FEASIBILITY ANALYSIS

Feasibility Analysis
A. Product/Service Feasibility Analysis
1. Product/Service Desirability
a. Concept Test
2. Product/Service Demand
a. Buying Intentions Survey
b. Library, Internet, and Gumshoe Research
B. Industry/Target Market Feasibility
1. Industry Attractiveness
2. Target/Market Attractiveness
C. Organizational Feasibility Analysis
1. Management Prowess
2. Resource Sufficiency
D. Financial Feasibility Analysis
1. Total Start-Up Cash Needed
2. Financial Performance of Similar Businesses
3. Overall Financial Attractiveness of the Proposed Venture

II. First Screen

CHAPTER NOTES

I. Feasibility Analysis

1. Feasibility analysis is the process of determining if a business idea is viable.

2. As a preliminary evaluation of a business idea, a feasibility analysis is

completed to determine if an idea is worth pursuing and to screen ideas before
spending resources on them.

3. It follows the opportunity recognition stage but comes before the development
of a business plan.

4. statistics
show that the majority of entrepreneurs do not follow this pattern before
launching their ventures. Several studies have investigated why this is the
case. The consensus of the research is that entrepreneurs tend to underestimate
the amount of competition there will be in the marketplace and tend to
overestimate their personal chances for success.

A. Product/Service Feasibility Analysis—is an assessment of the overall appeal

of the product or service being proposed.

1. Product/Service Desirability
 a. A concept test entails showing a representation of the product or
service to prospective users to gauge customer interest, desirability,
and purchase intent.

b. There are three primary purposes for a concept test: (1) to valuate
the underlying premises of a product or service that an entrepreneur
thinks is compelling; (2) to help develop an idea; and (3) to estimate
the potential market share the product or service might command.

c. A well-designed concept test, which is usually called a concept

statement, includes the following:

- A description of the product of service being offered

- The intended target market
- The benefits of the product or service
- A description of how the product will be positioned in relative to
similar ones in the market
- A brief description of the company’s management team.

2. Product/Service Demand

a. A buying intentions survey is an instrument that is used to gauge

customer interest in a product or service.

b. It consists of a concept statement or a similar description of a product

or service with a short survey attached. The statement and survey
should be distribute to 20 to 30 potential customers to be completed.

c. One caveat is that people who say that they intend to purchase a product
or service don’t always follow through; as a result, the numbers
resulting from this activity are almost always optimistic.

d. It’s also important to conduct library, Internet, and gumshoe research.

While administering a buying intentions survey is important, more data
is needed.

B. Industry/Target Market Feasibility

* Is an assessment of the overall appeal of the market for the product or service
being produced.

1. Industry Attractiveness

a. Industries vary considerably in terms of their growth rate, as shown

in table 3.4 in the textbook. In general, the most attractive industries
 are characterized as the following:

- Are young rather than old

- Are early rather than late in their life cycles
- Are fragmented rather than concentrated
- Are growing rather than shrinking
- Sell products or 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 a key raw
material, like gasoline or flour, to remain profitable

b. In addition to evaluating an industry’s growth potential, a new

venture will want to know more about the overall attractiveness
of the industry it plans to enter. This can be accomplished through
both primary research and secondary research.

i. Primary research is research that is original and is collected by

the entrepreneur.

ii. Secondary research probes data that are already collected,

2. Target Market Attractiveness

a. A target market is a place within a larger market segment that

represents a narrower group of customers with similar needs.

b. 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 at least until
the entrepreneurial venture can get off to a successful start.

c. The sources of information to mine and tap are not as transparent

when investigating target market attractiveness opposed to industry
attractiveness.

C. Organizational Feasibility – Is conducted to determine whether a proposed

business has sufficient management expertise, organizational competence, and
resources to successfully launch its business.

1. Management Prowess

a. A firm should candidly evaluate the prowess, or ability, of its

management team.
 b. Two of the most important factors in this area are the passion
that the sole entrepreneur or management team has for the
business idea and the extent to which the management team
or sole entrepreneur understands the markets in which the firm
will compete.

2. Resource Sufficiency

a. The second area of organizational feasibility analysis is to determine

whether the potential new venture has sufficient resources to move
forward to successfully develop a product or service idea.

b. The focus in organizational feasibility analysis should be on

nonfinancial resources in that financial feasibility is considered
separately.

D. Financial Feasibility – Is the final stage of analysis. For feasibility analysis, a

quick financial assessment is usually sufficient.

1. Total Start-Up Cash Needed

a. 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.

i. The financial feasibility analysis should state specifically where the

money will come from to fund the venture’s start-up costs.

2. Financial Performance of Similar Businesses

a. The second component of financial feasibility analysis is estimating a

proposed start-up’s potential financial performance by comparing it
to similar, already established businesses. Obviously, this number will
result in approximate rather than exact numbers.

b. There are several ways of doing this, all of which involve a little ethical
detective work.

3. Overall Financial Attractiveness of the Proposed Venture

a. A number of other factors are associated with evaluating the financial

attractiveness of a proposed venture.

b. Typically, these evaluations are based primarily on a new venture’s

projected financial rate of return. At the 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 risks assumed in launching the business
- The existing alternatives for the money being invested
- The existing alternatives for the entrepreneur’s time and efforts

c. Opportunities demanding substantial capital, requiring long periods

of time to mature, and having a lot of risk involved make little sense
unless they provide high rates of return.

3. Overall Attractiveness of the Investment

a. A number of other financial factors are associated with promising

business opportunities.
II. First Screen

1. First Screen, is a template for completing a feasibility

analysis. It is called First Screen because a feasibility analysis is an
entrepreneurs (or a group of entrepreneurs’) initial pass at determining the
feasibility of a business idea.

2. The mechanics for filling out the First Screen worksheet are straightforward.
It maps the four areas of feasibility analysis described in the chapter,
accentuating the most important points in each area.

3. The final section of the worksheet, “Overall Potential,” includes a section

that allows for suggested revisions to the business idea to improve its
potential or feasibility.
 INDUSTRY AND COMPETITOR ANALYSIS

I. Industry Analysis

* Material following the opening feature on BusinessesAtoZ.

1. Industry analysis is business research that focuses on the potential of an

industry.

2. An industry is a group of firms producing a similar product or service, such

as music, fitness drinks, or electronic games.

3. Once it is determined that a new venture is feasible in regard to the industry

and market in which it will compete, a more in-depth analysis is needed to
learn the ins-and-outs of the industry the firm plans to enter.

A. Industry Analysis

1. When studying an industry, an entrepreneur must answer three questions

before pursuing the idea of starting a firm.

a. First, is the industry accessible – in other words, is it a realistic place

for a new venture to enter?

b. Second, does the industry contain markets that are ripe for innovation
or are underserved?

c. Third, are there positions in the industry that will avoid some of the
negative attributes of the industry as a whole?

2. It is useful for a new venture to think about its position at both the
company level and the product or service level. At the company level,
a firm’s position determines how the entire company is situated relative
to its competitors.

B. Industry vs. Firm Level Factors

1. To illustrate the importance of the industry a firm chooses to enter,

research has shown that both firm- and industry-specific factors contribute
to a firm’s profitability.

2. In various studies, researchers have found that from 8 to 30 percent of the

variation in firm profitability is directly attributable to the industry in
which a firm competes.
II. Studying Industry Trends
A. Environmental Trends

1. Economic trends, social trends, technological advances, and political and

regulatory changes are the most important environmental trends for
entrepreneurs to study.

B. Business Trends

1. Other trends impact industries that aren’t environmental trends per se but
are important to mention. For example, the firms in some industries
benefit from an increased ability to outsource manufacturing or service
functions to lower-cost labor markets, while firms in other industries don’t
share this advantage.

III. The Five Competitive Forces That Determine Industry Profitability

1. The five competitive forces model is a framework for understanding the

structure of an industry and was developed by Harvard professor Michael
Porter.

2. The framework is comprised of the

forces that determine industry profitability.

3. These forces – the threat of substitutes, the entry of new competitors, rivalry
among existing firms, the bargaining power of suppliers, and the bargaining
power of buyers – determine the average rate of return for the firms in an
industry.

4. Each of Porter’s five forces impacts the average rate of return for the firms in
an industry by applying pressure on industry profitability. Well-managed
companies try to position their firms in a way that avoids or diminishes these
forces – in an attempt to beat the average rate of return for the industry.

A. Threat of Substitutes

1. The price that consumers are willing to pay for a product depends in part
on the availability of substitute products.

2. For example, there are few if any substitutes for prescription medicines,
which is one of the reasons the pharmaceutical industry is so profitable.

3. In contrast, when close substitutes for a product do exist, industry

profitability is suppressed because consumers will opt not to buy when
the price is too high.
B. Threat of New Entrants

1. If the firms in an industry are highly profitable, the industry becomes a

magnet to new entrants.

2. Unless something is done to stop this, the competition in the industry will
increase, and average industry profitability will decline.

3. There are a number of ways that firms in an industry can keep the
number of new entrants low. These techniques are referred to as barriers
to entry. The six major sources of barriers to entry are shown below:

a. Barriers to Entry

- Economies of scale
- Product differentiation
- Capital requirements
- Cost advantages independent of size
- Access to distribution channels
- Government and legal barriers

C. Rivalry Among Existing Firms

1. In most industries, the major determinant of industry profitability is the

level of competition among the firms already competing in the industry.

2. Some industries are fiercely competitive to the point where prices are
pushed below the level of costs. When this happens, industry-wide
losses occur.

3. There are four primary factors that determine the nature and intensity of
the rivalry among existing firms in an industry

a. Number and balance of competitors

b. Degree of difference between products
c. Growth rate of an industry
d. Level of fixed costs

D. Bargaining Power of Suppliers

1. In some cases, suppliers can suppress the profitability of the industries to

which they sell by raising prices or reducing the quality of the components
they provide.

2. If a supplier reduces the quality of the components it supplies, the quality

 of the finished product will suffer, and the manufacturer will eventually
have to lower its price.

3. If the suppliers are powerful relative to the firms in the industry to which
they sell, industry profitability can suffer.

4. Several factors have an impact on the ability of suppliers to exert pressure

on buyers and suppress the profitability of the industries they serve. These
include:

a. Supplier concentration
b. Switching costs
c. Attractiveness of substitutes
d. Threat of forward integration

E. Bargaining Power of Buyers

1. Buyers can suppress the profitability of the industries from which they
purchase by demanding price concessions or increases in quality.

2. For example, the automobile industry is dominated by a handful of large

automakers that buy products from thousands of suppliers in different
industries. This enables the automakers to suppress the profitability of
the industries from which they buy by demanding price reductions.

3. Several factors affect buyers’ ability to exert pressure on suppliers and

suppress the profitability of the industries from which they buy. These
include the following:

a. Buyer group concentration

b. Buyer’s costs
c. Degree of standardization of supplier’s products
d. Threat of backward integration

IV. The Value of the Five Forces Model

1. Along with helping a firm understand the dynamics of the industry it plans to
enter, the five forces model can be used in two ways to help a firm determine
whether it should enter a particular industry and whether it can carve out an
attractive position in that industry.

2. First, the five forces model can be used to asses the attractiveness of an
industry or a specific position within an industry by determining the level of
threat to industry profitability for each of the five forces,

a. For example, if a firm filled out the form and several of

 the threats to industry profitability where high, the firm may want to
reconsider entering the industry or think carefully about the position it will
occupy in the industry.

3. The second way a new firm can apply the five forces model to help determine
whether it should enter an industry is by using the model to answer several
key questions. By doing so, a new venture can assess the thresholds it may
have to meet to be successful in a particular industry. These questions are:

a. Question 1: Is the industry a realistic place for our new venture to enter?

b. Question 2: If we do enter the industry, can our firm do a better job than
the industry as a whole in avoiding or diminishing the impact of the forces
that suppress industry profitability?

c. Question 3: Is there a unique position in the industry that avoids or

diminishes the forces that suppress industry profitability?

d. Question 4: Is there a superior business model that can be put in place that
would be hard for industry incumbents to duplicate?

V. Industry Types and the Opportunities They Offer

A. Emerging Industries

1. An emerging industry is a new industry in which standard operating

procedures have yet to be developed.

2. The firm that pioneers or takes the leadership of an emerging industry

often captures a first-mover advantage.

B. Fragmented Industries

1. A fragmented industry is one that is characterized by a large number of

firms of approximately the same size.

2. The primary opportunity existing for start-ups in fragmented industries is

to consolidate the industry and establish industry leadership as a result of
doing so.

C. Mature Industries

1. A mature industry is an industry that is experiencing slow or no increase

in demand, has numerous repeat customers, and has limited product
innovation.
 2. Occasionally, entrepreneurs introduce new product innovations to mature
industries, surprising industry incumbents who thought nothing new was
possible in their industries.

D. Declining Industries

1. A declining industry is an industry that is experiencing a reduction in

demand.

2. Typically, entrepreneurs shy away from declining industries because the

firms in the industry don’t meet the tests of an attractive opportunity

E. Global Industries

1. A global industry is an industry that is experiencing significant

international sales.

2. Many start-ups enter global industries and from day one try to appeal
to international rather than just domestic markets.

3. The two most common strategies pursued by firms in global industries

are the multidomestic strategy and the global strategy.

a. Firms that pursue a multidomestic strategy compete for market share

on a country-by-country basis and vary their product or service
offerings to meet the demands of a local market.

b. In contrast, firms pursuing a global strategy use the same basic

approach in all foreign markets. Firms that sell more universal
products, such as athletic shoes, have been successful with global
strategies.

VI. Competitor Analysis

1. After a firm has gained an understanding of the industry and markets in

which it plans to compete, the next step is to complete a competitor
analysis.

2. A competitor analysis is a detailed analysis a firm’s competition. It helps a

firm understand the positions of its major competitors and the opportunities
that are available to obtain a competitive advantage in one or more areas.

3. A competitive analysis grid is a tool for organizing the information a firm

collects about its primary competitors.
A. Identifying the Competition

1. The different types of competitors a business are

- Direct competitors
- Indirect competitors
- Future competitors

B. Sources of Competitive Intelligence

1. To complete a meaningful competitive analysis grid, a firm must first

understand the strategies and behaviors of its competitors.

2. The information that is gathered by a firm to learn about its competitors

is referred to as competitive intelligence.

3. The following are examples of ways a firm can ethically obtain

information about its competitors:

- Attend conferences and trade shows

- Purchasing competitors’ products
- Studying competitors’ Web sites
- Set up Google and Yahoo! e-mail alerts
- Read industry-related books, magazines, and Web sites
- Talk to customers about what motivated them to buy your product
as opposed to your competitor’s product

C. Completing a Competitive Analysis Grid