The search for promising project ideas is the first step

towards establishing a successful venture.

3.1 Generation of Ideas
The typical route of idea may be described as:
- someone with specialized technical knowledge or
marketing expertise or some other competence feels that
he can offer a product or service which can cater to a
presently unmet need or serve a market where demand
exceeds supply or effectively compete with similar
product or services because of certain favorable features
like better quality or lower prices.
3.1.1. Stimulating the flow of ideas
To stimulate the flow of ideas, the following are helpful:
SWOT analysis(periodic) : a conscious, deliberate, and
systematic effort by an organization to identify
opportunities that can be profitably exploited by it. - --
➢ Monitoring the Environment (Micro and Macro
environment of the organization)
➢ Corporate appraisal

i) Clear Articulation of Objectives

ii) Fostering a Conducive Climate: To tap the creativity of
people and to harness their entrepreneurial urges
3.1.2. Tools for Identifying Investment
Opportunities
i) Porter Model: Profit Potential of Industries
Micheal Porter has argued that the profit potential of an
industry depends on the combined strengths of the
following five basic competitive forces:
➢Threat of new entrants (Barrier to entry)
➢Rivalry among existing firms (intensity of rivalry)
➢Pressure from substitute products ( other products)
➢Bargaining power of buyers
➢Bargaining power of sellers
 1. Threat of new entrants (Barrier to entry)
New entrant can be a threat when:-
➢Add (increase) capacity
➢Inflate costs
➢Push prices down
➢Reduce profitability
Barrier to Entry may limit the threat of new entrant.
2. Rivalry among existing firms (intensity of rivalry)
Strong completion in the industry reduces the average profitability of
the industry. The intensity of rivalry in an industry tends to be high
when:
➢The number of competitors in the industry is large
➢The level of fixed costs is high
➢There is chronic over capacity in the industry
➢The industry’s product is regarded as a commodity or near –
commodity
➢The industry confronts high exist barriers.
 3. Pressure from substitute products ( other products)
The threat from substitute products is high when:
➢the price-performance trade-off offered by the substitute
products is attractive
➢the switching costs for prospective buyers are minimal
➢the substitute products are being produced by industries
earning superior profits
4) Bargaining power of buyers
Buyers have high bargaining power when:
➢the purchase is large
➢switching costs are low
➢it poses a strong threat of backward integration
 5) Bargaining power of sellers
Suppliers have strong bargaining power when:
➢few suppliers dominate
➢the supplier group is more concentrated than the buyer
group
➢there are hardly any viable substitutes for the products
supplied
➢the switching costs for the buyers are high
➢their strong threat for forward integration
3.1.3. Scouting for Project Ideas
Good project ideas key to success-are elusive. So, a wide variety of
sources should be tapped to identify them.
a. Analyze the performance of Existing Industries
b. Examine the Inputs and Outputs of Various Industries.
c. Review Imports and Exports.
d. Study Plan Outlays and Governmental Guidelines.
e. Look at the Suggestions of Financial Institutions and
Developmental Agencies.
f. Investigate Local Materials and Resources
g. Analyze Economic and Social Trends
h. Study New Technological Developments
i. Draw Clues from Consumption Abroad.
j. Explore the Possibility or Reviving Sick Units.
k. Indentify Unfulfilled Psychological Needs
3.2. Preliminary Screening
From the long list of project ideas, preliminary
screening is required to eliminate ideas which prima
facie are not promising. For this purpose, the following
aspects may be looked into:

➢Compatibility with the promoter

➢Consistency with government priorities
➢Availability of inputs
➢Adequacy of market
➢Reasonableness of cost
➢Acceptability of risk level
3.3. Project Rating Index
A preliminary evaluation may be translated into a project
rating index to prioritize :-
The steps involved in determining the project rating index are
as follows:
➢Identify factors relevant for project rating.
➢Assign weights to these factors (the weights are supposed
to reflect their relative importance).
➢Rate the project proposal on various factors using a
suitable rating scale. (Typically a 5-point scale or a 7-point
scale is used for this purpose.)
➢For each factor, multiply the factor rating with the factor
weight to get the factor score.
➢Add all the factor scores to get the overall project rating
index.
Once the project rating index is determined, it is compared with a
pre-determined hurdle value to judge whether the project is
prima facie worthwhile or not. E.g.
Factor Factor VG G A P VP Factor
weight 5 4 3 2 1 score
x
Input availability 0.25 0.75
x
Technical Know-how 0.10 0.40
x
Reasonableness of cost 0.05 0.20
x
Adequacy of market 0.15 0.75
x
Complementary relationship with 0.05 0.20
other products
x
Stability 0.10 0.40
x
Dependence on firm’s strength 0.20 1.00

x
Consistency with government 0.10 0.30
priorities
Rating Index= 4:00
 3.4. Sources of Positive Net Present Value
Imperfections in real markets (product and factor
markets) lead to entry barriers which cause positive
NPVs. It appears that there are six main entry
barriers that result in positive NPV projects. They
are as follows:
i. Economies of Scale
ii. Product Differentiation
iii. Cost Advantage
iv. Marketing Reach
v. Technological Edge
vi. Government Policy
3.6 Monitoring the Environment
Basically, a promising investment ideas enable a firm to
exploit opportunities in the environment by drawing on its
competitive strengths.
Hence, the firm must systematically monitor the
environment and assess its competitive abilities. For purposes
of monitoring, the business environment may be divided
into six broad sectors.
➢Economic Sector
➢Governmental Sector
➢Technological Sector
➢Socio-Demographic Sector
➢Competition Sector
➢Supplier Sector
Exercise 1. Suppose you are part of the project team that has
indentified factors relevant for the project sponsors and compares
previously identified three project proposals (idea), if the project team
will accept the prime facial worth project ideas which scores at least
3.5 project rating index. Which of the project proposal pass the criteria
set by the team? The projects ideas (proposals) identified are as
follows: (VG- Very good; G- good; A-Average; P- Poor; VP- Very
Poor)