Planning and Scheduling of industrial projects

IENG-6103 ADVANCED INDUSTRIAL
PROJECT MANAGEMENT
Planning and Scheduling of industrial
projects
Chapter-2
Dr.K.BALASUNDARAM
Assistant Professor
School of Mechanical & Industrial
Engineering
Dire Dawa Institute of Technology
Dire Dawa University
Dr.K.BALASUNDARAM
Assistant Professor
School of Mechanical & Industrial
Engineering
Dire Dawa Institute of Technology
Dire Dawa University

Outline of presentations
Chapter -2
Need for capital Investment
Phases in capital investment
The strategy of capital investment
Generation and screening of industrial projects ideas
2

CAPITALCAPITAL
INVESTMENTINVESTMENT

INTRODUCTION
The efficient allocation of funds is among the
main functions of financial management.
Allocation of funds means investment of funds
in assets or activities.
t is also called investment decision because we
have to select the assests in which investment
has to be made.
These assets can be classified into two parts :
i) Short-term or Current Assets.
ii) Long-term or Fixed Assets.
4

IMPORTANCE OF CAPITAL EXPENDITURE DECISION
Investment decisions require special attention because of the following reasons :
5
Growth
The effects of investment decisions extend into the future and have to endured
for a longer period
Risk
Funding
Irreversibility
Complexity
A long-term commitment of funds may also change the risk complexity of
the firm
Investment decisions generally involve large amount of funds
Most investment decisions are irreversible
Investment decisions are among the firm’s most difficult
decisions.

Types of Capital Investments
Capital investments may be classified in different ways
6

7
Physical
or
Tangible Investment
Physical assets are tangible
investment
Examples:
Land, Building , plant ,
machinery, Vehicles, and
computers

8
Monetary
Investment
Monetary assets are financial
claims against some parties.
Examples:
Deposits, bonds, and equity
shares

Intangible
An intangible asset is an asset
that lacks of physical
substance and usually is very
hard to evaluate.
Examples:
Copyrights, Franchises,
Trademark

Capital investment may also be classified as
10

11
Strategic investment
A strategic investment is one that has
a signification impact on the direction
of the firm.
Example:
Tata Motor’s decision to invest in a
passenger car project may be
regarded as a strategic investment .

12
Tactical Investments
A tactical investment is meant to
implement a current strategy as
efficiently or as profitably as possible.
Example:
An investment by Tata Motor’s to
replace an old machine to improve
productivity represents a tactical
investment.

Capital investments are often classified by companies in different
categories for planning and control.
While the system of classification may vary from one firm to
another, the following categories are found in most classifications:
1. Mandatory investment, 2. Replacement investment
3. Expansion Investment 4. Diversification
5. R&D Investment 6. Miscellaneous investments
13

14
Mandatory
investment
Examples: Pollution control equipment, a fir fighting equipment,
medical dispensary, and a crèche in the factory
Replacement
investment
Expansion
Investment
Diversificatio
n
R&D
Investment
Is meant to worn out equipment with new equipment to reduce the
operating cost . Increase the yield and improve the quality.
Is meant to increase the capacity to cater to a growing demand.
Diversification of a existing business require investment in new
product and a new kind of production activity within the firm
It is meant to develop a new products

PHASES IN CAPITALPHASES IN CAPITAL
INVESTMENTSINVESTMENTS

Phases of capital Investment
Capital budgeting is a complex process which may be divided into six broad phases:
17
Planning
Analysis
Selection
Financing
Implementation
Review
Financing
Implementation
Selection

Phases of capital Investment-Planning
The planning phase of a firm’s capital
budgeting process is concerned with the
articulation of its broad investment
strategy and the generation and
preliminary screening of project proposals.
This provides the framework which
shapes, guides and circumscribes the
identification of individual project
opportunities
18

Once a project proposal is
identified, it need to be examined.
To begin with , a preliminary
project analysis is done.
i) Whether the project worthwhile to
justify a feasibility study and
ii) What aspects of the project are
critical to its viability and hence
warrant an in-depth investigation.
19
Phases of capital Investment-Planning

Phases of capital Investment-Analysis
The focus of this phase of capital budgeting is on
gathering, preparing and summarising relevant
information about various project proposals which
are being considered for inclusion in the capital
budget.
Under this a detail analysis of the marketing,
technical, economic and ecological aspects in
undertaken.
Based on the information developed in this analysis ,
the stream of costs and benefits associated with the
20

Phases of capital Investment-Selection
Selection addresses the question
-Is the project worthwhile?
A wide range of appraisal criteria have
been suggested to judge the worth
whileness of a project. They divided
into two broad categories they are
1. Discounting criteria and
2. Non-discounting criteria
21

The method of capital budgeting are the techniques which are used to make comparative
evaluation of profitability of investment.
Non-discounting criteria:
The non-discounting methods of capital are as follows :
• Pay back period method (PBP)
• Accounting rate of return method (ARR)
Discounting criteria:
The key discounting criteria are
Net present value method (NPV) Internal rate of return method (IRR)
profitability index method (PVI)
22

The selection rules associated with associated with these criteria as follows:
23
Criterion Accept Reject
Paypack period[PBP] PBP< target period PBP> target period
Accounting rate of return[ARR] ARR> target value ARR< target value
Net present value [NPV] NVP>0 NVP<0
Internal rate of return[IRR] IRR>cost of capital IRR<cost of capital
Benefit cost ratio[BCR} BCR>1 BCR<1

Once a project is selected, suitable
financing arrangements to be made.
The two broad sources of finance for a
project are Equity and Debt.
Equity:
It referred to as shareholders funds on
balance sheet in Ethiopia .
Debt:
It referred to as loan funds on balance sheet
in Ethiopia.
24
Phases of capital Investment-Financing

Flexibility, risk, income,
control and taxes are the key
business consideration that
influence the capital structure
decision and the choice of
specific instruments of
financing.
25
Phases of capital Investment-Financing

Phases of capital Investment-Implementation
Every entrepreneur should draw an
implementation scheme or a time table for his
project to ensure the timely completion of all
activities involved in setting upon enterprise.
Timely implementation is important because if
there is delay it causes, among other things, a
project cost overrun.
In India delay in project implementation has
become a common feature. Implementation
phase for an industrial project, which involves
settings up of manufacturing facilities,
consists of several stages. These are :-
26

27
Stage Concerned with
Project and engineering design Preparation of blueprints, and plant designs, plant engineering,
selection of specific machineries and equipment
Negotiation and contracting
Negotiating like project financing , construction of buildings
and civil works, supply of machineries marketing arrangement
etc
Construction Site preparation, construction of buildings and civil works,
erection and installation of machinery and equipment
Training Training for engineers, technicians, and workers
Plant and commissioning Start up of the plant

28
An illustrative implementation schedule

Phases of capital Investment-Review
Once the project is commissioned, the review
phase has to be set in motion. Performance
review should be dome periodically compare
actual performance with projected performance.
A feedback device is useful in several ways.
i) It throws light on how realistic were the
assumption underlying the project.
ii) It provides a documented log of experience that
is highly valuable in future decision
iii) It suggests corrective action to be taken in the
light of actual performance. It helps in
uncovering judgmental basis. 29

STRATEGY OFSTRATEGY OF
CAPITALCAPITAL
INVESTMENTINVESTMENT

Introduction
Capital budgeting is not the exclusive domain of
financial analysis and accountants, it is
multifunctional task linked to a firm’s overall
strategy.
Capital budgeting may be viewed as a two-stage
process.
1. Promising growth opportunities are identified
through the use of strategic planning techniques
and
2.Individual investment proposals are analysed and
evaluated in detail to determine their worth.
31

 To discusses strategic planning techniques
and approaches aimed at identifying
promising growth opportunities. It is
organized into six sections which are:
32
Strategic planning techniques

Concept of Strategy
Harvard Professor , defined strategy
as:
“ The determination of the basic long
–term goals and objectives of an
enterprise, and the adoption of
course of action and the allocation
of resources necessary for carrying
out those goals”.
33
Harvard Professor

34
Environmental Analysis
Customers Competitors, Suppliers
Regulation. Infrastructure
Social/political environment
Internal Analysis
Technical know –how manufacturing
capacity. Marketing and distribution
Capacity, Logistics, Financial
resources
Identify opportunities
Opportunities and threats
Strength and weaknesses
Determine core capabilities
Find the fit between core capabilities and external opportunities
Firm’s strategies
Formulation of strategies
Figure shows Formulation of strategies

Grand Strategy
The thrust of the overall strategy or Grand strategy of the firm may be on growth,
stability, or contraction as shown in figure.
35

Grand Strategy-Growth
Generally , companies strive for growth in
revenues, assets, and profits.
The important growth strategies are:
Concentration, Vertical integration, and
Diversification.
Concentration :
When a company anticipates growth in the
market size of its product range or an increase
in the market share enjoyed by it in its product
range, expansion of the capacity of the
existing product range.
36

Such an expansion offers several advantages :
Familiarity with technology
Production methods, and
Market conditions
Lower capital coasts
Reeducation in unit overhead coast
Examples:
1. McDonald’s in fast food business
2. Michelin Tyres in tyres
3. Microsoft in computer software
4. Asian paint in paints and Hero Honda in
two –wheelers
37
Growth- Concentration

Growth- Diversification
Diversification involves entering a new business that is different from the current
businesses. There are two broad type of diversification are :
38
When a new type of product or service is provided
with the help of related technology.
A growth strategy in which a company seeks to
develop by adding totally unrelated products and

When an organization takes up an activity in such a manner that is related
to the existing business definition of one or more of firms businesses, either
in terms of customer groups, customer's functions or alternative
technologies, it is called concentric diversification.
Concentric diversification

40
It involves getting into a related business
Example:
A detergent manufacture may get into soap business
A scooter manufacture may enter the field of motor
cycles(Bajaj Auto)
A truck manufacture may go to in for passenger
cars(tata motors)
Advantages :
i)Certain manufacturing facilities may be better
utilized
ii)All products may benefit from the market image of
the company

When an organization adopts a strategy which requires taking of those activities
which are unrelated to the existing businesses definition of one or more of its
businesses either in terms of their respective customer groups, customer
functions or alternative technologies, it is called conglomerate diversification.
Conglomerate diversification

Conglomerate diversification- Example

43
It means that a firm gets into new business which is unrelated
Example:
ITC limited , traditionally a cigarette manufacture, entered the field of hotels
Bharat Vilay Mills, a textile manufacture, diversified into synthetic tanks
Escorts , a tractor company , set up a dry dock.
Principle:
i)Overcome the limited growth opportunities in the existing line of business
ii)Enter newly emerging and promising sectors

Growth- Vertical Integration
Vertical integration may be of two types:
44
Vertical integration provides the greater
stability to the existing as well as proposed
operations, ensures better coordination
between the supplying and consuming units,
bring about savings in indirect taxes, and
enhances the market power of the combined
entity.
Example:
Internationally , most of the oil companies
are vertical integrated

45
Backward Integration
It Involves manufacture of raw materials
and components required for the existing
operations of the company.
Example
Reliance Industries Limited set up a unit
for the manufacture of polyester filament
yarn required for its textile units
It involves the manufacture of
products which use the existing
products of the company as input.
Example
Bharat Forge company set up an
automotive axles unit which uses its
forgings as input.
Forward Integration
Vertical Integration

Backward Integration Forward Integration

Stability strategies
Stability strategy is a strategy in
which the organization retains its
present strategy at the corporate
level and continues focusing on its
present products and markets.

Examplesof Stability strategies
Cigarette, liquor industries fall
in this category because of
strict control over capacity
expansion.
Both these industries require
license under the provisions of
Industries (Development and
regulations) Act, 1951.

Contraction strategies decrease
the size or scope of operations for
an organization either at the
corporate level or business level.
Contraction is the opposite of
growth
Contraction strategies include
divestiture and liquidation,
Contraction Strategies

Contraction Strategies- Divestiture
Divestiture:
It involves the sale of business in it or plant on one firm to another.
Form the seller’s perspective: It is a form of contraction.
From the buyer’s point of view: It is a form of expansion.
Example:
Coromandal Fertilizers Limited sold its cement division to India cement
limited, the size of Coromandal Fertilizers Limited contracted. Whereas the
size of India cement limited expanded.
50

Portfolio strategy is a roadmap by which investors can use their assets to achieve their
financial goals.
Portfolio theory refers to the design of optimal portfolios and its implication for asset
pricing.
In a multi-business firm, allocation of resources across various businesses is a key
strategic decision. Portfolio tools have been developed to guide the process of strategic
planning and resources allocation
Strategic Portfolio Planning is the business process by which organizations determine
the set of innovation and new product development (NPD) investments they will fund—
and those they won’t—to achieve their business objectives.
Portfolio Optimization helps you strategically manage your product portfolio to make
the right investment decisions, optimize the value of your portfolio, and allocate the most
profitable use of resources.
Portfolio Strategy

Matrix is developed by Bruce Henderson of the Boston Consulting Group in the early 1970's
According to this technique, business or products are classified as lowor high performance depending upon their market growth rate & relative market share.
The Boston Consulting Group (BCG) matrix is the best-known approach to portfolio planning.
Using the matrix requires a firm's businesses to be categorized as high or low along two dimensions: its share of the market and the growth rate of its industry.
Boston consulting group (BCG)

To assess :
Profiles of products/businesses
The cash demands of products
The development cycles of products Resource allocation and divestment decisions
WHY BCG MATRIX ?

To understand the Boston Matrix
you need to understand how market
share & market growth interrelated.
Market share is the percentage of
the total market that is being
serviced by your company
measured either in the revenue
terms or unit volume terms.
The higher your market share, the
higher proportion of the market you
control.
RELATIVE MARKET SHARE

MARKET GROWTH
Market Growth is used as
a measure of a market’s
attractiveness.
Markets experiencing high
growth are ones where the
total market share
available is expanding &
there is plenty of
opportunity for everyone to
make money

BCG Matrix
A tool for strategic (product) planning
and resource allocation, the Boston
Consulting Group (BCG) product
portfolio matrix analyses products on
the basis of (a) relative market share
and (b) industry growth rate.
The BCG matrix
Market share on the horizontal axis
Market growth rate on the vertical axis
57

58
BCG Matrix
Stars
high, market share and a high
growth rate
Questions Marks
high growth potential but low
present market share
Cash cows
relatively high market share but
low growth
Dogs
low markets share and limited
growth potential
High
High
Low
Low
Market share
MarketgrowthRate

The BCG matrix classifies businesses in four categories
59
BCG Matrix
Stars
Questions
marks
Cash flow
Dog
Product which enjoy a high, market share and a high growth rate are
referred to as stars.
Products with high growth potential but low present market share are
called question marks.
Products which enjoy a relatively high market share but low growth
potential are called cash cows.
Products with low markets share and limited growth potential are
referred to as dogs.

BCG MATRIX is simple and easyto understand.
It helps you to quickly and simply screen the opportunities open to you, and helps you think about how you can make the most of
them.
It is used to identifyhow corporate cash resources can best be used to maximize a company's future growth and profitability.
BCG Matrix-Benefits

BCG MATRIX uses onlytwo dimensions, Relative market share and market growth rate.
Problems of getting data on market share and market growth.
High market share does not mean profits all the time.
Business with low market share can be profitable too.
BCG Matrix-Limitations

The general electric Matrix was developed by GE with the assistance of the consulting firm McKinsey & Company.
The model identifies the market position and profitability of different business units based on their market attractiveness and business unit strength.This is more advanced form
of Growth matrix model compared to BCG Matrix.
The main aims for GE Model
Analyze the current portfolio of business units and their position compared to others
Develop growth strategies for each individual business units by adding new products and businesses to the portfolio
Decide the business units to be sold or invested more to exploit future opportunities
General Electric’s Stoplight Matrix

The General Electric Company of US is widely respected for the sophistication
maturity, and quality of its planning systems.
The matrix developed by his company for guiding resource allocation is called
the General Electric’s Stoplight Matrix.
It calls for analyzing various products of the firm in terms of two key issues.
Business Strength :- How strong is the firm vis-a-vis its competitors ?
‘ Industry attractiveness :- What is the attractiveness or potential of the industry.
63

64
Invest Invest Hold
Invest Hold Divest
Hold Divest Divest
Strong
Low
Business Strength
IndustryAttractiveness Average Weak
MediumHigh

GENERATION AND
SCREENING OF
PROJECT IDEAS

OUTLINE
 INTRODUCTION
 GENERATION OF PROJECT IDEA
 Scouting of project Idea
 SWOT analysis
 Monitoring the environment
 Industry/corporate appraisal
 SCREENING OF PROJECT IDEA
 Preliminary screening
 Project rating index

Introduction
 The search for promising project ideas is the first step
towards establishing a successful venture.
 As the traditional saying goes, the key to success lies in
getting into the right business at the right time.
 While this advice is simple, its accomplishment is difficult
because good business opportunities tend to elusive or hard
to pin point.

 Identification of such opportunities requires imagination, sensitivity to
environmental changes, and realistic assessment of what the firm can
do.
 The notion of identification is simple, it is difficult to develop methods or
procedures for accomplishing it as there is no well defined theory to
guide this tasks.
 Therefore, in this seminar we will discuss certain broad considerations
and guidelines helpful in the generation and screening of project ideas.
Introduction

Objective
 The objective is to identify investment opportunities which are feasible
and promising and which merit further examination and appraisal.
 The discussion is divided in to nine sections as follows:
 Generation of Ideas
 Monitoring the Environment
 Corporate appraisal
 Identifying investment opportunities: Profit potential of industries
 Scouting for project Ideas
 Preliminary Screening
 Project Rating Index

 Project selection process starts with the generation of a project idea.
 Ideas are based on technological advancement and most of the ideas are
variant of present products or services.
 To stimulate the flow of ideas, the following are helpful:
 SWOT Analysis
 Clear Articulation of Objectives
 Fostering a Conducive Climate
Generation of Ideas

SWOT Analysis
 It represents conscious,
deliberate and systematic
effort by an organization to
identify opportunities that can
be profitably exploited by it.
 Periodic SWOT analysis
facilitates the generation of
ideas.

Clear Articulation of Objectives
 The operational objectives of a firm may be once or more of the following:
 Cost Reduction
 Productivity Improvement
 Increase in Capacity utilization
 Improvement in contribution margin
 Expansion into promising fields
 A clear articulation and prioritization of objectives helps in channelizing the
efforts of employees and prods them to think more imaginatively.

Fostering a Conducive Climate
 To tap the creativity of people and to harness their entrepreneurial skills,
a conducive organization climate has to be foster.
 And encourages a techniques like brainstorming, group discussions, etc
which result in development of creative and innovative ideas.
 Knowledge of market, products, and services.
 Knowledge of potential customer choice.
 Market survey & research.
 Making visits to trade and exhibitions.
 Government guidelines & policy.
 Ideas given by the experienced person.
 Ideas by own experience.
 SWOT analysis.

Monitoring the Environment
 Basically a promising investment idea enables 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 purpose of monitoring the business environment may be divided into
six broad sectors.

Contd……..
The important aspects studied in monitoring the key
sectors of the environment are as follows:
Economic Sector:
 State of Economy
 Overall rate of growth
 Growth rate of primary, secondary, and tertiary sectors
 Cyclical fluctuations
 Linkage with the world economy
 Trade surplus /deficits
 Balance of payment situation

Contd……..
 Governmental Sector:
 Industrial policy
 Governmental programs and projects
 Tax framework
 Subsidies, incentives and concessions
 Import and export policies
 Financing norms
 Lending conditions of financial institutions and commercial banks
 Technological Sector:
 Emergence of new technologies
 Access to technical know-how, foreign as well as indigenous
 Receptiveness on the part of industry

Contd……..
 Socio-demographic Sector:
 Population trends
 Age shifts in population
 Income distribution
 Educational profile
 Employment of women
 Attitudes toward consumption and investment
 Competition Sector:
 Number of firms in the industry and the market share of the top
 few
 Degree of homogeneity and differentiation among the products
 Entry barrier
 Comparison with substitutes in term of quality and price
 Marketing polices and practices

Contd……..
 Supplier Sector:
 Availability and cost of raw
material
 Availability and cost of energy
 Availability and cost of capital
Business Environment

Corporate Appraisal
 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 and the important aspects to be
considered under them are as follow :
 Marketing and Distribution
 Production and Operations
 Research and Development
 Corporate Resources and Personnel
 Finance and Accounting

 Marketing and Distribution:
 Market Image
 Product Line
 Product Mix
 Distribution Channels
 Customer loyalty
 Marketing & distribution costs
 Production and Operations:
 Condition and capacity of plant and machinery
 Availability of raw material and power
 Degree of vertical integration
 Location advantage
 Cost structure

 Research and Development:
 Research capabilities of the firm
 Track record of new product developments
 Laboratories and testing facilities
 Coordination between research and operations
 Corporate Resources and Personnel:
 Corporate image
 Dynamism of top management
 Relation with government and regulatory agencies
 State of industry relations

 Finance and Accounting:
 Financial leverage and borrowing capacity
 Cost of capital
 Tax situation
 Relations with shareholders and creditors
 Accounting & control system
 Cash flows and liquidity

Identifying Investment Opportunities:
 There are several useful tools or frameworks that are helpful in
identifying promising investment opportunities.
 The more popular ones are the porter Model and Life cycle approach.
Porter Model: profit potential of industries:
 The profit potential of an industry depends on the combined strength of
the following five basic competitive forces:

Contd……..
Threat of new entrants
Rivalry among existing firms
Pressure from substitute products
Bargaining power of buyers
Bargaining power of sellers.
Porter, Michael E, Competitive Strategy: Techniques for Analyzing Industries and Competitors, el EThe Free
Press, 1980

• Investment in P: low return,
negative NPV
• Investment in RG: high return,
positive NPV
• Investment in MS: average return,
neutral NPV
• Investment in D: return,
negative NPV
Each stage represents an investment opportunity that exhibit different characteristics
Life Cycle Approach

Scouting for project Ideas
 Good project ideas-the key to success- are elusive.
1. Analyze the performance of existing industries
- in terms of profitability and capacity utilization
2. Examine inputs and outputs of various industries
(one person’s trash can be another person’s treasure)
3. Review imports and Exports
- Helpful to understand the trend of imports and exports and the
potentials for those.
4. Study Plan outlays and governmental guidelines
- Provides useful pointers for investment opportunities
5. Study new technological developments
6. Identify unfulfilled psychological needs
7. Attending trade fairs
- To know new products and developments

Preliminary Screening
 It is important to know whether your idea is comfortable to your self.
 To do this some preliminary screening required to eliminate ideas which
are not promising.
 Aspects:
 Compatibility with the promoter (interest, personality & resource of the
entrepreneur)
 Consistency with governmental priorities (idea feasibility within national
goal and regulations)
 Availability of inputs (capital requirement is manageable?, resource are
domestic?, technical know-how will be obtained?)
 Adequacy of market
 Reasonableness of cost
 Acceptability of risk level

Project Rating Index
 What are we doing if we have two or more project ideas? (rate)
PROJECT A

Planning and Scheduling of industrial projects

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