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Undertaking a Feasibility Study

Contents

1.0 Introduction to this Guide 2.0 Technical Feasibility 2.1 Product/Service 2.2 Technology & Intellectual Property 3.0 Commercial Feasibility 3.1 Target Market 3.2 Competition 3.3 Industry Analysis 3.4 What is Market Research? 3.5 Points to remember when conducting Market Research 4.0 Financial Feasibility 4.1 Pricing and Business Model 4.2 The Business Model 5.0 Organisational Feasibility 5.1 Team 5.2 Organisational Structure 6.0 Outputs of a Business Feasibility 6.1 Feasibility Structure 6.2 Terms of Reference 6.3 The Executive Summary 6.4 SWOT Analysis and Critical Risk Factors 6.5 Recommendations 6.6 Conclusion to the Guide 7.0 Appendix 7.1 Terms of Reference 7.2 Market Research 7.3 Organisational Charts

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1.0 Introduction to this Guide


Whether you are new to running a business or have been operating an established business for a number of years the importance of ensuring you are pursuing a worthwhile business idea cannot be understated. A complete and well executed feasibility study will be a crucial asset in convincing banks and financial institutions as well as yourself, that your business idea has a genuine possibility of succeeding. A feasibility study will aid the business promoter in formulating a structured approach to weighing up the opportunity at hand while simultaneously acting as a safeguard against wasted investment or resources. There is a large degree of work involved in the p reparation, undertaking and documenting of a Feasibility study. It is critical that the individual(s) promoting the business dedicate the appropriate time to each stage of the process to ensure that a comprehensive and objective study is conducted. A feasibility study can be defined as an analysis or research into the practicality of a proposed plan or method, based on factors like marketplace, competition, available technology, manpower, and financial resources A feasibility study needs to provide the business or business promoter with an answer to the fundamental question, Does this idea have the potential to succeed and will it work? There is no easy answer to this question and in order to find one; the business promoter must undertake pertinent research under the appropriate headings detailed further on in this guide. By conducting a thorough feasibility study, the business promoter will be provided with: Clear supporting evidence for recommendations to assist with decision making A signpost towards challenges that will need to be addressed Valuable information about the target market A definitive answer on whether or not to pursue the business idea in question Definition taken from www.dictionary.com

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1.0 Introduction to this Guide contd...


This guide has been created as an outline to undertaking a full feasibility study. In writing this guide we have drawn on professional and practical experience in helping businesses produce clear, logical and comprehensive feasibility studies. It is important to realise however that, like businesses, all feasibility studies are different. Each must be tailored to the needs of the individual business and clearly analyse the business as a whole. The feasibility study must fully address all areas of the business to include Technical Feasibility, Commercial Feasibility and Organisational Feasibility so that a comprehensive overall view of the proposed business idea is constructed. On completion of your feasibility study the business promoter will have be left with a clear view as to whether or not to proceed with the proposed business concept . Concurrently, the promoter will have realised any potential pitfalls which may be associated with the venture. There appears to be a common misconception that a feasibility study and a business plan are one in the same. They are however, very different documents. A feasibility study is in fact the stepping stone towards the creation of a business plan and must be conducted prior to the production of a business plan. This guide has five sections: 1. Technical 2. Commercial 3. Financial 4. Organisational 5. Outputs of a Business Feasibility Within each section the guide addresses briefly what the promoter, along with their advisors need to do. This will list activities such as talk to Patent Advisors, undertake secondary research etc. Each section will secondly identify key issues that should be assessed as each element of the feasibility is undertaken.

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2.0 Technical Feasibility


The actions to be taken by the business promoter: Talk to internal Operations and R&D team and/or advisors to develop blueprint for the product or service Identify external technology partners (possibly via tender) re equipment and components required Identify enterprise agency financial supports (e.g., Framework 7, Innovation Voucher, Feasibility or Tax Credits) if applicable.

2.1 Product/Service
Under technical feasibility, the promoter must look at the product/service that your business offers/intends to offer customers. This section provides evidence that it is technically possible, given appropriate resources, to produce or manufacture the product/service examined in the feasibility. New businesses can be founded by individuals in any industry and should have strong technical capabilities. The purpose of the feasibility is not to physically create a new product that is ready for market but to prove that such a product can be created. This may consist of providing validated drawings or designs and possibly by producing a working prototype. This feasibility analysis should cover: A comprehensive description of the product/service from a technical viewpoint. . Details of the means used to provide the product/service to customers e.g. ecommerce website, physical store, direct sales Details of the components to be used in producing the product/service and who will supply them. Details of the plant, machinery and processes involved in producing the product/service. The promoter must also stipulate details of whether the product is manufactured internally or will be manufactured using outsourcing. Information regarding whether the product/service will link to other product/service lines if an existing business, or if there is an option to offer complimentary product lines. Details relating to how the product will be packaged must also be provided in this section.

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2.1 Product/Service
Technology & Intellectual Property focuses on whether intellectual property will be created by engaging in this new venture. This is particularly relevant for software, or highly technical products. The promoter must provide details of the existence of any existing IP agreements or planned agreements along with details of any patent searches undertaken. There are several Patent Databases available to use, Espacenet is a worldwide database of published patents and patent applications. This website is free to use and search, and is administered through the European Patent Office. Other points to be addressed: Details of any patent advisors to the business. Any licensing agreements related to the product/service must be explored. Details of any costs incurred to date relating to patents. Details of the technology incorporated into the product/service. This area is particularly relevant for businesses specialising in products featuring specialised software The patents, copyrights and trademarks held by the business in relation to its product/service Details referring to the protection of trade secrets should also be referred to here External partners must also be identified in this section. These partners may be brought in to meet any gaps that the business may have in the research and development capability. If the business has secured, or intends to secure funding for R & D grants such as innovation vouchers or an Enterprise Ireland R& D growth fund must be provided here. Now that all technical issues have been discussed, this guide will now focus on what needs to be considered under the heading of Commercial Feasibility.

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3.0 Commercial Feasibility


The actions to be undertaken by the business promoter: Talk to potential customers to clearly identify their burning needs A broad profile of specific customer segments should be generated to assist in understanding customer needs. The profile would outline sex, age, income level etc Undertake customer research to confirm that solution meets end user needs Identify target markets and Collate industry information including a comprehensive assessment of the competition.

3.1 Target Market


When completing the target market element of the feasibility the promoter must analyse a number of potential markets that they may enter. Each of these markets should then be ranked in order to determine the most beneficial market(s) to enter into. A clear, detailed description of the intended market should be supplied. In this section, the business promoter should be able to demonstrate that there is a sufficient room in the market to allow the business to generate profits. This section should consider the following: Specific details of the chosen market that the business intends to operate in The size of the chosen market The recent, current and projected conditions of the target market The reputation of the chosen market (e.g. highly technical, easily entered, tough to crack) Whether the business intends to operate on a local, national or international scale The first step in the feasibility is to assess if the business has existing customers. If yes, one has a captive audience and can also add new customers. To add new customers, one needs to define the target market. All details relating to the business potential customers must be addressed.

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3.1 Target Market contd...


The promoter should be capable of creating a profile of the organisations ideal customer in their head. The promoter must ask themselves: Who is our target customer? Am I operating as a Business to Customer or Business to Business enterprise? (See Figure 1.2) What is our ideal customers sex, age, income level and interests? Is there a distinction between our buyer and our end user? What are the target customer segments (geographic, demographic, psychographic and behavioural)? What products/services are they already using? On what factors are buying decisions made?

B2B applications have these unique characteristics that set them apart from B2C applications -Different types of purchases and authorizations -Unique contracts, terms, and conditions for different business customers -Participation in customer's supply chain -Variety of customer sizes, demands, and requirements Fig 1.2

It is vital that the promoter(s) take advantage of any secondary research previously compiled that relates to their target market. Secondary research can often provide a solid base on which to formulate a primary research plan.

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3.2 Competition
It is vital when conducting a feasibility study to perform a detailed analysis of the business that you will be competing against directly, as well as indirectly. This will enable the business promoter to develop an understanding of the target customers needs and expectations and how these needs are being served. By studying how competitors interact with their customers, the promoter can learn a great deal. This section should include: Details of all significant direct competitors Details of any indirect competitors Your businesss advantages and disadvantages versus the competition Barriers to entry for anyone who wishes to enter the market Your businesss USP (Unique Selling Point)

3.3 Industry Analysis


The promoter must conduct an in-depth analysis of the industry that they intend on operating in. In order for the business owner to operate their business venture in a particular industry they must have a clear understanding of the forces in play. Porters 5 Forces is a useful and effective method of analysing each of these forces with relation to the proposed business venture. (See Fig 1.3) For an excellent video on the Harvard Business Review website see http://hbr.org/2008/01/the-five-competitive-forces-that-shape-strategy/ar/1

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Fig 1.3

This analysis will have significant influence on business model and route to market decisions which will be discussed in section 4.2. An honest appraisal of the customer problem may require redesign or tailoring of the product configuration. The ability to tailor the product if required by customers has to be fully addressed by the Technical Feasibility. If a positive assessment is determined during the Commercial feasibility stage, the study moves on to address financial feasibility. Customer research is an important element for any feasibility study. Before this guide moves on to discussing Financial Feasibility, it will take a closer look at the importance of Market Research.

3.4 What is Market Research ?


Market research can be described as the collecting, reviewing and analysing of important information regarding your customers wants, needs and attitude towards your business product/service. Market research is carried out by the business promoter before drafting a feasibility study and is an important factor in gauging your customers response to your business new venture. If market research is conducted effectively using an appropriate method, it can be an important and valuable tool for companies to aid them in the decision making process.

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3.5 Points to remember when conducting Market Research


Market research is a crucial element of every feasibility study. There are a number of key points that every business promoter must be aware of when conducting research into their target market. These points are as follows: 1. Talk to people at every opportunity. When researching your market it must always be a priority to engage with your potential customers. Be open about your product and get their feedback on how they feel about your product/service. Tradeshows or networking events are always valuable opportunities to learn this information. 2. Record the information. By recording the information you have gathered the promoter is able to document all reactions in detail. Valuable information is kept on file and can be referred to at a later date. Talk to a representative sample of potential customers, not just your friends or family. In terms of survey design, it is vital that you are speaking to the right people. Construct a potential customer profile and only approach these individuals when conducting a survey. This will enable you to extract the necessary information from likely users of your product/service. Listen carefully, not the answers that you want to hear but for real customer feedback. It is common for business promoters undertaking a new venture to approach market research with a certain element of bias. Many promoters want there business to succeed and may often give more focus to the positive reactions of customers than the negative. While it is recommended that you should use experts to design and undertake your research, the promoter should always be as involved as possible, particularly in meeting customers. It does take time. It is no secret that undertaking market research relating to a new product/service is a time consuming process. The promoter must dedicate the appropriate time to this process as detailed market research provides the opportunity to learn valuable information from potential customers. A large amount of resources must be invested in this process. The promoter must be aware that it will take time and money to conduct effective market research into their target market. The business owner must be aware of this factor. Market research needs to well structured. The promoter must approach market research in a clearly thought, logical and structured process. This will facilitate the promoter in the collecting of this information. Page | 11

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4.0 Financial Feasibility


The actions to be undertaken by the business promoter: Talk to financial advisor. Collate financial information. Generate projections across multiple scenarios. Define the business model

4.1 Pricing and Business Model


The financial feasibility is the number crunching and decision making that follows the information flow arising from the market research undertaken during the commercial feasibility stage. It is presented firstly as a business model and secondly as a set of standard financial projections. The key element to the pricing and finance section of the feasibility study is the generation of financial assumptions. Financial assumptions are the backbone to your financials and must be as accurate as possible. The promoter must research both their fixed and variable expenses in order to generate accurate assumptions to support all financial projections that have been prepared. The creation of these projections should be a standard process where there should be no mistakes. If the promoter is inexperienced in this area, it is advised that a finance professional is consulted to ensure clarity is achieved. Scenario planning is an important element to determining the financial feasibility of a business. This involves the testing of different assumptions in terms of revenues and customers numbers, pricing elasticity. Allied Irish Bank provide a useful online cash flow wizard at www.aib.ie

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4.2 The Business Model


The business model can be defined as The rationale of how an organization creates, delivers and captures economic value. In other words, the business model describes how your business makes money. The business model focuses on 3 key areas: Revenue Streams (who pays you) Route to market (channels of distribution) Gross Margin This is a central section of the feasibility study for the interested party and must be given the necessary diligence to demonstrate the businesss viability. Included in this section should be: In depth details on how the business expects to generate money (Direct sales, licensing, online sales or retail sales) The cost of purchasing products, the price you intend to sell your products at Your pricing in relation to your competitors

Fig 1.4 The input to every business model is its customers. Following this, the product/service offered by the business must demonstrate a unique capability which the business has to meet a critical need of the market. The business unique capability may be comprised of valued, highly capable employees, innovative new technology specific to the firm, company structure etc. The route to market, or channel of distribution, must also feature in a business model. The agreed upon pricing model then results in the generation of revenue streams for the business.

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5.0 Organisational Feasibility


The actions to be undertaken by the business promoter: Compile up to date CVs of promoters and management team. Define the duties and responsibilities of each member of the management team. Define the business organisational structure. Generate a company organisational chart.

5.1 Team
The feasibility study must also assess the management team that will be behind the business venture. Information regarding each key individual involved in the running of the business is dealt focused on to determine if the selected individuals have the skills and qualities required to run the business venture effectively. Items to be addressed in this section would include: The background of the promoters Key profiles of management/Profiles of management to be recruited The roles and duties of each member of the management team Full CVs of the Senior Management A brief description of any non executive directors must also be provided Details of advisors and mentors to be sought by the promoters

5.2 Organisational Structure


It is common for all businesses and organisations to have various departments and positions that work together in reaching a common goal. In order to facilitate this collaboration, the business promoter must decide upon a suitable organisational structure for the business. This structure will communicate the flow of authority within the business and can often differ in size, shape and formation depending on the business in question (See Section 7.3 of the Appendices). Items to be addressed in this section would include: Details of each department present in the business Details of each employee in each department A full company organisation chart

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6.0 Outputs of a Business Feasibility


If all sections of the study have been satisfactorily completed with due diligence, the potential viability of the proposed business idea should be evident. Any conclusions drawn from the study must be clearly laid out along with any recommendations, changes or alterations suggested that would improve the chances of the business idea becoming possible.

6.1 Feasibility Structure


The Feasibility Study you conduct can include the following elements:

Terms of Reference Executive Summary Contents Page Product/Service Technology &Intellectual Property Market Environments Target Customers Competition Pricing and Business Model Financials
SWOT Analysis & Critical Risk Factors

Financials Conclusions & Recommendations


Fig 1.1

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It is important that certain elements of the feasibility study be undertaken in sequence e.g. Technical Feasibility must be conducted before Financial Feasibility. The key element to every feasibility study is the message that is conveyed in the report. This guide examines each of these areas, and describes the basic information to be included within each section. It is always advised that the business promoter or senior decision maker is centrally involved in the conducting of the feasibility study, this is especially critical if an external marketing company has been commissioned to undertake the study. The promoter is also advised to include objective reviewers at various stages of the study to provide unbiased scrutiny. We have now dealt with what a Feasibility Study is comprised of, along with the elements to be included and the structure to be followed. This guide will now explore the Terms of Reference and Executive Summary sections of a Feasibility Study.

6.2 Terms of Reference


Terms of Reference are a crucial element of every Feasibility Study. Terms of Reference can be defined as a specific set of ordered instructions that clearly indicate to the project team, the issues that should be addressed in your feasibility study. This is a crucial part of every Feasibility Study whether the study will be undertaken internally by the management team, or by an external party. By defining the guidelines of the Feasibility Study to be undertaken, the promoter will be provided with clear directions that the study will take throughout the course of the process. Through brainstorming, the project team must define and specify the primary objective of the feasibility study. Secondary objectives must also be decided upon and generally take the form of 'to assess, examine or investigate key issues under the four areas of feasibility or, can be firmer to determine such as to detail or outline'.

Definition taken from www.barlowandassociates.com

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Essentially, the Terms of Reference specify all aspects of the study such as the objectives, goals, scope and deliverables to be achieved. Each of these need to be agreed upon by all members of the project team. Common elements to be included in this section include: Background of Feasibility Title and Location Project Summary -Background -Methodology -Rational -Purpose -Goal(s) -Development Context Scope -General -Key Consideration -Activities Cost of Study All goals and objectives detailed in the project terms of reference must be SMART. That is to say, that each goal must be Specific, Measurable, Agreed Upon, Realistic and Timely. To see an example of a Feasibility Study Terms of Reference see Appendix 7.1.

6.3 The Executive Summary


The purpose of the executive summary is to provide a concise summary of the study as a whole. This section of the Feasibility Study must specify if the proposed business venture is viable under the four key headings of Technical Feasibility, Commercial Feasibility and Organisational Feasibility. In order to prove this viability of the proposed business venture the promoter(s) must provide evidence here to support the key recommendations and/or identification of the challenges to be faced if the proposed opportunity is to be pursued. The primary objective of the study along with all relevant secondary objectives must be clearly stated by the individual(s) involved in the study along with brief details relating to the research undertaken as part of the study. This would include an outline of any primary and secondary research conducted.

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If a group of potential customers were interviewed or surveyed, the results of this research should be demonstrated using visual illustrations such as graphs and charts. Similarly, this section should outline the key financial assumptions and projects under numerous possible scenarios. These may also be presented on graphs or charts. The executive summary should cover no more than two pages of text. It should be set out in paragraphs of approximately equal length which follow the headings of the study and must be written after all other areas of the Feasibility Study have been completed. Now that the Terms of Reference and Executive Summary sections of a Feasibility Study have been explored, we will now focus on the four key areas of Technical, Commercial, Financial and Organisational Feasibility, detailing the information and points to be considered under each heading.

6.4 SWOT Analysis and Critical Risk Factors


In this section, the promoter should carry out a SWOT analysis of the business to include the businesss strengths, weaknesses, opportunities and threats. Along with this analysis the business owner is encouraged to create a list of the risks that the business faces at present as well as in the potential future risks. Items to be included here are: A detailed SWOT analysis of the business A detailed SWOT analysis of the businesss competitors A list of critical risk factors that the business venture may face. Actions to be taken by the promoter: Under take a detailed SWOT analysis. Write a feasibility report to document the key findings of the study. Prepare recommendations at the conclusion of the study.

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6.5 Recommendations
Some areas where recommendations may be made would include: Product: A particular feature of the product is not popular among consumers. The feature must be changed to coincide with customers opinions. Staff: A member, or members, of the management team may not be sufficiently qualified to meet the business requirements. An alternative member must be identified. Intellectual Property: A patent on the product has not been acquired therefore the product cannot be protected against replication. The promoter must immediately apply for a patent on their product. Price: The price that the product/service is sold at is too expensive/too cheap. The promoter must revise their pricing strategy to correspond with the price that potential customers would be willing to pay. Branding: The brand does not connect with potential customers or add to the product/services credibility. In this case the promoter must review the branding with a view to getting these messages across. Supplier: The suppliers providing the components are too expensive resulting in a reduction in profits. Alternative, more cost effective suppliers must sought and approached. The business model: The current business model is ineffective. A new business model must be adopted for the business. Competition: A major competitor has been omitted. Conduct an in-depth study of this competitor immediately. Financials: Cash flow projections for the business are inaccurate. The projections need to be reviewed by a professional with a view to providing more realistic figures. Channel of distribution: The channel of distribution planned for the product/service is not ideal. The promoter needs to assess all other possible routes to market and determine which route is most suitable. Even if the business idea is found to be flawed, this does not necessarily mean that the idea should be completely abandoned. It may be possible for the promoter to alter some aspects of so that the idea can become viable. Once the feasibility study has been completed, it is the promoters decision whether or not to go ahead with the business venture.

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6.6 Conclusion to the Guide


Feasibility studies and business plans are complimentary documents. It is normal for a business plan to be prepared following the conducting of a feasibility study. While a feasibility study is focused on analyses, scenarios and calculations a business plan is concerned with tactics, strategies and agreed budgets. Another key difference between the two documents is updating. A feasibility study is a once off document produced by the promoter (or external party) to assess the viability of a business concept. On the other side of the coin, a business plan is a document that is regularly updated by the promoter to keep track of any changes experienced by the business. The key overriding factor concerning both a business plan document and a feasibility study is the ability of an organisation to profitability meet customer needs. As a final note, this guide will now revise the list of actions that need to be taken by the business promoter, prior to undertaking the feasibility study. The actions are as follows: Technical: Talk to internal Operations and R&D team and/or advisors to develop blueprint for the product or service Identify external technology partners (possibly via tender) re equipment and components required Identify enterprise agency financial supports (e.g., Framework 7, Innovation Voucher, Feasibility or Tax Credits) if applicable. Commercial: Talk to potential customers to clearly identify their burning needs A broad profile of specific customer segments should be generated to assist in understanding customer needs. The profile would outline sex, age, income level etc Undertake customer research to confirm that solution meets end user needs Identify target markets and Collate industry information including a comprehensive assessment of the competition.

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Financial: Talk to financial advisor. Collate financial information. Generate projections across multiple scenarios. Define the business model Organisational: Compile up to date CVs of promoters and management team. Define the duties and responsibilities of each member of the management team. Define the business organisational structure. Generate a company organisational chart. Finally: Under take a detailed SWOT analysis. Write a feasibility report to document the key findings of the study. Prepare recommendations at the conclusion of the study. On behalf of Bridgewater Management, I hope that you have enjoyed reading this Guide to Undertaking a Feasibility Study and will find it useful in the conduction of your Feasibility Study.

All reasonable care has been taken in the preparation of this brochure. No responsibility or liability is accepted by the authors, Bridgewater Management, for any errors, or omissions or misstatements it may contain, or for any loss or damage howsoever occasioned, to any person relying on any statement or omission in this brochure.

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7.0 Appendix 7.1 Terms of Reference:


For a sample Terms of Reference please follow this link. http://www.adb.org/Documents/ADBBO/Other_Notices/pak/TOR-L2178-railwayelectrification.pdf

7.2 Market Research


There are two key categories of market research and these are; Primary Research and Secondary Research. Primary Research Primary Research consists of research conducted using first hand experience. All information gathered is original data collected by the business promoter for the first time and comes directly from the source. Primary research is divided under two headings. These headings are; Qualitative Research and Quantitative Research. Qualitative Research This type of research pays particular focus to the quality of the information collected. The majority of this information is acquired using the format of an open ended discussion so that one idea can quickly lead onto a new idea or suggestion. Collecting qualitative information is semi-structured to combine a focused agenda with flexibility to identify issues which may be unforeseen. Quantitative Research Quantitative research is a form of primary research that is centred on the collecting of specific and unambiguous information. Here closed questions are used, designed to extract specific information from the individual. Collecting quantitative information follows a structured approach and seeks to acquire specific, measured information. Page | 22

Types of Primary Research Personal observation of consumers Personal Interviews/ Telephone Interviews Surveys Questionnaires Focus Groups Primary Research Advantages/Disadvantages
Advantages Specific information is acquired Large degree of control Direct contact with audience Results are kept private Disadvantages Expensive to conduct Time Consuming Information gathered may only be relevant for a short time period.

Secondary Research Secondary research differs from primary research in the respect that it focuses on the analysis of previously collected, second hand information compiled by another individual or group. It is the most common form of research employed in the industry today and probably, the easiest method of market research. This type of research uses information already collected to generate a conclusion relative to the task faced by the business promoter. Types of Secondary Research Published Reports Internet Libraries Databases Past Sales Data Government Statistics Secondary Research Advantages/Disadvantages
Advantages Disadvantages

Information is already collected Information is easily accessed Low Cost Minimal time is wasted

Quality of research may be poor Research may be bias Information may be outdated Research may not exactly fit your need Page | 23

7.3 Organisational Charts

Director

Training Manager

Sales Manager

Admin Manager Administration Clerk

Training Staff

Sales Staff

First Aid International Organisational Chart

Sample Organisational Chart for a hospital

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