSOR,
INSTITUTE OF MANAGEMENT SCIENCES,
UNIVERSITY OF LUCKNOW
Environment 2

 Environment literally means the surroundings, external

objects, influences or circumstances under which
someone or something exists.
 The environment of any organisation is the aggregate of
all conditions, events and influences that surround and
affect it.
 Characteristics of Environment
❖ environment is complex,
❖ dynamic,
❖ multi-faceted, and
❖ has a far reaching impact.
External vs Internal Environment 3

 The external components of Opportunities Threats

the environment operate * Economic boom, * Economic
outside the periphery of an * Favourable
demographic shifts,
downturn
* New competitors
organisation and are * Loosening of
* Unexpected shifts
responsible for creating regulations,
in consumer tastes
* Favourable global
opportunities and threats. influences * New technology.

 The internal components of

the environment operate
Weakness
inside the periphery of an Strength
* Capability Gaps
organisation and are * Good reputation
* Overdependence
* Resource on a single product
responsible for creating * Experience line
strengths and weaknesses. * Capabilities * Low Employee
morale
 Environmental Scanning
Gathering Information 4

External: Internal:
Opportunities and Strengths and
Threats Weaknesses

❖Natural Environment: ❖Structure:

Resources and Climate Chain of Command

❖Societal Environment: ❖Culture:

General Forces Beliefs, Expectations, Values

❖Task Environment: ❖Resources:

Industry Analysis Assets, Skills, Competencies,
Knowledge
 5

External
Scanning
STEEP (PESTEL) Analysis 6

Monitoring trends in societal and natural environment

S - Socio-Cultural P - Political
T - Technological E - Economic
E - Economic S - Socio-Cultural
E - Ecological T - Technological
P - Politico-Legal E - Ecological
L - Legal
 Some Important Variables in 7

Societal Environment
Economic Technological Political-Legal Socio-Cultural
• Total • Environmental
government/Industry protection laws
• GDP trends • Lifestyle changes
spending for R&D • Immigration laws
• Interest rates • Career expectations
• Patent protection • Foreign trade
• Money supply • Consumer activism
• New developments in regulations
• Inflation rates • Growth rate of
technology transfer • Attitudes toward
• Unemployment levels population
• Productivity foreign companies
• Wage/price controls • Age distribution of
improvements • Laws on hiring and
• Disposable and population
through automation promotion
discretionary income • Regional shifts in
• Internet availability • Stability of
• Currency markets population Life
• Telecommunication government
• Global financial expectancies
infrastructure • Outsourcing
system • Level of education
• Computer hacking regulation
activity • Foreign “sweat shops”
 Eight Significant Socio-Cultural 8

Trends
 1. Increasing environmental awareness
 2. Growing health consciousness
 3. Expanding seniors market
 4. Impact of Generation Y
 5. Declining mass market
 6. Changing pace and location of life
 7. Changing household composition
 8. Increasing diversity of workforce and markets
 Significant Technological 9

Breakthroughs
 1. Portable information devices and
electronic networking
 2. Alternative energy sources
 3. Precision farming
 4. Virtual personal assistants
 5. Genetically altered organisms
 6. Smart, mobile robots
Industry Analysis: Task 10

Environment
 An industry is a group of firms that produces a
similar product or service, such as soft drinks or
Michael E
financial services. Porter

 An examination of the important stakeholder

groups, such as suppliers and customers, in a
particular corporation’s task environment is a
part of industry analysis.
 Porter’s Five Forces approach to Industry Analysis
Porter’s Five Potential Entrants
11
Forces:: Threats of
New Entrants

Industry Competitors
Bargaining
Power of
Suppliers
Suppliers Buyers
Bargaining
Power of
Suppliers Rivalry Among
Existing Firms

Threat of Substitute
Products or Services

Substitutes
The Five Forces
12

Threat of
New Entrants Rivalry Bargaining Bargaining Relative
* Economies of among Power of Power of Power of
scale
Existing Firms Buyers Suppliers Other
* Product
differentiation •Number of •Purchases large •Few dominant Stakeholders
* Capital competitors proportion of suppliers •Government
requirements •Rate of industry Threat of product/service •Product/service •Local
* Switching costs growth Substitute •Potential to is unique communities
•Product or integrate •Lack of
* Access to
service
Products backwards substitutes
•Complementors
distribution •Special interest
channels characteristics •Plentiful •Potential to groups
•Amount of fixed alternative integrate
* Cost suppliers
disadvantages costs forward
independent of •Diversity of rivals
size
* Government
policy
 Environment Scanning 13

 Events: specific occurrences.

 Trends: general tendencies.

 Issues: current concerns.

 Expectations: demands made by

interest groups.
Approaches to Environmental Scanning 14

SYSTEMATIC AD HOC APPROACH PROCESSED-FORM

APPROACH APPROACH
Sources of information for 15

environmental scanning
 Documentary or secondary
sources
 Mass media
 Internal sources
 External agencies
 Formal studies
 Spying and surveillance
Factors affecting environmental appraisal 16

STRATEGIST-RELATED ORGANISATION- ENVIRONMENT-

FACTORS RELATED FACTORS RELATED FACTORS
 Structuring Environmental Appraisal 17

 Environment Threat Opportunity Profile (ETOP)

 Divide environment into sectors and evaluate its impact
 Hypothetical Bicycle company ETOP.

Environmental Nature of Impact of each Sector

Sectors Impact
Economic Growing affluence among urban consumers
Glueck

Political Bicycle viewed as transport of low and lower middle

class, no major political attention
Regulatory No major restriction and laws related to the industry
exist.
Socio-Cultural Rising health consciousness; Increased awareness on
benefits of cycling
Technological Technological upgrade needed; restrictions on
imports of machinery could be an issue.
Reference Text 18

1. Exploring Corporate Strategy: Text and Cases

by Johnson, Scholes and Whittington
2. Strategic Management and Business Policy by
Wheelen and Hunger
3. Strategic Management and Business Policy by
Azhar Kazmi
Techniques of Demand Forecasting (Survey
and Statistical Methods)
Article Shared by

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The main challenge to forecast demand is to select an effective technique.

There is no particular method that enables organizations to anticipate risks and uncertainties in
future. Generally, there are two approaches to demand forecasting.

The first approach involves forecasting demand by collecting information regarding the buying
behavior of consumers from experts or through conducting surveys. On the other hand, the
second method is to forecast demand by using the past data through statistical techniques.

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Thus, we can say that the techniques of demand forecasting are divided into survey methods
and statistical methods. The survey method is generally for short-term forecasting, whereas
statistical methods are used to forecast demand in the long run.

These two approaches are shown in Figure-10:

Let us discuss these techniques (as shown in Figure-10).

Survey Method:

Survey method is one of the most common and direct methods of forecasting demand in the
short term. This method encompasses the future purchase plans of consumers and their
intentions. In this method, an organization conducts surveys with consumers to determine the
demand for their existing products and services and anticipate the future demand accordingly.

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The survey method undertakes three exercises, which are shown in Figure-11:
The exercises undertaken in the survey method (as shown in Figure-11) are discussed as
follows:

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i. Experts’ Opinion Poll:

Refers to a method in which experts are requested to provide their opinion about the product.
Generally, in an organization, sales representatives act as experts who can assess the demand
for the product in different areas, regions, or cities.

Sales representatives are in close touch with consumers; therefore, they are well aware of the
consumers’ future purchase plans, their reactions to market change, and their perceptions for
other competing products. They provide an approximate estimate of the demand for the
organization’s products. This method is quite simple and less expensive.

However, it has its own limitations, which are discussed as follows:

a. Provides estimates that are dependent on the market skills of experts and their experience.
These skills differ from individual to individual. In this way, making exact demand forecasts
becomes difficult.

b. Involves subjective judgment of the assessor, which may lead to over or under-estimation.

c. Depends on data provided by sales representatives who may have inadequate information
about the market.

d. Ignores factors, such as change in Gross National Product, availability of credit, and future
prospects of the industry, which may prove helpful in demand forecasting.

ii. Delphi Method:

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Refers to a group decision-making technique of forecasting demand. In this method, questions

are individually asked from a group of experts to obtain their opinions on demand for products
in future. These questions are repeatedly asked until a consensus is obtained.

In addition, in this method, each expert is provided information regarding the estimates made
by other experts in the group, so that he/she can revise his/her estimates with respect to others’
estimates. In this way, the forecasts are cross checked among experts to reach more accurate
decision making.
Ever expert is allowed to react or provide suggestions on others’ estimates. However, the names
of experts are kept anonymous while exchanging estimates among experts to facilitate fair
judgment and reduce halo effect.

The main advantage of this method is that it is time and cost effective as a number of experts
are approached in a short time without spending on other resources. However, this method may
lead to subjective decision making.

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iii. Market Experiment Method:

Involves collecting necessary information regarding the current and future demand for a
product. This method carries out the studies and experiments on consumer behavior under
actual market conditions. In this method, some areas of markets are selected with similar
features, such as population, income levels, cultural background, and tastes of consumers.

The market experiments are carried out with the help of changing prices and expenditure, so
that the resultant changes in the demand are recorded. These results help in forecasting future
demand.

There are various limitations of this method, which are as follows:

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a. Refers to an expensive method; therefore, it may not be affordable by small-scale

organizations

b. Affects the results of experiments due to various social-economic conditions, such as strikes,
political instability, natural calamities

Statistical Methods:

Statistical methods are complex set of methods of demand forecasting. These methods are used
to forecast demand in the long term. In this method, demand is forecasted on the basis of
historical data and cross-sectional data.

Historical data refers to the past data obtained from various sources, such as previous years’
balance sheets and market survey reports. On the other hand, cross-sectional data is collected
by conducting interviews with individuals and performing market surveys. Unlike survey
methods, statistical methods are cost effective and reliable as the element of subjectivity is
minimum in these methods.

These different statistical methods are shown in Figure-12:

ADVERTISEMENTS:

The different statistical methods (as shown in Figure-12).

Trend Projection Method:

Trend projection or least square method is the classical method of business forecasting. In this
method, a large amount of reliable data is required for forecasting demand. In addition, this
method assumes that the factors, such as sales and demand, responsible for past trends would
remain the same in future.

In this method, sales forecasts are made through analysis of past data taken from previous
year’s books of accounts. In case of new organizations, sales data is taken from organizations
already existing in the same industry. This method uses time-series data on sales for forecasting
the demand of a product.

Table-1 shows the time-series data of XYZ Organization:

The trend projection method undertakes three more methods in account, which are as
follows:

i. Graphical Method:

Helps in forecasting the future sales of an organization with the help of a graph. The sales data
is plotted on a graph and a line is drawn on plotted points.
Let us learn this through a graph shown in Figure-13:

Figure-13 shows a curve which is plotted by taking into the account the sales data of XYZ
Organization (Table-1). Line P is drawn through mid-points of the curve and S is a straight
line. These lines are extended to get the future sales for year 2010 which is approximately 47
tons. This method is very simple and less expensive; however, the projections made by this
method may be based on the personal bias of the forecaster.

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ii. Fitting Trend Method:

Implies a least square method in which a trend line (curve) is fitted to the time-series data of
sales with the help of statistical techniques.

In this method, there are two types of trends taken into account, which are explained as
follows:

a. Linear Trend:

Implies a trend in which sales show a rising trend.

In linear trend, following straight line trend equation is fitted:

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S = A+BT

Where

S= annual sales

T=time (in years)

A and B are constant

B gives the measure of annual increase in sales

b. Exponential Trend:

Implies a trend in which sales increase over the past years at an increasing rate or constant rate.
The appropriate trend equation used is as follows:

Y = aTb

Where

Y= annual sales

T= time in years

a and b are constant

Converting this into logarithm, the equation would be:

Log Y = Log a + b Log T

The main advantage of this method is that it is simple to use. Moreover, the data requirement
of this method is very limited (as only sales data is required), thus it is inexpensive method.

However, this method also suffers from certain limitations, which are as follows:

1. Assumes that the past rate of changes in variables will remain same in future too, which is
not applicable in the practical situations.

2. Fails to be applied for short-term estimates and where trend is cyclical with lot of fluctuations

3. Fails to measure relationship between dependent and independent variables.

iii. Box-Jenkins Method:

Refers to a method that is used only for short-term predictions. This method forecasts demand
only with stationary time-series data that does not reveal the long-term trend. It is used in those
situations where time series data depicts monthly or seasonal variations with some degrees of
regularity. For instance, this method can be used for estimating the sales forecasts of woolen
clothes during the winter season.

Barometric Method:

In barometric method, demand is predicted on the basis of past events or key variables
occurring in the present. This method is also used to predict various economic indicators, such
as saving, investment, and income. This method was introduced by Harvard Economic Service
in 1920 and further revised by National Bureau of Economic Research (NBER) in 1930s.

This technique helps in determining the general trend of business activities. For example,
suppose government allots land to the XYZ society for constructing buildings. This indicates
that there would be high demand for cement, bricks, and steel.

The main advantage of this method is that it is applicable even in the absence of past data.
However, this method is not applicable in case of new products. In addition, it loses its
applicability when there is no time lag between economic indicator and demand.
Econometric Methods:

Econometric methods combine statistical tools with economic theories for forecasting. The
forecasts made by this method are very reliable than any other method. An econometric model
consists of two types of methods namely, regression model and simultaneous equations model.

These two types of methods are explained as follows:

i. Regression Methods:

Refer to the most popular method of demand forecasting. In regression method, the demand
function for a product is estimated where demand is dependent variable and variables that
determine the demand are independent variable.

If only one variable affects the demand, then it is called single variable demand function. Thus,
simple regression techniques are used. If demand is affected by many variables, then it is called
multi-variable demand function. Therefore, in such a case, multiple regression is used.

The simple and multiple regression techniques are discussed as follows:

a. Simple Regression:

Refers to studying the relationship between two variables where one is independent variable
and the other is dependent variable.

The equation to calculate simple regression is as follows:

Y = a + bx

Where, Y = Estimated value of Y for a given value of X

b = Amount of change in Y produced by a unit change in X

a and b = Constants

The equations to calculate a and b are as follows:

Let us learn to calculate simple regression with the help of an example. Suppose a researcher
wants to study the relationship between the employee (sales group) satisfaction and sales of an
organization.

He/she has taken the feedback from the employees in the form of questionnaire and asked them
to rate their satisfaction level on a 10-pointer scale where 10 is the highest and 1 is the lowest.
The researcher has taken the sales data for every individual member of the sales group. He/she
has taken the average of monthly sales for an year for every individual.
The collected data is arranged in Table-2:

The calculation of mean for employee satisfaction (X) and sales is as follows:
This is the regression equation in which the researcher can take any value of X to find the
estimated value of Y.

For example, if the value of X is 9, then the value of Y would be calculated as follows:

Y = -1.39 + 1.61X

Y = -1.39 + 1.61(9)

Y= 13.1

With the help of preceding example, it can be concluded that if an employee is satisfied, then
his/her output would increase.

b. Multiple Regression:

Refers to studying the relationship between more than one independent and dependent
variables.

In case of two independent variables and one dependent variable, following equation is
used to calculate multiple regression:

Y = a + b1X1 +b2X2

Where, Y (Dependent variable) = Estimated value of Y for a given value of X1 and X1

X1 and X2 = Independent variables

b1 = Amount of change in Y produced by a unit change in X1

b2 = Amount of change in Y produced by a unit change in X2

a, b1 and b2 = Constants

The equations used to calculate a and b values are as follows:

The number of equations depends on the number of independent variables. If there are two
independent variables, then there would be three equations and so on.

Let us learn to calculate multiple regression with the help of an example. Suppose the
researcher wants to study the relationship between intermediate percentage, graduation
percentage, and MAT percentile of a group of 25 students.

It is important to note that intermediate percentage and graduation percentage are independent
variables and MAT percentile is dependent variable. The researcher wants to find out whether
the percentile in MAT depends on the percentage of intermediate and graduation or not.

The collected data is shown in Table-3:

The equations required to calculate multiple regression are as follows:

These equations are used to solve the multiple regression equation manually. However, you
can also use SPSS to find out multiple regression.

If we use SPSS in the preceding example, we would get the output shown in Table-4:

Table-5 shows the summary of the regression model. In this table, R is the correlation
coefficient between the independent and dependent variables, which is very high in this case.
R Square shows that a large part of variation in the model is shown by employment
opportunities in a state. Standard error of estimate is quite low that is 1.97. It also indicates that
the variation in the present data is less.

Table-6 shows the coefficients of regression model:

Table-6 shows that the calculated t value is greater than the significance t value. Thus, the
coefficients show cause and effect relationship between the independent and dependent
variables.

Table-7 shows the AN OVA table for the two variables under study:

Table-7 shows the analysis of variation in the model. The regression row shows the variation
occurred due to regression model. However, the residual row shows the variation that occurred
by chance. In Table-7, the value of sum of squares for regression row is greater than the value
of sum of squares for residual row; therefore, most of the variations are produced only due to
model.

The calculated F value is very large as compared to the significance value. Therefore, we can
say that the intermediate percentage and graduation percentage have a strong effect on the
MAT percentile of a student.

Simultaneous Equations:

Involve several simultaneous equations.

There are two types of variables that are included in this model, which are as follows:

i. Endogenous Variables:

Refer to inputs that are determined within the model. These are controlled variables.

ii. Exogenous Variables:

Refer to inputs of the model. Examples are time, government spending, and weather conditions.
These variables are determined outside the model.
For developing a complete model, endogenous and exogenous variables are determined first.
After that, necessary data on both exogenous and endogenous variables are collected.
Sometimes, data is not available in required form, thus, it needs to be adjusted into the model.

After the development of necessary data, the model is estimated through some appropriate
method. Finally, the model is solved for each endogenous variable in terms of exogenous
variable. The prediction is finally made.

Other Statistical Measures:

Apart from statistical methods, there are other methods for demand forecasting. These
measures are very specific and used for only particular datasets. Therefore, there usage cannot
be generalized for all types of research.

These measures are shown in Figure-14:

The different types of statistical measures (as shown in Figure-14) are discussed as
follows:

iii. Index Number:

Refers to the measures used to study the fluctuations in a variable or group of related variables
with respect to time period/base period. They are most commonly used in economics and
financial research to study various factors, such as price and quantity of a product. The factors
that are responsible for the problem are identified and calculated.

There are mainly four types of index numbers, which are as follows:

a. Simple index number:

Refers to the number that measures a relative change in a single variable with respect to the
base year.

b. Composite index number:

Refers to the number that measures a relative change in a group of related variables with respect
to the base year.

c. Price index number:

Refers to the number that measures a relative change in the price of a commodity in different
time periods.
d. Quantity index number:

Refers to the number that measures a relative change in the physical quantity of goods
produced, consumed or sold for a commodity in different time periods.

Time Series Analysis: Refers to the analysis of a series of observations over a period of equally
spaced time intervals. For example analyzing the growth of a company from its incorporation
to the present situation. Time series analysis is applicable in various fields, such as public
sector, economics, and research.

There are various components of time series analysis, which are as follows:

a. Secular Trend:

Refers to the trend that is denoted by T and prevalent over a period of time. Secular trend for a
data series can be upward or downward. The upward trend shows the increase in a variable,
such as increase in prices of commodities; whereas, the downward trend shows the declining
phases, such as decline in the rate of diseases and sales for a particular product.

b. Short Time Oscillation:

Refers to a trend that remains for a shorter period of time.

It can be classified into the following three trends:

1. Seasonal trend:

Refers to the trend that is denoted by S and occurs year after year for a particular period. The
reason for such trends is weather conditions, festivals, and some other customs. Examples of
seasonal trend are the increase in the demand for woolens in winters and increase in sales for
sweet near Diwali.

2. Cyclical Trend:

Refers to the trend that is denoted by C and lasts more than for an year. Cyclical trends are
neither continuous nor seasonal in nature. An example of cyclical trend is business cycle.

3. Irregular trend:

Refers to the trend that is denoted by I and is short and unpredictable in nature. Examples of
irregular trends are earthquakes, volcano eruptions, and floods.

Decision Tree Analysis:

Refers to the model that is used to take decision in an organization. In the decision tree analysis,
a tree-type structure is drawn to decide the best solution for a problem. In this analysis, we first
find out different options that we can apply to solve a particular problem.
After that, we can find out the outcome of each option. These options/decisions are connected
with a square node while the outcomes are demonstrated with a circle node. The flow of a
decision tree should be from left to right.

The shape of the decision tree is shown in Figure-15:

Let us understand the working of a decision tree with the help of an example. Suppose an
organization wants to decide the type of segmentation to increase the customer base.

This problem can be solved by using the decision tree shown in Figure-16:

In Figure-16, the decision tree shows two types of segmentation, namely demographic
segmentation and geographical segmentation. Now, we would analyze the outcomes of these
two segmentations. To analyze the demographic segmentation, the company has to incur S
40,000 (estimated cost). The outcome of the demographic segmentation can be good, moderate,
and poor.

The estimated revenue projected for three years for the three options (good, moderate,
and poor) are as follows:

Good = $ 21500000

Moderate = $ 950000

Poor= S300000

The probabilities assigned to the outcomes are 0.4 for good, 0.5 for moderate, and 0.1 for poor.

Now, we calculate the outcomes of demographic segmentation in the following manner:

Good= 0.4*2100000 = 840000

Moderate = 0.5*950000=475000

Poor = 0.1*300000= 30000

Similarly, in case of geographical segmentation, the cost incurred is $ 70000 (estimated cost).
The outcome of the geographical segmentation can be good and poor.

The estimated revenue projected for three years for the two options (good and poor) are
as follows:

Good = $ 1350000

Poor= $ 260000

The probabilities assigned to the outcomes are 0.6 for good and 0.4 for poor.

Now, we calculate the outcomes of geographical segmentation in the following manner:

Good= 0.6*1350000 = $ 810000

Poor = 0.4*260000 = $ 104000

Now, we would analyze the two outcomes for taking a decision to select one segmentation
out of the two segmentations in the following manner:

For demographic segmentation:

Good= 840000-40000= $ 800000

Moderate = 475000-40000= $ 435000

Poor = 30000-40000= $ (10000)

Similarly, for geographical segmentation:

Good= 810000-70000= $ 740000

Poor =104000-70000= $ 340000

As we can see from the calculation that if we select the demographic segmentation, then the
maximum estimated profit would be $ 800000. In demographic segmentation, there are chances
of incurring losses (10,000), if the product is not successful in the market.

If we select geographical segmentation, then the maximum estimated profit would be$ 740000.
In geographical segmentation, we would earn less profit (S 340000), if the product is not
successful in the market. Therefore, it is better to use geographical segmentation for marketing
the product, as no loss is involved in it.
 7 MANAGERIAL APPRAISAL

It is relatively easy to appraise the performance of technical or operative employees compared

to managerial personnel because the performance of operative employees compared to
managerial personnel. This is because the performance of operative employees can be
measured quantitatively whereas the performance of managers cannot be measured in
quantities terms. On managerial appraisal the managers attain organizational objectives by
performing the basic managerial functions, planning, organizing, leading, motivating, staffing
and controlling. Each of these functions can be done by performing a number of or series of
activities.

USES OF PERFORMANCE APPRAISAL

The use of performance appraisal is that enables the management to make effective decisions
their earlier decisions relating to the following issues of HRM;

• Organizational planning based on potentialities of its human resources

• Human resources planning based on weakness, straights and potentialities of human resources

• Organizational effectiveness through performance improvements

• Fixation and re-fixation of salary, allowances, incentives and benefits

• Original placement or placement adjustment decisions

• Identifying training and employment needs and to evaluate effectiveness of training and
development programmers

• Career planning and development needs and movement of employee

Performance improvements; Performance feedback allows the employee, manager and

personnel specialists to intervene with appropriate actions to improve performance.

Compensation adjustments; Performance evaluations help decision-makers determine who

should receive pay raises. Many firms grant part or all of their pay increases and bonuses based
upon merit, which is determined mostly through performance appraisals.
 Placement Decisions; Promotions, transfers and demotions are usually based on past or
anticipated performance. Often promotions are a reward for past performance.

Training and Development needs; Poor performance may indicate the need for retraining.
Likewise, good performance may indicate untapped potential that should be developed.

Career Planning and Development; Performance feedback guides career decisions about
specific career paths one should investigate

Staffing Process Deficiencies; Good or bad performance implies strengths or weakness in the
personnel departments staffing procedures

Informational Inaccuracies; Poor performance may indicate errors in job analysis information,
human resources plans or other parts of the personnel management information system.

Job design errors; Poor performance may be symptom of ill-conceived job design. Appraisals
help diagnose these errors.

Equal Employment Opportunity; Accurate performance appraisals that actually measure job-
related performance ensures that internal placement decisions are not discriminatory

External Challenges; Sometimes, performance is influenced by factors outside the work

environment, such as family, financial, health or other personnel matters

Feedback to Human Resources; Good/bad performance throughout the organizational

indicates how well the human resources function is performing.

PROBLEMS OF PERFORMANCE APPRAISAL

• Rating biases; the problem with subjective measure has the opportunity for bias. The rater biases
include halo effect, the error of central tendency, the leniency and strictness biases, personnel
prejudice and the recency effect

• Failure of the superiors in conducting performance appraisal and post performance appraisal
interviews

• Most part of the appraisal is based on subjectivity

• Less reliability and validity of the performance appraisal techniques

• Negative ratings affect interpersonal relations and industrial relations system

• Influence of external environmental factors and uncontrollable internal factors

• Feedback and post appraisal interview may have a setback on production

• Management emphasizes on punishments rather than development of an employee in

performance appraisal

• Some superior completed appraisal reports within a few minutes

• Absence of inter-rater reliability

• The situation was unpleasant in the feedback interview

HOW TO MINIMIZE THE PROBLEMS OF PERFORMANCE APPRAISAL?

• By convening an open meeting with the appraises to discussed the performance of all employees
before, during and after performance

• By encouraging everyone to comment on each other’s achievements and areas requiring

improvement

• The appraiser should tell the truth and reality behind the curtains to his subordinates

• By conducting counseling meetings with the appraises to appraise them of their performance and
its consequences

Recent Developments

In view of the limitation of performance appraisal, improvements performance appraisal

practices are improved. These improvements include;

• Change in the Approach to performance management

• Emphasis on Documentation
• Computer-based performance management

• Collaborative performance management

• Customized performance management system

LEGAL ISSUES IN PERFORMANCE MANAGEMENT

As indicated earlier, the scores and rates obtained in performance appraisal are used for
promotions, training, transfers, pay fixations, providing benefits etc. As such the performance
rates are used for crucial HR decisions. These decisions may not be accepted to the entire
employee in an organization. The employees dissatisfied with the HR managers decisions
based on performance appraisal scores may move the matter in a court of law legally.

Hence management should develop a legally defensible performance appraisal system. The
following guidelines to develop a legally defensible appraisal system;

• Conduct job analysis to ascertain in the criteria and standards required for successful job
performance

• Incorporate these criteria and standards into a rating instrument

• Use clearly defined individual dimensions of job performance rather than undefined, global
measures of job performance

• Communicate in writing the performance to employees and also to those rating them

• Employ subjective supervisory ratings as only one component of the overall appraisal process

• Train supervisors to use the rating instruments properly

• Allow appraisers substantial daily contact with the employee being evaluated

• Base appraisals on separate evaluations of each of the job performance dimensions

• Appraiser should have absolute authority to determine personnel actions

• Include an employee appeal process

• Provide corrective guidance to assist poor performers in improving their performance, wherever,
appropriate.

Here’s a close look at the six most-used modern performance methods:

1. Management by Objectives (MBO)

Management by objectives (MBO) is the appraisal method where managers and employees
together identify, plan, organize, and communicate objectives to focus on during a specific
appraisal period. After setting clear goals, managers and subordinates periodically discuss the
progress made to control and debate on the feasibility of achieving those set objectives.

This performance appraisal method is used to match the overarching organizational goals with
objectives of employees effectively while validating objectives using the SMART method to
see if the set objective is specific, measurable, achievable, realistic, and time-sensitive.

At the end of the review period (quarterly, half-yearly, or annual), employees are judged by
their results. Success is rewarded with promotion and a salary hike whereas failure is dealt with
transfer or further training. This process usually lays more stress on tangible goals and
intangible aspects like interpersonal skills, commitment, etc. are often brushed under the rug.

Incorporating MBO into your performance management process

To ensure success, the MBO process needs to be embedded in the organizational-wide goal
setting and appraisal process. By incorporating MBO into the performance management
process, businesses can improve employee’s commitment, amplify chances for goal
accomplishment, and enable employees to think futuristically.

Ideal for:
Measuring the quantitative and qualitative output of senior management like managers,
directors, and executive (business of any size)

Common reason for failure:

Incomplete MBO program, inadequate corporate objectives, lack of top management

involvement

Steps to implement a successful MBO program:

1. Every manager must have 5-10 goals expressed in specific, measurable terms
2. Manager can propose their goals in writing, which will be finalized after review
3. Each goal needs to include a description and a clear plan (list of tasks) to accomplish it
4. Determine how progress will be measured and how frequently (minimum quarterly)
5. List down corrective actions that will be taken if progress is not in accordance with plans
6. Ensure that goals at each level are related to the organizational objectives and levels
above/below

Did you know?

Retail giant Walmart, uses an extensive MBO participatory approach to manage the
performance of its top, middle, and first-line managers.

2. 360-Degree Feedback

360-degree feedback is a multidimensional performance appraisal method that evaluates an

employee using feedback collected from the employee’s circle of influence namely managers,
peers, customers, and direct reports. This method will not only eliminate bias in performance
reviews but also offer a clear understanding of an individual’s competence.

This appraisal method has five integral components like:

1. Self-appraisals

Self-appraisals offer employees a chance to look back at their performance and understand
their strengths and weaknesses. However, if self-appraisals are performed without structured
forms or formal procedures, it can become lenient, fickle, and biased.

2. Managerial reviews

Performance reviews done by managers are a part of the traditional and basic form of
appraisals. These reviews must include individual employee ratings awarded by supervisors as
well as the evaluation of a team or program done by senior managers.

3. Peer reviews

As hierarchies move out of the organizational picture, coworkers get a unique perspective on
the employee’s performance making them the most relevant evaluator. These reviews help
determine an employee’s ability to work well with the team, take up initiatives, and be a reliable
contributor. However, friendship or animosity between peers may end up distorting the final
evaluation results.

4. Subordinates Appraising manager (SAM)

This upward appraisal component of the 360-degree feedback is a delicate and significant step.
Reportees tend to have the most unique perspective from a managerial point of view. However,
reluctance or fear of retribution can skew appraisal results.

5. Customer or client reviews

The client component of this phase can include either internal customers such as users of
product within the organization or external customers who are not a part of the company but
interact with this specific employee on a regular basis.

Customer reviews can evaluate the output of an employee better, however, these external users
often do not see the impact of processes or policies on an employee’s output.

Advantages of using 360-degree feedback:

• Increase the individual’s awareness of how they perform and the impact it has on other
stakeholders
• Serve as a key to initiate coaching, counselling, and career development activities
• Encourage employees to invest in self-development and embrace change management
• Integrate performance feedback with work culture and promote engagement

Ideal for:
Private sector organizations than public sector organisations as peer reviews at public sector
organizations are more lenient.

Common reason for failure:

Leniency in review, cultural differences, competitiveness, ineffective planning, and misguided

feedback

Did you know?

Top private organizations like RBS, Sainsbury’s, and G4S are using 360-degree, multi-rater
performance feedback to measure employee performance.

3. Assessment Centre Method

The concept of assessment centre was introduced way back in 1930 by the German Army but
it has been polished and tailored to fit today’s environment. The assessment centre method
enables employees to get a clear picture of how others observe them and the impact it has on
their performance. The main advantage of this method is that it will not only assess the existing
performance of an individual but also predict future job performance.
During the assessment, employees are asked to take part in social-simulation exercises like in-
basket exercises, informal discussions, fact-finding exercises, decision-making problems, role-
play, and other exercises that ensure success in a role. The major drawback of this approach is
that it is a time and cost intensive process that is difficult to manage.

Advantages of the assessment centre method:

• Enhance a participant’s knowledge, boost his/her thought process, and improve employee
efficiency
• Can be tailored to fit different roles, competencies, and business needs
• Offer an insight of the employee’s personality (ethics, tolerance, problem-solving skill,
introversion/extroversion, adaptability, etc.)

Ideal for:

Manufacturing organizations, service-based companies, educational institutions, and

consulting firms to identify future organizational leaders and managers.

Guidelines to implement assessment centre practice:

1. Use job analysis to determine the components of effective performance

2. Identify performance metrics that can be measured using this assessment center
3. Classify meaningful and relevant candidate behavior in the assessment process
4. Find assessment techniques that can ideally elicit ideal behavioral information
5. Spot assessors and assessee’s excluding immediate supervisors
6. Provide thorough training to assessors and reviewers
7. Maintain a system of performance records for each candidate
8. Review records and reward employee or provide training accordingly

Did you know?

Microsoft, Philips, and several other organizations use the assessment centre practice to
identify future leaders in their workforce.
4. Behaviorally Anchored Rating Scale (BARS)

Behaviorally anchored rating scales (BARS) bring out both the qualitative and quantitative
benefits in a performance appraisal process. BARS compares employee performance with
specific behavioral examples that are anchored to numerical ratings.
Each performance level on a BAR scale is anchored by multiple BARS statements which
describe common behaviors that an employee routinely exhibits. These statements act as a
yardstick to measure an individual’s performance against predetermined standards that are
applicable to their role and job level.

The first step in BARS creation is generation of critical incidents that depict typical workplace
behavior. The next step is editing these critical incidents into a common format and removing
any redundancy. After normalization, the critical instances are randomized and assessed for
effectiveness. Remaining critical incidents are used to create BARS and evaluate employee
performance.

Advantages of using BARS:

• Enjoy clear standards, improved feedback, accurate performance analysis, and consistent
evaluation
• Eliminate construct-irrelevant variance in performance appraisal ratings by emphasis more on
specific, concrete, and observable behaviors
• Decrease any chance for bias and ensure fairness throughout the appraisal process

Ideal for:

Businesses of all sizes and industries can use BARS to assess the performance of their entire
workforce from the entry level agent to c-suite executives

Common drawbacks of BARS:

1. High chance for subjectivity in evaluations

2. Hard to make compensation and promotion decisions
3. Time-consuming to create and implement
4. Demands more from managers and senior executives

5. Psychological Appraisals

Psychological appraisals come in handy to determine the hidden potential of employees. This
method focuses on analyzing an employee’s future performance rather than their past work.
These appraisals are used to analyze seven major components of an employee’s performance
such as interpersonal skills, cognitive abilities, intellectual traits, leadership skills, personality
traits, emotional quotient, and other related skills.

Qualified psychologists conduct a variety of tests (in-depth interviews, psychological tests,

discussions, and more) to assess an employee effectively. However, it is a rather slow and
complex process and the quality of results is highly dependent on the psychologist who
administers the procedure.
Specific scenarios are taken into account while performing psychological appraisal. For
instance, the way in which an employee deals with an aggressive customer can be used to
appraise his/her persuasion skills, behavioral response, emotional response, and more.

Advantages of psychological appraisals:

1. Extract measurable, objective data about not just an employee’s performance but also
potential
2. Can be deployed easily when compared with other performance appraisal methods
3. Offer introverted or shy employees a platform to shine and prove their potential

Ideal for:

Large enterprises can use psychological appraisals for an array of reasons including
development of leadership pipeline, team building, conflict resolutions, and more.

Common reasons for failure:

Absence of proper training, lack of trained professionals to administer reviews, and

nervousness or anxiety of candidates can skew results.

Did you know?

Ford motors, Exxon Mobil, Procter & Gamble use psychological appraisals to test the
personality and performance of their employees.

6. Human-Resource (Cost) Accounting Method

Human resource (cost) accounting method analyses an employee’s performance through the
monetary benefits he/she yields to the company. It is obtained by comparing the cost of
retaining an employee (cost to company) and the monetary benefits (contributions) an
organization has ascertained from that specific employee.

When an employee’s performance is evaluated based on cost accounting methods, factors like
unit-wise average service value, quality, overhead cost, interpersonal relationships, and more
are taken into account. Its high-dependency on the cost and benefit analysis and the memory
power of the reviewer is the drawback of human resources accounting method.

Advantages of the human cost accounting method:

• Effectively measure the cost and value that an employee brings to the organization
• Help identify the financial implications that an employee’s performance has on the
organization’s bottom line

Ideal for:

Startups and small businesses where the performance of one employee can make or break the
organization’s success.

Implementation of human resource cost accounting method:

 1. Identify the gap between the market and the current package of an employee
2. Determine the monetary and non-monetary value that an employee brings to the table
3. List down the things that an employee achieved in the review period (increase in the
subscriber count, improvement in revenue, number of new deals won, etc.,)

A future-focused employee performance appraisal method

Choosing the right performance appraisal method is more critical than ever since it reflects
what you think of your employees and how much you care about employee morale. Once
you’ve found an ideal performance review method for your needs, the next step is
implementing it properly to eliminate critical performance gaps and address pressing issues
that impact ROI