Entrepreneurship:

Successfully Launching
New Ventures, 2/e
Bruce R. Barringer
R. Duane Ireland

Chapter 3

3-1
©2008 Prentice Hall
 Chapter Objectives
(1 of 3)

1. Explain what a feasibility analysis is and why it’s

important.
2. Discuss the proper time to complete a feasibility
analysis when developing a business venture.
3. Describe the purpose of a product/service feasibility
analysis and the two primary issues that a proposed
business should consider in this area.
4. Identify three primary purposes of concept testing.
5. Explain a concept statement and its contents.
3-2
©2008 Prentice Hall
 Chapter Objectives
(2 of 3)

6. Define the term usability testing and explain why

it’s important.
7. Describe the purpose of industry/market feasibility
analysis and the three primary issues to consider in
this area.
8. Explain the difference between primary research
and secondary research.
9. Describe the purpose of organizational feasibility
analysis and list the two primary issues to consider
in this area.
3-3
©2008 Prentice Hall
 Chapter Objectives
(3 of 3)

10. Explain the importance of financial feasibility

analysis and list the most critical issues to consider
in this area.

3-4
©2008 Prentice Hall
 What Is Feasibility Analysis?

• Feasibility Analysis
– Feasibility analysis is the process of determining whether a
business idea is viable.
– It is the preliminary evaluation of a business idea,
conducted for the purpose of determining whether the idea
is worth pursuing.
– Feasibility analysis takes the guesswork (to a certain
degree) out of a business launch, and provides an
entrepreneur with a more secure notion that a business idea
is feasible or viable.

3-5
©2008 Prentice Hall
 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 shown in the figure on the next
slide.

3-6
©2008 Prentice Hall
 Feasibility Analysis

Role of feasibility analysis in developing successful business ideas

3-7
©2008 Prentice Hall
 Four Forms of Feasibility Analysis

Product/Service Feasibility Industry/Market Feasibility

Analysis Analysis

Organizational Feasibility Financial Feasibility

Analysis Analysis

3-8
©2008 Prentice Hall
 Product/Service Feasibility Analysis

• Product/Service Feasibility 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.
– The two components of a product/service feasibility
analysis are:
• Concept testing.
• Usability testing.

3-9
©2008 Prentice Hall
 Preparing a Concept Statement
(1 of 3)

• Concept Statement
– Before a company undertakes product/service feasibility
analysis, a concept statement should be developed.
– A concept statement is a one page description of a business
that is distributed by a startup entrepreneur to people who
are asked to provide feedback on the potential of the
business idea.
– The feedback will hopefully provide the entrepreneur (1) a
sense of the viability of the business idea, and (2)
suggestions for how the idea can be strengthened or
“tweaked” before proceeding further.

3-10
©2008 Prentice Hall
 Preparing a Concept Statement
(2 of 3)

• Information to Include
– A description of the product or service being offered.
– The intended target market.
– The benefits of the product or service.
– A description of how the product will be positioned relative
to similar ones in the market.
– A description of how the product or service will be sold
and distributed.
– Information about the founder or founders of the firm.

3-11
©2008 Prentice Hall
 Preparing a Concept Statement
(3 of 3)

New Venture Fitness

Drink’s Concept Statement

3-12
©2008 Prentice Hall
 Usability Test
(1 of 2)

• Usability Testing
– Is the method by which users of a product are asked to
perform certain tasks in order to measure the product’s
ease-of-use and the user’s perception of the experience.
– Usability tests are sometimes called user tests, beta tests, or
field trials, depending on the circumstances involved.
• While it is tempting to rush a new product or service to market,
conducting a usability test is a good investment of an
entrepreneur’s or firm’s resources.
• Many products that consumers find frustrating to work with have
been brought to market too quickly.

3-13
©2008 Prentice Hall
 Usability Test
(2 of 2)

• Usability Testing (continued)

– Prototype
• Conducting a usability test typically requires the development of a
prototype.
• A prototype is the first physical depiction of a new product, which
is usually still in a rough or tentative mode.
– Virtual Prototype
• A virtual prototype is a computer-generated 3D image of an idea. It
displays an invention as a 3D model that can be viewed from all
sides and rotated 360 degrees.

3-14
©2008 Prentice Hall
Product/Service Feasibility Analysis in Action
Role of feasibility analysis in the development of successful
business ideas at Activision (an electronic games company)

The Activision “Green Light Process”

3-15
©2008 Prentice Hall
 Industry/Market Feasibility Analysis
(1 of 6)

• Industry/Market Feasibility Analysis

– Is an assessment of the overall appeal of the market for the
product or service being proposed.
– For industry/market feasibility analysis, there are three
primary issues that a proposed business should consider:
• Industry attractiveness, market timeliness, and the identification of
a niche market.
• Industry Attractiveness
– A primary determinant of a new venture’s feasibility is the
attractiveness of the industry it chooses.

3-16
©2008 Prentice Hall
 Industry/Market Feasibility Analysis
(2 of 6)

Characteristics of attractive industries for new ventures

• Are large and growing (with growth being more important than size).
• Are important to the customer.
• Are fairly young rather than older and more mature.
• Have high rather than low operating margins.
• Are not crowded.

3-17
©2008 Prentice Hall
 Industry/Market Feasibility Analysis
(3 of 6)

• Industry Attractiveness
– Although the criteria shown on the preceding slide is an
ideal list, the extent to which a new business’s proposed
industry’s growth possibilities satisfy these criteria should
be taken seriously.
– In addition to evaluating an industry’s growth potential, a
new venture will want to know more about the industry it
plans to enter.
– This can be accomplished through both primary and
secondary research, as explained in the next slide.

3-18
©2008 Prentice Hall
 Organizational Feasibility Analysis
(1 of 4)

• Organizational Feasibility
– Is concerned with determining whether the business itself
has sufficient skills and resources to bring a particular
product or service idea to market successfully.
– There are two primary issues to consider in this area:
• Management prowess.
• Resource sufficiency.

3-19
©2008 Prentice Hall
 Organizational Feasibility Analysis
(2 of 4)

• 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 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.

3-20
©2008 Prentice Hall
 Organizational Feasibility Analysis
(3 of 4)

• Resource Sufficiency
– This topic pertains to an assessment of whether an
entrepreneur has sufficient resources to launch the
proposed venture.
– The focus here should be on nonfinancial resources in that
financial feasibility is considered separately.
– 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.

3-21
©2008 Prentice Hall
 Organizational Feasibility Analysis
(4 of 4)

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.

3-22
©2008 Prentice Hall
 Financial Feasibility Analysis
(1 of 5)

• Financial Feasibility
– For feasibility analysis, a quick financial assessment is
usually sufficient.
– The most important issues to consider at this stage are:
• Total start-up cash needed.
• Financial performance of similar businesses.

3-23
©2008 Prentice Hall
 Financial Feasibility Analysis
(2 of 5)

• Total Start-Up Cash Needed

– The first issue refers to the 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 $1 in revenues.
– When projecting start-up expenses, it is better to
overestimate rather than underestimate the costs involved.
• Murphy’s Law is prevalent in the start-up world—things will go
wrong. It is a rare start-up that doesn’t have some setbacks in
getting up and running.

3-24
©2008 Prentice Hall
 Financial Feasibility Analysis
(3 of 5)

• 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.
3-25
©2008 Prentice Hall