Entrepreneurship by M.

Mansoor Sultan
 Lecture # 4
Entrepreneurship Successfully launching new Venture
Fifth Edition by Bruce R. Barringer Oklahoma State University R. Duane Ireland Texas A & M
University
Feasibility Analysis
Chapter # 3
Feasibility Analysis
• It 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.
• 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.
 Feasibility Analysis
Continued…

• A mental transition must be made

when completing a feasibility analysis
from thinking of a business idea as
just an idea to thinking of it as a
business.
• A feasibility analysis is an assessment
of a potential business rather than
strictly a product or service idea.

Figure 3.1 Role of Feasibility Analysis in Developing

Successful Business Ideas
Feasibility Analysis

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.
Product/Service Feasibility Analysis
• It 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:
1. Product/service desirability
2. Product/service demand
Product/service Desirability
• 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:
1. Does it make sense? Is it reasonable? Is it something real customers will buy?
2. Does it take advantage of an environmental trend, solve a problem, or fill a gap in
the marketplace?
3. Is this a good time to introduce the product or service to the market?
4. Are there any fatal flaws in the product or service’s basic design or concept?
 Product/service Desirability
Continued…

• Concept Test: This test involves showing a preliminary description of a product or service idea, called a concept statement,
to industry experts and prospective customers to solicit their feedback.
• It is a one-page document that normally includes the following:
1. A description of the product or service. This section details the features of the product or service; many include a sketch
of it as well.
2. The intended target market. This section lists the consumers or businesses who are expected to buy the product or
service.
3. 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.
4. 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.
5. A brief description of the company’s management team
Concept Test:
Continued…

• After the concept statement is developed, it should be shown to at least 20

people who are familiar with the industry that the firm plans to enter and who
can provide informed feedback.
• The temptation to show it to family members and friends should be avoided
because these people are predisposed to give positive feedback. Instead, it
should be distributed to people who will provide candid and informed feedback
and advice.
Example: New venture Fitness Drinks’ Concept
Statement
Figure 3.2
Product/Service Demand
• 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 include:
1. Talking face-to-face with potential customers,
2. Utilizing online tools, such as Google Adwords and landing pages, to assess
demand, and
3. Library, Internet, and gumshoe research.
Talking Face-to-Face with Potential Customers
• The only way to know if your product or service is what people want is by talking to them.
• Curiously, this often doesn’t happen. One study of 120 business founders revealed that more
than half fully developed their products without getting feedback from potential buyers. In
hindsight, most viewed it as a mistake.
• The authors of the study quoted one of the participants as saying “You’ll learn more from
talking to five customers than you will from hours of market research (at a computer).”
• 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.
• In some instances, you have to pause and think carefully about who the potential customer is.
For example, in health care the “customer” is typically not the patient who will use the drugs
or benefit from a medical procedure. Instead the actual customer, or the entity that will be
paying the bill, is often an insurance company, hospital, or Medicare or Medicaid.
 Utilizing Online Tools, Such As Google Adwords
And Landing Pages, To Assess Demand
• Another common approach to assessing product demand is to use online tools, such as Google AdWords and landing pages.
• The way this works is as follows. Suppose you’ve developed a new type of sunglasses for snowboarders and want to assess likely demand.
• One way of doing this is to buy keywords on the Google search page like “snowboarding” and “sunglasses.” You can purchase the keywords
through Google’s AdWords program. Once you buy the keywords, when someone searches for the term “snowboarding” or “sunglasses” a link
to an ad you’ve prepared will show up either at the top or to the right of the organic search results.
• The text below the link will say something such as “Innovative new sunglasses for snowboarders.” If someone clicks on the link, they’ll be
taken to what online marketers call a landing page.
• A landing page is a single Web page that typically provides direct sales copy, like “click here to buy a Hawaiian vacation.
• Your landing page, which can be inexpensively produced through a company like LaunchRock, will show an artist’s depiction of your
innovative new sunglasses, provide a brief explanation, and will then say something like “Coming Soon—Please Enter Your E-mail Address for
Updates.”
• How often your ad appears will depend on what you purchase through Google’s automated AdWord’s keyword auction. Google will provide
you analytics regarding how many people click on the ad and how many follow through and provide their e-mail address. You can also capture
the e-mail addresses that are provided.
Utilizing Online Tools, Such As Google Adwords
And Landing Pages, To Assess Demand
• The beauty of using Google AdWords is that the people who click on the ad were either searching for the term
“snowboarding” or “sunglasses” or they wouldn’t have seen the ad. So you’re eliciting responses from a self-
selected group of potential buyers.
• The overarching purpose is to get a sense of interest in your product. If, over a three-day period, 10,000 people click
on the ad and 4,000 provide their e-mail address to you, that might signal a fairly strong interest in the product.
• On the other hand, if only 500 people click on the ad and 50 give you their e-mail address, that’s a much less
affirming response.
• It’s strictly a judgment call regarding how many clicks represent an encouraging response to your product idea.
Normally, utilizing an AdWords and landing page campaign wouldn’t be the only thing you’d do to assess demand.
• You’d still want to talk to prospective customers face-to-face, as discussed earlier. Running an AdWords and
landing page campaign is, however, a practical and often surprisingly affordable way to get another data point in
regard to assessing demand for a new product or service idea.
Library, Internet, And Gumshoe Research
• The third way to assess demand for a product or service idea is by conducting library, Internet, and
gumshoe research.
• While talking to prospective customers is critical, collecting secondary data on an industry is also
helpful.
• For example, Spring Toys makes super-safe, environmentally friendly, educational toys for children.
• We need feedback from prospective customers and industry-related data to make sure. Industry-
related data can help us answer the following types of questions:
• What’s the trajectory of the toy industry? What do industry experts say are the most important
factors that parents consider when they buy their children toys? Is there an “educational toy”
segment within the larger toy industry? If so, is this segment growing or shrinking? Is there a trade
association for the makers of educational toys that already has statistics about the market demand for
educational toys?
Library, Internet, And Gumshoe Research
Continued…

• 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.
• 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 observe the types of toys that get 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
• It is an assessment of the overall appeal of the industry and the target market for 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 limited 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
 • Industries vary in terms of their overall
attractiveness.

Industry Attractiveness • In general, the most attractive industries have the

characteristics depicted in Table 3.4.
• 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.
Target Market Attractiveness
• A target market is a place within a larger market segment that represents a narrower
group of customers with similar needs.
• Most start-ups 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’s also not realistic, in most cases, for a start-up to introduce a completely original
product idea into a completely new market. In most instances, it’s just too expensive
to be a pioneer in each area.
Organizational Feasibility Analysis
• This 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:
1. Management prowess
2. Resource sufficiency
 Management prowess

• A proposed business should evaluate the prowess, or ability, of its initial management team, whether it is a sole
entrepreneur or a larger group.
• This task requires the individuals starting the firm to be honest and candid in their self assessments.
• Two of the most important factors in this area are the passion that the solo entrepreneur or the management team has for
the business idea and the extent to which the management team or solo entrepreneur understands the markets in which
the firm will participate.
• There are no practical substitutes for strengths in these areas.
• In addition, a potential new venture should have an idea of the type of new-venture team that it can assemble.
• A new-venture team is the group of founders, key employees, and advisers that either manage or help manage a new
business in its start-up years.
• If the founder or founders of a new venture have identified several individuals they believe will join the firm after it is
launched and these individuals are highly capable, that knowledge lends credibility to the organizational feasibility of
the potential venture.
Resource Sufficiency
• 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 resources sufficiency problem exists.
 Financial Feasibility Analysis
• It 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, it will need to complete
pro forma (or projected) financial statements that demonstrate the firm’s financial viability for the
first one to three years of its existence.
Total Startup Cash Needed
• 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.
• After determining a total figure, an explanation of where the money will come from should be
provided. Avoid cursory explanations such as “I plan to bring investors on board” or “I’ll
borrow the money.” Although you may ultimately involve investors or lenders in your
business, a more thoughtful account is required of how you’ll provide for your initial cash
needs.
• If the money will come from friends and family or is raised through other means, such as credit
cards or a home equity line of credit, a reasonable plan should be stipulated to repay the
money.
Types Of Nonfinancial Resources That Are Critical To
Many Start-ups’ Success
Table 3.5
Financial Performance Of Similar Businesses
• 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 will result 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.
Overall Financial Attractiveness Of The Proposed
Venture
• A number of other factors are associated with evaluating the financial attractiveness
of a proposed venture.
• These evaluations are based primarily on a new venture’s projected sales and rate of
return (or profitability), as just discussed.
• At the feasibility analysis stage, the projected return is a judgment call.
• A more precise estimation can be computed by preparing pro forma (or projected)
financial statements, including one- to three-year pro forma statements of cash flow,
income statements, and balance sheets (along with accompanying financial ratios).
• This work can be done if time and circumstances allow, but is typically done at the
business plan stage rather than the feasibility analysis stage of a new venture’s
development.
Overall Financial Attractiveness Of The Proposed
Venture
Continued…

• To gain perspective, a start-up’s projected rate of return should be weighed

against the following factors to assess whether the venture is financially feasible:
1. The amount of capital invested
2. The risks assumed in launching the business
3. The existing alternatives for the money being invested
4. The existing alternatives for the entrepreneur’s time and efforts
Chapter Summary