Chapter 3
Feasibility Analysis
Bruce R. Barringer
R. Duane Ireland
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What Is Feasibility Analysis?
• Feasibility analysis is the
process of determining whether
a business idea is viable.
• It is the preliminary evaluation
Feasibility Analysis of a business idea, conducted
for the purpose of determining
whether the idea is worth
pursuing.
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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.
• Components of a Properly Conducted Feasibility
Analysis
– A properly conducted feasibility analysis includes four
separate components, as discussed in the following slides.
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Feasibility Analysis
Role of feasibility analysis in developing business ideas.
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Forms of Feasibility Analysis
Product/Service Feasibility
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Product/Service Feasibility Analysis
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Purpose
• Is an assessment of the overall
Product/Service appeal of the product or service
Feasibility Analysis 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.
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Product/Service Feasibility Analysis
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Components of product/service
feasibility analysis
Product/Service Product/Service
Desirability Demand
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Product/Service Desirability
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First, ask the following questions to determine the basic
appeal of the product or service.
• Does it make sense? Is it reasonable? Is it something consumers
will get excited about?
• Does it take advantage of an environmental trend, solve a
problem, or take advantage of 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 or service’s basic design
or concept? (cap is not sealed, oil is dropping)
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Product/Service Demand
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• Talking Face-to-Face with Potential Customers
– The only way to know if your product or service is what
people want is by talking to them.
– The idea is to gauge 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.
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Product/Service Demand
• Utilizing Online Tools, Such as Google AdWords and
Landing Pages, to Assess Demand
– A variety of additional online tools are available to help
assess the demand for a new product or service.
– Examples include:
• Sites that provide feedback on business ideas (Foundersuite,
Quirky).
• Market Research (CrowdPicker, Google Trends).
• Online Surveys (Survey Monkey, Google Consumer Surveys).
• Q&A Sites (Quora, Stack Overflow).
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First Screen
• First Screen
– is 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 cuts muster at this stage, the next step is
to complete a business plan.
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Strength of Business Idea
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Forms of Feasibility Analysis
Industry/Target Market
Feasibility
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Industry/Target Market Feasibility Analysis
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Purpose
• Is an assessment of the overall
appeal of the industry and the
Industry/Target Market target market for the proposed
Feasibility Analysis business.
• An industry is a group of firms
producing a similar product or
service.
• A firm’s target market is the
limited portion of the industry it
plans to go after.
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Industry/Target Market Feasibility Analysis
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Components of industry/target market
feasibility analysis
Target Market
Industry Attractiveness
Attractiveness
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Industry Attractiveness
Characteristics of Attractive Industries
• Are young rather than old.
• Are early rather than late in their life cycle.
•Are growing rather than shrinking.
• Are selling products and services that customers “must have” rather than
“want to have.”
• Are not crowded.
• Have high rather than low operating margins.
• Are not highly dependent on the historically low price of key raw materials.
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Industry related Screening
3-17
Target Market Attractiveness
• Target Market Attractiveness
– 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.
– 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.
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Target Market screening
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Forms of Feasibility Analysis
Organizational Feasibility
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Organizational Feasibility Analysis
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Purpose
• Is conducted to determine
Organizational Feasibility whether a proposed business has
Analysis sufficient management expertise,
organizational competence, and
resources to successfully launch
a business.
• Focuses on non-financial resources.
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Organizational Feasibility Analysis
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Components of organizational
feasibility analysis
Management Prowess Resource Sufficiency
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Management Prowess
• Management Prowess
– A proposed business should candidly evaluate the prowess,
or ability, of its management team to satisfy itself that
management has the requisite passion and expertise to
launch the venture.
– Two of the most important factors in this area are:
• The passion that the sole entrepreneur or the founding team has for
the business idea.
• The extent to which the sole entrepreneur or the founding team
understands the markets in which the firm will participate.
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Resource Sufficiency
1 of 2
• Resource Sufficiency
– This topic pertains to an assessment of whether an
entrepreneur has sufficient resources to launch the
proposed venture.
– 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.
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Resource Sufficiency
2 of 2
Examples of nonfinancial resources that may be critical
to the successful launch of a new business
• Affordable office space.
• Lab space, manufacturing space, or space to launch a 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).
• Ability to obtain intellectual property protection.
• Ability to form favorable business partnerships.
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Founders screening
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Forms of Feasibility Analysis
Financial Feasibility
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Financial Feasibility Analysis
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Purpose
• Is the final component of a
Financial Feasibility comprehensive feasibility analysis.
Analysis • A preliminary financial assessment
is sufficient.
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Financial Feasibility Analysis
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Components of financial
feasibility analysis
Total Start-Up Cash Financial Performance of
Needed Similar Businesses
Overall Financial
Attractiveness of the
Proposed Venture
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Total Start-Up Cash Needed
• Total Start-Up 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 capital purchases and operating expenses
needed to generate the first $1 in revenues.
– The point of this exercise is to determine if the proposed
venture is realistic given the total start-up cash needed.
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Financial Performance of Similar
Businesses
• Financial Performance of Similar Businesses
– Estimate the proposed start-up’s financial performance by
comparing it to similar, already established businesses.
– There are several ways to doing this, all of which involve a
little ethical detective work.
• First, there are many reports available, some for free and some that
require a fee, offering detailed industry trend analysis and reports
on thousands of individual firms.
• Second, simple observational research may be needed. For
example, the owners of the start-up could estimate their sales by
tracking the number of people who patronize similar restaurants
and estimating the average amount each customer spends.
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Overall Financial Attractiveness of the
Proposed Venture
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Financial Factors Associated With Promising Business
Opportunities
• Steady and rapid growth in sales during the first 5 to 7 years in a clearly
defined market niche.
• High percentage of recurring revenue—meaning that once a firm wins a
client, the client will provide recurring sources of revenue.
• Ability to forecast income and expenses with a reasonable degree of
certainty.
• Internally generated funds to finance and sustain growth.
• Availability of an exit opportunity for investors to convert equity to cash.
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Financial screening
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Overall potential screening
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