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CHAPTER 3 FEASIBILTY ANALYSIS

Feasibility analysis is the process ofdetermining whether a business idea isviable

Timing of Feasibility Analysis

- early in thinking through

before a lot of resources are spent

Requires primary and secondaryresearcha. Primary research- research collect by the personb. secondary research- probes data that is already collected

Forms of Feasibility Analysis

a. Product/Service Feasibility- Product/Service Desirability- Product/Service Demand

- Administer a Concept Test bycreating a concept statement- concept statement is a one pagedescription of a business, that isdistributed to people who are asked toprovide feedback on the potential of

the business idea- feedback provide sense of theviability and Suggestions for how theidea can be strengthened

- Product/Service Demand – Step 1: Administer a Buying

Intentions Survey – Step 2: Conduct library,

Internet, and Gumshoeresearch

– A gumshoe is a detective or an

investigator that scrounges aroundfor information or clues

b. Industry/Target Market Feasibility Analysis

Industry Attractiveness

Target Market Attractiveness

find a market that’s large enoughfor the proposed business but is yetsmall enough to avoid attracting

larger competitors

Organizational Feasibility Analysis

Determine whether a proposed businesshas sufficient management expertise,organizational competence, and resourcesto successfully launch a business.

Focuses on non-financial resources

Components of organizationalfeasibility analysisa. Management Prowess

ability, of its management team tosatisfy itself that management hasthe requisite passion and expertiseto launch the venture

Two of the most important factors:passion for the business idea andextent to which understands themarkets in which the firm will

participate.

b. Resource Sufficiency

- firm should list the 6 to 12 mostcritical nonfinancial resources that willbe needed to move the business ideaforward

Financial Feasibility Analysisa. Total Start-Up Cash Needed- total cash needed to prepare thebusiness to make its first sale- sources and reasonable plan to paymoney back

b. Financial Performance of SimilarBusinesses

there are many reports available

simple observational research

c. Overall Financial Attractiveness ofthe Proposed Investment- Steady and rapid growth- High percentage of recurring revenue-Ability to forecast income andexpenses- Availability of an exit opportunity forinvestors to convert equity to cash

First Screen

tool that can be used in the initialpass at determining the feasibility

of a business idea draw attention to issue like this one

and forces founder to thinkalternatively



WRITING A BUSSINESS PLAN

A business plan is a written narrative,typically 25 to 35 pages long, thatdescribes what a new business plansto accomplish

dual-purpose document used bothinside and outside the firm

two audience

A Firm’s Employees - helps theemployees of a firm operate in sync

Investors and other externalstakeholders - good use of aninvestor’s funds or the attention ofothers

Structure of the Business Plan

easily find critical information

a. Software Packages- software packages available thatemploy an interactive, menu-drivenapproach to assist in the writingb. Sense of Excitement- needs to project a sense ofanticipation and excitement about thepossibilities

Content of the Business Plan- give clear and concise information

on all the important aspects

- long enough to provide sufficientinformation yet short enough tomaintain reader interest

- 25 to 35 pages

Types of Business Plans- Summary business plan – new

venture that want to test if investorinterested (10-15)

- Full business plan –new venturethat need funding (25-35)

- Operational business plan – newventure operations and guidance(40-100)

Outline of Business Plan• Executive Summary

- short overview of the entirebusiness plan

- provides a busy reader witheverything that needs to be known

- shouldn’t exceed two single-spacepages.

Company Description- Company description.- Company history.- Mission statement.- Products and services.

- Current status.- Legal status and ownership.- Key partnerships

Industry Analysis- describing the industry the

business will enter in terms of itssize, growth rate, and salesprojections

Market Analysis- breaks the industry into segments

and zeros in on the specificsegment (or target market) to whichthe firm will try to appeal.

- Include : Market segmentation andtarget market selection, Buyerbehavior and Competitor analysis

Marketing Plan- how the business will market and

sell its product or service- Include: Overall marketing strategy,

Product, price, promotions, anddistribution.

Management Team and CompanyStructure

- founders and a handful of keymanagement personnel

- Include: Management team, Boardof directors, Board of advisers,Company structure

- Go directly to the managementteam section to assess the strengthof the people starting the firm

Operations Plan- how your business will be run and

how your product or service will beproduced

- Include: General approach tooperations, Business location,Facilities and equipment

Product (or Service) Design andDevelopment Plan

- include a section that focuses onthe status of your developmentefforts

- Include: Development status andtasks, Challenges and risks,Intellectual property.

Financial Projections- presents a firm’s pro forma (or

projected) financial projections

- Include: Sources and uses of fundsstatement.- Include: Assumptions sheet, Pro forma

income statements, Pro forma balance



sheets, Pro forma cash flows, Ratioanalysis.

Presenting the Business Plan toInvestors

a. The Oral Presentationb. Questions and Feedback to Expectfrom Investors

INDUSTRY ANALYSIS

a group of firms producing a similarproduct or service

Industry Analysis - determined that anew venture is feasible in regard to theindustry and market in which it willcompete

- helps a firm determine if the nichemarket it identified during feasibilityanalysis is favorable for a new firm

How Industry and Firm-Level Factors Affect Performance- Firm Level Factors - Include a

firm’s assets, products, culture,teamwork among its employees,reputation

- Industry Level Factors - Includethreat of new entrants, rivalry

among existing firms, bargainingpower of buyers

Assessing Industry Attractivenessa. Study Environmental and BusinessTrends- Environmental Trends- Business Trends

b. The Five Competitive Forces Model- framework for understanding the

structure of an industry- determine the average rate of

return for the firms in an industry- impacts the average rate of return

for the firms in an industry byapplying pressure on industryprofitability

Component of five forces modela. Threat of Substitutes

- when close substitutes for aproduct exist, industry profitability issuppressed, because consumerswill opt out if the price gets too high

- offer their customers amenities toreduce the likelihood that they willswitch to a substitute product, evenin light of a price increase

b. Threat of New Entrants

- try to keep the number of new entrants lowby erecting barriers to entry- barrier to entry is a condition that creates adisincentive for a new firm to enter anindustry- Economies of Scale, Productdifferentiation,Capital requirements, Costadvantages independent of size,Access todistribution channels,Government and legalbarriers- Non Traditional Barriers to Entry -Strength

of management team, First-mover advantage,Passion of the management team andemployees, Unique Business Model, InternetDomain Name, Inventing a new approach toan industry

c. Rivalry Among Existing Firms- Some industries are fiercely competitive, tothe point where prices are pushed below thelevel of costs, and industry-wide losses occur- Factors that determine the intensity of the

rivalry among existing firmsi. Number and balance of competitorsii. Degree of difference betweenproductsiii. Growth rate of an industryiv. Level of fixed costs

d. Bargaining Power of Suppliersi. Supplier concentrationii. Switching costsiii. Attractiveness of substitutesiv. Threat of forward integration

e. Bargaining Power of Buyers- demanding price concessions or increasesin quality- Factor involves

i. Buyer group concentrationii. Buyer’s costs iii. Degree of standardization ofsupplier’s productsiv. Threat of backward integration



First Application of the Model- to assess the attractiveness of an

industry by determining the level ofthreat to industry profitability foreach of the forces

Second Application of the Model

- to help determine whether it should

enter an industry is by using themodel to answer several keyquestions

Industry Types and the OpportunitiesThey Offer

a. Emerging Industries- Industries in which standardoperating procedures have yet to bedeveloped- Opportunity: First-mover advantage.

b. Fragmented Industries- Industries that are characterized by alarge number of firms of approximatelyequal size- Opportunity: Consolidation

c. Mature Industries- Industries that are experiencing slowor no increase in demand-Opportunities: Process innovation andafter-sale service innovation

d. Declining Industries- Industries that are experiencing areduction in demand.- Opportunities: Leadership,establishing a niche market, andpursuing a cost reduction strategy

e. Global Industries- Industries that are experiencing

significant international sales.- Opportunities: Multidomestic andglobal strategies

Competitor Analysis- detailed analysis of a firm’s

competition.- helps a firm understand the

positions of its major competitorsand the opportunities that areavailable

- tool for organizing the information afirm collects about its competitors

Identifying Competitors- Direct competitor – business that

provide similar product

- Indirect competitors – offer closesubstitute product

- Future competitor – not yetdirect/indirect but will soon

Sources of Competitive Intelligencea. Collecting Competitive Intelligence- information that is gathered by a firmto learn about its competitors- A new venture should take care thatit collects competitive intelligence in aprofessional and ethical manner

Ethical ways to obtain information aboutcompetitors

- Attend conferences and trade shows.- Purchase competitor’s products. - Study competitors’ Web sites. - Set up Google and Yahoo! e-mail

alerts.- Read industry-related books,magazines, and Web sites.

- Talk to customers about whatmotivated them to buy your product asopposed to your competitor’s product

Completing a Competitive AnalysisGrid

- tool for organizing the information afirm collects about its competitors

- help a firm see how it stakes upagainst its competitors, provide ideasfor markets to pursue, and identify itsprimary sources of competitiveadvantage



Developing an Effective Business Model

Business Model

- its plan or diagram for how itcompetes, uses its resources,structures its relationships, interfaceswith customers, and creates value to

sustain itself on the basis of the profitsit generates

- include all the activities that define howa firm competes in the marketplace.

- important to understand that a firm’sbusiness model takes it beyond itsown boundaries

- Almost all firms partner with others tomake their business models work

The Importance of Business Models- Serves as an ongoing extension of

feasibility analysis- Focuses attention on how all the

elements of a business fit together andconstitute a working whole

- Describes why the network ofparticipants needed to make abusiness idea viable are willing to worktogether

- Articulates a company’s core logic to

all stakeholders, including allemployees.

Diversity of Business Models- no standard business model for an

industry or for a target market withinan industry

- over time, the most successfulbusiness models in an industrypredominate

How Business Models Emergea. The Value Chain- the string of activities that moves aproduct from the raw material stage,through manufacturing anddistribution, and ultimately to the enduser- can identify ways to create additionalvalue and assess whether it has the

means to do so- helpful in identifying opportunities fornew businesses and in understandinghow business models emerge

- Entrepreneurs look at the value chainof a product or a service to pinpoint

where the value chain can be mademore effective or to spot whereadditional “value” can be added.

Focus on

- A single primary activity such asmarketing and sales.

- The interface between one stage ofthe value chain and another, such asthe interface between operations andoutgoing logistics.

- One of the support activities, such ashuman resource management.

Potential Fatal Flaws in BusinessModels

a. Two fatal flaws can render a businessmodel untenable from the beginning:

- A complete misread of the customer.- Utterly unsound economics.

Components of a Business Model

a. Core Strategy

- The first component of a business modelis the core strategy, which describes how afirm competes relative to its competitors

- Primary Elements of Core Strategy

i. Mission statement - describes why it exists

and what its business model is suppose toaccomplish

ii. Product/market scope - products andmarkets on which it will concentrate



iii. Basis for differentiation - new venturedifferentiate itself from its competitors insome way that is important to its customers

Strategic Resources- A firm is not able to implement a

strategy without resources, so theresources a firm has affects itsbusiness model substantially

- two most important strategic resourcesare: A firm’s core competencies andStrategic assets

- A core competency is a resource orcapability that serves as a source of afirm’s competitive advantage

- Strategic assets are anything rare andvaluable that a firm owns. They

include plant and equipment, location,brands, patents, customer data, ahighly qualified staff, and distinctivepartnerships

Importance of Strategic Resources- New ventures ultimately try to combine

their core competencies and strategicassets to create a sustainablecompetitive advantage.

- This factor is one that investors payclose attention when evaluating abusiness.

- A sustainable competitive advantage isachieved by implementing a value-creating strategy that is unique and noteasy to imitate.

Partnership Network- New ventures, in particular, typically

do not have the resources to performkey roles.

- In most cases, a business does not

want to do everything itself becausethe majority of tasks needed to build aproduct or deliver a service are notcore to a company’s competitiveadvantage.

- A firm’s partnership network includes: Suppliers - company that

provides parts or services toanother company

Other key relationships - Firmspartner with other companies to

make their business models work The Most Common Types of Business

Partnerships- Joint venture

- Network- Consortia- Strategic alliance- Trade association

Customer Interface- way a firm interacts with its customer

hinges on how it chooses to compete- three elements of a company’s

customer interfacei. Target customer.ii. Fulfillment and support - the way afirm’s product or service reaches itcustomers. It also refers to thechannels a company uses and whatlevel of customer support it providesiii. Pricing model

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