DEVELOPMENT PLANNING AND

PROJECT ANALYSIS II

Econ 3132

CHAPTER ONE
The Basic Concepts of Project Planning
1.1 The Basic Project Concepts
Introduction:
Project planning involves estimating and comparing
beneficial effects of an investment with its costs.

Projects are the cutting edge of development.

Implementing development programs is the most difficult

problem in developing countries due to poor project
preparation.

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Identifying national dev’t objectives, selecting priority
areas for investment, designing effective policies and
mobilizing resources are all critical.

Unless plans and projects are carefully prepared in a

substantial detail, inefficient expenditure is likely to
result a tragic loss in nations’ capital.

In many countries, the capacity to prepare and analyze

projects lags.

The time and effort required to prepare suitable projects

is continuously underestimated.
3
Much attention is paid to policy formulation &
planning of greatly broader scope.

Specific projects to spend the available money and

on which a great deal of dev’t depends are
overlooked.

4
Definition of a Project
A project is:

An activity for which money will be spent in

expectation of returns and logically lends itself to
planning, financing and implementing as a unit.

The smallest operational element prepared and

implemented as separate entity in a national plan.

A specific activity, with specific starting and ending

points, intended to accomplish specific objectives.

5
A project is a unique activity noticeably different
from preceding similar investments, and it is likely to
be different from succeeding ones.

It is not a routine segment of an ongoing

programme.

It will have a well-defined sequence of investment

and production activities, and a specific group of
benefits, that we can identify, quantify & determine
value for money.

6
 Basic Characteristics of Project:
These characteristics are elements that make a project.
1. A single definable purpose, end-item or result: This is
usually specified in terms of cost, schedule and
performance requirements.

2. Every project is unique: It requires the doing of

something different, something that was not done
previously.
 Even in “routine” projects such as home construction, the
variables such as zoning laws, labour market, public services
and local utilities make each project different.
 A project is a one-time, once-off activity, never to be
repeated exactly the same way again.
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3. Projects are temporary activities: A project is an ad hoc
organization of staff, material, equipment and facilities
that is put together to accomplish a goal.

 This goal is within a specific time-frame. Once the goal

is achieved, the organization created for it is disbanded
or it is reconstituted to begin work on a new goal
(project).

4. Projects cut across organizational lines: Projects always

cut across the regular organizational lines and
structures within a firm. They do this because the
project needs to draw from the skills and talents of
multiple professions and departments within the firm
and sometimes even from other organizations.
5. Projects involve unfamiliarity: Because a project differs
from what was previously done, it also involves
unfamiliarity.

 Project also encompasses new technology and, for the

organization/firm undertaking the project, these bring
into play significant elements of uncertainty and risk.

6. The organization usually has something at stake

when undertaking a project: The unique project
“activity” may call for special scrutiny or effort because
failure would jeopardize the organization/firm or its goals.

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7. Project is the process of working to achieve a
goal: During the process, projects pass through several
distinct phases, which form and are called the project
life cycle.
 The tasks, people, organizations, and other resources
will change as the project moves from one phase to the
next.
 The organizational structure and the resource
expenditures build with each succeeding phase, peak
and then decline as the project approaches completion.

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Classification of Projects
1. New, Extension and Rehabilitation projects

 New Projects: require substantial early capital

investment and embody many physical inputs.

 Extension and Rehabilitation Projects: embody less

capital but more human resource skills and institutional
development.

 Appraisal of a new project demands more time and

resources.

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2. Blue Print Projects:
 Where a project can be planned in considerable and
predictable detail before implementation begins, has few
opportunities for revision once implementation is underway,
tends to be capital and equipment intensive, and is top-down
in relation to project beneficiaries.
 Most appropriate for engineering type projects.

3. Participatory projects:
 People or process or labour intensive
 Evolves and alters as it is implemented
 Unpredictable,
 Owned by the beneficiaries
 Difficult to appraise
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4. Single versus Multiple-intervention projects
 Projects may comprise single/multiple interventions.
 Single intervention projects are simple to appraise.

5. Productive, Social and infrastructure projects

 Productive sectors: like agriculture and industry where project
inputs and outputs are quantified and valued for comparison.
 Social sectors: like education and health where quantifying and
valuing outputs may not be easy.
 Infrastructure sectors: like transport, power, water supply,
sanitation, telecommunications and housing projects

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6. Single and Multi-purpose projects
 Some projects are single purpose while others are set out to
be multi-purpose.

7. Slow and quick benefit yielding projects

 It is often important to recognize whether a project will yield
benefits slowly or quickly.

 An agricultural project concentrates on producing annual crops

will usually be much faster in yielding a benefit than one
focusing on planting tree crops like oranges that will take 4 to 5
years to start to bear fruit.

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Program and Project
• Program, which is a bigger package of action is composed of a
number of projects aiming at attaining one or more related
objectives of plan
• Project on the other hand achieve goals which lead to the
accomplishment of specific objectives within program
Basic differences
 A program is broader in scope than a project
 A program is a domain out of which project can be found
 A program has general objective while projects have a specific
objectives. For example, if the objective of the extension program
is self food efficiency, the objective of the project could be
increasing crop production, milk production, honey production etc

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 Project has a specific project area while program don't have a
specific program area
 Projects have specific beneficiary groups.
Similarities
 Has purpose/objectives
 Require input (financial, manpower, material)
 Generate output (goods or services)
 Operate over space and time

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1.2 The Project Cycles
• The way in which projects are planned and carried out
follows a sequence and that is known as the project
cycle
• The “project cycle” is a natural sequence for project
planning
• The cycle may be divided in to equally valid
phases/stages. These are
 Identification phase
 Preparation/Formulation phase
 Appraisal phase
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  Implementation stage
 Evaluation phase
A) Identification phase
• The first stage is to identify project ideas for potential
projects that are in line with the development objectives
and local problems
• The most common sources for project ideas are well-
informed technical specialists and local leaders
• Suggestions for new projects may arise because of
problems facing the society or short supply products
• projects ideas also come from the funding/operating
agencies responsible for project implementation.
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• National governments, non-state actors such as civil
organizations, NGOs, multilateral/regional development
agencies, etc. are also bring project ideas
• Logical framework analysis (LFA) and institutional
assessment is very important in this stage
• This may involves consultation with the intended
beneficiaries, an analysis of the problems they face (by
using problem tree), and identification of options to
address these problems

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B) Preparation/Formulation stage
 Once projects have been identified, a process of
progressively more detailed project plan starts
 The first step in project preparation is to carry out a
feasibility study to get sufficient information for deciding
whether to begin a more advanced planning
 This stage is also called the feasibility study phase
 Detailed assessment for feasibility (whether it is likely to
succeed) and sustainability (whether it is likely to
generate long-term benefits for the beneficiaries) must
be done
 Details of the feasibility study will depend on the
complexity of the project
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• As projects are planned in greater and greater detail, the
investment of time and money becomes more and more
substantial and expectations of vested interest continue
to grow
• To conduct the detail financial, economic and
environmental analysis a group of experts or external
consultants may be selected
• Once the feasibility studies have indicated that the
proposed project is worthwhile, detailed planning and
analysis may begin
• Detailed project preparation takes time, often a year or
more for complex projects and may be quite expensive
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Contents of Project Proposals
1. Cover Page
2. Table of Contents
3. Executive Summary
4. Description of Organization
 Mission, Goals and Organizational Structure
5. Project Description (also called Project Narrative or
Research Plan)
5.1. Introduction/Background of the Projects
5.2. Rationale of Project (also called Problem Statements)
5.3. Objective of the Project (also called specific aims)
 Describe overall purposes and objectives
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5.4. Project Work Plan
 Physical plans in terms of targets, activities, expected
outputs/outcomes should be explained
 Financial plan should be described
5.5. Human Resource of project
5.6. Project Site (Geographic, Physical, Virtual etc. )
5.7. Project Monitoring (Progress Report)
5.8. Proposed Budget with sources
5.9. Appendices (also called Attachments)

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C) Project Appraisal Phase
 Project appraisal can be defined as a detail review of a
project report by a person or an institution that is in no
way involved in its preparation.
 Thus, appraisal needs an external and entirely
independent body to view the project.
 Appraisal is the comprehensive and systematic
assessment of all aspects of the proposed projects.
 Appraisal provides an opportunity to re-examine every
aspect of the project plan to assess whether the
proposal is appropriate and sound before investing more
money

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 If the appraisal team concludes that the project plan is
sound, the investment may proceed.

 But if the appraisal team finds serious flaws, it may be

necessary for the analyst to alter the project plan or to
develop a new plan.

 Project appraisals should cover several (at least seven)

aspects of a project, each of which must have been given
special consideration during the project preparation
phase. We will see those aspects later on

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D) Implementation Stage
The objective of any effort in project planning and
analysis is to have a project that can be implemented to
the benefit of the society.

Translating project plan into actual investment and

operation is one of the most critical and difficult task

Thus, implementation is perhaps the most important

part of the project cycle.

In this stage, funds are actually disbursed to get the

project set up and running
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Project implementation must be flexible.

Circumstances will change, and project managers must

be able to respond intelligently to these changes.

Even as the project implementation is on progress,

project managers will need to reshape and re-plan parts
of the project, or perhaps the entire project.

If necessary the project is re-oriented to bring it back on

track, or to modify some of its objectives in the light of
any significant changes that may have occurred since its
formulation.

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 Implementation is the process of refinement and
learning from experience-in effect it is a kind of “mini-
cycle” within the large project cycle
E) Evaluation Phase
The final phase in the project cycle is evaluation

The analyst looks systematically at the elements of

success and failure in the project

Evaluation is not limited only to completed projects

It may be undertaken when the project is in trouble, as

the first step in the re-planning effort
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 Although in the generic cycle the evaluation phase
comes after implementation, it is common practice also
to conduct a mid-term evaluation during
implementation
 It is a critical assessment of projects to identify what has
been achieved, and to identify lessons that have been
learned just to improve future projects performance
 Finally, it should be undertaken when a project is
terminated & this is called terminal evaluation
 Evaluation is undertaken by external bodies such as
sponsoring agency, or external assistance agency,
independent consultant teams etc.

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Evaluators want to know if these objectives were
made clear to planners , project beneficiaries or
outcomes and impacts were met

Carefully considered recommendations should come

from the evaluation regarding the realization of
expected outputs, outcomes or impacts and about
how to improve the appropriateness of each aspect of
the project

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Aspects of Project Analysis
1. Demand and market analysis

2. Technical aspect analysis

3. Institutional, organizational and managerial aspects

4. Social aspects

5. Financial aspects

6. Economic aspects

7. Ecological/environmental aspects

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 1. Demand and Market Aspect Analysis
First step in this analysis is to estimate the potential size
of the market for the product proposed to be
manufactured and get an idea about the market share
likely to be captured.

Thus, it is concerned with two broad issues:

i. What is the likely aggregate demand for the product
or service?
ii. What share of the market will the proposed product
enjoy?

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These are very important but difficult questions in project
analysis.

Intelligent and meaningful answers to them call for an in-

depth study and assessment of various factors like patterns
of consumption, income and price elasticity of demand,
composition of market, nature of competition, availability
of substitutes, distribution channels, etc.

In many cases, project feasibility studies make a short shrift

of demand and market analysis.

Given its importance, demand and market analysis should

be carried out in an orderly and systematic manner.
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Situational Analysis
The project analyst may informally talk to customers,
competitors, middlemen, and others in the industry to
assess the relationship between the product and its
market.

If possible, he may look at the experience of the

company to know about the preference and purchasing
power of customers, actions and strategies of
competitors and practices of middlemen.

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If such a situational analysis generates enough data to
measure the market and get a reliable handle over
projected demand and revenues, a formal study need
not be required.

But in most cases, a formal study of the demand and

market is warranted.

To carry out a study, it is necessary to spell out its

objectives clearly and comprehensively.

To spell out the objectives, it is helpful to structure

them in the form of questions.
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Always bear in mind how the information generated
will be relevant in

 forecasting the overall market demand;

 assessing the share of the market that the proposed

project will capture.

This ensures that questions irrelevant to the demand

and market analysis will not be asked unnecessarily.

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Data Collection
To answer questions listed in delineating the
objectives of market study, information may be
obtained from secondary/primary sources.

Primary information: is collected for the first time to

meet the specific purpose at hand.

Secondary information: has been collected in some

other contexts and is already available.

Secondary information provides the base and stating

point for demand and market analysis.
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Methods of Estimating (forecasting) Demand
After gathering information about various aspects of the
market and demand, an attempt may be made to
estimate (forecast) future demand.

Forecasting methods-classified into 3 categories:

I. Qualitative Methods: these rely on the judgment of
experts to translate qualitative information into
quantitative estimates. The ones are Jury of
executive method and Delphi method.
II. Time Series Projection Methods: these generate
forecasts based on historical time series analysis.
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  Trend projection, exponential smoothing and
moving average are important time series
projection methods.

III. Causal Methods: these are more analytical than the

preceding methods which seek to develop forecasts
on the basis of cause-effect relationships specified in
an explicit, quantitative manner.
 The important causal methods are: chain ratio,
consumption level, end use, leading indicator and
econometric methods.

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 Jury of Executive Method
This method involves soliciting the opinions of a group
of managers on expected future sales and combining
them into a sales estimate.

Advantages:
i. a quick method to develop a demand forecast.

ii. permits the inclusion of various factors such as

economic climate, technological developments,
competitive environment, consumer preferences, etc.)
in the subjective estimates of the experts.
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iii. has enormous appeal to managers who tend to prefer
their judgment to mechanistic forecasting procedures.

Disadvantages:
i. The biases underlying the subjective estimates cannot be
easily discovered.

ii. Reliability of this technique is questionable.

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Delphi Method
This method is used for eliciting opinions of a group of
experts with the help of a mail survey.

Steps involved in the Delphi method are:

1. A group of experts sent a questionnaire by mail and asked to
express their views.
2. The responses received from the experts are summarized
without disclosing identity of the experts & sent back to them
with questionnaire that probes further the reasons for the
extreme views expressed in the first round.
3. The process may be continued for one or more rounds till a
reasonable agreement emerges in the views of the experts.
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It appeals to many organizations because
i. It is understandable to users.

ii. It seems to be more accurate and less expensive than the

traditional face-to-face group meetings.

But there are certain questions:

i. What is the value of the exert opinion?

ii. What is the contribution of additional rounds and

feedback to accuracy?

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Trend Projection Method
This method involves:
Determining the trend of consumption by analyzing past
consumption statistics.

Projecting future consumption by extrapolating the

trend. Linear relationship is commonly used
Yt = a + bT
where, Yt = demand for year T
T = time variable
a = intercept of the relationship
b = slope of the relationship
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• To estimate the parameters a and b, the least squares
method is used.

• According to this method, a linear relationship is chosen

to minimize the sum of squared deviations from the line.

• The parameters are estimated using the following

equations:

b
 TY  nT Y
 T  nT
2 2

a  Y  bT
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e.g. Let’s use the following demand data to illustrate
the use of the trend projection method.

Year Demand (‘000) Year Demand (‘000)

1988 10 1995 20
1989 13 1996 22
1990 14 1997 23
1991 17 1998 22
1992 18 1999 24
1993 18 2000 24
1994 19 2001 25

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Solution: For purpose of linear trend analysis, it is
convenient to change the time axes as follows.

Actual Year for Actual Year for

Year Analysis Year Analysis
1988 0 1995 7
1989 1 1996 8
1990 2 1997 9
1991 3 1998 10
1992 4 1999 11
1993 5 2000 12
1994 6 2001 13
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 Yt = a + bT

The calculation of a and b is shown below.

Calculation in the least squares method:

T Y TY T2
0 10 0 0
1 13 13 1
2 14 28 4
3 17 51 9
4 18 72 16
5 18 90 25
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Calculation in the least squares … Continued
T Y TY T2
6 19 114 36
7 20 140 49
8 22 176 64
9 23 207 81
10 22 220 100
11 24 264 121
12 24 288 144
13 25 325 169
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Calculation in the least squares … Continued

ΣT = 91

Ī = ΣT/n = 91/14 = 6.50

ΣY = 269

Ÿ = ΣY/n = 269/14 = 19.21

ΣTY = 1998

ΣT2 = 819

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Calculation in the least squares … Continued
b = (ΣTY – nĪŸ)/(ΣT2 – nĪ2)
= [1998 – (14)(6.50)(19.21]/(819 – 14(6.5)2
= (1998 – 1748.11)/(819 – 591.5)
= 249.89/227.5 = 1.098 = 1.1
a = Ÿ - bĪ = 19.21 – 1.1(6.5) = 12.1

The least squares line is

Yt = 12.1 + 1.1T
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Advantages of the least squares method:
i. It uses all the observations;

ii. The straight line is derived by an objective statistical

procedure; and

iii. A measure of goodness of fit is available.

Limitations of the least squares method:

 Somewhat complicated than earlier methods; and

 Its results are valid only when certain conditions are

satisfied.
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Other Relationships used
• Exponential Relationship: Yt = aebt
In logarithmic form: lnYt = lna + bt
• Polynomial Relationship:
Yt = a0 + a1t + a2t2 + … + antn
e. g. A polynomial of degree 2: Yt = a0 + a1t + a2t2
• Cobb-Dauglas Relationship: Yt = atb
In logarithmic form: logYt = loga + blogt
where, Yt is demand for year t, t is the time variable
and a, b, and at,s are constants.
53
 Moving Average Method
• In this method of sales forecasting, forecast for the next
period is equal to the average of the sales for several
preceding periods. In symbols,
Ft + 1 = (St + St – 1 + … + St – n + 1)/n

where, Ft + 1 = forecast for the next period

St = sales for the current period
n = period over which average is taken

Remark:
1. The forecaster has to specify n.
2. No a priori way to determine n; it can be arrived at by
experimentation.
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 Example:
To illustrate the use of the moving average
method, consider the following time series data.

Year 1 2 3 4 5 6 7 8 9 10 11 12

Sales 28 29 28.5 31 34.2 32.7 33.5 31.8 31.9 34.3 35.2 36

Find the forecasts for periods 5 to 12.

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Solution: If n is set equal to 4 (n has to be specified by the
forecaster), the first forecast for period 5 will be equal to

28.0  29.0  28.5  31.0 116.5

  29.1
4 4
The forecast for period 6 is equal to
29.0  28.5  31.0  34.2 122.7
  30.7
4 4
N .B. If n  4, the first forecast can be made only for period 5.
Other forecasts follow as shown below.

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T St Ft Ft + 1 = (St + St - 1 + St - 2 + St - 3)/4
1 28.0
2 29.0
3 28.5
4 31.0
F5 = (28.0 + 29.0 + 28.5 + 31.0)/4 = 29.1
5 34.2 29.1 F6 = (29.0 + 28.5 + 31.0 + 34.2)/4 = 30.7
6 32.7 30.7 F7 = (28.5 + 31.0 + 34.2 + 32.7)/4 = 31.6
7 33.5 31.6 F8 = (31.0 + 34.2 + 32.7 + 33.5)/4 = 32.9
8 31.8 32.9 F9 = (34.2 + 32.7 + 33.5 + 31.8)/4 = 32.9
9 31.9 33.1 F10 = (32.7 + 33.5 + 31.8 + 31.9)/4 = 32.5
10 34.3 32.5 F11 = (33.5+ 31.8 + 31.9 + 34.3)/4 = 32.9
11 35.2 32.9 F12 = (31.8 + 31.9 + 34.3 + 35.2)/4 = 33.3
12 36.0 33.3
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Chain Ratio Method
• The potential sales of a product may be estimated by
applying a series of factors to a measure of aggregate
demand.
• The chain ratio method uses a simple analytical
approach to demand estimation.
• However, its reliability is critically dependent on the
ratios and rate of usage employed in the process of
determining the sales potential.
• Some of these ratio and rates of usage may be based
on objective proportions, while others will have to be
subjectively defined.
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 Consumption Level Method
• It is useful for a directly consumed product.
• It helps to estimate consumption based on elasticity
coefficients (income and price elasticity).
• Income elasticity: measures responsiveness of demand to
variations in income. It is defined as
EI = [(Q2 – Q1)/(I2 - I1)]*[(I1 + I2)/(Q1 + Q2)]
where, EI = income elasticity of demand
Q1 = quantity demanded in the base year
Q2 = quantity demanded in the following year
I1 = income level in the base year
I2 = income level in the following year
59
 Cons’n Level Mtd … Cont’d

• The information on income elasticity of demand along

with projected income may be used to obtain a
demand forecast.

• The income elasticity of demand differs from one

product to another.

• Further, for a given product, it tends to vary from one

income group to another and from one region to
another.

• Hence, where possible, disaggregated analysis should

be attempted.

60
 Cons’n Level Mtd … Cont’d
• Price elasticity: measures the responsiveness of demand
to variations in price. It is defined as
EP = (Q2 – Q1)/(P2 - P1)*(P1 + P2)/(Q1 + Q2)

where,
EP = price elasticity of demand
Q1 = quantity demanded in the base year
Q2 = quantity demanded in the following year
P1 = price per unit in the base year
P2 = price per unit in the following year

61
 Cons’n Level Mtd … Cont’d
• Future demand may be estimated based on price
elasticity and expected price change.

• Price elasticity may also be used to study the impact of

variable prices obtained in the future on economic
viability of the project.

• But in using the price elasticity measure, you should

bear in mind that:
i. It is applicable only to small variations.
ii. It is based on the assumption that the structure and
behavior remain constant.

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 End Use Method
• This method is suitable for estimating intermediate
products.

• It is also known as the consumption coefficient method.

• It involves the following steps:

1. Identify the possible uses of the product.
2. Define the consumption coefficient of the product for
various uses.
3. Project the output level for consuming industries.
4. Derive the demand for the product.
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• Inputs required for its application are:
i. Projected output levels of consuming industries
ii. Consumption coefficients

• But it may be difficult to estimate the projected output

levels of consuming industries.

• Essentially, the consumption coefficients may vary from

one period to another in the wake of technological
changes and improvements in the methods of
manufacturing.

• So, the end use method should be used wisely.

64
Leading Indicator Method
• Leading indicators are variables which change ahead
of other variables, the lagging variables.

• So, observed changes in leading indicators may be

used to predict changes in lagging variables.

• For example, the change in the level of urbanization

(a leading indicator) may be used to predict the
change in the demand for air conditioner (a lagging
variable).

65
 Leading Indicator Mtd … Cont’d
• Two basic steps are involved in this method:
i. Identify the appropriate leading indicator(s).
ii. Establish the relationship between the leading
indicator(s) and the variable to the forecast.

• Merit of this method: it does not require a forecast of an

explanatory variable.

• Demerits of this method:

• Difficult to find appropriate leading indicator(s).

• Lead-lag relationship may not be stable over time.

66
Econometric Method
• An econometric method is a mathematical
representation of economic relationship(s) derived
from economic theory.

• The primary objective of econometric analysis is to

forecast the future behavior of the economic
variables incorporated in the model.

• Two types of econometric models employed:

1. Single equation model
2. Simultaneous equation model
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1. The single equation model assumes that one variable,
the dependent variable, is influenced by one or more
independent (explanatory) variables. Thus, one way
causality is postulated.
Example:
Dt = a0 + a1Pt + a2Nt + Ut ………………………(1)

where, Dt = demand for a certain product in year t

Pt = price of the product in year t
Nt = income in year t
Ut = error term and a0, a1 & a2 are constants

68
2. The simultaneous equation model portrays economic
relationship in terms of two or more equations
e.g. consider the model given by
GNPt = Gt + Ct + It + Et …………………………(2)
It = a0 + a1GNPt …………………….……….(3)
Ct = b0 + b1GNPt……….…………….………(4)

where
GNPt = gross national product for year t
Gt = government expenditure for year t
It = gross investment for year t
Ct = consumption for year t
Et = error term and a0, a1, b0 & b1 are constants
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 Econometric Method … Cont’d

• In the above model, equation 2 is just a definitional

equation which says that the gross national product
(GNP) is equal to the sum of government expenditure,
gross investment and consumption.

• Equation 3 postulates that investment is a linear

function of GNP.

• Equation 4 postulates that consumption is a linear

function of GNP.

70
 Econometric Method … Cont’d
• Econometric model involves four broad steps:
1. Specification: Expression of an econometric relationship
in a mathematical form.
2. Estimation: Determination of the parameter values &
other statistics by a suitable method.
3. Verification: Accepting or rejecting the specification as a
reasonable approximation to the truth based on
estimation results.
4. Prediction: Projection of the value of the explained
variable(s).

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Advantages:
i. The process of econometric analysis sharpens the
understanding of complex cause-effect relationships.
ii. Econometric model provides a basis for testing
assumptions and for judging how sensitive the
results are to changes in the assumptions.

Limitations:
i. It is expensive and data demanding.
ii. The difficulty in obtaining the projected values of the
independent variable(s) may be the main limiting
factor in employing the econometric method for
forecasting purposes.
72
 Marketing Strategy
• Marketing strategy covers: target segment, positioning,
product line, price, distribution, sales force, sales
promotion and advertising.

 Target Segment: The target segment from the point

of view of income is middle class. But the segment
needs to be described more clearly in terms of its
psychometrics. e.g. a company may specifically
target students or teenagers or entry level
executives.

73
 Positioning: This is how long a product is placed in the
mind of the customer. Having decided on targeting
students, a company could be positioned as
“romantic” or “rugged”. Similarly, if entry level
executives are targeted, the positioning could be “self
confidence” or “daylong freshness”.

 Product Line: Would a company like to launch a single

variant or more than one variant? What fragrance
goes with a “romantic” soap and what fits if the
positioning is “rugged”?

74
 Price: Will a company be launched in mid-price
segment because the segment is growing? Will the
price decision change depending on whether the
positioning is “romantic” or “rugged”?

 Distribution: A company may like to confine its

distribution centers in the South and East. It may
drop out ineffective outlets.

 Sales Force: This may be marginally increased. A

company is likely to press for an increase in the
efficiency of its individual salesmen to boost its sales.

75
 Sales Promotion: Direct consumer promotion is
usually expensive because it covers thousands of
individual customers.

 A small organization may like to promote dealers

because their number is limited.

 It may aim at spending 60% of the promotion budget

on dealer schemes and the remaining on consumer
schemes.

 Advertising: Unconventional and creative advertising

options may be allocated 60% of the budget.

76
• The remaining goes to mainstream advertising like
newspapers, and TV.

• This is because mainstream advertising is expensive

and not affordable.

77
 Material Inputs and Utilities
These are classified into four broad categories:
i. Raw materials
ii. Processed industrial materials & components
iii. Auxiliary materials and factory supplies
iv. Utilities

i. Raw materials (processed & semi- processed) may be

classified into four types:
a. agricultural products b. mineral products
c. Livestock products d. Marine products
78
 Material Inputs & Utilities … Cont’d

a. Agricultural Products: In studying these products, the

quality must be first examined.
 Then an assessment of quantities available,
currently and potentially, is required.

Questions that may be raised in this context are:

• What is the present marketable surplus?

• What is the present area under cultivation?

• What is the likely increase in yield per unit area?

79
 Material Inputs & Utilities … Cont’d

b. Mineral Products: In assessing mineral materials,

information is required on the quantum of
exploitable deposits and the properties of raw
materials.

• The study should provide details of location, size and

depth of deposits and the availability of open cast or
underground mining.

• Besides, information could be generated on the

composition of the Ore, level of impurities, need for
beneficiation, and physical, chemical and other
properties.
80
 Material Inputs & Utilities … Cont’d

c. Livestock and Forest Products: Secondary data on

livestock and forest products often do not provide a
reliable basis for estimation. So, a specific survey is
required to obtain more reliable data on the
quantum of livestock and forest products.

d. Marine Products: Assessing the availability of marine

products and the cost of collection is somewhat
difficult. Preliminary marine operations, essential for
this purpose, have to be provided for in the
feasibility study.

81
 Material Inputs & Utilities … Cont’d

ii. Processed Industrial Materials & Components

• These represent important inputs for a number of
industries. In studying them, the following questions
need to be answered:
 In the case of industrial materials, what are their properties?
 What is the total requirement of the project?
 What quantity would be available from domestic sources?
 What quantity can be procured from foreign sources? How
reliable are the supplies?
 What has been the past trend in prices?
 What is the likely future behaviour of prices?
82
 Material Inputs & Utilities … Cont’d
iii. Auxiliary Materials and Factory Supplies
• In addition to the basic raw materials and processed
industrial raw materials and components, a
manufacturing project requires various auxiliary
materials and factory supplies (chemicals, additives,
packaging materials, paints, varnishes, oils, grease,
cleaning materials, etc.)

• The requirements of such auxiliary materials and

supplies should be taken into account in the feasibility
study.

83
 Material Inputs & Utilities … Cont’d
iv. Utilities
• A broad assessment of utilities (power, water, steam,
fuel, etc.) may be made at the time of input study
though a detailed assessment can be made only after
formulating the project with respect to location,
technology and plant capacity.

• Successful operation of the project critically depends

on adequate availability of utilities.

84
 Material Inputs & Utilities … Cont’d

• Hence, the following questions should be raised

while conducting the input study.
 What quantities are required?

 What are the sources of supply?

 What should be the potential availability?

 What are the likely shortages/bottlenecks?

 What measures may be taken to augment supplies?

85
 Location, Site and Environment
Location and Site
• The choice of location and site follows an assessment of
demand, size & input requirement.

• Location is a fairly broad area (a city, an industrial zone,

or a coastal area) while site is a specific piece of land
where the project would be set up.

• Various factors influence the choice of location:

proximity to raw materials and markets, availability of
infrastructure, labor situation, government policies and
other factors.
86
 Proximity to Raw Materials and Markets
• Proximity to source of raw materials & nearness to
market for the final products is crucial to location.

• In terms of basic location model, optimal location is

where the total cost is minimised. This, implies:
i. a resource-based project like a cement plant or a steel-mill
should be located close to the source of the basic material;
ii. a project based on imported material may be located near
a port;
iii. a project that manufactures a perishable product should
be close to center of consumption.
87
 Proximity to Raw Materials … Cont’d

• However, for many industrial products, proximity to

the source of raw material or the center of
consumption may not be very important.

• e.g. Petro-chemical Units or Refineries may be

located close to the source of raw material or the
center of consumption or at some intermediate
points.

88
Availability of Infrastructure
• Availability of power, transportation, water, and
communications should be carefully assessed before
a location decision is made.

• Adequate supply of power is a very important

condition for location since insufficient power can be
a major constraint, particularly in the case of an
electricity-intensive project like an aluminum plant.

89
 Availability of Infrastructure … Cont’d
• In evaluating power supply, look into the following
aspects: the quantum of power available, the
stability of power supply, the structure of the power
tariff, and the investment required by the project for
a tie-up in the network of power supplying agency.

• For transporting inputs of the project and

distributing the outputs, adequate transport
connections are required.

90
 Availability of Infrastructure … Cont’d

• The availability, reliability and cost of transport for

various locations should be assessed.

• Given the plant capacity and the type of technology,

the water requirement for the project can be assessed.

• Once the required quantity is estimated, the amount

to be drawn from public utility system and the amount
to be provided by the project from the surface or sub-
surface sources may be determined.

91
 Availability of Infrastructure … Cont’d

• To do so, the following factors may be examined:

 relative costs
 relative dependability

 relative qualities

• In addition to power, transportation, and water, the

project should have adequate communication
facilities like telephone and internet.

92
Labour Situation
• In labour-intensive projects, the labour situation in
particular location becomes important.

• The key factors to be considered in evaluating labour

situation are: availability of labour (skilled, semi-
skilled and unskilled); prevailing labour rates; labour
productivity; state of industrial relations judged in
terms of the frequency and severity of strikes and
lockouts and degree of unionization.

93
Government Policies
• Government policies have a bearing on location
decision.

• In the case of public sector projects, location is

directly decided by the government. It may be based
on a wider policy for regional dispersion of
industries.

• In the case of private sector projects, location is

influenced by certain governmental restrictions and
inducements.
94
 Government Policies … Cont’d

• The government may prohibit the setting up of

industrial projects in certain areas which suffer from
urban congestion.

• More positively, the government offers inducements

for establishing industries in backward areas.

• These inducements consist of subsidies, concessional

finance, sales tax loans, power subsidy, income tax
benefits, lower promoter contribution, etc.

95
Other Factors
• Several other factors have to be assessed before
arriving at a location decision. These are:
 Climatic conditions,

 General living conditions,

 Proximity to ancillary units

 Ease in coping with pollution

• Each of these factors are briefly describe below.

96
Climatic Conditions

• The climatic conditions like temperature, humidity,

wind, sunshine, rainfall, snowfall, dust, flooding, and
earthquakes have an important influence on location
decision.

• They have a bearing on the cost as they determine

the extent of air-conditioning, dehumidification,
refrigeration, special drainage, etc. required for the
project.

97
Living Conditions & Proximity to Ancillary Units
General Living Conditions:
• The general living conditions like the cost of living,
housing situation, safety, and facilities for education,
health care, transportation and recreation need to be
assessed carefully.

Proximity to Ancillary Units:

• Most firms depend on ancillary units. If ancillary units
are located nearby, coordination becomes easy,
transportation costs are lower, & inventory
requirements become considerably less.

98
Ease in Coping with Environmental Pollution
• A project may cause environmental pollution in
various ways. It may :
 Emit gaseous pollutants
 Produce solid and liquid discharges

 Cause noise, heat and vibrations

• The location study should analyze the cost of

mitigating environmental pollution to tolerable levels
at alternative locations.

99
Site Selection
• Once the broad location is chosen, attention needs
to be focused on the selection of a specific site.

• Two to three alternative sites should be considered

and evaluated with respect to cost of land and cost
of site preparation & dev’t.

• The cost of land tends to differ from one site to

another in the same broad location.

• Sites close to a city cost more whereas sites away

from the city cost less.
100
 Site Selection … Cont’d

• Sites in an industrial area developed by a government

agency may be available at a concessional rate.

• Cost of site preparation & dev’t depends on the physical

features of the site, a need to demolish & relocate
existing structures and the work involved to obtain
utility connections to the site.

• The work involved in obtaining utility connections to the

site and the cost associated with it should be carefully
scrutinized.

101
Environmental Aspects
• As discussed earlier, a project may cause
environmental pollution in several ways.

• Projects that produce physical goods like Cement,

Steal, Paper and Chemicals by converting natural
resource endowments into saleable products are
likely to cause more environmental damage.

• Consequently, the environmental impacts of a project

should be carefully assessed prior to its actual
implementation.

102
 Environmental Aspects … Cont’d
• Hence, the environmental aspects of these projects
have to be properly examined. The key issues that need
to be considered are:

• What are the types of effluents and emissions

generated?

• What should be done for proper disposal of effluents

and treatment of emissions?

• Will the project be able to secure all environmental

clearances and comply with all statutory requirements?

103
 Engineering and Technology
Plant Capacity:
• Plant capacity is the volume (number of units) of a
product that can be produced during a given period. It
may be defined in two ways: feasible normal capacity
and maximum normal capacity.

• The feasible normal capacity is the capacity attainable

under normal working conditions.

• This may be established on the basis of installed

capacity, technical conditions of the plant, normal
stoppages, and downtime for maintenance and tool
changes, holidays and shift patterns.
104
 Plant Capacity … Cont’d
• The maximum normal capacity is the capacity which is
technically attainable and this often corresponds to the
installed capacity guaranteed by the supplier of the plant.

• Several factors have a bearing on the capacity decision.

These are: technological requirement, input constraints,
investment cost, market conditions, resources of the firm
and government policy.

105
Technological Requirement
• For many industrial products, particularly in process
type industries, there is a certain minimum economic
size determined by the technological factor.

• For example, a cement plant should have the

capacity of at least 300 tones per day in order to use
the rotary kiln method; otherwise it has to employ
the vertical shaft method which is suitable for lower
capacity.

106
Input Constraints

• In a developing country like Ethiopia, there may be

constraints on the availability of certain resources.
Power supply may be limited
basic raw materials may be scarce
foreign exchange available for imports may be
inadequate

• These kinds of constraints should be borne in mind

while choosing the plant capacity.

107
 Investment Cost
• When serious input constraints do not exist, the
relationship between capacity and investment cost is an
important consideration.

• Typically, the investment cost per unit of capacity decreases

as the plant capacity increases. This relationship may be
expressed as:
C1 = C2(Q1/Q2)α
where, C1 = derived cost for Q1 units of capacity
C2 = Known cost for Q2 units of capacity
α = a factor reflecting capacity-cost relationship
(0 < α < 1).
108
 Investment Cost … Cont’d
• For example, suppose the known investment cost for 5000
units of capacity for the manufacturer of a certain product is
Birr 200,000. What will be the investment cost for 10,000
units capacity if the capacity cost factor is 0.6?

• Solution:
Given: Q2 = 5000, Q1 = 10, 000, C2 = 200, 000,
α = 0.6, C1 = ?

Q   10,000 
0.6
C C  1   200,000 
1 2 Q   5,000 
 2
 200,0002 0.6  200,000(1.516)
 303,200
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 Market Conditions
• If the market for the product is likely to be very strong,
a plant of higher capacity is preferable.

• If the market is likely to be uncertain, it might be

advantageous to start with a smaller capacity.

• If the market, starting from a small base, is expected to

grow rapidly, the initial capacity may be higher than
the initial level of demand-further additions to capacity
may be effected with the growth of the market.

110
Resources of the Firm

• The resources, both managerial and financial,

available to a firm define a limit on its capacity
decision.

• Obviously, a firm can not choose a scale of

operations beyond its financial resources and
managerial capability.

111
Government Policy
• The government policy may influence the capacity
level.

• Traditionally, the policy of the government is to

distribute the additional capacity to be created in a
certain industry among several firms, regardless of
economies of scale.

• However, this policy has been substantially modified

in recent years and the concept of ‘minimum
economic capacity’ has been adopted in several
industries.
112
 Technology
• Appropriate technology refers to those methods of
production which are suitable to the local economic, social
and cultural conditions.

• The advocates of appropriate technology urge that the

technology should be evaluated in terms of the following
questions:
 Does the technology utilise local raw materials?
 Does the technology utilise local manpower?
 Do the goods and services produced cater to the basic needs?
 Does the technology protect ecological balance?
 Is the technology harmonious with social and cultural
conditions?
113
 Engineering
Plant Layout:
• It is concerned with physical layout of the factory.

• In process industries, the plant layout is dictated by the

production process adopted.

• But in manufacturing industries, there is much greater

flexibility in defining the plant layout.

• Important considerations to prepare plant layout:

consistency with production technology, smooth flow of
goods from one stage to another, proper utilization of the
space, and scope of expansion and safety of personnel.

114
Machinery and Equipment
• The need for machineries and equipment depends on
production technology and plant capacity.

• It is also influenced by the type of project.

• For a process-oriented industry, like petro-chemical unit,

machineries and equipment required should be such that
the various stages are matched well.

• The choice of machineries and equipment for a

manufacturing industry is somewhat wider as various
machines can perform the same function with varying
degrees of accuracy.

115
 Machinery & Equipment … Cont’d
• To determine the kinds of machinery and equipment
required for a manufacturing industry, follow the procedure
outlined below:
i. Estimate the likely levels of production over time.

ii. Define the various matching & other operations.

iii. Calculate the machine hours required for each type of

operation.

iv. Select machines and equipment required for each function.

116
 Machinery & Equipment … Cont’d

• The equipment required for a project may be classified into

the following types:
i. Plant (process) equipment

ii. Mechanical equipment

iii. Electrical equipment

iv. Instruments

v. Controls

vi. Internal transportation system

vii.Others
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• In addition to the machineries and equipment, a list
should be prepared of spare parts and tools required.

• This may be divided into:

i. Spare parts and tools to be purchased with the original
equipment.

ii. Spare parts and tools required for operational wear

and tear.

118