Phase 2 starts with a diagnostic analysis, from a "global" perspective, of the economic situation in the project area or subsector (or target group) which is the desired focus of the project. Competitive and Comparative Advantage Analysis (Tool No. 3) can be useful here, particularly when the economic activities which will form the project are still largely undefined. The formulation team then shifts its attention to those agents (individuals, groups, organizations) who, in various ways, will be closely associated with the project. A time-efficient method for obtaining essential information about the socio-economic characteristics and "operating strategies" of different agents is Rapid Rural Appraisal (Tool No. 4).
These analyses of the project situation from both "macro" and "micro" perspectives should enable the formulation team to identify critical deficiencies in the present economic system which could be remedied through an investment project. Problem Tree Analysis (Tool No. 5) is a systematic method of examining problems which can be applied to constraints on development in the context of project formulation. Before the necessary project interventions can be defined more precisely, however, an assessment is required of important changes which are likely to occur anyway in the project area/subsector in the foreseeable future. Trend Extrapolation and Guesstimation (Tool No. 6), Demand Projections (Tool No. 7) and Price Projections (Tool No. 8) are techniques which can be of help in defining the future "without-project" situation.
The formulation team can now proceed to an outline specification of a possible project. Generating Project Options: A Checklist (Tool No. 9) can guide this creative process. The financial and economic viability of each of the preliminary project designs that emerges can be rapidly checked by the Quick Method of Investment Appraisal (Tool No. 10) and, to the extent that other important objectives must also be satisfied, the final choice of project design can be selected with the aid of the Multi-criteria Decision Matrix (Tool No. 12).