Chapter 3 Feasibility analysis Productservice feasibility analysis Industrymarket

Chapter 3 Feasibility analysis Product/service feasibility analysis Industry/market feasibility analysis Organizational feasibility analysis Financial feasibility analysis

Product/service feasibility analysis Feasibility analysis is the process of determining if a business idea is viable before spending resources on it. Most entrepreneurs do not conduct a feasibility analysis before launching their ventures. Feasibility analysis has four components: ü product/service feasibility ü industry/market feasibility ü organizational feasibility ü financial feasibility

Product/service feasibility analysis is an assessment of the product or service being proposed in the sense that it is what customers want and that it will have an adequate market. The benefits of conducting a product/service feasibility analysis are: ü Getting the product right the first time (the entrepreneur knows what customers want because he asked them) ü A segment of customers emerges because the firms or individuals that participate in the feasibility analysis often become the firm` s first customers ü By asking prospective customers to test the usability of a product or the ease of use of a service the firm avoids any defect in product/service design ü The time and capital are used more efficiently because the entrepreneur has a better idea of what customers want ü The entrepreneur collects information about the need for additional products/services

Product/service feasibility analysis consists of two tests: concept testing and usability testing. Concept testing means showing the product/service to prospective users to see their interest and purchase intent. Example: Cheskin, a marketing firm, performed a study for Pepsi. Co (it wanted to have a better understanding of the teen market to guide development of its soft drink). Cheskin sent cameras to hundreds of teens, asking them to photograph their lives as they really are. They interviewed friends, asking them about their dreams, fears, cares and concerns. As a result it was created a model that explain the main type of teenagers, tracks their relative influence over time and predicts how trends move through the teen population. All this information were used by Pepsi. Co in its product development efforts of its soft drinks and provided it with an advantage over its competitors.

Usability testing A concept test is usually followed by the development of a prototype (model) of the product/service. Prototyping is iterative, meaning that the model is improved until the customers and the designer agree on the final design. Conducting a usability test is a good investment of an entrepreneur` s resources. Many products that customers find frustrating to work with have been brought to market too quickly. There are many forms of usability tests. Some entrepreneurs having a limited budget, develop a basic prototype and ask friends and colleagues to use the product, then complete an evaluation form or give a verbal feedback. Other companies have usability testing programs and facilities.

Usability testing is particularly important for software and Web site design. Example: In Intuit` s usability testing lab (in California) customers are seated in front of PCs and then asked to work with software programs that were developed. A soundproof room is attached to the lab, where programmers and designer observe the participants.

Industry/market feasibility analysis It is an assessment of the overall appeal of the market for the product or service being proposed. For feasibility analysis the entrepreneurs should consider the following issues: § Industry attractiveness An industry that is growing is more attractive because it is more receptive to new entrants and new product introductions. The most attractive industries are characterized as the following: ü Being large and growing (with growth being more important than size). ü Being important to the customers. These markets sell products or services that customers “must have“ rather than “would like to have“. ü Being older and more mature, these markets tend to be early in their product life cycle, when price competition is not intense.

ü These markets are more profitable for entry and competition purposes. ü Not being crowded. A crowded market with lots of competitors is characterized by price competition and low profit. Beside the evaluation of an industry` s growth potential, the entrepreneur needs more information about the overall attractiveness of the industry he plans to enter. These can be accomplished through both a primary and a secondary research. Primary research involves an entrepreneur talking to potential customers and key industry participants. Secondary research probes data that are already collected, the sources including industry-related publications, government statistics, competitors` Web sites, industry reports.

After completing the primary and secondary research, an entrepreneur should have concrete numbers regarding the market size and industry growth rate. § Market timeliness The timeliness of the introduction of a particular product or service varies depending on whether the new firm is planning to introduce a new product/service or one that is an improvement on those currently available. a). If the product/service is an improvement on those already available in the market, the first step is to determine whether the window of opportunity for that product/service is open or closed. Examples: Some markets such as the one for Internet search engines are either saturated with competitors or dominated by competitors with sufficient market power and are closed to new entrants. Other markets, such as specialty restaurants are characterized by windows of opportunity that are open to new entrants.

The second step is to study the current dynamics of the industry and whether the timing for a new business is good. Example: The personal computer industry was consolidated because of Hewlett. Packard` s acquisition of Compaq and Dell` s increasing market dominance. When an industry consolidates, some large firms in the industry acquire or force out of business the smaller firms. This trend in the personal computer industry suggests that it is not a good time to launch a new personal computer firm. b). For new businesses that are developing a new product/service, is vitally important to capture a first-mover advantage. The first-mover advantages are that it can set the standard for an industry, it gets brand recognition and market power.

Examples of first movers: Yahoo!, Nokia, Palm. The disadvantages of first movers are: high research and development costs, the risk that a competitor will study the first mover` s product/service and quickly come out with a better version. The second mover has the advantage of studying all the mistakes that were made by the first movers and it will build a better product or service. § Identifying a niche market A niche market is a place within a larger market segment that represents a narrower group of customers with similar interests.

Most successful entrepreneurial firms do not start by selling to large markets. They identify an emerging or underserved niche within a larger market. For a new firm selling to a niche market makes sense for the following reasons: ü It allows a firm to establish itself within an industry without competing against powerful competitors ü A niche strategy allows a firm to focus on serving a specialized market instead of trying to be everything to everybody in a broad market

Organizational feasibility analysis is conducted to determine weather a proposed business has sufficient management expertise, organizational competence and resources to successfully launch its business. There are two issues to consider: § Management ability The entrepreneur must complete a self-assessment. The most important factors in this area are the passion that the entrepreneur or the management team has for the business idea and the extent to which they understand the market.

Example: Garden. com was started in 1995 to sell gardening supplies on the Internet. None of Garden. com’ s three founders had any experience in Garden retailing, nor were they knowledgeable gardeners. The firm failed after losing many millions of dollars of its investors’ money. § Resource sufficiency The second area of organizational feasibility analysis is to determine whether the potential new venture has sufficient resources to successfully develop a product or service idea, such as: availability of office space, the quality of the labor force in the area where the business will be located, the possibility of obtaining intellectual property protection on key aspects of the new business. One resource sufficiency issue that new firms should consider is their proximity to similar firms.

There are clusters of high-tech firms in the Silicon valley of California, on Route 128 around Boston, in the Cambridge region in the UK. Clusters arise because they increase the productivity of the firms participating in them. Because these firms are located in the same area, it is easy for their employees to network with each other, it is easy for the firms to gain access to specialized suppliers, scientific knowledge and technological expertise. Researchers found that small manufacturing firms benefit more than larger firms by being close to a cluster of similar firms. Example: A semiconductor start-up that decided to locate in Kansas city, Missouri, would be at a significant disadvantage to a semiconductor start-up in the Silicon Valley which already has a cluster of semiconductor firms.

Financial feasibility analysis is the final stage of the feasibility analysis. A quick financial assessment is sufficient because the business environment will evolve. The most important issues to consider are: capital requirements, financial rate of return, overall attractiveness of investment. ü Capital requirements The entrepreneur should assess the feasibility of raising enough money to fund the capital requirements for the business. New firms need money for hiring employees, office or manufacturing space, equipment, training, research and development, marketing. At the feasibility analysis stage it is not necessary for this number to be exact.

ü Financial rate of return Return on assets, return on equity, return on investment are examples of the ways the rate of return expected from a new business can be projected. It is important to determine whether the projected return is adequate to justify the business and depends on the following factors: the amount of capital invested, the amount of time required to earn the return, the risk assumed in launching the business, the existing alternatives for the money being invested. 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.

ü Overall attractiveness of the investment It depends on some factors such as: à steady and rapid growth in sales during the first five to seven years in a defined market niche à ability to forecast income and expenses with a reasonable degree of certainty à internally generated funds to finance and sustain growth à availability of an exit opportunity (such as an acquisition) for investors to convert equity into cash