Department of Business Administration - Chair for Entrepreneurship

AP Primer i in i Entrepreneurship E t hi

Prof.Dr.UlrichKaiser Ch i of Chair f Entrepreneurship E t hi UniversittZrich

Fall2012

Department of Business Administration - Chair for Entrepreneurship

Content

2008PrenticeHall HS12 A Primer in Entrepreneurship, Prof. Dr. Ulrich Kaiser, Fall 2012 (Lecture 3) Seite 2

Department of Business Administration - Chair for Entrepreneurship

AP Primer i in i Entrepreneurship E t hi
PartIIDevelopingSuccessfulBusinessIdeas Lecture3 FeasibilityAnalysis

Prof.Dr.UlrichKaiser Chair of Entrepreneurship UniversittZrich Fall2012

Department of Business Administration - Chair for Entrepreneurship

Agenda
1.FeasibilityAnalysis:AnOverview 1.1Timing g 1.2FourTypesofFeasibilityAnalysis 2.Product/ServiceFeasibilityAnalysis 2.1ConceptTesting 2.2UsabilityTesting 3.Industry/MarketFeasibilityAnalysis 4.OrganizationalFeasibilityAnalysis 5.FinancialFeasibilityAnalysis

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Questions

? ? ?
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Whatisanfeasibility yanalysis y andwhatisitdesigned g toaccomplish p ingeneral? Whatarethefourareasthataproperlyexecutedfeasibilityanalysis explores? Whatarethe(primary)issuestoconsiderineachofthesefourareas?

tobeansweredintodayslecture.

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Department of Business Administration - Chair for Entrepreneurship

1FeasibilityAnalysis:AnOverview
Feasibilityanalysisistheprocessofdeterminingifabusinessideaisviable.

FeasibilityAnalysis... ... isthepreliminaryevaluationofabusinessidea idea,conductedfor thepurposeofdeterminingwhethertheideaisworthpursuing. launch and ... takestheguesswork(toacertaindegree)outofabusinesslaunch, providesanentrepreneurwithamoresecurenotionthatabusinessidea isfeasibleorviable. ... followstheopportunityrecognitionstagebutcomes beforethedevelopmentofabusinessplan.

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1FeasibilityAnalysis:AnOverview
1.1Timing Beforeacompanyundertakesafeasibilityanalysis,aconceptstatementshould bedeveloped.

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1FeasibilityAnalysis:AnOverview
1.1Timing

Thesequencepicturedmakesperfectsense.

BUT

Themajorityofentrepreneursdonotfollowthispatternbefore launchingtheirventures. Entrepreneurstendtounderestimatetheamountofcompetition therewillbeinthemarketplaceandtendtooverestimatetheir personalchanceforsuccess.

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1FeasibilityAnalysis:AnOverview
1.2FourTypesofFeasibilityAnalysis

Product/Service yAnalysis y Feasibility Feasibility A l i Analysis Organizational g FeasibilityAnalysis

Industry/Market Feasibility yAnalysis y

Financial FeasibilityAnalysis

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2Product/ServiceFeasibilityAnalysis
Theproduct /servicefeasibilityanalysisisanassessmentofthe overallappealoftheproductorservicebeingproposed.

idea

Beforeap prospective p firmrushesaproduct p orserviceinto development,itshouldbeconfidentthattheproductor serviceiswhatprospectivecustomerswant. ConceptTesting UsabilityTesting

components

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2Product /ServiceFeasibility Analysis

2.1ConceptTesting Aconcept ttest t tentails t il showing h i arepresentation t ti of fth theproduct d torservice i t to prospectiveuserstogaugecostumerinterest,desirability,andpurchaseintent. ConceptStatement isaonepagedescriptionofabusinessthatis distributedbyastartupentrepreneurtopeoplewho areaskedtoprovidefeedbackonthepotentialofthe businessidea.

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2Product /ServiceFeasibility Analysis

2.1ConceptTesting

Purpose

1. evaluatetheunderlyingpremisesofaproductorservicethatan

entrepreneurthinksiscompelling
2. helpdevelopanidea 3. estimatethepotentialmarketsharetheproductorservicemight

command

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2Product /ServiceFeasibility Analysis

2.1ConceptTesting i f information ti to t i include l d adescriptionoftheproductorservicebeingoffered theintendedtargetmarket thebenefitsoftheproductorservice adescriptionofhowtheproductwillbe positionedrelativetosimilaronesinthemarket adescriptionofhowtheproductorservicewillbesoldanddistributed informationaboutthefounderorfoundersofthefirm
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2Product /ServiceFeasibility Analysis

2.1ConceptTesting(Example) NewVentureFitnessDrinksInc.
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2Product /ServiceFeasibility Analysis

Aconcepttestisusuallyfollowedbythedevelopmentofa prototypeormodeloftheproductorservice prototype isthefirstphysicaldepictionofanewproduct,whichisusuallystillinarough ortentativemode. virtualprototype isacomputergenerated3Dimageofanideaanddisplaysaninventionasa3D modelthatcanbeviewedfromallsidesandrotated360 . Forproducts, F d t lik likeanewb board dgame,aprototype t t i isneeded d d t toget tmore substantivefeedbackthancanbegleanedfromaconceptstatement. having h i aprototype t t available il bl permits it usability bilit testing t ti to t take t k place. l
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2Product /ServiceFeasibility Analysis

2.2UsabilityTesting Usabilitytesting measuresaproductseaseofuseandtheusers perceptionoftheexperience. issometimescalledusertest,betatest,orfieldtrial. Theconduct Th d t of fausability bilit test t ti isagood d i investment t tof fan entrepreneursorfirmsresources,

!
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BUT itistemptingtorushanewproductorservicetomarket. Manyproductsthatconsumersfindfrustratingtoworkwith have beenbroughttomarkettooquickly!

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2Product /ServiceFeasibility Analysis

ConceptandUsabilityTestinginPractice ThegreenlightprocessatActivision

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3Industry/MarketFeasibilityAnalysis
TheIndustry/MarketFeasibilityAnalysisisanassessmentoftheoverall appealofthemarketfortheproductorservicebeingproposed.

Therearethreeprimaryissuesthatshouldbeconsidered.

1. 2. 3.

industryattractiveness markettimeliness identificationofanichemarket

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3Industry/MarketFeasibilityAnalysis
Aprimarydeterminantofanewventuresfeasibilityisthe attractivenessoftheindustryitchooses. Industriesvaryconsiderablyintermsoftheirgrowthrate. industryattractiv i veness Characteristicsofthemostattractiveindustries beinglargeandgrowing beingimportanttothecustomer beingfairlyyoungratherthanolderandmoremature havinghighratherthanlowoperatingmargins b crowded d d notbeing Inadditiontoevaluatinganindustrysgrowthpotential,anewventure will illwanttoknow k moreabout b the h industry i d it i plans l toenter.
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3Industry/MarketFeasibilityAnalysis
Gettingtoknowmoreabouttheindustrycanbeaccomplished throughbothprimaryandsecondaryresearch. industryattractiv i veness
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Roleofprimaryandsecondaryresearch ininvestigatingindustryattractiveness Originalresearchthatiscollectedbytheentrepreneurand Primary involvesanentrepreneurtalkingtopotentialcustomersand Research keyindustryparticipants. probesdatathatarealready ycollectedand Researchthatp Secondary haveitssourceinindustryrelatedpublications,government Research statistics,competitorswebsites,andindustryreportsfrom researchlikeForresterResearch. Research
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3Industry/MarketFeasibilityAnalysis
Asecondconsiderationisthetimelinessoftheintroduction ofaparticularproductorservice. products/services being ganimprovement p ofthosealready availableinthe marketplace Windowofopportunity:Open?Closed? dtimefor f enteringthe h market: k Good Arecustomersbuying? Areindustryincumbentsmakingmoney?

market ttimelin ness

breakthroughproduct/ serviceestablishinga newmarketsegment

Shouldwetrytocaptureafirstmover advantage?

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3Industry/MarketFeasibilityAnalysis
Anichemarketisaplacewithinalargermarketsegmentthat representsanarrowergroupofcustomerswithsimilarinterests. ident tificationofanich hemarke et

Sellingtoanichemarketmakessense,because itallowsafirmtoestablishitselfwithinanindustry withoutcompetingagainstmajorcompetitorsheadon. itallowsafirmtofocusonservingaspecializedmarket verywellinsteadoftryingtobeeverythingtoeverybodyin abroadmarketwhichisnearlyimpossiblefornewentrant.

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3Industry/MarketFeasibilityAnalysis
Anotherusefulwayofthinkingaboutthistopicistodistinguish betweenverticalandhorizontalmarkets. ident tificationofanich hemarke et

isanalogoustoanichemarketandfocusesonsimilar Vertical businessesthathavespecificneeds.Startupstypically Market startbysellingintoverticalmarkets.

Horizontal meetsthespecificneedsofawidevarietyofindustries, Market rather th than th aspecific ifi one.

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4Organizational Feasibility Analysis

Theaimistodeterminewhetherthebusinessitselfhassufficientexpertise, competenceandresourcestosuccessfullylaunchitsbusiness.

Therearetwoprimaryissuestoconsider.

1. 2.

ManagementProwess ResourceSufficiency

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4Organizational Feasibility Analysis

Afirmshouldcandidlyevaluatetheprowess(ability)ofits managementteam. managem mentpro owess
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Managementshouldhave: q p passion. therequisite Thepassionthatthesoloentrepreneurorthefoundingteam hasforthebusinessidea. theexpertise tolaunchtheventure. Theextenttowhichthesoloentrepreneurorthefoundingteam understandsthemarketsinwhichthefirmwillparticipate. Soloentrepreneursorfoundingteamswithestablishedsocialand professionalnetworks alsohaveanadvantage advantage.
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4Organizational Feasibility Analysis

Theassessmentofwhetheranentrepreneurhassufficientresourcesto launchtheproposedventurefocusesonnonfinancialresources.

resource esufficie ency

Afirmshouldlistthe6to12criticalnonfinancialresources thatwillbe neededtomoveforwardtosuccessfullydevelopthebusinessidea.

Ifcriticalresourcesarenotavailableincertain areas,itmaybeimpracticaltoproceedwiththe businessidea.

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4Organizational Feasibility Analysis

Nonfinancialresourcesthatmaybecriticaltothesuccessfullaunchofa newbusinessmaybe: availabilityofaffordableofficeorlabspace, business, likelihoodoflocalandstategovernmentsupportofthebusiness qualityofthelaborpoolavailable, proximity ytokey ysuppliers pp andcustomers, , p willingnessofhighqualityemployeestojointhefirm, likelihoodofestablishingfavorablestrategicpartnerships, proximitytosimilarformsforthepurposeofsharingknowledge, possibilityofobtainingintellectualpropertyprotectioninkeyareas.

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resource esufficie ency

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5FinancialFeasibility Analysis
Asthefinalstageofacomprehensivefeasibilityanalysis aquickfinancialassessmentisusuallysufficient.

Mostimportantissuestoconsider:

1. 2 2. 3.

totalstartupcashneeded fi financial i lperformance f of fsimilar i il businesses b i overallattractivenessoftheproposedventure

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5FinancialFeasibility Analysis
Anactualbudgetshouldbepreparedthatlistsalltheanticipatedcapital purchasesandoperatingexpensesneededtogeneratethefirstCHF1in revenues. revenues

tot talstartupcashneeded

Murphys Murphy sLaw

Whatevercangowrong,willgowrong.
Itisararestartupthatdoesnothavesomesetbacks ingettingupandrunning.

Whenprojectingstartupexpenses,itisbetterto overestimateratherthanunderestimatethecostsinvolved.

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5FinancialFeasibility Analysis
financialp performan nceofsim milarbusin nesses Theproposedstartupsfinancialperformanceisestimatedbycomparing ittosimilar,alreadyestablishedbusinesses. Thereareseveralmethodstodothis,allofwhichinvolvealittleethical detectivework:

1 1. 2.

Availablereports,ofwhichsomeareforfreeandsomerequire afee:They yofferdetailedindustry ytrendanalysis y andreports p onthousandsofindividualfirms. Simpleobservationresearch:Forexample,theownersofNew VenturesFitnessDrinkscouldestimatetheirsalesbytracking thenumberofpeoplewhopatronizesimilarrestaurantsand estimatingtheaverageamounteachcustomerspends.
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5FinancialFeasibility Analysis
financialp performan nceofsim milarbusin nesses
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BusinessRatingAgencies http://www.creditreform.ch/ http://www.dnbswitzerland.ch BusinessSurveys htt // http://www.kof.ethz.ch/services/data/ k f th h/ i /d t / BusinessOrganizations http://www.zurichcci.ch/

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5FinancialFeasibility Analysis
ove erallattra activeness softheproposedv venture Theextenttowhichabusinessopportunityispositiverelativeto eachfinancialfactor,whichisassociatedwithpromisingstartups, i b is based donanestimate i rather h than h actual lperformance. f Factorsthatpertaintotheoverallfinancialfeasibility: steadyandrapidgrowthinsalesduringthefirst5to7years inaclearlydefinedmarketniche highpercentageofrecurringrevenue abilitytoforecastincomeandexpenses withareasonabledegreeofcertainty internallygeneratedfundstofinanceandsustaingrowth availabilityofanexitopportunityforinvestorstoconvertequityintocash
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Doyouknowtheanswer?

?! ?! ?!
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Whatisanfeasibility yanalysis y andwhatisitdesigned g toaccomplish p ingeneral? Whatarethefourareasthataproperlyexecutedfeasibilityanalysis explores? Whatarethe(primary)issuestoconsiderineachofthesefourareas?

testyourself.

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References
Barringer,B.andD.,Ireland(2008):Entrepreneurship SuccessfullyLaunching NewVentures,Pearsons PrenticeHall.

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Outlook

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