Chapter 3

Feasibility analysis

Product/service feasibility analysis

Industry/market feasibility analysis

Organizational feasibility analysis

Financial feasibility analysis

Product/service feasibility analysis

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

viable before spending resources on it.

Most entrepreneurs do not conduct a feasibility analysis before

launching their ventures.

Feasibility analysis has four components: product/service feasibility industry/market feasibility organizational feasibility financial feasibility

Product/service feasibility analysis is an assessment of the product or

service being proposed in the sense that it is what customers want and

that it will have an adequate market.

The benefits of conducting a product/service feasibility analysis are: Getting the product right the first time (the entrepreneur knows what

customers want because he asked them) A segment of customers emerges because the firms or individuals

that participate in the feasibility analysis often become the firm` s first customers

By asking prospective customers to test the usability of a product or the ease of use of a service the firm avoids any defect in product/service design

The time and capital are used more efficiently because the entrepreneur has a better idea of what customers want

The entrepreneur collects information about the need for additional products/services

Product/service feasibility analysis consists of two tests: concept testing and usability testing.Concept testing means showing the product/service to prospective users to see their interest and purchase intent.

Example:Cheskin, a marketing firm, performed a study for PepsiCo (it wanted to have a better understanding of the teen market to guide development of its soft drink).Cheskin sent cameras to hundreds of teens, asking them to photograph their lives as they really are. They interviewed friends, asking them about their dreams, fears, cares and concerns. As a result it was created a model that explain the main type of teenagers, tracks their relative influence over time and predicts how trends move through the teen population.All this information were used by PepsiCo in its product development efforts of its soft drinks and provided it with an advantage over its competitors.

Usability testing

A concept test is usually followed by the development of a prototype

(model) of the product/service.

Prototyping is iterative, meaning that the model is improved until the

customers and the designer agree on the final design.

Conducting a usability test is a good investment of an entrepreneur` s

resources.

Many products that customers find frustrating to work with have been

brought to market too quickly.

There are many forms of usability tests.

Some entrepreneurs having a limited budget, develop a basic prototype

and ask friends and colleagues to use the product, then complete an

evaluation form or give a verbal feedback.

Other companies have usability testing programs and facilities.

Usability testing is particularly important for software and Web site

design.

Example:

In Intuit` s usability testing lab (in California) customers are seated in

front of PCs and then asked to work with software programs that

were developed. A soundproof room is attached to the lab, where

programmers and designer observe the participants.

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 the entrepreneurs should consider the following issues: Industry attractivenessAn industry that is growing is more attractive because it is more receptive to new entrants and new product introductions.

The most attractive industries are characterized as the following: Being large and growing (with growth being more important than

size). Being important to the customers. These markets sell products or

services that customers “must have“ rather than “would like to have“. Being older and more mature, these markets tend to be early in their

product life cycle, when price competition is not intense.

These markets are more profitable for entry and competition purposes.

Not being crowded. A crowded market with lots of competitors is characterized by price competition and low profit.

Beside the evaluation of an industry` s growth potential, the

entrepreneur needs more information about the overall attractiveness of

the industry he plans to enter. These can be accomplished through

both a primary and a secondary research.

Primary research involves an entrepreneur talking to potential

customers and key industry participants.

Secondary research probes data that are already collected, the sources

including industry-related publications, government statistics,

competitors` Web sites, industry reports.

After completing the primary and secondary research, an entrepreneur should have concrete numbers regarding the market size and industry growth rate.

Market timelinessThe timeliness of the introduction of a particular product or service varies depending on whether the new firm is planning to introduce a new product/service or one that is an improvement on those currently available.

a). If the product/service is an improvement on those already available in the market, the first step is to determine whether the window of opportunity for that product/service is open or closed.

Examples:Some markets such as the one for Internet search engines are either saturated with competitors or dominated by competitors with sufficient market power and are closed to new entrants. Other markets, such as specialty restaurants are characterized by windows of opportunity that are open to new entrants.

The second step is to study the current dynamics of the industry and

whether the timing for a new business is good.

Example:

The personal computer industry was consolidated because of Hewlett-

Packard` s acquisition of Compaq and Dell` s increasing market

dominance. When an industry consolidates, some large firms in the

industry acquire or force out of business the smaller firms. This trend in

the personal computer industry suggests that it is not a good time to

launch a new personal computer firm.

b). For new businesses that are developing a new product/service, is vitally important to capture a first-mover advantage. The first-mover advantages are that it can set the standard for an industry, it gets brand recognition and market power.

Examples of first movers:

Yahoo!, Nokia, Palm.

The disadvantages of first movers are: high research and development

costs, the risk that a competitor will study the first mover` s

product/service and quickly come out with a better version.

The second mover has the advantage of studying all the mistakes that

were made by the first movers and it will build a better product or

service.

Identifying a niche market

A niche market is a place within a larger market segment that

represents a narrower group of customers with similar interests.

Most successful entrepreneurial firms do not start by selling to large

markets. They identify an emerging or underserved niche within a larger

market.

For a new firm selling to a niche market makes sense for the following

reasons: It allows a firm to establish itself within an industry without competing

against powerful competitors A niche strategy allows a firm to focus on serving a specialized

market instead of trying to be everything to everybody in a broad market

Organizational feasibility analysis

Organizational feasibility analysis is conducted to determine weather a

proposed business has sufficient management expertise, organizational

competence and resources to successfully launch its business.

There are two issues to consider: Management ability

The entrepreneur must complete a self-assessment.

The most important factors in this area are the passion that the

entrepreneur or the management team has for the business idea and

the extent to which they understand the market.

Example:

Garden.com was started in 1995 to sell gardening supplies on the

Internet. None of Garden.com’ s three founders had any experience in

Garden retailing, nor were they knowledgeable gardeners. The firm

failed after losing many millions of dollars of its investors’ money.

Resource sufficiency

The second area of organizational feasibility analysis is to determine

whether the potential new venture has sufficient resources to

successfully develop a product or service idea, such as: availability of

office space, the quality of the labor force in the area where the

business will be located, the possibility of obtaining intellectual property

protection on key aspects of the new business.

One resource sufficiency issue that new firms should consider is their

proximity to similar firms.

There are clusters of high-tech firms in the Silicon valley of California,

on Route 128 around Boston, in the Cambridge region in the UK.

Clusters arise because they increase the productivity of the firms

participating in them. Because these firms are located in the same area,

it is easy for their employees to network with each other, it is easy for

the firms to gain access to specialized suppliers, scientific knowledge

and technological expertise.

Researchers found that small manufacturing firms benefit more than

larger firms by being close to a cluster of similar firms.

Example:

A semiconductor start-up that decided to locate in Kansas city, Missouri,

would be at a significant disadvantage to a semiconductor start-up in the

Silicon Valley which already has a cluster of semiconductor firms.

Financial feasibility analysis

Financial feasibility analysis is the final stage of the feasibility analysis.A quick financial assessment is sufficient because the business environment will evolve.

The most important issues to consider are: capital requirements, financial rate of return, overall attractiveness of investment.

Capital requirementsThe entrepreneur should assess the feasibility of raising enough money to fund the capital requirements for the business.

New firms need money for hiring employees, office or manufacturing space, equipment, training, research and development, marketing.

At the feasibility analysis stage it is not necessary for this number to be exact.

Financial rate of return

Return on assets, return on equity, return on investment are examples

of the ways the rate of return expected from a new business can be

projected.

It is important to determine whether the projected return is adequate to

justify the business and depends on the following 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 being invested.

Opportunities demanding substantial capital, requiring long periods of

time to mature and having a lot of risk involved make little sense unless

they provide high rates of return.

Overall attractiveness of the investment

It depends on some factors such as:

steady and rapid growth in sales during the first five to seven years in a defined market niche

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 (such as an acquisition) for investors to convert equity into cash