CHAPTER 3

FEASIBILITY ANALYSIS

LEARNING OBJECTIVES

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

2. Discuss the proper time to complete a feasibility analysis when developing an
entrepreneurial 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. Explain a concept statement and its contents.
5. Describe the purpose of a buying intentions survey and how it’s administered.
6. Explain the importance of library, Internet, and gumshoe research.
7. Describe the purpose of industry/target market feasibility analysis and the three
primary issues to consider in this area.
8. Discuss the characteristics of an attractive industry.
9. Describe the purpose of organizational feasibility analysis and list the two primary
issues to consider in this area.
10. Explain the importance of financial feasibility analysis and list the most critical
issues to consider in this area.

CHAPTER OVERVIEW

This chapter introduces feasibility analysis, and makes the case for the importance of
feasibility analysis as a way of testing the potential viability of a business idea. The chapter
stresses that the proper time to complete a feasibility analysis is after opportunity recognition
but before the completion of a business plan. The value of completing a concept statement is
discussed. A concept statement is a one page description of a business idea, which an
entrepreneur uses to solicit feedback about the potential viability of the idea.

The four stages of feasibility analysis are introduced, including product/service feasibility,
industry/target market feasibility, organizational feasibility and financial feasibility. The
major issues to consider in each stage of feasibility analysis are introduced and discussed.

A feasibility analysis software product, called Feasibility Analysis Pro, is available for this
textbook that provides an excellent means to enhance the value of this chapter.

CHAPTER OUTLINE

I. Feasibility Analysis
A. Product/Service Feasibility Analysis
1. Product/Service Desirability
a. Concept Test
2. Product/Service Demand
a. Buying Intentions Survey
b. Library, Internet, and Gumshoe Research
 B. Industry/Target Market Feasibility
1. Industry Attractiveness
2. Target/Market Attractiveness
C. Organizational Feasibility Analysis
1. Management Prowess
2. Resource Sufficiency
D. Financial Feasibility Analysis
1. Total Start-Up Cash Needed
2. Financial Performance of Similar Businesses
3. Overall Financial Attractiveness of the Proposed Venture

II. First Screen

CHAPTER NOTES

I. Feasibility Analysis

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

2. As a preliminary evaluation of a business idea, a feasibility analysis is

completed to determine if an idea is worth pursuing and to screen ideas before
spending resources on them.

3. It follows the opportunity recognition stage but comes before the development
of a business plan, as illustrated in Figure 3.1 in the textbook.

4. Although the sequence pictured in Figure 3.1 makes perfect sense, statistics
show that the majority of entrepreneurs do not follow this pattern before
launching their ventures. Several studies have investigated why this is the
case. The consensus of the research is that entrepreneurs tend to underestimate
the amount of competition there will be in the marketplace and tend to
overestimate their personal chances for success.

A. Product/Service Feasibility Analysis—is an assessment of the overall appeal

of the product or service being proposed.

1. Product/Service Desirability

a. A concept test entails showing a representation of the product or

service to prospective users to gauge customer interest, desirability,
and purchase intent.

b. There are three primary purposes for a concept test: (1) to valuate
the underlying premises of a product or service that an entrepreneur
thinks is compelling; (2) to help develop an idea; and (3) to estimate
the potential market share the product or service might command.

c. A well-designed concept test, which is usually called a concept

statement, includes the following:
 - A description of the product of service being offered
- The intended target market
- The benefits of the product or service
- A description of how the product will be positioned in relative to
similar ones in the market
- A brief description of the company’s management team.

2. Product/Service Demand

a. A buying intentions survey is an instrument that is used to gauge

customer interest in a product or service.

b. It consists of a concept statement or a similar description of a product

or service with a short survey attached. The statement and survey
should be distribute to 20 to 30 potential customers to be completed.

c. One caveat is that people who say that they intend to purchase a product
or service don’t always follow through; as a result, the numbers
resulting from this activity are almost always optimistic.

d. It’s also important to conduct library, Internet, and gumshoe research.

While administering a buying intentions survey is important, more data
is needed.

B. Industry/Target Market Feasibility

* Is an assessment of the overall appeal of the market for the product or service
being produced.

1. Industry Attractiveness

a. Industries vary considerably in terms of their growth rate, as shown

in table 3.4 in the textbook. In general, the most attractive industries
are characterized as the following:

- Are young rather than old

- Are early rather than late in their life cycles
- Are fragmented rather than concentrated
- Are growing rather than shrinking
- Sell products or services that customers “must have” rather than
“want to have”
- Are not crowded
- Have high rather than low operating margins
- Are not highly dependent on the historically low price of a key raw
material, like gasoline or flour, to remain profitable

b. In addition to evaluating an industry’s growth potential, a new

venture will want to know more about the overall attractiveness
of the industry it plans to enter. This can be accomplished through
both primary research and secondary research.
 i. Primary research is research that is original and is collected by
the entrepreneur.

ii. Secondary research probes data that are already collected, such
as those shown in Appendix 3.2.

2. Target Market Attractiveness

a. A target market is a place within a larger market segment that

represents a narrower group of customers with similar needs.

b. 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 at least until
the entrepreneurial venture can get off to a successful start.

c. The sources of information to mine and tap are not as transparent

when investigating target market attractiveness opposed to industry
attractiveness.

C. Organizational Feasibility – Is conducted to determine whether a proposed

business has sufficient management expertise, organizational competence, and
resources to successfully launch its business.

1. Management Prowess

a. A firm should candidly evaluate the prowess, or ability, of its

management team.

b. Two of the most important factors in this area are the passion
that the sole entrepreneur or management team has for the
business idea and the extent to which the management team
or sole entrepreneur understands the markets in which the firm
will compete.

2. Resource Sufficiency

a. The second area of organizational feasibility analysis is to determine

whether the potential new venture has sufficient resources to move
forward to successfully develop a product or service idea.

b. The focus in organizational feasibility analysis should be on

nonfinancial resources in that financial feasibility is considered
separately.

D. Financial Feasibility – Is the final stage of analysis. For feasibility analysis, a

quick financial assessment is usually sufficient.

1. Total Start-Up Cash Needed

 a. The 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
generate the first $1 in revenues.

i. The financial feasibility analysis should state specifically where the

money will come from to fund the venture’s start-up costs.

2. Financial Performance of Similar Businesses

a. 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 number will
result in approximate rather than exact numbers.

b. There are several ways of doing this, all of which involve a little ethical
detective work.

3. Overall Financial Attractiveness of the Proposed Venture

a. A number of other factors are associated with evaluating the financial

attractiveness of a proposed venture.

b. Typically, these evaluations are based primarily on a new venture’s

projected financial rate of return. At the macro level, the following
factors should be considered to determine whether the projected
return is adequate to justify the launch of the business.

- The amount of capital invested

- The amount of time required to earn the return
- The risks assumed in launching the business
- The existing alternatives for the money being invested
- The existing alternatives for the entrepreneur’s time and efforts

c. 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.

3. Overall Attractiveness of the Investment

a. A number of other financial factors are associated with promising

business opportunities. Examples are reflected in Table 3.6 in the
textbook.

II. First Screen

1. First Screen, shown in Appendix 3.1, is a template for completing a feasibility

 analysis. It is called First Screen because a feasibility analysis is an entrepreneurs
(or a group of entrepreneurs’) initial pass at determining the feasibility of a
business idea.

2. The mechanics for filling out the First Screen worksheet are straightforward. It
maps the four areas of feasibility analysis described in the chapter,
accentuating the most important points in each area.

3. The final section of the worksheet, “Overall Potential,” includes a section

that allows for suggested revisions to the business idea to improve its
potential or feasibility.