3-1

Week - 6

Feasibility Analysis
Bruce R. Barringer
R. Duane Ireland
What Is Feasibility Analysis?
3-2

Feasibility analysis is the process

of determining whether a business
idea is viable.
Feasibility Analysis It is the preliminary evaluation of a
business idea, conducted for the
purpose of determining whether the
idea is worth pursuing.
When To Conduct a Feasibility Analysis 3-3

 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.
 Completing a feasibility analysis requires both
primary and secondary research.
 3-4

 Primary research normally includes talking to

industry experts, obtaining feedback from
prospective customers, conducting focus groups, and
administering surveys.
 Secondary research probes data that is already
collected. The data generally includes industry
studies, Census Bureau data, analyst forecasts, and
other pertinent information gleaned through library
and Internet research.
Feasibility Analysis
3-5

Role of feasibility analysis in developing business ideas.

Forms of Feasibility Analysis
3-6

Industry/Target Market
Product/Service Feasibility
Feasibility

Organizational Feasibility Financial Feasibility

Outline for a Comprehensive
Feasibility Analysis 3-7
Product/Service Feasibility Analysis
1 of 2 3-8

Is an assessment of the overall

Product/Service appeal of the product or service
Feasibility Analysis being proposed.
Purpose
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.
Product/Service Feasibility Analysis
2 of 2 3-9

Components of product/service
feasibility analysis

Product/Service Product/Service
Desirability Demand
Product/Service Desirability
1 of 3 3-10

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?
Product/Service Desirability
2 of 3 3-11

 Second, Administer a Concept Test

A concept statement should be developed.
A concept statement is a one-page description of a
business that is distributed to people who are asked to
provide feedback on the potential of the business idea.
 The feedback will hopefully provide the entrepreneur:
A sense of the viability of the product or service idea.
 Suggestions for how the idea can be strengthened or “tweaked”
before proceeding further.
Concept statement normally includes the
following: 3-12

 A description of the product or service. This section details the

features of the product or service; many include a sketch of it as
well.
 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 and/or solves a 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.
 A brief description of the company’s management team.
 3-13

 After the concept statement is developed, it should be shown to at

least 10 people who are familiar with the industry that the firm
plans to enter and who can provide informed feedback.
 A short survey should be attached to the statement. The possible
survey questions should be;
1. List three things you like about the product or service idea described in this statement.
2. Provide three suggestions for making the idea better.
3. Do you think the idea is feasible (i.e., is a realistic or viable business idea)?
4. Provide any additional comments or suggestions you think might be helpful (including red
flags).

Rather than developing a formal concept statement, some entrepreneurs

conduct their initial product/service feasibility analysis by simply talking
through their ideas with people or conducting focus groups to solicit
feedback.
Product/Service Desirability
3 of 3
3-14

New Venture
Fitness Drink’s
Concept Statement
Product/Service Demand
1 of 6 3-15

 Product/Service Demand
 There are two steps to assess product/service demand.
 Step 1: Administer a Buying Intentions Survey
 Step 2: Conduct Library, Internet, and Gumshoe research
Product/Service Demand
2 of 6
3-16

 Buying Intentions Survey

 Is an instrument that is used to gauge customer interest in a
product or service.
 It consists of a concept statement or a similar description of
a product or survey with a short survey attached to gauge
customer interest.
 Internet sites like Survey Monkey make administering a
buying intentions survey easy and affordable.
Product/Service Demand
3 of 6
3-17
Product/Service Demand
4 of 6 3-18

 Library, Internet, and Gumshoe Research

 The second way to assess the demand for a product or
service is by conducting library, Internet, and gumshoe
research.
 Reference librarians can often point you toward
resources to help you investigate a business idea, such as
industry-specific trade journals and industry reports.
 Internet searches can often yield important information
about the potential viability of a product or service idea.
Product/Service Demand
5 of 6 3-19

Explanation
A gumshoe is a detective or a
investigator that scrounges around
Gumshoe Research for information or clues wherever
they can be found.
Be a gumshoe. Ask people what they
think about your product or service
idea. If your idea is to sell
educational toys, spend a week
volunteering at a day care center and
watch how children interact with
toys.
Product/Service Demand
6 of 6 3-20

One of the most effective things

an entrepreneur can do to conduct
a thorough product/service
feasibility analysis is to hit the
streets and talk to potential
customers.
Industry/Target Market Feasibility
Analysis (1 of 2) 3-21

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.
Industry/Target Market Feasibility Analysis
2 of 2 3-22

Components of industry/target market

feasibility analysis

Target Market
Industry Attractiveness
Attractiveness
Industry Attractiveness
1 of 2 3-23

 Industry Attractiveness
 Industries vary in terms of their overall attractiveness.
 In general, the most attractive industries have the
characteristics depicted on the next slide.
 Particularly important—the degree to which
environmental and business trends are moving in
favor rather than against the industry.
Industry Attractiveness
2 of 2 3-24

Characteristics of Attractive Industries

•Are young rather than old
• Are early rather than late in their life cycle
• Are fragmented rather than concentrated
• 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
Target Market Attractiveness
3-25

 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 an
entire industry.
 Often, considerable ingenuity must be employed to find
information to assess the attractiveness of a specific target market.
 Instead, by focusing on a smaller target market, a firm can usually
avoid head-to-head competition with industry leaders and can
focus on serving a specialized market very well.
 Organizational Feasibility Analysis
1 of 2 3-26

Purpose

Is conducted to determine whether a

Organizational Feasibility proposed business has sufficient
Analysis management expertise,
organizational competence, and
resources to successfully launch a
business.
Focuses on non-financial resources.
Organizational Feasibility Analysis
2 of 2 3-27

Components of organizational
feasibility analysis

Management Prowess Resource Sufficiency

Management Prowess
3-28

 Management Prowess
A proposed business should honestly 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.
Resource Sufficiency
1 of 2 3-29

 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.
 Ifcritical resources are not available in certain areas, it may be
impractical to proceed with the business idea.
Resource Sufficiency
2 of 2 3-30

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
Financial Feasibility Analysis
1 of 2 3-31

Purpose
Is the final component of a
Financial Feasibility comprehensive feasibility analysis.
Analysis
A preliminary financial assessment
is sufficient.
Financial Feasibility Analysis
2 of 2 3-32

Components of financial
feasibility analysis

Total Start-Up Cash Financial Performance of

Needed Similar Businesses

Overall Financial
Attractiveness of the
Proposed Venture
Total Start-Up Cash Needed
3-33

 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.
Financial Performance of Similar
Businesses 3-34

 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 New Venture Fitness Drinks could estimate their sales by
tracking the number of people who patronize similar restaurants and
estimating the average amount each customer spends.
Overall Financial Attractiveness of the
Proposed Venture (1 of 2) 3-35

 Overall Financial Attractiveness of the Proposed

Investment
A number of other financial factors are associated with
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.
 The table on the next slide lists the factors that pertain to
the overall attractiveness of the financial feasibility of the
business idea.
 Overall Financial Attractiveness of the
Proposed Venture (2 of 2) 3-36

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
 3-
Importance of Feasibility Analysis 37

 Risk Reduction
 Resource Allocation
 Financial Viability
 Strategic Alignment
 Market Analysis
 Decision-Making Support
 Technical Considerations
 Credibility for Investors