Unit 3: Feasibility Analysis LH 8

Concept, product/service feasibility,

industry/target market feasibility
analysis, organizational feasibility
analysis and financial feasibility
analysis.
 Concept of Feasibility Analysis
• Feasibility analysis is the analysis and evaluation of a
proposed project to determine if it
• 1. is technically feasible,
• 2. is feasible within estimated cost,
3. will be profitable,
4. has a market,
5. is worth investing time and money,
6. has demand for the new product/service etc..
• Feasibility analysis (FA) is used to assess the strengths &
weakness of a proposed project & present directions of
activities which will improve the project & achieve desired
results.
• It is the process of determining if a business idea is viable.
• It is also known as feasibility study.
• It evaluates a project on basis of economical, technical, managerial,
organizational, commercial & financial aspect.
• It is an assessment of the practicability of a proposed project.
• It helps to assess the merit of the business idea.
• The goal of feasibility analysis is to determine whether the project
should go ahead, be redesigned, or abandoned.
• If the resulting data show a non-viable project, the production
programs, material inputs, location, organization set-up, technology,
etc. should be adjusted in an attempt to present a well defined viable
project.
• Feasibility analysis is investigative in nature and is designed to
critique the merits of a proposed business.
• It is an effective way to safeguard against wastage of investment as
it is estimated that only one in fifty business ideas are commercially
viable.
• It can be used to develop successful business idea.
• Thus feasibility study is an analysis that takes all
of a project's relevant factors into account—
including economic, technical, legal, and
scheduling considerations—to ascertain the
likelihood of completing the project successfully.
• Project managers use feasibility studies to
distinguish the pros & cons of undertaking a
project before they invest a lot of time and
money into it.
• Feasibility studies also can provide a company's
management with crucial information that could
prevent the company from entering blindly into
risky businesses.
Feasibility analysis mainly covers following aspect,
A. Product/Service Feasibility (Technical Feasibility)
i. Product/Service Desirability
ii. Product/Service Demand
B. Industry/Target Market Feasibility
i. Industry Attractiveness
ii. Target Market Attractiveness
C. Organizational Feasibility
i. Management Prowess (prowess: skillfulness/manual ability)
ii. Resource Sufficiency
D. Financial Feasibility
i. Total Start-up Cash Needed
ii. Financial Performance of Similar Businesses
iii. Overall Financial Attractiveness of the Proposed Venture
 Proposed Business Venture

Spending the time and resources

necessary to move forward with the
business ideas depends on

Product/Service Industry/Target Organizational Financial

Feasibility Market Feasibility Feasibility Feasibility

If yes in all four If no in one or

areas more areas

Proceed with Drop or rethink

business plan business idea
A. Product/Service Feasibility (Technical Feasibility)

• Product/service feasibility is an assessment of the overall appeal of

the product or service being proposed.
• Feasibility analysis should start with identifying the technical
feasibility for producing products and services that will satisfy the
expectation of potential customer.
• It includes functional design and attractiveness of the product,
competitive changes, durability & reliability of the product, product
safety, easy and low cost of maintenance, etc..
• Before developing a new product or service, the firm should be sure
that the product or service is what prospective customers want.
• Product feasibility analysis is being assessed on basis of following
two components,
• i. Product/Service Desirability
• ii. Product/Service Demand
 i. Product/Service Desirability
• The first component of product/service feasibility
is to confirm that the proposed product or service
is desirable and serves a need in the market place.
• It helps to determine,
– will consumer get excited about the product or
– is this a good time to introduce the product or service
or
– does it take advantage of the environmental trend,
solve a problem, or take advantage of a gap in the
market or
– are there any flaw in the product or service?
• It can be assessed with the help of concept test.
 • A concept test is a one page document that includes,
• 1. A description of the Product or Service
• 2. The intended Target Market
• 3. The benefits of the Product or Service
• 4. Company’s Position, etc
• which is distributed to prospective customers
and industry experts with a view to collect
feedback from them.
• the feedback will provide the entrepreneur a
sense of viability of the product or service idea
and suggestions for how the idea can be
strengthened before proceeding further.
 ii. Product/Service Demand
• The second component of product/service
feasibility analysis is to determine if there is
demand for the product or service.
• There are two steps to assessing product/
service demand,
• a. Administer a Buying Intentions Survey
• b. Conduct Library, Internet and Gumshoe
research.
a. Administer a Buying Intentions Survey
Buying Intention 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
service with short survey attached. Each participant should be
asked to read the statement and complete the survey. The
survey includes questions like,
- How likely would you be to buy the product or service
described above?
- How much would you be willing to pay for the product or
service?
- Where would you expect to find this product or service for
sale?
Such questions are answered by customers and this helps to
understand the buying intention of customers.
b. Conduct Library, Internet and Gumshoe research.
• The second way to assess demand for product or
service is by conducting library, internet and gumshoe
research.
• One needs to collect evidence that there will be healthy
demand for the product or service.
• Reference librarian can help you investigate the
business idea.
• Internet searches can yield important information about
the potential viability of a product or service idea.
• A gumshoe is a detective or investigator that collects
small information wherever they can be found
regarding the product or service.
 B. Industry/Target Market Feasibility Analysis

• An industry is a group of firms producing a similar product or

services.
• The target market of the firms is the limited portion of the
industry it plans to go after/appeal.
• Industry/target market feasibility analysis is an assessment of
the overall appeal of the industry and the target market for the
proposed business.
• The analysis should include the description of the industry,
current market analysis, competition, anticipated future market
potential, potential buyers, sources of revenues, sales
projection, etc..
• Most firms and certainly entrepreneurial start-ups typically do
not try to serve the entire industry, instead they select a specific
target market and try to serve that market very well.
 Components of industry/target market
feasibility analysis

i. Industry Target Market

Industry Attractiveness
Attractiveness Attractiveness
 i. Industry Attractiveness
• An industry is a group of firms producing a similar product or services. Industries
vary in terms of their overall attractiveness. When environmental & business
trends are moving in favor rather than against the industry, then it is an attractive
industry. Attractive industries have characteristics as listed below,
• Are young rather than old
• Are early rather than late in their life cycle
• Are fragmented rather than concentrated (industry in which no single firm has
domination is a fragmented market & industry dominated by few large firms are
concentrated market)
• Are more receptive to new entrants
• Are growing rather than shrinking
• Are selling 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 competitive.
 ii. Target Market Attractiveness
• A target market is a place within the large market segment that
represents narrower group of customer with similar needs.
• The challenge in identifying an attractive target market is to find a
market that’s large enough for the proposed business & is yet small
enough to avoid attracting large competitors.
• Assessing the attractiveness of target market is tough.
• Ingenuity (the ability to solve difficult problems, often in original,
clever & inventive ways) must be employed to finding information
to assess the attractiveness of a specific target market.
• Firms can avoid head-to-head competition with industry leaders by
focusing on a smaller target market and serving them very well.
• Its not realistic mostly for start-ups to introduce a completely new
product idea into a completely new market.
• Most successful start-ups introduce a new product into an existing
market.
C. Organizational Feasibility Analysis
• Organizational feasibility analysis is the assessment of the
professional background information of the founders and
principals of the business, and what skills they can
contribute to the business.
• It is conducted to determine whether the proposed business
has sufficient management expertise, organizational
competence, and resources to successfully launch its
business.
• It includes the detail about the hierarchical structure,
authority-responsibility relationship, communication pattern,
organizational structure, etc. of the proposed venture.
• The focus in organizational feasibility analysis is on non-
financial resources.
Organizational feasibility analysis should include
• The description of the business structure (Sole
trading, partnership or joint stock company)
• The description of organization structure
• Internal and external principles and practices of the
business
• Professional skills and resumes, etc..

There are two primary issues to consider in this area

as described below,
i. Management Prowess/Ability
ii. Resource Sufficiency
 i. Management Prowess/Ability
• Management prowess is the ability or skillfulness of the
management.
• The proposed firm should evaluate the prowess or ability of the
initial management team, without impartiality, to satisfy itself that
the management has the requisite passion & expertise to launch
the venture.
• An indication of passion is the willingness of a new venture team
to complete a comprehensive feasibility analysis.
• The management team starting the proposed venture must be
honest & impartial in their self assessment.
• Two most important factors in this area are:
– The passion that the solo entrepreneur or the founding team has for the
business idea.
– The extent to which the management team or solo entrepreneur
understands the market in which they will participate.
• Management with extensive professional and
social network can fill their experience and
knowledge gaps through their colleagues and
friends.
• The potential new venture should have an idea
of the type of new-venture team that it can
assemble.
• A new-venture team is the group of founders,
key employees, and team that either manage
or help manage a new business in its start-up
years.
 ii. Resource Sufficiency

• Resource sufficiency refers to assessment whether the entrepreneur

has sufficient resources to launch the proposed venture.
• The objective is to identify the most important non-financial
resources and assess their availability.
• Important non-financial resources that may be critical to successful
launch new business may be availability of affordable office space,
support of local & state government, availability of quality labor,
proximity to key suppliers and customers, willingness of quality
employees to join the firm, possibility of obtaining intellectual
property protection, etc..
• To test resource sufficiency, a firm should list 6 to 12 most critical
non-financial 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.
 D. Financial Feasibility Analysis
• Financial feasibility is the final component of a
comprehensive feasibility analysis.
• It is the financial analysis of the proposed business
venture.
• It is the assessment of the financial aspects of the
proposed venture.
• A preliminary financial assessment is usually
sufficient.
• The purpose of financial analysis is to identify the
financial characteristics and to determine the
financial feasibility of the proposed venture.
 Components of Financial Feasibility Analysis

• i. Total Start-up Cash Needed

• ii. Financial Performance of Similar Business
• iii.Overall Financial Attractiveness of the
Proposed Venture
 i. Total Start-up Cash Needed
• Total start-up cash needed 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 revenue.
• An explanation of where the money will come from
should be provided.
• The point of this exercise is to determine if the
proposed venture is realistic given the total start-up
cash needed.
 A successful entrepreneur should make proper estimate of
financial requirement and should estimate about the start-up
costs including the following facts:
a. Cost of Production-legal fees, cost of survey, drafting, printing
and documentation expenses, registration charges, etc..
b. Cost of Financing-cost of printing application forms &
prospectus, underwriting commission, brokerage, etc..
c. Cost of Fixed Assets-cost of land & building, plant &
machinery, furniture & fixtures, etc..
d. Cost of Intangible Assets-costs of goodwill and patent.
e. Cost of Current Assets-costs of account & bills receivable,
inventory, cash and bank balance, etc..
f. Cost of Developing Business-cost of operating losses suffered
during gestation period (the duration between initiation and
birth) & contingent expenditure, etc..
ii. Financial Performance of Similar Business
• It is estimating the proposed start-up’s financial performance
by comparing it to similar, already established businesses.
• There are several ways for obtaining financial performance
of similar business, all of which involve a little ethical
detective work.
- There are many reports available, some for free and some
require a fee, which offer detailed financial reports of
thousands of individual firms.
- Simple observational research and legwork (work that
involves much travelling about to collect information,) may
also be needed.
- Financial information of competitors can be obtained
through direct contact, by phone and taking interviews.
- Simple online searches may also be helpful.
 iii. Overall Financial Attractiveness of the
Proposed Venture
• A number of other factors are associated with evaluating the financial
attractiveness of a proposed venture.
• These evaluations are based primarily on projected sales and rate of return.
• A more precise estimation can be computed by preparing projected financial
statement, including
• Statement of cash flow
• Income statements
• Balance sheets
• Financial ratios, etc..

The start-up’s projected rate of return should be weighed against

-the amount of capital invested
-the risk assumed in launching the business
-the existing alternatives for the money being invested
-the existing alternatives for the entrepreneur’s time and effort, etc..
 Financial Factors Associated With Promising
Business Opportunities are:

• Steady and rapid growth in sales during the first 5 to 7

years in a clearly defined market niche.
• High percentage of recurring revenue, i.e. 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.