- The document discusses various tools and frameworks for identifying promising investment opportunities, including SWOT analysis, Porter's five forces model, and the product life cycle approach. - It outlines the process of generating ideas, screening projects, and developing a project rating index to evaluate ideas. Factors like strategic fit, costs, risks and market potential are assessed. - Successful entrepreneurs ask important questions about goals, strategy, and execution capability. Qualities like leadership, marketing skills, and the willingness to sacrifice are also discussed.

1. CHAPTER 3
GENERATION AND SCREENING OF
PROJECT IDEAS

2. OUTLINE
• Generation of ideas
• Monitoring the environment
• Corporate appraisal
• Profit potential of industries : Porter model
• Scouting for project ideas
• Preliminary screening
• Project rating index
• Sources of positive net present value
• On being an entrepreneur

3. Generation of Ideas
To stimulate the flow of ideas, the following are helpful
 SWOT analysis
 Clear articulation of objectives
 Fostering a conducive environment

4. Competitor
Business Environment

5. Corporate Appraisal
 Marketing and distribution
 Production and operations
 Research and development
 Corporate resources and personnel
 Finance and accounting

6. Tools for Identifying Investment Opportunities
There are several tools or frameworks that are helpful in identifying
promising investment opportunities. The more popular ones are:
• Porter model
• Life cycle approach
• Experience Curve

7. Porter Model
According to Michael Porter the profit potential of an industry depends
on the combined strength of the five basic competitive forces as shown
below
Forces Driving Industry Competition
Potential
Entrants
Suppliers
THE INDUSTRY
Rivalry Among
Existing Firms
Buyers
Substitutes
Threat of New
Entrants
Bargaining
Power of Buyers
Bargaining
Power of
Suppliers
Threat of
Substitute
Products

8. Life Cycle Approach
Many industrial economists believe that most products evolve through a
life cycle that has four stages:
• Pioneering stage
• Rapid growth stage
• Maturity and stabilisation stage
• Decline stage
Investment in the pioneering stage, per se, may have a low return and
negative NPV. However, it may create options for participating in
growth.

9. Most products evolve through a life cycle. The broad stages and
the investment returns in these stages are as follows:
Stage Investment Return
 Pioneering  May have negative NPV
but may create options
for participating in
growth stage
 Rapid growth  Positive NPV
 Maturity  NPV – neutral
 Decline  Negative

10. Experience Curve
 The experience curve shows how the cost per unit behaves with respect to
the accumulated volume of production
10 20 40 80
100
80
60
40
Accumulated volume of production
 The key factors that contribute to decline in unit cost with respect to the
accumulated volume of production are learning effects, technological
improvements, and economies of scale

11. Scouting for Project Ideas
 Analyse the performance of existing industries
 Examine the inputs and outputs of various industries
 Review imports and exports
 Study plan outlays and governmental guidelines
 Look at the suggestions of financial institutions and development agencies
 Investigate into local materials and resources
 Analyse economic and social trends
 Study new technological developments
 Draw clues from consumption abroad
 Explore the possibility of reviving sick units
 Identify unfulfilled psychological needs
 Attend trade fairs
 Stimulate creativity for generating new product ideas
 Hope the chance factor will favour you

12. Preliminary Screening
Compatibility with the promoter
Consistency with governmental priorities
Availability of inputs
Adequacy of market
Reasonableness of cost
Acceptability of risk level

13. Project Rating Index
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

14. Construction of a Rating Index
Factor Factor Rating Factor
Weight Score
VG G A P VP
5 4 3 2 1
Input availability 0.25  0.75
Technical know-how 0.10  0.40
Reasonableness of cost 0.05  0.20
Adequacy of market 0.15  0.75
Complementary relationship
with other products 0.05  0.20
Stability 0.10  0.40
Dependence on firm’s
strength 0.20  1.00
Consistency with
governmental priorities 0.10  0.30
Rating Index 4.00

15. Sources of Positive NPV
It appears that there are six main entry barriers that result in
positive NPV projects. They are as follows:
• Economies of scale
• Product differentiation
• Cost advantage
• Marketing reach
• Technological edge
• Government policy

16. The Questions Every Entrepreneur Must Answer
According to Amar Bhide the following are the question that every
entrepreneur must answer:
Are my goals well defined?
• Personal aspirations
• Business sustainability and size
• Tolerance for risk
Do I have the right strategy?
• Clear definition
• Profitability and potential for growth
• Durability
• Rate of growth
Can I executive the strategy
• Resources
• Organisational infrastructure
• The founder’s role

17. Qualities and Traits of a Successful Entrepreneur
It appears that a successful entrepreneur has the following qualities and
traits :
Willingness to make sacrifice
Leadership
Decisiveness
Confidence in the project
Marketing orientation
Strong ego
Open-mindedness

18. On Entrepreneurship
An internationally acknowledged authority on development
economics, Nobel Laureate Sir Arthur Lewis commented as
follows on the role of entrepreneurship.
“ I have devoted a lifetime to the study of developing economies. I
have examined strategies of development, the role of foreign trade, of
savings and investment, the most helpful role of government, and a
myriad of other factors. I am now convinced that nothing matters
more than the work ethic and entrepreneurial spirit of the
population.”

19. SUMMARY
 Identification of promising investment opportunities requires imagination, sensitivity
to environmental changes, and a realistic assessment of what the firm can do.
 To stimulate the flow of investment ideas, the following are helpful: (i) SWOT
analysis, (ii) clear articulation of objectives, and (iii) conducive climate.
 The business environment which needs to be monitored regularly to identify
investment opportunities, may be divided into six broad sectors: economic sector,
government sector, technological sector, socio-demographic sector, competition
sector, and supplier sector.
 A realistic appraisal of corporate strengths and weaknesses is essential for
identifying investment opportunities which can be profitably exploited. The broad
areas of corporate appraisal are: market and distribution, production and operations,
research and development, corporate resources and personnel, and finance and
accounting.
 According to Michael Porter the profit potential of an industry depends on the
combined strength of the following five basic competitive forces (i) threat of new
entrants, (ii) rivalry among existing firms, (iii) pressure from substitute products, (iv)
bargaining power of buyers, and (v) bargaining power of sellers. Good project ideas
– the key to success are elusive. So a wide variety of sources should be tapped to
identify them.

20.  It is possible to develop a long list of project ideas. For the preliminary screening of
these ideas, the following aspects may be looked into: compatibility with the
promoter, consistency with governmental priorities availability of inputs, adequacy
of market, reasonableness of cost, and acceptability of risk level. When a firm
evaluates a large number of project ideas regularly, it may be helpful to streamline
the process of preliminary screening by employing a project rating index.
 It appears that there are six main entry barriers which result in positive NPV
projects: economies of scale, product differentiation, cost advantage, marketing
reach, technological edge, and government policy.
 Every entrepreneur must answer the following questions: Are my goals well
defined? Do I have the right strategy? Can I execute the strategy?
 It appears that a successful entrepreneur has the following qualities and traits:
willingness to make sacrifices, leadership, decisiveness, confidence in the project,
marketing orientation, and a strong ago.