Ch: 3 Feasibility AnalysisPart II – Developing successful Business Idea

Feasibility AnalysisIntuit: The value of validating

business Idea◦ It’s the leading provider of financial management

software & related services in United states.◦ Its flagship products, Quicken, Quick book and Quicken

Turbo Tax, simplify personal finance, small business management, payroll processing, and tax preparation.

◦ Intuits founding is an excellent example of how a strong business idea coupled with properly executed feasibility analysis leads to business success. Scott Cook initiated the business in 1983. Cooks background in consumer marketing was a true advantage during the products development. Worked with P&G had good understanding of feasibility analysis & marketing research.

◦ Quicken for consumers needed to make personal financial management easier.

◦ Quick Book for small business accounting program.

Feasibility Analysis

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

As a preliminary evaluation of a business idea, a feasibility analysis is completed to determine if an idea is worth pursuing & to screen ideas before spending resources on them.

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

When a business idea is deemed unworkable, it should be dropped or rethought. If it is rethought and a slightly different version of the original idea emerges, the new idea should be subjected to the same level of feasibility analysis as the original idea.

Feasibility Analysis

New Business Venture

Spending the time & resources necessary to move forward with the business idea

depends on

Product/Service

feasibility

Industry/Market

feasibility

Organizationa

l feasibility

Financial feasibility

Yes in all 4 areas

No in 1 or more areas

Proceed with business plan

Drop or rethink

business idea

Feasibility Analysis Although the sequence in the table makes perfect

sense, statistics shows the majority of the entrepreneurs do not follow this pattern before launching their venture.

Reason is entrepreneur tends to underestimate the amount of competition there will be in the marketplace & tend to overestimate their personal chances for success.

Once a business idea is determined to be feasible much work remains to be done to completely flesh out the idea when preparing to write the business plan & launch the venture.

Concept Statement Before a company undertakes a feasibility analysis a concept

statement should be developed. A concept statement is a preliminary description of a business & include the following;

A description of the product or service being offered: This section details the features of the product or service and may include a sketch of it as well. A computer generated simulation of the functionality of the product or service is also helpful.

The intended target market: This section list the business or people who will buy the product or services.

The benefits of Product or service: This section describes the benefits of the product or service and include an account of how the product or service adds value and/ or solves a problem.

A description of how the product will be positioned relative to similar ones in the market: A company’s position describes how it is situated relative to its competitions.

A description of how the product or service will be sold & distributed: This section specifies whether the product will be sold directly by the manufacturer or through distributor or franchises.

4 Areas of Feasibility Analysis

Product/Service feasibility

Industry/Market feasibility

Organizational feasibility

Financial feasibility

Product / Service Feasibility Analysis It is an assessment of the overall appeal of the

product or service being proposed. Before rushing a prospective product or service into a development, a firm should be confident that its what customer want & that the product or service will have an adequate market.

In launching a new firm it is easy for an entrepreneur to get caught up in activities such as raising money, hiring employees, buying computer equipment, signing leases, writing press releases & so on.

For most firms, however the no 1 success factor is delivering a superior product or service.

Two primary tests ◦ Concept testing, ◦ Usability testing

constitute product/service feasibility analysis.

Product / Service Feasibility Analysis Concept Testing: A concept test entails showing a representation of the product

or service to prospective users to gage customer interest, desirability, and purchase intent.

There are 3 primary purposes for concept test; The first one being to validate the underlining premises of a

product or service idea that an entrepreneur thinks is compelling. To test his idea an entrepreneur must ask prospective customers & key industry participants what they think. This can be accomplished via phone interviews, personal interviews & focus groups & simply by watching people perform relevant tasks. In some instances, it is also important for firms to do basic research to make sure that they fully understands the behavior & attitudes of their potential cliental.

An eg of this type of basic research is a recent study that Cheskin, a marketing firm perform for Pepsi. (they wanted to have a better understanding of the teen Market to guide development of its soft drinks.)

Product / Service Feasibility Analysis Concept Testing: The second purpose of concept test is to help develop an idea. For eg,

a firm may show a product idea to prospective customers, get feedback, & tweak the idea. Then in an iterative manner, they will show it to more potential customers, get feedback & tweak the idea some more & so on.

The objective is to emerge from the concept test with the product or service that is refined to the point that the entrepreneur is confident i.e. satisfies the defined need & with one that prospective customers have said that they like & may be willing to buy.

The third purpose of a concept test is to estimate the potential market share the product or service might command. Some type of buying intention question appears is almost in every concept test, usually in the form of survey, questionnaire that looks something like this;

How likely would you be to buy the product like this; if we make it◦ Definitely would buy◦ Probably would buy◦ Might or might not buy◦ Probably would not buy◦ Definitely would not buy

Product / Service Feasibility Analysis Usability Testing: A concept test is usually followed by a development of a

prototype or model of the product or service. Prototyping is a iterative, meaning that the mock-up is the

refined & refined again until the customer & designer agree on the final design.

Typically a basic prototype is developed & is use to gauge customer interest & to conduct usability testing. Usability testing requires that users of a product performs certain task in order to measure the product ease of a use & the user perception of the experience.

Usability testing are sometime called user test, beta test or field trials, depending on the circumstances involved. Again, while it is tempting to rush a new product or service to market, conducting a usability test is a good investment of an entrepreneurs or a firms resources. Many products that customers find frustrating to work with have been brought to market too quickly.

Product / Service Feasibility Analysis Usability Testing: There are many forms of usability test. Some entrepreneurs, working within limited budgets,

develop a fairly basic prototype & ask friends & colleagues to use the product, then complete an evaluation form or give verbal feedback.

This approach is better than no testing. Usability testing is important for software & website

design.

Industry / Market Feasibility Analysis It is an assessment of the overall appeal of the

market for the product or service being proposed. For feasibility analysis, there are 3 primary issues that

are proposed business should consider◦ Industry Attractiveness◦ Market Timeliness◦ Identification of Niche Market

Industry / Market Feasibility Analysis Industry Attractiveness: Industries vary considerably in term of their growth rate.

Typically, an industry that is growing is more attractive because it is more receptive to new entrants & new product introductions. A primary determinant of a new ventures feasibility is the attractiveness of the industry it chooses.

In general the most attractive industries are characterized as the following;◦ Being large & growing (with growth being more important than size)

◦ Being important to the customer. Theses markets typically sell products or services that customer “must have” rather than “would like to have”

◦ Being fairly young rather than older & more mature. These markets tend to be early in their product life cycle, when price competition is not intense.

◦ Having high rather than low operating margins. These markets are simply more profitable for entry & competition purposes.

◦ Not being crowded. A crowded market, with lots of competitors is typically characterized by fierce price competition & low operating margins.

Industry / Market Feasibility Analysis Industry Attractiveness: 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 & secondary research.◦ Primary research is original & is collected by the entrepreneur.

◦ Secondary Research probes date that are already collected.

The sources of secondary research include industry related publications, government statistic, competitors web sites & industry reports from respected research firms, such as Forrester Research.

As evidence that primary & secondary research has been completed, an entrepreneur should have concrete numbers relative to the market size & projected growth rate of the industry that he or she plans to enter.

Industry / Market Feasibility Analysis Market Timeliness: A second consideration in regard to the industry

/Market feasibility of the business idea is the timeliness of the introduction of a particular product or service. The factors to consider vary, depending on whether a prospective business is planning to introduce a breakthrough new product or service or one that is an improvement on those currently available.

If the product or service is an improvement on those already available in the market place, the first consideration is to determine whether the window of opportunity for the product or service is open or close.

Industry / Market Feasibility Analysis Identifying a Niche Market: The final step in industry / Market feasibility analysis is

identifying a niche market in which the firm can participate.

A Niche market is the place within a large market segment that represents a narrower group of customers with similar interest. Most successful entrepreneurial firms do not starts by selling to broad markets.

Instead, most start by identifying an emerging or underserved niche with a large market.

For a new firm, selling to a niche market makes sense for at least 2 reasons.◦ First it allows a firm to establish itself within an industry without

competing against major participants head on, for eg. Buyand hold.com appeals to a new investors who want to invest relatively small amounts of money at a time.

◦ Second, a niche strategy allows a firm to focus on serving a specialized market very well instead of trying to be everything to everybody in a broad market.

Organizational Feasibility Analysis It is conducted to determine whether a proposed business has

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

There are 2 primary issues to consider in this area◦ Management Prowess * expertise or ability◦ Resource sufficiency

Management Prowess: A firm should candidly evaluate the pros or ability of its management team. This means that the entrepreneur must complete a self assessment. Two of the most important factors in this area are the passion that the solo entrepreneur or the management teams has for the business idea & the extend to which the management team or solo entrepreneur understands the market in which the firm will participate.

Resource Sufficiency : The second area of organizational feasibility analysis is to determine whether the potential new venture has sufficient resources to move forward to successfully developed a product or service idea. The focus in organizational feasibility analysis should be on non financial resources in that financial feasibility is considered separately.

Financial Feasibility Analysis It is the final stage of a comprehensive feasibility analysis.

For feasibility analysis, a quick financial assessment is usually sufficient . More 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 forecast.

The most important issues to consider at this stage are◦ Capital Requirement◦ Financial Rate of Return◦ Overall attractiveness of investment

If a proposed new venture moves beyond the feasibility analysis stage, it will need to complete a pro forma (or projected) financial statements that demonstrate the firms financial viability for the first 1 to 3 years of its existence

Financial Feasibility Analysis Capital Requirements: An assessment of the feasibility

of raising enough money to fund the capital requirements for the business is necessary. New firms typically need money for a host of purposes. Including the hiring of personnel, office or manufacturing space, equipment, training, research & development, Marketing, & initial Product role out. At the feasibility analysis stage it is not necessary for this number to be exact. However , the number should be fairly accurate & give an entrepreneur an idea of the dollar amount that will be needed to launch a firm.

Financial Rate of Return: Return on Assets, return on equity & return on investment are examples of the many ways the rate of return expected from a new business can be projected. There are different factors,◦ The amount of capital invested

◦ The amount of time required to earn the return

◦ The risk assumed in launching the Business

◦ The existing alternatives for the money been invested

◦ The existing alternatives for the entrepreneurs time & efforts

Financial Feasibility Analysis Overall Attractiveness of the Investment: A number of

other financial factors are associated with promising business opportunities. In the feasibility analysis stage the extent to which a business opportunity is positive relative to each factor is based on an estimate or forecast rather than actual performance.

Feasibility analysis is a vital step in the process of developing successful business ideas.