Feasibility analysis



Feasibility analysis (from Allen 2003. Launching new ventures)

Feasibility analysis is a set of tools and a process of examining a business concept in a way that gives you confidence about the conditions under which you are willing to move forward. The results of feasibility analysis tell you:

• Whether there is market acceptance for the concept

• What conditions must be present for you to move into the business planing stage—the nature of the genesis team, start-up capital requirements, distribution channel, and so forth.

Feasibility vs. business plan

A feasibility study is a way to test your business concept in the market to see whether it makes sense to develop it and enter the market. By contrast, a business plan assumes a feasible concept. The purpose of the business plan is to describe the creation of a company to execute the concept. In short, feasibility is about an idea; the business plan is about a company.

The nature of the feasibility analysis

In general the research that you do to conduct the feasibility analysis answers the following three questions:

1. Is there a customer base and a market of sufficient size to make the concept viable?

2. Do the capital requirements to start, based on estimates of sales and expenses, make sense?

3. Can an appropriate start-up or genesis team be put together to execute the concept?

The feasibility may help you identify the HOLES/FATAL FLAWS in the business concept. This does not mean that you should not follow the business only that you need to develop solutions for these holes.

A feasibility analysis includes the following:

• Identifying industry risks and benefits

• Analyzing market/customer risks and benefits

• Analyzing product/service risks and benefits

• Evaluating the founding team

• Analyzing financial risks and requirements

• Analyzing the value chain

Business concept:

A business concept is a concise description of an opportunity that contains four elements:

• the product/service,

• customer definition,

• value proposition, (benefit to the customer),

• and distribution channel.

It is important to summarize into what is called the “elevator pitch.”: A concise description of the business concept that incites interest. It should clearly reflect an understanding of the “what business you are in”

Conducting industry analysis

• Identify the industry

• Examine secondary resources

• Conduct primary research, including talking with people in the industry

• Analyze the data and draw conclusions

Identifying the Industry: North American Industry Classification System (NAICS)

NAICS is replacing the traditional U.S. Standard Industrial Classification System (SIC). You can learn the new coding for industry you’re interested in by going to the U.S. Department of Commerce National Technical Information Service (NTIs)--- ntis/.

NAICS industries are identified by a six-digit code. The first 2 digits designate a major economic sector such as Agriculture or Manufacturing. The 3rd digit designates an economic subsector such as crop production or apparel manufacturing. The 4th digit designates an industry group, such as grain and oil seed farming or fiber, yarn, and thread mills. The 5th digit designates the NAICS Industry such as Wheat Framing or Broadwoven Fabric Mills. The last digit is used for industrial classification in other countries when necessary. With the NAICS code, you can find statistics about size of the industry, sales, number of employees, and so forth.

Secondary sources of industry information

With the industry identified you can begin a search of secondary data sources—journals, trade magazines, reference books, government publications, and annual reports of public corporations—available in a university or community library and on the internet. Historical data, such as annual reports over a 10 or 15-year period, can often help you spot trends, cycles, and seasonal variations in the industry. Trade magazines provide a good sense of key firms and of the directions the industry may be taking.

Analyze and organize the data collected to answer the following key questions:

1. Is the industry growing?

2. Where are the opportunities?

3. What is the status of any new technology?

4. How much does the industry spend on research and development?

5. Who are the major competitors?

6. Are there young, successful firms in the industry?

7. What does the future look like?

8. Are there any threats to the industry?

9. What are the typical margins in the industry? You derive margins by dividing gross profit by sales

Primary data

Provides the most current information and it is extremely important so “pound the pavement” and talk to: Industry observers, suppliers and distributors, customers, employees of key firms in the industry, professionals from service organizations; trade shows. How to access them:

• Where possible secure and introduction

• Seek out individuals who regularly deal with the media

• Allow sufficient lead-time

• Offer something that might be of value

• Be honest about your affiliation

• Gain credibility by showing that you have done your homework

• If possible take a colleague or business partner with you.

• Carefully observe the surroundings

• Be sure the opening questions are easy and nonthreatening.

The ideal industry

• Has over $50 billion in sales and niches with sufficient size to allow for the attainment of an adequate market share.

• Growing at a rate greater than the GNP

• Allows for after tax profits over 5 percent of sales within 3 to 5 years

• Socially and environmentally in-sync with societal and political trends

What does an industry analysis include as a minimum?

• A definition of carrying capacity of the market we are targeting? or how big is the cake and how big can it become? Or how much growth can a particular market support?

• An understanding of the structure of the industry:

o Emergent? Consolidated?

o How competitive it is considering the five forces model (barriers of entry and exit; bargaining power of buyers and suppliers; and rivalry). What are the opportunities and threats?

o Who is the competition what are their strengths and weaknesses?

Consider analyzing the competition by preparing a competitive grid (for an example see the Electronic Reserve Library)

• Start by listing competitors differentiating if possible and relevant among:

• Direct competitors

• Indirect competitors

• Emerging competitors

• Subsequent columns will depend on your needs, but in general you will want to compare product or service, benefit, distribution, and marketing strategy. Other relevant aspects are:

• Current market strategies

• Management style and culture

• Pricing strategy

• Customer mix

• Promotional mix

• Plan for gathering information:

• Visit the competitor’s web sites or the outlets where their products are sold. Evaluate appearance, number of customers coming and going, what they buy, how much, and how often. Talk to customers and employees alike.

• Buy your competitors’ products. You can see the features and benefits of the products and also learn about how they treat their customers.

• Search the internet

• Find information on public companies to serve as benchmarks for the industry (; ; ).

• Search government web sites (; edgardhp.htm; :8000/).

A reminder on Competitive entry strategies: cost superiority; differentiation; niche strategy

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