PROJECT PREPARATION (FORMULATION)
Dr. Kahsu Mebrahtu Areaya (Assistant Professor)
Mekelle University
College of Business and Economics
School of Management
Department of Management
Post Graduate Program (MBA)
Chapter Objectives
After studying this chapter, you should be able to
understand :
Market analysis,
Technical and institutional analysis,
Financial analysis,
Social cost-benefit,
Gender analysis,
Environmental analysis, etc.
Project Management by Dr. Kahsu Mebrahtu 2
Areaya, MU,CBE, School of Management ,
Department of Management
PROJECT PRE-FEASIBILITY AND
FEASIBILITY STUDY
The starting point for preparing any project approved in
principle is the pre-feasibility study carried out at the
identification stage
Pre feasibility study is the assessment of a project whether
there is a need for further study (to screen out the bad and
the not-so promising ideas).
The written culmination of the pre-feasibility exercise is called
project identification brief
Project identification brief identifies the constraints and the means for
overcoming them and makes the rough and ready assessment of the
costs and benefits.
Project Management by Dr. Kahsu Mebrahtu Areaya, 3
MU,CBE, School of Management , Department of
Management
…PROJECT PRE-FEASIBILITY AND
FEASIBILITY STUDY
OBJECTIVES OF PRE-FEASIBILITY
STUDY
To examine possible alternatives that are
emanated in pre feasibility studies
To determine whether future analysis is
justifiable
To undertake supporting studies, such as
environmental impact, laboratory test, equipment
selection, etc.
Project Management by Dr. Kahsu Mebrahtu 4
Areaya, MU,CBE, School of Management ,
Department of Management
FEASIBILITY STUDY FOR
COMMERCIAL PROJECTS
Commercial projects are those that are
primarily conceived for generating
maximum profit through customer
satisfaction
Feasibility study provides relevant information in
for the final investment decision (accept or reject)
based on a thorough and comprehensive analysis
of the projects technical, financial, economic,
social and institutional aspects.
Project Management by Dr. Kahsu 5
Mebrahtu Areaya, MU,CBE, School
of Management , Department of
…Feasibility Study
Commercial project feasibility study includes:
1. Market and Demand analysis
2. Raw materials and supplies study
3. Location, site, and environmental assessment
4. Production program and plant capacity
5. Technology and engineering study
6. Organization and Management
7. Project charts and layouts
8. Structures and Civil works
9. Financial Analysis
10. Economic Analysis
11. Environmental Analysis
12. Implementation (Work) scheduling
Project Management by Dr. Kahsu 6
Mebrahtu Areaya, MU,CBE, School
of Management , Department of
MARKET AND DEMAND ANALYSIS
The major objective of market analysis is to
determine whether there is a gap between
demand and supply, i.e.,
is there a market for the product?
Project Management by Dr. Kahsu 7
Mebrahtu Areaya, MU,CBE, School
of Management , Department of
…Market Analysis
Customer Analysis and Market Segmentation, it involves
Analysis of what, why, how, when, how much, and where
customer purchase a product.
Market structure of the product (Consumer goods or capital
goods market)
Market segmentation (i.e. Uniform customer behaviour such as
children and adult market; organizational and Individual market,
etc)
Market Analysis (market volume, market potential, market share,
sales, production program inputs, etc)
Export market so as to meet international standards
Imports Project Management by Dr. Kahsu 8
Mebrahtu Areaya, MU,CBE, School
of Management , Department of
…Market Analysis
Analysis of the Channels of Distribution
Identify the various possible chains
connecting producers and end users. These
are often:
Whole sellers distribution
Retailers distribution
Direct to customers
Project Management by Dr. Kahsu 9
Mebrahtu Areaya, MU,CBE, School
of Management , Department of
…Market Analysis
Analysis of Competitors
Assess how competitors use market-mix (i.e., the 4 P's).
General information about competition (sales, market share, etc)
For example,
Market Share
Shell --------------------------- 40%
Agip --------------------------- 10%
Total --------------------------- 20%
Mobil -------------------------- 30%
This helps as a profile of reaction and main strength and weakness of
competitors to compare with own situation.
Project Management by Dr. Kahsu 10
Mebrahtu Areaya, MU,CBE, School
of Management , Department of
…Market Analysis
Analysis of the Socio-Economic Environment
Society and culture
Social and economic policies
Customs and habits
Ecology and environmental protection plans
Inflation and Demography
Politics and Laws
Development of domestic and international trade,
etc.
Project Management by Dr. Kahsu 11
Mebrahtu Areaya, MU,CBE, School
of Management , Department of
…Market Analysis
Marketing Strategy
Market share and Price strategy:
Cost Leadership
Differentiation
Marketing Targeting
4 P's (Product, Place, Promotion, and Price)
Product market relations strategy:
Market Penetration
Market development
Diversification
Competition and Market Expansion, etc
Project Management by Dr. Kahsu 12
Mebrahtu Areaya, MU,CBE, School
of Management , Department of
…Market Analysis
Marketing Cost
The marketing cost arises from the
marketing strategy, such as packaging,
storage, salaries, commission, discounts,
promotion and advertisement, transport,
insurance, distribution, supplies, market
research, etc.
Project Management by Dr. Kahsu 13
Mebrahtu Areaya, MU,CBE, School
of Management , Department of
…Market Analysis
Demand Projection
In feasibility study current demand is determined
and the future potential demand will be forecasted
with the help of different techniques:
Techniques of Demand Projection(Reading
Assignment) :
Trend Analysis
Average Annual Rate of Growth Method
Regression Analysis
Consumption Coefficient
Project Management by Dr. Kahsu 14
Mebrahtu Areaya, MU,CBE, School
of Management , Department of
…Market Analysis
Decision:
After the market and demand analysis, the analyst
should decide on the feasibility of the project
based on the signal of the market and demand
study.
Is there a demand for the output of the project in
the market?
What is the demand and supply gap? Etc.
Project Management by Dr. Kahsu 15
Mebrahtu Areaya, MU,CBE, School
of Management , Department of
RAW MATERIALS AND
SUPPLIES STUDY
A. Classification of Raw Materials and Supplies
1. Raw Materials (Unprocessed and Semi-processed):
Agricultural product
Livestock and Forest products
Marine products and Fishery
Mining
Quarrying, Etc.
2. Processed and Industrial Materials and Components
3. Factory Supplies:
Electricity, Fuel, Water, etc
Recycled waste
4. Spare parts
5. Supplies for Social and external needs, etc.
Project Management by Dr. Kahsu 16
Mebrahtu Areaya, MU,CBE, School
of Management , Department of
… RAW MATERIALS AND
SUPPLIES STUDY
Factors affecting project input requirements:
1. Socio-Economic Factors
This refers to the social and cultural background of the society where
the project is planned to be located. For example, meat factory should
not be opened where meat is not eaten.
2. Commercial and Financial (Business) Factors
The project input requirement depends on the type of raw materials used,
productivity of workers, market demands for a given product, product
mix, availability of fund, etc.
3. Technical Factors
The project input requirement depends on the type of the industry,
technology and production process, machinery and equipment, project
life, etc.
Project Management by Dr. Kahsu 17
Mebrahtu Areaya, MU,CBE, School
of Management , Department of
… RAW MATERIALS AND
SUPPLIES STUDY
Decision:
After the raw materials and supplies study,
the analyst should decide on the abundance
of the supply of raw materials and supplies.
Project Management by Dr. Kahsu 18
Mebrahtu Areaya, MU,CBE, School
of Management , Department of
LOCATION, SITE, AND
ENVIRONMENT
The location of the project is highly affected
by the nature of the project itself.
1. Rooted Projects :are projects rooted at certain area
(proximity to an input) because it is better to transport end
products (outputs) than raw materials
2. Tied Projects :are projects that are tied to the market
(proximity to the market) because the transportation of the
final product is uneconomical
3. Foot Loose Projects: are projects that can be located anywhere. They
are neither tied to the market nor rooted to the raw materials. For
example, candy industry.
Project Management by Dr. Kahsu 19
Mebrahtu Areaya, MU,CBE, School
of Management , Department of
Key Decisions in Location, Site, And
Environment Assessment
A. Location Analysis (Location Selection)
B. Site Selection
C. Cost Estimates
Project Management by Dr. Kahsu 20
Mebrahtu Areaya, MU,CBE, School
of Management , Department of
… Key Decisions in Location, Site,
And Environment Assessment
A. Location Analysis (Location Selection)
The strategic orientation of choice of location
includes:
1. Proximity to market and raw materials
2. Natural Environment Assessment
Climate conditions (temperatures, rainfall, hurricane, dust, wind, etc).
Effect on agriculture, industry, transport, construction, management, etc.
Ecological requirement, such as avoiding contaminating water smoke.
Project Management by Dr. Kahsu 21
Mebrahtu Areaya, MU,CBE, School
of Management , Department of
…A. Location Analysis (Location
Selection)
3. Environmental Impact Assessment
Assessment of environmental consequences of the newly planned or
existing project and of any related activities.
Assessment of environmental conflicts that is potential conflicts with
existing and future neighbouring industries, urban settlements
4. Socio - Economic Policies
It involves in the study of:
Government regulations and restrictions
Local government policies: that is concessions, incentives, restrictions,
fiscal and legal regulations, procedures, utility supplies, building
regulations, taxes ,etc
Project Management by Dr. Kahsu 22
Mebrahtu Areaya, MU,CBE, School
of Management , Department of
…A. Location Analysis (Location
Selection)
5. Infrastructure Conditions: It studies,
Technical infrastructure
Transport and communication
Social infrastructure (Police, Court, etc)
Factory supplies (electricity, water, fuel, etc)
Availability of human resources
Infrastructure services (construction, erection, garages, etc)
6. Effluent and Waste Disposal: It studies,
Gaseous effluent such as smoke
Noise, heat, vibration
Liquid or solid effluent
Decision: In line with the location analysis criteria, select the location that best fits among
alternatives.
Project Management by Dr. Kahsu 23
Mebrahtu Areaya, MU,CBE, School
of Management , Department of
… Key Decisions in Location, Site,
And Environment Assessment
B. Site Selection
During site selection, the following requirements and conditions
should be assessed:
Site requirements such as ground condition, soil condition, site
preparation and development, etc.
Construction requirement such as requirements by the municipality.
Land conditions that are infrastructure, such as an out let to the main
road.
Effluent and waste disposal
Human resources
Social infrastructures such as school, hospital, market, police, court,
etc.
Project Management by Dr. Kahsu 24
Mebrahtu Areaya, MU,CBE, School
of Management , Department of
…B. Site Selection
Socio - economic condition that is society may resist
certain areas not to be used for project location.
Strategic Aspects: Project site analysis should give certain
allowance for project expansion.
Cost of Land: Land can be acquired through purchase,
lease or concession, which depends on the law of the land.
The analyst should select land with optimal cost.
Decision: Based on the site selection requirements, select
the site, which best fits.
Project Management by Dr. Kahsu 25
Mebrahtu Areaya, MU,CBE, School
of Management , Department of
… Key Decisions in Location, Site,
And Environment Assessment
C. Cost Estimates
The major costs with regard to location and site selections
are:
Cost of mitigating the environmental problems, that is cost
of devices to mitigate
Cost of land
Transport such as cost of transporting output and raw
materials to the market and the plant respectively, items
for construction purpose.
Others such as housing costs and benefit packages for
employees, etc Project Management by Dr. Kahsu 26
Mebrahtu Areaya, MU,CBE, School
of Management , Department of
PRODUCTION PROGRAM AND
PLANT CAPACITY
The production program and plant capacity study involves in:
A. Determination of Production Program
Market requirement
Input requirement
Technology requirement
B. Determination of Plant Capacity
1.Feasible (Normal) Capacity- capacity assuming limiting factors
2. Maximum (Nominal or Designed) Capacity
Designed capacity assumes technically feasible condition without
taking in to consideration any real world problems and constraints like
machine break down.
Project Management by Dr. Kahsu 27
Mebrahtu Areaya, MU,CBE, School
of Management , Department of
TECHNOLOGY AND
ENGINEERING STUDY
Technology and engineering study covers:
A. Production program and plant capacity
B. Technology choice
C. Technology acquisition and transfer
D. Plant lay out and basic engineering
E. Machinery and equipment selection
F. Civil engineering works
G. Maintenance and replacement requirement
H. Estimate of investment costs.
Project Management by Dr. Kahsu 28
Mebrahtu Areaya, MU,CBE, School
of Management , Department of
ORGANIZATION AND HUMAN
RESOURCES
• This involves :
Design of the organizational structure
Estmating Human Resource (Manpower)
Requirement
Recruitment and Training
Project Management by Dr. Kahsu 29
Mebrahtu Areaya, MU,CBE, School
of Management , Department of
Outdoor lighting
Landscaping
STRUCTURES AND CIVIL WORKS
This involves :
1)Site preparation and development
Grading and levelling the site
Demolition and removal of existing structures
Relocation of existing pipelines, cables, roads, power line, etc
Connection of the site to the public utilities net work, etc
2) Buildings and structures
Factory or process buildings
Administrative buildings
3) Outdoor works
Supply and distribution of utilities
Outdoor lighting
Landscaping
Project Management by Dr. Kahsu 30
Mebrahtu Areaya, MU,CBE, School
of Management , Department of
PROJECT CHARTS AND
LAYOUTS
• This involves:
General Functional Layout
Material Flow Diagram
Production Line Diagram
Transport Layout
Utility Consumption Layout
Communication Layout
Organizational Layout
Plant Layout
Project Management by Dr. Kahsu 31
Mebrahtu Areaya, MU,CBE, School
of Management , Department of
FINANCIAL ANALYSIS
This involves deciding :
Cost of project
Means of financing
Estimates of sales and production
Cost of production
Working capital requirement and its financing
Estimates of working results (Projection of profit)
Break-Even Point
Projected cash flow statements
Projected balance sheet
Project Management by Dr. Kahsu 32
Mebrahtu Areaya, MU,CBE, School
of Management , Department of
ECONOMIC ANALYSIS
Economic analysis is made in order to rectify the
economic viability of the project. This analysis is
undertaken from the point of view of the nation or
the economy as a whole.
Economic analysis can therefore be seen as a cost-
benefit analysis from the national perspective.
Economic viability is concerned with public
‘profitability’(unlike the private profitability
under the financial analysis)
Project Management by Dr. Kahsu 33
Mebrahtu Areaya, MU,CBE, School
of Management , Department of
ENVIRONMENTAL ANALYSIS
• Environmental impact assessment thus
studies the unintended consequence of a
project. Its purpose is to identify, examine,
asses, and evaluate the likely and probable
impacts of a proposed development project
on environment and, thereby, to work out
the remedial action plans to minimize the
incidence of adverse impact.
Project Management by Dr. Kahsu 34
Mebrahtu Areaya, MU,CBE, School
of Management , Department of
WORK (IMPLIMENTATION) SCHEDULE
It reflects the plan of work concerning
installation as well as initial operation. Its
purpose is:
To anticipate likely problems to arise during
the installation phase and suggest possible
means for coping with them.
To establish the phasing of investments taking
into account the availability of finances.
To develop a plan of operations covering the
initial period (the running-in period).
Project Management by Dr. Kahsu 35
Mebrahtu Areaya, MU,CBE, School
of Management , Department of
Thank You !!!
