Individual Assignment

Chapter 3 Feasibility Analysis

Introduction

This chapter focuses on assessing the feasibility of a business idea. Feasibility analysis is the process of determining if a business idea is viable. In  Chapter  2 , we introduced the First Screen, which is a tool for quickly assessing the merits of business ideas. A feasibility analysis is a more stringent test designed to take the best ideas that emerge from the First Screen and more fully assess their feasibility.

As mentioned in  Chapter 1 , the most effective business plans are part of a comprehensive process that includes (1) identifying a business idea, (2) screening the idea (or ideas) to determine their preliminary feasibility, (3) conducting a feasibility analysis to see if proceeding with a business plan is warranted, and (4) writing the plan. A visual reminder of the comprehensive nature of this process and where feasibility analysis fits in is provided in  Figure 3-1 . Recall 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 to 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 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.

This chapter presents a template for completing a feasibility analysis and describes each of the four steps in the feasibility analysis process.

Note: Shaded step is covered in this chapter.

Figure 3-1 The Comprehensive Feasibility Analysis/Business Planning Process

Template for Completing a Feasibility Analysis

The template for completing a feasibility analysis is shown in  Table 3-1 . It includes an introduction, the four parts of feasibility analysis (product/service feasibility, industry/market feasibility, organizational feasibility, and financial feasibility), and a summary and conclusion. A fuller version of the template, with instructions and assessment tools, is provided in  Appendix 3.1  at the end of this chapter. It may be helpful to refer to  Appendix 3.1  periodically when reading through the descriptions of each of the four forms of feasibility to visualize how the various parts of the feasibility analysis fit together and see what the assessment instruments look like. *

*  Copies of the feasibility analysis shown in the Appendix, along with each of the assessment tools mentioned in the chapter, can be obtained from the publisher’s Web site at  http://www.prenhall.com/barringer .

The template shown in  Table 3-1  represents a full feasibility analysis. Whereas the First Screen should take only two to three hours to complete, completing a full feasibility analysis is a lengthier process. It requires both primary and secondary research. 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 are already collected. The data generally include industry studies, Census Bureau data, company reports, and other pertinent information gleaned through library and Internet research.

Table 3-1 Full Feasibility Analysis

It should be emphasized that while a feasibility analysis tests the merits of a specific idea, it allows ample opportunity for the idea to be revised, altered, and changed as a result of the feedback that is obtained and the analysis that is conducted. The whole idea behind the feasibility analysis process is to take an abstract concept, like the idea of opening a fitness center for the 50+ demographic (introduced in  Chapter 2 ), and put it to the test—by talking to industry experts, surveying prospective customers, studying industry trends, thinking through the financials, and scrutinizing it in other ways. These types of activities not only help determine whether an idea is feasible but also help shape and mold the idea. The importance of this notion is affirmed by R.G. Cooper, a widely published author in the area of new product development, who wrote:

New product success is largely decided in the first few plays of a game—in those critical steps and tasks that precede the actual development of a product. The upfront homework defines the product and builds the business case for development. 1

Although Cooper was referring specifically to developing new products, the same can be said for developing new companies. The most critical steps are the early ones, where the upfront homework (i.e., feasibility analysis and preparing a business plan) defines the business and provides sufficient evidence to build a compelling case for moving forward.

An integral part of the feasibility analysis described in this chapter is the set of assessment tools that helps organize the thinking of the people completing a feasibility analysis and helps them make final judgments regarding each area of feasibility. The assessment tools are referred to in the chapter and are shown in their entirety in  Appendix 3.1  at the end of this chapter.

Now let’s look at each of the four components of feasibility analysis and how each of the four components should be evaluated and assessed.

Product/Service Feasibility Analysis

Product/service feasibility is an assessment of the overall appeal of the product or service being proposed. Although there are many important things to consider when launching a new venture, nothing else matters if the product or service itself doesn’t sell. There are two key issues to consider at this point: product desirability and product demand.

Product/Service Desirability

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. The following questions speak to the basic appeal of the product:

· Does it make sense? Is it reasonable? Is it something that a specific group of consumers will get excited about?

· Does it take advantage of an environmental trend, solve a problem, or fill a gap in the marketplace?

· Is this a good time to introduce the product or service to the market?

· Are there any fatal flaws in the product’s basic design or concept?

The proper mindset at the feasibility analysis stage is to get a general sense of the answers to these and similar questions, rather than to try to reach final conclusions. One way to achieve this objective is to administer a concept test.

Concept Test.

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)

After the concept statement is developed, it should be shown to 5 to 10 people who are familiar with the industry that the firm hopes to enter and who can provide informed feedback and to 5 to 10 potential customers. The temptation to show it to family members and friends should be avoided because these people are predisposed to give positive feedback. Instead, it should be distributed to people who will provide candid and informed feedback and advice. A short survey should be attached to the statement that asks the participants to (1) tell you three things that they like about the product or service idea, (2) provide you three suggestions for making it better, (3) tell you whether they think the product or service idea is feasible, and (4) share additional comments or suggestions. The information gleaned from the statements should be tabulated and carefully read. If time permits, the statement can be used in an iterative manner to strengthen the product or service idea. For example, you might show the statement to a group of potential customers, get feedback, tweak the idea, show it to second group for additional feedback, tweak the idea some more, and so on.

The concept statement for a fictitious company, named Prime Adult Fitness, is provided in  Figure 3-2 . The fitness center, as alluded to several times in the book, will target consumers who are 50 years old and older and will be the main focus of the business plan, discussed in  Chapters 4  through  10 . Prime Adult Fitness will feature exercise machines, classes, and workouts that are specifically designed for older people. It will also offer massage therapy and physical therapy services on site and will feature classes that focus on its members’ mental fitness to complement the activities that focus on physical fitness. To help facilitate this goal, the company will maintain a well-stocked game room and will facilitate small groups that meet to play Sudoku and similar games.

There are many variations on how entrepreneurs solicit feedback on their business ideas. Rather than developing a formal concept statement, some entrepreneurs conduct product/service feasibility analysis by simply talking through their ideas with potential customers and others and gathering informal feedback. For example, during the development of Proactiv ( www.proactiv.com ), a popular acne medication, Dr. Katie Rodan, one of the company’s cofounders, hosted dinner parties at her house to solicit feedback from guests about her product idea. The guests included business executives, market researchers, an FDA regulatory attorney, the chief financial officer of a major company, and others. 2  Similarly, Sharelle Klause, the founder of Dry Soda ( http://www.drysoda.com ), a company that makes an all natural soda that’s paired with food the way wine is in upscale restaurants, tested her idea by first talking to her husband’s colleagues, who were in the food industry, and then tapped into the professional network of a friend, who owned a bottled water company. Through this process, she met a chemist who was instrumental in helping her develop the initial recipes for her beverage. Klause also went directly to restaurant owners and chefs to ask them to sample early versions of her initial four flavors: Rhubarb, Kumquat, Lavender, and Lemongrass. 3

Product

Prime Adult Fitness will be a fitness center for people 50 years old and older. The center will be two-thirds the size of an average Bally Fitness Center or Gold’s Gym and will feature exercise machines, classes, and workouts that are especially designed for its clientele. It will also feature access to massage and physical therapy services.

Prime Adult Fitness will provide an atmosphere that encourages older people to exercise and stay fit. Substantial evidence suggests that older people prefer to exercise with people their own age. In fact, according to one study, many older people would rather exercise alone than in a mixed group that includes younger people. As a result, there may be a large untapped market of older people who would like to join a fitness center but aren’t interested in their current choices. Prime Adult Fitness will provide older people a fitness center designed specifically for them.

Target Market

Prime Adult Fitness will be located in Central Florida, one of the fastest growing areas for people 50 years old and older in the country. It will limit its membership to people 50 years old and older. Although the fitness industry itself is on a steady growth curve, we believe that existing fitness centers are not able to offer the environment, programs, or mix of classes that are optimal for older people. As shown by Curves International (just for women) and others, focusing on a single demographic is a viable and potentially profitable way of carving out a distinct target market in the fitness industry.

How Prime Adult Fitness Will Be Positioned Relative to Competitors

Prime Adult Fitness will be the only fitness center in Central Florida exclusively focused on people 50 years old and older. Its amenities will be equal to the major competitors in its target market, which include Life Time Fitness, LA Fitness, and the YMCA. The company’s approach will free it to focus exclusively on the needs of its clientele.

Management Team

Prime Adult Fitness is led by its cofounders, Jeremy Ryan and Elizabeth Sims. Jeremy started a successful fitness center in South Florida and grew it to 38 units in 3 years before selling it to a major chain. Elizabeth Sims worked with Jeremy in his last venture and has 19 years experience as a certified public accountant.

Figure 3-2 Concept Statement: Prime Adult Fitness

On other occasions, feasibility analysis is used to help entrepreneurs gain insight on certain aspects of their product idea. For example, Tom Patterson, who started a men’s undershirt company named Tommy John’s ( www.tommyjohnwear.com ), was particularly interested in how men’s undershirts are bought. As a result, he went to stores and literally spent hours watching people buy undershirts. One thing he found out is that men only buy undershirts for about 17 years of their life. From age 0 to 17 their mothers buy their undershirts, and from age 34 (or whenever they get married) on their wives buy it. As a result of this insight, he designed a box with very feminine colors, chocolate brown and Tiffany blue, specifically to catch the eye of a woman. The box was designed to slide open easily, so a shopper could touch the undershirt, a distinct attribute of his boxes that also appeals to female purchasers. 4

Although not a complete approach, there is merit to the give-and-take that entrepreneurs like Rodan, Klause, and Patterson experienced by talking with (and observing) prospective customers rather than just handing them a concept statement and asking them to complete a survey. A catchy phrase that champions the idea of soliciting feedback from potential customers and others to validate the merits of a business idea is “Get Out of the Building.” The meaning of the phrase “Get Out of the Building” and how it applies to product/service desirability is described in the following Business Plan Insight boxed feature.

Product/Service Demand

The second component of product/service feasibility analysis is to determine if there is demand for the product or service. A useful technique to gain a preliminary sense of the demand for a product or service is to administer a buying intentions survey.

Buying Intentions Survey.

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 25 to 50 potential customers (do not include any of the people who completed 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

The number of people who indicate that they definitely would buy is typically combined with the number of people who indicate that they probably would buy to gauge customer interest.

One caveat is that people who say that they intend to purchase a product or service don’t always follow through, so the numbers resulting from this activity are almost always optimistic. The survey also doesn’t normally tap a scientifically random sample. Still, the results give a potential entrepreneur a general sense of the degree of customer interest in the product or service idea.

Business Plan Insight Get Out of the Building

A staple concept of the lean startup movement, pioneered by Steve Blank and others, is the idea that you cannot make something people will love without making something people want. And the best way to find out if anyone will actually buy what you’re making is to Get Out of the Building. What the phrase “Get Out of the Building” refers to is that it’s impossible to really understand customers and to fully assess the merits of a business idea from your office, apartment, classroom, or dorm. Instead, you have to “Get Out of the Building” and interact with potential customers and others in their offices, stores, factories, homes, or wherever they are to get a true sense of the veracity of a business idea.

Once you “Get Out of the Building” the idea is to observe, interview, probe, ask follow-up questions, and so forth to not only validate but also to improve upon your idea. Here’s an example. Say you’re thinking about opening a pet supply store. You’ve done tons of library and Internet research and think you’ve come up with a concept that will set you apart from the big-box pet supply stores like PetSmart and Petco. But from the desk in your office how do you really know? The key to validate what you believe to be true is to “Get Out of the Building” and talk to people who can give you informed feedback. In the pet supply store example, here’s how it works. Imagine how much you’d learn about what people want from pet stores, if your idea resonates with them, and suggestions you will get for improving on your idea if you conducted the following “Get out of the Building” research:

· Interview 25 people who shop once a month or more at a pet supply store.

· Visit 12 pet supply stores and spend 60 minutes per store observing people shopping, taking note of what they purchase (and the combination of things that they purchase), listening to them ask store personnel questions, and approaching them with questions of your own if something sparks your interest.

· Contact five vendors who supply products to pet supply stores and interview them in person or over the phone.

· Contact five veterinarians and ask them for interviews.

After you hear from potential customers and others, you’ll have a much better sense of whether your idea is a good one. You’ll also learn things that will invariably help you improve on and strengthen your idea. The key is to Get Out of the Building and test your ideas.

Additional questions are often added to the buying intentions survey, depending on the nature of the product or service involved. Examples of the types of questions that are added include the following:

· How much would you be willing to pay for the product or service? This provides insight into pricing.

· Where would you expect to find this product or service for sale? This may provide insight into sales and distribution.

The survey should be kept short to maximize participation.

To find people to talk through a product or service idea or to react to a concept statement, entrepreneurs should contact industry trade associations and attend industry trade shows. A Web site that provides a directory of the trade associations in an industry and displays a schedule of trade show dates and locations are included in the Internet Resources Table ( Appendix 2.2 ) at the end of  Chapter 2 . Another online resource, Trade Show News Network ( http://www.tsnn.com ), provides a searchable database of more than 25,000 trade shows, conferences, and seminars for various industries. For example, if you were launching a Web site to help engaged couples better plan their weddings, you could go to the Trade Show News Network Web site ( www.tsnn.com ), type the word “wedding” in the search box, and obtain a complete list of wedding related trade shows and conferences including dates, descriptions and links to their Web sites. Attending a trade show or conference that is related to the industry your business will be entering is an excellent way to make contacts with industry experts and potential business partners.

To supplement the techniques discussed above, there are a growing number of tools available online for all facets of feasibility analysis, as shown in  Table 3-2 . The tools range from open-ended Q&A sites, like Quora ( www.quora.com ), to sites that will conduct usability tests of Web sites and applications. A particularly useful and affordable tool is Google Consumer Surveys (www.google.com/consumersurveys), where you can create a survey and obtain responses for as little as 10 cents per respondent. In addition to providing raw data, Google Consumer Surveys produces charts summarizing responses and highlighting interesting differences among respondents, which can be segmented by age, gender, location, and other demographic categories.

Industry/Target Market Feasibility Analysis

Industry/target market feasibility is an assessment of the overall appeal of the industry and the target market for the product or service being proposed. 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 fitness centers, smartphones, elderly home care, or online education. 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. Prime Adult Fitness’s target market is people 50 years and older within the broader fitness center industry.

It’s important to assess both the broad industry you will be entering and your specific target market. If you want more detailed information on either of these topics, you can skip ahead to  Chapters 5  and  6  of this book, which focus on the industry analysis and market analysis sections of the business plan.

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, are fragmented rather than concentrated, and have high rather than low operating margins. 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.

Table 3-2 Online Tools Available for Completing Feasibility Analysis

Tool	Source	Cost
A/B testing—meaning respondent is given two options (i.e., which logo is more appealing? which product idea is best)	Pick-fu ( http://pickfu.com )	$20 for a single test
Consumer trends (shows how often a particular search terms is entered, which is a proxy for how much interest there is in a particular topic)	Google Trends ( www.google.com/trends )	Free
Feedback on product ideas	Quirky ( www.quirky.com )	Free
Feedback on ideas or designs	Conceptshare ( www.conceptshare.com )	Free 15-day trial; tiered pricing system based on level of feedback.
Q&A sites—open-ended questions	Quora ( www.quora.com )	Free
	Startup Nation ( www.startupnation.com )	Free
Survey	SurveyMonkey ( www.surveymonkey.com )	Free for basic survey; fee based for more extensive surveys
	Ask Your Target Market ( www.aytm.com )	About $1 per respondent; pricing varies depending on the nature of the survey.
	Google Consumer Surveys (www.google.com/consumersurveys)	Starts at 10 cents to 50 cents per respondent depending on how tightly focused the survey audience is
Web site usability tests	UserTesting ( www.usertesting.com )	$49 for video of a visitor speaking their thoughts as they use your Web site
	Loop 11 ( www.loop11.com )	Flat fee of $350 for user testing project
	OpenHallway ( www.openhallway.com )	Tiered pricing system starting at $49 per month

Other factors are also important. For example, the degree to which environmental and business trends are moving in favor rather than against the industry is important for the industry’s long-term health and its capability to spawn new target or niche markets. For example, an increased awareness of the benefits of exercise is an extremely positive trend for the fitness industry. Another factor is how important the products or services an industry sells are to its customers. One of the reasons the pharmaceutical industry is so profitable is because there are no good substitutes for its products. Compare that to the movie theater industry, which is struggling. How many options do we have for watching movies at home (i.e., Netflix,  Hulu.com , cable, DVD rentals) and how many alternatives do we have for spending our free time and money other than going to a movie theater?

The assessment tool provided in the feasibility analysis in  Appendix 3.1  enables you to assess the industry you’re thinking about entering. As you fill out this assessment tool, make sure to stick strictly to an assessment of your industry, not the specific portion of the industry you plan to target. Refer to the Internet Resources Table in  Appendix 2.2  at the end of  Chapter 2  to identify sources that will help you make your assessments. IBISWorld, Bizminer, and Mintel are particularly useful resources for this section of the feasibility analysis.

Target Market Attractiveness

As mentioned, 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. An example of a company that has targeted a market that meets these criteria is Songkick ( www.songkick.com ), the Web-based startup introduced in  Chapter 2  that allows users to “follow” their favorite bands and sends them an alert when one of the bands they’re following is in their area. The company, which launched in 2007, has five million unique visitors to its site every month and lists over 100,000 upcoming concerts on its site. 5  Although Songkick operates in the $16.5 billion global music industry, it has carved out a specialized target or niche market (connecting concert goes with concerts in their area) for itself and is gaining traction. As the company gains momentum and financial resources, it may grow beyond this specialized market, but has gotten off to a good start largely because it has remained laser focused on a clearly defined target market within a larger industry.

Although it’s generally easy to find good information to assess the attractiveness of an industry, discerning the attractiveness of a small target market is tougher, particularly if the firm is pioneering the market. Often, under these circumstances, information from more than one industry and/or market must be collected and synthesized to make an informed judgment. For example, RunKeeper ( www.runkeeper.com ) is a smartphone app that launched in 2008 and was the first app that allowed runners to track runs on smartphones and view the results on a Web site that provided analytics, running-related tips, and social support. The question for a product like this is what market to assess? There are no Standard Industrial Classification (SIC) or North American Industry Classification System (NAICS) codes for the “smartphone running app” industry or market. Obviously, a combination of markets must be studied, including the smartphone market, the app market, and the market for running-related products. It would be important to know not only how well smartphones and apps are selling but also what the current trends in running are. If running was gaining in popularity, as it was at the time, then that would be a positive sign for RunKeeper’s market. If smartphone and apps were selling like hotcakes, but running was on a sharp decline, the niche market that RunKeeper was pioneering would be much less attractive.

Google Trends ( www.google.com/trends ) is a useful tool for assessing whether the popularity of a particular topic or product is gaining or losing momentum. In short, Google Trends shows how often a particular search term is entered relative to the total search volume. Here’s how it works. Go to Google Trends ( www.google.com/trends ) and type the term “running app” into the search box. If you see a trend line that’s sloping upward to the right, it means that a steadily increasing number of people are searching for the term “running app” on Google. You can also use Google Trends to compare the volume of searches between two or more terms, which may provide insight into which is the better of two product ideas. For example, enter the terms “running app” and “biking app” (separated by a comma) into Google Trends. You’ll probably see a much more promising trend line for running apps than biking apps.

A tool for assessing the validity and attractiveness of a target market is provided in the full feasibility analysis in  Appendix 3.1 . Again, make sure to focus this analysis strictly on the portion of your industry you plan to target.

Market Timeliness

The final step in industry/market feasibility analysis is to evaluate the timeliness of the introduction of the proposed product or service. There are two important considerations. The first consideration is to determine if the window of opportunity for the product or service is open or closed. As explained in  Chapter  2 , the term “window of opportunity” is a metaphor describing the time period in which a firm can realistically enter a new market. After 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. An important judgment call is whether the window of opportunity for a particular business idea is open or closed.

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. For example, over the past several years, the Formal Wear and Costume Rental Industry has experienced a perfect storm of trends working against future growth. The trends include inexpensive imports (making it as inexpensive to buy as rent), lower disposable income, and a general societal leaning toward dressing more casually, even for traditionally formal events like weddings and proms. These trends, which aren’t expected to change anytime soon, suggest that now is not a good time to launch a Formal Wear and Costume Rental startup. 6  A tool for assessing market timeliness for any startup is provided in the full feasibility in  Appendix 3.1 .

Firms that do not conduct a thorough industry and target market analysis and enter a small part of an industry without knowing its size or potential, often find that the market is not large enough to maintain and grow the business. In these instances, firms must often scramble to find a complementary niche to expand the size of their business.

Organizational Feasibility Analysis

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. This task requires the individuals starting the firm to be honest and candid in their self-assessments. Two of the most important factors in this area are the passion that the sole entrepreneur or management team has for the business and the extent to which the people involved understand the markets in which the firm will compete. There are no practical substitutes for strengths in these areas.

A collection of additional factors help define management prowess, including prior entrepreneurial experience, 7  the depth of the professional and social networks of the people involved, 8  the degree of creativity among the members of the group, the extent of experience that the team has in cash flow management, and the extent to which the sole entrepreneur and members of the team have college degrees. 9  In most instances, not all of these qualities will be present. This is the reason that many startups fairly quickly add an industry veteran or an experienced entrepreneur to their team, or place one or more individuals with these credentials on their board of advisors. The prowess, or strength, of a startup’s management team is normally given disproportionate weight when outsiders evaluate the desirability of a new venture, and most entrepreneurs know this.

A tool for assessing management prowess is provided in the full feasibility analysis in  Appendix 3.1 .

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 nonfinancial resources because financial feasibility is considered separately. It is not necessary to develop an exhaustive list of nonfinancial resources. The objective is to identify the 8 to 12 most important and potentially problematic nonfinancial resources and assess whether they are available. An example is a startup that will require one or more wet labs to produce its products or perform its service. A wet lab is a space where chemicals, drugs, or other material or biological matter is tested or analyzed, and requires water, direct ventilation, and specialized piped utilities. Most wet labs are in buildings that are specifically designed to house them. If a firm plans to rent its wet labs, but no wet lab rental space is available in the community where the firm plans to locate, a serious resources sufficiency problem exists. Other nonfinancial resources, which often become issues due to concerns regarding their affordability or availability, include office space, light manufacturing space, key management employees, key support personnel, and support from state and local governments if applicable.

One important but easily overlooked resource sufficiency issue that new firms should consider is their proximity to similar firms. There are well-known clusters of high-tech firms, for example, in the Silicon Valley of California, on Route 128 around Boston, and in Austin, Texas. Clusters arise because they increase the productivity of the firms participating in them. Because these firms are located near each other, it is easy for their employees to network with each other, and it is easy for the firms to gain access to specialized suppliers, scientific knowledge, and technological expertise native to the area. 10  For example, there is a cluster of medical device companies in the Twin Cities area of Minnesota. As a result, a medical device firm that decided to locate in Des Moines, Iowa, for example, may have a decided disadvantage over a similar startup located in Minneapolis, which is just 240 miles to the north. Researchers have found that small manufacturing firms benefit more than larger firms by being physically close to a cluster of similar firms. 11

An instrument to assess resource sufficiency is provided in the full feasibility analysis in  Appendix 3.1 .

Financial Feasibility Analysis

Financial feasibility analysis is the final stage of a comprehensive feasibility analysis. For feasibility analysis, a preliminary financial analysis is normally sufficient. More rigor at this point is typically not required because the specifics of the business will inevitably evolve, making it impractical to spend a lot of time early on preparing detailed financial statements. Still, it is important to have more than a cursory sense of the financial feasibility of a proposed business.

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. If a proposed new venture moves beyond the feasibility analysis stage, more complete financial projections will be included in the business plan.

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. After a total figure is arrived at, an explanation of where the money will come from should be provided. Avoid cursory explanations such as “I’ll borrow the money” or “I plan to bring equity investors on board.” Although you may ultimately involve lenders or investors in your business, a more thoughtful account is required of how you’ll provide for your initial cash needs.

If the money will come from friends and family or is raised through other means, such as credit cards or a home equity line of credit, a reasonable plan should be stipulated to repay the money. Showing how a new venture’s startup costs will be covered and repaid is an important issue. Many new ventures look promising as ongoing concerns but have no way of raising the money to get started or are never able to recover from the initial costs involved. When projecting startup expenses, it is better to overestimate rather than underestimate the costs involved. Murphy’s Law is prevalent in the startup world—things will go wrong. It is a rare startup that doesn’t experience some unexpected expenses during the startup phase.

A form for estimating total startup expenses is included in the full feasibility analysis in  Appendix 3.1 .

Financial Performance of Similar Businesses

The second component of the financial feasibility analysis is estimating a proposed startup’s potential financial performance by comparing it to similar, already-established businesses. Obviously, this effort will result in approximate rather than exact numbers. There are several ways of doing this, all of which involve a little ethical detective work. First, substantial archival data are available online, which offer detailed financial reports on thousands of individual firms. The easiest data to obtain are on publicly traded firms through Hoovers, Yahoo! Industry Center or a similar source. These firms are typically too large, however, for meaningful comparisons to proposed new ventures. The trick is to find the financial performance of small, more comparable firms. A listing of Web sites that are helpful in this regard are provided in the Internet Resources Table in  Appendix 2.2  at the end of  Chapter 2 . Both Bizminer and Bizstats, for example, provide revenue, expense, and income estimates for firms in specific industries. Bizstats ( www.bizstats.com ), which is free, allows an entrepreneur to type in the projected revenue of his or her firm, by industry classification, and receive a mock income statement in return that shows the average profitability and expense percentages of U.S. small businesses in the same category. Bizminer ( www.bizminer.com ) provides a printout of the average sales and profitability for firms in the industries they follow, which provides more detail than similar reports. Bizminer’s reports cost between $69 and $99, unless accessed for free through a large public or university library. IBISWorld provides data on the average sales and profitability for the firms in the industries they track. It also normally provides a chart of the average expenses (as a percentage of net sales) for major items like wages, rent, and utilities for firms in the industries they follow. There are additional ways to obtain financial performance data on smaller firms. Some industry trade associations publish data on the sales and profitability of the firms in their industries. If the data can’t be easily found, you can call or e-mail a trade association to ask if the data are available. Similarly, if startup entrepreneurs identify a business that is similar to the one they want to start, and the business isn’t likely to be a direct competitor, it’s not inappropriate to ask the owner or manager of the business to share sales and income data. Even if the owner or manager is only willing to talk in general terms (i.e., “our annual sales are in the $2 million range, and we’re netting between $150,000 and $200,000 per year”), that information is certainly better than nothing.

Simple Internet searches are also often helpful. If you’re interested in the fitness industry, simply typing “fitness industry sales” and “fitness industry profitability” in the Google or Bing search bar will invariably result in links to stories about fitness companies that will discuss sales and profitability data.

A final way to obtain sales data for similar businesses is through simple observation and legwork. This approach works in some cases, and in some cases, it doesn’t. For example, if you were proposing to open a smoothie shop, you could gauge the type of sales to expect by estimating the number of people, along with the average purchase per visit, who patronize similar smoothie shops in your area. A very basic way of doing this is to frequent these stores and count the number of customers who come in and out of the stores during various times of the day.

The assessment tool associated with this topic is included in the full feasibility analysis that appears in  Appendix 3.1 .

Overall Financial Attractiveness of the Proposed Venture

A number of other factors are associated with evaluating the financial attractiveness of a proposed venture. Again, at the feasibility analysis stage, the extent to which a proposed business appears positive relative to each factor is based on an estimate or forecast rather than actual performance. Important factors in this category include the extent to which sales can be expected to grow during the first one to two years of the venture, the percentage of recurring revenue to anticipate (it’s 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.

An instrument to assess the overall financial attractiveness of the proposed venture is provided in the full feasibility analysis in  Appendix 3.1 .

In summary, feasibility analysis is a vital step in the process of both validating and developing business ideas. Although the process described in this chapter will not give an entrepreneur a final answer regarding the potential feasibility of a business idea, it should provide substantial clarity and insight. The ultimate goal of the process is that only well-researched, well-thought out, and potentially feasible ideas enter the business planning process.

Chapter Summary

1. Feasibility analysis is the process of determining if a business idea is viable.

2. 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.

3. Secondary research probes data that are already collected. The data generally include industry studies, Census Bureau data, company reports, and other pertinent information gleaned through library and Internet research.

4. Product/service feasibility is an assessment of the overall appeal of the product or service being proposed. Its two components are product/service desirability and product/service demand.

5. 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.

6. A buying intentions survey is an instrument 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.

7. Industry/target market feasibility is an assessment of the overall appeal of the industry and market for the product or service being proposed. Its three components are industry attractiveness, target market attractiveness, and market timeliness.

8. Organizational feasibility analysis is conducted to determine whether a proposed business has sufficient management expertise, organizational competence, and resources to successfully launch its business. Its two components are management prowess and (nonfinancial) resource sufficiency.

9. Clusters of firms arise because of the increase in the productivity of the firms participating in them. Because the firms are located near each other, it is easy for the employees to network with each other, and it is easy for the firms to gain access to specialized suppliers, scientific knowledge, and technological expertise native to the area.

10. Financial feasibility analysis is conducted to determine if a new venture is feasible from a financial perspective. Its three components are total startup cash needed, financial performance of similar businesses, and overall financial attractiveness of the proposed venture.

Review Questions

1. What is a feasibility analysis? How does a feasibility analysis differ from a business plan?

2. What are the four individual components of a full feasibility analysis?

3. What is the difference between primary research and secondary research? Are both types of research necessary to complete a full feasibility analysis?

4. Describe the purpose of product/service feasibility analysis. Briefly describe its two components.

5. Describe the purpose of a concept test and how it should be executed. Also, describe the purpose of a buying intentions survey and how it should be distributed and assessed.

6. Explain the purpose of industry/target market feasibility analysis. Briefly describe its three components.

7. What is a target market? Why do most startups start in target markets rather than broader markets that have more customers?

8. Describe the purpose of organizational feasibility analysis. Briefly describe its two components.

9. What is an industry “cluster?” Why might a semiconductor startup, for example, decide to launch in a geographic area where there are other semiconductor firms, rather than another area?

10. Describe the purpose of a financial feasibility analysis. Briefly describe its three components.

Application Questions

1. Kendall Ryan just applied for a bank loan to finance a Greek-style restaurant he plans to open near a large Midwestern university campus. The banker asked Kendall if he conducted any primary research to assess the feasibility of the restaurant. Kendall replied that he spent countless evenings and weekends in the library and on the Internet collecting data on the feasibility of Greek-style restaurants, and he is confident that his restaurant will be successful. He said that he even did careful research to make sure that Greek-style restaurants do well near large Midwestern university campuses. If you were the banker, how would you react to Kendall’s statements?

2. Three recent startups, CareZone, BenchPrep, and CitySlips were mentioned in  Chapter 2 . Pick one of these companies and write a concept statement for it.

3. InstyMeds, another company introduced in  Chapter 2 , developed a vending machine for prescription drugs to be located in rural hospitals and urgent care centers. Describe how you would have conducted an industry/target market feasibility analysis for this startup.

4. Jane Robinson has developed a software product that helps elementary school teachers better prepare their lesson plans and more accurately assess their students’ progress. Jane is now wondering whether this is a good time to launch the product. What factors should Jane consider in making this determination?

5. Using one or more of the resources included in the Internet Resources Table in  Appendix 2.2  at the end of  Chapter 2 , investigate the health and growth potential of the spa industry in the United States.

Endnotes

1. R. G. Cooper, Product Leadership: Creating and Launching Superior New Products (Reading, MA: Perseus Books, 1998), 99.

2. B. R. Barringer and R. Duane Ireland, Entrepreneurship: Successfully Launching New Ventures (Upper Saddle River, NJ: Prentice-Hall, 2012).

3. G. Galant and S. Klause, “VV Show #35” (Venture Voice),  http://www.venturevoice.com  (March, 2006).

4. B. Fried and T. Patterson, “Tom Patterson, Inventor & Founder of Tommy John,” Got Invention Radio Podcast,  http://gotinvention.com/ , originally posted on July 15, 2012 (accessed on June 9, 2013).

5. M. Butcher, “Songkick Secures Sequoia’s First Ever UK Investment With a $10M B Round,” Techcrunch,  www.techcrunch.com , March 8, 2012 (accessed June 9, 2013).

6. S. Lerman, “IBIS World Industry Report 53222 Formal Wear & Costume Rental in the US,” June 2013.

7. D. Politis, “The Process of Entrepreneurial Learning: A Conceptual Framework,” Entrepreneurship Theory and Practice, 29 (2005): 399–424.

8. D. M. DeCarolis and P. Saparito, “Social Capital, Cognition, and Entrepreneurial Opportunities: A Theoretical Framework,” Entrepreneurship Theory and Practice, 30 (2006): 41–56.

9. NFIB, National Small Business Poll, Volume 12, no. 2 (Washington, D.C.: NFIB Research Foundation, 2012).

10. B. Feld, Startup Communities (New York, NY: Wiley, 2012).

11. M. Rogers, “Networks, Firm Size and Innovation,” Small Business Economics, 22, no. 2 (2004): 141–153.

Appendix 3.1 Full Feasibility Analysis

Note: All fields can be expanded to provide additional space to respond to the questions. A copy of this template, along with each of the assessment tools, is available in MS Word and PDF format at the authors’ Web site at http://www.bus.ucf.edu/barringer.

Introduction

A. Name of the proposed business

B. Name of the founder (or founders)

C. One paragraph summary of the business

Part 1: Product/Service Feasibility

Issues Addressed in This Part

A. Product/service desirability

B. Product/service demand

Assessment Tools

Concept Statement Test

· Write a concept statement for your product/service idea. Show the concept statement to 5 to 10 people who are familiar with the industry your startup will be entering and 5 to 10 potential customers. Select people who will give you informed and candid feedback.

· Attach a blank sheet to the concept statement, and ask the people who read the statement to (1) tell you three things they like about your product/service idea, (2) provide three suggestions for making it better, (3) tell you whether they think the product or service idea is feasible (or will be successful), and (4) share any additional comments or suggestions.

· Summarize the information you obtain from the concept statement into the following three categories:

· Strengths of the product or service idea—things people who evaluated your product or service concept said they “liked” about the idea

· Suggestions for strengthening the idea—suggestions made by people for strengthening or improving the idea

· Overall feasibility of the product or service concept—report the number of people who think the idea is feasible, the number of people who think it isn’t feasible, and any additional comments that were made

· Other comments and suggestions

Buying Intentions Survey

· Distribute the concept statement to 25 to 50 prospective customers (do not include any of the people who completed the concept statement test) with the following buying intentions survey attached. Ask each participant to read the concept statement and complete the buying intentions survey. Record the number of people who participated in the survey and the results of the survey here.

· Along with the raw data recorded here, report the percentage of the total number of people you surveyed who said they would probably buy or definitely would buy your product or service if offered. This percentage is the most important figure in gauging potential customer interest.

· One caveat is that people who say that they intend to purchase a product do not always follow through, so the numbers resulting from this activity are almost always optimistic. Still, the numbers provide you with a preliminary indication of how your most likely customers will respond to your potential product or service offering.

How likely would you be to buy the product or service described above?

·            Definitely would buy

·            Probably would buy

·            Might or might not buy

·            Probably would not buy

·            Definitely would not buy

Additional questions may be added to the buying intentions survey.

Conclusion (expand fields and report findings, in discussion form, for each area)

A. Product/service desirability

B. Product/service demand

C. Product/service feasibility (circle the correct response)

Not Feasible    Unsure    Feasible

D. Suggestions for improving product/service feasibility

Part 2: Industry/Market Feasibility

Issues Addressed in This Part

A. Industry attractiveness

B. Target market attractiveness

C. Timeliness of entry into the target market

Assessment Tools

Industry Attractiveness

· To the extent possible, assess the industry at the five-digit NAICS code level your potential business will be entering. Use a broader industry category (less NCICS digits) if appropriate ( www.census.gov/eos/www/naics/concordances/concordances.html ).

· Assess the attractiveness of the industry the potential business plans to enter on each of the following dimensions.

Industry Attractiveness Assessment Tool

(used to assess the broad industry, rather than the specific target market, you plan to enter)

Target Market Attractiveness

· Identify the portion or specific market within your broader industry that you plan to target.

· Assess the attractiveness of the target market on each of the following dimensions.

Target Market Attractiveness Assessment Tool

(used to assess the specific target market, rather than the broader industry, you plan to enter)

Market Timeliness

· Determine the extent to which the “window of opportunity” for the proposed business is open or closed based on the following criteria.

· Determine the timeliness of entering a specific target market based on other criteria.

Market Timeliness Assessment Tool

Conclusion (expand fields and report findings, in discussion form, for each area)

A. Industry attractiveness

B. Target market attractiveness

C. Market timeliness

D. Industry/market feasibility (circle the correct response)

Not Feasible    Unsure    Feasible

E. Suggestions for improving industry/market feasibility.

Part 3: Organizational Feasibility

Issues Addressed in This Part

A. Management prowess

B. Resource sufficiency

Assessment Tools

Management Prowess

· Use the following table to candidly and objectively rate the “prowess” of the founder or group of founders who will be starting the proposed venture.

Management Prowess Assessment Tool

Resource Sufficiency

· The focus in this section is on nonfinancial resources. Use the following table to rate your “resource sufficiency” in each category.

· The list of resources is not meant to be exhaustive. A list of the 6 to 12 most critical nonfinancial resources for your proposed business is sufficient.

An explanation of the rating system used in the first portion of the table is as follows:

  ① Available

  ② Likely to be available: will probably be available and will be within my budget

  ③ Unlikely to be available: will probably be hard to find or gain access to, and may exceed my budget

  ④ Unavailable

  ⑤ NA: not applicable for my business

Resource Sufficiency Assessment Tool

Conclusion (expand fields and report findings, in discussion form, for each area)

A. Management prowess

B. Resource sufficiency

C. Organizational feasibility (circle the correct response)

Not Feasible    Unsure    Feasible

D. Suggestions for improving organizational feasibility

Part 4: Financial Feasibility

Issues Addressed in This Part

A. Total startup cash needed

B. Financial performance of similar businesses

C. Overall financial attractiveness of the proposed venture

Assessment Tools

Total Startup Cash Needed

· The startup costs (which include capital investments and operating expenses) should include all the costs necessary for the business to make its first sale. New firms typically need money for a host of purposes, including the hiring of personnel, office or manufacturing space, equipment, training, research and development, marketing, and the initial product rollout.

· At the feasibility analysis stage, it is not necessary for the number to be exact. However, the number should be fairly accurate to give an entrepreneur an idea of the dollar amount that will be needed to launch the firm. After the approximate dollar amount is known, the entrepreneur should determine specifically where the money will come from to cover the startup costs.

· The total startup cash needed can be estimate using the following table.

Total Startup Cash Needed (to Make First Sale)

Capital Investments	Amount
Property
Furniture and fixtures
Computer equipment
Other equipment
Vehicles
Operating Expenses	Amount
Legal, accounting, and professional services
Advertising and promotions
Deposits for utilities
Licenses and permits
Prepaid insurance
Lease payments
Salary and wages
Payroll taxes
Travel
Signs
Tools and supplies
Starting inventory
Cash (working capital)
Other expense 1
Other expense 2
Total Startup Cash Needed =

Comparison of the Financial Performance of Proposed Venture to Similar Firms

· Use the following tables to compare the proposed new venture to similar firms in regard to annual sales (Year 1 and Year 2) and profitability (Year 1 and Year 2).

Overall Financial Attractiveness of the Proposed Venture

· The following factors are important in regard to the overall financial attractiveness of the proposed business.

· Assess the strength of each factor in the following table.

Overall Financial Attractiveness of Proposed Venture Assessment Tool

Conclusion (report finding for each area)

A. Total startup cash needed

B. Financial performance of similar businesses

C. Financial feasibility (circle the correct response)

Not Feasible    Unsure    Feasible

D. Suggestions for improving financial feasibility

Overall Feasibility: Summary and Conclusion

Conclusion—briefly summarize your justification for your overall assessment.