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Feasibility Analysis

• Product/service,
• Industry/market,
• Organizational and
• Financial feasibility analyses

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