Lecture Sheet-12

(Session 21)
E2: Enterprise Management

Scope of session
 Chapter 12– Project Stages – Initiation
Why projects are initiated, checklist for project evaluation, considerations in project selection:
Project requirement, Feasibility, SWOT, Risk management, contingency planning

Chapter 12: Project Stages - Initiation

Project Initiation
Projects are initiated when a need or an objective is identified. Objectives are those things that the organization
wants to achieve. Typically, top-level objectives are profit-oriented, or in non-profit-making organizations
objectives will be to improve the standard of living or education, and so on of members. It is usually a function
of the board of directors to determine the high-level organizational objectives. These objectives are then
converted from ‘whats’ into ‘hows’ by undertaking projects.

Why Are Projects Initiated?

1. Market Demand: Market demand is described as “The aggregate of the demands of all potential customers
(market participants) for a specific product over a specific period in a specific market.” This demand
generally initiates new projects to meet the specific needs of a particular customer group.

2. Strategic Opportunity/Business Need: Organizations might initiate projects in order to get a strategic
opportunity or due to a business need.

3. Social Need: Social needs of people or groups might be reason to initiate new projects as well. UNICEF is
an organization tries to increase the life and education standards of children all around the world.

4. Environmental Consideration: Environmental considerations become an important aspect for most of the
companies. Because consumers become more responsive and selective in recent years for “green” products.
As a result, companies had to give importance in environmental issues in their products and started to
produce more environmentally friendly products or revised their production processes to produce more
environmentally friendly.

5. Customer Request: This is actually the most common way to initiate projects especially for vendors. Let’s
think from the perspective of a software vendor. Your customers may ask from you to deliver a new custom
software application for their business need.

6. Technological Advance: Companies might initiate new projects to have a technological advance against
their rivals. Remember the entrance of the Gmail to IT world. It was an e-mail provider as its rivals in the
beginning. But, they entered into the market with a revolutionary way by having at least 2GBs of mailbox
capacity and increasing each day. When they introduced their e-mail service, their competitors were
providing 250MBs of capacity at most. Thus, this technological advance of Gmail, respectively Google,
helped to attract new consumers and become the world’s most preferred e-mail provider.

7. Legal Requirement: Depending on the industry you are working new regulations might be obligated by the
government or agencies. In order to work in line with the proposed regulations, you might need to initiate
new projects.

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 Lecture Sheet-12
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Checklist for project evaluation
Project Evaluation factors
Production Factors 3. Payout period
1. Time until ready to install 4. Cash requirements
2. Length of disruption during installation 5. Time until break-even
3. Learning curve—time until operating as desired 6. Size of investment required
4. Effects on waste and rejects 7. Impact on seasonal and cyclical fluctuations
5. Energy requirements
6. Facility and other equipment requirements Personnel Factors
7. Safety of process 1. Training requirements
8. Other applications of technology 2. Labor skill requirements
9. Change in cost to produce a unit output 3. Availability of required labor skills
10. Change in raw material usage 4. Level of resistance from current work force
11. Availability of raw materials 5. Change in size of labor force
12. Required development time and cost 6. Inter- and intra-group communication
13. Impact on current suppliers requirements
14. Change in quality of output 7. Impact on working conditions

Marketing Factors Administrative and Miscellaneous Factors

1. Size of potential market for output
2. Probable market share of output
3. Time until market share is acquired
4. Impact on current product line
5. Consumer acceptance
6. Impact on consumer safety
7. Estimated life of output
8. Spin-off project possibilities
Financial Factors
1. Profitability, net present value of the investment
2. Impact on cash flows
1. Meet government safety standards
2. Meet government environmental standards
3. Impact on information system
4. Reaction of stockholders and securities markets
5. Patent and trade secret protection
6. Impact on image with customers, suppliers, and
competitors
7. Degree to which we understand new technology
8. Managerial capacity to direct and control new
process

Considerations in project selection

There are a number of considerations which must be made at this stage of project, and these are:
 Project requirement
 Feasibility
 SWOT
 Risk management
Project requirement: A requirement is a statement of what is expected of a project or product; it must be
clearly defi ned and appropriate to meet the organization’s objectives. If a project requirement is set out clearly
from the outset, the project has a greater chance of success, and less chance of escalation of costs due to rework,
continual changes and customer dissatisfaction.
A requirement is different from a specification, in that the requirement is the statement of the reason for what
is being done or developed, whereas a specification is the statement of the detailed characteristics of the
project or product such as size or performance criteria. It is important that the customer and project team agree
that the requirement is appropriate and meets the organizational needs and objectives (Field and Keller, 1998).
Feasibility: Simply, a feasibility analysis is used to determine the viability of an idea, such as ensuring a project
is legally and technically feasible as well as economically justifiable. In a broad sense, a feasibility study is an
analysis that takes all of a project's relevant factors into account—including economic, technical, legal, and

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scheduling considerations—to ascertain the likelihood of completing the project successfully. Project managers
use feasibility studies to discern the pros and cons of undertaking a project before they invest a lot of time and
money into it.
Feasibility studies also can provide a company's management with crucial information that could prevent the
company from entering blindly into risky businesses.

 Benefits of Conducting a Feasibility Study

The importance of a feasibility study is based on organizational desire to “get it right” before committing
resources, time, or budget. A feasibility study might uncover new ideas that could completely change a project’s
scope. It’s best to make these determinations in advance, rather than to jump in and to learn that the project
won’t work. Conducting a feasibility study is always beneficial to the project as it gives you and other
stakeholders a clear picture of the proposed project.

Below are some key benefits of conducting a feasibility study:

 Improves project teams’ focus

 Identifies new opportunities
 Provides valuable information for a “go/no-go” decision
 Narrows the business alternatives
 Identifies a valid reason to undertake the project
 Enhances the success rate by evaluating multiple parameters
 Aids decision-making on the project
 Identifies reasons not to proceed

 Types of feasibility
There are a number of types of feasibility which could be considered, including the following:
 Technical feasibility
 Social/Operational feasibility
 Ecological/Environmental feasibility
 Economic/Financial feasibility
 Legal feasibility
 Scheduling Feasibility

Technical Feasibility: This assessment focuses on the technical resources available to the organization. It helps
organizations determine whether the technical resources meet capacity and whether the technical team is
capable of converting the ideas into working systems. Technical feasibility also involves evaluation of the
hardware, software, and other technical requirements of the proposed system.

Operational Feasibility: This assessment involves undertaking a study to analyze and determine whether—and
how well—the organization’s needs can be met by completing the project. Operational feasibility studies also
examine how a project plan satisfies the requirements identified in the requirements analysis phase of system
development.
These may include awareness of the social issues within a group or office (e.g. introducing a computerized
system), or larger social awareness regarding the effect of projects or products on workers, employment or the
environment. It is also important to ensure that the projects fits with business goals.
Social considerations include:

 Number of people required (during the project and after integration)

 Skills required – identify recruitment, training, redundancy

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Ecological feasibility: Ecological considerations may be driven by the understanding that customers would
prefer to purchase alternative products or services as they are more ecologically sound and less harmful to the
environment. Environmental considerations may be stimulated primarily by health and safety legislation. It is
important for organizations to consider the raw material input, the production processes and the disposal of the
product at the end of its life.
Social considerations include:
 Affects on local community and what that might do to company image
 What pollution could be caused by the project
Economic Feasibility: This assessment typically involves a cost/ benefits analysis of the project, helping
organizations determine the viability, cost, and benefits associated with a project before financial resources are
allocated. It also serves as an independent project assessment and enhances project credibility—helping
decision-makers determine the positive economic benefits to the organization that the proposed project will
provide.
The types of costs and benefits involved in a project will depend upon the precise nature and scope of that
project and can vary greatly.

Benefits
► Tangible – those benefits that can be evaluated financially (reduction of employees when processes
are automated).
► Intangible – those benefits that are not easy to evaluate financially (a new computer system may
provide better information to managers for decision making and control)

Costs
► Capital costs – These are incurred in the acquisition of assets. Capital costs will include the purchase
price of an asset (e.g. land and building, equipment, plant) plus any additional costs of installation
and maintenance. Capital expenditure usually occurs at the beginning of the project.
► Revenue costs – Any cost incurred by the project other than for the purchase of assets are revenue
costs. These costs are those incurred on a regular basis and include not only repair and running costs
of the assets but also the general overheads not necessarily directly incurred by the project. Examples
are costs such as rent and rates, general management salaries and depreciation. The project itself will
also incur direct revenue costs such as materials and the salaries and wages of the direct workers.
► Finance costs – Finance for projects is required to pay for the original assets and may also be
required to cover the recurring running expenses of the project. Financing costs are usually incurred
as interest charges that have to be paid on the balance of funds outstanding. Therefore, if a project
proposal requires funding, it is important to know exactly how much it requires, when payments
would be due and how much interest would be paid.
Sources of finance include the following:
 finance borrowed from a lending institution (bank)
 capital invested by shareholders
 retained profit from the business
 grants or subsidies from government (for specified projects only)

Legal Feasibility: This assessment investigates whether any aspect of the proposed project conflicts with legal
requirements like zoning laws, data protection acts or social media laws. Let’s say an organization wants to
construct a new office building in a specific location. A feasibility study might reveal the organization’s ideal
location isn’t zoned for that type of business. That organization has just saved considerable time and effort by
learning that their project was not feasible right from the beginning.

Scheduling Feasibility: This assessment is the most important for project success; after all, a project will fail if
not completed on time. In scheduling feasibility, an organization estimates how much time the project will take
to complete.

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SWOT analysis
SWOT is an analytical tool that can be used in two ways:
1. applied to a whole company, it can be used to identify strategies needed by the business
2. applied to a specific project, it can be used to assist in project selection.
SWOT stands for Strengths, Weaknesses, Opportunities and Threats. The strengths and weaknesses normally
result from the organization or project’s internal factors, and the opportunities and threats relate to the external
environment. The four categories of SWOT can be explained in more detail as follows:
(Assume that a company is part way through a project to renovate a house)
1. Strengths. These are the things that are going well (or work well) in the organization or project, such as its
competitive advantage or the skills and competencies and morale of the individuals within it, and major
successes. Examples are:
 Relationships with key sub-contractors are good
 The project is on schedule, and the current forecast is for completion on time

2. Weaknesses. These are the things that are going badly (or work badly) in the organization or project. They
include skills that are lacking within the organization as a whole or the project team. Examples are:
 The project is over budget in the areas of plumbing, construction of the fireplace and rewiring the
lounge.

3. Opportunities. These relate to events or changes outside the organization or project, for example in its
external business environment. The events or changes can be exploited to the advantage of the organization
and will therefore provide some strategic focus to the decision-making of the managers within the
organization. Examples are:
 The local furniture store having a sale
 The decorator has been identified, as a result of recommendation by a satisfied customer

4. Threats. Threats relate to events or changes outside the organization or project (in its business
environment) that must be defended against. The company will need to pro-vide some strategies to
overcome these threats in some way or it may start to lose market share to its competitors. Examples are:
 The builder is concerned that the cost and time estimates for the bathroom may be too low. He says
he won’t know for sure until he is part way through the work.
 The supplier says that the paint ordered is not in stock with the supplier – it may take six weeks to
arrive.
When evaluating a project proposal, it is important to establish whether the proposal helps to achieve the
organization’s objectives. SWOT can establish whether a particular project proposal has sufficient strengths that
are compatible with the achievement of the organization’s objectives, or provides the organization with
sufficient opportunities to do so in the future. It will also highlight the threats and weaknesses of particular
proposals.
Risk and Uncertainty
Uncertainty: Uncertainty is defined as an absence of information, knowledge, or understanding regarding the
outcome of an action, decision, or event.
Risk: Risk is actually a measure of the amount of uncertainty that exists. It’s directly tied to information. In the
world of project management, risk relates primarily to the extent of your ability to predict a particular outcome
with certainty.

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Threat: The effects of risk can be positive or negative. Positive effects of risk are often referred to as
opportunities. Threats are the negative—or “downside”— effects of risk. Threats are specific events that drive
your project in the direction of outcomes viewed as unfavorable (e.g., schedule delays, cost overruns, and
inferior product performance).
 Classification of risk
Risks can be classified under three headings.
1. Quantitative risk: This is a risk that can be expressed as a financial amount. Estimation of risk is usually
based on the probability of the event occurring, multiplied by the financial or non- financial consequence of
the event. It can be considered to be the product of three values:
- the likelihood of an event occurring – p(E);
- the likelihood that the event will lead to a loss – p(L);
- the monetary cost of the worst possible potential loss associated with that accident – M.
The value of the quantitative risk is therefore p(E) X p(L) X M.
2. Socially constructed risk: People often believe some things to be risks, even when statistics indicate they
are not (and vice versa). Socially constructed risk may well exceed quantitative risk. Companies must
therefore also manage people’s perceptions of risk.

3. Qualitative risk: Since risks cannot always be quantified accurately, but some way of categorizing risks is
useful, we need a pragmatic solution. If we look at a subjective assessment of the scale and likelihood of
risk, we can generate a table such as the following:

Having done this, in our risk management program we should address the category A risks first, then the Bs
and so on. Do not worry too much about the Es.
 Risk Management Process
Historically, the focus of risk management has been on preventing loss. However, recently, organizations are
viewing risk management in a different way, so that:

 risks are seen as opportunities to be seized

 organizations are accepting some uncertainty in order to benefit from higher rewards associated with
higher risk

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 risk management is being used to identify risks associated with new opportunities to increase the
probability of positive outcomes and to maximize returns
 effective risk management is being seen as a way of enhancing shareholder value by improving
performance.

Risk management is therefore the process of reducing the possibility of adverse consequences either by
reducing the likelihood of an event or its impact, or taking advantage of the upside risk. It is a method of
controlling risks. Management are responsible for establishing a risk management system in an organization.
The process of establishing a risk management system is summarized in the following diagram:

 Managing Risk

TARA (or SARA): Strategies for managing risks can be

explained as TARA (or SARA): Transference (or
Sharing), Avoidance, Reduction or Acceptance.
 Transference: In some circumstances, risk can
be transferred wholly or in part to a third party,
so that if an adverse event occurs, the third party
suffers all or most of the loss. A common
example of risk transfer is insurance. Businesses
arrange a wide range of insurance policies for
protection against possible losses. This strategy is
also sometimes referred to as sharing.

Risk sharing - An organization might transfer its

exposures to strategic risk by sharing the risk
with a joint venture partner or franchisees.

 Subcontract the risk to those more able to handle it, such as a specialist supplier or insurer.
 Avoidance: An organization might choose to avoid a risk altogether. However, since risks are
unavoidable in business ventures, they can be avoided only by not investing (or withdrawing from the
business area completely). The same applies to not-for-profit organizations: risk is unavoidable in the
activities they undertake.
 Abort the plan.

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 Escape the specific clause in the contract.
 Leave the risk with the customer or supplier.
 Reduction/mitigation: A third strategy is to reduce the risk, either by limiting exposure in a particular
area or attempting to decrease the adverse effects should that risk actually crystallize.
 Take an alternative course of action with a lower risk exposure.
 Invest in additional capital equipment or security devices to reduce the risk or limit its
consequences.
 Acceptance: The final strategy is to simply accept that the risk may occur and decide to deal with the
consequences in that particularly situation. The strategy is appropriate normally where the adverse
effect is minimal. For example, there is nearly always a risk of rain; unless the business activity cannot
take place when it rains then the risk of rain occurring is not normally insured against.
 Accept that some risks are an inevitable part of doing business.
 Continue to monitor risks to ensure that their potential impact or likelihood have not increased.

Contingency Planning: Contingency plans are specific actions that are to be taken when a potential problem
occurs. Although they’re intended to deal with problems only after they’ve occurred, contingency plans should
be developed in advance. This helps ensure a coordinated, effective, and timely response. Also, some plans may
require backup resources that need to be arranged for in advance. Contingency planning should be done only for
the high-threat problems that remain after you’ve taken preventive measures. Common problems encountered
on projects are given in the below table:

Concept & Compiled by:

Md. Shahadat Hossen
ACMA, ACCA (Finalist), CFC (Canada), CIPFA (Affiliate, UK)
Deputy Manager- Finance (Additional Charge)
Dhaka Power Distribution Company Limited
Ministry of Power, Energy & Mineral Resourcesc

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