CONDUCTING A FEASIBILITY ANALYSIS

THE FEASIBILITY ANALYSIS A feasibility study is a thorough analysis of the viability of your business concept in today’s market. It is a preliminary evaluation of a business idea, conducted for the purpose of determining whether the idea is worth pursuing. Entrepreneurs tend to underestimate the amount of competition in the marketplace and tend to overestimate their personal chances for success.

The Role Feasibility Analysis Proceed With Business Plan Product/Service Feasibility Yes in All areas Proposed Business Venture Spending time and Resources Depends on.. Industry/Market Feasibility No in one or more Financial Feasibility Drop or Rethink Business idea

THE IMPORTANCE OF THE FEASIBILITY STUDY Your business venture can easily fail if you don’t complete the necessary research to prove that your business idea can survive in today’s market. It saves time, money, energy, and pride because it prevents planning a business that will not survive in the market place. It enables you to make data driven decisions if your business idea needs to be changed. Potential investors and financial institutions need to believe that your business idea will not fail.

Elements of a Feasibility Analysis Industry and Market Feasibility Product or Service Feasibility Financial Feasibility

PRODUCT/SERVICE FEASIBILITY An assessment of the overall appeal of the product or service being proposed. Are customers willing to pay money for the product/service. Concept Testing Usability Testing

Benefits of Product Feasibility Analysis Getting the product right the first time. A beta (or early adopter) community emerges. Avoiding any obvious flaws in product or service design. Using time and capital more efficiently. Gaining insight into additional product and service offerings.

1. Concept Testing A concept test involves showing a preliminary description of the product or service idea to prospective customers to gauge customer interest, desirability, and purchase intent. Primary purposes: 1. To validate the underlying premise of the product/service idea. Potential customers complete a questionnaire pertaining to product features, price, location (if applicable) and suggestions for improving the concept.

2. To help develop and strengthen the idea. 3 2. To help develop and strengthen the idea. 3. To estimate the potential market share the product/service might command. Some type of buying intention question appears in almost every concept test to try to determine how many people will actually buy the product or service. A well designed concept test is usually called a ‘Concept Statement’.

Concept Statement A Description of the Product/service Being Offered The Intended Target Market The Benefits of the Product or Service A Description of How the Product will be Positioned Relative to Similar Ones in the Market A Description of How the Product or Service will be Sold and Distributed

2. Usability Testing Usability testing measures a product’s ease of use and the user’s perception of the experience. (Sometimes called user test, beta test, or field trials) A concept test is usually followed by the development of a prototype or model of the product. A prototype is the first physical depiction of a new product, which is usually still in a rough or tentative mode.

Industry/Market Feasibility Analysis An assessment of the overall appeal of the market for the product or service being proposed. Primary Research Secondary Research Consideration of three primary issues: 1. Industry attractiveness 2. Market timeliness 3. Identification of a niche market

The overall attractiveness of an industry should be an important consideration when an entrepreneur decides whether to pursue a particular business opportunity. The five competitive forces model by Michel Porter is a framework for understanding how the threat of substitutes, the entry of new competitors, rivalry among existing firms, the bargaining power of suppliers, and the bargaining power of buyers determine the average rate of return (profitability) for the firms in an industry.

COMPETITIVE FORCES IN A MARKET (Current and Possible) Threat of Possible Newcomers Industry Competitors Rivalry among Existing firms Bargaining power Of Customers Bargaining power Of Suppliers Suppliers Customers Threat of Substitute Products (Current and Possible) Porter’s Five Forces Model

Rivalry among existing firms An industry is more attractive when the following conditions prevail: The number of competitors is large or quite small (less than five). Competitors are not similar in size or capability. The industry is growing at a fast pace The opportunity to sell a differentiated product is present.

Bargaining Power of Suppliers An industry is more attractive when the following conditions prevail: Many suppliers sell a commodity product to the companies in it. Substitute product are available for the items suppliers provide. Companies in the industry find it easy to switch from one supplier to another or to substitute products (“switching costs” are low). The items suppliers provide the industry account for a relatively small portion of the cost of finished products.

Bargaining Power of Buyers An industry is attractive when the following conditions prevail: Customers’ “switching costs” are relatively high. The number of buyers in the industry is large. Customers demand products that are differentiated. Customers find it difficult to get information on suppliers’ costs, prices, and product features.

Threat of New Entrants An industry is more attractive to new entrants when the following conditions prevail: The advantages of economies of scale are absent. Capital requirements to enter the industry are low. Cost advantages are not related to company size. Buyers are not extremely brand-loyal. Governments, through regulatory and international trade policies, do not restrict new entrants.

Threat of Substitute Products/Services An industry is more attractive when the following conditions prevail: Quality substitute products are not readily available. The prices of substitute products are not significantly lower than those of the industry’s products. Buyers’ cost of switching to substitute products is high.

Market Timeliness The timeliness of the introduction of a particular product or service is an important consideration in industry/market feasibility analysis. 1. Improvement on available product/service Window of Opportunity Timing of the new business 2. Introduction of a new breakthrough product First –mover Advantage Second-mover Advantage

Niche Market Identification of potentially attractive niche markets. A niche market is a place within a larger market segment that represents a narrower group of customers with similar interests. Which niche in the market will be the focus? How large is the market segment? How fast is the segment growing? What is the basis for differentiation?

Financial Feasibility The financial feasibility analysis is a preliminary financial analysis of whether a business idea is prudent. 1. Total Start-up Cash Requirement 2. Financial Rate of Return 3. Overall attractiveness of the investment (ROI)