Chp 3

 Feasibility analysis is the process of determining if a business idea is viable

 If a business idea falls short on one or more of the four components of
feasibility analysis, it should be dropped or rethought, as shown in the
figure.
 Many entrepreneurs make the mistake of identifying a business idea and
then jumping directly to developing a business model  to describe and gain
support for the idea.
 This sequence often omits or provides little time for the important step of
testing the feasibility of a business idea.
 A feasibility analysis is an assessment of a potential business rather than
strictly a product or service idea.
 Feasibility analysis is investigative in nature and is designed to critique the
merits of a proposed business. A business plan is more focused on planning
and selling.
 The reason it is important to complete the entire process “, is to avoid
falling into the “everything about my opportunity is wonderful” mode. In
Mullins’ view, failure to properly investigate the merits of a business idea
before developing a business model and a business plan is written runs the
risk of blinding an entrepreneur to inherent risks associated with the
potential business and results in too positive of a plan”
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 Completing a feasibility analysis requires both primary and secondary

research.
 Primary research is research that is collected by the person or persons
completing the analysis. It normally includes talking to prospective
customers, getting feedback from industry experts, conducting focus
groups, and administering surveys.
 Secondary research probes data that is already collected. The data
generally includes industry studies, Census Bureau data, analyst forecasts,
and other pertinent information gleaned through library and Internet
research.
 feasibility analysis tests the merits of a specific idea, it 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
eliciting feedback from potential customers, talking to industry experts,
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. In some cases, it will be decided
that the idea is not feasible. Although regrettable, it is better to know early
rather than later if an idea doesn’t have sufficient merit to become a
business.
 Product/service feasibility analysis
 is an assessment of the overall appeal of the product or service being
proposed. Although there are many important things to consider when
launching a new venture, nothing else matters if the product or service
itself doesn’t sell.
 There are two components to product/ service feasibility analysis:
 product/service desirability and product/service demand
 The first component of product/service feasibility is to affirm that the
proposed product or service is desirable and serves a need in the
marketplace. You should ask yourself, and others, the following questions
to determine the basic appeal of the product or service:
 ■ Does it make sense? Is it reasonable? Is it something real customers will
buy?
 ■ Does it take advantage of an environmental trend, solve a problem, or fill
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?
 The best way to answer these questions is to “get out of the building” and
talk— and, more importantly, listen to—potential customers.
 A concept test involves showing a preliminary description of a product or
service idea, called a concept statement, to prospective customers and
industry experts to solicit their feedback. It is a one-page document that
normally includes the following:
 ■ A description of the product or service. This section details the features
of the product or service. You probably won’t have a working prototype of
your product at this point, but you might have a sketch or a rough model to
show your participants.
 ■ The intended target market. This section lists the consumers or
businesses who are expected to buy the product or service.
 ■ The benefits of the product or service. This section describes the benefits
of the product or service and includes an account of how the product or
service adds value and/or solves a problem.
 ■ A description of how the product or service will be positioned relative to
competitors. A company’s position describes how its product or service is
situated relative to its rivals.
 ■ A brief description of the company’s management team.

 After the concept statement is developed, it should be shown to at least

25 people who are familiar with the industry that the firm plans to enter
and who can provide informed feedback.
 The second component of product/service feasibility analysis is to
determine if there is demand for the product or service. Three commonly
utilized methods for doing this are
 talking face-to-face with potential customers,
 utilizing online tools, such as Google AdWords and landing pages, to assess
demand, and
 library, Internet, and gumshoe research.

 The only way to know if your product or service is what people want and
need is by talking to them. Curiously, this often doesn’t happen. ” The idea
is to gauge customer reaction to the general concept of what you want to
sell. Entrepreneurs are often surprised to find out that a product idea that
they think solves a compelling problem gets a lukewarm reception when
they talk to actual customers.
 One approach to finding qualified people to talk to about a product or
service idea or to react to a concept statement is to contact trade
associations and/or attend industry trade shows. If your product idea is in
the digital media space, for example, you may be able to call the Digital
Media Association (which is a national trade association devoted primarily
to the online audio and video industries) and obtain a list of members who
live in your area. Attending trade shows in the industry in which you have
an interest will place you in direct contact with numerous people who
might be of assistance
 . Online surveys are also useful to reach a large number of people quickly.
Services such as SurveyMonkey and Google Consumer Surveys are making
it increasingly easy to survey specific target markets and receive detailed
analytics for a very affordable price.

 Another common approach to assessing product demand is to use online

tools, such as administering surveys, utilizing Q&A sites, and conducting
online marketing research. Surveys are most effective in validating what
you’ve learned from face-toface interviews, rather than collecting initial
data. if you’ve interviewed a number of people about the home healthcare
service you’d like to start, and through several iterations of your idea feel
that you’re getting close to product/market fit, you can further validate
your idea by reaching a larger audience via an online survey. Be careful to
avoid confirmation bias, which is a tendency to search for information that
 validates your preconceptions. Make sure to ask questions that allow for a
wide range of responses. SurveyMonkey and Google Consumer Surveys are
excellent online survey platforms. There are many resources available in
print and online that provide instructions about how to create effective
online surveys. It is better to not conduct a survey than to administer one in
an uninformed and/or haphazard manner. There are several Q&A sites that
can be utilized to get feedback about product/service demand.
 The third way to assess demand for a product or service idea is by
conducting library, Internet, and gumshoe research. Although talking to
prospective customers is critical, collecting secondary data on an industry is
also helpful. Simple gumshoe research is also important for gaining a sense
of the likely demand for a product or service idea. A gumshoe is a detective
or an investigator that scrounges around for information or clues wherever
they can be found. Don’t be bashful. 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. Take the owner of a toy store to lunch and discuss your ideas.
Spend some time browsing through toy stores and observing the types of
toys that receive the most attention. If you actually launch a business, there
is simply too much at stake to rely on gut instincts and cursory information
to assure you that your product or service will sell. Collect as much
information as you can within reasonable time constraints.

 Industry/target market feasibility

 is an assessment of the overall appeal of the industry and the target market
of the product or service being proposed. There is a distinct difference
between a firm’s industry and its target market; having a clear
understanding of this difference is important.
 An industry is a group of firms producing a similar product or service, such
as computers, children’s toys, airplanes, or social networks.
 A firm’s target market is the portion of the industry that it goes after or to
which it wants to appeal. Most firms, and certainly entrepreneurial start-
 ups, typically do not try to service an entire industry. Instead, they select or
carve out a specific target market and try to service that group of
customers particularly well.
 There are two components to industry/target market feasibility analysis:
industry attractiveness and target market attractiveness.
 Industries vary in terms of their overall attractiveness. The top three factors
are particularly important. Industries that are young rather than old, are
early rather than late in their life cycle, and are fragmented rather than
concentrated are more receptive to new entrants than industries with the
opposite characteristics. You also want to pick an industry that is
structurally attractive—meaning start-ups can enter the industry (in various
target markets) and compete effectively. Some industries are characterized
by such high barriers to entry or the presence of one or two dominant
players that potential new entrants are essentially shut out. Other factors
are also important. For example, the degree to which environmental and
business trends are moving in favor of rather than against the industry are
important for its long-term health and its capacity to spawn new target or
niche markets. Are changing economic and societal trends helping or
hurting industry incumbents? Are profit margins increasing or decreasing?
Is innovation accelerating or waning? Are input costs going up or down?
Are new markets for the industry’s staple products opening up or are
current markets being shut down by competing industries?

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 a target market is a segment within a larger market that represents a
narrower group of customers with similar needs. Most startups simply
don’t have the resources needed to participate in a broad market, at least
 initially. Instead, by focusing on a smaller target market, a firm can usually
avoid head-to-head competition with industry leaders and can focus on
serving a specialized market very well. It is also not realistic, in most cases,
for a start-up to introduce a totally original product idea into a completely
new market. In most instances, it is just too expensive to be a pioneer in
each area. Most successful start-ups either introduce a new product into an
existing market (like Wonder Workshop introducing new toys into the
existing toy market) or introduce a new market to an existing product (like
Etrainer is introducing web-based, real-time fitness instruction, which is a
new market for an existing product offered by personal trainers).
 The challenge in identifying an attractive target market is to find a market
that is large enough for the proposed business but yet is small enough to
avoid attracting larger competitors, at least until the entrepreneurial
venture can get off to a successful start
 An organizational feasibility analysis is conducted to determine whether a
proposed business has sufficient management expertise, organizational
competence, and resources to successfully launch.
 There are two primary issues to consider in this area: management
prowess and resource sufficiency.
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 One thing that many potential business founders find while assessing management prowess is
that they may benefit from finding one or more partners to help them launch their business.
Tips for finding an appropriate business partner are provided in the nearby “Partnering for
Success” feature. Another group of people to reach out to in the feasibility analysis stage is
potential mentors A good mentor will offer meaningful advice and help you work through
challenges.
 The second area of organizational feasibility analysis is to determine whether the proposed
venture has or is capable of obtaining sufficient resources to move forward. The focus in
organizational feasibility analysis is on nonfinancial resources. The objective is to identify the
most important nonfinancial resources and assess their availability. An example is a start-up that
will require employees with specialized skills. If a firm launches in a community that does not
have a labor pool that includes people with the skill sets the firm needs, a serious resource
sufficiency problem exists. Another key resource sufficiency issue is the ability to obtain
intellectual property protection on key aspects of the business. This issue doesn’t apply to all
start-ups; but, it is critical for companies that have invented a new product or are introducing a
new business process that adds value to the way a product is manufactured or a service is
delivered. One quick test a start-up can administer is to see if a patent has already been filed for
its product or business process idea
 To test resource sufficiency, a firm should list the 6 to 12 most critical nonfinancial resources
that it will need to move its business idea forward and determine if those resources are
available.
 A financial feasibility analysis is the final component of a comprehensive feasibility analysis. For
feasibility analysis, a preliminary financial assessment is usually sufficient; indeed, additional
rigor at this point is typically not required because the specifics of the business will inevitably
evolve, making it impractical to spend a lot of time early on preparing detailed financial
forecasts
 The most important issues to consider at this stage are total start-up cash needed, financial
performance of similar businesses, and the overall financial attractiveness of the proposed
venture. If a proposed new venture moves beyond the feasibility analysis stage, complete pro
forma (or projected) financial statements that demonstrate the firm’s financial viability for the
first one to three years of its existence must be completed
 This first issue refers to the total cash needed to prepare the business to make its first sale. An
actual budget should be prepared that lists all the anticipated capital purchases and operating
expenses needed to get the business up and running.

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 There are worksheets posted online that help entrepreneurs determine the start-up costs to
launch their respective businesses. Start-up cost worksheets are available via SCORE
(www.score.org) and the U.S. Small Business Administration (www.sba.gov).
 The second component of financial feasibility analysis is estimating a proposed start-up’s
potential financial performance by comparing it to similar, already established businesses.
Obviously, this effort results in approximate rather than exact numbers. There are several ways
of doing this, all of which involve a little gumshoe labor. First, substantial archival data, which
offers detailed financial reports on thousands of individual firms, is available online. The easiest
data to obtain is on publicly traded firms through Hoovers or a similar source. These firms are
typically too large, however, for meaningful comparisons to proposed new ventures. The
challenge is to find the financial performance of small, more comparable firms.
 There are additional ways to obtain financial data on smaller firms. If a startup entrepreneur
identifies a business that is similar to the one to be started, and the business isn’t likely to be a
direct competitor, it is perfectly acceptable to ask the owner or manager of the business to
share sales and income data.
 Simple observation and legwork is a final way to obtain sales data for similar businesses.
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