2nd mod papc
75
2 nd module Preliminary Screening • Compatibility with the promoter • Consistency with the governmental priorities • Availability of inputs • Adequacy of market • Reasonableness of cost • Acceptability of the risk level
Transcript of 2nd mod papc
2nd module Preliminary Screening
• Compatibility with the promoter
• Consistency with the governmental priorities
• Availability of inputs
• Adequacy of market
• Reasonableness of cost
• Acceptability of the risk level
Project Rating Index
• Identify factors relevant for project rating
• Assign weights to these factors
• Rate the project proposal on various factors, using a suitable rate scaling(5-7)
• For each factor multiply the factor rating to get factor score
• Add all the factor scores to get the overall project rating index
Construction of a Rating IndexFactor Factor
weight Rating Factor score
VG 5 G 4 A 3 P 2 VP 0
Input availability 0.25 y 0.75
Technical know-how 0.10 y 0.40
Reasonableness of cost 0.05 y 0.20
Adequacy of market 0.15 y 0.75
Complementary relationship with other products
0.05 y 0.20
Stability 0.10 y 0.40
Dependence on firm’s strength 0.20 y 1.00
Consistency with government policies
0.10 y 0.30
Total Rating Index 4.00
Sources of positive NPV• Economies of scale
• Product differentiation• effective Ad and superior market
• Exceptional service
• Innovative product features
• High quality and dependability
• Cost advantage• Accumulated experience and comparative edge on
learning curve
• Monopolistic access to low cost material
• A favorable location
• More effective cost control and cost reduction
• Market reach • ex.Avon market network
• HUL distribution network
• Technological edge• IBM & Intel
• Government policy• Restrictive licensing
• Import restriction
• High tariff walls
• Environmental controls
• Special tax releifs
Porter 5 force model
Threat of substitute products
• Threat of substitute products means how easily your customers can switch to your competitors product. Threat of substitute is high when:
• There are many substitute products available
• Customer can easily find the product or service that you’re offering at the same or less price
• Quality of the competitors’ product is better
• Substitute product is by a company earning high profits so can reduce prices to the lowest level.
Threat of new entrants
• A new entry of a competitor into your market also weakens your power. Threat of new entry depends upon entry and exit barriers. Threat of new entry is high when:
• Capital requirements to start the business are less
• Few economies of scale are in place
• Customers can easily switch (low switching cost)
• Your key technology is not hard to acquire or isn’t protected well
• Your product is not differentiated
Industry Rivalry
• Industry rivalry mean the intensity of competition among the existing competitors in the market. Intensity of rivalry depends on the number of competitors and their capabilities. Industry rivalry is high when:
• There are number of small or equal competitors and less when there’s a clear market leader.
• Customers have low switching costs• Industry is growing• Exit barriers are high and rivals stay and compete• Fixed cost are high resulting huge production and
reduction in prices
Bargaining power of suppliers
• Bargaining Power of supplier means how strong is the position of a seller. How much your supplier have control over increasing the Price of supplies. Suppliers are more powerful when
• Suppliers are concentrated and well organized
• a few substitutes available to supplies
• Their product is most effective or unique
• Switching cost, from one suppliers to another, is high
• You are not an important customer to Supplier
Bargaining power of Buyers
• Bargaining Power of Buyers means, How much control the buyers have to drive down your products price, Can they work together in ordering large volumes. Buyers have more bargaining power when:
• Few buyers chasing too many goods
• Buyer purchases in bulk quantities
• Product is not differentiated
• Buyer’s cost of switching to a competitors’ product is low
• Shopping cost is low
• Buyers are price sensitive
• Credible Threat of integration
Qualities of successful Entrepreneur
• Willingness to make sacrifices
• Leadership
• Decisiveness
• Confidence in the project
• Market orientation ex.Edwin Land Polaroid
• Strong ego
MARKET AND DEMAND ANALYSIS
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Situational Analysis and Specifications of Objectives
Collection of Secondary Information
Conduct of Market Survey
Characterization of the Market
Demand Forecasting
Market Planning
14
SITUATIONAL ANALYSIS AND SPECIFICATIONS OF OBJECTIVES
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COLLECTION OF SECONDARY INFORMATION
• General Sources of Secondary Information
• Industry Specific Sources of Secondary Information
• Evaluation of Secondary Information
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SECONDARY SOURCES OF DATA
1. Indian Economic Survey2. Indian Basic Facts3. Reports of Export Working Groups on Various
Industries4. Census of Manufacturing Industries5. Indian Statistical Yearbook6. Monthly Statistical Bulletin7. Annual Report of RBI8. Annual Reports and Accounts of the Companies
Listed on the Stock Exchange9. Annual Reports of the Various Associations of
Manufacturers17
CONDUCT OF MARKET SURVEY
• Census Survey
• Sample Survey
• Steps in a Sample Survey– Define the Target Population
– Select the Sampling Scheme and Sample Size
– Develop the Questionnaire
– Recruit and Train the Field Investigators
– Obtain Information as Per the Questionnaire from the Sample of Respondents
– Scrutinizes the Information Gathered
– Analyze and interpret the Information18
CONDUCT OF MARKET SURVEY
• Some Problems
– Heterogeneity of the Country
– Multiplicity of the Languages
– Design of Questionnaire
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CHARACTERISATION OF THE MARKET
• Effective Demand in the Past and Present
Production + Imports – Exports – Change in stock level
• Breakdown of Demand
– Nature of Product
– Consumer Groups
– Geographical Division
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CHARACTERISATION OF THE MARKET
• Price
• Methods of Distribution and Sales Promotion
• Consumers
• Supply and Competition
• Government Policy
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Forecasting
• Predicting the future
• Qualitative forecast methods– subjective
• Quantitative forecast methods– based on mathematical
formulas
12-2222
Types of Forecasting Methods
• Depend on
– time frame
– demand behavior
– causes of behavior
12-2323
Time Frame
• Indicates how far into the future is forecast
– Short- to mid-range forecast
• typically encompasses the immediate future
• daily up to two years
– Long-range forecast
• usually encompasses a period of time longer than two years
12-2424
Demand Behavior
• Trend
– a gradual, long-term up or down movement of demand
• Random variations
– movements in demand that do not follow a pattern
• Cycle
– an up-and-down repetitive movement in demand
• Seasonal pattern
– an up-and-down repetitive movement in demand occurring periodically
12-2525
• Analytical
• Cause effect relationship basis
• Quantitative
• Explicit
Causes of Behavior
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DEMAND FORECASTING
• Qualitative Methods
– These methods rely essentially on the judgment of experts to translate qualitative information into quantitative estimates
– Used to generate forecasts if historical data are not available (e.g., introduction of new product)
– The important qualitative methods are:
• Jury of Executive Method
• Delphi Method
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JURY OF EXECUTIVE OPINION METHOD
• Rationale– Upper-level management has best information on latest
product developments and future product launches
• Approach– Small group of upper-level managers collectively develop
forecasts – Opinion of Group
• Main advantages– Combine knowledge and expertise from various
functional areas
– People who have best information on future developments generate the forecasts
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JURY OF EXECUTIVE OPINION METHOD
• Main drawbacks– Expensive
– No individual responsibility for forecast quality
– Risk that few people dominate the group
– Subjective
– Reliability is questionable
• Typical applications– Short-term and medium-term demand forecasting
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DELPHI METHOD
• Rationale
– Eliciting the opinions of a group of experts with the help of mail survey
– Anonymous written responses encourage honesty and avoid that a group of experts are dominated by only a few members
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DELPHI METHOD
• Approach
Coordinator Sends Initial Questionnaire
Each expertwrites response(anonymous)
Coordinatorperformsanalysis
Coordinatorsends updatedquestionnaire
Coordinatorsummarizesforecast
Consensusreached?
YesNo
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DELPHI METHOD
• Main advantages– Generate consensus
– Can forecast long-term trend without availability of historical data
• Main drawbacks– Slow process
– Experts are not accountable for their responses
– Little evidence that reliable long-term forecasts can be generated with Delphi or other methods
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DELPHI METHOD
• Typical application
– Long-term forecasting
– Technology forecasting
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TIME SERIES PROJECTION METHODS
• These methods generate forecasts on the basis of an analysis of the historical time series.
• Assume that what has occurred in the past will continue to occur in the future
• Relate the forecast to only one factor - time
The important time series projection methods are:
– Trend Projection Method
– Exponential Smoothing Method
– Moving Average Method
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Linear Trend Line
12-35
y = a + bx
wherea = intercept of the relationshipb = slope of the linex = time periody = forecast for demand for period x
b =
a = y - b x
wheren = number of periods
x = = mean of the x values
y = = mean of the y values
xy - nxy
x2 - nx2
x
n
y
n
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Least Squares Example
12-36
x(PERIOD) y(DEMAND) xy x2
1 73 73 12 40 80 43 41 123 94 37 148 165 45 225 256 50 300 367 43 301 498 47 376 649 56 504 81
10 52 520 10011 55 605 12112 54 648 144
78 557 3867 650
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Least Squares Example (cont.)
12-37
x = = 6.5
y = = 46.42
b = = =1.72
a = y - bx
= 46.42 - (1.72)(6.5) = 35.2
3867 - (12)(6.5)(46.42)
650 - 12(6.5)2
xy - nxy
x2 - nx2
7812
55712
37
12-38
Linear trend line y = 35.2 + 1.72x
Forecast for period 13 y = 35.2 + 1.72(13) = 57.56 units
70 –
60 –
50 –
40 –
30 –
20 –
10 –
0 –
| | | | | | | | | | | | |
1 2 3 4 5 6 7 8 9 10 11 12 13
Actual
De
man
d
Period
Linear trend line
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Advantages
• It uses all observations
• The straight line is derived by statistical procedure
• A measure of goodness fit is available
Disadvantages
• More complicated
• The results are valid only when certain conditions are satisfied
Trend Projection Method
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Exponential Smoothing
12-40
Averaging method
Weights most recent data more strongly
Reacts more to recent changes
Widely used, accurate method
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Exponential Smoothing (cont.)
12-41
Ft +1 = Dt + (1 - )Ft
where:
Ft +1 = forecast for next period
Dt = actual demand for present period
Ft = previously determined forecast for present period
= weighting factor, smoothing constant
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Effect of Smoothing Constant
12-42
0.0 1.0
If = 0.20, then Ft +1 = 0.20 Dt + 0.80 Ft
If = 0, then Ft +1 = 0 Dt + 1 Ft = Ft
Forecast does not reflect recent data
If = 1, then Ft +1 = 1 Dt + 0 Ft = Dt
Forecast based only on most recent data
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Exponential Smoothing (α=0.30)
12-43
F2 = D1 + (1 - )F1
= (0.30)(37) + (0.70)(37)
= 37
F3 = D2 + (1 - )F2
= (0.30)(40) + (0.70)(37)
= 37.9
F13 = D12 + (1 - )F12
= (0.30)(54) + (0.70)(50.84)
= 51.79
PERIOD MONTH DEMAND
1 Jan 37
2 Feb 40
3 Mar 41
4 Apr 37
5 May 45
6 Jun 50
7 Jul 43
8 Aug 47
9 Sep 56
10 Oct 52
11 Nov 55
12 Dec 54
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Exponential Smoothing (cont.)
12-44
FORECAST, Ft + 1
PERIOD MONTH DEMAND ( = 0.3) ( = 0.5)
1 Jan 37 – –
2 Feb 40 37.00 37.00
3 Mar 41 37.90 38.50
4 Apr 37 38.83 39.75
5 May 45 38.28 38.37
6 Jun 50 40.29 41.68
7 Jul 43 43.20 45.84
8 Aug 47 43.14 44.42
9 Sep 56 44.30 45.71
10 Oct 52 47.81 50.85
11 Nov 55 49.06 51.42
12 Dec 54 50.84 53.21
13 Jan – 51.79 53.61
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Exponential Smoothing (cont.)
12-45
70 –
60 –
50 –
40 –
30 –
20 –
10 –
0 – | | | | | | | | | | | | |
1 2 3 4 5 6 7 8 9 10 11 12 13
Actual
Ord
ers
Month
= 0.50
= 0.30
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Moving Average
• Naive forecast
– demand in current period is used as next period’s forecast
• Simple moving average
– uses average demand for a fixed sequence of periods
– stable demand with no pronounced behavioral patterns
• Weighted moving average
– weights are assigned to most recent data
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Moving Average:Naïve Approach
12-47
Jan 120Feb 90Mar 100Apr 75May 110June 50July 75Aug 130Sept 110Oct 90
ORDERSMONTH PER MONTH
-120
90100
75110
5075
130110
90Nov -
FORECAST
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Simple Moving Average
12-48
MAn =
n
i = 1Di
n
where
n = number of periods in the moving average
Di = demand in period i
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3-month Simple Moving Average
12-49
Jan 120Feb 90Mar 100Apr 75May 110June 50July 75Aug 130Sept 110Oct 90Nov -
ORDERSMONTH PER MONTH
MA3 =
3
i = 1Di
3
=90 + 110 + 130
3
= 110 ordersfor Nov
–––
103.388.395.078.378.385.0
105.0110.0
MOVING AVERAGE
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5-month Simple Moving Average
12-50
Jan 120Feb 90Mar 100Apr 75May 110June 50July 75Aug 130Sept 110Oct 90Nov -
ORDERSMONTH PER MONTH
MA5 =
5
i = 1Di
5
=90 + 110 + 130+75+50
5
= 91 ordersfor Nov
–––––
99.085.082.088.095.091.0
MOVING AVERAGE
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Smoothing Effects
12-51
150 –
125 –
100 –
75 –
50 –
25 –
0 – | | | | | | | | | | |
Jan Feb Mar Apr May June July Aug Sept Oct Nov
Actual
Ord
ers
Month
5-month
3-month
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Weighted Moving Average
12-52
WMAn = i = 1
Wi Di
where
Wi = the weight for period i, between 0 and 100 percent
Wi = 1.00
Adjusts moving average method to more closely reflect data fluctuations
n
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Weighted Moving Average Example
12-53
MONTH WEIGHT DATA
August 17% 130September 33% 110October 50% 90
WMA3 =
3
i = 1Wi Di
= (0.50)(90) + (0.33)(110) + (0.17)(130)
= 103.4 orders
November Forecast
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CAUSAL METHODS
• Causal methods seek to develop forecasts on the basis of cause-effects relationships specified in an explicit, quantitative manner.
– Chain Ratio Method
– Consumption Level Method
– End Use Method
– Leading Indicator Method
– Econometric Method
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CHAIN RATIO METHOD
• Market Potential for heated coats in the U.S.:– Population (U) = 280,000,000– Proportion of U that are age over 16 (A) = 75%– Proportion of A that are men (M) = 50%– Proportion of M that have incomes over $65k (I) = 50%– Proportion of I that live in cold states (C) = 50%– Proportion of C that ski regularly (S) = 10%– Proportion of S that are fashion conscious (F) = 30%– Proportion of F that are early adopters (E) = 10%– Average number of ski coats purchased per year (Y) = .5
coats– Average price per coat (P) = $ 200
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CHAIN RATIO METHOD
• Market Potential for heated coats in the U.S.:
Market Sales Potential =
U x A x M x I x C x S x F x E x Y
= 280 Million x 0.75 x 0.50 x 0.50 x 0.50 x 0.10 x 0.30 x 0.10 x200
= $7.88 Million
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CONSUMPTION LEVEL METHOD
• This method is used for those products that are directly consumed. This method measures the consumption level on the basis of elasticity coefficients. The important ones are
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CONSUMPTION LEVEL METHOD
• Income Elasticity: This reflects the responsiveness of demand to variations in income. It is calculated as:
• E1 = [Q2 - Q1/ I2- I1] * [I1+I2/ Q2 +Q1]
• Where E1 = Income elasticity of demandQ1 = quantity demanded in the base yearQ2 = quantity demanded in the following yearI1 = income level in the base year I2 = income level in the following year
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CONSUMPTION LEVEL METHOD
• Price Elasticity: This reflects the responsiveness of demand to variations in price. It is calculated as:
• EP = [Q2 - Q1/ P2- P1] * [P1+P2/ Q2 +Q1]
• Where EP = Price elasticity of demand Q1 = quantity demanded in the base year Q2 = quantity demanded in the following year P1 = price level in the base year P2 = price level in the following year
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• Suitable for estimating demand for intermediate products
• Also called as consumption coefficient method
Steps
1. Identify the possible uses of the products
2. Define the consumption coefficient of the product for various uses
3. Project the output levels for the consuming industries
4. Derive the demand for the project
END USE METHOD
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END USE METHOD
• This method forecasts the demand based on the consumption coefficient of the various uses of the product.
Projected Demand for Indchem
Consumption
Coefficient
Projected Output
in Year X
Projected Demand for
Indchem in Year X
Alpha
Beta
Kappa
Gamma
2.0
1.2
0.8
0.5
10,000
15,000
20,000
30,000
Total
20,000
18,000
16,000
15,000
69,00061
LEADING INDICATOR METHOD
• This method uses the changes in the leading indicators to predict the changes in the lagging indicators.
• Two basic steps:
1. Identify the appropriate leading indicator(s)
2. Establish the relationship between the leading indicator(s) and the variable to forecast.
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ECONOMETRIC METHOD
• An advanced forecasting tool, it is a mathematical expression of economic relationships derived from economic theory.
• Economic variables incorporated in the model
1. Single Equation Model
Dt = a0 + a1 Pt + a2 Nt
• Where
Dt = demand for a certain product in year t.
Pt = price of the product in year t.
Nt = income in year t.
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ECONOMETRIC METHOD
2. Simultaneous equation method
GNPt = Gt + It + Ct
It = a0 + a1 GNPt
Ct = b0 + b1 GNPt
• Where
GNPt = gross national product for year t.Gt = Governmental purchase for year t.
It = Gross investment for year t.
Ct= Consumption for year t.
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Advantages
• The process sharpens the understanding of complex cause – effect relationships
• This method provides basis for testing assumptions
Disadvantages
• It is expensive and data demanding
• To forecast the behaviour of dependant variable, one needs the projected values of independent variables
ECONOMETRIC METHOD
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UNCERTANITIES IN DEMAND FORECASTING
• Data about past and present markets.– Lack of standardization:- product, price, quantity,
cost, income….
– Few observations
– Influence of abnormal factors:- war, natural calamity
• Methods of forecasting– Inability to handle unquantifiable factors
– Unrealistic assumptions
– Excessive data requirement66
UNCERTANITIES IN DEMAND FORECASTING
• Environmental changes
– Technological changes
– Shift in government policy
– Developments on the international scene
– Discovery of new source of raw material
– Vagaries of monsoon
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COPING WITH UNCERTAINTIES
• Conduct analysis with data based on uniform and standard definitions.
• Ignore the abnormal or out-of-ordinary observations.
• Critically evaluate the assumptions
• Adjust the projections.
• Monitor the environment.
• Consider likely alternative scenarios.
• Conduct sensitivity analysis68
Market planning
• Current marketing situation
- Market, Competition, Distribution, PEST.
• Opportunity and issue analysis - SWOT
• Objectives- Break even, % market share…
• Marketing strategy- target segment, positioning, 4 Ps
• Action program- Quarter 1, Q2, Q3….
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Technical Analysis • Manufacturing process/technology
– Choice of technology – Plant capacity
– Principals inputs
– Investment outlay and production cost
– Use by other units
– Product mix
– Latest developments
– Ease of absorption
• Appropriate technology
Material Input and Utilities • Raw material
• Processed industrial materials and components
• Auxiliary material and factory supply
• Utilities
Product Mix
Plant capacity
• Technological requirement
• Input constraints
• Investment costs
• Market condition
• Resources of the firm
• Governmental policy
Location and site
• Proximity to raw material and markets
• Availability of infrastructure
• Labour situation
• Governmental policies
• Other factors• Climate conditions
• General living condition proximity to ancillary units
• Ease in coping with environmental pollution
• Site selection
• Machinery and equipments
– Constraints in selecting machineries and equipment
– Procurement of plant and machine
• Structure and civil work • Site preparation and development
• Building and development
• Building and structure
• Other works
Project chart and layout
