Lecture 4

Feasibility Analysis

Iqra Batool
Uet, Taxila
What Is Feasibility Analysis?

 Feasibility Analysis: Feasibility analysis is the process of determining

whether a business idea is viable.
 It is the preliminary evaluation of a business idea, conducted for the
purpose of determining whether the idea is worth pursuing.

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 When To Conduct a Feasibility Analysis

 Timing of Feasibility Analysis: The proper time to conduct a feasibility

analysis is early in thinking through the prospects for a new business.
 The thought is to screen ideas before a lot of resources are spent on
them.

 Components of a Properly Conducted Feasibility Analysis: A properly

conducted feasibility analysis includes four separate components.

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Feasibility Analysis

 Role of feasibility analysis in developing business ideas:

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Forms of Feasibility Analysis

 Product/Service Feasibility
 Industry/Target Market Feasibility
 Organizational Feasibility
 Financial Feasibility

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Outline for a Comprehensive Feasibility Analysis

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 Product/Service Feasibility Analysis

 Product/Service Feasibility Analysis: Is an assessment of the overall

appeal of the product or service being proposed.
 Before a prospective firm rushes a new product or service into
development, it should be sure that the product or service is what
prospective customers want.

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 Product/Service Feasibility Analysis

 Components of Product/Service Feasibility Analysis :

 Product/Service Desirability
 Product/Service Demand

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Product/Service Desirability:

 First, ask the following questions to determine the basic appeal of the
product or service.

 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
take advantage of 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?

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Product/Service Desirability:

 Second, Administer a Concept Test

 A concept statement should be developed.
 A concept statement is a one-page description of a business that is
distributed to people who are asked to provide feedback on the potential
of the business idea.
 The feedback will hopefully provide the entrepreneur:
• A sense of the viability of the product or service idea.
• Suggestions for how the idea can be strengthened or “tweaked” before
proceeding further.

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Product/Service Desirability:

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Product/Service Demand

 Product/Service Demand: There are two steps to assessing

product/service demand.
 Step 1: Talking Face-to-Face with Potential Customers.
 Step 2: Using Online Tools, Such as Google AdWords and Landing
Pages, To Assess Demand.

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Product/Service Demand
 Talking Face-to-Face with Potential Customers:
 The only way to know if your product or service is what people want
is by talking to them.
 The idea is to gauge customer reaction to the general concept of what
you want to sell, and tweak, revise, and improve on the idea based on
the feedback.
 In some cases, talking with potential customers will cause an
entrepreneur to abandon an idea.
• Entrepreneurs are often surprised to find that a product idea they
think solves a problem gets lukewarm reception when they talk to
actual customers.

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Product/Service Demand
 Utilizing Online Tools, Such as Google AdWords and Landing
Pages, to Assess Demand
 The second way to assess demand is to utilize online tools to gauge
reaction from potential customers.
 Some entrepreneurs purchase text ads on search engines that show
up when a user is searching for a product that is close to their idea. If
the searcher clicks on the text ad, they are directed to a landing page
that describes the idea. There may be a link on the landing page that
says “For future updates please enter your e-mail address.” Demand
for the idea can be assessed by how many people click on the text ad
and enter their e-mail address.

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Product/Service Demand
 Utilizing Online Tools, Such as Google AdWords and Landing
Pages, to Assess Demand (Continued)
 A variety of additional online tools are available to help assess the
demand for a new product or service.
 Examples include:
• Sites that provide feedback on business ideas (Foundersuite, Quirky).
• Market Research (CrowdPicker, Google Trends).
• Online Surveys (Survey Monkey, Google Consumer Surveys).
• Q&A Sites (Quora, Stack Overflow).

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Industry/Target Market Feasibility Analysis

 Industry/Target Market Feasibility Analysis: Is an assessment of the

overall appeal of the industry and the target market for the proposed
business.

 An industry is a group of firms producing a similar product or

service.

 A firm’s target market is the limited portion of the industry it plans to

go after.

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Industry/Target Market Feasibility Analysis

 Components of Industry/Target Market Feasibility Analysis:

 Industry Attractiveness
 Target Market Attractiveness

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Industry Attractiveness

 Industry Attractiveness:
 Industries vary in terms of their overall attractiveness.
 Particularly important—the degree to which environmental and
business trends are moving in favor rather than against the industry.

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Industry Attractiveness
 Characteristics of Attractive Industries:
 Are young rather than old.
 Are early rather than late in their life cycle.
 Are fragmented rather than concentrated.
 Are growing rather than shrinking.
 Are selling products and 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 key raw
materials/like gasoline or flour, to remain profitable.

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Target Market Attractiveness

 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.

 Assessing the attractiveness of a target market is tougher than

assessing the attractiveness of an entire industry.

 Often, considerable ingenuity must be employed to find information

to assess the attractiveness of a specific target market.

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Organizational Feasibility Analysis

 Organizational Feasibility Analysis: Is conducted to determine

whether a proposed business has sufficient management expertise,
organizational competence, and resources to successfully launch a
business.
 Focuses on non-financial resources.

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Organizational Feasibility Analysis

 Components of Organizational Feasibility Analysis

 Management Prowess
 Resource Sufficiency

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Management Prowess

 Management Prowess: A proposed business should candidly

evaluate the prowess, or ability, of its management team to satisfy
itself that management has the requisite passion and expertise to
launch the venture.
 Two of the most important factors in this area are:
 The passion that the sole entrepreneur or the founding team has for
the business idea.
 The extent to which the sole entrepreneur or the founding team
understands the markets in which the firm will participate

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Resource Sufficiency

 Resource Sufficiency: This topic pertains to an assessment of

whether an entrepreneur has sufficient resources to launch the
proposed venture.
 To test resource sufficiency, a firm should list the 6 to 12 most critical
nonfinancial resources that will be needed to move the business idea
forward successfully.
 If critical resources are not available in certain areas, it may be
impractical to proceed with the business idea.

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Resource Sufficiency

 Examples of nonfinancial resources that may be critical to the

successful launch of a new business:
 Affordable office space.
 Lab space, manufacturing space, or space to launch a service
business.
 Availability of contract manufacturers or service providers.
 Key management employees (now and in the future).
 Key support personnel (now and in the future).
 Ability to obtain intellectual property protection.
 Ability to form favorable business partnerships.

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Financial Feasibility Analysis

 Financial Feasibility Analysis: Is the final component of a

comprehensive feasibility analysis.
 A preliminary financial assessment is sufficient.

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Financial Feasibility Analysis

 Components of Financial Feasibility Analysis:

 Total Start-Up Cash Needed

 Financial Performance of Similar Businesses
 Overall Financial Attractiveness of the Proposed Venture

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 Total Start-Up Cash Needed

 Total Start-Up Cash Needed:

 The 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 generate the
revenues.
 The point of this exercise is to determine if the proposed venture is
realistic given the total start-up cash needed.

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Financial Performance of Similar Businesses

 Financial Performance of Similar Businesses

 Estimate the proposed start-up’s financial performance by comparing
it to similar, already established businesses.
 There are several ways to doing this, all of which involve a little
ethical detective work.
• First, there are many reports available, some for free and some that
require a fee, offering detailed industry trend analysis and reports on
thousands of individual firms.
• Second, simple observational research may be needed. For example,
the owners of New Venture Fitness Drinks could estimate their sales
by tracking the number of people who patronize similar restaurants
and estimating the average amount each customer spends.
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Overall Financial Attractiveness of the Proposed
Venture

 Overall Financial Attractiveness of the Proposed Investment

 A number of other financial factors are associated with promising

business start-ups.
 In the feasibility analysis stage, the extent to which a business
opportunity is positive relative to each factor is based on an estimate
rather than actual performance.

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 First Screen

 First Screen:
 Shown in Appendix 3.1 is a template for completing a feasibility
analysis.
 It’s called “First Screen” because it’s a tool that can be used in the
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.

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