Chapter 3
Feasibility Analysis
Chapter Notes
I.
Introduction

Feasibility analysis is the process of determining if a business idea is viable

The feasibility analysis step, along with the idea screening step, is investigative in
nature and is designed to critically asses the merits of a business idea

The most compelling facts a company can include in a business plan are the
results of its own feasibility analysis, especially feedback from industry experts
and prospective customers
II.
Template for Completing a Feasibility Analysis

Template is shown in Table 3.1. A fuller version is provided in Appendix 1 at the
end of the chapter

The four parts of feasibility analysis are product/service feasibility,
industry/market feasibility, organizational feasibility, and financial feasibility

Completing a full feasibility analysis takes longer than a First Screen and should
include both primary and secondary research
III.
Product/Service Feasibility

Product/service feasibility is an assessment of the overall appeal of the product or
service being proposed
a.
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

The proper mindset is to get a general sense of the answers to your product
desirability questions rather than try to reach final conclusions
i.
Concept Test

A concept 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

A concept statement is normally a one-page document
which includes the following: (1) description of product or
service, (2) intended target market, (3) benefits of product
or service, (4) description of how the product or service
will be positioned relative to competitors, (5) description of
how the product or service will be sold, and (6) a brief
description of company’s management team


b.
Product/Service Demand

The second component of the product/service feasibility analysis is to
determine if there is demand for the product or service
i.
IV.
Concept statement should be shown to 5 to 10 people who
are familiar with the industry the firm hopes to enter
Attached to the concept statement should be a survey that
asks participants to (1) tell you three things they like about
the product or service idea, (2) provide you three
suggestions for making it better (tell you whether they
think the product or service idea is feasible), and (3) share
additional comments or suggestions
Buying Intentions Survey

A buying intentions survey gauges customer interest in a product
or service

The buying intentions survey consists of a concept statement with
a short survey attached

The statement and survey should be distributed to 15 to 30
potential customers

The statement and survey typically features a question that asks
how likely the subject would be to buy the product or service
Industry/Target Market Feasibility Analysis

Industry/target market feasibility is an assessment of the overall appeal of the
industry and the target market for the product or service being proposed

Most firms do not try to service their entire industry, only a specific target market
within the industry

It’s important to assess both the broad industry and your specific target market
a.
Industry Attractiveness
i.
In general, the most attractive industries for start-ups are large and
growing, are young rather than old, are early rather than late in
their life cycle, and are fragmented rather than concentrated
ii.
Some industries are characterized by such high barriers to entry, or
the presence of one or two dominant players, that potential entrants
are essentially shut out
iii.
You should also note the degree to which environmental and
business trends are moving in favor of rather than against the
industry
b.
Target Market Attractiveness
i.
By focusing on a target market, a firm can usually avoid head-tohead competition with industry leaders, instead of serving a
specialized market very well
ii.
iii.
c.
V.
The challenge is to find a target market that’s large enough for the
proposed business, yet is small enough to avoid attracting larger
competitors
Often, information from more than one industry and/or market
must be collected and synthesized to make an informed judgment,
especially if the firm is pioneering a unique area of the
marketplace
Market Timeliness
i.
Determine if the window of opportunity for the product or service
is open or closed
ii.
Study the simple economics of the industry to determine whether
the timing is right for a new entrant
iii.
Firms that fail to conduct a thorough industry and target market
analysis often find that the market is not large enough to maintain
and grow the business
Organizational Feasibility Analysis

Organizational feasibility analysis determines whether a proposed business has
sufficient management expertise, organizational competence, and resources to
successfully launch its business
a.
Management Prowess
i.
A start-up should assess the prowess, or ability, of its initial
management team
ii.
Individuals starting the firm should conduct honest and candid
self-assessments
iii.
Two of the most important factors are passion for the business and
understanding of the markets in which the firm will compete
iv.
Additional factors that define management prowess include prior
entrepreneurial experience, depth of professional and social
networks, degree of creativity, experience in cash flow
management, and whether the team has college degrees
b.
Resource Sufficiency
i.
The focus in organizational analysis is on non-financial resources
because financial feasibility is considered separately
ii.
Identify the 8 to 12 most important and potentially problematic
non-financial resources and assess whether they are available
iii.
Examples of non-financial resources include office space,
manufacturing space, key management employees, key support
personnel, and support from state and local governments if
applicable
iv.
VI.
One easily overlooked resource sufficiency issue that should be
considered is proximity to similar firms, creating a cluster that can
increase productivity of the participating firms
Financial Feasibility

For feasibility analysis, a preliminary financial analysis, is normally sufficient.

The most important issues to consider at this stage are total start-up cash needed,
financial performance of similar businesses, and overall financial attractiveness of
the proposed venture

More complete financial projections will be included in the business plan
a.
Total Start-up Cash Needed
i.
Try to determine total cash needed to prepare the business to make
its first sale
ii.
A detailed explanation of where the money will come from should
be provided
iii.
If money will come from friends, credit cards, or a home equity
line of credit, a reasonable plan should be stipulated to repay the
money
iv.
When projecting start-up expenses, it is better to overestimate
rather than underestimate the costs involved
b.
Financial Performance of Similar Businesses
i.
Estimate a proposed start-up’s potential financial performance by
comparing it to similar, already established businesses
ii.
Utilize archival data available online, including financial reports
on firms
iii.
Some industry trade associations publish data on the sales and
profitability of firms in their industries
iv.
Basic Internet searches are also helpful
v.
c.
Simple observation and leg work can also be used to gauge the
type of sales to expect by estimating the number of customers and
average purchase amount at various times of day
Overall Financial Attractiveness of the Proposed Venture
i.
The extent to which a proposed business appears positive relative
to each factor is based on an estimate or forecast, not actual
performance
ii.
Important factors include the extent to which sales can be expected
to grow during the first few years of the venture, percentage of
recurring revenue to anticipate, the likelihood that internally
generated funds will be available within two years, and the
availability of exit opportunities for investors if applicable