Idea Generation and Evaluation

Most authors agree that after the initial stage in the entrepreneurial process is idea
generation, identification and refining of a viable economic opportunity that exists in the
market.
There is a strong link between getting the initial idea and the starting of the new enterprise. Since
ideas are many, developing the right idea into a market opportunity, implementing it and
building a successful business around it are the important aspects of entrepreneurship.
Opportunity identification is related to entrepreneurial alertness that is described as the
entrepreneur’s ability to see, discover and exploit opportunities that others miss. Opportunity
identification includes searching and scanning the informational environment, inherent the
information from the changing external environments. It also includes being able to capture,
recognize and make effective use of abstracts.
Timely adaptation of that opportunity to suit actual market need is key to new venture
success. Opportunity development is the process of combining resources to pursue a market
opportunity identified. This involves systematic research to refine the idea to the most promising
high potential opportunity that can be transformed into marketable items. Feasibility of the idea
is checked and evaluated from all aspects. A professional evaluation can tell whether the specific
product or service developed by the idea can justify the investment and the risk taken for the
venture. The detail of process of feasibility analysis is discussed later in this book.
Creativity produces new ideas. While Creativity is related to ‘imagination’, innovation is related to
‘implementation’. Innovation is a process of taking ideas forward, revising and refining them for a
useful product, process or service. Creative Problem Solving (CPS) is a key idea generation
technique. Creative problem solving (CPS) is a way of solving problems or identifying
opportunities when conventional thinking has failed.

Opportunity & Idea:

In general sense, the term opportunity implies a good chance or a favourable situation to do
something offered by circumstances. An opportunity is a favorable set of circumstances that
creates a need for a new product, service, or business. . In the same vein, business opportunity
means a good or favourable change available to run a specific business in a given environment at
a given point of time. For an entrepreneur to capitalize on an opportunity, its window of
opportunity must be open.

In entrepreneurship ‘Window of opportunity’ is a viral term, used in context of recognizing

opportunities. It is defined as:
‘A window of opportunity is a short time period during which an otherwise unattainable
opportunity exists. After the window of opportunity closes, the opportunity ceases to exist’
For the short time this window is open, it is controlled by two important factors, ‘market need’
and availability or affordability of solution. When the window of opportunity opens up an
entrepreneur has chance to bring innovation in market, in the form of a new product or service
and generate whopping revenue. When market saturation occurs that window of opportunity
closes but a new window of opportunity opens up. When a window of opportunity exists, for an
entrepreneur it’s the ideal time to act.
However, business opportunity is the ‘suitable set of various different factors that creates a need
for a new product, service or business’. The business opportunities have the ability to create
value however ideas cannot do so. Ideas are just abstract versions; a person can dream or
presume with ideas. In contrast, opportunities need handwork and deal with the practicality.
Investors are not interested in ideas, they invest in business opportunities.

A good opportunity has following four traits:

Attractive: An opportunity should be appealing to the public (off course to the entrepreneur too)
and it should have the ability to address problems of a wide audience.
Timely: Opportunity should be recognized and exploited at the right time. According to Ray
Kroc principle of success, right time is one of the two main keys of success. He said that: ‘The
most important requirement for the major success are: First, Being in the right place at the right
time, and second, Doing something about it’ (Ray Karoc).

Durable: Opportunity should be durable. Its impact shouldn’t be transient. An entrepreneur

should give a birds’ eye view, to this trait of an opportunity before exploiting it because an
opportunity should have enough time to create value in market.

Create Value: Value is the worth of something. A good opportunity has the ability to create
value in the market. Opportunity is anchored in a product, service or business that creates value
for its buyer or end user.
Now this is the right time to address the question that how to find an opportunity? The answer is
simple, ‘Every Problem is an Opportunity’.

Opportunity identification and selection are like corner stone’s of business enterprise. Better the
former, better is the latter. In a sense, identification and selection of a suitable business
opportunity serves as the trite saying ‘well begun is half done. If we ask any intending
entrepreneur what project or product he/she will select and start as an enterprise, the obvious
answer he/she would give is one that having a good and is profitable market. But the question is
how without knowing the product could one know its market?

Whose market will one find out without actually having the product? Whose profitability will
one find out without actually selling the product? There are other problems, besides. While
trying to identify the suitable product or project, the intending entrepreneur passes through
certain processes.
The processes at some times create a situation, or say, dilemma resembling ‘Hen or Egg’
controversy. That is, at one point, the intending entrepreneur may find one product or project as
an opportunity and may like it, but at the other moment may dislike and turn down it and may
think for and find other product or project as an opportunity for him/her. This process of
dilemma goes on for some intending entrepreneurs rendering them into the problem of what
product or project to start. Then, how to overcome this problem of product identification and
selection?
One way to overcome this dilemmatic situation is to know how the existing entrepreneurs
identified the opportunity and set up their enterprises. An investigation into the historical
experiences of Indian small enterprises in this regard reveals some interesting factors.

To mention the important ones, the entrepreneurs selected their products or projects based
on:
a. Their own or partners’ past experience in that business line;

b. The Government’s promotional schemes and facilities offered to run some specific business
enterprises;
c. The high profitability of products;

d. Which indicate increasing demand for them in the market?

e. The availability of inputs like raw materials, labour, etc. at cheaper rates;

f. The expansion or diversification plans of their own or any other ongoing business known to
them;
g. The products reserved for small-scale units or certain locations.

Now, having gained some idea on how the existing entrepreneurs selected products/projects, the
intending entrepreneur can find a way out of the tangle of which opportunity/product/project to
select to finally pursue as one’s business enterprise.

One of the ways employed by most of the intending entrepreneurs to select a suitable
product/project is to firstly generate ideas about a few products/ projects. Accordingly, what
follows next is a discussion idea generation about products.

Idea Generation:

Getting the idea

There is a strong link between getting the initial idea and the starting of the new enterprise.
There are different definitions given by authors. Rwigema & Venter defines an idea as simply
the conception of a possibility and reflective method of evading, circumventing or
surmounting obstacles and challenges. The Oxford Dictionary defines an idea as a thought
or suggestion about a possible course of action.
Synonymous with “idea” are the terms thought, intention, scheme, suggestion, proposal,
initiative, spur, impulse, brainwave, insight, concept and connotation (Oxford, 2005).
Since ideas are many, developing the idea from the market opportunities, implementing it and
building a successful business around it are the important aspects of entrepreneurship.

Similarly a market opportunity is also defined differently. According to Wickham- a

market opportunity is a gap left in a market by those who currently serve it, giving a
chance to others to add unrealized value by performing differently from and better than
competitors in order to create new possibilities. The Oxford Dictionary (2005) defines
opportunity as a favourable time or set of circumstances for doing something. Synonymous
with opportunity are chance, opening and prospect.

While business opportunities are detected from ideas, an idea is not synonymous with
opportunity. The difference between an idea and an opportunity is that an opportunity is the
possibility of occupying the market with a specific innovative product that will satisfy a real
need and for which customers are willing to pay. Successful venturing may well rest upon the
ability to recognize or distinguish an opportunity from an idea.

Sources of Idea Generation:

In a sense, opportunity identification and selection are akin to, what is termed in marketing
terminology, ‘new product development.’ Thus, product or opportunity identification and
selection process starts with the generation of ideas, or say, ideas about some opportunities or
products are generated in the first instance.
The ideas about opportunities or products that the entrepreneur can consider for selecting the
most promising one to be pursued by him/her as an enterprise, can be generated or discovered
from various sources- both internal and external.

These may include:

(i) Knowledge of potential customer needs,
(ii) Watching emerging trends in demands for certain products,

(iii) Scope for producing substitute product,

(iv) Going through certain professional magazines catering to specific interests like electronics,
computers, etc.

(v) Success stories of known entrepreneurs or friends or relatives,

(vi) Making visits to trade fairs and exhibitions displaying new products and services,
(vii) Meeting with the Government agencies,

(viii) Ideas given by the knowledgeable persons,

(ix) Knowledge about the Government policy, concessions and incentives, list of items reserved
for exclusive manufacture in small-scale sector,

(x) A new product introduced by the competitor, and

(xi) One’s market insights through observation.

There are many sources for new venture opportunities for individuals. Clearly, when you see
inefficiency in the market, and you have an idea of how to correct that inefficiency, and you
have the resources and capability — or at least the ability to bring together the resources and
capability needed to correct that inefficiency — that could be a very interesting business idea. In
addition, if you see a product or service that is being consumed in one market, that product is not
available in your market, you could perhaps import that product or service, and start that
business in your home country.

Many sources of ideas come from existing businesses, such as franchises. You could license the
right to provide a business idea. You could work on a concept with an employer who, for some
reason, has no interest in developing that business. You could have an arrangement with that
employer to leave the company and start that business. You can tap numerous sources for new
ideas for businesses. Perhaps the most promising source of ideas for new business comes from
customers — listening to customers. That is something we ought to do continuously, in order to
understand what customers want, where they want it, how they want a product or service
supplied, when they want it supplied, and at what price.
Obviously, if you work in a large company, employees might come up with ideas. Indeed, you
might want to listen to what they have to say. You could pursue these ideas by asking yourself
some key questions such as, “Is the market real? Is the product or service real? Can I win? What
are the risks? And is it worth it?”

In nutshell, a prospective entrepreneur can get ideas for establishing his/ her enterprise from
various sources. These may include consumers, existing products and services presently on offer,
distribution channels, the government officials, and research and development. A brief mention
about each of these follows in turn:

Consumers:
No business enterprise can be thought of without consumers. Consumers demand for products
and services to satisfy their wants. Also, consumers’ wants in terms of preferences, tastes and
liking keep on changing. Hence, an entrepreneur needs to know what the consumers actually
want so that he/she can offer the product or service accordingly. Consumers’ wants can be
known through their feedback about the products and services they have been using and would
want to use in future.

Existing Products and Services:

One way to have an enterprise idea may be to monitor the existing products and services already
available in the market and make a competitive analysis of them to identify their shortcomings
and then, based on it, decide what and how a better product and service can be offered to the
consumers. Many enterprises are established mainly to offer better products and services over the
existing ones.

Distribution Channels:
Distribution channels called, market intermediaries, also serves as a very effective source for
new ideas for entrepreneurs. The reason is that they ultimately deal with the ultimate consumers
and, hence, better know the consumers’ wants.

As such, the channel members such as wholesalers and retailers can provide ideas for new
product development and modification in the existing product. For example, an entrepreneur
came to know from a salesman in a departmental store that the reason his hosiery was not selling
was its dark shade while most of the young customers want hosiery with light shade. The
entrepreneur paid heed to this feedback and accordingly changed the shade of his hosiery to light
shade. Entrepreneur found his hosiery enjoying increasing demand just within a month.

Government:
At times, the Government can also be a source of new product ideas in various ways. For
example, government from time to time issues regulations on product production and
consumption. Many a times, these regulations become excellent sources for new ideas for
enterprise formation.
For example, government’s regulations on ban on polythene bags have given new idea to
manufacture jute bags for marketing convenience of the sellers and buyers. A prospective
entrepreneur can also get enterprise idea from the publications of patents available for license or
sale.

Besides, there are some governmental agencies that assist entrepreneurs in obtaining specific
product information. Such information can also become basis for enterprise formation.

Research and Development:

The last but no means the least source of new ideas is research and development (R&D) activity.
R&D can be carried out in-house or outside the organization. R&D activity suggests what and
how a new or modified product can be produced to meet the customers’ requirements.
Available evidences indicate that many new product development, or say, new enterprise
establishments have been the outcome of R&D activity. For example, one research scientist in a
Fortune 500 company developed a new plastic resin that became the basis of a new product, a
plastic molded modular cup pallet. Most of the product diversifications have stemmed from the
organization’s R&D activity

Identification of Opportunity
Opportunity recognition or perceiving the possibility is largely centred upon the personal
characteristic of an entrepreneur. Among them entrepreneurial alertness is most important, which
is the ability to look at things from different perspectives to map the overall process of
opportunity recognition and exploitation. Besides that the person who has an innovative and
creative mind is better able to fill the opportunity gap.
For recognizing opportunity, an entrepreneur should be able to identify the environmental trends
that play a vital role in creating an opportunity gap. The entrepreneur should also be able to
identify the solution of the problem existing in the environment. All these environmental trends
acting together generate an opportunity gap (difference between what is available and what is
possible), which ultimately is a gateway for an entrepreneur to think of new ideas and solutions
to fill that opportunity gap.
To most people taking big risks is a challenge so prior experience helps the entrepreneur to better
understand the feasibility and applicability of an opportunity. Networking or making and using
contacts are other important qualities to help recognize business opportunities. Some rational
fellow said, ‘If you want to achieve something bad tell this to people around you, sooner or later
in life they’ll show up and help you achieve it’. Networking therefore is called a ‘hidden job
market’. So, exploiting and developing networking and relationships are ways of advancement in
professional life.
To sum up all, opportunity recognition is a process that depends upon environmental trends
(social, economic, political and technological) and solving problems which are basically
supported by personal characteristics of an entrepreneur. An assortment of these two keys can
unlock a gateway to recognize opportunities, to fill that gap and enjoy the perks of
entrepreneurial successes.

Components of Identifying Opportunity:

These two important components of identifying opportunities are discussed below.

1. Observing Trends
The first approach to identifying opportunities is to observe trends and study how they create
opportunities for entrepreneurs to pursue.

Economic Forces
Economic forces affect generating ideas and creating opportunities. It includes the state of the
economy, income of the target audience and the spending patterns of consumers.

Economic forces affect consumers’ level of disposable income. Individual sectors of the
economy have a direct impact on consumer buying patterns. For example, a drop in interest rates
typically leads to an increase in new home construction and furniture sales.

Social Forces
The social forces largely influence creating an opportunity gap. These forces include cultural and
ethnic beliefs of people, demographic alterations, and peoples’ way of thinking.
An understanding of the impact of social forces on trends and how they affect new product,
service and business ideas is a fundamental piece of the opportunity recognition puzzle. The
persistent proliferation of fast-food restaurants, for example, isn’t due primarily to people’s love
for fast food but rather to the fact that people are busy: the number of households with both
parents working remains high.
Some of the recent social trends that allow for new opportunities are the following:

 The aging of the population

 The increasing diversity of the workforce
 The globalization of industry
 The increasing focus on health care and fitness
 The proliferation of computers and the Internet
 The continual increase in the number of cell phone users
 New forms of music and other types of entertainment
Technological Advances
What are the emerging trends in technologies and how old technologies can be modified to serve
the new purpose are important aspects to be considered while recognizing opportunities. Given
the rapid pace of technological change, it is vital for entrepreneurs to remain on top of how new
technologies affect current and future opportunities.

Once a technology is created, products emerge to advance it. For example, RealNetworks was
created to add video capabilities to the Internet.
Advances in technology frequently join together with economic and social changes to create
opportunities. For example, the creation of the cell phone is a technological achievement, but it
was motivated by an increasingly mobile population that found many advantages to having
the ability to communicate with coworkers, customers, friends, and family members from
anywhere.
Political Action and Regulatory Changes
Political action and regulatory changes also provide the basis for opportunities. For example,
new laws create opportunities for entrepreneurs to start firms to help companies comply with
these laws.

2. Solving a Problem:
Sometimes identifying opportunities simply involves noticing a problem and finding a way to
solve it. These problems can be pinpointed through observing trends and through more simple
means, such as intuition, destiny, or chance. Some business ideas are clearly gleaned from the
recognition of problems in emerging trends. For example, Symantec Corp. created Norton
antivirus software to rid computers of viruses.

At other times, the process is less deliberate. An individual may set out to solve a practical
problem and realize that the solution may have broader appeal. At still other times, someone
may simply notice a problem that others are having and think that the solution might represent an
opportunity.
An unanticipated discovery is a chance discovery made by someone with a prepared mind.
Corridor principle is another driving force to recognize opportunities. This principle is more
explicitly defined as:
‘The mere act of starting a venture enables entrepreneurs to see other venture opportunities they
could neither see nor take advantage of until they had started their initial venture’.

Therefore, opportunity recognition depends upon the personal characteristics of an entrepreneur

that includes prior experience, networking, creativity, entrepreneurial alertness and corridor
principle.

Characteristics required for recognizing business opportunities:

Researchers have identified several characteristics that tend to make some people better at
recognizing opportunities than others. Some of them are given below:

a) Prior Experience - Several studies show that prior experience in an industry helps
entrepreneurs recognize business opportunities. Once an entrepreneur starts a firm, new
venture opportunities become apparent. This is called the corridor principle, which states
that once an entrepreneur starts a firm, he or she begins a journey down a path where
“corridors” leading to new venture opportunities become apparent.

b) Cognitive Factors – Opportunity recognition may be an innate skill or a cognitive

process.
There are some who think that entrepreneurs have a “sixth sense” that allows them to see
opportunities that others miss. This sixth sense is called entrepreneurial alertness, which is
formally defined as the ability to notice things without engaging in deliberate search.

c) Social Networks – The extent and depth of an individual’s social network affects
opportunity recognition. People who build a substantial network of social and
professional contacts will be exposed to more opportunities and ideas than people with
sparse networks. This exposure can lead to new business starts.

d) Creativity – Is the process of generating a novel or useful idea. For an individual, the
creative process can be broken into five steps.
The five steps are:

i. Preparation – Is the background, experience, and knowledge that an entrepreneur

brings to the opportunity recognition process.

ii. Incubation - Is the stage during which a person considers an idea or thinks about a
problem; it is the “mulling things over” phase.

iii. Insight – Insight is the flash of recognition – when the solution to a problem is seen or
an idea is born.

iv. Evaluation – Is the stage of the creative process during which an idea is subjected to
scrutiny and analyzed for its viability.

v. Elaboration – Is the stage during which the creative idea is put into a final form. The
details are worked out, and the idea is transformed into something of value.

Opportunity development

Opportunity development as the process of combining resources to pursue a market

opportunity identified. This involves systematic research to refine the idea to the most
promising high potential opportunity that can be transformed into marketable items.
Having recognized the opportunity, timely adaptation of that opportunity to suit
actual market need is key to new venture success.
The assessment must answer following questions:

 What market need it fulfils

 Personal observation experienced or recorded with regard to that market need
 Social condition regarding that market need
  What market research data can be marshalled to describe that market need
 Any patents required or available for fulfill this need
 Type of competition and its behaviour
 Overview of international market
 Competition in international market
 Where is the money to be made in the activity

Opportunity evaluation
A critical element of the entrepreneurial process is the opportunity screening and
evaluation. After identification, the idea is investigated in detail. The selection of the
right idea is more important than identification of the idea. Opportunity is a business
concept which if turned into a tangible product or service by the entrepreneur, will
result in to profit. It is about creating values. A professional executed evaluation can tell
whether the specific product or service has the returns needed to justify the investment and
the risk to be taken.
Opportunity assessment compared to a business plan should be shorter, focus on the
opportunity not on the entire venture and provide the basis for making the decision of
whether or not to act on the opportunity.

An opportunity assessment includes the following:

a) A description of the product or services
b) An assessment of the market opportunity
c) An assessment of the entrepreneur and the team
d) Pricing and specification of all the activities and resources needed to
translate the opportunity into a viable business venture
e) Source of capital to finance the initial venture as well as its growth and
profitability
Feasibility Analysis

Feasibility analysis is the process of determining if a business idea is viable before spending
resources on it. Most entrepreneurs do not conduct a feasibility analysis before launching their
ventures.
Business feasibility study can also be defined as a controlled process for identifying problems
and opportunities, determining, describing situation, defining successful outcomes and assessing
the range of cost and benefits associated with several alternatives for solving a problems. As the
name implies, a feasibility study is an analysis of the viability of an idea.
 The business feasibility reports is used to support the decision making process based on a cost
benefits analysis of actual business or project viability. The feasibility study is conducted during
the deliberation phase of business development cycle, prior to commencement of formal business
plan. It is analytical tool that include recommendation and limitation which are utilized to assist
decision maker when determining if the business concept is viable.

Conducting a feasibility study need not be difficult or expensive, but the most important aspects
should all be taken into account to ensure that potential problems are addressed.

In general, the following questions can be answered by a feasibility study report:

a. Is there a demand for the produce? (Find out the characteristics required of the product
and the size and value of the market)
b. who else is producing similar products?(Determine the number and type of competitors)
c. What is needed to make the product? (Find the availability and cost of staff, equipment,
services, raw materials, ingredients and packaging)
d. What is the cost of producing a product? (Calculate the capital costs of getting started
and the operating costs of production)
e. What is the likely profit? (Calculate the difference between the expected income
from sales to an estimated share of the market and the costs of production)

Each of these aspects should be looked at in turn. When all the information has been gathered
and analysed, it should be possible to make a decision on whether the proposed investment in the
business is worthwhile or whether the producer's money could be better spent doing something
else. The same considerations should be taken into account when an existing entrepreneur wishes
to diversify production or make a new product.
A feasible business venture is one where the business will generate adequate cash-flow and
profits, withstand the risks it will encounter, remain viable in the long-term and meet the goals
of the founders. The venture can be either a start-up business, the purchase of an existing
business, an expansion of current business operations or a new enterprise for an existing
business.
A feasibility study is only one step in the business idea assessment and business development
process. To reduce the risk of failure and losing money, potential producers should go through
the different aspects of running their business in discussions with friends and advisers before
they commit funds or try to obtain a loan. This process is known as doing a feasibility
study and when the results are written down, the document is known as a business plan.
The conclusions of the feasibility study should out-line in depth the various scenarios examined
and the implications, strengths and weaknesses of each. The project leaders need to study the
feasibility study and challenge its underlying assumptions. This is the time to be skeptical.
Don’t expect one alternative to “jump off the page” as being the best scenario. Feasibility
studies do not suddenly become positive or negative. As you accumulate information and
investigate alternatives, neither a positive nor negative outcome may emerge. The decision of
whether to proceed is often not clear cut. Major stumbling blocks may emerge that negate the
project. Sometimes these weaknesses can be overcome. Rarely does the analysis come out
overwhelmingly positive. The study will help you assess the tradeoff between the risks and
rewards of moving forward with the business project.

Evaluate Alternatives
A feasibility study is usually conducted after producers have discussed a series of business ideas
or scenarios. The feasibility study helps to “frame” and “flesh-out” specific business scenarios so
they can be studied in-depth. During this process the number of business alternatives under
consideration is usually quickly reduced.
During the feasibility process you may investigate a variety of ways of organizing the business
and positioning your product in the marketplace. It is like an exploratory journey and you may
take several paths before you reach your destination. Just because the initial analysis is negative
does not mean that the proposal does not have merit. Sometimes limitations or flaws in the
proposal can be corrected. It is also important to remember that the business plan is a working
document that should be used as a framework to guide the development of a business. To do this
it should be regularly updated.

Pre-Feasibility Study
A pre-feasibility study may be conducted first to help sort out relevant scenarios. Before
proceeding with a full-blown feasibility study, you may want to do some pre-feasibility analysis
of your own. If you find out early-on that the proposed business idea is not feasible, it will save
you time and money. If the findings lead you to proceed with the feasibility study, your work
may have resolved some basic issues.

Feasibility Study vs. Business Plan

A feasibility study is not a business plan. The separate roles of the feasibility study and the
business plan are frequently misunderstood. The feasibility study provides an investigating
function. It addresses the question of “Is this a viable business venture?” The business plan
provides a planning function. The business plan outlines the actions needed to take the
proposal from “idea” to “reality.”

The feasibility study outlines and analyzes several alternatives or methods of achieving business
success. The feasibility study helps to narrow the scope of the project to identify the best
business scenario(s). The business plan deals with only one alternative or scenario. The
feasibility study helps to narrow the scope of the project to identify and define two or three
scenarios or alternatives. The person or business conducting the feasibility study may work
with the group to identify the “best” alternative for their situation. This becomes the basis for
the business plan.

The feasibility study is conducted before the business plan. A business plan is prepared only
after the business venture has been deemed to be feasible. If a proposed business venture is
considered to be feasible, a business plan is usually constructed next that provides a
“roadmap” of how the business will be created and developed. The business plan pro-vides the
“blueprint” for project implementation. If the venture is deemed not to be feasible, efforts
may be made to correct its deficiencies, other alternatives may be explored, or the idea is
dropped.

Components of Feasibility Analysis

Prominent components of feasibility analysis are: Product/service feasibility, Industry/market
feasibility, Technical feasibility, Economical feasibility, Organizational feasibility and financial
feasibility.

Product/service feasibility analysis

This analysis is an assessment of the overall appeal of the product or service being proposed. The idea is
that before a prospective firm rushes a product or service into development, it should be confident that the
product or service is what its prospective customers want. It is an assessment of the product or
service being proposed in the sense that it is what customers want and that it will have an
adequate market.

The benefits of conducting a product/service feasibility analysis are:

a) Getting the product right the first time (the entrepreneur knows what customers want
because he asked them). A segment of customers emerges because the firms or
individuals that participate in the feasibility analysis often become the firm` s first
customers.
b) By asking prospective customers to test the usability of a product or the ease of use of a
service, the firm avoids any defect in product/service design.
c) The time and capital are used more efficiently because the entrepreneur has a better
idea of what customers want. The entrepreneur collects information about the need for
additional products/services

Product/service feasibility analysis consists of two tests:

1. Concept testing

2. Usability testing
Industry/Market Feasibility

Assessing the market size for a new business is a tricky but critical part of a feasibility analysis.
For a business idea to work, you must have enough customers willing to spend enough money
on your product or service to provide sales revenue that covers your expenses and, hopefully,
earns you a profit. Accordingly, determining how many potential customers exist might be an
essential part of discovering whether your business idea is going to work.

Also, a market assessment will help to determine the viability of a proposed product in the
marketplace. The market assessment will help to identify opportunities in a market or market
segment. If no opportunities are found, there may be no reason to proceed with a feasibility
study. If opportunities are found, the market assessment can give focus and direction to the
construction of business scenarios to investigate in the feasibility study. A market assessment
will provide much of the information for the marketing feasibility section of the feasibility
study.

The first thing consumers usually do when they hear of a new product or service is compare it
to existing alternatives. Customers will buy from a new business only if they perceive the value
provided by that new business to be greater than the value provided by existing competitors.

Perceived value is a judgment. Consumers compare what they think they are going to get from
your new business to what they think they are getting from existing businesses. To attract
them, you must convince them that you are providing something better, more convenient,
healthier, more durable, cheaper, or of a higher quality at the same price. In short, you must
create a perception that you have a competitive advantage. This advantage can be based on
many different characteristics: location, a specific product line, technology or exclusive access
to some supplier. No matter what it is, there must be something about your business that
makes it distinctive, different and competitively superior to the businesses your customers will
compare you to.

Next, determine whether or not you can communicate your competitive advantage simply and
believably to the marketplace. It is not enough just to be better—you have to convince
potential customers that you are better.

Begin with a little market re-search, the process of discovering what makes a specific market
work. Typical questions answered in a preliminary market research study might include:

How many customers are there?

Who are they, and what are they like?
How many service or product providers are there already?
How does each compete?
What do they say about each other?
How successful are they?
What does it take to succeed in this business?
These are all questions that must be answered, or at least understood, before launching a new
business venture. Know who you are competing against and why you can persuade customers
to frequent your business instead of those currently operating.
One of the key success factors in a small business is having the resources to wait out the inertia
of your customers. Customers are creatures of habit and, therefore, unlikely to change their
behavior immediately just because a new product or service enters the marketplace.

Frequently, it takes a long time for people to become familiar and comfortable enough with a
new business to patronize it. In fact, many studies show that it takes three years for a new small
business to break even and five years to begin making a profit. Most business plans, though, are
considerably more optimistic. Some entrepreneurs like to say, “It took us five years to become an
overnight success.”

Technical Feasibility Study

Once an entrepreneur has found information about potential consumers, their requirements
and the likely share of the market that could be obtained for a new product, it is then necessary
to assess whether production at this scale is technically feasible . The Technical Feasibility Study
assesses the details of how you will deliver a product or service (i.e., materials, labor,
transportation, where your business will be located, the technology needed, etc.). It is a study,
logistical or tactical plan of how your business will produce, store, deliver, and track its products
or services.

A technical feasibility study is an excellent tool for troubleshooting and long-term planning. In
some regards, it serves as a flow chart of how your products and services evolve and move
through your business to physically reach your market . Expenses for technical requirements
(i.e., materials and labor) should be noted in the technical feasibility study. The Technical
Feasibility Study must support your Financial Information.

This assessment is based on an outline design of system requirements, to determine whether

the company has the technical expertise to handle completion of the project. When writing a
feasibility report, the following should be taken to consideration:

• A brief description of the business to assess more possible factors which could affect the
study
• The part of the business being examined
• The human and economic factor
• The possible solutions to the problem
 • At this level, the concern is whether the proposal is both technically and legally feasible
(assuming moderate cost).

The technical feasibility assessment is focused on gaining an understanding of the present

technical resources of the organization and their applicability to the expected needs of the
proposed system. It is an evaluation of the hardware and software and how it meets the need
of the proposed system.

Basic things that most businesses need to include in their technical feasibility study include

1. Materials
2. Labor
3. Transportation or Shipping
4. Physical Location
5. Technology

The series of questions below is helpful in deciding the technical requirements of the business:

a) Are enough raw materials available of the correct quality when needed for year-round
production?
b) Is the cost of the raw materials satisfactory?
c) Is the correct size and type of equipment available for the expected production level
and at a reasonable cost?
d) Can it be made by local workshops and are maintenance and repair costs affordable?
e) Is sufficient information and expertise available to ensure that the raw material is
consistently made at the required quality?
f) Are suitable packaging materials available and affordable?
g) Are distribution procedures to retailers or other sellers established?
h) Is a suitable building available and what modifications are needed?
i) Are services (fuel, water, electricity etc.) available and affordable?
j) Are trained workers available and are their salaries affordable?

Economic Analysis:

Launching a new business venture, producing a new product line, or expanding into a new
market is risky under any economic condition. Conducting an economic feasibility analysis is an
important step in assessing the costs, benefits, risks and rewards of a new venture. The analyses
survey the economic climate, articulate a business plan, and estimate the costs and revenues of
planned operations. Economic studies help businesses plan operations, identify opportunities and
pitfalls, and attract investors. An economic feasibility analysis is not necessarily difficult or
expensive, but it must be thorough, factoring in all potential challenges and problems. It also
serves as an independent project assessment and enhances project credibility—helping decision
makers determine the positive economic benefits to the organization that the proposed project
will provide.

Economic feasibility implies that the project can be justified on an economic basis. Economic
feasibility measures the overall desirability of the project in financial terms and indicates the
superiority of a single approach over others that may be equally feasible in a technical sense.

The ultimate objective of the economic analysis is to provide a decision-making tool which can
be used not only for the pilot project but also for demonstration purposes.

Economic feasibility of an investment project/ product

The economic feasibility of a project or product is measured by the extent to which the utility
value received during the entire project or product life, exceeds the proper costs incurred in
creating the utility value. In economic feasibility study, utility value (over the project or product
life) is equivalent to accounting revenue, while costs (also over the project life) are equivalent to
the accounting expense. However, the terms are not synonymous, because the accounting terms
are applicable to short periods during which period, the time value of money is ignored. The
equivalent terms for the economic feasibility, apply to the entire project or product life (usually
of several years), during which period, the time value of money and the opportunity cost incurred
must be taken into consideration.

Time value of money is the recognition that one rupee received today is worth more than one
rupee received in the future. The rent or interest each investor charges for its use can quantify
this time value money. Time value of money therefore depends on the investment opportunities
available to each investor.

The opportunity cost is the minimum return on investment that a particular investor is willing
to accept, other alternative investment projects will only be attractive if they offer higher returns,
other factors such as risks, remaining equal. The opportunity cost therefore represents the
minimum rent or interest that the investor will charge for the use of his money or the sacrifices
he makes by investing his money. The opportunity costs of different investors therefore represent
the minimum time value of money for each investor.

Procedure for Economic Analysis

A scientific method involving, observation, problem definition, formulation of hypothesis,

experimentation, and verification is used in an economic feasibility analysis. A sequence of
clearly defined steps is involved in carrying out the economic analysis of a project. An example
is given below:
Identify and describe the target market for your intended venture or business activity.
Describe how the intended customer base would benefit from your product or service. If your
planned activity serves a business customer base, identify the industry your targeted customers
are in, and who the key players are. For a consumer base, describe the demographic
characteristics and shopping behavior of your intended customers.

Assess the competition in your target market. Identify the major competing firms, their
products and services, and their respective shares of the market for your intended activity. Doing
this will force you to consider how to distinguish your products or services from those of your
competitors. Describe the overall plan for your enterprise or activity. This includes production
requirements, facilities, sales and marketing strategy.

Project the revenues of your business activity, based on an assumed share of the target market.
You can provide revenue projections for a period of one year or longer. Some analysts suggest
providing revenue projections for a three-year period. As a new entrant into the market, you
should keep your projections conservative, estimating only a small market share (usually about 5
to 10 percent). Using your estimated market share and sale price, estimate your total revenues,
breaking them down by month, quarter and year.

Estimate the costs of your business activity, considering fixed and variable costs. Fixed costs
are those that remain constant within the time period for which you are projecting revenues.
Examples include facilities (such as rental on factory or office space), interest on capital items,
and administrative expenses. Account for fixed costs as a single lump sum, as they are the same
regardless of the level of sales or services provided. Variable costs are those that change in
response to sales levels. Materials expenses, labor costs, marketing costs and distribution are
variable costs. Express these in terms of cost per unit.
Weigh the costs and benefits of your planned activity or enterprise, using your projected
revenues and costs as a guide. If the benefits–generally understood as profits–exceed the costs of
the planned activity, you can consider the new enterprise a feasible undertaking for your
organization.

Methods for Economic Feasibility Studies

Several methods are available for carrying out economic feasibility study of a project. Some of
them are given below:

1) Payback period method,

2) Present worth method-Net Present value (NPV),
3) Rate of return method-Internal Rate of Return (IRR),
4) Benefit–cost ratio method,
Organizational feasibility analysis
Organizational feasibility analysis is conducted to determine whether a proposed business has
sufficient management expertise, organizational competence and resources to successfully
launch its business. There are two primary issues to consider in this area:

a) Management prowess and

b) Resource sufficiency

Management Prowess (ability)

A firm should candidly evaluate the prowess (ability) of its management team to make sure
management has the requisite passion and expertise to launch the venture. The most important
factors in this area are:

a) The passion that the solo entrepreneur or the founding team has for the business idea.
b) The extent to which the solo entrepreneur or the founding team understands the markets
in which the firm will participate.

Solo entrepreneurs or founding teams with established social and professional networks also
have an advantage.

Assessment of the entrepreneurial team

Regardless of how right the opportunity may seem to be, it will not make a successful
business unless it is developed by a team with strong skills. Once the opportunity has been
evaluated, the next step is to ask pertinent questions about the people who would run the
company. The assessment must answer questions like: What market need it fulfils? Personal
observation experienced or recorded with regard to that market need, Social condition
regarding that market need, what market research data can be used to describe that market
need? Any patents required or available for fulfill this need? Type of competition and its
behavior, Overview of international market Competition, in international market, Where is the
money to be made in the activity?

Company with inexperienced founders and management in that particular industry has high
probability of failure. An example of a company that suffered by having a management team
that was unfamiliar with the industry is illustrated here:

Example: Garden.com was started in 1995 to sell gardening supplies on the Internet. None of
Garden.com’s three founders had any experience in Garden retailing, nor were they
knowledgeable gardeners. The firm failed after losing many millions of dollars of its investors’
money.
2. Resource Sufficiency

The second area of organizational feasibility analysis is to determine whether the potential new
venture has sufficient non financial resources to successfully develop a product or service such
as: 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.
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.

One resource sufficiency issue that new firms should consider is their proximity to similar firms.
There are clusters of high-tech firms in the Silicon valley of California, on Route 128 around
Boston, in the Cambridge region in the UK. Clusters arise because they increase the productivity
of the firms participating in them. Because these firms are located in the same area, it is easy
for their employees to network with each other; it is easy for the firms to gain access to
specialized suppliers, scientific knowledge and technological expertise. Researchers found that
small manufacturing firms benefit more than larger firms by being close to a cluster of similar
firms.

Example: A semiconductor start-up that decided to locate in Kansas city, Missouri, would be at
a significant disadvantage to a semiconductor start-up in the Silicon Valley which already has a
cluster of semiconductor firms.

Financial feasibility analysis

Financial feasibility analysis is the final stage of the feasibility analysis. Evaluate financial
feasibility of concept. Estimate one-time start-up expenditures. Cost of a project is broadly divided into
fixed and variable cost. Fixed costs are expenses that do not vary with the level of your sales, such as rent,
manager’s salary, utilities, insurance and other operating expenses. Variable expenses are directly related
to sales, and include items such as raw materials or purchases to be sold, and direct labor.

Estimate expected monthly operating expenses, develop short-term financial projections, determine your
breakeven point, and forecast your cash flow Pro forma, income statement Pro form balance sheet. The
breakeven point is the level of operation at which a business neither earns a profit nor incurs a loss. It is a
useful in planning because it shows entrepreneurs minimum level of activity required to stay in business.
With one change in the break even calculation, an entrepreneur can also determine the sales volume
required to reach a particular profit target. As you estimate break-even, you’ll use quantities that describe
the relationship between your prices and your variable costs such as your contribution margin and your
contribution percentage.
The most important issues to be considered in financial feasibility analysis are: capital
requirements, Sources of Capital, financial rate of return, and overall attractiveness of
investment.

Capital requirements: The entrepreneur should assess the feasibility of raising enough money to
fund the capital requirements for the business. New firms need money for hiring employees,
office or manufacturing space, equipment, training, research and development, marketing. At
the feasibility analysis stage it is not necessary for this number to be exact.
Sources of Capital: One of the most important aspects of any business is to know the sources of business.
In the market there are different types of financial instruments available to finance any project. On the
basis of duration they are divided in two types- short term and long term. Some of the important sources
of finance are- funds from internal operations, short-term sources of debt financing, liquidation of assets,
Long-term sources of debt financing, equity financing, venture capitals etc.

Financial Rate of Return: Return on assets, return on equity, return on investment, return on
capital employed are examples of the ways the rate of return expected from a new business
can be projected. It is important to determine whether the projected return is adequate to
justify the business. The adequate is a relative term and depends on the following factors:

• The amount of capital invested,

• The amount of time required to earn the return,
• The risk assumed in launching the business,
• The existing alternatives for the money being invested.
Several considerations can be made to determine the rate of return that is necessary to justify
the investment in the business. 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.