Chapter four

Assessing the Feasibility of

a New Venture
 OUTLINES
 Assessment and Evaluation of Entrepreneurial
Opportunities
 Structuring the New Venture
 Legal Structures and Issues
 Sources and Types of Capital
 Buying versus Starting a Business
 Conducting Feasibility Study
Assessing the Feasibility of a New Venture
• As the name implies, a feasibility study is an analysis of the viability of an
idea. It focuses on helping answer the essential question of “should we
proceed with the proposed project idea?”. All activities of the study are
directed toward helping answer this question.
• Entrepreneurs with a business idea should conduct a feasibility study to
determine the viability of their idea before proceeding with the development
of the business. Determining early-on that a business idea will not work,
saves time, money and heartache later.
 Assessing the Feasibility of a New Venture
• A feasible business venture is one where the business will
Generate adequate cash-inflow and profits
Withstand the risks it will encounter
Remain viable in the long-term and meet the goals of the founders
• The venture can be a new start-up business, the purchase of an existing
business, franchise, an expansion of current business operations or a new
enterprise for an existing business.
 Elements in Evaluating New Ventures
• Market opportunity
• Industry trends & regulatory matters
• Proprietary approach: is the intellectual property stand alone or platform IP
• Technology impact: what is the nature and outgrowth of the technology?
• Financials: is the model articulated for how products will be sold, who will
buy them, how much revenue is projected and by when?
• Team: does the team have the requisite skills to move all aspects of the
company forward?
• SWOT: is a series of steps one has to consider in evaluating a business
opportunity and arriving at a decision on starting a business or not.
 Guidelines Of Business Feasibility Study
i. Description of the Business
ii. Market Feasibility: Enterprise description, enterprise competitiveness, market
potential, sales projection, access to market outlets
iii. Technical Feasibility: Determine facility needs, suitability of production
technology, availability and suitability of site, raw materials
iv. Financial Feasibility: Estimate the total capital requirements, estimate equity
and credit needs and determine sources, budget expected costs and returns of
various alternative
v. Organizational/Managerial Feasibility: legal structure of the business, business
founders
vi. Study Conclusions: it contain the information you will use for deciding
whether to proceed or not with creating the business
 The Marketing Perspective
• Market is a group of potential customers having needs to satisfy, ability to
buy and willingness to pay in order to satisfy these needs.
• Market is also social and managerial process by which individuals & groups
obtain what they need and want through creating and exchanging products
and value with others.
• The main concepts of marketing
Marketing activities are integrated
Organizations are market oriented
Marketing focuses on selected markets
Customer satisfaction is the core of marketing
 Marketing starts early before production & continues after selling
 The Marketing Mix

• A marketing organization has to concentrate on four important aspects

known as the 4p’s of marketing.
• The marketing manager has to combine these 4 p’s (Product, Price,
Promotion and Place.) In such a way that the combination provides
satisfaction to the customer and profit to the manufacturer.
• When these elements (4 p’s) are combined together they are called as “The
Marketing Mix”.
1. The product mix: Includes 4. The price mix: Includes
• Product planning and development • Price polices
• Branding, Packaging, Labeling  Skimming pricing (Pricing above
2. Place mix (Physical distribution the market)
mix):  Penetration pricing (Pricing below
• Channels of distribution the market)
• Transportation  Premium pricing (Pricing with the
• Warehousing market)
3. Promotion mix: Includes • Discounts
• Advertising  Quantity discount Seasonal
• Personal selling discount
• Sales promotion  Trade discount Cash discount
• Publicity
• Credits
 1. THE PRODUCT MIX
• Product: is any commodity that satisfies the needs & wants of customer.
• It is a bundle of tangible & intangible attributes, which satisfy the needs, and
wants of customers.
• In today market, a product can be
A person (soccer players)
Organization (privatized firms)
Objects (items)
Places (leased land) Idea (business plans or project proposal)
Services (medication or barber), or mixes of these elements
• So, a product can be defined as anything, which comprises of benefits in forms of
physical, service, and symbolic attributes to maximize buyers’ want satisfaction.
 1.1 Product planning and development

 Product planning includes three major types of decisions:

• Development and introduction of new products
• Modifications of existing products in keeping with the changing tastes and
preferences of the target customers
• Elimination of unprofitable or obsolete products
 1.2 Branding
• Brand name: the part of a brand which consists of word, letters and/or
numbers, which can be vocalized identification to the product. E.g.. OMO,
Coke.
• Brand mark: the part of a brand that can be recognized but is not
utterable/complete. It can appear in the form of symbol, design, distinctive
coloring or lettering.
• Trademark: a brand or part of a brand that has been given legal protection so
that the owner has exclusive rights to its use. After companies identify their
trademark, they entail a term “™” or “®” .
• Trade Name: Trade name is the name of the business organization. A trade
name may also be used as a brand name. In such a case it performs a dual
function. It gives identification to the product as well as the manufacturer.
• A modern example of a brand is Coca Cola which belongs to the Coca-Cola
Company. The Coca-Cola logo is an example of a widely-recognized trademark
and global brand.
• Examples of global brands include Facebook, Apple, Pepsi, McDonald's,
Mastercard, Gap, Sony, Nike, Adidas and Kangoo Jumps.
• BRAND refers to names, logos and slogans. E.g. COKE, NIKE, CALVIN KLEIN
it is what makes a product or service different from its competitors
• TRADEMARK is something you can do to brands. If you trademark a brand, then
you own the "intellectual property" of that brand and you are the only person
allowed to use that Brand name, slogan etc. If others want to use that brand, they
must ask your permission or pay some money.
• The logo for this website, Wikipedia®, which is a registered trademark of
Wikimedia Foundation, Inc.
 Importance of a Brand
• The brand makes it easier for the seller to process orders and track down
problems.
• The seller’s brand name and trademark provide legal protection of unique
product features.
• Branding gives the seller the opportunity to attract a loyal profitable set of
customers and helps to increase the control and share of the market.
• Branding helps the seller to segment markets and expand the product mix.
• Good brand help to build the corporate image because it advertises the
quality and size of the company.
• Brands make it easy for customers to identify products or services.
 Requirements of a Good Brand

• Be easy to pronounce, recognize and remember

• Be distinctive
• Suggest something about the product’s benefits or characteristics
• Suggest about the product qualities such as action or use
• Be large enough to be applicable to new products that may be added to the
product line
• Have a possibility of registration and legal protection
 1.3 Packaging

• Packaging is a marketing process concerned with the design and production

of the container or wrapper for a product.
• The container or wrapper or covering is called the package.
Importance of packaging
• Packaging serves several safety and utilitarian purposes
• Packaging may implement a company’s marketing program.
• Well-packaged products may increase profit possibilities in that it stimulates
customers to pay more just to get the special package.
 1.4 Labeling

• A means of communication between the brand and the consumer.

1. Brand label: simply the brand alone applied to the product or to the
package.
2. Grade label: a label, which identifies the quality with, a letter, number
or word.
3. Descriptive label: it gives objective information about the use,
construction, care, performance or other features of the product.
Sometimes it is called informative label. E.g. medicines
 2. The Price Mix

• Price is the amount of money consumers have to pay to obtain the product.
• Price has operated as the major determinant of user choice traditionally.
• Although non-price factors have become more important in recent decades
price still remains one of the most important element determining market
share and profitability.
• Different companies set the price haphazardly/arbitrarily as based on cost.
 Methods of Pricing
1. Cost plus pricing/ Mark Up pricing/ cost + profit=price
2. Skimming pricing
• The following conditions should be satisfied
 A sufficient number of buyers have a high current demand.
 The high initial prices do not attract more competition to the
market.
 The high price communicates the image of a superior product.
3. Penetration pricing: below market price
4. Premium pricing: with market
• Which one do you think is better for new start-up business?
The major objectives of pricing are:
• Achievement of target return
• Maximization of profit
• Increase of sales volume
• Maintenance or increase of market share
• Stabilization of prices
• Meeting competition
 3. Place Mix
• Place: includes company activities that make the product available to target
consumers.
• Physical distribution includes:
Channels of distribution
Transportation
Warehousing/ storing goods/
 Definition Of Marketing Channels
• The marketing (or distribution) channels refer to the activities, parties and
channel structure required to transfer a product from its point of production
to its point of consumption by the end customer.
 Direct Channel
• Door-to-door selling
• Manufacturers’ sales branches
• Direct mail
 Indirect channel
• Merchant Middlemen:
 Whole seller:- Eg. Petram PLC and East Africa Trading are wholesalers of
consumer products.
 Retailer:- Eg. Hadiya supermarket, and several Kiosks are found closer to sell the
items to residential houses.
• Agent Middlemen
Commission agent, Brokers, Selling agents. E.g. Sony Glorious, is an agent to Sony
Electronics products,
Equatorial business is agent to Samsung.
 Channel levels

Zero-level One-level Two-level Three-level

Manufacturer Manufacturer Manufacturer Manufacturer

Agent

Wholesaler
Wholesaler

Retailer Retailer Retailer

Consumer Consumer Consumer Consumer

 4. Promotion Mix
• Is sometimes known as marketing communication. Means activities that
communicate the merits of the product & persuade target customers to buy it.
• Promotional objectives:
• Informing the product
• Increasing sales
• Stabilizing sales / profit
• Positioning the product
 The promotional mix consists of four major tools
• Advertising: such as informative Ad, Persuasive Ad and Reminder Ad
• Personal selling: oral presentation in conversation with one / more
consumers for the purpose of making sale
• Sales promotion: includes: gifts, games, sampling, coupons, and window
displays.
• Publicity: any information about the organization, its personnel or its
products that appears in any medium on a non - paid basis.
 Market Segmentation
• Market segment is a group of individuals or organizations within a market that
share one or more common characteristics.
• The process of dividing a market in to segments is called market segmentation.
Bases for market segmentation
1. Geographic segmentation: region urban, suburban, rural, market density,
climate, terrain (land, topography), city size, country size, state size
2. Demographic segmentation: age, gender, race, ethnicity, income, education,
occupation, family size, family life cycle, religion, social class
3. Psycho graphic segmentation: personality, attributes, motives, lifestyles
4. Behavioral segmentation: volume usage, end use, benefit, expectations,
brand loyalty, price sensitivity
 Market Research

1. Marketing research is the systematic recording and analysis of data about

problems relating to marketing.
American Marketing Association
2. Marketing research is the application of scientific method to the solution of
marketing problems.
Luck, Wales, Taylor
• It is important for any business to conduct it before established ,ongoing
business and futurity.
 Factors Affecting the business Environment
1. The macro environment (far environment)
a. Economic forces
 Rising income
 Inflation
 Recession:-A recession is a period of economic activity when income,
production, and employment tend to fall-all of which reduce demand. Thus
businesses are expected to design different strategies that enable them
overcome the problems of inflation and recession.
b. Legal and political factors
 Federal and state laws
 The development of regional markets
 The creation and expansion of the global market
c. Social forces
Demographic forces
• Population growth
• Age distribution
Cultural forces
The consumer movement: is a connection of individuals, organizations and
groups whose objective is to protect the rights of consumers
d. Technological forces
2. The microenvironment (The near environment)
• The microenvironment refers the competitive situation of an industry.
• The competitive environment refers to the number of competitors a firm must
face, the relative size of the competitors, and the degree of interdependence
within the industry.
• Competition in an industry arises from
 The power of buyers
 The power of suppliers
 The threat of new entrants
 The threat of substitutes
 The intensity of rivalry/competition
• Porter claims that five forces determine competitiveness. These are shown in figure below:
• Economies of scale
I.e. the average size of business varies from industry to industry .For example,
the average size of chemical firms is very large, where as the average size of
retail firms is relatively small. The most fundamental reason for these
differences in the extent of economies of scale in an industry. i.e. how the total
cost per unit produced changes as more units are produced.
 Forms of ownership and legal requirements
• Those forms have been modified over the course of time to keep pace with business
needs and the custom of society.
• Ownership of business is represented by the right of individual or a group of
individuals to acquire legal title to property (assets) for the purpose of controlling
them and to enjoy the gains of profits from such possession and use.
• The most common forms currently in wide use by small business are:
Sole proprietorship
Partnership
Corporations and
Cooperatives
• Each form of ownership has a characteristic internal structure, legal status, size and
field to which it is best suited.
 Sole Proprietorship
• It is an individual or single ownership
• The sole proprietorship is a form of business organization in which
 An individual introduces his capital,
 Use of his own skill and intelligence in the management of its affairs and
 It is solely responsible for the results of its operation.
• This form is known also as individual or single proprietorship, sole ownership or
individual enterprise.
• Example: Photo studio, bookshop, bakeries, small town restaurants, retail stores,
radio and watch repair shops, and other elementary forms of business where
personal service is important.
 Advantages of Sole Proprietorships
a. Ease and low cost of formation and dissolution: there are no restrictions on
either starting or terminating small business operations.
b. Direct motivation and personal care
c. Freedom and promptness of action: the sole proprietor can take his own
decision and there is none to question his authority. The sole proprietor can
take prompt/quick decisions especially when an emergency arises.
d. Business confidentiality
e. Single Tax: the proprietorship does not pay tax as a business; the profits from
the business are the personal income of the owner and are declare on his
individual income tax return.
 Disadvantages of Sole Proprietorship
a. Limited resources and size: the capacity and skill are very limited. Lending
institutions and suppliers may not be willing to cooperate because it is
neither safe nor dependable which results in making the business to remain
limited in size.
b. Limited Managerial Skill: in complex and difficult condition which requires
different expertise knowledge
c. Unlimited liability: the sole proprietor will be legally liable for all debts of the
business, a source of courage and real devotion, limit his activities only in
specified areas
d. Uncertain future/Death of the owner terminates the business/
e. Difficulty in hiring and keeping high achievement employees
 Partnership
• The association of two or more persons to carry as co-owners of a business
where the relationship is based on agreement is called partnership.
• This form of a business requires the existence of two or more persons entering
into a contractual relationship.
• This contract, which is an agreement between the parties, is known as a
memorandum of association or article of partners’ deed.
 Kinds of Partners
1. A general partner: assumes unlimited liability and is usually active in managing the
business. Most partners are general partners.
2. A limited or special partner: assumes limited liability, risking only his /her
investment in the business. Limited partners may not be active in management,
and their names are not used in the name of the business.
3. A secret partner: takes an active role in managing a partnership but whose
identities are unknown to the public. i.e. the general public does not know of this
person’s partnership status.
4. A silent partner: as opposed to a secret partner, a silent partner, his identities
and involvement, is known to the general public, but is inactive in managing the
partnership business.
5. Senior partners: assume major roles in management because of the long tenure
(possession), amount of investment in the partnership, or age. They normally
receive large shares of the partnership’s profits.
6. Junior partners: are generally younger partners in tenure, have only small
investment in the firm, and are not expected to make major decision. They
assume limited role in the partnership’s management and receive a smaller
share of the partnership’s profits.
 Advantages of Partnership
1. Ease of starting
2. Increased source of capital: partnership can offer creditors less risk than a sole
proprietorship; it is often an attractive investment.
3. Combined managerial skill
4. Definite legal status: today's partner can be assured that a competent lawyer
can answer virtually any questions he/she might have about this form of
ownership. i.e. lawyers can provide a sound legal advice about partnership
issues.
5. Motivation of important employees
6. Reduced risk
 Disadvantages of Partnership
1. Unlimited liability
2. Risk of implied authority
• The fault and miss judgment made by a single partner binds the firm and
the remaining partners. Thus, they are liable for the debts made by the
partner.
3. Lack of harmony agreement or synchronization
4. Lack of continuity/instability/If any one of the general partners dies,
withdraws because of mentally or physically incapable (injured), the
partnership ends.
5. Investment withdrawals difficulty /frozen-investment/
 Corporation

• Separate legal entity that is run by stockholders having limited liability

• A corporation is an artificial person authorized and recognized by law, with
distinctive name, a common seal, comprising of transferable shares of fixed
values, carrying limited liability and having a perpetual or continued or
uninterrupted succession life.
 Characteristics of Corporation
1. Separate legal entity
• It can sue or be sued.It has the right to manage its own affairs and shareholders cannot
be liable for the acts of the corporation
2. Limited liability
• Since the corporation has separate legal entity its debts are its own. The assets and
liabilities, rights and obligations incidental to the company’s activities are assets and
liabilities, rights and obligations respectively of the company and not of its members.
3. Transferability of shares
• It is easy to transfer ownership in a corporation. A stockholder may sell stock to
another person and transfer the membership and membership interest freely without
consulting other stockholders.
4. Perpetual existence
• Death, insanity, retirement and withdrawal of shareholders will not affect the company.
5. Common seal
• A corporation has a common seal with the name of the company engraved on it,
which is used as a substitute for its signature through it acts through its agents.
6. Separation of ownership from management
• All shareholders, large in numbers, do not have the opportunity of managing the
day-to-day activity of the corporation.
7. Supervision
• A company is created by the legal process of incorporation. While it exists, it is
subject to detailed regulation.
8. Written Constitution
• On the creation of a company, the promoters must file certain documents with the
Registrar of Companies. These include the Article of Association and the
Memorandum of Association.
 Advantages of a corporation
1. Financial strength
2. Limited liability
3. Scope of expansion
• Corporations have greater potential than sole proprietorship or partnerships
4. Managerial efficiency
• Corporations enjoy the advantage of efficient management by hiring
specialist’s skilled persons to become members of the board of directors to
mange the corporation
5. Ease in transferring ownership
6. Legal entity status
• A corporation can purchase property, make contracts, sue and be sued in the
corporate name.
 Disadvantages of a Corporation
1. Difficulty of formation
• It is time consuming and cumbersome/not manageable to establish
corporations unlike the other forms of businesses.
2. Lack of owner’s/manager’s personal interest
• These forms of organizations are managed by directors, hired officials, and
employees who may not be expected to have such an interest in the success
of the business as the individual owner or partner would have in his own
business.
3. Delay in decision-making: it needs official meeting of managers or board
4. Lack of secrecy, openness, lack of privacy
5. Double taxation
 Cooperatives
• It is an organization owned by members/customers who pay an annual
membership fee and share in any profits (if it is profit making organization).
• It has to adopt the following principles:
 Members have an equal vote in decisions
 Membership is open to every one who fulfills specified conditions
(e.g. Number of hour worked)
 Assets controlled and usually owned jointly by members
 Profit shared equally between members with limited interest
payment on loans made by members
 Members benefit from participation, not investment
 Other Forms of Business
 Franchises
• A franchise is a business in which the owner of the name or method of
doing business (called the franchisor) allows a local operator (called the
franchisee) to set up a business under that name.
 Management buy-outs and buy-ins
• In recent years the traditional separation of shareholders and management
has been eroded by the growing popularity of management buy-outs’. This
is where a group of members pool their resources to buy the business they
have been running, usually from as larger, parent company. A management
buy-in is where a group of managers buys into an existing firm, usually
replacing those who have been running it.
 Sources and Types of Capital

 There are five ways to finance (capitalize) a start up

1. ones own saving
2. Selling shares
3. Accepting loans or Collecting fees from members
4. Borrowing from other sources (Venture Capital, financial institutions,
credit unions, friends, family)
 Starting Your Own Business
 Benefits
• Complete freedom to design and manage the business according to your vision.
• Not bound by anyone else's rules, history or assets.
• Opportunity to bring something new to the market.
• Can be less expensive than buying a successful business.
 Challenges
• Can take a while until you are profitable.
• There is no guarantee of business success and a high rate of failure for new
businesses.
• More difficult to get financing because lenders or investors are taking a risk
with your idea.
 Buying An Existing Business
 Benefits
• Benefit from the work that has already been done on establishing a brand,
developing customer relationships, developing business processes and acquiring
assets.
• Can start bringing in profits more quickly.
• Easier to get financing because the business model is proven.
 Challenges
• The upfront investment is often higher than if you were starting your own
business.
• The previous owner business model and way of doing business may not be a
perfect match with what you envision.