Chapter 3

Feasibility Analysis

©2010 Pearson Education 3-1

 What Is Feasibility Analysis?

• Feasibility analysis is the

process of determining
whether
a business idea is viable.
Feasibility Analysis • It is the preliminary evaluation
of a business idea, conducted
for the purpose of determining
whether the idea is worth
pursuing.

©2010 Pearson Education 3-2

 When To Conduct a Feasibility Analysis

• Timing of Feasibility Analysis

– The proper time to conduct a feasibility analysis is early in
thinking through the prospects for a new business.
– The thought is to screen ideas before a lot of resources are
spent on them
• Components of a Properly Conducted Feasibility
Analysis
– A properly conducted feasibility analysis includes four
separate components, as discussed in the following slides.

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 Feasibility Analysis

Role of feasibility analysis in developing business ideas.

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 Research
• Primary research
Customer surveys and questionnaires, Focus groups

• Secondary research
Trade associations and business directories, Direct mail lists, Demographic
data, Census data, Forecasts, Market research, Articles, Local data, WWW

• Feasibility analysis allows ample opportunity for the idea to be revised,

altered, and changed as a result of the feedback that is obtained and the
analysis that is conducted.
• The key objective behind feasibility analysis is to put an idea to the test - by
talking to industry experts, surveying prospective customers, studying
industry trends, thinking through the financials, and scrutinizing it in other
ways.
• These types of activities not only help determine whether an idea is feasible
but also help shape and mold the idea.

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 Forms of Feasibility Analysis

Industry/Target Market
Product/Service Feasibility
Feasibility

Organizational Feasibility Financial Feasibility

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Outline for a Comprehensive Feasibility
Analysis

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 Product/Service Feasibility Analysis
1 of 2

Purpose
• Is an assessment of the overall
Product/Service appeal of the product or service
Feasibility Analysis being proposed.
• Before a prospective firm rushes
a new product or service into
development, it should be sure
that the product or service is what
prospective customers want.

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 Product/Service Feasibility Analysis
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Components of product/service
feasibility analysis

Product/Service Product/Service
Desirability Demand

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 Product/Service Desirability
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First, ask the following questions to determine the basic

appeal of the product or service.

• Does it make sense? Is it reasonable? Is it something consumers

will get excited about?
• Does it take advantage of an environmental trend, solve a
problem, or take advantage of a gap in the marketplace?
• Is this a good time to introduce the product or service to the
market?
• Are there any fatal flaws in the product or service’s basic design
or concept?

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 Product/Service Desirability
2 of 3

• Second, Administer a Concept Test

– A concept statement should be developed.
– A concept statement is a one page description of a
business, that is distributed to people who are asked to
provide feedback on the potential of the business idea.
– The feedback will hopefully provide the entrepreneur
• A sense of the viability or the product or service idea.
• Suggestions for how the idea can be strengthened or “tweaked”
before proceeding further.

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 Product/Service Desirability
3 of 3

New Venture
Fitness Drink’s
Concept Statement

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 Product/Service Demand
1 of 6

• Product/Service Demand
– Their are two steps to assessing product/service demand.
– Step 1: Administer a Buying Intentions Survey
– Step 2: Conduct library, Internet, and Gumshoe research

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 Product/Service Demand
2 of 6

• Buying Intentions Survey

– Is an instrument that is used to gauge customer interest in a
product or service.
– It consists of a concept statement or a similar description of
a product or survey with a short survey attached to gauge
customer interest.
– Internet sites like SurveyMonkey make administering a
buying intentions survey easy and affordable.

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 Product/Service Demand
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 Product/Service Demand
4 of 6

• Library, Internet, and Gumshoe Research

– The second way to assess the demand for a product or
service is by conducting library, Internet, and gumshoe
research.
– Reference librarians can often point you towards resources
to help you investigate a business idea, such as industry-
specific trade journal and industry reports.
– Internet searches can often yield important information
about the potentially viability of a product or service idea.

©2010 Pearson Education 3-16

 Product/Service Demand
5 of 6

Explanation
• A gumshoe is a detective or an
investigator that scrounges around
Gumshoe Research for information or clues wherever
they can be found.
• Be a gumshoe. Ask people
what they think about your product
or service idea. If your idea is to
sell educational toys, spend a week
volunteering at a day care center
and watch how children interact
with toys.
©2010 Pearson Education 3-17
 Product/Service Demand
6 of 6

• One of the most effective

things an entrepreneur
can do to conduct a
thorough product/service
feasibility analysis is to
hit the streets and talk to
potential customers.
• This potential entrepreneur
is administering a survey
about a new product idea.

©2010 Pearson Education 3-18

Industry/Target Market Feasibility Analysis
1 of 2

Purpose
• Is an assessment of the overall
appeal of the industry and the
Industry/Target Market target market for the proposed
Feasibility Analysis business.
• An industry is a group of firms
producing a similar product or
service.
• A firm’s target market is the
limited portion of the industry it
plans to go after.

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Industry/Target Market Feasibility Analysis
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Components of industry/target market

feasibility analysis

Target Market
Industry Attractiveness
Attractiveness

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 Industry Attractiveness
1 of 2

• Industry Attractiveness
– Industries vary in terms of their overall attractiveness.
– In general, the most attractive industries have the
characteristics depicted on the next slide.
– Particularly important—the degree to which environmental
and business trends are moving in favor rather than against
the industry .

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 Industry Attractiveness
2 of 2

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 Target Market Attractiveness

• Target Market Attractiveness

– 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.
– Assessing the attractiveness of a target market is tougher
than an entire industry.
– Often, considerably ingenuity must be employed to finding
information to assess the attractiveness of a specific target
market.

©2010 Pearson Education 3-23

 Organizational Feasibility Analysis
1 of 2

Purpose
• Is conducted to determine
Organizational Feasibility whether a proposed business has
Analysis sufficient management expertise,
organizational competence, and
resources to successfully launch
a business.
• Focuses on non-financial resources.

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 Organizational Feasibility Analysis
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Components of organizational
feasibility analysis

Management Prowess Resource Sufficiency

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 Management Prowess
1 of 2

• Management Prowess
– A firm should candidly evaluate the prowess, or ability, of
its management team to satisfy itself that management has
the requisite passion and expertise to launch the venture.
– Two of the most important factors in this area are:
• The passion that the solo entrepreneur or the founding team has for
the business idea.
• The extent to which sole entrepreneur or the founding team
understands the markets in which the firm will participate.

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 Management Prowess
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• An indication of passion
is the willingness of a
new venture team to
complete a
comprehensive
feasibility analysis.

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 Resource Sufficiency
1 of 2

• Resource Sufficiency
– This topic pertains to an assessment of whether an
entrepreneur has sufficient resources to launch the
proposed venture.
– To test resource sufficiency, a firm should list the 6 to 12
most critical nonfinancial resources that will be needed to
move the business idea forward successfully.
• If critical resources are not available in certain areas, it may be
impractical to proceed with the business idea.

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 Resource Sufficiency
2 of 2

Examples of nonfinancial resources that may be critical

to the successful launch of a new business
• Availability of affordable office or lab space.
• Likelihood of local and state government support of the business.
• Quality of the labor pool available.
• Proximity to key suppliers and customers.
• Willingness of high quality employees to join the firm.
• Likelihood of establishing favorable strategic partnerships.
• Proximity to similar firms for the purpose of sharing knowledge.
• Possibility of obtaining intellectual property protection in key areas.

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 Financial Feasibility Analysis
1 of 2

Purpose
• Is the final component of a
Financial Feasibility comprehensive feasibility analysis.
Analysis • A preliminary financial assessment
is sufficient.

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 Financial Feasibility Analysis
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Components of financial
feasibility analysis

Total Start-Up Cash Financial Performance of

Needed Similar Businesses

Overall Financial
Attractiveness of the
Proposed Venture

©2010 Pearson Education 3-31

 Total Start-Up Cash Needed

• Total Start-Up Cash Needed

– The first issues refers to the 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.
– The point of this exercise is to determine if the proposed
venture is realistic given the total start-up cash needed.

©2010 Pearson Education 3-32

 Financial Performance of Similar
Businesses
• Financial Performance of Similar Businesses
– Estimate the proposed start-up’s financial performance by
comparing it to similar, already established businesses.
– There are several ways to doing this, all of which involve a
little ethical detective work.
• First, there are many reports available, some for free and some that
require a fee, offering detailed industry trend analysis and reports
on thousands of individual firms.
• Second, simple observational research may be needed. For
example, the owners of New Venture Fitness Drinks could estimate
their sales by tracking the number of people who patronize similar
restaurants and estimating the average amount each customer
spends.

©2010 Pearson Education 3-33

 Overall Financial Attractiveness of the
Proposed Venture
1 of 2

• Overall Financial Attractiveness of the Proposed

Investment
– A number of other financial factors are associated with
promising business startups.
– In the feasibility analysis stage, the extent to which a
business opportunity is positive relative to each factor is
based on an estimate rather than actual performance.
– The table on the next slide lists the factors that pertain to
the overall attractiveness of the financial feasibility of the
business idea.

©2010 Pearson Education 3-34

 Overall Financial Attractiveness of the
Proposed Venture
2 of 2

Financial Factors Associated With Promising Business

Opportunities
• Steady and rapid growth in sales during the first 5 to 7 years in a clearly
defined market niche.
• High percentage of recurring revenue—meaning that once a firm wins a
client, the client will provide recurring sources of revenue.
• Ability to forecast income and expenses with a reasonable degree of
certainty.
• Internally generated funds to finance and sustain growth.
• Availability of an exit opportunity for investors to convert equity to cash.

©2010 Pearson Education 3-35