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Chapter 3: Feasibility Analysis
CHAPTER 3
FEASIBILITY ANALYSIS
LEARNING OBJECTIVES
1. Explain what a feasibility analysis is and why it’s important.
2. Discuss the proper time to complete a feasibility analysis when developing an
entrepreneurial venture.
3. Describe the purpose of a product/service feasibility analysis and the two primary
issues that a proposed business should consider in this area.
4. Explain a concept statement and its contents.
5. Describe the purpose of a buying intentions survey and how it’s administered.
6. Explain the importance of library, Internet, and gumshoe research.
7. Describe the purpose of industry/target market feasibility analysis and the two
primary issues to consider in this area.
8. Discuss the characteristics of an attractive industry.
9. Describe the purpose of organizational feasibility analysis and list the two primary
issues to consider in this area.
10. Explain the importance of financial feasibility analysis and list the most critical
issues to consider in this area.
CHAPTER OVERVIEW
This chapter introduces feasibility analysis, and makes the case for the importance of
feasibility analysis as a way of testing the potential viability of a business idea. The
chapter stresses that the proper time to complete a feasibility analysis is after opportunity
recognition but before the completion of a business plan. The value of completing a
concept statement is discussed. A concept statement is a one-page description of a
business idea, which an entrepreneur uses to solicit feedback about the potential viability
of the idea.
The four stages of feasibility analysis are introduced, including product/service
feasibility, industry/target market feasibility, organizational feasibility, and financial
feasibility. The major issues to consider in each stage of feasibility analysis are
introduced and discussed.
A feasibility analysis software product, called Feasibility Analysis Pro, is available for
this textbook that provides an excellent means to enhance the value of this chapter.
CHAPTER OUTLINE
I. Feasibility Analysis
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Chapter 3: Feasibility Analysis
A. Product/Service Feasibility Analysis
1. Product/Service Desirability
a. Concept Test
2. Product/Service Demand
a. Buying Intentions Survey
b. Library, Internet, and Gumshoe Research
B. Industry/Target Market Feasibility
1. Industry Attractiveness
2. Target/Market Attractiveness
C. Organizational Feasibility Analysis
1. Management Prowess
2. Resource Sufficiency
D. Financial Feasibility Analysis
1. Total Start-Up Cash Needed
2. Financial Performance of Similar Businesses
3. Overall Financial Attractiveness of the Proposed Venture
II. First Screen
CHAPTER NOTES
I. Feasibility Analysis
1. Feasibility analysis is the process of determining if a business idea is viable.
2. As a preliminary evaluation of a business idea, a feasibility analysis is
completed to determine if an idea is worth pursuing and to screen ideas before
spending resources on them.
3. It follows the opportunity recognition stage but comes before the development
of a business plan, as illustrated in Figure 3.1 in the textbook.
4. Although the sequence pictured in Figure 3.1 makes perfect sense, statistics
show that the majority of entrepreneurs do not follow this pattern before
launching their ventures. Several studies have investigated why this is the
case. The consensus of the research is that entrepreneurs tend to underestimate
the amount of competition there will be in the marketplace and tend to
overestimate their personal chances for success.
A. Product/Service Feasibility Analysis—is an assessment of the overall appeal
of the product or service being proposed.
1. Product/Service Desirability
a. A concept test entails showing a representation of the product or
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service to prospective users to gauge customer interest, desirability,
and purchase intent.
b. There are three primary purposes for a concept test: (1) to valuate
the underlying premises of a product or service that an entrepreneur
thinks is compelling; (2) to help develop an idea; and (3) to estimate
the potential market share the product or service might command.
c. A well-designed concept test, which is usually called a concept
statement, includes the following:
- A description of the product or service being offered
- The intended target market
- The benefits of the product or service
- A description of how the product will be positioned relative to
similar ones in the market
- A brief description of the company’s management team
2. Product/Service Demand
a. A buying intentions survey is an instrument that is used to gauge
customer interest in a product or service.
b. It consists of a concept statement or a similar description of a product
or service with a short survey attached. The statement and survey
should be distributed to 20 to 30 potential customers to be completed.
(People who completed the concept statement test should not be asked
to complete this survey.)
c. One caveat is that people who say that they intend to purchase a product
or service don’t always follow through; as a result, the numbers
resulting from this activity are almost always optimistic.
d. It’s also important to conduct library, Internet, and gumshoe research.
While administering a buying intentions survey is important, more data
is needed.
B. Industry/Target Market Feasibility
* Is an assessment of the overall appeal of the market for the product or service
being produced.
1. Industry Attractiveness
a. Industries vary considerably in terms of their growth rate, as shown
in table 3.5 in the textbook. In general, the most attractive industries
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are characterized as the following:
- Are young rather than old
- Are early rather than late in their life cycles
- Are fragmented rather than concentrated
- Are growing rather than shrinking
- Sell products or services that customers “must have” rather than
“want to have”
- Are not crowded
- Have high rather than low operating margins
- Are not highly dependent on the historically low price of a key raw
material, like gasoline or flour, to remain profitable
b. 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 research and secondary research.
i. Primary research is research that is original and is collected by
the entrepreneur.
ii. Secondary research probes data that are already collected, such
as those shown in Appendix 3.2.
2. Target/Market Attractiveness
a. A target market is a place within a larger market segment that
represents a narrower group of customers with similar needs.
b. The challenge in identifying an attractive target market is to find
a market that’s large enough for the proposed business but is yet
small enough to avoid attracting larger competitors at least until
the entrepreneurial venture can get off to a successful start.
c. The sources of information to mine and tap are not as transparent
when investigating target market attractiveness opposed to industry
attractiveness.
C. Organizational Feasibility Analysis– Is conducted to determine whether a
proposed business has sufficient management expertise, organizational
competence, and resources to successfully launch its business.
1. Management Prowess
a. A firm should candidly evaluate the prowess, or ability, of its
management team.
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b. Two of the most important factors in this area are the passion
that the sole entrepreneur or management team has for the
business idea and the extent to which the management team
or sole entrepreneur understands the markets in which the firm
will compete.
2. Resource Sufficiency
a. The second area of organizational feasibility analysis is to determine
whether the potential new venture has sufficient resources to move
forward in order to successfully develop a product or service idea.
b. The focus in organizational feasibility analysis should be on
nonfinancial resources in that financial feasibility is considered
separately.
c. Types of nonfinancial resources that are critical to many start-ups’
success (Table 3.7)
- Affordable office space
- Lab space, manufacturing space, or space to launch a service business
- Contract manufacturers or service providers
- Key management employees (now and in the future)
- Key support personnel (now and in the future)
- Key equipment needed to operate the business (computers,
machinery, delivery vehicles)
- Ability to obtain intellectual property protection
- Support of local governments and state government if applicable
for business launch
- Ability to form favorable business partnerships
D. Financial Feasibility Analysis– Is the final stage of analysis. For feasibility
analysis, a quick financial assessment is usually sufficient.
1. Total Start-Up Cash Needed
a. The 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
generate the first $1 in revenues.
i. The financial feasibility analysis should state specifically where the
money will come from to fund the venture’s start-up costs.
2. Financial Performance of Similar Businesses
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a. 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 number will
result in approximate rather than exact numbers.
b. There are several ways of doing this, all of which involve a little ethical
detective work.
3. Overall Financial Attractiveness of the Proposed Venture
a. A number of other factors are associated with evaluating the financial
attractiveness of a proposed venture.
b. Typically, these evaluations are based primarily on a new venture’s
projected financial rate of return. At the macro level, the following
factors should be considered to determine whether the projected
return is adequate to justify the launch of the business.
- The amount of capital invested
- The risks assumed in launching the business
- The existing alternatives for the money being invested
- The existing alternatives for the entrepreneur’s time and efforts
c. 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.
4. Overall Attractiveness of the Investment
a. A number of other financial factors are associated with promising
business opportunities. Examples are reflected in Table 3.8 in the
textbook.
II. First Screen
1. First Screen, shown in Appendix 3.1, is a template for completing a feasibility
analysis. It is called First Screen because a feasibility analysis is an
entrepreneur’s (or a group of entrepreneurs’) initial pass at determining the
feasibility of a business idea.
2. The mechanics for filling out the First Screen worksheet are straightforward.
It maps the four areas of feasibility analysis described in the chapter,
accentuating the most important points in each area.
3. The final section of the worksheet, “Overall Potential,” includes a section
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that allows for suggested revisions to the business idea to improve its
potential or feasibility.
BOXED FEATURES: QUESTIONS FOR CRITICAL THINKING
What Went Wrong?
Visa Cash in Hong Kong: How Feasible Was it?
1. Describe the difference between Visa Cash and Octopus cards.
Answer: The Octopus card adopts RFID technology while Visa Cash does not,
forcing users to insert the card in reading machines for processing. Since the
Octopus card can be used in many contactless ways, people do not need to take out
their cards from their bags, allowing users to place their bags above the card
reader. This design saves time and simplifies life for millions of public
transportation passengers.
2. What can a start-up learn from the experience of Visa Cash about the importance
of a feasibility analysis?
Answer: That feasibility analysis is important for a start-up business. The
