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.

 #Creativepreneurship #Binus@Bandung

Summary for Chapter 2 “Recognizing Opportunities and Generating Ideas”

In this chapter, we discuss the importance of understanding the difference between ideas and opportunities. Not every idea is in fact the source of an opportunity for an entrepreneur to pursue. In addition to describing the differences between ideas and opportunities, this chapter also discusses approaches entrepreneurs use to spot opportunities, as well as factors or conditions in the external environment that may result in opportunities.

The Differences Between Opportunities and Ideas

Essentially, entrepreneurs recognize an opportunity and turn it into a successful business. An opportunity is a favorable set of circumstances that creates a need for a new product, service, or business. A common mistake entrepreneurs make in the opportunity recognition process is picking a currently available product or service that they like or are passionate about and then trying to build a business around a slightly better version of it. Although this approach seems sensible, such is usually not the case. The key to opportunity recognition is to identify a product or service that people need and are willing to buy, not one that an entrepreneur wants to make and sell. an opportunity has four essential qualities: It is (1) attractive, (2) timely, (3) durable, and (4) anchored in a product, service, or business that creates or adds value for its buyer or end-user.

For an entrepreneur to capitalize on an opportunity, its window of opportunity must be open. The term window of opportunity is a metaphor describing the time period in which a firm can realistically enter a new market. Once the market for a new product is established, its window of opportunity opens. As the market grows, firms enter and try to establish a profitable position.

Three Ways to Identify Opportunities

There are three approaches entrepreneurs use to identify an opportunity their new venture can choose to pursue

Observing Trends

The first approach to identifying opportunities is to observe trends and study how they create opportunities for entrepreneurs to pursue. The most important trends to follow are economic trends, social trends, technological advances, and political action and regulatory changes. As an entrepreneur or potential entrepreneur, it’s important to remain aware of changes in these areas. When looking at environmental trends to discern new business ideas, there are two caveats to keep in mind. First, it’s important to distinguish between trends and fads. Second, even though we discuss each trend individually, they are interconnected and should be considered simultaneously when brainstorming new business ideas.

Economic Forces

Understanding economic trends is helpful in determining areas that are ripe for new business ideas, as well as areas to avoid. When the economy is strong, people have more money to spend and are willing to buy discretionary products and services that enhance their lives. In contrast, when the economy is weak, not only do people have less money to spend, they are typically more reluctant to spend the money they have, fearing the economy may become even worse, and that in turn, they might lose their jobs because of a weakening economy.

Social Forces

An understanding of the impact of social forces on trends and how they affect new product, service, and business ideas is a fundamental piece of the opportunity recognition puzzle. Often, the reason that a product or service exists has more to do with satisfying a social need than the more transparent need the product fills. Here is a sample of the social trends that are currently affecting how individuals behave and set their priorities:

■ Aging of the population

■ The increasing diversity of the workforce

■ Increased participation in social networks

■ Growth in the use of mobile devices

■ An increasing focus on health and wellness

■ Emphasis on clean forms of energy, including wind, solar, biofuels, and others

■ Continual migration of people from small towns and rural areas to cities

■ Desire for personalization (which creates a need for products and services that people can tailor to their own tastes and needs)

Technological Advances

Advances in technology frequently dovetail with economic and social changes to create opportunities. Technological advances also provide opportunities to help people perform everyday tasks in better or more convenient ways. Another aspect of technological advances is that once a technology is created, products often emerge to advance it.

Political Action and Regulatory Changes

Political and regulatory changes also provide the basis for business ideas. The combination of new regulations, incentives for doctors and hospitals to shift to electronic records, and the release of mountains of data held by the Department of Health and Human Services (on topics such as hospital quality and nursing home patient satisfaction), is motivating entrepreneurs to launch electronic medical records start-ups, apps to help patients monitor their medications, and similar companies.

Solving a Problem

The second approach to identifying opportunities is to recognize problems and find ways to solve them. Problems can be recognized by observing the challenges that people encounter in their daily lives and through more simple means, such as intuition, serendipity, or chance. There are many problems that have yet to be solved. Commenting on this issue and how noticing problems can lead to recognizing business ideas. If you’re having difficulty solving a particular problem, one technique that is useful is to find an instance where a similar problem was solved and then apply that solution to your problem.

Finding Gaps in the Marketplace

Gaps in the marketplace are the third source of business opportunities. There are many examples of products that consumers need or want that aren’t available in a particular location or aren’t available at all. Product gaps in the marketplace represent potentially viable business opportunities. A common way that gaps in the marketplace are recognized is when people become frustrated because they can’t find a product or service that they need and recognize that other people feel the same way.

Personal Characteristics of the Entrepreneur

There are some characteristics that tend to make some people better at recognizing opportunities than others :

Prior Experience

Several studies show that prior experience in an industry helps entrepreneurs recognize business opportunities. Although prior experience is important in an industry in most instances, there is anecdotal evidence suggesting that people outside an industry can sometimes enter it with a new set of eyes, and as a result innovate in ways that people with prior experience might find difficult. 

Cognitive Factors

Opportunity recognition may be an innate skill or a cognitive process. There are some who think that entrepreneurs have a “sixth sense” that allows them to see opportunities that others miss. This sixth sense is called entrepreneurial alertness, which is formally defined as the ability to notice things without engaging in deliberate search. Most entrepreneurs see themselves in this light, believing they are more “alert” than others. Alertness is largely a learned skill, and people who have more knowledge of an area tend to be more alert to opportunities in that area than others.

Social Networks

The extent and depth of an individual’s social network affects opportunity recognition. People who build a substantial network of social and professional contacts will be exposed to more opportunities and ideas than people with sparse networks. This exposure can lead to new business starts. Research results over time consistently suggest that somewhere between 40 percent and 50 percent of those who start businesses got their ideas through social contacts. In a related study, the differences between solo entrepreneurs (those who identified their business ideas on their own) and network entrepreneurs (those who identified their ideas through social contacts) were examined. The researchers found that network entrepreneurs identified significantly more opportunities than solo entrepreneurs, but were less likely to describe themselves as being particularly alert or creative.

Creativity

Creativity is the process of generating a novel or useful idea. Opportunity recognition may be, at least in part, a creative process. On an anecdotal basis, it is easy to see the creativity involved in forming many products, services, and businesses. Increasingly, teams of entrepreneurs working within a company are sources of creativity for their firm. There are five steps to generating creative ideas :

Preparation. Preparation is the background, experience, and knowledge that an entrepreneur brings to the opportunity recognition process. Just as an athlete must practice to excel, an entrepreneur needs experience to spot opportunities. Over time, the results of research suggest that as much as 50 to 90 percent of start-up ideas emerge from a person’s prior work experience.

Incubation. Incubation is the stage during which a person considers an idea or thinks about a problem; it is the “mulling things over” phase. Sometimes incubation is a conscious activity, and sometimes it is unconscious and occurs while a person is engaged in another activity. One writer characterized this phenomenon by saying that “ideas churn around below the threshold of consciousness.”

Insight. Insight is the flash of recognition when the solution to a problem is seen or an idea is born. It is sometimes called the “eureka” experience. In a business context, this is the moment an entrepreneur recognizes an opportunity. Sometimes this experience pushes the process forward, and sometimes it prompts an individual to return to the preparation stage. For example, an entrepreneur may recognize the potential for an opportunity, but may feel that more knowledge and thought is required before pursuing it.

Evaluation. Evaluation is the stage of the creative process during which an idea is subjected to scrutiny and analyzed for its viability. Many entrepreneurs mistakenly skip this step and try to implement an idea before they’ve made sure it is viable. Evaluation is a particularly challenging stage of the creative process because it requires an entrepreneur to take a candid look at the viability of an idea. We discuss how to evaluate the feasibility of new business ideas in chapter 3.

Elaboration. Elaboration is the stage during which the creative idea is put into a final form: The details are worked out and the idea is transformed into something of value, such as a new product, service, or business concept. In the case of a new business, this is the point at which a business plan is written.

Techniques for Generating Ideas

In general, entrepreneurs identify more ideas than opportunities because many ideas are typically generated to find the best way to capitalize on an opportunity. Several techniques can be used to stimulate and facilitate the generation of new ideas for products, services, and businesses.

Brainstorming

A common way to generate new business ideas is through brainstorming. In general, brainstorming is simply the process of generating several ideas about a specific topic. The approaches range from a person sitting down with a yellow legal pad and jotting down interesting business ideas to formal “brainstorming sessions” led by moderators that involve a group of people. In a formal brainstorming session, the leader of the group asks the participants to share their ideas. One person shares an idea, another person reacts to it, another person reacts to the reaction, and so on. 

Focus Groups

A focus groups is a gathering of 5 to 10 people who are selected because of their relationship to the issue being discussed. Focus groups are used for a variety of purposes, including the generation of new business ideas. Focus groups typically involve a group of people who are familiar with a topic, are brought together to respond to questions, and shed light on an issue through the give-and-take nature of a group discussion. Focus groups usually work best as a follow-up to brainstorming, when the general idea for a business has been formulated—such as casual electronic games for adults—but further refinement of the idea is needed. Usually, focus groups are conducted by trained moderators. The moderator’s primary goals are to keep the group “focused” and to generate lively discussion.

Library and Internet Research

A third approach to generating new business ideas is to conduct library and Internet research. A natural tendency is to think that an idea should be chosen, and the process of researching the idea should then begin. This approach is too linear. Often, the best ideas emerge when the general notion of an idea—like creating casual electronic games for adults—is merged with extensive library and Internet research, which might provide insights into the best type of casual games to create. Libraries are often an underutilized source of information for generating business ideas. The best approach to utilizing a library is to discuss your general area of interest with a reference librarian, who can point out useful resources, such as industry-specific magazines, trade journals, and industry reports. Internet research is also important. If you are starting from scratch, simply typing “new business ideas” into Google or Bing will produce links to newspaper and magazine articles about the “hottest” and “latest” new business ideas.

Other Techniques

Firms use a variety of other techniques to generate ideas. Some companies set up customer advisory board that meet regularly to discuss needs, wants, and problems that may lead to new ideas. Other companies conduct varying forms of anthropological research, such as day-in-the-life research.

Encouraging the Development of New Ideas

In many firms, idea generation is a haphazard process. However, entrepreneurial ventures can take certain concrete steps to build an organization that encourages and protects new ideas. Let’s see what these steps are.

Establishing a Focal Point for Ideas

Some firms meet the challenge of encouraging, collecting, and evaluating ideas by designating a specific person to screen and track them—for if it’s everybody’s job, it may be no one’s responsibility.

Encouraging Creativity at the Firm Level

There is an important distinction between creativity and innovation. As indicated in chapter 1, innovation refers to the successful introduction of new outcomes by a firm. In contrast, creativity is the process of generating a novel or useful idea; however, creativity does not require implementation of an idea. In other words, creativity is the raw material that goes into innovation.