Entrepreneur

Feasibility Analysis

Feasibility Analysis

⚫ Feasibility analysis is important to test the

potential viability of a business idea.

⚫ Proper time: after opportunity recognition,

before the completion of a business plan.

⚫ Testing business concepts

⚫ shown to industry experts and prospective customers

⚫ solicit feedback about the potential viability of the idea.

Chapter Objectives

1. Explain what a feasibility analysis is and why it’s

important.

2. Describe a product/service feasibility analysis,

explain its purpose, and discuss the two primary

issues that a proposed business should consider in

this area.

3. Describe an industry/market feasibility analysis,

explain its purpose, and discuss the two primary

issues to consider when completing this analysis.

Chapter Objectives

4. Explain what an organizational feasibility analysis

is and its purpose and discuss the two primary issues

to consider when completing this analysis.

5. Describe what a financial feasibility analysis is,

explain its importance, and discuss the most critical

issues to consider when completing this analysis.

6. Describe a feasibility analysis template and explain

when it is important for entrepreneurs to use this

template.

What Is Feasibility Analysis?

Feasibility Analysis

•Feasibility Analysis is the

preliminary evaluation of a

business idea, conducted

for the purpose of

determining whether the

business idea is viable and

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.

o A common mistake is to go forward with a plan based on false

expectations before establishing feasibility!

⚫ Good to include a concept statement referring to it in

the business plan

Components of Feasibility Analysis

(1) Product/Service Feasibility

(4) Organizational Feasibility

(2) Industry Feasibility

(5) Financial Feasibility

A properly conducted feasibility analysis includes four separate

components:

(3) Target Market Feasibility

First Screen

First Screen: a template for completing a feasibility analysis.

⚫ It’s called “First Screen”

because it’s a tool that can be

used in the initial pass at

determining the feasibility of a

business idea.

⚫ If a business idea passes this

stage, the next step is to

complete a business plan.

Feasibility Analysis

Role of feasibility analysis in developing business ideas.

Outline for a Comprehensive Feasibility

Analysis

(1) Product/Service

Feasibility

Product/Service Feasibility Analysis

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. • Do they like it?

• Does it respond to an opportunity?

• Is it affordable? Accessible? Readily usable?

Understandable? o Software, consulting/training, technology products

Product/Service

Feasibility Analysis

Two sub-components of product/service feasibility

analysis

(A) Product/Service

Desirability

(B) Product/Service

Demand

Product/Service Feasibility Analysis

A. Product /Service Desirability

A. Product /Service Desirability: can be

determined through three steps:

(1) Administering a Concept Statement

(2) Self Questions

(3) Asking Industry Experts

A Concept Statement is a one-page description

of a business distributed to people who are

asked to provide feedback on the potential of the

business idea. ⚫ People who are familiar with the industry that the firm plans

to enter o Reliable (not to discourage), but honest!

o Family members: if they are in the business

⚫ 1st step to bringing potential product to the market field!

⚫ The feedback will hopefully provide: o A sense of the viability of the product or service idea.

o Suggestions for how the idea can be strengthened or “tweaked” before

proceeding further.

One-Page Concept Statement

Concept Statement is One Page that comprises the following components: ⚫ Background about the product or service. This section describes where the business idea

came from, and whether and how it might relate to certain exposures, experiences,

observations, education/professional background, or other.

⚫ A description of the product or service. This section describes the business concept, and

details the features of the product or service.

⚫ The intended target market. This section lists the consumers or businesses who are

expected to buy the product or service.

⚫ The benefits of the product or service.* This section describes the benefits of the product

or service, and includes an account of how the product or service adds value, solves a

problem, fills a gap, addresses a market niche, and/or provides a new solution to an already

existing problem.

⚫ A description of how the product or service will be positioned relative to competitors. A

company’s position describes how its product or service is situated relative to its rivals.

⚫ Project Team: This section mentions names of team members with respective backgrounds,

and specifies role and function of each member, and his clear contribution to the project.

⚫ Project Advisor(s) (if any): This section mentions any specific industry experts, prospective

customers, mentors, family members, or friends who might have given/be giving you insights

into the project, or whom you plan on soliciting respective feedback from.

One-Page Concept Statement

New Venture

Fitness Drink’s

Concept Statement

One-Page Concept Statement

Product/Service Feasibility Analysis

A. Product /Service Desirability

(1) Self-Questions to determine the basic appeal of the product or service a. Does it make sense? Is it reasonable?

b. Is it something consumers will get excited about?

c. Does it take advantage of an environmental trend, solve a

problem, or take advantage of a gap in the marketplace?

d. Is this good time to introduce the product or service to the

market?

e. Are there any fatal flaws in the product or service’s basic

design or concept?

Product/Service Feasibility Analysis

A. Product /Service Desirability

Common Fatal Flaws

⚫ The problem doesn’t exist, or happens infrequently

⚫ Caring more about funding than the business opportunity

⚫ Wrong location

⚫ Tracking/Copying the competition

⚫ Tunnel vision – focusing too much on the product than the market

⚫ Considerations in marketing / communication

o Social, cultural, improper channels, business/product name!

Asking Industry Experts – the Concept Statement is handed along with a Product Desirability Survey to

10 industry experts to be developed

⚫ Product Desirability Survey Questions:

1. Do you think the idea is feasible (i.e., is a realistic or viable

business idea)?

2. List three things you like about the product or service idea

described in this statement.

3. Provide three suggestions for making the idea better.

4. Provide any additional comments or suggestions you think

might be helpful (including red flags).

Product/Service Feasibility Analysis

A. Product /Service Desirability

B. Product/Service Demand

Assessing product/service demand is a research that can

be performed to assess product demand, i.e., likelihood

of potential customers to buy the product.

⚫ Performed through two techniques:

❑ Step 1: Talking Face-to-Face with Potential Customers to

administer a Buying Intentions Survey

❑ Step 2: Using Library and Online ResearchTools, Such as

Google Ads (previously AdWords) and Landing Pages,

Product/Service Feasibility Analysis

B. Product /Service Demand

Step (1) - Talking Face-to-Face with Potential

Customers - to administer a Buying Intentions

Survey

⚫ The only way to know if your product or service is what

people want is by talking to them.

⚫ The idea is to measure customer reaction to the general

concept of what you want to sell, and tweak, revise, and

improve on the idea based on the feedback.

⚫ In some cases, talking with potential customers will cause an

entrepreneur to abandon an idea.

⚫ Entrepreneurs are often surprised to find that a product idea they think solves a

problem gets lukewarm reception when they talk to actual customers.

Product/Service Feasibility Analysis

B. Product Demand

Buying Intentions Survey: an instrument used to

gauge customer interest in a product or service, and

consists of

(1) A Concept Statement or a similar description of a product or

service

(2) A Buying Intentions questions attached.

⚫ The statement and survey should be distributed to

⚫ 20 -30 potential (different) customers

o At least 10 face-to face

o Each participant should be asked to read the statement and

complete the survey.

Product/Service Feasibility Analysis

B. Product Demand

Product/Service Feasibility Analysis

B. Product Demand

Buying Intentions Survey

Step (2) – Online Research Tools, Such

as Google Ads and Landing Pages, to Assess

Demand and gauge reaction from potential

customers

⚫ A good idea: Some entrepreneurs purchase text ads

on search engines that show up when user is

searching for a product close to his idea.

⚫ https://ads.google.com/

Product/Service Feasibility Analysis

B. Product Demand

Google Ads (previously Google AdWords, before July 24, 2018[2]) is an online advertising platform developed by Google where

advertisers pay to display brief advertisements, service offerings, product listings, video content and generate mobile application

installs within the Google ad network to web users.(wikipedia)

⚫ If the searcher clicks on the text ad, they are directed to a

landing page that describes the idea.

⚫ There may be a link on the landing page that says “For

future updates please enter your e-mail address.”

⚫ Demand assessed by how many people click on the text ad

and enter their e-mail address.

Product/Service Feasibility Analysis

B. Product Demand

Step (2) – Online Research Tools

Other online tools to assess potential product/service demand

include: ⚫ Quirky provides feedback on business ideas (Foundersuite, Quirky).

⚫ Market Research o Crowd Picker – focus-test their ideas and products to get valuable feedback.

o Google Trends - top search queries in Google Search

⚫ Online Surveys (Survey Monkey, Google Consumer Surveys).

⚫ Q&A Sites (Quora, Stack Overflow).

Product/Service Feasibility Analysis

B. Product Demand

First Screen

Part 1: Strength of Business Idea

(2) Industry/Target Market

Feasibility

Industry/Target Market

Feasibility Analysis

Industry/Target

Market

Feasibility

Analysis

Purpose: To assess 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. (airplanes, fitness drinks, or

children’s toys.)

• A firm’s target market is the limited

portion of the market the business

plans to go after. o It is a place within a larger market segment

that represents a narrow group of customers

with similar needs.

Industry/Target Market

Feasibility Analysis

Two sub-components of industry/target market

feasibility analysis

(B) Industry Attractiveness

(A) Target Market Attractiveness

First Screen

Part 3:Target Market & Customer-Related Issues

Target Market Attractiveness

(A) Target Market Attractiveness

⚫ Challenge in identifying an attractive target market:

o Finding a market large enough for the proposed business

o Yet small enough to avoid attracting larger competitors.

⚫ Assessing the attractiveness of a target market is tougher than

assessing the attractiveness an entire industry.

⚫ Often, considerable ingenuity must be employed to find

information to assess the attractiveness of a specific target

market.

⚫ Most attractive Target markets are easy to identify, with low

barriers, high purchasing power, high growth potential, and

high/easy product awareness

Industry Attractiveness

(B) Industry Attractiveness

⚫ Industries vary in terms of their overall

attractiveness.

⚫ This step explores characteristics of the generally

most attractive industries, and finds out into which

industry description the business fits

⚫ Particularly important would be the degree to

which environmental and business trends are

moving in favor rather than against the industry.

Industry Attractiveness

• Are young rather than old.

• Are early rather than late in their life cycle.

• Are fragmented rather than concentrated.

o Fragmented industry is one in which

no single enterprise dominates the market

o No market leader, a high number of small players

• Are growing rather than shrinking.

• Are selling products/services that customers

“must have” rather than “want to have.”

• Are not crowded

o Crowded Industries have a high number of similar, fiercely competing players with little differentiation

(e.g. mobile phone shops)

• Have high rather than low operating margins.

• Are not highly dependent on the historically low price of key raw materials.

Characteristics of Most Attractive Industries

Top declining Industries

⚫ Glass Products

⚫ Paper Products & Newspapers

⚫ Chemical pesticides & fertilizers

⚫ Miscellaneous relocated industries

o medical equipment, jewelry and flatware,

sporting and athletic goods, dolls, toys, and

games, office supplies, signs, concrete burial

vaults, Christmas tree ornaments, Christmas tree

lighting sets, beauty and barber chairs, burnt

wood articles, lamp shades, matches, metal

combs, and electric hair clippers.

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Industry Attractiveness

Top Growing

Industries

• Renewables and

environment

• Internet

• Online publishing

• Philanthropy

• Corporate Social

Responsibility

• E-learning

• International trade &

development

• Computer games

First Screen

Part 2: Industry-Related Issues

(3) Organizational Feasibility

Organizational Feasibility Analysis

Organizational

Feasibility Analysis

Purpose

• To determine whether a

proposed business has

sufficient management

expertise, organizational

competence, and resources to

successfully launch a

business. o Focuses on non-financial resources.

Organizational Feasibility Analysis

Two Sub-components of organizational feasibility

analysis

(A) Management Prowess

(B) Resource Sufficiency

Management Prowess

(A) Management Prowess

A proposed business should candidly evaluate the Prowess, or the Ability

Whether the management team satisfy itself that it has the requisite passion and expertise to launch the venture.

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

⚫ How much Passion the sole entrepreneur or the founding team has for the business idea.?

⚫ How much Understanding does the sole entrepreneur or the founding team have?

o Of technicalities of the industry

o Of needs and behavior of the Markets in which the firm will participate

More factors which add to the management prowess ➔

increase organizational feasibility:

1. Capable individual team members Venture team identified

they believe will join the firm after it is launched 1. lends credibility to the organizational feasibility of the potential venture.

2. Capable partners who would join the board of advisors

/directors upon launching

3. Professional and social networks managers have

4. Marketing Associates who can help launch the business 1. Experts in launching campaigns, distribution channel partners (direct & indirect),

strategic partners (cross marketers; vendors, legal advisors)

Management Prowess

Resource Sufficiency

(B) Resource Sufficiency (non financial)

This pertains to an assessment of whether an entrepreneur has

sufficient resources to launch the proposed venture.

⚫ Meant mostly are Non-financial resources

⚫ 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.

⚫ If critical resources are not available in certain areas, it may be impractical

to proceed with the business idea.

⚫ E.g. Proper Location

Resource Sufficiency

Examples of nonfinancial resources that may be

critical to the successful launch of a new business

• Affordable office space.

• Lab/manufacturing space, or space to launch service

business.

• Availability of contract manufacturers or service

providers.

• Key management employees (now and in the future).

• Key support personnel (now and in the future). o Maintenance, quality control. customer support, crisis/risk

management, legal

Resource Sufficiency

Examples of nonfinancial resources that may be critical to the

successful launch of a new business

• Availability of intellectual property protection.

• Availability of favorable business partnerships. o Industry associations; industry strategic partners; educational bodies;

regulators & policy makers; suppliers

• Key equipment needed to operate the business

(computers, machinery, delivery vehicle

• Support of local governments and state government if

applicable for business launch

First Screen

Part 4: Founder- (or Founders-) Related Issues

Components of Feasibility Analysis

Product/Service Feasibility

Organizational Feasibility

Industry/Target Market

Feasibility

Financial Feasibility

(4) Financial Feasibility

Financial Feasibility Analysis

⚫ For feasibility analysis, a preliminary

financial assessment is sufficient.

❑ As business will evolve, it is impractical to spend a

lot of time early on preparing detailed financial

forecasts.

❑ If a proposed new venture moves beyond the

feasibility analysis stage, it will need to complete

projected financial statements for the first 1-3 years

Financial Feasibility Analysis

Three sub-components of financial feasibility analysis

(A) Total Start-Up Cash (Capital)

Needed

(B) Financial Performance

Of Similar Businesses

(C) Overall Financial Attractiveness

of the Proposed Venture

Total Start-Up Capital Needed

(A) Total Start-Up Capital Needed

Cash needed to prepare the business to make its

first sale: generate the first $1 in revenues.

⚫ An actual budget should be prepared that lists

o all anticipated capital purchases (fixed)

o All operating expenses needed (ongoing)

⚫ The point of this exercise is to determine if the

proposed venture is realistic, given the total start-up

cash needed.

⚫ Total Start-up Capital= Fixed Costs + (Monthly Costs x 6)

Total Start-Up Capital Needed

Start-up cost

worksheets are

available via

⚫ SCORE

(www.score.org) ❑ Start-up Cash

https://www.score.org/resourc

e/start-expenses

❑ www.vertex42.com

⚫ Small Business

Administration (www.sba.gov)

Source:

https://www.vertex42.com/ExcelTemplates/

business-startup-costs.html

Financial Performance

of Similar Businesses

(B) Financial Performance of Similar

Businesses

Comparison to similar, already established businesses.

⚫ There are several ways to doing this, all of which involve a

little ethical detective work.

(1) Sourcing reports available - some for free and some that require a fee, offering detailed industry trend analysis and reports on thousands of

individual firms.

(2) Simple observational research – e.g. owners of New Venture Fitness Drinks could estimate their sales by tracking the number of people

who support similar restaurants and estimating the average amount each

customer spends.

Financial Performance

of Similar Businesses

⚫ www.BizStats.com shows average profitability and

expense percentages of U.S. businesses in the same

category.

⚫ www.IBISWorld.com provides a chart of the average

expenses for major items like wages, rent, office and

administrative expenses, and utilities for firms in the

industries they follow.

⚫ www.bizminer.com estimates a firm’s sales and net

profit for firms in the industries you follow

⚫ Regular online reports are issued by the Ministry of Trade,

Chambers of Commerce, top audit and consulting firms

(E&Y, PWC)

Financial Performance

of Similar Businesses

World Bank’s

“Doing Business” Reports

⚫ http://www.doingbusiness.org/c

ontent/dam/doingBusiness/coun

try/s/saudi-arabia/SAU.pdf

Financial Performance

of Similar Businesses

Overall Financial Attractiveness of the

Proposed Venture

(C) Overall Financial Attractiveness of

the Proposed Investment

A number of other financial factors are associated with

(indication of) promising business start-ups.

⚫ 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.

⚫ factors that pertain to the overall attractiveness of the

financial feasibility of the business idea.

Factors associated with attractiveness of a proposed

venture are related a new venture’s projected financial

rate of return that justifies launch of the business, i.e., gain or loss on an investment over a specified time period,

❑ Number of income sources

❑ Amount of capital invested

❑ Risks assumed in launching the business

➢ Political; security; fluctuations; expensive storage; unclear costs;

❑ Time needed for business to mature

❑ Opportunity Cost

• Existing alternatives for the money being invested

• Existing alternatives for the entrepreneur’s time and efforts

Overall Financial Attractiveness of the

Proposed Venture

Overall Financial Attractiveness of the

Proposed Venture

Financially Promising Business Opportunities are typically

characterized by the following:

❖Ability to forecast income and expenses with a reasonable degree of certainty.

o Income sources, sales unit, projected transactions

❖High percentage of recurring revenue — meaning that once a firm wins a client, the client will provide recurring sources of revenue.

❖Steady and rapid growth in sales during the first 5 to 7 years in a clearly defined market niche.

❖ Internally generated funds to finance and sustain growth.

o If otherwise high risk of competition is associated if it takes long time to grow

❖ Availability of an exit opportunity for investors to convert equity

to cash.

Opportunities which demand o substantial capital,

o requiring long periods of time to mature, and

o having a lot of risk involved

make little sense and better be

disregarded! o unless they provide exceptionally high rates of return

Overall Financial Attractiveness of the

Proposed Venture

First Screen

Part 5: Financial Issues

First Screen

Overall Potential

First Screen: a template for completing a feasibility analysis.

⚫ It’s called “First Screen”

because it’s a tool that can be

used in the initial pass at

determining the feasibility of a

business idea.

⚫ If a business idea passes this

stage, the next step is to

complete a business plan.

First Screen

Overall Potential