978-0134741086 Chapter 4 Part 1

SECTION II. THE ENTREPRENEURIAL JOURNEY BEGINS

CHAPTER 4. CONDUCTING A FEASIBILITY ANALYSIS AND

DESIGNING A BUSINESS MODEL

Part 1: Learning Objectives

1. Describe the process of conducting an idea assessment.

2. Present the elements of a feasibility analysis.

3. Describe the six forces in the macro environment of an industry.

4. Understand how Porter’s Five Forces Model assesses the competitive environment.

5. Describe the various methods of conducting primary and secondary market research.

6. Understand the four major elements of a financial feasibility analysis.

7. Describe the process of assessing entrepreneur feasibility.

8. Describe the nine elements of a business model in the Business Model Canvas.

Part 2: Class Instruction

Introduction

Five critical steps guide the process of going from idea generation to growing a successful

Idea Assessment LO 1

An idea assessment helps to efficiently evaluate the numbers ideas that come out of the

creative process. The idea sketch pad in Figure 4.2, Idea Sketch Pad, is an effective tool

used to help assess ideas in a relatively short period of time by asking a series of key

questions addressing five key parameters.

1. Customers.

2. Offering – a description of the product or service.

3. Value proposition of how your business will be important to the customers.

4. Core competencies to differentiate from competitors.

5. People on the management team.

Placing the answers to these questions on the sketch pad, entrepreneurs can clearly

visualize gaps or weaknesses, and change the idea to improve its chances for success.

Feasibility Analysis LO 2

A feasibility analysis is the process of determining if the idea is a viable foundation for

of the industry of interest. Refer to Figure 4.4, Environmental Forces and New Ventures.

Industry and Market Feasibility LO 3

The first step in assessing industry attractiveness is to paint a picture of the industry in

4. Economic changes can make or break industries.

5. Political and legal changes create opportunities for entrepreneurs.

6. Global trends create opportunities for even the smallest companies.

Entrepreneurs should ask the following questions to evaluate the six foundational macro

trends to determine the attractive of an industry:

 How large is the industry, and how fast is it growing?

 Is the industry as a whole profitable?

 Is the industry characterized by high profit margins or razor-thin margins?

Porter’s Five Forces Model LO 4

Porter’s Five Forces model (refer to Figure 4.7, Five Forces Model of Competition)

the industry, The bargaining power of buyers, threat of new entrants to the industry, and

threat of substitute products or services.

1. Rivalry Among Companies Competing in the Industry. The strongest of the five

forces in most industries is the rivalry that exists among the businesses competing in a

2. Bargaining Power of Suppliers to the Industry. The greater the advantage that

suppliers of key raw materials or components have, the less attractive is the industry.

An industry is generally more attractive when:

3. Bargaining Power of Buyers. Buyers have the potential to exert significant power over

businesses. When the number of customers is small and the cost of switching to a

competitor’s product is low, buyers have a high level of influence. An industry is

4. Threat of New Entrants. The larger the pool of potential new entrants to an industry,

the greater is the threat to existing companies in it. This is particularly true in industries

where the barriers to entry, such as capital requirements, specialized knowledge, access

to distribution channels, and others are low. An industry is generally more attractive to

new entrants when these factors exist:

5. Threat of Substitute Products or Services. Substitute products or services can turn an

entire industry on its head. An example is the growing trend of companies using plastic

containers instead of glass. An industry is generally more attractive when:

Table 4.1, The Five-Forces Matrix, is a quantitative tool that assesses importance and the

degree of threat to provide a weighted score. This approach can help leverage insight from

the five forces assessment.

Market Niches. The next step in assessing an industry is to identify potentially attractive

 How large is this market segment, and how fast is it growing?

 What is the basis for differentiating our product or service from competitors?

 Do we have a superior business model that will be difficult for competitors to

reproduce?

Generally a niche strategy is a good way to enter as it usually takes fewer resources for

the start–up due to lower marketing costs and the ability to start on a smaller scale.

However, entrepreneurs should be aware of some cautions:

 Entering a niche requires adaptability in the initial plan.

 Niches change.

 Niches can go away.

 Niches can grow.

Product or Service Feasibility Analysis:

Is There a Market? LO 5

A product or service feasibility analysis determines the degree to which a product or

which involves gathering data that has already been compiled and is available. Primary

research tools include:

 Customer Surveys. These should be short and carefully worded, use a simple

ranking system, and used with people who represent the target market of the

business.

homes to observe them as they use the product or service.

 “Windshield” Research. Researchers observe customers’ interactions with

existing businesses.

Secondary research should be used to support, not replace, primary research. It is usually

less expensive to collect than primary data, and includes the following resources:

 Forecasts

 Market Research

 Articles

 Local Data

 The Internet

Consider using Hands On… How To “Do You Want Fries with Those

Crickets?” at this point.

Financial Feasibility Analysis:

Is There Enough Margin? LO 6

The third component of a feasibility analysis involves assessing the financial feasibility.

This step involves assessing these four elements:

 Capital Requirements. This refers to the amount of money needed to start the

business. The typical start–up in the United States is launched with an average of

$30,000, and one in five starts with no funding. Bootstrapping is the process of

finding creative ways to exploit opportunities with limited resources.

requirements to determine the rate of return the venture is expected to produce.

Wise entrepreneurs take the time to test their ideas to determine the viability of the

concept as a business.

Entrepreneur Feasibility:

Is This Idea Right for Me? LO 7

Many new businesses require that an entrepreneur have a certain set of knowledge,

experiences, and skills to have any chance of being success. This is called entrepreneurial

readiness. Another way to ensure the necessary knowledge and skills are in place is

through building a team.

Beyond the entrepreneur’s readiness to start a business, the second aspect is to assess

whether the business can meet the financial and nonfinancial needs of the entrepreneur and

the team. For example, will the business be able to generate enough profit to support

everyone’s income needs? Does the business fit the goals and aspirations the entrepreneur

has outside of work? Refer to Table 4.2, Entrepreneurial Self-Assessment.

with a dynamic framework to guide them through the process. Refer to Figure 4.8, The

Business Model Canvas.

The canvas is comprised of nine elements:

1. Customer Segments. Identify a segment of customers who have a clearly defined

2. Value Proposition. A compelling value proposition is at the heart of every

successful business. The value proposition is the collection of products and/or

3. Customer Relationships. What level of customer service is expected by your

4. Channels. In the business model canvas, channels refer to both communication

product, which is the simplest version of a product or service that can create a

sustainable business.

o Customer pivot – changes in the target customer description.

o Revenue model pivot – changes in the way the firm generates revenue.

Consider using You Be the Consultant: “RendezWoof: Creating a Minimal Viable

Product for a Mobile App” and/or You Be the Consultant: “When to Call It Quits

on a New Business” at this point.

Conclusion