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Entrepreneurship: MS-402

DEPARTMENT OF MECHANICAL ENGINEERING

UMT
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Entrepreneurship

• FEASIBILITY ANALYSIS
Feasibility analysis
Feasibility analysis is the process of determining if a business idea is capable of
being viable.

Spending the time and resources

Proposed
necessary to move forward with the
business Venture
business idea depends on

Product / service Industry / Organizational Financial

feasibility market feasibility feasibilit
y

Yesin all 4 areas No in one or more

areas

Proceed with Drop of rethink

Business Plan business idea

Effective businesses emerge from a process that includes:

1) Recognizing a business venture

2) Testing the feasibility of theidea
3) Writing a business plan
4) Launching a business
If the process fails to include any one of the above mentioned points the
entrepreneur must leave or rethink his business proposal. Most entrepreneurs
after recognizing a business idea directly go on writing a business plan while
ignoring to test the feasibility of the idea. This however mostly turns out to be
unfavorable for their business.

e.g. e-bay drop off stores that were opened in mid-2000s failed quickly.
The mental transition needs to be made when completing a feasibility analysis
from thinking if a business idea as just an idea and thinking of it as a BUSINESS.

A feasibility analysis is an assessment of a potential business rather than strictly a

product or service idea. An outline for this is present in Appendix 3.2.

It is investigative in nature and is designed to critique the merits of a proposed

business. A business plan in contrast is focused on planning and selling.

Completing a feasibility analysis requires both primary and secondary research.

Primary research is research that is collected by person or persons completing
the analysis. It normally includes talking to industry experts, obtaining feedback
from customers, conducting focus groups and administering surveys. Secondary
research investigate data that is already collected such as industry studies,
analysts forecast and other required information collected through library or
internet. Internet research table Appendix 3.2 is usefulhere.

Moreover while a feasibility analysis tests the merits of a specific idea, it allows
ample opportunity for the idea to be revised and changed as a result of the
feedback and analysis that is conducted.

This chapter provides a methodology for conducting a feasibility analysis by

describing its four keyareas:

1) Product/Service Feasibility
2) Industry/Market Feasibility
3) Organizational Feasibility
4) Financial Feasibility
Product/Service Feasibility:
This is an assessment of the overall appeal of the product or service being
proposed. There are two components to product/service feasibility analysis
namely product/service desirability and product/service demand.

Product/Service Desirability:
The first component in product/service feasibility is to make certain that the
proposed product or service is advantageous and serves a need in the market.
One should ask the following questions to determine the basic appeal of the
product or service:

1) Does it make sense? Is it reasonable? Is it something consumers will be excited

about?
2) Does it take advantage of the environmental trend, solve a problem or fill a
gap in the market?
3) Is this a good time to introduce the product or service to the market?
4) Are there any fatal flaws in the product or service’s basic design or concept?
Rather than trying to reach final conclusions, at this stage your mind-set should
be to get a general sense of the answers to these questions i.e. a general idea.
One way of obtaining these answers is a concept test.

A concept test involves showing a preliminary description of a product or service

idea, called a concept statement to industry experts and prospective customers.
It is a one page document that normallyincludes:

 a description of the product or service, features includinga sketch

 the intended target market, list of consumers or businesses expected to buy
 the benefits of the product or service, how it adds value or solves a problem
 product or service position relative to its competitors, what is the position
relative to itsrival
 and a brief description of the company’s managementteam.
After the development of this statement it should be shown to a minimum 10
people who are familiar with the required industry. Moreover a survey should be
attached with this statement, information obtained should be tabulated and
thoroughly analyzed to obtain the required information and use it to improve the
product and service.

Items to be included in thesurvey:

1. List 3 things you like about the product/service

2. 3 suggestions for making the ideabetter
3. Do you think the idea is feasible i.e. realistic orviable business idea
4. Provide any additional comments or suggestions you think might be helpful
(including red flags).

Rather than developing concept statements some entrepreneurs prefer to

conduct their feasibility analysis by talking to their potential customers or focus
groups. The ideal method however is to do both-distribute a concept statement to
at least ten reliable people and engage in verbal give and take with as many
industry experts and prospective customers aspossible.

Product/Service Demand:
The second component of product/service feasibility analysis is to determine
whether there is a demand for the product or service in the market. Two methods
for making this determination are administering a buying intention survey and
conducting library, Internet and gumshoe research.

A buying intentions survey is used to estimate a customer’s interest in a specific

product or service. It consists of a concept statement or a similar description with
a short survey attached. The statement and survey should be distributed to 20- 30
potential customers (people who completed the concept statement test should
not be asked to complete thissurvey).

Example of Buying Intention Survey is given in Table3.3

To estimate customer interest, the number of people who indicate they would
definitely buy the product are combined with the number of people who indicate
they probably would buy. This method is not completely reliable as the people
who say they will definitely buy the product mostly end up not buying it. So this
survey would give an optimistic result. Also people selected are not scientifically
selected through a random sample. Still the results give a general sense of the
degree of customer interest in the product or service. This also gives you an idea
of pricing (how much would be willing to pay for this) and also sales and
distribution (where would you expect to find this product).

You can also contact trade associations and / or attend industry trade shows.

Library, Internet and Gumshoe Result:

The second method of assessing product/service demand is by conducting library,
Internet and gumshoe research. A buying intentions survey is not enough. For a
feasibility analysis you need more data and you have to accumulate more
evidence that there will be healthy demand for your product or service. Three
important ways to do this are via library, internet and gumshoe result. Libraries
can point you towards resources to help investigate a business idea, such as
industry-specific magazines, trade journals and industry reports. Internet too is a
marvelous resource; by simply typing the required information in the Google
search box one can find an article describing the research.

Simple gumshoe research is also important for gaining a sense for the likely
demand for a product or service idea. A gumshoe is a detective or an investigator
that scourges around for information or clues wherever they can be found. So
don’t be bashful, ask people what they think of your product or service. The
objective is to collect as much information as one can within the reasonable time
constraints.

Industry/Target Market FeasibilityAnalysis:

Industry and target market are terms required to be understood for target market
feasibility analysis.
  Industry
Industry is a group of firms producing a similar product or device. E.g
computers, children toys, airplanes or tires.
 Target market
A firms Target market is the limited portion of the industry that it
goes after or to which it wants to appeal. Most firms do not try to
service the entire industry. Instead, they select or carve out a specific
target market and try to service that market very well mark out the
specific market and try to service them. Target Market is a place
within a larger market segment that represents a narrower group of
customers with similar needs.

Industry/Target market feasibility is an assessment of the overall appeal of the

industry and the target market for the product or service being proposed.

The two components to industry analysisare

1. Industry attractiveness:

Attractive industries have the following attributes (top 3 are most

important):
 Industry is young rather than old.
 They are early rather than late in their life cycle.
 They are fragmented rather than concentrated.
 They are growing rather than shrinking.
 Sell products and services that customers “must have” rather than
“want to have”
 They are not crowded.
 They should have higher operating margins.
 They are not highly dependent on the historically low price of a key raw
material like gasoline, flour, to remain profitable.
 Other things to consider is the degree to which environmental and
business trends are moving in favour rather than against theindustry
  Pick an industry which is structurally attractive – menaing startups can
enter the industry in various target market and compete. Some
industries have high barriers to entry or already have 2 or 3 dominant
players that new entrants will not be able to compete.

2. Target market attractiveness:

Most start-ups don’t have the resources needed to participate in a broad market,
initially. By focusing on a smaller target market, a firm can avoid head-to-head
completion with industry leaders and can focus on serving a specialized market
very well.

Most successful startups eiher introduce a new product into an existing market
(like patient monitoring system into the existing medical market) or introduce a
new market to an existingproduct.

Indicators of a good target marketare:

 The market should be large enough for the proposed business but yet
small enough to avoid attracting larger competitors until the
entrepreneurial venture can get off to a successful start.
 To assess the attractiveness of a small target market is tougher
particularly, if the startup is pioneering the target market. For these
circumstances, information from more than one industry/market must
be gathered and synthesized to make a particular informed judgment.
 The sources of information to mine and tap are also not transparent
when investigating target market attractiveness opposed to industry
attractiveness. You have to be very creative to get information on a
narrowly defined target market. E.g. search engines
(google/yahoo/bing), a site that reviews or sells similar products, trade
associations of trade shows, newspaper and magazine articles, contact
companies which might be related to your product to get data.
Organizational FeasibilityAnalysis:
Organizational feasibility analysis is conducted to determine whether a proposed
business has a sufficient management expertise, organizational competence, and
resources to successfully launch its business.

The two primary issues of this areaare:

1. Managementprowess:

The proposed business should evaluate the prowess or ability of its initial
management team, whether it’s a sole entrepreneur individual or a larger
group. It requires the individuals to start the firm with honest and candid
self-assessments.

Two most important factors in this area are the passion that the solo
entrepreneur or team has for the business idea and the extent to which
they understand the market in which the firm will participate.

Managers who have extensive social and professional networks can reach
out to colleagues and friends to plug the experience and knowledge gaps.

A new venture team is the group of founders, key employers, and advisors
thateither manage or help manage a new business in its start-up years.

If the founder/s have identified people who they believe will join the firm
after it’s launch and these people are capable, this will lend credibility to
the organizational feasibility.

Many new founder/s while assessing their find that they will benefit from
finding one or more partners to launch their business.
2. Resourcesufficiency:

To assess if the proposed venture already has or will be capable of obtaining

sufficient resources to move forward. The objective is to identify the most
important non-financial resources and to assesswhether they are available.
E.g. a business which needs specialized people.

The other key resource sufficiency issue is the ability to obtain intellectual
property protection on main aspects of the business. This issue is important
when a new product is invented or a new business process is introduced that
adds value to the way a product is manufactured or a service isdelivered.
The issue of finding an appropriate and an affordable location to operate is
also a sufficiency issue.

Financial FeasibilityAnalysis:
Financial feasibility analysis is the final component of a comprehensive feasibility
analysis. A preliminary financial assessment is usually sufficient for it. Since over
time the concept will evolve and details will be added.

The most important issues at this stage are asfollows:

1. Total start up cash needed:

This refers to the total cash needed to prepare the business to make its first
sale. A budget should be prepared for the capital purchases and operating
expenses needed to get the business up andrunning.
Once the total number is there should be an explanation on how the firm will
get this amount. You should not use general terms like taking loans or bringing
investors. All firms do that at a later stage. If the money is coming from
friends, family, credit card, personal loans this should be stated and also the
repayment strategy.
You should always overestimate. There are different resources and worksheets
available on internet to help in determining the expenses.

2. Financial performance of the similarbusinesses:

The second component is estimating a proposed start-up’s potential financial

performance by comparing it to similarly established businesses. This is an
approximation rather than an exactnumber.

Substantial archival data available online offers detailed financial reports on

thousands of individual firms. Comparison should be made with smaller
companies which can be compared to new ventures. The easiest data to
obtain is on publically traded firms.

There are additional ways to obtain financial data on smaller firms given in
Appendix on Internet Resources, where information on similar companies and
industry averages are provided.

If the start-up entrepreneur identifies a similar business and if its not a

competitor he/she can askthe owner about approximate sales and profits.

The final way to obtain sales data for similar businesses is through observation
and legwork. This approach is suitable in most cases but involves a lot of
practical research.

3. Overall financial attractiveness of the proposedventure:

Many factors are associated with evaluating the financial attractiveness of the
proposed venture. At the feasibility state, the projected return is a judgment
call. A precise estimation can be computed by preparing 2-3 years pro-forma
(budgeted) financial statements : income statements, balance sheets, cash
flows and financial ratios.
 To gain perspective, a start-up’s projected rate of return should be weighed
against the following factors to assess the whether the venture is financially
feasible:

o Amount of capitalinvested.
o Risksassumed in launching the business.
o Existing alternatives for the money beinginvested.
o Existing alternatives for the entrepreneur’s timeand efforts.

The different other factors important in financial feasibility include:

 Steady and rapid growth in sales in first five toseven years.

 High percentage of recurring revenue.
 Ability to forecast income and expenses with a reasonable degree of
certainty.
 Internally generated funds to finance and sustaingrowth.
 Availability of an exit opportunity for investors to convert equity into cash.

First screen:
First screen is a template for completing a feasibility analysis. It is called first
screen because a feasibility analysis is an entrepreneur’s initial pass at
determining the feasibility of a businessidea.

It maps out the 4 areas of feasibility described here, accentuating the most
important points. The final portion overall Potential includes a section for
suggested revisions to business idea to improve its potential or feasibility.

It does take some research and analysis but its not lengthy. Do not guess or
speculate, base your analysis on facts and good information. Be candid, the idea is
not to score the highest potential but to achieve an accurate analysis of the
business idea