Chapter 3 - Feasibility Analysis

3.1 Feasibility analysis: is the process of determining if a business idea is viable. If a business idea
falls shot on one or more of the four components of feasibility analysis it should be dropped or
rethought.
Product/service
feasibility Yes in all
Spending the time four areas Proceed with the
and resources Industry/target
business plan
Proposed necessary to move market feasibility
business forward with the
venture business idea Organizational No in one
depends on feasibility or more Drop or rethink
of the the business plan
Financial four areas
feasibility

Why feasibility analysis is important

Is an assessment of a potential business rather than strictly a product or service idea.
It is investigative in nature and is designed to critique the merits of a proposed business.

Four key areas for conducting a feasibility analysis

 Product/service feasibility
 Industry/target market feasibility
 Organizational feasibility
 Financial feasibility

Primary research
Is research that is collected by the person or persons completing the analysis. It normally includes
talking to prospective customers, getting feedback from industry experts, conducting focus groups
and administering surveys.

Secondary research
Probes data that is already collected. The date generally includes industry studies, census bureau
data, analyst forecast and other pertinent information gleaned through library and internet
research.

3.2 Product/Service feasibility analysis

Is an assessment of the overall appeal of the product or service being proposed.

There are two components to product/ service feasibility analysis:

1. Product/Service desirability
2. Product/service demand

1. Product/Service desirability
Is to affirm that the proposed product or service is desirable and serves a need in the marketplace.
Ask the following questions to determine the basic appeal of the product or service
 Does it make sense
 Is it reasonable
 Does it take advantage of an environmental trend, solve a problem
 Is this a good time to introduce the product or service to the market
 Are there any fatal flaws in the product or service basic design or concept

For product service desirability you need to perform a Concept test

Concept test:
Involves showing a preliminary description of a product or service idea, called a concept statement,
to prospective customers and industry experts to solicit their feedback.
It is a one page document that normally includes the following
 A description of the product or service
 The intended target market
 The benefit of the product or service
 A description of how the product or service will be positioned relative to competitors
 A brief description of the company’s management team

2. Product/service demand
Is to determine if there is a demand for the product or service.

Three commonly utilized methods for doing it (Product/Service demand)

1. Talking face to face with potential customers
2. Utilizing online tools to assess demand
3. Library, internet and gumshoe research

1 Talking face to face with potential customers

 The only way to know if your product or service is what people want and need is by talking to
them.
 More than half of companies fully developed their product with getting feedback from potential
buyers.
 You will learn more from talking to your customers than from hours of market research.

2 Utilizing online tools to assess demand

 Use online tools such as administering surveys, utilizing Q&A sites and conduction online
marketing research.
 Surveys are most effective in validating what you’ve learned form face to face interviews, rather
than colleting initial data.
 You can further validate your idea by reaching a larger audience via online survey. (Be careful to
avoid confirmation bias)
 There are several Q&A sites that can be utilized to get feedback about product/service demand.

3 Library, internet and gumshoe research

 Collecting secondary data on an industry is also helpful
 For your particular product or service you need archival as well as primary forms of research to
assess likely demand.
 The internet is a marvellous recourse
3.3 Industry/Target Market Feasibility Analysis
Industry/target market feasibility is an assessment of the overall appeal of the industry and the
target market of the product or service being proposed.
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 portion of the industry that it goes after or to which it wants to appeal.

There are two components to industry/target market feasibility analysis:

1. industry attractiveness
2. Target market attractiveness.

1 Industry Attractiveness
 Industries vary in terms of their overall attractiveness.
 The top three factors are particularly important. Industries that are young rather than old, are
early rather than late in their life cycle, and are fragmented rather than concentrated are more
receptive to new entrants than industries with the opposite characteristics.
 Other factors are also important. For example, the degree to which environmental and business
trends are moving in favour of rather than against the industry are important for its long-term
health and its capacity to spawn new target or niche markets.

Characteristics of Attractive Industries

 Are young rather than old
 Are early rather than late in their life cycle
 Are fragmented rather than concentrated
 Growing rather than shrinking
 I Are selling products or services that customers “must have” rather than “want to have”
 Are not crowded
 Have high rather than low operating margins
 Are not highly dependent on the historically low price of a key raw material, like p
gasoline or flour, to remain profitable

2 Target market attractiveness.

 Target market is a segment within a larger market 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 can usually avoid head-to-head
competition with industry leaders and can focus on serving a specialized market very well.
 The challenge in identifying an attractive target market is to find a market that is large enough
for the proposed business but yet is small enough to avoid attracting larger competitors, at least
until the entrepreneurial venture can get off to a successful start.
 While it is generally easy to find good information to assess the attractiveness of an entire
industry, discerning the attractiveness of a small target market within an industry is tougher,
particularly if the start-up is pioneering the target market.

3.4 Organizational Feasibility Analysis

An organizational feasibility analysis is conducted to determine whether an opposed business has
sufficient management expertise, organizational competence, and resources to successfully launch.
There are two primary issues to consider in this area:
1. management prowess
2. Resource sufficiency.

1 Management prowess
 A proposed business should evaluate the prowess, or ability, of its initial management team,
whether it is a sole entrepreneur or a larger group.
 This task requires the individuals starting the firm to be honest and candid in their self
assessments.
 Two of the most important factors in this area are
- the passion the solo entrepreneur or the management team has for the business idea
- the extent to which the management team or solo entrepreneur understands the markets
in which the firm will participate.
 A collection of additional factors help define management prowess. 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.
 A new-venture team is the group of founders, key employees, and advisers that either manage
or help manage a new business in its start-up years.

2 Resource sufficiency
 To determine whether the proposed venture has or is capable of obtaining sufficient resources
to move forward.
 The focus in organizational feasibility analysis is on nonfinancial resources.
 The objective is to identify the most important nonfinancial resources and assess their
availability.
 An example is a start-up that will require employees with specialized skills.
 Another key resource sufficiency issue is the ability to obtain intellectual property protection on
key aspects of the business.
 This issue doesn’t apply to all start-ups; but, it is critical for 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.

3.5 Financial Feasibility Analysis

 For feasibility analysis, a preliminary financial assessment is usually sufficient; indeed, additional
rigor at this point is typically not required because the specifics of the business will inevitably
evolve, making it impractical to spend a lot of time early on preparing detailed financial
forecasts.
 The most important issues to consider at this stage are
1 total start-up cash needed,
2 Financial performance of similar businesses,
3 The overall financial attractiveness of the proposed venture.

1 Total Start-Up Cash Needed

This first issue refers to the total cash needed to prepare the business to make its first sale. An actual
budget should be prepared that lists all the anticipated capital purchases and operating expenses
needed to get the business up and running,
Types of Non-financial Resources That Are Critical to Many Start-Ups’ Success
 Affordable office space
 Contract manufacturers or service providers
 Key management employees (now and in the future)
 Key support personnel (now and in the future)
 Key equipment needed to operate the business (computers, machinery, delivery vehicles)
 ability to form favourable business partnerships
 Ability to obtain intellectual property protection on key aspects of the business

2’’ Financial performance of similar businesses,

 Is estimating a proposed start-up’s potential financial performance by comparing it to similar,
already established businesses.
 There are several ways of doing this, all of which involve a little gumshoe labour.
 First, substantial archival data, which offers detailed financial reports on thousands of individual
firms, is available online.
 The easiest data to obtain is on publicly traded firms through Hoovers or a similar source.
 There are additional ways to obtain financial data on smaller firms. If a start-up entrepreneur
identifies a business that is similar to the one to be started, and the business isn’t likely to be a
direct competitor, it is perfectly acceptable to ask the owner or manager of the business to
share sales and income data.
 Simple observation and legwork is a final way to obtain sales data for similar businesses.

3. The overall financial attractiveness of the proposed venture.

 These evaluations are based primarily on a new venture’s projected sales and rate of return (or
profitability), as just discussed.
 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).
 To gain perspective, a start-up’s projected rate of return should be weighed against the
following factors to assess whether the venture is financially feasible:
- The amount of capital invested
- The risks assumed in launching the business
- The existing alternatives for the money being invested
- The existing alternatives for the entrepreneur’s time and efforts

3.6 A Feasibility Analysis Template

 A feasibility Analysis is an entrepreneur’s (or a group of entrepreneurs’) initial pass at
determining the feasibility of a business idea.
 If a business idea cuts muster at this stage, the next step is to complete a business plan.
 The mechanics for filling out the First Screen worksheet are straight forward.
 The value of the First Screen worksheet is that it draws attention to issues such as this one and
forces the founders to think about alternatives.
 If this particular suggestion is realistic and is determined to be a better way to proceed, a
revised version of First Screen might rate the two factors referred to previously,
- “Initial Capital Requirements” and
- “Time to Break Even,”
as “high potential” rather than “low potential” because of the change in the business concept
that was
Financial Feasibility
- I Steady and rapid growth in sales during the first five to seven years in a clearly defined market
niche
- High percentage of recurring revenue-meaning that once a firm wins a client, the client will
provide recurring sources of revenue
- Ability to forecast income and expenses with a reasonable degree of certainty
- Internally generated funds to finance and sustain growth
- Availability of an exit opportunity (such as an acquisition or an initial public offering) for
investors to convert equity into cash