Chapter 3: Feasibility Analysis
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CHAPTER 3
FEASIBILITY ANALYSIS
LEARNING OBJECTIVES
1.
Explain what a feasibility analysis is and why it’s important.
2.
Describe a product/service feasibility analysis, explain its purpose, and discuss the
two primary issues that a proposed business should consider in this area.
3.
Describe an industry/market feasibility analysis, explain its purpose, and discuss
the two primary issues to consider when completing this analysis.
4.
Explain what an organizational feasibility analysis is and its purpose and discuss
the two primary issues to consider when completing this analysis.
5.
Describe what a financial feasibility analysis is, explain its importance, and discuss
the most critical issues to consider when completing this analysis.
6.
Describe a feasibility analysis template and explain why it is important for
entrepreneurs to use this template.
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. The chapter concludes by introducing First Screen, which is a
CHAPTER OUTLINE
I. Feasibility Analysis
II. Product/Service Feasibility Analysis
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A. Product/Service Desirability
B. Product/Service Demand
III. Industry/Target Market Feasibility Analysis
A. Industry Attractiveness
B. Target Market Attractiveness
IV. Organizational Feasibility Analysis
A. Management Prowess
B. Resource Sufficiency
V. Financial Feasibility Analysis
A. Total Start-Up Cash Needed
B. Financial Performance of Similar Businesses
C. Overall Financial Attractiveness of the Proposed Venture
VI. A Feasibility Analysis Template
CHAPTER NOTES
I. Feasibility Analysis
A. Feasibility analysis is the process of determining if a business idea is viable.
B. 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.
C. It follows the opportunity recognition stage but comes before the development of
a business plan, as illustrated in Figure 3.1 in the textbook.
D. 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.
E. Completing a feasibility analysis requires both primary and secondary research.
Primary research is research that is collected by the person or persons completing
the analysis. Secondary research probes data that is already collected.
II. Product/Service Feasibility Analysis
Product/service feasibility analysis is an assessment of the overall appeal of the
product or service being proposed.
There are two components to product/service feasibility analysis: product/service
desirability and product/service demand.
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A. Product/Service Desirability—The first component of product/service feasibility
analysis is to affirm that the proposed product or service is desirable and serves a
need in the marketplace.
1. Concept Test
a. A concept test entails 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
b. After the concept statement is developed, it should be shown to at least 25
people who are familiar with the industry that the firm plans to enter and
can provide informed feedback.
c. The concept statement for a fictitious company named New Venture
Fitness Drinks is included in Figure 3.2 in the chapter.
i. A description of the product or service being offered
ii. The intended target market
2. Online Tools Available for Completing Feasibility Analysis
a. Rather than developing a formal concept statement, some entrepreneurs
conduct their initial product/service feasibility analysis by simply
talking through their ideas with prospective customers. The ideal
combination is to do both—distribute a concept statement and engage in
verbal give-and-take with as many industry experts and prospective
customers as possible.
b. There are also a growing number of online tools that help entrepreneurs
quickly and inexpensively make contact with prospective customers and
complete other steps in the feasibility analysis process. A sample of the
online tools that are available are provided in Table 3.2 in the chapter.
B. Product/Service Demand—The second component of product/service feasibility
analysis is to determine if there is demand for the product or service. The
commonly used methods for doing this are shown below.
47
1. Talking Face-to-Face with Potential Customers
a. The only way to know if your product or service is what people want is by
2. Utilizing Online Tools, Such As Google AdWords and Landing Pages, to
Assess Demand
3. Library, Internet, and Gumshoe Research
a. The third way to assess demand for a product or service idea is by
conducting library, Internet, and gumshoe research. Although talking to
prospective customers is critical, collecting secondary data on an industry
or business idea is also helpful.
b. For your particular product or service you need archival as well as primary
forms of research to assess likely demand. Your college or university
library is a good place to start.
III. Industry/Target Market Feasibility Analysis
Industry/target market feasibility is an assessment of the overall appeal of the
industry and the target market for the product or service being proposed.
An industry is a group of firms producing a similar product or service, such as
airplanes, fitness drinks, or children’s toys. A target market is the limited portion
Chapter 3: Feasibility Analysis
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of the industry that a particular business goes after. Most firms do not try to
service an entire industry.
A. Industry Attractiveness—Industries vary in terms of their overall attractiveness. In
general, the most attractive industries have the following characteristics (Table
3.4):
1. Are young rather than old
2. Are early rather than late in their life cycle
3. Are fragmented rather than concentrated
4. Are growing rather than shrinking
B. Target Market Attractiveness
1. A target market is a place within a larger market segment that represents a
narrow group of customers with similar needs.
2. The challenge in identifying an attractive target market is to find a market
3. The sources of information to mine and tap are not as obvious when
investigating target market attractiveness opposed to industry attractiveness.
IV. Organizational Feasibility Analysis
Organizational feasibility analysis is conducted to determine whether a proposed
venture 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.
A. Management Prowess
1. A firm should candidly evaluate the prowess, or ability, of its management
team.
2. 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.
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B. Resource Sufficiency
1. 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.
2. The focus in organizational feasibility analysis should be on nonfinancial
resources that are critical to many start-ups’ success (Table 3.5).
3. Types of nonfinancial resources that are critical to many start-ups’ success:
a. Affordable office space
b. Lab space, manufacturing space, or space to launch a service business
c. Contract manufacturers or service providers
d. Key management employees (now and in the future)
V. 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.
The most important issues to consider at this state are total start-up cash needed,
financial performance of similar businesses, and the overall financial
attractiveness of the proposed venture.
A. Total Start-Up Cash Needed
1. 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.
a. The financial feasibility analysis should state specifically where the
money will come from to fund the venture’s start-up costs.
B. Financial Performance of Similar Businesses
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1. The second component of financial feasibility analysis is estimating a
2. There are several ways of doing this, all of which involve a little ethical
detective work.
C. Overall Financial Attractiveness of the Proposed Venture
1. A number of other factors are associated with evaluating the financial
attractiveness of a proposed venture.
2. 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.
a. The amount of capital invested
b. The risks assumed in launching the business
d. The existing alternatives for the entrepreneur’s time and efforts
3. 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.
D. Overall Attractiveness of the Investment
1. A number of other financial factors are associated with promising business
opportunities. Examples are reflected in Table 3.6 in the textbook.
VI. A Feasibility Analysis Template
A. First Screen, shown in Appendix 3.2, is a template entrepreneurial firms use to
complete a feasibility analysis.
B. It is called First Screen because a feasibility analysis is an entrepreneur’s (or
group of entrepreneurs’) initial pass at determining the feasibility of a business
idea.
C. 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.
Chapter 3: Feasibility Analysis
D. The final section of the worksheet, “Overall Potential,” includes a section that
allows for suggested revisions to the business idea to improve its potential or
feasibility.
BOXED FEATURES: QUESTIONS FOR CRITICAL THINKING
What Went Wrong?
How Feasible Was the Keurig At-Home Soda Machine to Begin With?
1.
Of the five facts that contributed to Kold’s failure, which one do you think was the
most damaging? Explain your answer.
Answer: Students will vary in terms of their answers to this question. Many
students will say that reason #1 and reason #5 were particularly damaging. It is
critical that entrepreneurs have a strong understanding of the industries that they
enter, and get their products in the hands of customers (for feedback) as soon as
possible. The Keurig Kold may have had a completely different outcome if those
two issues had been handled differently.
2.
Describe the feasibility analysis that Keurig Kold should have conducted prior to
the Kold’s debut. Do you think Keurig would have produced the same product if
they had followed your recommendations? In what ways do you think the product
would have been different?
Answer: The feasibility analysis that Keurig should have conducted for the Kold
should have focused on where the typical customer would place the machine at
home to get a sense of the size dimension. It should have addressed the serving
size issue in addition to the place of use issue for electrical connection. Keurig
may not have produced at all if they had a proper feasibility study because they
would have gotten the point that people don’t make soda at home.
3.
Why is it so difficult to change people’s behavior? How would you have gone
about convincing people that making soda in their home is a good idea?
Answer: Behaviors are ingrained and so hard to change. SodaStream has
tremendous acceptance in Europe because of the sustainability issue – buying
bottles and cans pose a recycling problem; making soda at home using a
SodaStream solves that. That may have been a good way to position the Kold.
4.
Write a 200-word essay on what a start-up can learn about feasibility analysis from
the Keurig Kold failure.
Answer: The essay should talk about the following. That feasibility analysis is an
absolute necessity, regardless of how “hot” an industry is or how attractive the
business idea seems when describing it to others. Obviously, Keurig didn’t
Chapter 3: Feasibility Analysis
anticipate that their product would fail when they launched it. They felt confident
that they were proceeding in a fruitful manner. They were wrong—on all the five
major dimensions. Certainly, a carefully conducted feasibility analysis would have
been helpful in avoiding mistakes and maximizing their chances for success.
Savvy Entrepreneurial Firm
Prototyping: How to Build What the Customer Wants
1.
What are the advantages of showing rough prototypes to potential customers, like
those produced for Step 1 and Step 2, rather than showing them a well-developed
prototype to begin with?
Answer: Prototyping is an iterative process and each iteration costs the
entrepreneur time and money. Showing Step 1 and Step 2 prototypes has the
advantage of falling down early and getting up quickly to make changes. A
drawing and a description and a prototype made of (say) cardboard can be done
quickly and important feedback can be obtained before going forward.
2.
Make a list of the things the inventor of the new toaster in the feature might learn
as a result of the prototyping process.
Answer: Students are likely to come up with a variety of factors. Possible
questions include: size of the toaster (given kitchen space) – the inventor’s original
may not fit apartment kitchens; perhaps the toaster should have wheels for easy
movement across the kitchen top.
3.
For the prototyping process described above, why was it necessary to go into the
homes of the people who might use the device? Couldn’t similar information have
been learned in a lab?
Answer: It is important to track how people use the toaster in their kitchen. This
cannot be done in a lab; it has to be done in the very place where the toaster is
going to reside – the kitchens of buyers. Just like the founders of Owlet Baby
Monitors found out that owners liked to move the base from room to room, the
product has to be observed when in use.
4.
Do some Internet research and learn about the “Lean Startup” movement. In what
ways is prototyping an essential part of the lean start-up approach?
Answer: While the Lean Startup methodology (theleanstartup.com) does not
explicitly talk about prototyping, it used a term called “minimum viable product”
which is essentially the same thing. The goal is to collect maximum information
about the product and its usage with minimum effort, which is the essence of
prototyping.
Chapter 3: Feasibility Analysis
Partnering for Success
Finding the Right Business Partner
1.
Think about your personality and work habits. What type of person (in terms of
personality and work habits) do you think you’d work well with and what type of
person do you think you’d be in constant conflict with?
Answer: This question makes for a good individual assignment.
2.
Do you think it’s a good idea or a bad idea to form a business partnership with a
close friend? How could you go about discerning if a good friend would make for
a good business partner?
Answer: There are both positives and negatives involved in partnering with a good
friend. On the positive side, it’s important to partner with someone you get along
with, trust, and like to spend time with. On the negative side, friends are often
reluctant to challenge one another when they think a mistake is being made,
because they don’t want to put their friendship at risk. In the end it’s a judgment
call. In regard to discerning whether a good friend would make for a good business
partner, your friend should be subject to the same criteria (mentioned in the article)
as any other potential business partner. It’s usually a mistake to cut your friend
slack on one or more of the criteria, just because he or she is a friend.
3.
Provide some suggestions, other than those mentioned in the feature, for places
(online or offline) for finding a business partner.
Answer: This is a good question for a group or individual assignment. Urge your
students to think about the networking events and other resources that are available
at your college or university and in your local community for making connections
with potential business partners. An example would be taking a business plan
class. There are many examples of students who met one another in a business
plan class, worked together on a business plan to fulfill class requirements, and
then actually started the business after graduation.
4.
Spend some time looking at LinkedIn. How could you use LinkedIn to help find a
business partner?
Answer: One of the main purposes of LinkedIn is to help users maintain a list of
contacts with whom they have some level of relationship. As a result, if you
developed a robust list of contacts, you could reach out to your contacts indicating
that you’re looking for a business partner, and see if your contacts make any useful
recommendations.
Chapter 3: Feasibility Analysis
REVIEW QUESTIONS
3-1.
How would you describe the four areas that a properly executed feasibility
analysis explores?
Answer: Product/service feasibility analysis is an assessment of the overall
appeal of the product or service being proposed. 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. Organizational
feasibility analysis is conducted to determine whether a proposed business has
sufficient management expertise, organizational competence, and resources to
successfully launch its business. Financial feasibility analysis provides a quick
financial assessment of the viability of a business idea.
3-2.
What is a product/service feasibility analysis?
Answer: Product/service feasibility analysis is an assessment of the overall
appeal of the product or service being proposed.
3-3.
What is the difference between primary research and secondary research?
Answer: Primary research is research that is original and is collected by the
entrepreneur. An example would be an entrepreneur distributing a concept
statement of a business idea and asking for feedback. Secondary research
probes data that are already collected. An example would be an entrepreneur
studying industry publications to gain information about potential customers
and competitors.
3-4.
What is a concept statement?
Answer: A concept statement is a preliminary description of a business. A
concept statement represents the first step in a feasibility analysis. Feedback
from the concept statement helps direct the remaining stages of the feasibility
analysis.
3-5.
What are the two ways that entrepreneurs assess the likely product demand for
the proposed product or service they are analyzing?
Answer: By talking face-to-face with potential customers and via utilizing
online tools, such as Google AdWords and landing pages.
3-6.
What is gumshoe research in the context of product/service feasibility analysis?
Answer: In the context of product/service feasibility analysis, gumshoe research
is doing what it takes, which may involve scrounging for information and clues
wherever they can be found, to gain insight about the demand for a product
idea.
3-7.
What is industry/target market feasibility analysis?
Answer: Industry/target market feasibility analysis is an assessment of the
overall appeal of the market for the product or service being proposed. The two
components of industry/target market feasibility analysis are industry
attractiveness and target market attractiveness.
3-8.
What are the attributes or characteristics of an attractive industry for a new
venture?
Answer: In general, the most attractive industries for new ventures have the
following characteristics:
Are young rather than old
Are early rather than late in their life cycle
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,
such as gasoline or flour, to remain competitive
3-9.
What is a target market?
Answer: A target market is a place within a larger market segment that
represents a narrower group of customers with similar needs. Most start-ups
don’t have the resources needed to participate in broad markets, 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.
3-10.
Why do most start-ups focus on relatively small target markets to begin with
rather than larger markets with more substantial demand?
Answer: Because it takes substantial resources to attack a large market.
Entrepreneurial firms typically have only the resources and the expertise to