Pre-feasibility Study

After applying the opportunity screening matrix their listed opportunities, you should have one or two
surviving options. The next step is to conduct a pre-feasibility study would leave you with what is,
hopefully, the one best opportunity. The idea is to focus on a few key items that could make or
break the business concepts. The prefeasibility study examines each opportunity in terms of the valuing
factors:
1. market potential and prospects;
2. availability of technology;
3. project investment and cost estimates, and;
4. financial forecast and determination of financial feasibility

Market Potential

Simply put, market potential is an estimated number of possible customers who might avail of your
product or service. You can come up with a general idea of this by simply determining the
relevant (or targeted customers) population of the town or Barangay (or even province or country) in
which you want to operate your business.

Segmenting the Market

Of course, not everyone is going to be your customer. That is why you also have the describe who your
specific customers are. You can start by asking, “Are my customers mainly......?”
• male or female? or both?
• kids, teenagers, young adults, or parents?
• Grade school, high school, or college graduates?
• local resident or from outside of town?
• reach, middle class, or impoverished families (A, B, C, D and E)?

Once you have a set of customers or a target segment in mind, you can narrow down your potential
market to a smaller number. Keep in mind that some general statistics for the above descriptions can be
found online. However, there are other more specific classifications, but you might want to look into. For
instance, your service might cater to people of specific religion. Or maybe a product might appeal only to
people who are computer savvy. In order to obtain such data, you might have to do some hands-on
research and surveys. You can ask about buying behaviors of customers, their lifestyles, their favorite
activities in order to classify or segment them differently.

Assessing Competition

Market potential is also affected by the number of establishments serving your target customers.
Generally, you should try to avoid serving a market with a lot of competitors. However,
some entrepreneurs choose to enter the biggest, riches, and most competitive market in order to achieve
high visibility and growth potential.

Aside from profiling your competitors, you should assess their individual strengths. Which competitor is
the most well-known? which compared or offers the lowest or highest prices? which one would be making
the most money? Can these enterprises be considered as expert in what they're doing, or can you do
better than them? By asking such questions, you should get an idea of whether you can compete with
existing businesses or not. This might lead you to ask whether you should change your location or modify
your target segment in order to avoid competition.

Estimating market shares and sales

Now that you know the potential number of customers and competitors, you can come up with an
“educated guess” what market share you can attract. Are you confident enough to go for 50% of the
market? or just 10%? and so on. (Later on, after completing the rest of the pre-feasibility study, you
should adjust your market share estimate according to the investment requirements and costs of
production.)

Lastly, with an estimated market shares, you can now make a sales forecast. These forecasts should be in
terms of the number of products or services sold, and monetary value of the sales. To calculate the
monetary value, use price estimates based on competitor's prices.
To get a better idea of estimating market potential, read the following cases study, and answer the
question that follow.

Case Study 1: Gamer Internet Shop

Joel, a self-confessed computer geek and gamer, is planning to start the computer shop in his Barangay
of San Vicente. He learned from a quick visit the barangay Hall that there were around 40,000 people
living in the area. However, he wants to cater specifically to the gamer segment made up of mostly male
high school and college students, plus young adults with a lot of free time on their hands.
To help him calculate for the potential number of gamers/ customers, he went around in the
barangay, visiting the schools and existing computer shops. After one day of just walking around and
asking a few questions with the right people, he gathered the following information.

• There were three schools in San Vicente: won all boys Catholic High School with 400
students, one public elementary with around 2000 students, and one public high school
with nearly 1000 students.
• There were eleven computer shops in the barangay, all of which were 5 to 15 minutes
walking distance from at least one school.
• Seven of these shops had only three to five computers in catered to people who just
needed to print and type documents or surf the net. The remaining four shops had at least
10 computers each and catered to the gamer market. The biggest shop had 25
computers.
• All computer gaming shops charge a rental price of 20 pesos to 25 pesos per hour.
• As Joel suspected, the gamer were mostly male high school students from both the
Catholic and public high schools. There were a few college age students and young adults.
There were even fewer grade school students.
• Peak hours were on weekdays from 3:00 PM to 7:00 PM. At this time, all computer gaming
shops we're filled to capacity. Oftentimes, there would be a number of customers just
watching the other players or waiting for a seat to become available.
• On non-peak hours (including weekends), the shops average 5 customers per hour.

Joel also made sure to patronize all the four gaming shops in order to assess their performance. Except
for the biggest shop, which was also the newest, the equipment in these shops were at least three years
old and were in need of upgrades video The Internet connection in all shops was OK but was prone to lag
(or slowdowns). Air conditioning was a problem in two shops, especially during the peak hours.

Based on this research, Joel estimated at the gamer market in San Vicente was at least 1000 strong male
high schoolers. This does not include the number of college students and young adults residing
in barangay who were also gamers. But since existing gaming shops only had a total capacity of less than
1000 customers per hour, he believed that there was still room for him to put up other shops with 25
computers. He planned to charge a rental fee of 20 pesos per hour. His operating hours would be from
10:00 AM to 10:00 PM every day.

With his estimates, Joel forecast that he would be able to sell 3,280 computer rental hours in one
month (given four weeks or 28 days in a month). when multiplied by 20 hourly rental fees, this was
equivalent to 65,600 pesos in sales every month.
To validate his conclusion, Joel wanted to conduct a survey of 100 gamers of different ages. Still, he was
confident that setting up a new gaming shop could earn him a lot of money.

Questions:
1. How did Joanne sold for the 65,600 pesos monthly sales estimate? he found the equation
or solution that he used.
2. How can Joel differentiate his computer shop product of existing competitors? this at
least three things that you think will make it sharp the most popular one in the barangay.

Technology assessment and operations viability:

With a general idea of market potential, you can now determine the level of operations and technology
needed to meet customer demand. There are at least four target customers expectations affecting the
scale and complexity of an enterprise's operations:

1. Qualities demanded: this will determine the needed capacity of operations.

2. Quality specifications demanded: this would dictate the (1) quality of inputs or raw
materials, (2) quality assurance process in transforming inputs to outputs, and (3) quality
outputs and outcomes for the customer who will be looking for the specific results.
3. Delivery expectations: moving how much, how frequent and when to deliver the
customers with affect your agreement with suppliers, subcontractors, etc.
4. Price expectations: the selling price of your product or service would be compared by the
customer to your competitors.

This part of the pre-feasibility study requires you to assess whether or not you can attain the necessary
operational and technological levels it will satisfy customers expectations. However, you should
remember that while satisfying customers, your business should also be generating profits.

To help you in deciding whether or not you can meet all customers' expectations and earn money for
yourself at the same time, you may want to use the Operations Viability Assessment table below us
guide. note that the table should be accomplished from right to left, starting with outcomes or desired
results.
 Table 1: Operations Viability Assessment

Product-Market /
Inputs Throughput Outputs Output – Outcome Outcomes
Matching
(right quantity and (high productivity, (right quantity, quality (bring goods and (desired and results)
quality) efficiency, economy) and costs, time) services to customers)
Money Resource Flow
• Manpower • Operating systems Customers quality,
• Management and procedures • Goods • Fit between delivery and price
• Methods • Management produced outputs and expectations
• Materials processes, • Services outcome
• Machinery supervision and rendered expectations Sales, volume, market
control • Correct marketing share
• Quality control mix
during process Financial results

To help you understand how the Operations Viability Assessment tool works, with the following case
study.

Case Study 2.2: Mia’s Dress Shop

Mia, an up-and-coming fashion designer, had a dream: to craft elegant and fashionable dresses
that would make ladies feel like the most beautiful person in the room. For Mia, the dress itself was only
an output or a product. She knew what potential customers desired the most (the outcome): it was to
hear people say how beautiful or young or slimmer they looked wearing one of Mia’s dresses. This
outcome would also lead to a second result: more sales income for Mia through referrals from satisfied
clients.

Starting with this customer outcome, Mia worked backwards and designed an enterprise delivery
system (EDS) from output to throughput to input. She covered every step of the design and dressmaking
process, from creating a positive customer experience, to designing the dress, to the actual cutting and
sewing of the dress. The table below shows the resulting operations viability assessment for Mia’s Dress
Shop. With the right people, the proper training, and the correct processes, Mia was confident that she
could attain the outcomes she wanted.

Inputs Throughputs Outputs Outcomes

(right quantity and quality)
• Well-trained and attentive
staff
• Pleasant store ambiance
• Interactive catalogues with
attractive designs to
choose from
• Expert designer
• Well-trained and attentive
staff
(high productivity, efficiency,
economy)
Designer, cutter and measurer
must give total attention to the
customer. Assistants should engage
customers in conversation while
waiting for their turn.
Let customer choose. Use
computer-aided design alternative.
Talk to customers and learn a lot
about what they want, what image
(right quantity quality (desired end results)
and costs, time)
Customer experience.
Customer feels good from
the time she walks in to the
time she walks out. She feels
fully entertained and
attended to.
Design and style of dress
output:
• Uniquely the Cloth feels good on the
customers body, looks elegant, unique,
• Computer with design they prefer, what occasion they are • Flatters the body does does not fade, shrink or
software attending. Render the choses not exaggerate bad wrinkle.
design aesthetically and parts
functionally appealing. Show how • Fits customer’s
the design and style of the dress personality Dress fits body perfectly, not
will actually look on the customer • Projects the too loose nor too tight, not
through the computer-aided customer’s desired too long or too short. Dress
program. image feels good to wear.
• Fits the occasion being
attended by the
customer Dress delivered on time as
promised.

• Wide variety of high-
quality cloth with unique
designs; does not shrink or
fade
• Expert measurer and cutter
• Measuring and cutting
equipment
• Proper guidelines and
procedures to follow
• Expert sewer
• Sewing machines and other
tools
• Strict quality control
methods
Tie up with fabric stores with Happy customers who feel
unique designs. Cloth must be beautiful and receive the
washed and tested beforehand to adulation of others while
ensure quality. wearing the dresses
Extract measurements of different
parts of the body. Body shape and
contour must be drawn. Expert Customers are willing to pay
cutter undistracted and does more.
precise cutting of cloth. Use lining
before actual cloth is cut. Have
fitting sessions. Customers keep retuning
Classify workers according to Workmanship and referring their friends
complexity of the job and • Well-stitched well- and relatives.
expertise. One hundred percent embroidered, etc.
quality control. Constant sewer • No puckering, no
supervision. Each step in the folding
sewing process must be inspected • Completed before
before the succeeding step. delivery time.

Investment Requirements and Production/Servicing Costs:

Now that you know that the logical in operational requirements of your proposal you should ask yourself,
“how much money will I need to start business idea?” in other words, what investments do you need to
make in order to get your proposal off the ground with the needed technologies and operating levels?

There are at least three needed to pursue any opportunity:

A. Pre-operating costs: these are the things you need to take care of any preparations for
the launch of your business. This includes the pre-feasibility study (which you're doing right
now), the in-depth feasibility study, market research, product development, and
promotional costs.

B. production/ service facilities investments: these are the long-term investment for your
actual business establishment, including investment in land, buildings, machinery,
equipment, computers, software, furniture, vehicles, etc. If you are renting or leasing a space
for your business, any leasehold improvement (or renovation) it's also part of the facilities
investments.
 C. working capital investment: is it a short-term investment needed to jumpstart the
operations of the business, which includes: cash on hand and in banks; accounts receivable
and inventory (raw materials, working process, and finished goods). it should be enough cash
to cover short-term operating expenses and purchases of merchandise or raw
materials. Properly estimate the amount of inventory needed to support the sales level
target. Also, determine the credit period requirement of your customers. On top of the
investments, you should also ask the meet the monthly production/ servicing or
operating cost for your proposal. This includes:
a. Employees’ salaries, wages and benefits;
b. Rent and least expenses;
c. Utilities;
d. Transportation;
e. Fees and licenses;
f. Commissions;
g. Office supplies, and more.

Remember that your technological and operational requirements will have a big effect on operating costs,
particularly in terms of manpower, supplies, and overhead (rent, utilities) expenses.
All in all, this part of the pre-feasibility study as two questions:

1. Do I have enough resources to cover the necessary investments?

2. Is it my sales estimate (from the Market Potential part) significantly higher than my
monthly production/ service costs?

Reference:
Dr. Eduardo Morato Jr. (2015). A Trilogy on Entrepreneurship. Eduardo Morato Publishing.