Project Management

Introduction
• Capital Investments : Importance
and Difficulties:
Importance:
1. Long Term Effect
2. Irreversibility
3. Substantial Outlays
Difficulties :
1. Measurement Problems
2. Uncertainty
3. Temporal spread
• Types of Capital Investments :
1. Physical Assets.
2. Monetary Assets.

1. Strategic Investment. – significant impact

2. Tactical Investment.- current strategy

1. Mandatory Investment.
2. Replacement Investment.
3. Expansion Investment.
4. Diversification Investment.
5. Miscellaneous Investment.
• Phases of Capital Budgeting :
• Planning
• Analysis
• Selection
• Financing
• Implementation: Stages
1. Project and Engineering Design
2. Negotiations and Contracting
3. Construction
4. Training
5. Plant Commissioning
• Expeditious Implementation:
• Adequate Formulation.
• Use of Principle of Responsibility Accounting.
• Use of Network Techniques.

* Review
Levels of Decision Making :
1. Operating decisions- Lower level Management, Routing,
Minor resource commitment, and short term.
2. Administrative decisions – Middle level Management,
Semi structured, Moderate resource commitment, and
medium term.
3. Strategic decisions – Top level Management,
Unstructured, Major resource commitment, and long
term.
• Facets of Project Analysis :
1. Market analysis.
2. Technical analysis.
3. Financial analysis.
4. Economic analysis.
5. Ecological analysis.
Key Issues in Project Analysis:
1. Market analysis:
- Potential market.
- Market share.
2. Technical analysis:
- Technical viability.
- Sensible choices.
3. Financial analysis:
- Risk
- Return
4. Economic analysis:
- Benefit and cost in Shadow Prices.
- Other impacts.
5. Ecological analysis:
- Environmental Damages.
- Restoration Measures.
• Key Issues In Major Investment Decisions:
• 1. Investment story – sensible.
• 2. Risks
• 3. DCF Value
• 4. Financing.
• 5. Impact on short term EPS.
• 6. Options.
• Common Weaknesses in Capital
Budgeting:
• Poor Alignment between strategy and capital budgeting.
• Deficiencies in Analytical Techniques:
1. The Base Case is Poorly identified.
2. Risk is Treated Inadequately.
3. Options are not Properly Evaluated.
4. There is lack of Uniformity in Assumptions.
5. Side effects are ignored.
• No Linkage between Compensation and Financial
Measures.
• Reverse Financial Engineering.
• Weak Integration between Capital Budgeting and Expense
Budgeting.
• Inadequate Post-Audit.
• PROJECT MANAGEMENT:
• A project is a group of multiple
interdependent activities that require people
and resources.
• Key Objectives of Project Management:
1. Quality requirements.
2. Deadlines.
3. Cost limits.
4. High levels of team commitment.
 STRATEGY AND RESOURCE
ALLOCATION
• Strategy:
• “The determination of the basic long term
goals and objectives of an enterprise, and the
adoption of courses of action and the
allocation of resources necessary for carrying
out those goals” . K. R. Andrews.
• Strategy involves matching a firm’s capabilities
with the opportunities present in the external
environment.
• Formulation of Strategy:
1. Environmental Analysis:
- Customers.
- Competitors.
- Suppliers.
- Regulation.
- Infrastructure.
-Social/Political Environment.
2. Internal Analysis:
- Technical knowhow.
- Manufacturing capacity.
- Marketing and distribution.
- Logistics.
- Financial resources.
• 3. Opportunities and Threats:
- Identify opportunities.
4. Strengths and Weaknesses:
- Determine core capabilities.
FIND THE FIT BETWEEN CORE CAPABILITIES AND
EXTERNAL OPPORTUNITIES.
THAT WILL LEAD TO DETERMINATION OF FIRM’s
Strategy.
 GROWTH STRATEGY
• 1. Growth Strategy:
• Concentration – growth in the market size of
product range, expansion of the capacity of the
existing product range.
• Vertical integration- backward and forward.
• Diversification – entering a new business.
• 2. Stability Strategy:
• 3. Contraction Strategy:
- Divestiture.
- Liquidation.
 DIVERSIFICATION – A MIXED BAG
• CREAT VALUE:
1. Managerial Economies of Scale.
2. Higher debt capacity.
3. Lower tax burden.
4. Larger internal capital.
EROSION OF VALUE:
1. Unprofitable Investment.
 COMPULSION FOR CONGLOMERATE
DIVERSIFICATION IN INDIA
• Restriction in growth in the existing line of
business.
• Vulnerability to changes in government policies.
• Opening of newer areas of investments.
• Cyclicality of the main line of business.
• Bandwagon mentality.
• Desire to avail tax incentives.
• A self-image of venturesomeness and versatility.
• A need to widen future options.
 How to Reduce the Risks in
Diversification
• What can out company do better than any of our
competitors in our current markets?
• What strategic assets do we need in order to succeed
in the new market?
• Can we catch up to or leapfrog competitors at their
own game?
• Will diversification break up strategic assets that need
to be kept together.
• Will we be simply a player in the new market or will we
emerge a winner?
• What can our company learn by diversifying, and are
we sufficiently organized to learn it?
 Guidelines for Conglomerate
Diversification
• Avoid large scale diversification.
• Whether you have critical skills and resources.
• It is a good fit.
• Try to be the first.
• Follow substantial sub-contracting tp fill blown
manufacturing.
• Seek partnership.
• Float a separate company.
• It may be greatest challenge to corporate vision and
leadership.
• Guard against bandwagon mentality.
 PORTFOLIO STRATEGY
• BCG Matrix :
It was developed by Boston Consulting Group and
classifies the various businesses in a firm’s
portfolio on the basis of relative market share
and relative market growth rate.
The BCG matrix classifies businesses in four
categories as described below:
1. STARS : High market share and high growth rate.
Eventually, as growth declines and additional
investment needs diminish, stars become cash
cows.
• 2. Question Marks: High growth potential but
low present market share. Potentially these
into stars. There is no guarantee that this
would happen.
• 3. Cash Cows : Enjoys a relatively high market
share but low growth potential are called cash
cows. Cash surpluses available are used else
where.
• 4. Dogs: Low market share and limited growth
potential. Prospects are bleak and hence, it is
better to phase them out.
• It is broadly clear that cash cows generate funds
and dogs, if divested, release funds. On the other
hand, stars and question marks require further
commitment of funds. Hence, the suggested
patter of resource allocation should be as under :
• 1. Investments should be diverted towards stars
and question marks.
• 2. Funds of cash cows should not be diverted
towards dogs.
• GENERAL ELECTRIC’S STOPLIGHT MATRIX:
• It is better than BCG.
• It uses a 3x3 matrix called General Electric’s
Stoplight Matrix to guide the allocation of
resources.
• The matrix calls for evaluating the businesses
of a firm in terms of two key issues:
• 1. Business strength. Strong, Average, and
Weak.
• 2. Industry attractiveness. . Strong, Average,
and Weak.
• McKinsey Matrix :
• The McKinsey matrix has two dimensions viz.
competitive position and industry
attractiveness.
• The criteria or factors used for judging
industry attractiveness and competitive
position with suggested weights for them are
shown below:
• 1. Industry Attractiveness:
• Criteria Weight
• Industry size o.10
• Industry growth 0.30
• Industry profitability 0.20
• Capital intensity 0.05
• Technological stability 0.10
• Competitive intensity 0.20
• Cyclicality 0.05
 Assessment of the SBU Factory
Automation
• 1. Industry Attractiveness:
• Criteria Weight Rating Score
• Industry size o.10 4 0.40
• Industry growth 0.30 4 1.20
• Industry profitability 0.20 3 0.60
• Capital intensity 0.05 2 0.10
• Technological stability 0.10 1 0.10
• Competitive intensity 0.20 3 0.60
• Cyclicality 0.05 2 0.10
• Total 3.10
• 2. Competitive Position:
Key success Factors Weights
Market share 0.15
Technological knowhow 0.25
Product quality 0.15
After-sales service 0.20
Price competitiveness 0.05
Low operating costs 0.10
Productivity 0.10
• 2. Competitive Position:
Key success Factors Weights Rating Score
Market share 0.15 4 0.60
Technological knowhow 0.25 5 1.25
Product quality 0.15 4 0.60

After-sales service 0.20 3 0.60

Price competitiveness 0.05 4 0.20
Low operating costs 0.10 4 0.40
Productivity 0.10 5 0.50
4.15
• An Strategic Business Unit on above
dimensions is assessed and placed in one of
the nine cells given in the 3x3 matrix.
• An SBU judged as winner justify commitment
of resources, SBU judged as loser is candidate
for disinvestment and SBU judged as question
mark or average business or profit producer
call for moderate commitment of resources.
 GENERATION AND SCREENING OF
PROJECT IDEAS
• 1. Generation of Ideas:
• Stimulating the flow of Ideas:
SWOT Analysis.
Clear Articulation of Objectives:
- Cost reduction.
- Productivity improvement.
- Increase in capacity utilization.
- Improvement in contribution margin
- Expansion into promising field.
 Monitoring the Environment
• 1. Economic Sector:
• State of the economy.
• Overall growth rate.
• Growth rate of primary, secondary, and tertiary
sectors.
• Cyclical fluctuations.
• Linkages with the world economy.
• Trade surplus/deficit.
• Balance of payment situation.
2. Governmental Sector:
• Industrial Policy.
• Government programmes and projects.
• Tax framework.
• Subsidies, incentives, and concessions.
• Import and export policies.
• Financial norms.
• Lending conditions of financial institutions.
3. Technological Sector:
- Emergence of new technologies.
- Access to technical know-how, foreign as well as
indigenous.
- Receptiveness on the part of industry.
4. Socio-demographic Sector:
- Population trends.
- Age shifts in population.
- Income distribution.
- Educational profile.
- Employment of women.
- Attitudes towards consumption and investment
5. Competition Sector:
- Number of firms in the industry and the market
share of the top few.
- Degree of homogeneity and differentiation
among products.
- Entry barriers.
- Comparison with substitutes in terms of quality,
price, appeal and functional performances.
6. Supplier Sector:
- Availability and cost of raw materials and sub-
assemblies.
- Availability and cost of energy.
- Availability and cost of money.
 CORPORATE APPRAISAL
1. Marketing and Distribution:
- Market image.
- Product line.
- Market share.
- Distribution network.
- Customer loyalty.
- Marketing and Distribution Cost.
2. Production and Operations:
- Condition and capacity of plant and machinery.
- Availability of raw materials, sub-assemblies, and power.
- Degree of vertical integration.
- Locational advantages.
- Cost structure.
• 3. Research and Development.
• Research capabilities of the firm.
• Track record of new product development.
• Laboratories and testing facilities.
• Coordination between research and operations.
4. Corporate resources and Personnel:
- Corporate image.
- Clout with governmental and regulatory
agencies.
- Dynamism of top management.
- Competence and commitment of employees.
-State of industrial relations.
5. Finance and Accounting:
- Financial leverage and borrowing capacity.
-Cost of capital.
- Tax situation.
- Relations with shareholders and creditors.
- Accounting and control system.
- Cash flows and liquidity.
TOOLS FOR IDENTIFYING INVESTMENT
OPPORTUNITIES
• 1. Porter Model:
• Michael Porter has argued that the profit potential of an industry
depends on the combined strength of the following five basic
competitive forces:
A. Threat of New Entrants: New entrants add capacity, inflate costs,
push prices down, and reduce profitability. Entry barriers are high
when:
- The new entrants have to invest substantial resources to enter
the industry.
- Economies of scale are enjoyed by the industry.
- Existing firms control the distribution channels, benefit from
product differentiation in the form of brand image and customer
loyalty, and enjoy some kind of proprietary experience curve.
-Switching costs-are high. One time cost of switching from the
products of one supplier to another
- The Govt. policy limits or even prevents new entrants.
• B. Rivalry between Existing Firms:
• Firms in an industry compete on the basis of price, quality,
promotion, service, warranties and so on. The intensity of
rivalry in an industry tends to be high when:
- The number of competitors in the industry is large.
-At least a few firms are relatively balanced and capable of
engaging in a sustained competitive battle.
-The industry growth is sluggish, prodding firms to strive for
a higher market share.
- The level of fixed costs is high. Pressure for higher capacity
utilization.
- There is chronic over capacity in the industry.
-The industry’s product is regarded as a commodity or near-
commodity, stimulating strong price and service
competition.
- The industry confronts high exit barriers.
• C. Pressure from Substitute Products:
• In a say, all firms in an industry face competition from
industries producing substitute products. The threat from
substitute products is high when:
• - The price-performance trade off offered by the substitute
products is attractive.
• - The switching costs are prospective buyers are minimal.
• - The substitute products are being produced by industries
earning superior profits.
• D. Bargaining Power of Buyers:
• Buyers are a competitive force. They can bargain for price
cut, ask for superior quality and better service, and induce
rivalry among competitors. The bargaining power of a
buyer group is high when:
- Its purchases are large relative to the sales of the seller.
- Its switching costs are low.
- It poses a strong threat of backward integration.
• E. Bargaining Power of Suppliers;
• Suppliers, like buyers, can exert a competitive force in
an industry as they can raise prices, lower quality, and
curtail the range of free services that they provide.
Suppliers have strong bargaining power when:
- A few suppliers dominate and the supplier group is
more concentrated than the buyer group.
- They are hardly any viable substitutes for the
products supplied.
- The switching costs for the buyers are high.
- Suppliers do present a real threat of forward
integration.
• 2. Life Cycle Approach:
• Many industrial economists believe that most products evolve
through a life cycle which has four stages:
A. Pioneering Stage:
- During this stage, the technology and or the product is relatively
new. Only a few entrants may survive this stage.
B. Rapid Growth Stage:
- Firms which survive the intense competition of the pioneering
stage, witness significant expansion in their sales and profits.
C. Maturity and Stabilization Stage:
- During this stage, when the industry is more or less fully
developed, its growth rate is comparable to that of the economy as
a whole.
D. Decline Stage;
- With the satiation of demand, encroachment of new products,
and changes in consumer preferences, the industry eventually
enters the decline stage, relative to the economy as a whole.
• Each stage presents investment opportunities
that exhibit different characteristics.
• Investment in the pioneering stage – have a low
return and negative NPV. It will create options to
participate in the growth stage.
• Investment in the growth stage- earn a high
return and generate positive NPV.
• Investment in the maturity stage-earn average
return and be NPV neutral.
• Finally, investment in the decline stage may earn
meagre returns and produce negative NPV
 SCOUTING FOR PROJECT IDEAS
• Analyse the performance of Existing Industries.
• Examine the Input and Outputs of Various
Industries.
• Review Imports and Exports.
• Study Plan Outlays and Govt. Guidelines.
• Look at the Suggestions of Financial Institutions
and Developmental Agencies.
• Investigate 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 that Chance Factor will favour You.
 PRELIMINARY SCREENING
• Compatibility with the promoter.
• Consistency with Governmental priorities.
• Availability of Inputs.
• Adequacy of Market.
• Reasonableness of Cost.
• Acceptability of Risk Level.
 PROJECT RATING INDEX
• In case of large number of projects to be evaluated
regularly, it will be helpful to streamline the process of
preliminary screening. For this purpose, a preliminary
evaluation may be translated into a project rating
index. The steps involved in determining the project
rating index are as under:
• Identify factors relevant for project rating.
• Assign weights to these factors.
• Rate the project proposal on various factors, using a
suitable rating scale.( 5 or7 point scale).
• For each factor multiply the factor