Summary Week 3

Feasibility Analysis

Feasibility Analysis is the process of determining if a business idea is viable.  If a business idea falls short on one or more of the four components of feasibility analysis, it should be dropped or rethought, as shown in the figure. Many entrepreneurs make the mistake of identifying a business idea and then jumping directly to developing a business model to describe and gain support for the idea. Feasibility analysis is investigative in nature and is designed to critique the merits of a proposed business.

Product/Service Feasibility Analysis

Product/Service Feasibility Analysis is an assessment of the overall appeal of the product or service being proposed. Although there are many important things to consider when launching a new venture, nothing else matters if the product or service itself doesn’t sell. There are two components to product/service feasibility analysis: product/service desirability and product/service demand.

Product/Service Desirability

The first component of product/service feasibility is to affirm that the proposed product or service is desirable and serves a need in the marketplace. You should ask yourself, and others, the following questions to determine the basic appeal of the product or service:

■ Does it make sense? Is it reasonable? Is it something real customers will buy?

■ Does it take advantage of an environmental trend, solve a problem, or fill 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?

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 to solicit their feedback. It is a one-page document that normally includes the following:

■ 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.

Product/Service Demand

The second component of product/service feasibility analysis is to determine if there is demand for the product or service. Three commonly utilized methods for doing this include (1) talking face-to-face with potential customers, (2) utilizing online tools, such as Google Adwords and landing pages, to assess demand, and (3) library, Internet, and gumshoe research.

Talking Face-to-Face with Potential Customers

The only way to know if your product or service is what people want is by talking to them. Curiously, this often doesn’t happen. One study of 120 business founders revealed that more than half fully developed their products without getting feedback from potential buyers. In some instances, you have to pause and think carefully about who the potential customer is.

Utilizing Online Tools, Such as Google AdWords and Landing Pages, to Assess Demand

Another common approach to assessing product demand is to use online tools, such as Google AdWords and landing pages. The way this works is as follows. The overarching purpose is to get a sense of interest in your product. If, over a three-day period, 10,000 people click on the ad and 4,000 provide their e-mail address to you, that might signal a fairly strong interest in the product. On the other hand, if only 500 people click on the ad and 50 give you their e-mail address, that’s a much less affirming response.

Library, Internet, and Gumshoe Research

The third way to assess demand for a product or service idea is by conducting library, Internet, and gumshoe research. While talking to prospective customers is critical, collecting secondary data on an industry is also helpful. Your university or college library is a good place to start, and the Internet is a marvelous resource. Simple gumshoe research is also important for gaining a sense of the likely demand for a product or service idea. A gumshoe is a detective or an investigator that scrounges around for information or clues wherever they can be found. Don’t be bashful. 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. Take the owner of a toy store to lunch and discuss your ideas. Spend some time browsing through toy stores and observe the types of toys that get the most attention. If you actually launch a business, there is simply too much at stake to rely on gut instincts and cursory information to assure you that your product or service will sell. Collect as much information as you can within reasonable time constraints.

Industry/Target Market Feasibility Analysis

Industry/Target Market Feasibility Analysis is an assessment of the overall appeal of the industry and the target market for the product or service being proposed. There is a distinct difference between a firm’s industry and its target market; having a clear understanding of this difference is important. An industry is a group of firms producing a similar product or service, such as computers, children’s toys, airplanes, or social networks. A firm’s target market is the limited portion of the industry that it goes after or to which it wants to appeal. Most firms, and certainly entrepreneurial start-ups, typically do not try to service an entire industry. Instead, they select or carve out a specific target market and try to service that group of customers particularly well. There are two components to industry/target market feasibility analysis: industry attractiveness and target market attractiveness.

Industry Attractiveness

Industries vary in terms of their overall attractiveness. The top three factors are particularly important. Industries that are young rather than old, are early rather than late in their life cycle, and are fragmented rather than concentrated are more receptive to new entrants than industries with the opposite characteristics.

Target Market Attractiveness

We noted previously that a target market is a place within a larger market segment that represents a narrower group of customers with similar needs. Most start-ups simply don’t have the resources needed to participate in a broad market, at least initially. 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. It’s also not realistic, in most cases, for a start-up to introduce a completely original product idea into a completely new market. In most instances, it’s just too expensive to be a pioneer in each area. Most successful start-ups either introduce a new product into an existing market or introduce a new market to an existing product

Organizational Feasibility Analysis

Organizational feasibility analysis is conducted to determine whether a proposed business has sufficient management expertise, organizational competence, and resources to successfully launch. There are two primary issues to consider in this area: management prowess and resource sufficiency.

Management Prowess

A proposed business should evaluate the prowess, or ability, of its initial management team, whether it is a sole entrepreneur or a larger group. Two of the most important factors in this area are the passion that the solo entrepreneur or the management team has for the business idea and the extent to which the management team or solo entrepreneur understands the markets in which the firm will participate.

Resource Sufficiency

The second area of organizational feasibility analysis is to determine whether the proposed venture has or is capable of obtaining sufficient resources to move forward. The focus in organizational feasibility analysis is on nonfinancial resources. The objective is to identify the most important nonfinancial resources and assess their availability.

Financial Feasibility Analysis

Financial feasibility analysis is the final component of a comprehensive feasibility analysis. For feasibility analysis, a preliminary financial assessment is usually sufficient; indeed, additional rigor at this point is typically not required because the specifics of the business will inevitably evolve, making it impractical to spend a lot of time early on preparing detailed financial forecasts.

Total Start-Up Cash Needed

This 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 get the business up and running. After determining a total figure, an explanation of where the money will come from should be provided. Avoid cursory explanations such as “I plan to bring investors on board” or “I’ll borrow the money.” Although you may ultimately involve investors or lenders in your business, a more thoughtful account is required of how you’ll provide for your initial cash needs.

Financial Performance of Similar Businesses

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 effort will result in approximate rather than exact numbers. There are several ways of doing this, all of which involve a little gumshoe labor. First, substantial archival data, which offers detailed financial reports on thousands of individual firms, is available online. If a start-up entrepreneur identifies a business that is similar to the one he or she wants to start, and the business isn’t likely to be a direct competitor, it’s perfectly acceptable to ask the owner or manager of the business to share sales and income data. Simple observation and legwork is a final way to obtain sales data for similar businesses.

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 a new venture’s projected sales and rate of return (or profitability), as just discussed. At the feasibility analysis stage, the projected return is a judgment call. A more precise estimation can be computed by preparing pro forma (or projected) financial statements, including one- to three-year pro forma statements of cash flow, income statements, and balance sheets (along with accompanying financial ratios). This work can be done if time and circumstances allow, but is typically done at the business plan stage rather than the feasibility analysis stage of a new venture’s development.

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