Copyright ©2014 Pearson Education, Inc.

publishing as Prentice Hall

Chapter 4 Conducting a Feasibility Analysis and

Crafting a Winning Business Plan

Part 1: Learning Objectives

1. Discuss the steps involved in subjecting a business idea to a feasibility analysis.
2. Explain why every entrepreneur should create a business plan as well as the
benefits of developing a plan.
3. Describe the elements of a solid business plan.
4. Explain the “Five Cs of Credit” and why they are important to potential lenders
and investors reading business plans.
5. Describe the keys to making an effective business plan presentation.

Part 2: Class Instruction

Introduction
An entrepreneur needs a well-conceived and factually based business plan to increase the
likelihood of success. Research has documented that companies that perform business
planning outperform those that do not. Conducting a feasibility analysis is the first
step in developing an effective business plan.
A ​business model defines the process a company applies to generate sales and profit and
is comprised of these seven components:
1. A definition of your target customers and how your company will reach them
2. The customer value proposition your company offers
3. Point of differentiation
4. Pricing
5. Selling process
6. Distribution system
7. Customer support
Conducting a Feasibility Analysis LO 1
For many entrepreneurs, coming up with an idea for a new business concept or approach
is easy. A ​feasibility analysis is the process of determining if the idea is a viable
foundation for creating a successful business. If the idea meets the necessary criteria,
the entrepreneur’s next step is to build a solid business plan for capitalizing on the
idea. If the idea fails, the entrepreneur abandons it and moves on to the next
opportunity. It is about learning, being efficient, and increasing the chances for

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success before investing resources. Conducting a feasibility study reduces the

likelihood that entrepreneurs will pursue fruitless business ventures.
A feasibility study is ​not​ the same as a business plan.
A ​feasibility study is an investigative tool to answer the question, “Should we proceed
with this business idea?” It serves as a filter, screening out ideas that lack the
potential for building a successful business, ​before an entrepreneur commits the
necessary resources to building a business plan.
A ​business plan​ is a planning tool for transforming an idea into reality.
Feasibility studies are particularly useful when entrepreneurs have generated multiple
ideas for business concepts and must winnow their options down to the “best choice.”
A feasibility analysis consists of three interrelated components:
1. An industry and market feasibility analysis,
2. A product or service feasibility analysis, and
3. A financial feasibility analysis.
Addressing these questions helps entrepreneurs determine whether the potential for
sufficient demand for their products and services exists. We will first explore
techniques to assess the “Industry and Market Feasibility” aspect of the Feasibility
Analysis.
When evaluating the feasibility of a business idea, entrepreneurs find a basic analysis of
the industry and targeted market segments a good starting point. The focus in this
phase is two-fold:
1) To determine how attractive an industry is overall as a “home” for a new
business, and;
2) To identify possible niches a small business can occupy profitably.
Porter’s Five Forces model evaluates five key forces that determine the setting in which
companies compete. Hence, the attractiveness of the industry based upon these five
considerations:
1) The rivalry among the companies competing in the industry,
2) The bargaining power of suppliers to the industry,
3) The bargaining power of buyers,
4) The threat of new entrants to the industry, and
5) The threat of substitute products or services.

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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
particular market. This force makes markets a dynamic and highly competitive place.
An industry is generally more attractive when:
● The number of competitors is large, or, at the other extreme, fewer than five.
● Competitors are not similar in size or capability.
● The industry is growing at a fast pace.
● The opportunity to sell a differentiated product or service is present.
Bargaining power of suppliers – ​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:
● Many suppliers sell a commodity product to the companies in it.
● Substitute products are available for the items suppliers provide.
● Companies find it easy to switch suppliers or to substitute products.
● When the items suppliers provide the industry account for a relatively small
portion of the cost of the industry’s finished products.
Bargaining power of buyers – B ​ uyers 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
generally more attractive when:
● Industry customers’ “switching costs” are high

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● The number of buyers is large

● Customers demand differentiated products
● Customers find it difficult to gain access to information about buyers
● The products companies sell account for a small portion of the cost of their
customers’ finished goods.
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:
● Economies of scale are absent
● Capital requirements to enter are low
● Cost advantages are not related to company size
● Buyers are not brand-loyal
● Governments do not restrict new companies from entering the industry
Threat of substitute products or services – ​Substitute products or services can turn an
entire industry on its head. An industry is generally more attractive when:
● Quality substitutes are not readily available
● Prices of substitute products are not significantly lower that those of the
industry’s products
● Buyer’s switching costs are high
After surveying the power these five forces exert on an industry, entrepreneurs can
evaluate the potential for their companies to generate reasonable sales and profits in a
particular industry to answer the question, “Is this industry a good one for my
business?” Note that the lower the score for an industry, the more attractive it is.
Table 4.1 - The Five-Forces Matrix on page 132 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.
Business prototyping enables entrepreneurs to test their business models on a small scale.
Business prototyping recognizes that every business idea is a hypothesis that needs to
be tested. If the test supports the hypothesis and its accompanying assumptions, it is
time to launch a company. If the prototype fails, the entrepreneur scraps the business
idea with only minimal losses and turns to the next idea.
A ​product or service feasibility analysis determines the degree to which a product or
service idea appeals to potential customers and identifies the resources necessary to
produce the product or provide the service. This portion of the feasibility analysis
addresses two important questions:

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1. Are customers willing to purchase our goods and services?

2. Can we provide the product or service to customers at a profit?
Getting that feedback might involve using engaging in primary research such as
customer surveys and focus groups, gathering secondary customer research, building
prototypes, and conducting in-home trials can help answer these questions.
Information gained through primary or secondary research may also prove invaluable.
The ​financial feasibility analysis of a venture is the final component of the feasibility
analysis. This step involves assessing these three elements:
1. Capital requirements
2. Estimated earnings
3. Return on investment
Wise entrepreneurs take the time to test their ideas to determine the viability of the
concept as a business.
Why Develop a Business Plan? LO 2
The plan serves as an entrepreneur’s road map to building a successful business. It
describes the direction the company is taking, what its goals are, where it wants to be,
and how it plans to get there.
The business plan serves three essential functions:
1. The business plan provides an operational guide for action and success;
2. The business plan attracts lenders, and;
3. The business plan is a reflection of its creator.

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A viable business plan is capable of passing three “tests” including:

1. The reality test
2. The competitive test
3. The value test
A business plan can increase your chances for success and serve as a guide through
uncertain and new experiences.
The Elements of a Business Plan LO 3
Every business plan is unique. There are many resources available to use as a guide. The
seemingly overwhelming task of building a business plan is easily broken down into
workable parts that any student or entrepreneur can undertake. Plans may include the
following:
● Executive Summary
● Mission Statement
● Company History
● Business and Industry Profile
● Objectives
● Business Strategy
● Description of Firm’s Product/Service
● Marketing Strategy
● Documenting Market Claims
● Competitor Analysis
● Description of the Management Team
● Plan of Operation
● Forecasted or Pro-Forma Financial Statements
● The Loan or Investment Proposal

In addition, there are ten tips on preparing your business plan that can save time and help
to create a more cohesive and impressive overall plan.
1. Have a cover
2. Check for spelling and grammar
3. Create a visual appeal
4. Include a table of contents
5. Make it interesting and compelling
6. Demonstrate its profit potential
7. Use spreadsheets
8. Include cash flow projections
9. Keep it concise and “crisp”
10. Tell the truth – always!

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What Lenders and Investors Look for in a Business Plan LO 4

Bankers and other lenders include the “five Cs” of credit as a part of their evaluation of
the credit-worthiness of loan applications. The higher a business scores on the
evaluation, the greater its chance will be of receiving a loan based on these five
criteria:
1. Capital
2. Capacity
3. Collateral
4. Character
5. Conditions
Making the Business Plan Presentation LO 5
Keys to making an effective business plan presentation include the following:
● Demonstrate enthusiasm, but don’t be too emotional.
● Know your audience.
● “Hook” investors quickly with an up-front explanation of the new venture, its
opportunities, and the benefits to them.
● Keep it simple and to the point.
● Avoid the use of technological terms.
● Use visual aids.
● Close by reinforcing the nature of the opportunity and the related benefits to
investors.
● Be prepared for questions.
● Follow up with every investor to whom you make a presentation.
Business Plan Format — ​contents and sources
Review the business plan outline in the text. This may also be an opportunity to show the
business plan outline from “Business Plan Pro” as an example to the class. Emphasize
that although business plans may vary regarding the order of information, good
business plans contain the same basic elements.

Conclusion
There are no guarantees for entrepreneurial success. The “binder with the plan” is not as
valuable as the planning process itself. The business plan process may provide insight
and clarity of vision. Learning as much as possible before launching the business can
save the entrepreneur frustration and money!
The business plan: Entrepreneurs benefit from it; lenders and investors demand it!

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Part 3: Chapter Exercises

You Be the Consultant: “Does Your Business Model GEL?” pages 134
1. Use Debelak’s GEN analysis to evaluate the quality of PAYJr’s and
MyPunchbowl’s business models. (You may have to do more research to
evaluate each company more accurately.)
After conducting additional research on both companies, students may appreciate that
acquiring additional information may be valuable to apply the GEL analysis with
greater accuracy.
This is one potential response:
PAYJr 1. Large number of potential customers – ​quantification needed
2. There are ways to find these customers via “kid-based” Web
sites
3. Spending patters are predictable and traceable
4. Ongoing support may be limited and attractive
Overall Assessment: High
My Punchbowl 1. Select customers that have sporadic event planning needs
2. Challenging to find due to the fragmented market
3. Spending patters may be difficult to anticipate and track
4. Ongoing sales support may be demanding
Overall Assessment: Low
2. Based on your analysis in question number 1, would you invest in these
businesses? Explain.
The GEL analysis would rank PAYJr as more attractive – and that does not necessarily
mean that it will merit a student’s decision to invest.
3. What steps could the founders of these businesses take to improve the quality of
their business models?
Both need to conduct additional research to quantify their model, evaluate costs, forecast
revenues, and further assess the businesses ability to effectively connect with and
serve customers in a profitable manner. Testing their model may be a next step.

You Be the Consultant: “Battle of the Plans” pages 141-142

1. If your school does not already have a business plan competition, work with a
team of our classmates in a brainstorming session to develop ideas for creating
one. What would you offer as a prize? How would you finance the competition?
Whom would you invite to judge it? How would you structure the competition?
Students will generate a variety of ideas and you may look for these qualities:
● Are the recommendations creative?

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● Are they realistic?

● Are they practical for the school’s environment?
● Have they thought through the ramifications of their ideas?
● Is the financial proposal sound?
● What individuals or groups did the students propose for judging the
competition?
● How did they structure the competition and is that a viable format?
2. Use the Web to research business plan competitions at other colleges and
universities across the nation. Using the competitions at these schools as
benchmarks and the ideas you generated in Question 1, develop a format for a
business plan competition at your school.
Students will generate a variety of ideas and you may look for these qualities:
● Was there evidence of research conducted on other competitions?
● Were the recommendations based on this research?
● Is the overall concept sound? Is it realistic?
● What challenges might their format present that they did not address?
3. Assume that you are a member of a team of entrepreneurial students competing
in a prestigious business plan competition. Outline your team’s strategy for
winning the competition.
Student responses will vary and you may look for these general characteristics regarding
the proposed strategy:
The Business Plan
● Does the business plan have an effective executive summary that clearly
describes the market need and how the product or service will uniquely
address that need?
● Are the financial statements complete, clear and believable?
● Is there a solid strategy to acquire funding?
● Is there a plan to have the right people with the right skills and experience in
the right positions?
● Is there evidence of solid research behind the concept and the development of
the venture?
● Does the business plan tell a clear story about the venture using well-written
text, images, table and charts?

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The Presentation
● Does the presentation have a “hook” to engage the audience?
● Does the presentation offer a clear story about the venture using visuals with a
well-rehearsed script?
● Do the presenters and the concept itself seem credible?
● Do the presenters project confidence about the business potential?
● Was the presentation compelling?

Part 4: Chapter Discussion Questions

1. Explain the steps involved in conducting a feasibility analysis. (LO 1)
The feasibility analysis involves these steps:
1. Industry and market feasibility—​Industry attractiveness and five forces model
2. Product or service feasibility
3. Financial feasibility
2. Why should an entrepreneur develop a business plan? (LO 2)
The reasons for the entrepreneur to develop a business plan are twofold:
1. The business plan serves as a guide to company operations by charting a
future course and strategy.
2. The business plan attracts lenders and investors.
3. Describe the major components of a business plan. (LO 3)
Although a business plan should be tailored to fit each specific situation and
company, it typically includes: an executive summary, a mission statement, a
business and industry profile, a description of the company’s strategy, a profile of its
products or services, its marketing strategy and competitor/customer base analysis, a
management team profile, a plan of operation, financial data, and a loan or investment
proposal.
4. How can an entrepreneur seeking funds to launch a business convince potential
lenders and investors that a market for the product or service really does exist?
(LO 4)
Entrepreneurs can begin to convince lenders and investors that a market for their
product or service exists by conducting a market analysis and answering the
following five questions:
1. Who are the prospective buyers (specifically) for your products or services?
2. What is their motivation to buy?
3. How many customers does the market contain?
4. What are the projected annual sales?

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5. How will you outsmart the competition and capture market share?
5. How would you prepare to make a formal presentation of your business plan to
a venture capital forum? (LO 5)
As with all presentations, entrepreneurs should be informed and well prepared before
making business plan presentations. The following tips might also be helpful:
● Demonstrate enthusiasm, but don’t be overemotional.
● “Hook” investors quickly with an up-front explanation of the new venture, its
opportunities, and the anticipated benefits to them.
● Use visual aids.
● Hit the highlights, leave details to questions and later meetings.
● Avoid the use of technological terms.
● Close by reinforcing the nature of the opportunity and relate benefits to
investors.
● Be prepared for questions.
● Follow up with every investor.
6. What are the 5 Cs of credit? How does a banker use them when evaluating a
loan request? (LO 4)
The five Cs of credit include:
1. Capital
2. Capacity
3. Collateral
4. Character
5. Conditions
Bankers score the attractiveness of the business in terms of the five Cs: The greater the
score, the higher probability that the small business will receive the loan.

Part 5: Case Studies

The following text case may be used for lecture and assignments for topics presented in
this chapter.
● Case 4: Little Dudes and Divas

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Part 6: Online Videos and Podcasts

These online videos may enhance class discussion and provide additional insight for the
chapter topics.
● Berkeley Entrepreneurs Forum – Tech Entrepreneurship on the Global Stage
http://www.youtube.com/watch?v=-urhpWUDhko 1:48:23 minutes
● Developing A Successful Business Plan:
SBA Business Plan Webinar – Part 1: Introduction 2:17 minutes
http://www.youtube.com/watch?v=tEL_l7klIY8
● Feasibility Study Template 1:08 minutes
http://www.youtube.com/watch?v=gNsimuW0dJU
● Importance of a Business Plan to Raise Money 1:37 minutes
http://www.youtube.com/watch?v=-xLFZTxkgmM&NR=1
● How to Write a Business Plan 9:02 minutes
http://www.youtube.com/watch?v=x0y3VgjhGw0

Links to additional online resources are available on the companion Web site at
www.pearsonhighered.com/scarborough​.

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