Feasibility Analysis By Bruce R. Barringer, PhD Department of Management University of Central Florida Orlando, FL 32816 Email: Bruce.Barringer@bus.ucf.edu 3-1

Feasibility Analysis Most effective business plans Identifying a business idea Screening the idea(s) to determine their preliminary feasibility Conducting a feasibility analysis Writing the plan This chapter discussed the importance of the feasibility analysis. 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.

Figure 3 - 1 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 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.

Feasibility Analysis Primary research Secondary research Original research collected by person completing the analysis Secondary research Probes data already collected 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.

Product/Service Feasibility Product desirability Is the product desirable and serve a need in the marketplace? Is it reasonable? 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 such as: Does it make sense?, Is it reasonable?, Is it something that consumers will get excited about?, and Are there any fatal flaws in the product’s basic design or concept?, are all questions that speak to the basic appeal of the product.

Concept Test A concept test is a preliminary description of a product or service idea to industry experts to solicit their feedback 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).

Product/Service Demand Buying intentions survey Gauge customer interest in a product or service How likely would you be to buy a product like this if we make it? Definitely would buy Probably would buy Might or might not by Probably would not buy Definitely would not buy 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 the survey should be distributed to 15-30 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

Industry/Target Market Feasibility Analysis A group of firms producing a similar product or service 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.

Industry / Target Market Feasibility Analysis The limited portion of the industry that the firm goes after or tries to appeal to 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. Instead, they select or carve out a specific target market and try to service that market very well.

Industry/Target Market Feasibility Analysis Industry attractiveness Target market attractiveness Market timeliness Industry Attractiveness 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. 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 attracting larger competitors. The final step in industry/market feasibility analysis is to evaluate the timeliness of the introduction of the proposed product or service

Industry Attractiveness Large and growing industries Structurally attractive Start-ups can enter the industry and compete Favorable environmental and business trends Importance of product to its customers 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. 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.

Target Market Attractiveness Should be large enough for the new business but small enough to avoid attracting larger competitors 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.

Market Timeliness Window of opportunity Economics of the industry Time period that a firm can enter a market Economics of the industry Determine if the timing is right for a new entrant The first consideration is to determine if the window of opportunity for the product or service is open or closed. 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.

Organizational Feasibility Analysis Management prowess Resource sufficiency 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. 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

Financial Feasibility 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. 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 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.