Conducting a Feasibility Analysis and Designing a Business Plan Chapter 4 Conducting a Feasibility Analysis and Designing a Business Plan

Feasibility Analysis the process of determining whether an entrepreneur’s idea is a viable foundation for creating a successful business. A feasibility analysis consists of three interrelated components: an industry and market feasibility analysis, a product or service feasibility analysis, and a financial feasibility analysis.

Industry and Market Feasibility Analysis Determine how attractive an industry is overall as a “home” for a new business. Identify possible niches a small business can occupy profitably.

Five-Forces Model A model that recognizes the power of five forces on an industry: rivalry among competing firms, bargaining power of suppliers, bargaining power of buyers, threat of new entrants, and threat of substitute products or services.

Product or Service Feasibility Analysis determines the degree to which a product or service idea appeals to potential customers and identifies the resources necessary to produce the product or provide the service.

Research Primary Research: Information that an entrepreneur collects firsthand and analyzes. Secondary Research: Information that has already been compiled and is available for use, often at a very reasonable cost or sometimes even free.

Types of Research Customer Surveys and Questionnaires Focus Groups Trade Associations and business Directories Direct Mail Lists Demographic Data Census Data Market Research Articles Local Data Internet

Hands-On Research Prototype: an original, functional model of a new product that entrepreneurs can put into the hands of potential customers so that they can see it, test it, and use it. In-home Trial: A research technique that involves sending researchers into customers’ homes to observe them as they use the company’s product or service.

Financial Feasibility Analysis The major elements to be included in a financial feasibility analysis include the initial capital requirement, estimated earnings, time out of cash and the resulting return on investment.

Four major Elements of a Financial Feasibility Analysis Capital requirements - money needed to start a business Estimated Earnings - forecast the earning potential of the proposed business Time Out Of Cash - the total cash needed to sustain the business until the business achieves break-even cash flow Return On Investment - estimated earnings divided by the amount of capital (money) invested in the business

Entrepreneur Feasibility A new business requires that an entrepreneur has a certain set of knowledge, experiences and skills (or has a team in place for any areas he/she is lacking) Next, question whether the business can meet the financial and non-financial needs of the entrepreneur and the team

Entrepreneurial Self-Assessment Personal aspirations and priorities - what motivates you, drains you, and what do you like to do with your time? How do you measure success? Financially? In your personal life? What are your goals for your business, career and personal life? In 1 year? In 5 years? In 10 years? At retirement? What are the core personal values that you intend to bring to your business?

Developing and Testing a Business Model Phase 1 - When building a business model, the entrepreneur addresses a series of questions that will explain how a business will become successful. 1. Customer segments - The entrepreneur’s first step is to identify a segment of customers who have a clearly defined need. 2. Value Proposition - The value proposition is the collection of products and/or services the business will offer to meet the needs of the customers. It is all the things that will set the business apart from its competitors, such as pricing, quality, features, product availability, and other features. 3. Customer relationships - Not every business provides the same type and same level of customer service. This is what defines the customer relationship in the business model.

Developing and Testing a Business Model (p. 2) 4. Channels - In the business model canvas, channels refer to both communication channels (promotion) and distribution channels (product placement). Communication channels define how the customers seek out information about this type of product. The distribution channel defines the most effective way to get products to the customers for this type of business. 5. Key activities - What important things must the entrepreneur do to ensure a successful launch and to sustain the growth of the business? 6. Key resources - What are the human, capital, and intellectual resources needed for the business to be successful?

Developing and Testing a Business Model (p. 3) 7. Key partners - This segment of the business model includes key suppliers, key outsourcing partners, investors, industry partners, advisers, and all other external businesses or entities that are critical to make the business model work. 8. Revenue streams - How will the value proposition generate revenue? Will it be a one-time sale, ongoing fees, advertising, or some other source of cash into the business? 9. Cost structure - What are the fixed and variable costs that are necessary to make the business model work

Developing and Testing a Business Model (p. 4) Phase 2 The second phase in designing the business model is to test the problem that the team things the business solves through its core value proposition. The team must “get out of the office” and test the model with real customers.

Developing and Testing a Business Model (p. 5) Phase 3 - The third phase is to test the solution to the problem in the market. Business prototyping: the process by which entrepreneurs test their business models on a small scale before committing significant resources to launch a business that might not work. Minimal Viable Product: The simplest version of a product or service with which an entrepreneur can create a sustainable business.

Developing and Testing a Business Model (p. 6) Phase 4 - The fourth phase of designing a business model is to make changes and adjustments in the business, called pivots, based on what the entrepreneur learns from engaging the market about the problem and the solution that the new business intends to pursue. Product Pivot (are the features important to the consumer?) Customer Pivot (are we targeting the correct customer?) Revenue Model Pivot (for example - high margin/low volume vs. low margin/high volume)