Feasibility analysis is a preliminary evaluation of business idea to determine
if an idea is worth pursuing and to screen idea before spending resources on them. It follows the opportunity recognition stage but comes before the development of a business plan. When a business idea is deemed unworkable, it should be dropped or re-thought. If it is re-thought and a slightly different version of the original idea emerges, the new idea should be subjected to the same level of feasibility analysis as the original idea Objectives for feasibility plan •Explain the concept of feasibility analysis •Differentiate between feasibility plan and business plan •Conduct a feasibility plan Terminologies Feasibility analysis: Is a process of determining if a business idea is viable
Is an act of showing a preliminary description of the
Concept testing: product or service to prospective customers to gauge customer interest, desirability, and purchase intent
Usability testing: Sometimes called field test, measures a product’s ease of
use and user’s perception of the experience Industry/market Is an assessment of the overall appeal of the market for the feasibility: product or service Industry When it is large and growing and when product/service attractiveness: customers must have than would like to have, young rather than older or mature, high rather than low operating margins and not being crowded Terminologies Cont’d Market timeliness: Determining whether the window of opportunity for product/service is open or closed, whether to try to capture a first-mover advantage is important – set industry standard, brand recognition and market power. Identifying a niche Is a place within larger market in which the firm can market: participate
Organizational Determining whether a proposed business has sufficient
feasibility analysis: management expertise, organizational competence, and resources to successfully launch its business
Management prowess: Is the ability of management team.
Resource sufficiency: Determining whether new venture has sufficient resources Financial feasibility analysis:Quick financial assessment of total start-up cash needed compared to similar businesses, and overall financial attractiveness of the firm Feasibility analysis Feasibility analysis in developing successful business idea
Product/service Yes in all 4 Proceed with feasibility Spending the time areas business plan and resources Industry/market Proposed necessary to feasibility business move forward with venture the business idea Organizational depends on No in 1 or Drop or rethink feasibility more areas business idea Financial feasibility Product/service feasibility analysis • It is an overall appeal of the product or service being proposed. Before rushing a prospective product or service into development, establish that it’s what the customers want and that there will be adequate market. • For a firm, the number one success factor is delivering a superior product or service. R.G. Cooper, a renowned author in product development wrote, “New product success or failure is largely decided in the first few plays of the game… In those critical steps and tasks that precede the actual development of the product. • The upfront homework defines the product and builds the business case for development”. Benefits for conducting a product/service feasibility analysis Benefit Explanation Getting the product right the You know what the customers want because you asked them, first time you also tested the product usability and quality of user’s experience. A beta (early adopter The firms or individuals that participate in the feasibility analysis community emerges) often become a company’s first customers or “adopters” and they provide first feedback as the product rolls out. Avoiding any obvious flows in Design flaws are usually uncovered by asking prospective product or service design customers to test the usability or ease of use of product or service. Using time and capital more You spend as much time or money chasing ideas that customers efficient do not want because you have a better idea of what customers want Gaining insight into additional Conducting a feasibility analysis for one product or service often product and service offerings prompts the recognition for additional product or service. Purposes of concept testing •, Validate the underlying Help develop the idea Try to estimate sales premise of the product or service Based on the results of Some type of buying By showing the concept the initial concept test, intention question test to potential customers many entrepreneurs appears in most every & asking them to complete tweak their idea and then concept test to try to a short questionnaire & show a revised concept determine how many offer comments & statement to another people will actually buy suggestions on how the group of potential the product or service idea can be strengthened customers What does a good concept test include? • A description of the product or service being offered by detailing the features of the product and may include a sketch of it as well. A computer generated simulation of the functionality of the product is helpful. • The intended market by listing the business or people who are expected to buy the product or service • The benefits of the product or service by describing the benefits of the product or service and includes an account of how the product adds value/or solves a problem. • A description of how the product will be positioned relative to similar ones in the market by describing how it is situated relative to competitors. • A description of how the product or service will be sold and distributed by specifying whether the product will be sold directly by the manufacturer or distributors or franchisees Usability testing & market feasibility analysis • Usability testing • Usability testing is a form of product/service feasibility analysis, which measures a product’s ease of use and the user’s perception of the experience. Usability testing is sometimes called, user tests, beta tests, or field trials. A concept test is usually followed by the development of a prototype or model of the product which is usually still in a rough or tentative mode. In some cases, virtual prototypes permit usability testing to take place. • Industry/market feasibility analysis • It is an assessment of the overall appeal of the market for the product or service being proposed. For feasibility analysis, the primary issues to be considered are: industry attractiveness, market timeliness, and identification of a niche market. Industry attractiveness
• Most attractive industries are characterised by:
• Being large and growing – growth being more important than size • Being important to the customer – these markets sell products or services that customers “must have” rather than “would like to have” – these products have inelastic demand curves. • Being fairly young rather than older and more mature – the markets tend to be early in product life cycle, when price competition is not intense. • Having high rather than low operating margins – these markets are simply more profitable for entry and competition purposes • Not being crowded – a crowded market, with lots of competitors is characterised by fierce price competition and low operating margins Financial feasibility analysis • For feasibility analysis, a quick financial assessment is usually sufficient. The most important issues to consider at this stage is the total cash needed with reference to financial performance of similar businesses, and overall financial attractiveness of the proposed venture. • Total start-up cash needed • Financial performance of similar businesses • Overall financial attractiveness of proposed venture - Projected financial rate of return i.e. return on assets, return on equity, and return on sales). At feasibility analysis stage, the projected return is a judgment call and is based primarily on comparing a proposed venture to similar businesses Attractiveness of proposed venture cont’d • At macro level the following factors should be considered to determine whether the projected return is adequate to justify the launch of the business; • The amount of capital invested • The amount of time required to earn the return • The risk assumed in launching the business • The existing alternatives for the money being invested • The existing alternatives for the entrepreneur’s time and efforts • Note that opportunities demanding substantial capital, requiring long periods of time to mature, and having a lot of risk involved make sense unless they provide high rates of return. The adequacy of returns also depends on the alternatives the individuals involved have. For example, an individual who is thinking about leaving a $150, 000 per year job to start a new firm requiring a higher rate of return than a person thinking leaving a $50, 000 per year job Assessing overall financial feasibility • Steady and rapid growth in sales during the first 5 to 7 years in a clearly defined market niche • High % of recurring revenue – meaning that once a firm wins a client, the client will provide recurring source of revenue • Ability to forecast income and expenses with reasonable degree of certainty • Internally generated funds to finance and sustain growth • Availability of an exit opportunity (such as an acquisition or an initial public offering) for investors to convert equity into cash
• In summary, feasibility analysis is a vital step in the process of developing
successful business ideas. Many entrepreneurs, in their haste to get their idea to market, neglect to conduct a thorough feasibility analysis. This approach is almost always a mistake and, more often than not, results in failure Getting financing for funding • Most new ventures need funding early in life due to: • Cash flow challenges – inventory must be purchased, employees must be trained and paid, and advertising must be paid for before cash is generated from sales • Capital investments – the cost of buying real estate, building facilities, and purchasing equipment typically exceeds firm’s ability to provide funds for these needs on its own • Lengthy product development cycle – some products are under development for years before they generate earnings. The up-front costs often exceed a firm’s ability to fund these activities on its own • Sources of personal financing - Personal funds – sweat equity; Friends and family – often comes in form of loans or investments, but can be in form of outright gifts foregone or delayed compensation or reduced or free rent • Bootstrapping – finding ways to avoid the need for external financing through creativity, ingenuity, thriftiness, cost-cutting, obtaining grants, or any other means, buy used equipment, lease equipment, obtain payments in advance from customers, minimize personal expenses, share office space, etc. Sources of equity, debt financing & Creative sources of financing & funding • Sources of debt financing • Business angels – individuals who invest their personal capital directly in start-ups • Venture capital – money invested by venture capital firms in start-ups and small businesses with exceptional growth potential. The fund or pool of money is raised from wealthy individuals, pension plans, university endowments, foreign investors and similar sources • Initial public offerings (IPO) – is to sell stock to the public by staging an initial public offering • Sources of debt financing - Commercial banks; Guaranteed loans • Creative sources of financing and funding – Leasing, Government grants, Strategic partners through licensing agreements
