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LECTURE 5WHAT IS FEASIBILITY ANALYSIS?FEASIBILITY ANALYSIS1-13-2Feasibility analysis is the process of determiningwhether a business idea is viable.It is the preliminary evaluation of a business idea,conducted for the purpose of determining whether theidea is worth pursuing.BUS 360: Leading InnovationM Wahidul IslamFall 2015WHEN TO CONDUCT A FEASIBILITY ANALYSISFEASIBILITY ANALYSIS TimingRole of feasibility analysis in developing business ideas.3-4 of Feasibility AnalysisThe proper time to conduct a feasibility analysis isearly in thinking through the prospects for a newbusiness.The thought is to screen ideas before a lot ofresources are spent on them3-3 1
A PROPERLY CONDUCTED FEASIBILITY ANALYSISOUTLINE FOR A COMPREHENSIVE FEASIBILITYANALYSISINCLUDES FOUR SEPARATE COMPONENTSOrganizational FeasibilityFinancial Feasibility3-6Industry/Target MarketFeasibility3-5Product/Service FeasibilityPRODUCT/SERVICE FEASIBILITY ANALYSISPRODUCT/SERVICE FEASIBILITY ANALYSIS1 OF 22 OF 2Before a prospective firm rushes a new product or service intodevelopment, it should be sure that the product or service is whatprospective customers want.3-83-7Is an assessment of the overall appeal of the product or servicebeing proposed.Components of product/servicefeasibility Demand2
PRODUCT/SERVICE DESIRABILITYPRODUCT/SERVICE DESIRABILITY1 OF 32 OF 3 Second, AdministerFirst, ask the following questions to determine the basicappeal of the product or service.a Concept TestA concept test involves showing a preliminary description of aproduct or service idea, called a concept statement. A concept statement is a one page description of a business, thatis distributed to people (at least 10) who are asked to providefeedback on the potential of the business idea. It includes 3-1015-9 Does it make sense? Is it reasonable? Is it something consumerswill get excited about? Does it take advantage of an environmental trend, solve aproblem, or take advantage of a gap in the marketplace? Is this a good time to introduce the product or service to themarket? Are there any fatal flaws in the product or service’s basic designor concept?A description of a product or service ideaThe intended target marketThe benefits of the product or serviceA description of how the product / service will be positioned relative tocompetitorsA brief description of company’s management teamThe 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 proceedingfurther.Alternatively Entrepreneurs sometimes just conducts a FocusGroup Study to getting feedbackPRODUCT/SERVICE DESIRABILITYPRODUCT/SERVICE DEMANDNEW VENTURE FITNESS DRINK’S CONCEPT STATEMENT1 OF 6 Product/Service 3-123-11 DemandTheir are two steps to assessing product/service demand.Step 1: Administer a Buying Intentions SurveyStep 2: Conduct library, Internet, and Gumshoe research3
PRODUCT/SERVICE DEMANDPRODUCT/SERVICE DEMAND2 OF 63 OF 6 Buying 3-14 3-13 Intentions SurveyIs an instrument that is used to gauge customer interest in aproduct or service.It consists of a concept statement or a similar description ofa product or survey with a short survey attached to gaugecustomer interest.Internet sites like SurveyMonkey make administering abuying intentions survey easy and affordable.PRODUCT/SERVICE DEMANDPRODUCT/SERVICE DEMAND4 OF 6GUMSHOE RESEARCH Library, A gumshoe is a detective or an investigator that scroungesaround for information or clues wherever they can be found.3-16 Internet, and Gumshoe ResearchThe second way to assess the demand for a product orservice is by conducting library, Internet, andgumshoe research.Reference librarians can often point you towardsresources to help you investigate a business idea, suchas industry-specific trade journal and industry reports.Internet searches can often yield importantinformation about the potentially viability of aproduct or service idea.3-15 Be a gumshoe Ask people what they think about your product or service idea. If your idea is to sell educational toys, spend a weekvolunteering at a day care center and watch how children interactwith toys.4
PRODUCT/SERVICE DEMANDONE OF THE MOST EFFECTIVE THINGS AN ENTREPRENEUR CAN DO TO CONDUCT ATHOROUGH PRODUCT/SERVICE FEASIBILITY ANALYSIS IS TO HIT THE STREETS ANDTALK TO POTENTIAL CUSTOMERSExercise3-17Product/Service Feasibility Analysis1-18INDUSTRY/TARGET MARKET FEASIBILITYANALYSIS3-20An industry is a group of firms producing a similar product orservice.3-19Is an assessment of the overall appeal of the industry and thetarget market for the proposed business.INDUSTRY/TARGET MARKET FEASIBILITYANALYSIS COMPONENTSIndustry AttractivenessTarget MarketAttractivenessA firm’s target market is the limited portion of the industry itplans to go after.5
INDUSTRY ATTRACTIVENESSINDUSTRY ATTRACTIVENESS1 OF 22 OF 2 Industry Attractiveness Particularly important—the degree to whichenvironmental and business trends are moving infavor rather than against the industry .TARGET MARKET ATTRACTIVENESSTARGET MARKET ATTRACTIVENESS A target The challenge in identifying an attractive targetmarket is to find a market that’s large enough for theproposed business but is yet small enough to avoidattracting larger competitors.3-23market is a place within a larger marketsegment that represents a narrower group ofcustomer with similar needs Target Market Attractiveness3-22Industries vary in terms of their overall attractiveness.3-21 t1-246
TARGET MARKET ATTRACTIVENESS AssessingIs conducted to determine whether a proposed business hassufficient management expertise, organizational competence, andresources to successfully launch a business.considerably ingenuity must be employedto finding information to assess the attractivenessof a specific target market.3-263-25the attractiveness of a target market istougher than an entire industry.ORGANIZATIONAL FEASIBILITY ANALYSIS Often,Focuses on non-financial resources.BE CREATIVEORGANIZATIONAL FEASIBILITY ANALYSISMANAGEMENT PROWESS2 OF 21 OF 2Components of organizationalfeasibility analysis ManagementA firm should candidly evaluate the prowess, orability, of its management team to satisfy itself thatmanagement has the requisite passion and expertise tolaunch the venture. Two of the most important factors in this area are:Resource Sufficiency3-283-27Management ProwessProwess The passion that the solo entrepreneur or the founding teamhas for the business idea. The extent to which sole entrepreneur or the founding teamunderstands the markets in which the firm will participate. 7
MANAGEMENT PROWESSRESOURCE SUFFICIENCY2 OF 21 OF 2An indication of passion is the willingness of a new venture team tocomplete a comprehensive feasibility analysis. Resource SufficiencyThis topic pertains to an assessment of whether anentrepreneur has sufficient resources to launch the proposedventure.To test resource sufficiency, a firm should list the 6 to 12most critical nonfinancial resources that will be needed tomove the business idea forward successfully.3-303-29A New Venture Team is a group of founders, key employees andadvisors that either manage or help manage the new business inits start-up years If critical resources are not available in certain areas, it may beimpractical to proceed with the business idea.FINANCIAL FEASIBILITY ANALYSISRESOURCE SUFFICIENCYTHE FINAL COMPONENT OF A COMPREHENSIVE FEASIBILITY ANALYSIS.2 OF 2A PRELIMINARY FINANCIAL ASSESSMENT IS SUFFICIENT.Examples of nonfinancial resources that may be criticalto the successful launch of a new business Quality of the labor pool available. Proximity to key suppliers and customers.Components of financialfeasibility analysisTotal Start-Up CashNeeded3-32of affordable office or lab space. Likelihood of local and state government support of the business.3-31 AvailabilityFinancial Performance ofSimilar Businesses Willingness of high quality employees to join the firm. Likelihood of establishing favorable strategic partnerships. Proximity to similar firms for the purpose of sharing knowledge. Possibility of obtaining intellectual property protection in key areas.Overall FinancialAttractiveness of theProposed Venture8
FINANCIAL PERFORMANCE OF SIMILARBUSINESSESTOTAL START-UP CASH NEEDED Total Performance of Similar BusinessesEstimate the proposed start-up’s financial performance bycomparing it to similar, already established businesses.There are several ways to doing this, all of which involve alittle ethical detective work.First, there are many reports available, some for free and some thatrequire a fee, offering detailed industry trend analysis and reports onthousands of individual firms. Second, simple observational research may be needed. For example,the owners of New Venture Fitness Drinks could estimate their salesby tracking the number of people who patronize similar restaurantsand estimating the average amount each customer spends. OVERALL FINANCIAL ATTRACTIVENESS OF THEPROPOSED VENTUREOVERALL FINANCIAL ATTRACTIVENESS OF THEPROPOSED VENTURE1 OF 22 OF 2Financial Factors Associated With Promising BusinessOpportunities Overall A number of other financial factors are associatedwith promising business startups.In the feasibility analysis stage, the extent to which abusiness opportunity is positive relative to each factoris based on an estimate rather than actualperformance. Steady and rapid growth in sales during the first 5 to 7 years in a clearly3-36 3-35Financial Attractiveness of the ProposedInvestment3-34 FinancialStart-Up Cash NeededThe first issue refers to the total cash needed toprepare the business to make its first sale.An actual budget should be prepared that lists all theanticipated capital purchases and operating expensesneeded to generate the first 1 in revenues.The point of this exercise is to determine if theproposed venture is realistic given the total start-upcash needed.3-33 defined market niche. High percentage of recurring revenue—meaning that once a firm wins aclient, the client will provide recurring sources of revenue. Ability to forecast income and expenses with a reasonable degree ofcertainty. Internally generated funds to finance and sustain growth. Availability of an exit opportunity for investors to convert equity to cash.9
FINANCIAL FEASIBILITY INDICATORSREFERENCESNUMEBRS MATTER Chapter 3 – Feasibility Analysis Financial IndicatorsBarringer, Bruce R. and Ireland, Duane (2010)Entrepreneurship: Successfully Launching NewVentures (3rd Edition) Pearson Education IncPaybackDiscounted PaybackNPVReturn on Initial Capital EmployedIRRScale Indicator1-3710
Organizational Feasibility Industry/Target Market Feasibility Financial Feasibility 3-6 OUTLINE FOR A COMPREHENSIVE FEASIBILITY ANALYSIS 3-7 PRODUCT/SERVICE FEASIBILITY ANALYSIS 1 OF 2 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