Introduction to Feasibility Analysis Chapter 3

What Is Feasibility Analysis? Preliminary evaluation of idea to determining if it’s worth pursuing Provides more secure notion that a business idea is viable Did analysis, feasible business Personal experience, observed others, surveyed customers Did analysis, not feasible No analysis, failed firm: Iridium (satellite phones) Too complex technology, too long to develop, new technology took over, line of sight to satellite, large phone, low battery power

Preparing a Concept Statement One page description of a business Given to people who provide feedback on the potential of the idea Purpose of feedback: Give sense of the viability of the business idea Suggestions for how the idea can be strengthened or altered before proceeding Prepare before feasibility analysis

Preparing a Concept Statement Components of Concept Statement (similar to elevator pitch components) Description of the product or service Description of target market Benefits of the product or service (value proposition) Description of product/service differentiators Description of how product/service sold/ distributed Description of the founder(s) of the firm

When To Conduct a Feasibility Analysis Timing of Feasibility Analysis After concept statement evaluation After opportunity recognition, before business plan Before a lot of resources are invested Four Components of Full Feasibility Analysis Product/Service Feasibility Industry/Market Feasibility Organizational Feasibility Financial Feasibility (covered in finance class)

Role of feasibility analysis in developing successful business ideas Figure 3.1 Role of feasibility analysis in developing successful business ideas

Overview of Full Feasibility Analysis (4 forms of feasibility analysis) Product/Service Feasibility Composed of two primary tests Concept testing Usability testing Industry/Market Feasibility Three primary issues a proposed business should consider: Industry attractiveness Market timeliness Identification of a niche market. Organizational Feasibility There are two primary issues to consider in this area: Management prowess Resource sufficiency Financial Feasibility The most important issues to consider at this stage are: Capital requirements Financial rate of return Overall attractiveness of the investment

Overview of Full Feasibility Analysis Product/Service Feasibility Composed of two primary tests Concept testing Usability testing Industry/Market Feasibility Three primary issues a proposed business should consider: Industry attractiveness Market timeliness Identification of a niche market. Organizational Feasibility There are two primary issues to consider in this area: Management prowess Resource sufficiency Financial Feasibility The most important issues to consider at this stage are: Capital requirements Financial rate of return Overall attractiveness of the investment

Product/Service Feasibility Product/Service Feasibility Analysis Assessment of overall appeal of proposed product/service Main idea: before rushing to development, be sure product/service is what prospective customers want Two components of product/service feasibility analysis: Concept testing Usability testing

Product/Service Feasibility: 1st Component Concept Testing Purpose: Gauge customer interest, desirability, purchase intentions Involves showing a representation of product/service to prospective users Occurs before the prototype stage Websites and graphic designs are taking this to a new level Concept test ≠ concept statement Concept test: tests feasibility of specific product/service idea Concept statement: is a preliminary evaluation of entire business idea

Product/Service Feasibility: 3 reasons to conduct Validate underlying premises of product/ service idea Use phone interviews, focus groups, watch consumers perform tasks, customer advisory boards Ex: PepsiCo developed model of 5 types of teens and tries to predict how trends move through teen populations Help developing idea Iteratively show idea to potential customers and make changes along the way Estimate potential market share Survey questions Market research surveys

Product/Service Feasibility: 2nd Component Usability Testing Purpose: determine ease-of-use and user’s perceptions of using product While tempting to rush a product/service to market usability tests are good investments of resources Eliminate potentially frustrating aspects of product/services Involves creating a physical prototype and giving it to users, measuring usage results, and making modifications as necessary Iterative in nature Also called: user tests, beta tests, or field trials http://scholar.google.com

Product/Service Feasibility: 3 forms of usability testing Basic Prototype: fairly simple prototype that is given to friends/colleagues for feedback American Inventor Gym class exercise mat Elaborate Usability Test: large-scale tests for well-funded or existing ventures Lab testing, elaborate customer measurement devices (e.g., Google), etc. Hybrid Test: Follow-me-home testing (e.g., day-in-the-life research)

Product/Service Feasibility: 5 Benefits Getting product right the first time Create a beta (or early adopter community) Avoid obvious flaws in product/service design MobileStar wireless “hotspots” Use time and resources more efficiently Potentially identify complementary product/ service offerings iPod accessories

Overview of Full Feasibility Analysis Product/Service Feasibility Composed of two primary tests Concept testing Usability testing Industry/Market Feasibility Three primary issues a proposed business should consider: Industry attractiveness Market timeliness Identification of a niche market. Organizational Feasibility There are two primary issues to consider in this area: Management prowess Resource sufficiency Financial Feasibility The most important issues to consider at this stage are: Capital requirements Financial rate of return Overall attractiveness of the investment

Industry/Market Feasibility Analysis Purpose: assess overall appeal of the market 3 primary issues to consider: Industry attractiveness, Market timeliness, and Identification of a niche market

Industry/Market Feasibility Analysis: Industry Attractiveness Issue 1: Industry Attractiveness Primary determinant of feasibility is attractiveness of industry chosen Characteristics of attractive industries: Large and growing (growth is very important) Industries are important to customers (e.g., must haves vs. likes) Early in the industry lifecycle to avoid price competition Industries are not crowded with competitors How to assess industry attractiveness? Forces in the broad environment (e.g., technological, sociocultural/demographic, political/legal, economic, global trends) Porter’s Five Forces analysis

Industry/Market Feasibility Analysis: Market Timeliness Issue 2: Market Timeliness Will the market be receptive to the product/service? If it’s a modification on existing offerings (e.g., cell phones with cameras) ask: Is the window of opportunity open? Are customers buying? Are competitors making money? If it’s a breakthrough product/service (e.g., Yahoo with internet search engines, eBay with online auctions, etc.) ask: Can we capture a first-mover advantage? Example: Microsoft in computer operating systems Will we suffer from a second-mover advantage? Example: IBM vs. Dell in personal computer retailing

Industry/Market Feasibility Analysis: Niche Markets Issue 3: Identification of a Niche Market Niche markets are places in larger market segments that represent narrower groups of customers 2 reasons for new firms to sell to niche markets: Allows a firm to establish itself in industry and avoid competing against major competitors (e.g., specialty retailers vs. Wal-Mart) Allows a firm to focus on serving specialized markets very well Avoids trying to be everything to everybody in a broad market Successful example: buyandhold.com and small scale investments Problematic example: Iridium and satellite phones (tried to serve everyone)

Overview of Full Feasibility Analysis Product/Service Feasibility Composed of two primary tests Concept testing Usability testing Industry/Market Feasibility Three primary issues a proposed business should consider: Industry attractiveness Market timeliness Identification of a niche market. Organizational Feasibility There are two primary issues to consider in this area: Management prowess Resource sufficiency Financial Feasibility The most important issues to consider at this stage are: Capital requirements Financial rate of return Overall attractiveness of the investment

Organizational Feasibility Analysis Purpose: determine if business has sufficient skills/resources to bring product/service to market successfully Non-financial factors important to consider here 2 primary issues to consider: Management prowess Resource sufficiency

Organizational Feasibility Analysis: Management Prowess Issue 1: Management Prowess Firm must evaluate the ability of the management team Determine if has the passion and expertise to launch the venture 2 most important factors in this area: Passion the solo entrepreneur/founding team has for the idea Extent the entrepreneur/founding team understands the markets in which the firm will participate Ventures with established networks have an advantage Successful Example: eBay

Organizational Feasibility Analysis: Resource Sufficiency Issue 2: Resource Sufficiency Assessment of resources needed to launch proposed venture Focus is on nonfinancial resources: Availability of affordable office or lab space, Likelihood of government support, Labor pool quality, Proximity to key suppliers, customers, and similar firms (clusters) Likelihood of strategic partnerships, Likelihood of attaining IP To test resource sufficiency: list critical nonfinancial resources needed to move idea forward successfully If resources not available, it may be impractical to proceed with the business idea

Overview of Full Feasibility Analysis Product/Service Feasibility Composed of two primary tests Concept testing Usability testing Industry/Market Feasibility Three primary issues a proposed business should consider: Industry attractiveness Market timeliness Identification of a niche market. Organizational Feasibility There are two primary issues to consider in this area: Management prowess Resource sufficiency Financial Feasibility The most important issues to consider at this stage are: Capital requirements Financial rate of return Overall attractiveness of the investment