Feasibility Analysis

FEASIBILITY ANALYSIS
 Feasibility analysis is the process of determining if a business idea is
viable.

 A feasibility analysis is an assessment of a potential business rather than

strictly a product or service idea

 Investigating the merits of the business idea

 the most effective businesses emerge from a process that includes

(1) recognizing a business idea
(2) testing the feasibility of the idea
(3) writing a business plan,
(4) launching the business.
 FEASIBILITY ANALYSIS
Many entrepreneurs make the mistake of identifying a
business idea and then jumping directly to writing a
business plan to describe and gain support for the idea.
 FEASIBILITY ANALYSIS
This chapter provides a methodology for conducting a
feasibility analysis by describing its four key areas:

 product/service feasibility,
 industry/market feasibility,
 organizational feasibility, and
 financial feasibility
First Screen which is a template for completing a
feasibility analysis.
Primary research is research that is collected by the
person or persons completing the analysis. It normally includes
talking to industry experts, obtaining feedback from prospective
customers, conducting focus groups, and administering surveys.

Secondary research probes data that is already collected.

The data generally includes industry studies, Census Bureau data,
analyst forecasts, and other pertinent information gleaned through
library and Internet research.

 It should be emphasized that while a feasibility analysis tests the

merits of a specific idea, it allows ample opportunity for the idea
to be revised, altered, and changed as a result of the feedback that
is obtained and the analysis that is conducted.
The key objective behind feasibility analysis is to put an idea
to the test—by talking to industry experts, surveying
prospective customers, studying industry trends, thinking
through the financials, and scrutinizing it in other ways.
Product/Service Feasibility Analysis
 Is the assessment of the appeal of the proposed
product or service !

 Nothing matters if the product or service itself doesn’t

sell in the market
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.

One of the best things prospective entrepreneurs can do,

throughout the feasibility analysis process, is get out and
talk to prospective customers about their product ideas.
Surveys, designed properly, can be an effective way of
gathering information.
 One way to achieve this objective is to administer a
concept test.

 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 description of the product or service. This
section details the features of the product or service;
many include a sketch of it as well.

 The intended target market. This section lists the

consumers or businesses who are expected to buy the
product or service.

 The benefits of the product or service. This section

describes the benefits of the product or service and
includes an account of how the product or service adds
value and/or solves a problem.
 A description of how the product or service will be
positioned relative to competitors. A company’s
position describes how its product or service is
situated relative to its rivals.

 A brief description of the company’s

management team.
Product/Service Desirability

 Does it make sense? Is it reasonable? Is it something

consumers will get excited about?
 Does it take advantage of an environmental trend,
solve a problem, or fill a gap in the marketplace?
 Is this a good time to introduce the product or service
to the market?
 Are there any fatal flaws in the product or service’s
basic design or concept?
 it should be shown to at least 10 people who are familiar
with the industry that the firm plans to enter and who can
provide informed feedback and candid advice.

 friends and family members should be avoided.

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

There are two techniques for making this

determination: administering a buying intentions
survey and conducting library, Internet, and
gumshoe research.
Buying Intentions Survey

 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.

 The statement and survey should be distributed to 20 to 30 potential

customers (people who completed the concept statement test should
not be asked to complete this survey).
Library, Internet, and Gumshoe
Research
 The second way to assess demand for a product or service
idea is by conducting library, Internet, and gumshoe research.

 more data is needed.

 reference librarians can often point you toward resources to

help investigate a business idea, such as industry-specific
magazines, trade journals, and industry reports.

 E.g Educational Toys - super-safe, environmentally friendly,

educational toys for children
Library, Internet, and Gumshoe
Research
 Simple gumshoe research is also important for gaining a
sense of the likely demand for a product or service idea. A
gumshoe is a detective or an investigator that scrounges
around for information or clues wherever they can be
found.

 E.g Educational Toys: spend a week volunteering at a day

care center and watch how children interact with toys. Take
the owner of a toy store to lunch and discuss your ideas.
Spend some time browsing through toy stores, and observe
the types of toys that get the most attention !!!!
Library, Internet, and Gumshoe
Research

 These tools range from open-ended Q&A sites, like Quora,

where an entrepreneur can pose questions pertaining to
business ideas and get informed feedback, to sites that will
conduct usability tests of Web sites and applications.

 These services are becoming increasingly affordable and

should be utilized where appropriate.
Industry/Target Market Feasibility
Analysis
is an assessment of the overall appeal of the industry
and the target market for the product or service being
proposed.

Difference between industry and target market ???

Industry/Target Market Feasibility
Analysis
 An industry is a group of firms producing a similar
product or service, such as computers, children’s toys,
airplanes, or social networks.

 A firm’s target market is the limited portion of the

industry that it goes after or to which it wants to appeal.

 Most early entrepreneurial start ups select or carve out a

specific target market and try to service that market very
well
Industry/Target Market Feasibility
Analysis
 Spring Toys is not trying to target the entire children’s
toy industry. Its target market is parents who are willing
to pay a premium for super-safe, environmentally
friendly, educational toys.
Industry Attractiveness
 In general, the most attractive industries have the
characteristics depicted in Table 3.5.
Industry Attractiveness
Other factors
 the degree to which environmental and business trends
are moving in favor rather than against the industry are
important for the industry’s long-term health !
 Are changing economic and societal trends helping or
hurting industry incumbents?
 Are new markets for the industry’s staple products
opening up or are current markets being shut down by
competing industries?
Target Market Attractiveness
 A target market is a place within a larger market segment that
represents a narrower group of customers with similar needs.

 Most start-ups simply don’t have the resources needed to

participate in a broad market, at least initially.

 Instead, by focusing on a smaller target market, a firm usually

can focus on serving a specialized market very well. It’s also not
realistic, in most cases, for a start-up to introduce a completely
original product idea into a completely new market. In most
instances, it’s just too expensive to be a pioneer in each area.
Target Market Attractiveness
 Most successful start-ups either introduce a new
product into an existing market (like Sprig Toys
introducing new toys into the existing toy market) or
introduce a new market to an existing product (like
InstyMeds is introducing vending machine sales, which
is a new market, to prescription medicines, which is an
existing product).
Target Market Attractiveness
 The challenge in identifying an attractive target market
is to find a market that’s large enough for the proposed
business but is yet small enough to avoid attracting
larger competitors at least until the entrepreneurial
venture can get off to a successful start.
Organizational Feasibility Analysis
 is conducted to determine whether a proposed business
has sufficient management expertise, organizational
competence, and resources to successfully launch its
business.
Management Prowess
 proposed business should evaluate the prowess, or
ability, of its initial management team, whether it is a sole
entrepreneur or a larger group !

 They have to be candid in their self-assessment and

honest.

 the passion that the solo entrepreneur or the

management team has for the business idea
Management Prowess
 the extent to which the management team or solo
entrepreneur understands the markets in which the firm
will participate.

 Managers with extensive professional and social networks

have an advantage in that they are able to reach out to
colleagues and friends to help them plug experience or
knowledge gaps.
Resource Sufficiency
 The second area of organizational feasibility analysis is to
determine whether the proposed venture has or is capable
of obtaining sufficient resources to move forward.

 Focus on nonfinancial resources.

 employees with specialized skills; otherwise a serious

resources sufficiency problem exists.
Resource Sufficiency
 the ability to obtain intellectual property protection on
key aspects of the business.

 companies that have invented a new product or are

introducing a new business process that adds value to the
way a product is manufactured or a service is delivered.

 Google Patents (www.google.com/patents) is a user

friendly way to search for patents
Resource Sufficiency
 it can give a start-up a quick assessment of whether
someone has beaten them to the punch regarding a
particular product or business process idea.
Resource Sufficiency
 To test resource sufficiency, a firm should list the 6 to 12
most critical nonfinancial resources that it will need to
move its business idea forward and determine if those
resources are available.
Resource Sufficiency
Financial Feasibility Analysis
 For feasibility analysis, a preliminary financial
assessment is usually sufficient;

 The most important issues to consider at this stage are

total start-up cash needed, financial performance of
similar businesses, and the overall financial
attractiveness of the proposed venture.

 complete pro forma (or projected) financial statements

that demonstrate the firm’s financial viability for the first
one to three years of its existence.
Total Start-Up Cash Needed
 For feasibility analysis, a preliminary financial
assessment is usually sufficient;

 The most important issues to consider at this stage are

total start-up cash needed, financial performance of
similar businesses, and the overall financial
attractiveness of the proposed venture.

 complete pro forma (or projected) financial statements

that demonstrate the firm’s financial viability for the first
one to three years of its existence.
Total Start-Up Cash Needed
 An actual budget should be prepared that lists all the anticipated
capital purchases and operating expenses needed to get the business
up and running.
 Avoid cursory explanations such as “I plan to bring investors on board”
or “I’ll borrow the money.”
 involve investors or lenders in your business, a more thoughtful
account is required of how you’ll provide for your initial cash needs.
 friends, family or is raised through other means, such as credit cards or
a home equity line of credit, a reasonable plan should be stipulated to
repay the money.
Financial Performance of Similar
Businesses

 The second component of financial feasibility analysis is estimating a

proposed start-up’s potential financial performance by comparing it to
similar, already established businesses.

 IBIS World also normally provides a chart of the average expenses (as a
percentage of sales) for major items like wages, rent, office and
administrative expenses, and utilities for firms in the industries they
follow
Overall Financial Attractiveness of the
Proposed Venture
 projected sales and rate of return (or profitability)
 A more precise estimation can be computed by preparing pro forma (or
projected) financial statements, including one- to three-year pro forma
statements of cash flow, income statements, and balance sheets (along
with accompanying financial ratios).