Feasibility analysis Dr Ashraf Sheta, B.Sc. Eng., MBA, DBA Sources Essentials of entrepreneurship ,Norman Scarborough Successfully launching new ventures, Bruce Barringer and Duane Ireland Preparing effective business plans, Bruce Barringer

Definition: Process of Determining if a Business Idea is Viable Feasibility Analysis Copyright © 2015 Pearson Education, Inc. Definition: Process of Determining if a Business Idea is Viable Sequential Steps Critically Assess Merits of Idea Lays Foundation for a Well-Reasoned and Researched Business Plan This chapter discussed the importance of the feasibility analysis. A feasibility analysis is the process of determining if a business idea is viable. This is a process of sequential steps designed to critically assess the merits of the business idea, and lays the foundation for a well-reasoned and researched business plan. As mentioned in Chapter 1, the most effective business plans are part of comprehensive process that includes identifying a business idea, screening the idea (or ideas) to determine their preliminary feasibility, conducting a feasibility analysis to see if proceeding with a business plan is warranted, and writing the plan.

Comprehensive Feasibility Analysis/Business Planning Process Copyright © 2015 Pearson Education, Inc. Comprehensive Feasibility Analysis/Business Planning Process Step 1 Identify a business idea. Step 2 Favorable Step 3 Favorable Step 4 Screen (or test) the results/proceed Conduct a full results/proceed Prepare idea to determine feasibility a written its preliminary Unfavorable analysis Unfavorable business Feasibility. Results/stop or results/stop or plan reevaluate idea reevaluate idea Step 5 Present the business Figure 3-1 plan to investors and others The sequential nature of the steps shown in Figure 3.1 cleanly separate the investigative portion of thinking through the merits of a business idea from the planning and selling stage of the process. Steps 2-3, which focus on feasibility analysis, are investigative in nature and are designed to critically assess the merits of a business idea. Step 4, the business plan, focuses on planning and selling. A properly conducted feasibility analysis lays the foundation for a well-reasoned and a well-researched business plan. The most compelling facts a company can include in a business plan are the results of its own feasibility analysis, particularly if the analysis includes feedback from industry experts and prospective customers.

Template for Completing a Feasibility Analysis See Table 3-1 Copyright © 2015 Pearson Education, Inc. Introduction Part1: Product/Service Part 2: Industry/Target Market Part 3: Organizational Part 4: Financial Summary and Conclusion Feasibility Analysis: Not Feasible Unsure Feasible There are six components to a feasibility analysis: Introduction, Product/Service Feasibility, Industry/Target Market Feasibility. Organizational Feasibility, Financial Feasibility, and Summary and Conclusion. An analysis must be done on each of the four steps to determine if it is not feasible, unsure, or feasible. Refer to Table 3-1 for more details. While a First Screen analysis only takes two to three hours to complete, a full feasibility analysis is a more lengthy process as it requires both primary and secondary research. While a feasibility analysis tests the merits of a specific idea, it allows opportunity for the idea to be revised, altered, and changed as a result of the feedback obtained and analysis conducted. The whole idea is to take an abstract concept and put it to the test through primary and secondary research. An integral part of the feasibility analysis is the set of assessment tools that help organize thinking and analysis. The assessment tools are referred to in the chapter and are shown in Appendix 3.1 at the end of this chapter.

Primary and Secondary Research Copyright © 2015 Pearson Education, Inc. Primary Research Original Research Collected by Person Completing the Analysis Industry Experts Prospective Customers Surveys Secondary research Probes Data Already Collected Internet and Library Sources Examples: Industry Studies, Census Data Primary research is original research that is collected by the person or persons completing the analysis. It normally includes talking to industry experts, obtaining feedback from prospective customers, and administering surveys. Secondary research probes data that is already collected. The data generally includes industry studies, Census Bureau data, company reports, and other pertinent information gleaned through library and Internet research.

Step 1: Product/Service Feasibility Copyright © 2015 Pearson Education, Inc. Step 1: Product/Service Feasibility Product Desirability Questions to Answer Through Research Does it Make Sense? Is it Reasonable? Will Consumers Get Excited? Take Advantage of Environmental Trend, Solve a Problem, or Fill a Gap? Good Time to Introduce to the Market? Any Fatal Flaws in Basic Design or Concept? 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. Questions to answer through research include: Does it make sense? Is it reasonable? Is it something that 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’s basic design or concept?

Concept Test Copyright © 2015 Pearson Education, Inc. Definition: Preliminary Written Description Shown to Industry Experts and Prospective Customers to Obtain Feedback Concept Statement Outline: Description of Product/Service Intended Target Market Benefits of Product/Service How Positioned vs. Competitors How it Will be Sold Management Team 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. It is normally a one page document, which includes the following: A description of the product or service. The intended target market. The benefits of the product or service. A description of how the product or service will be positioned relative to competitors. A description of how the product or service will be sold. A brief description of the company’s management team (for purposes of completeness). A sample concept statement is shown in Figure 3-2. Obtain feedback from 5 – 10 industry experts familiar with the industry to be entered, and obtain feedback from 5 – 10 prospective customers. Choose people who will provide candid and informed feedback and advice. Attach a short survey to Concept Statement asking for: Three things that they like about it. Provide three suggestions for improvement. Tell whether they think it is feasible. Share additional comments or suggestions. Upon completion and analysis, the process could be repeated if more information is needed.

Step 1: Product/Service Feasibility Copyright © 2015 Pearson Education, Inc. Step 1: Product/Service Feasibility Product/Service Demand Buying Intentions Survey Attached to Concept Statement Example: How Likely Are You to Buy? ___Definitely Would Buy ___Probably Would Buy ___Might or Might Not Buy ___Probably Would Not Buy ___Definitely Would Not Buy A buying intentions survey is a survey 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 the survey should be distributed to 25-50 potential customers (do not include any of the people who complete the concept statement test). Each participant should be asked to read the statement and complete the survey. The survey typically features a question that looks something like this: How likely would you be to buy a product (or service) like this, if we make it? _______ Definitely would buy _______ Probably would buy _______ Might or might not buy _______ Probably would not buy _______ Definitely would not buy Other questions might include: How much would you be willing to pay? Where would you expect to find this for sale? Remember that not everyone who says they will buy, actually will follow through and purchase the product or service. However, the results give you a general sense of the degree of customer interest. In the “Business Plan Insight”, entrepreneurs are encouraged to Get Out of the Building to observe, interview, probe, and just generally talk to prospective customers. Resources for conducting this kind of primary research can be found at the end of chapters 2 and 3.

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Step 2: Industry/Target Market Feasibility Copyright © 2015 Pearson Education, Inc. Step 2: Industry/Target Market Feasibility Definitions Industry: Group of Firms Producing Similar Product Example: Shoes Target Market: Limited Portion of Industry Which the Firm Wants to Attract Example: Children’s Shoes Must Research Both Industry and Market There is a distinct difference between a firm’s industry and its target market which should be clearly understood. An industry is a group of firms producing a similar product or service, such as computers, cars, airplanes, or clothing. For example, the shoe industry if very broad and includes a wide variety and types of shoes. A target market is a more concise limited portion of an industry. For example, a target market might be children’s shoes sold to parents in a specific geographical area. The entrepreneur must thoroughly research both the industry and the market.

Industry Attractiveness Copyright © 2015 Pearson Education, Inc. Industry Attractiveness Choose Industry That is: Large, Growing, Young, Fragmented, and Has Low Operating Margins Structurally Attractive: Low Barriers to Enter, so is Easy to Enter and Compete Favorable Environmental & Business Trends Importance of Product to Customers: No Good Substitutes Available in Other Industries Example: Very Few Substitutes for Prescription Drugs Industries vary in terms of their overall attractiveness. In general, the most attractive industries for startups are large and growing, are young rather than old, are early rather than late in their life cycle, and are fragmented rather than concentrated. In general, the most attractive industries for startups are large and growing, are young rather than old, are early rather than late in their life cycle, and are fragmented rather than concentrated. You also want to pick an industry that’s structurally attractive—meaning startups can enter the industry (in various target markets) and compete. Some industries are characterized by such high barriers to entry or the presence of one or two dominant players, that potential new entrants are essentially shut out. There are other factors that are important. For example, 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 and its ability to spawn new target or niche markets. Another factor is how important the products or services an industry sells are to its customers. For example, very few good substitutes exist for pharmaceuticals.

Target Market Attractiveness Copyright © 2015 Pearson Education, Inc. Target is Group of Customers with Similar Needs Start-Ups Lack Resources to Participate in Larger Markets Ideal Target Market is: Large Enough for New Business to be Profitable Small Enough to Avoid Head-to-Head Competition with Industry Leaders A firm’s target market is the limited portion of the industry that it goes after or tries to appeal to. Most firms do not try to service their entire industry as they lack the resources to do so. 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 attention of industry leaders. A target market is a place within a larger market segment that represents a narrower group of customers with similar needs. Most startups simply do not 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’s large enough for the proposed business but is yet small enough to avoid competing with larger competitors.

Market Timeliness Window of Opportunity is Copyright © 2015 Pearson Education, Inc. Market Timeliness Window of Opportunity is Determine if Timing is Right to Enter a Market Economics Trends in the Industry Determine if Timing is Right to Enter an Industry The first consideration is to determine if the window of opportunity for the product or service is open or closed. The final step in industry/market feasibility analysis is to evaluate the timeliness of the introduction of the proposed product or service Once the market for a new product is established, its window of opportunity opens. As the market grows, firms enter and try to establish a profitable position. At some point the market matures, and the window of opportunity closes. The second consideration regarding market timeliness is to study the simple economics of the industry the firm plans to enter to determine whether the timing is right for a new entrant.

Step 3: Organizational Feasibility Copyright © 2015 Pearson Education, Inc. Management Prowess: Understand the Market Prior Entrepreneurial Experience Professional & Social Networks Creativity Experience and Education Organizational feasibility analysis is conducted to determine whether a proposed business has sufficient management expertise, organizational competence, and resources to successfully launch its business. There are two primary issues to consider in this area: management prowess and resource sufficiency. Management Prowess A startup should assess the prowess, or ability, of its initial management team, whether it is a sole entrepreneur or a larger group.

Organizational Feasibility, Continued Copyright © 2015 Pearson Education, Inc. Resource Sufficiency: Location Availability Key Managers and Support Personnel Favorable Government Regulations Proximity to Similar Firms Intellectual Property Resource Sufficiency The second step in organizational feasibility analysis is 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 non-financial resources, since financial feasibility is considered separately Examples of non-financial resources include: Location Availability Key Managers and Support Personnel Favorable Government Regulations Proximity to Similar Firms Intellectual Property

Step 4: Financial Feasibility Copyright © 2015 Pearson Education, Inc. Total Start-Up Cash Needed Financial Performance of Similar Businesses Overall Financial Attractiveness of the Proposed Venture The most important issues to consider at this stage are total startup cash needed, financial performance of similar businesses, and the overall financial attractiveness of the proposed venture. Total Startup 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 operating expenses and capital purchases that will be needed to get the business up and running. An explanation of where the money will come from should be provided. It is better to overestimate costs than to underestimate them. Financial Performance of Similar Businesses The second component of financial feasibility analysis is estimating a proposed startup’s potential financial performance by comparing it to similar, already established businesses. A listing of websites which help in this research is available at the end of chapter 2. Overall Financial Attractiveness of the Proposed Venture A number of other factors are associated with evaluating the financial attractiveness of a proposed venture. Important factors in this category include the extent to which sales can be expected to grow during the first one to years of the venture, the percentage of recurring revenue to anticipate (its cheaper to serve a small number of loyal customers than to continually have to find new customers), the likelihood that internally generated funds will be available within two years to finance growth, and the availability of exit opportunities for investors if applicable.

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