Chapter 3

Feasibility Analysis
Bruce R. Barringer
R. Duane Ireland

©2010 Pearson Education 3-1

This Software Engineer Sold His Company to
Start a Vertical Hydroponic Farm in Goa
• Ajay Naik, a Goa-based
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hydroponic farmer.
• Hydroponics is the
process of growing plants
in water with added
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of soil.
• https://www.thebetterindia
.com/79003/ajay-naik-goa
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e-engineer/

©2010 Pearson Education 3-2

 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.

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 Feasibility Analysis

Role of feasibility analysis in developing business ideas.

Figure: 3.1

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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
Product/Service
• Is an assessment of the overall
Feasibility Analysis
appeal of the product or service
being proposed.

• Nothing else matters if the

product or service itself does not
sell.

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 Product/Service Feasibility Analysis
2 of 2

Components of product/service
feasibility analysis

Product/Service Product/Service
Desirability Demand

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 Product/Service Desirability
1 of 3

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 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.

– Please refer to Table 3.2 in the book.

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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.

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 Product/Service Demand
3 of 6

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 Main areas of a questionnaire
• Interest in your product or service
- desirability and demand
• Demographics
- What kind of people your prospects are?
• The means of reaching your market
- Availability
• The competition
- Alternatives
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©2010 Pearson Education 3-16
 Common mistakes
• Failure of the respondent to understand
question
• Failure of the interviewer to record the
reply accurately
• Boredom and fatigue
• Inaccuracy of memory
• No conscious attitude

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Industry/Target Market Feasibility Analysis
1 of 2

Industry/Target Market
Feasibility Analysis

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Industry/Target Market Feasibility Analysis
2 of 2

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.

– The top 3 factors are particularly very important (Refer to

next slide).

– 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.

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 Industry Attractiveness
2 of 2

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 The Five Competitive Forces Model

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 Threat of Substitutes

• Threat of Substitutes
– The price that consumers are willing to pay for a product
depends in part on the availability of substitute products.

– Higher the availability of substitutes, higher the threat.

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 Threat of New Entrants

• Threat of New Entrants

– If the firms in an industry are highly profitable, the industry
becomes a magnet to new entrants.
 Economies of Scale: Large economies of scale means difficulty to enter
 Product Differentiation: High differentiation means difficulty to enter
 Capital Requirements: High capital requirements means difficulty to
enter
 Cost advantages independent of size: Higher cost advantage means
difficulty to enter
 Access to distribution channels: Harder access, higher difficulty to enter
 Government and legal barriers: More barriers, higher difficulty

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 Rivalry Among Existing Firms

• Rivalry Among Existing Firms

– In most industries, the major determinant of industry
profitability is the level of competition among existing
firms.
 Number and balance of competitors: More the competitors, greater
the rivalry
 Degree of difference between products: Lower the difference, more
intense rivalry
 Growth rate of an industry: Slower growth intensifies rivalry
 Level of fixed costs: Higher fixed costs, greater the rivalry

©2010 Pearson Education 3-25

 Bargaining Power of Suppliers

• Bargaining Power of Suppliers

– Suppliers can suppress the profitability of the industries to
which they sell by raising prices or reducing the quality of
the components they provide.
 Supplier concentration: Lesser the no of suppliers, higher
bargaining power of suppliers.
 Switching costs: Lower switching cost for buyers, lower
bargaining power of suppliers
 Attractiveness of substitutes: Lower the substitutes, higher
bargaining power of suppliers.
 Threat of forward integration: If there is a chance that supplier will
enter the buyer’s industry, bargaining power of suppliers goes up.

©2010 Pearson Education 3-26

 Bargaining Power of Buyers

• Bargaining Power of Buyers

– Buyers can suppress the profitability of the industries from
which they purchase by demanding price concessions or
increases in quality.
 Buyer group concentration: Fewer the buyers, higher the
bargaining power of buyers.
 Buyer’s cost: Higher the cost, higher the bargaining power of
buyers.
 Degree of standardization of supplier’s products: Higher the degree
of standardization, higher the bargaining power of buyers.
 Threat of backward integration: If there is a chance that buyer will
enter the supplier’s industry, bargaining power of buyers goes up.

©2010 Pearson Education 3-27

 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.

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 Market Segmentation
• Geographic (Location, Region)

• Demographic (Age, Gender)

• Behavioral (Rate of Usage, Loyalty)

• Psychographic (personality, Lifestyle)

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 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
2 of 2

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
2 of 2

• 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.

©2010 Pearson Education 3-34

 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.

©2010 Pearson Education 3-35

 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.

©2010 Pearson Education 3-36

 Financial Feasibility Analysis
2 of 2

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 3-37

 Total Start-Up Cash Needed

• Total Start-Up Cash Needed

– The first issues 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 generate the first BDT 1.00 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 3-38

 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 3-39

 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 3-40

 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 3-41