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Project Appraisal Definition and Steps

When an organization wants to find a solution to a particular business problem and identify
the best way for implementing that solution, it needs to plan and develop a project that might
provide an effective action plan for addressing the problem through implementing the
solution. This organization will need to give an appraisal of the potential project to make sure
the project is really effective because it supports the right solution and solves the required
problem. In this context, project appraisal management serves as the major process of
analyzing and approving the project. In this article, I am going to write about the project
appraisal process and its key steps. I hope my article will help you learn how to evaluate and
appraise projects. At the end of the article I give a link to the project appraisal template,
which is a more structured way of explaining the appraising process.

Project appraisal is the process of assessing, in a structured way, the case for proceeding
with a project or proposal, or the project's viability. It often involves comparing various
options, using economic appraisal or some other decision analysis technique.

When a company wants to grow, it has two options: expand its current business or go into
business with other companies through acquisition or merger. If it chooses the acquisition
option, it can do so in a way that strategically enhances its current operations through vertical
or horizontal integration. Each technique has advantages and drawbacks, and companies may
use both strategies to create the growth they want.

Vertical Integration

In the vertical integration business model, companies expand by gaining control of their
entire supply chain. This type of integration can move forward toward the end consumer, or
backwards toward the raw materials for goods production. For example, if Joes Fluffy Flour
company processes wheat from farmers into flour for bakeries, Joe could vertically integrate
by going into business with the farmers, or by starting a bakery of his own. Additional
vertical integration might include trucks to transport the wheat and baked goods, or a
storefront shop to sell the final product.

Benefits and Drawbacks of Vertical Integration

Vertical integration allows a company to control the entire manufacturing process, from raw
goods to the end consumer. This usually translates to better cost and quality control, since the
company can set its own prices for raw goods and manufacturing. The drawback to this
control is a loss of flexibility and resilience. If Joes farmers have a bad year, he may be short
of wheat for his flour, driving up his costs and forcing him to scramble for additional
supplies. In a market situation, the trouble of a few farmers isnt supported by the market as a
whole - the loss of profit only affects those few farmers, and buyers dont necessarily see the
same large changes in their costs.

Horizontal Integration

If a company horizontally integrates, it acquires or merges with other companies that do the
same thing. If Joe produces flour in Minnesota, and Jenny produces flour in Iowa, they might
merge their companies to create a bigger, more robust company. Alternatively, if Jenny is also
making flour in Minnesota, Joe might buy Jennys company to eliminate direct competition
for his flour.

Benefits and Drawbacks of Horizontal Integration

Horizontal integration allows a company to expand into new territories without the high
expense of building from scratch, because an existing, profitable business is usually less
expensive than the total cost of starting a new business. Horizontally integrated businesses
may benefit from economies of scale. Once a company reaches a certain size, the cost of
increased business operations grows at a much lower rate than the profit from those activities.
For smaller companies, the drawback of this type of integration lies in consumer perception.
Horizontal integration usually takes the form of a merger or acquisition, and these actions
tend to be perceived as greedy or aggressive. As a result, the final company may suffer from a
poor reputation and decreases in consumer goodwill. Larger companies may find that
antitrust or anti-monopoly laws slow or even halt horizontal integration processes, nullifying
any cost-saving effect.

What is Project Appraisal Definition

Before we talk about the definition of project appraisal, I would like to tell one interesting
story from my life. Heres that story.

As Im a PMP and have a broad experience in managing various types of project, I always
wondered how my neighbour, who is a truck driver and thereby not experienced in project
appraisal management, could do all those projects without preliminary assessment and
analysis of the initial concept, problem, and solution. By the projects I mean the activities
my neighbour did when he was building the garage in his backyard, renovating the kitchen,
repairing his truck, even speaking with the postman, and so on. My wonder was that this
person has no idea of project appraisal and management yet he can do successful projects,
even without understanding that these are projects.

One day I took all these thoughts with me and went to my neighbour. I wanted to find out
how he reached success without using project, appraising or whatever else which I might
regard as the evaluation process. When I met him in his renovated kitchen, I was surprised to
see that he was creating a preliminary plan for his next project: Purchasing New Car. He was
sitting at the small kitchen table and writing something on a large sheet of some newspaper
(Daily News if being more precise). I walked close to the table and saw many words and
sentences underlined and crossed off, with multiple arrows and circles on the paper sheet.
Whatre you doing, that is what I asked. Dont you see? Im trying to plan my new
purchase. Remember that big Mercedes I showed you last month in the Truck Drivers
magazine. Ive decided to buy it. And now I want to plan everything ahead, to avoid failure,
you know.

I sat at the table near my neighbour and he told me about his plans. I found out that he always
made a plan before doing something important or unusual for his daily life, for example
garage building or kitchen renovation. He never used documents and templates but just a
sheet of a newspaper because, as he said with a smile, newspapers always lie but my records
and plans will make the reality more realistic and pragmatic (I still cant completely
comprehend what he meant indeed).
Im not going to annoy you by retelling our conversion in this text. I just want to focus you
on the key idea behind this story: often people unwittingly use the methods and techniques of
project appraisal and evaluation to determine chances of success of their endeavours. Before I
saw in my neighbours kitchen how newspapers could be used for the appraising process, I
thought only formal documents and papers were the tools to assess a professional-drive
project. But now I know for sure that every person can do an appraisal; the only thing to
remember is that every kind of project requires the appropriate level of knowledge and
competencies to generate a good project appraisal report. And thats all Lets give the
definition of project appraisal.

Project Appraisal is a consistent process of reviewing a given project and evaluating its
content to approve or reject this project, through analyzing the problem or need to be
addressed by the project, generating solution options (alternatives) for solving the problem,
selecting the most feasible option, conducting a feasibility analysis of that option, creating the
solution statement, and identifying all people and organizations concerned with or affected by
the project and its expected outcomes. It is an attempt to justify the project through analysis,
which is a way to determine project feasibility and cost-effectiveness.

Appraising a project means evaluating the proposed solution against its ability to solve the
identified problem or need. Some PM methodologies and guides (e.g. PMBOK) regards the
technical and financial project appraisal as a component of the initiation or pre-planning
phase. PRINCE2 suggests developing the business case which is a form of project appraisal.
The Method 123 (MPMM, which is based on PMI and PRINCE2 standards) also uses the
business case for preparing a proposed project for feasibility analysis and assessment.

Project appraisal management is an essential stage of any project, regardless of its nature,
type and size. This stage represents the first point of the pre-planning or initiation phase.
Without having appraised a project, it is financial and technically unreasonable to proceed
with further planning and development. No matter whether you are going to purchase a new
car (e.g. my neighbours project), constructing a building, improving a business process,
updating a network system, conducting a marketing campaign, building a garage, or any other
initiative, you should make a preliminary assessment and appraisal of your undertaking in
order to be sure that that you will do a required and necessary change to your environment.

Key Steps

Various PM methodologies use various approaches and techniques for developing a project
appraisal. In my practice we use some method that regards the appraisal process as a series of
4 steps that have a range of sub-steps and tasks. In this checklist you can view the entire
hierarchy with the details. I am going to give an overview of the steps. If you want to get
deeper, please read the checklist.

Step #1. Concept Analysis

The first step requires you (as a project appraiser or analyst) to conduct a range of analyses in
order to determine the concept of the future project and provide the Decision Package for the
senior management (project sponsors) for approval. It means you need to carry out the
problem-solution analysis that determines the problem/need to be addressed and the solution
to be used to handle the problem. The solution should analyzed by cost-effectiveness and
feasibility (various project appraisal methods and techniques can be used). Also you will need
to identify stakeholders (those people and organizations involved in or affected by the
problem and/or solution) and analyze their needs (how they relate to the problem and/or
solution). After all, you must develop a decision package that includes the problem statement,
the solution proposal, the stakeholder list, and the funding request. This package will then be
submitted to the sponsor for approval (or rejection). If the sponsor approves the project
concept then you can proceed to the next step.

Step #2. Concept Brief

At this step you must develop a summary of the project concept to define the goals,
objectives, broad scope, time duration and projected costs. All this data will be used to
develop the Concept Brief. You need to develop a project statement document that specifies
the project mission, goals, objectives and vision. Then you create a broad scope statement
that specifies the boundaries, deliverables ad requirements of your endeavour. Finally you
make a preliminary schedule template that determines an estimated duration of the project,
and then develop a cost projection document based on cost estimates and calculations.

Step #3. Project Organization

You use the Concept Brief to determine an organizational structure of your project. This
structure should be developed and explained in the Project Organizational Chart. The
document covers such issues as governance structure (roles and responsibilities), team
requirements and composition, implementation approach, performance measures, other info.
The idea behind the Project Organizational Chart is to create a visual representation of the
roles, responsibilities and their relationships and what people/organizations are assigned to
what roles and duties within the project.

Step #4. Project Approval

The final stage requires you to review all the previous steps and gather them into a single
document called the Project Appraisal. This document summarizes all the estimations and
evaluations made, to justify the project concept and verify that the proposed solution
addresses the identified problem. The financial, the cost-effectiveness and the feasibility
analyses will serve as the methods of project appraisal to approve the project. The document
is to be submitted to the snooper stakeholders (the customer, the sponsor) for review and
approval. If the appraisal is approved, then the project steps to the next phase, the planning.

Project Appraisal Template

Key steps for appraising projects

Appraising a project means reviewing and evaluating this project for feasibility and cost-
effectiveness to understand and approve the project concept, which explains what
problem/need to address and what solution to implement. This Project Appraisal Template is
designed to help analysts and appraisers to assess and justify theirs projects. It comprises a
range of steps and activities to be taken during the project initiation or pre-planning phase.
The Template describes the method that is based on best practices of project management
(PMI and PRINCE2 standards).

Project Appraisal: Overview


What (Definition). Appraising a project means performing a process of reviewing
evaluating this project and its content for feasibility and cost-effectiveness to approve
or reject the project concept, through analyzing the problem or need to be solved by
the project and identifying the best possible solution to be implemented. It involves an
analyst in identifying stakeholders and creating a decision package for making the
final decision on project approval or rejection.

Why (Purpose). The purpose is to analyze the proposed project to determine whether
the concept really offers an effective solution that addresses the identified problem. It
serves as a tool to reach project approval and step towards further project planning
and development. It aims to confirm that the proposed project is technically,
financially and economically feasible and cost-effective.

When (Phase). The appraising process is carried out during the pre-planning or
initiation phase. It comes before the planning phase to confirm that the project is
justified in terms of cost, benefits, feasibility and effectiveness. Sometimes in some
project environments, Appraisal is regarded as a single phase that aims at initiating a
project and developing a foundation for the planning process.

How (Action Items). In this Project Appraisal Template we offer our own ideas on
how to review and evaluate projects. We use the method and the steps of the
appraising process listed in the template in our activities in our company. The process
is based on best practices, including PRINCE2 and PMI standards. Herere the major
steps to start and complete the project appraising process:

o Concept Analysis: it aims to define concept of the proposed project and


determine what problem to solve and in which way (solution).

o Concept Brief: it is to describe the concept through defining the goals,


objectives, scope, costs, time-limits and business drivers of the proposed
project.

o Project Organization: it is focused on describing the roles and


responsibilities of project personnel through developing an organizational
chart.

o Project Proposal: it summarizes all the previous steps to develop the Project
Proposal and submit it for review and approval to the senior stakeholders.

1. Concept Analysis

Problem-Solution Analysis (aka Needs Assessment). First of all, an analyst needs to


define a problem and a solution. The problem is defined through identifying factors
that lead to the current situation (problem) and then deterring the effects caused by the
problem. Next the analyst should analyze the problem environment to determine a
possible solution that can effectively address the problem.
Summary: For the entire problem-solution analysis it is convenient to use the
context analysis which identifies general, external and internet factors,
defines the problem and generates the solution.

Feasibility and Alternatives Analysis. It is about technical, operational and


economical feasibility of the proposed solution in terms of cost-effectiveness and
benefits. Feasibility study includes a range of analyses including Economical analysis,
Financial Returns analysis, Market analysis, Risk analysis, Cost projection, and
Management analysis. The purpose is to confirm the solutions technical, operational
and economical feasibility. Also the process aims to identify alternatives (options) to
the proposed solution and find out whether the solution is better (in terms of
addressing the problem) than the rest of the alternatives.

Summary: the feasibility study along with the options analysis should
unambiguously confirm that the proposed solution is feasible and reasonable
and that alternatives are analyzed and rejected as less effective.

Stakeholder Analysis. This kind of analysis aims to identify all the people and
organizations involved in or affected by the problem and/or solution. It focuses on
developing the stakeholder list and the stakeholder needs matrix that determines the
expectations of the interested parties. It also specifies a method for managing the
expectations.

Summary: the stakeholder analysis identifies the stakeholders and their needs
and determines how best to address the needs in the context of the proposed
problem-solution environment.

Decision Package. This step aims to review all the analyses made, to create a
decision package that describes the reasonability of the project concept, including the
proposed solution. The document is to be submitted to the senior stakeholders (the
sponsor) for approval. In case the concept is approved, the sponsor authorizes funds
for investment.

Summary: the decision packages confirm that the concept is reasonable and
worth funding.

2. Concept Brief

Project Statement. As the concept is approved and the necessary funds are allocated,
now we need to create a stamen of the project. This document describes the following
details:

o Background and strategic context

o Vision

o Goals Statement

o Objectives
Summary: the project statement explains how the project is linked to the
business needs and strategic context, what goals and objectives it will
address, and how it will delivery the proposed solution.

Broad Scope. As the project is not planned thoroughly we can just talk about a broad
scope statement. Later, at the planning stage we must develop a detailed scope
statement. The broad scope statement includes:

o Boundaries

o Assumptions and constraints

o High-level deliverables

o Requirements

Summary: the broad scope defines what is in and out of the project, what
assumptions and constrains determine the project, what to delivery by the
project, and what requirements are to be met.

Time Estimation. It focuses on developing a preliminary schedule that defines time


duration required to develop and implement the project and to produce the
deliverables. It is the predecessor to the scheduling process which will be carried out
at the planning stage.

Summary: the time estimation creating a timeline of the activities required to


perform the project, implement the solution and address the problem, within
the stated scope.

Cost Projection. Cost estimates are to be developed to determine the total cost of
project development and implementation and to make a foundation for the budgeting
process.

Summary: the cost projection focuses on estimating the total amount of


expenses that are expected to occur to support the implementation of the
project and production of the deliverables.

Horizontal Integration Definition

Horizontal integration is the act of integrating other infrastructures, assets and companies of
the same industry or in the same level of production. The acquisition of these assets typically
results in an expansion of existing operations rather than the establishment of new operations.
An example of horizontal integration would be one fast food chain buying another or one oil
company purchasing refineries from another oil company.

Vertical Integration Definition

Vertical integration is the act of expanding into new operations for the purpose of decreasing
a firm's reliability on other firms in the process of production and distribution. Such
integration requires firms to undertake new aspects of business operations. An example
would be a supermarket firm that, instead of contracting with freight companies, purchases its
own trucks and distribution facilities that it uses to get food items and household products out
to its various locations.

Horizontal Integration Benefits

The principal benefit of engaging in horizontal integration is that it eliminates competition


from other firms. This is because the assets that it integrates are intrinsically assets that
competitors have been using to go after the same market sector. It also serves as a relatively
cheap way of breaking into new markets because, instead of engaging in all of the research,
analysis and legal issues involved with opening a branch in a new area, it allows a business to
take control of a branch that is already in place. However, governments tend to frown on
horizontal integration past a certain point. This is because, if a single firm takes control of an
entire market in this way, it becomes a monopoly, which means that it can charge exorbitant
prices with little fear of losing sales.

Vertical Integration Benefits

The principal benefit of vertical integration is that it allows firms to cut total costs by
internalizing the value that other firms would otherwise take as profits. For instance, a
grocery store may pay a trucking firm $5,000 to do something that only costs the trucking
firm $3,800. By buying its own truck and hiring an employee driver, the grocery store only
has to pay $3,800 now. The main things that inhibit firms from engaging in vertical
integration are the trouble associated with engaging in an unfamiliar type of operations and
the up-front costs that such integration efforts require.