technical and economic feasibility studies

January 2009

Technical and economic feasibility studies

Methodology and useful tools

© 2009 Propriété d’Ernst & Young – Confidentiel.

Table of contents

► Methodology► Methodology overview► Offer analysis► Strategic segment analysis► Competitive position► Business plan

► Useful tools


A technical and economic feasibility study aims at transforming an idea or an innovative technology into a structured project

► The way is long from an idea or a technology to a successful company► An entrepreneur faces diverse issues from market sizing to intellectual property and has to deal

with the different and numerous stakeholders of his industry

► The technical and economic study will help the entrepreneur to define his offer and his strategy

Competitors Venture Cap

Market prices Customers

Legal

environment

End-users

IP Ex-employerStart-up

Examples of constraints and stakeholders


Methodology overview

Offer analysisStrategic segment analysis

Competitive position

Business plan

► Qualify the needs for the different market segments

► Validate and structure the offer based on the idea or technology

► Define the targeted strategic segment

► Analyze the segment’s dynamics

► Analyze competitive structure and forces

► Define the key success factors on the segment

► Elaborate different scenarios : business model, offer, financing…

► Prioritize scenarios with specific criteria (return on assets, capacity of building a sustainable competitive advantage…)

► Elaborate global strategy and main milestones (R&D, marketing, recruiting…)

► Build financial forecasts (turnover, investments…)

► Calculate needed financing► Define targeted team

profile► Build IP strategy

► The methodology will progress through four stages which answer each to a main question for the client: ► Which offer based on our idea or technology will match an unmet need ?► Is the strategic segment I target attractive and what is required to success ?► Which model should we build to be successful on that segment ?► What are the next steps ?


Table of contents


► Useful tools


The first goal to reach is to transform an innovative technology or an idea into a solution for an unmet need

► Séparer capacité de l’offre à répondre aux besoins et attentes des clients / utilisateurs finaux (parfois différents)


Table of contents


► Useful tools


Strategic segment analysis is mandatory in order to build an appropriate value offer and the suitable business model

► The future enterprise will work on a specific value network, deal with specific competitors which want to sell a similar product to the same clients

► The first step is to define the pertinent strategic segment and its borders► The segment’s size and dynamics will be part of its attractiveness► In order to pick up the key success factors and to define a successful business model, the

structure of the segment must be analyzed► The analysis structure should then be the following:

Define the targeted strategic segment

Analyze the segment’s size and dynamics

Analyze the competitive structure and forces

Define the key success factors


Strategic segmentation is the basis of a pertinent further analysis

► Marketing segmentation is the process of dividing the market into homogeneous groups of customers, who respond similarly to a particular mix marketing of the four Ps –product, price, place, promotion

► Market segments must be distinguished from strategic segments which are those segments who require distinct value networks rather than just changes in the marketing mix

► For example in the airline industry flag carriers and low-cost companies are on two different strategic segments with their own value network, and a flag carrier could not be successful on low cost segment by keeping the same value network (cf. British Airways selling its subsidiary GO to EasyJet)

► Strategic segments regroup actors submitted to similar “forces” and who share the same key success factors

Source: Strategor, Chap. 2, From Market segments to strategic segments, Harvard BS Press

Identify a strategic segment Elements of identificationClients

Products

Clients

New entrants

Suppliers

Substitute products

Rivalry

Value network Economic model Competitive forces Key success factors Competitive

advantage sources


Segmentation is an iterative process which must lead to the appropriate level with an arborescence principle

► The appropriate level of segmentation is key:► Too detailed: confusion in the recommendations► Too rough: “economic journalism” risk

► Each sector has its “natural” segmentation criteria, eg. (production process x product) for industry► First stages are generally obvious but as the segmentation progresses it becomes more complex and

conceptual Example: LVMH activities

LVMH

Perfume

Wine and spirits

Leather and fashion

Retailing

Cognac and spirits

Champagne and wine

Champagne

Wine

Very premium

Premium

…

► The segmentation can be finally tested by placing the competitors on a matrix (eg. products/clients)


How to proceed to study a segment’s dynamics ?

► Data may not always exist on the segment’s volume and value and the size must be assessed with a market sizing (eg. basically unit sales x price per unit)

► A particular attention must be paid to the completeness of demand growth drivers analysis

► Major shifts can (sometimes) be anticipated (eg. music industry) and consist in a threat or an opportunity for the start-up

Information sources

Information retrieval► Professional associations

and organizations data► Market studies concerning

the segment or the underlying drivers (eg. Datamonitor)

► Analysts reports on clients, competitors, industry (eg. Thomson Research)

► Business press (eg. Reinsurance Magazine)

Contacts to summon► Client► Competition interviews

(competitors, clients, suppliers, subcontractors…)

Market picture

Structure of the segment and breaks

Projected dynamics

Quantification of segment’s volume/value

Past growth on a long period

Segment’s structure

Breaks affecting competitors

Underlying demand growth drivers

Pricing growth drivers

Possible shifts

1

2

3


The maturity level of the strategic segment is a key point to define to understand the actors’ strategy and measure the attractiveness

Evolution of sales and profits of an activity

Sales

Profit

Time

Salesand profit

Start Growth Maturity Decline

►Growth rate

►Growth potential

►# of competitors

►Comp. structure

►Technology

►Activity access

Average

High

Low to high

Split and volatile

Stammering

Easy

Very high

High

High

Crystallization

Progressive

Possible

Low and stable

None

Low

Leaders stability

Frozen

Very difficult

None or negative

Negative

Low

Oligopoly

Frozen

Uninteresting

►Usual strategies Innovate or copy Invest in market shares Make beneficial Milk

Source: Strategor, Chap. 2


The useful dimensions of a strategic analysis can be summarized with Porter’s five forces

► The five forces diagram summarizes the useful dimensions for an activity and competition analysis:► Vertical relationships between suppliers and their clients, and the retailers or clients of those ones► External forces: other industries (innovation or substitutes) and governments and laws

Source: Strategic choices and competition, M.E. Porter, Strategor

Rivalry between existing firms

Suppliers

Regulation / governments

Clients

New entrants /Substitutes

A renovated approach of Porter’s five forces

What is the bargaining power of suppliers?Are there any entry barriers? Which ones?

Is there a risk of substitution products?

Is the activity threaten by regulation?

What is the bargaining power of clients?


The attractiveness of a strategic segment takes into account all the dimensions previously analyzed

► The intrinsic attractiveness of a segment must be corrected with the success capacity of the firm on this segment

CriteriaValue intensity

0 1 2 3

Projectable growth rate

Leaders market shares

Technologies stability

<2%

>60%

Continuous innovation

2% to 8%

30% to 60%

Cycle <5 years

>8%

<30%

Cycle >5 years

Risk of substitution products

Entry barriers

Prices level

High

Non significant

Price war

Medium

Medium

High elasticity

None

High

High freedom of action

Productivity gains margin

Value added source

Low

Ordinary

Medium

Based on know-how

High

Resulting from specific assets

Security of supplying

Seasonality

Basis for the development of other activities

Fragile

High

Difficult

Vulnerable

Medium

Possible

Secured

Low

Obvious

Each criterion can be rated from 0 to 3 in function of its value intensity

The sum of different ratings quantifies the intrinsic attractiveness of a segment

Valuation statement of a segment attractiveness



The mastery level of the key success factors (KSF) defines the competitive position of the firm (1/3)

► Competitive position mixes external approach – the strategic segment – and internal approach –resources and skills of the firm – to diagnose the strategic position of the firm

The KSF must be few: 3 to 5 maximum

They must define the key elements which distinguish competitors and not those mastered by all

KSF are resources, skills, assets specific to an activity and mandatory for a firm to success

Their identification is based on an experimental approach where four sources must be analyzed:

Demand: growth drivers, clients types, bargaining powers…

Competition: entry barriers, concentration level…

Direct competitors: what distinguishes the best competitors?

Financial structure ratios: major costs, capital intensity…

Identify the KSF of the segment

1

Weight the different criteria

2 There are dominant KSF and the KSF must therefore be classified

An acceptable weighting won’t be exhaustive but reduced to 5 KSF

The result will be validated with objective data and confronted to operational management perception Source: Strategor, Chap. 4



The performance of the firm and the main competitors must be evaluated

The evaluation must be simple (eg. 0 to 5) with an even number scale to avoid medium ratings

This stage implies to collect lots of data on the competitors to get objective information

Evaluate the mastery level

3

Evaluate globally

4

By multiplying the ratings and the weights and adding up all the ratings, a global evaluation is obtained

A visual display can be used to transcribe the results and identify the advantages and disadvantages

The strengths and weaknesses of the firm can be easily extracted




Retailing implantation

Costs

TechnologyNetwork

Image

Leader

Us

Radar chart of competitive position (example) Competitive profile example

Forces 4 3 2 1 Weaknesses

Costs

Sales forces qualification

Territorial coverage

Product range

Production tool flexibility

Supply power

Financial power



Table of contents


► Useful tools


► What ? What business model ?► Who gets the most value added from the offer ? Who is ready to pay ? How much ? ► Key success factors► Best practices

► With whom ? (team, collaborations…)► How much ? (financial projections, financing…)

► Customers acquisition plan► Costs projections

► Barriers to entry ?► Which barriers am I able to build to protect my business?

► Choose the best scenario: ROA, sustainable competitive advantage…


Table of contents


► Useful tools

technical and economic feasibility studies

Documents