Chapter 3

Feasibility Analysis

Key Words

Feasibility analysis—the process of determining if a business idea is viable

Primary research—original research that is collected by the person or persons completing the
analysis
Secondary research—data this is already collected
Concept test—involves showing a preliminary description of a product or service idea (concept
statement) to industry experts and prospective customers to solicit their feedback
Buying intention survey—an instrument that is used to gauge customer interest in a product or
service
Industry—a group of firms producing a similar product or service, such as fitness centers, smart
phones, elderly home care, or online education
Target market—the limited portion of the industry that a firm goes after or tries to appeal to

Chapter Overview

This chapter focuses on assessing the feasibility of a business idea. A feasibility analysis is more
stringent than the “First Screen” (introduced in Chapter 2) and is designed to take the best idea or
ideas that emerge and more fully assess their viability.

This chapter includes a template for completing a feasibility analysis, including a description of
each of the four steps.

Chapter Summary

1. Feasibility analysis is the process of determining if a business idea is viable.

2. Primary research is original research that is collected by the person or persons
completing the analysis. It normally includes talking to industry experts,
obtaining feedback from prospective customers, and administering surveys.
3. Secondary research probes data that is already collected. The data generally
includes industry studies, Census Bureau data, company reports, and other
pertinent information gleaned through library and Internet research.
4. Product/service feasibility is an assessment of the overall appeal of the product
or service being proposed. Its two components are product/service desirability
and product/service demand.
5. A concept test involves showing a preliminary description of a product or service
idea, called a concept statement, to industry experts and prospective customers to
solicit their feedback.
6. A buying intentions survey is an instrument that is used to gauge customer
 interest in a product or service. It consists of a concept statement (or a similar
description of a product or service) with a short survey attached.
7. Industry/target market feasibility is an assessment of the overall appeal of the
industry and market for the product or service being proposed. Its three
components are industry attractiveness, target market attractiveness, and market
timeliness.
8. Organizational feasibility analysis is conducted to determine whether a proposed
business has sufficient management expertise, organizational competence, and
resources to successfully launch its business. Its two components are
management prowess and (non-financial) resource sufficiency.
9. Clusters of firms arise because they increase the productivity of the firms
participating in them. Because the firms are located near one another, it is easy
for the employees to network with one another, and it is easy for the firms to
gain access to specialized suppliers, scientific knowledge, and technological
expertise native to the area.
10. Financial feasibility analysis is conducted to determine if a new venture is
feasible from a financial perspective. Its three components are: total start-up cash
needed, financial performance of similar businesses, and overall financial
attractiveness of the proposed venture.

Chapter Outline

I. Introduction
II. Template for Completing a Feasibility Analysis
III. Product/Service Feasibility
a. Product/Service Desirability
i. Concept Test
b. Product/Service Demand
i. Buying Intentions Survey
II. Industry/Target Market Feasibility Analysis
a. Industry Attractiveness
b. Target Market Attractiveness
c. Market Timeliness
III. Organizational Feasibility Analysis
a. Management Prowess
b. Resource Sufficiency
IV. Financial Feasibility
a. Total Start-up Cash Needed
b. Financial Performance of Similar Businesses
c. Overall Financial Attractiveness of the Proposed Venture

Chapter Notes

I. Introduction
 Feasibility analysis is the process of determining if a business idea is viable
 The feasibility analysis step, along with the idea screening step, is investigative in
nature and is designed to critically asses the merits of a business idea
  The most compelling facts a company can include in a business plan are the
results of its own feasibility analysis, especially feedback from industry experts
and prospective customers

II. Template for Completing a Feasibility Analysis

 Template is shown in Table 3-1. A fuller version is provided in Appendix 3.1 at
the end of the chapter
 The four parts of feasibility analysis are product/service feasibility,
industry/market feasibility, organizational feasibility, and financial feasibility
 Completing a full feasibility analysis takes longer than a First Screen and should
include both primary and secondary research

III. Product/Service Feasibility

 Product/service feasibility is an assessment of the overall appeal of the product or
service being proposed

a. Product/Service Desirability
 The first component of product/service feasibility is to affirm that
the proposed product or service is desirable and serves a need in
the marketplace
 The proper mindset is to get a general sense of the answers to your
product desirability questions rather than try to reach final
conclusions

i. Concept Test
 A concept test involves showing a preliminary description
of a product or service idea, called a concept statement, to
industry experts and prospective customers to solicit their
feedback
 A concept statement is normally a one-page document
which includes the following: (1) description of product or
service, (2) intended target market, (3) benefits of product
or service, (4) description of how the product or service
will be positioned relative to competitors, (5) description of
how the product or service will be sold, and (6) a brief
description of company’s management team
 Concept statement should be shown to 5 to 10 people who
are familiar with the industry the firm hopes to enter
 Attached to the concept statement should be a survey that
asks participants to (1) tell you three things they like about
the product or service idea, (2) provide you three
suggestions for making it better (tell you whether they
think the product or service idea is feasible), and (3) share
additional comments or suggestions

b. Product/Service Demand
 The second component of the product/service feasibility analysis is to
determine if there is demand for the product or service

i. Buying Intentions Survey

 a. A buying intentions survey gauges customer interest in a product
or service
b. The buying intentions survey consists of a concept statement with
a short survey attached
c. The statement and survey should be distributed to 15 to 30
potential customers
d. The statement and survey typically features a question that asks
how likely the subject would be to buy the product or service

IV. Industry/Target Market Feasibility Analysis

 Industry/target market feasibility is an assessment of the overall appeal of the
industry and the target market for the product or service being proposed
 Most firms do not try to service their entire industry, only a specific target market
within the industry
 It’s important to assess both the broad industry and your specific target market

a. Industry Attractiveness
i. In general, the most attractive industries for start-ups are large and
growing, are young rather than old, are early rather than late in
their life cycle, and are fragmented rather than concentrated
ii. Some industries are characterized by such high barriers to entry, or
the presence of one or two dominant players, that potential entrants
are essentially shut out
iii. You should also note the degree to which environmental and
business trends are moving in favor of rather than against the
industry

b. Target Market Attractiveness

i. By focusing on a target market, a firm can usually avoid head-to-
head competition with industry leaders, instead of serving a
specialized market very well
ii. The challenge is to find a target market that’s large enough for the
proposed business, yet is small enough to avoid attracting larger
competitors
iii. Often, information from more than one industry and/or market
must be collected and synthesized to make an informed judgment,
especially if the firm is pioneering a unique area of the
marketplace

c. Market Timeliness
i. Determine if the window of opportunity for the product or service
is open or closed
ii. Study the simple economics of the industry to determine whether
the timing is right for a new entrant
iii. Firms that fail to conduct a thorough industry and target market
analysis often find that the market is not large enough to maintain
and grow the business

V. Organizational Feasibility Analysis

  Organizational feasibility analysis determines whether a proposed business has
sufficient management expertise, organizational competence, and resources to
successfully launch its business

a. Management Prowess
i. A start-up should assess the prowess, or ability, of its initial
management team
ii. Individuals starting the firm should conduct honest and candid
self-assessments
iii. Two of the most important factors are passion for the business and
understanding of the markets in which the firm will compete
iv. Additional factors that define management prowess include prior
entrepreneurial experience, depth of professional and social
networks, degree of creativity, experience in cash flow
management, and whether the team has college degrees

b. Resource Sufficiency
i. The focus in organizational analysis is on non-financial resources
because financial feasibility is considered separately
ii. Identify the 8 to 12 most important and potentially problematic
non-financial resources and assess whether they are available
iii. Examples of non-financial resources include office space,
manufacturing space, key management employees, key support
personnel, and support from state and local governments if
applicable
iv. One easily overlooked resource sufficiency issue that should be
considered is proximity to similar firms, creating a cluster that can
increase productivity of the participating firms

VI. Financial Feasibility

 For feasibility analysis, a preliminary financial analysis, is normally sufficient.
 The most important issues to consider at this stage are total start-up cash needed,
financial performance of similar businesses, and overall financial attractiveness of
the proposed venture
 More complete financial projections will be included in the business plan

a. Total Start-up Cash Needed

i. Try to determine total cash needed to prepare the business to make
its first sale
ii. A detailed explanation of where the money will come from should
be provided
iii. If money will come from friends, credit cards, or a home equity
line of credit, a reasonable plan should be stipulated to repay the
money
iv. When projecting start-up expenses, it is better to overestimate
rather than underestimate the costs involved

b. Financial Performance of Similar Businesses

 i. Estimate a proposed start-up’s potential financial performance by
comparing it to similar, already established businesses
ii. Utilize archival data available online, including financial reports
on firms
iii. Some industry trade associations publish data on the sales and
profitability of firms in their industries
iv. Basic Internet searches are also helpful

v. Simple observation and leg work can also be used to gauge the
type of sales to expect by estimating the number of customers and
average purchase amount at various times of day

c. Overall Financial Attractiveness of the Proposed Venture

i. The extent to which a proposed business appears positive relative
to each factor is based on an estimate or forecast, not actual
performance
ii. Important factors include the extent to which sales can be expected
to grow during the first few years of the venture, percentage of
recurring revenue to anticipate, the likelihood that internally
generated funds will be available within two years, and the
availability of exit opportunities for investors if applicable

Review Questions

1. What is a feasibility analysis? How does a feasibility analysis differ from a

business plan?

Answer: A feasibility analysis is the process of determining if a business idea is

viable. The feasibility analysis step, along with the idea screening step, is
investigative in nature and is designed to critically asses the merits of a business
idea before producing a business plan.

2. What are the four individual components of a full feasibility analysis?

Answer: Product/service feasibility, industry/target market feasibility,

organizational feasibility, and financial feasibility.

3. What is the difference between primary research and secondary research? Are
both types of research necessary to complete a full feasibility analysis?

Answer: Primary research is collected by the individual conducting the analysis,

whereas secondary research probes data that has already been collected. Both
types of research are needed for a complete feasibility analysis.

4. Describe the purpose of product/service feasibility analysis? Briefly describe its

two components.
 Answer: Product/service feasibility analysis is an assessment of the overall
appeal of the product or service being proposed. Its two components are product/
service desirability and product/service demand.

5. Describe the purpose of a concept test and how it should be executed. Also,
describe the purpose of a buying intentions survey and how it should be
distributed and assessed.

Answer: A concept test involves showing a preliminary description of a product

or service idea, called a concept statement, to industry experts and prospective
customers to solicit their feedback.

A buying intention survey is used to gauge customer interest in a product or

service. About 25 to 50 potential customers are given a concept statement with a
short survey attached. Typically the number of people who indicate that they
definitely would buy is combined with the number of people who indicate that
they probably would buy to gauge customer interest.

6. Explain the purpose of industry/target market feasibility analysis. Briefly

describe its three components?

Answer: Industry/target market feasibility is an assessment of the overall appeal

of the industry and market for the product or service being proposed. Its three
components are industry attractiveness, target market attractiveness, and market
timeliness.

7. What is a target market? Why do most start-ups start in target markets rather
than broader markets that have more customers?

Answer: A target market represents the limited portion of the industry that a
firm goes after or tries to appeal to. Start-ups rarely have the resources to
successfully serve the entire industry, so they appeal to a select portion of the
total industry that is not being targeted by the larger, more established firms.

8. Describe the purpose of organizational feasibility analysis. Briefly describe its

two components.

Answer: Organizational feasibility analysis is conducted to determine whether a

proposed business has sufficient management expertise, organizational
competence, and resources to successfully launch its business. Its two
components are management prowess and (non-financial) resource sufficiency.

9. What is an industry “cluster”? Why might a semiconductor start-up, for example,

decide to launch in a geographic area where there are other semiconductor firms,
rather than another area?
 Answer: Clusters of firms arise because of the increase of productivity of the
firms participating in them. It is easier for the employees of these firms to
network with one another and for the firms to gain access to specialized
suppliers, scientific knowledge, and technological expertise native to the area.

10. Describe the purpose of a financial feasibility analysis. Briefly describe its three
components.

Answer: Financial feasibility is conducted to determine if a new venture is

feasible from a financial perspective. Its three components are total start-up cash
needed, financial performance of similar businesses, and overall financial
attractiveness of the proposed venture.

Application Questions

1. Kendall Ryan just applied for a bank loan to finance a Greek-style restaurant
he plans to open near a large Midwestern university campus. The banker
asked Kendall if he conducted any primary research to assess the feasibility
of the restaurant. Kendall replied that he spent countless evenings
and weekends in the library and on the Internet collecting data on the
feasibility of Greek-style restaurants, and he is confident that his restaurant
will be successful. He said that he even did careful research to make
sure that Greek-style restaurants do well near large Midwestern university
campuses. If you were the banker, how would you react to Kendall’s
statements?

Answer: Kendall should also collect some primary research. Kendall could
conduct a concept test to see if the idea is appealing to 5-10 restaurant industry
experts and 5-10 potential customers. He could also distribute a buying
intentions survey to 25-50 potential customers on the campus to gauge customer
interest.

2. Three recent startups, CareZone, BenchPrep, and CitySlips were mentioned

in Chapter 2. Pick one of these companies and write a concept statement for it.

Answer: Student responses will vary but should include a preliminary

description of the product/service idea, the intended target market, the benefits of
the product/service, a description of how the product/service will be positioned
relative to competitors, a description of how the product/service will be sold, and
a brief description of the company’s management team.

3. InstyMeds, another company introduced in Chapter 2, developed a vending

 machine for prescription drugs to be located in rural hospitals and urgent
care centers. Describe how you would have conducted an industry/target
market feasibility analysis for this startup.

Answer: Student responses will vary but should include some analysis of the
trends in fitness, specifically yoga as well as trends in exercise equipment in
general. They should consider whether industry is large and growing, is young
rather than old, is early rather than late in its life cycle, and is fragmented rather
than concentrated. They should also note the degree to which environmental and
business trends are moving in favor rather than against the industry.

4. Jane Robinson has developed a software product that helps elementary

school teachers better prepare their lesson plans and more accurately assess
their students’ progress. Jane is now wondering whether this is a good time
to launch the product. What factors should Jane consider in making this
determination?

Answer: Jane should consider whether the window of opportunity is open or

closed. Are economic factors affecting public schools placing this industry on a
growth trend? She should also try to determine if there are a number of
competing lesson plan and assessment resources in this market. If so, the trends
may indicate that this is not a good time to launch a business in this industry.

5. Using one or more of the resources included in the Internet Resources Table
in Appendix 2.2 at the end of Chapter 2, investigate the health and growth
potential of the spa industry in the United States.

Answer: Student responses will vary.

Additional Activities

1. Concept Statement and Buying Intentions Survey

Purpose: students will learn to consolidate their new business concept into a one-page document
and will learn how to approach other people to obtain feedback on their concepts.

This could be done either as an individual or team assignment. It is not necessary for them to
have conducted a feasibility analysis before this assignment.

Ask students to identify one new business concept that they believe could be successful, write a
one-page concept statement, and then script at least five questions to include in a buying
intentions survey. You could either review these documents yourself or have students critique
one another’s work.

Then assign the students to share their concept statements and conduct their buying intentions
survey with some minimum number of people; a minimum of 5 people is recommended. Give
them one week to complete this assignment.

When the deadline is up, have students verbally report their results to the class.

2. Industry Attractiveness—the Best and the Worst

Purpose: to identify industries that are highly attractive or unattractive. Use this activity after
you have finished lecturing on Industry Attractiveness.

 Ask students to call out loud the best and worst examples of industries. For instance, what are
really bad industries to enter or what are examples of really attractive industries to enter.
Write the two lists on chalk- or whiteboard.

 For each item on each list ask students to share their reasons for placing that industry on their
list.

 After discussing each industry, have students work in discussion groups to answer the
following discussion questions.

 Have each discussion group report their answers to the total group and discuss.

The Best and the Worst Discussion Questions:

 Prioritize the list of the top “Do Enter Industries” based on our discussion of the “Best” list.
In other words, this would be the first industry I would want to enter, then the second
industry I would want to enter, and so on. Be prepared to defend your choices.

 Prioritize the list of the “Do Not Enter” industries based on your discussion of the “Worst”
list. Be prepared to defend your choices.

3. Organizational Feasibility Analysis

Purpose: to encourage students to expand their awareness of the various factors included in an
organizational feasibility test, and to encourage more ideas, adaptations, and innovations.

Use this discussion activity after you have completed your lecture on organizational feasibility
analysis.
Provide your students the “Who, What, Where, When, Why, and How” questions following.
Give them a few minutes to read through the questions, and then call their attention to the first
set of questions, “Who.” Ask them to answer with examples related to the feasibility of their new
business concept or about their industry. Once each student or group has answered each question,
ask them to create additional questions that need to be asked and answered. Then continue on to
the second point, “What,” and repeat the discussion, eliciting 4 to 5 responses of examples and
additional questions. Proceed through the remaining questions, allowing ample time for students’
examples and questions.

1. WHO
Who can help or make contributions to make our business successful?
Who must I “sell” on this idea in order for it to become a reality?
Who can help me get the additional resources needed to open our doors for business?
Who will benefit from the success of our business?

2. WHAT
What do I need by way of additional resources that I haven’t considered yet?
What techniques or methods can I use to get these resources?
What is the best way to get these resources for my business?
What is the first step that we must take to obtain resources?
What will make them (vendors, lenders, customers, other stakeholders) “buy”?

3. WHERE
Where should I start to obtain what I need?
What resistance is likely to be encountered as we attempt to obtain these organizational
resources?
Where should I “plant seeds” for the resources I will need in the future?

4. WHEN
When should I introduce the plan to each category of stakeholder?
When should we implement the various tasks needed to create our organization?
When should we revise our current organizational strategy?

5. WHY
Why should a stakeholder buy our idea?
Why is our way better?
Why is the resistance against our new business concept so strong?

6. HOW
How can we improve on our concept?
How can we “test the waters” without losing our shirts?
How can I persuade centers of influence and important stakeholders?