Feasibility Analysis (Chapter 5-6) [Week 3]

What Is Feasibility Analysis?

·         Feasibility analysis is the process of determining whether a business idea is viable.

·         It is the preliminary evaluation of a business idea, conducted for the purpose of determining whether the idea is worth pursuing.

When To Conduct a Feasibility Analysis

·         Timing of Feasibility Analysis

-          The proper time to conduct a feasibility analysis is early in thinking through the prospects for a new business

-          The thought is to screen ideas before a lot of resources are spent on them

·         Components of a Properly Conducted Feasibility Analysis

-          A properly conducted feasibility analysis includes four separate components, as discussed in the following slides.

Product/Service Feasibility Analysis

Purpose :

-          Is an assessment of the overall appeal of the product or service being proposed.

-          Before a prospective firm rushes a new product or service into development, it should be sure that the product or service is what prospective customers want.

Components of product/service feasibility analysis

Product/Service Desrirability

·         Administer a Concept Test

-          A concept statement should be developed.

-          A concept statement is a one page description of a business, that is distributed to people who are asked to provide feedback on the potential of the business idea.

-          The feedback will hopefully provide the entrepreneur

§  A sense of the viability or the product or service idea.

§  Suggestions for how the idea can be strengthened or “tweaked” before proceeding further.

Product/Service Demand

·         Product/Service Demand

-          Their are two steps to assessing product/service demand.

-          Step 1: Administer a Buying Intentions Survey

-          Step 2: Conduct library, Internet, and Gumshoe research

·         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 survey with a short survey attached to gauge customer interest.

-          Internet sites like SurveyMonkey make administering a buying intentions survey easy and affordable.

·         Library, Internet, and Gumshoe Research

-          The second way to assess the demand for a product or service is by conducting library, Internet, and gumshoe research.

-          Reference librarians can often point you towards resources to help you investigate a business idea, such as industry-specific trade journal and industry reports.

-          Internet searches can often yield important information about the potentially viability of a product or service idea.

·         Gumshoe Research

Explanation

-          A gumshoe is a detective or an investigator that scrounges around for information or clues wherever they can be found.

-           Be a gumshoe.  Ask people what they think about your product or service idea.  If your idea is to sell educational toys, spend a week volunteering at a day care center and watch how children interact with toys.

Industry/Target Market Feasibility Analysis

·         Industry/Target Market Feasibility Analysis

Purpose:

-          Is an assessment of the overall appeal of the industry and the target market for the proposed business.

-           An industry is a group of firms producing a similar product or service.

-           A firm’s target market is the limited portion of the industry it plans to go after.

Components of industry/target market feasibility analysis

Industry Attractiveness

·         Industry Attractiveness

-          Industries vary in terms of their overall attractiveness.

-          In general, the most attractive industries have the characteristics depicted on the next slide.

-          Particularly important—the degree to which environmental and business trends are moving in favor rather than against the industry.

Target Market Attractiveness

·         Target Market Attractiveness

-          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.

-          Assessing the attractiveness of a target market is tougher than an entire industry.

-          Often, considerably ingenuity must be employed to finding information to assess the attractiveness of a specific target market.

Organizational Feasibility Analysis

·         Organizational Feasibility Analysis

Purpose:

-          Is conducted to determine whether a proposed business has sufficient management expertise, organizational competence, and resources to successfully launch a business.

-           Focuses on non-financial resources.

·         Components of organizational feasibility analysis

Management Prowess

·         Management Prowess

-          A firm should candidly evaluate the prowess, or ability, of its management team to satisfy itself that management has the requisite passion and expertise to launch the venture.

-          Two of the most important factors in this area are:

§  The passion that the solo entrepreneur or the founding team has for the business idea.

§  The extent to which sole entrepreneur or the founding team understands the markets in which the firm will participate.

-          An indication of passion is the willingness of a new venture team to complete a comprehensive feasibility analysis.

Resource Sufficiency

·         Resource Sufficiency

-          This topic pertains to an assessment of whether an entrepreneur has sufficient resources to launch the proposed venture.

-          To test resource sufficiency, a firm should list the 6 to 12 most critical nonfinancial resources that will be needed to move the business idea forward successfully.

o   If critical resources are not available in certain areas, it may be impractical to proceed with the business idea. 

·         Examples of nonfinancial resources that may be critical to the successful launch of a new business

-          Availability of affordable office or lab space.

-           Likelihood of local and state government support of the business.

-           Quality of the labor pool available.

-           Proximity to key suppliers and customers.

Financial Feasibility Analysis

·         Financial Feasibility Analysis

Purpose:

-          Is the final component of a comprehensive feasibility analysis.

-           A preliminary financial assessment is sufficient.

·         Components of financial feasibility

Ø  Total Start-Up Cash Needed

-          The first issues refers to the the total cash needed to prepare the business to make its first sale.

-          An actual budget should be prepared that lists all the anticipated capital purchases and operating expenses needed to generate the first $1 in revenues.

-          The point of this exercise is to determine if the proposed venture is realistic given the total start-up cash needed.

Ø  Financial Performance of Similar Businesses

-          Estimate the proposed start-up’s financial performance by comparing it to similar, already established businesses.

-          There are several ways to doing this, all of which involve a little ethical detective work.

§  First, there are many reports available, some for free and some that require a fee, offering detailed industry trend analysis and reports on thousands of individual firms.

§  Second, simple observational research may be needed.  For example, the owners of New Venture Fitness Drinks could estimate their sales by tracking the number of people who patronize similar restaurants and estimating the average amount each customer spends.

Ø  Overall Financial Attractiveness of the Proposed Venture

-          A number of other financial factors are associated with promising business startups. 

-          In the feasibility analysis stage, the extent to which a business opportunity is positive relative to each factor is based on an estimate rather than actual performance.

-          The table on the next slide lists the factors that pertain to the overall attractiveness of the financial feasibility of the business idea.