Chapter 3. Feasibility Analysis

Feasibility Analysis

Feasibility analysis is the process of determining if a business idea is viable. If a business idea falls 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 for support the idea. The sequence often omits or provides little time for the important step of testing the feasibility of a business idea.

A feasibility analysis is an assessment of a potential business rather than strictly a product or service idea. 

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. It should be emphasized that while a feasibility analysis tests the merits of a specific idea, it allows ample opportunity for the idea to be revised, altered, and changed as a result of the feedback that is obtained and the analysis that is conducted. The key objective behind feasibility analysis is to put an idea to the test⎯by eliciting feedback from potential customers, talking to industry experts, studying industry trends, thinking through the financials, and scrutinizing it in other ways. Here are the four key areas of feasibility analysis:

Product/Service Feasibility Analysis

Product/service feasibility analysis 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:

Product/Service Desirability

The first component is to affirm that the proposed product or service is desirable and serves a need in the marketplace. Ask yourself and others these following questions to determine the basic appeal of the product or service:

• Does it make sense? Is it reasonable? Is it something real customers will buy?
• Does it take advantage of an environmental trend, solve a problem, or fill the gap in the marketplace?
• Ia this a good time to introduce the product or service to the market?
• Are there any fatal flaws in the product or service's basic design or concept?

The proper mind-set at the feasibility analysis stage is to get a general sense of the answers to these and similar questions, rather than to try to reach final conclusions. The best way to achieve this is to "get out of the building" and talk to potential customers. A tool that is particularly useful in the soliciting feedback and advice from prospective customers is to administer a concept test. 

A concept test involves showing a preliminary description of a product or a 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:

• A description of the product or service.
• The intended target market.
• The benefits of the product or service.
• A description of how the product or service will be positioned relative to competitors.
• A brief description of the company's management team.

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. It is important to keep a concept statement relatively short (no more than one page) to increase the likelihood that it will be read.

A common reason new business fail is that there isn't a large enough market for the venture's product. The ideal combination is to do both⎯distribute a concept statement to 20 or more people who can provide informed feedback and engage in verbal give-and-take with as many experts and prospective customers as possible.

Product/Service Demand

The second component 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 → The idea is to gauge customers reaction to the general concept of what you want to sell.
2. Utilizing Online Tools, Such as Google AdWords and Landing Pages to Assess Demand → The overarching purpose is to get a sense of interest in your product. Normally, utilizing an AdWords and landing page (A single web that typically provides direct sales copy by link) campaign wouldn't be the only thing you'd do to assess demand. 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.
3. Library, internet, and Gumshoe Research → While talking to prospective customers is critical, collecting secondary data on an industry is also helpful. The overarching point is that for your particular product or service you need archival as well as primary forms of research to assess likely demand. Simple gumshoe is also important for gaining a sense of the likely demand of a product or a service idea.

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. 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 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. Instead, they select or carve out a specific target market and try to service that group of customers particularly well. There are two components to industry/target market feasibility analysis:

Industry Attractiveness

Industries vary in terms of their overall attractiveness. In general, the most attractive industries have the characteristics. The top three factors are particularly important. Industries that are young rather than old, early rather than late in life cycle, and are fragmented rather than concentrated are most receptive to new entrants than industries with the opposite characteristics. 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. You can't cover every facet of an industry, but you should gain a sense of whether the industry you're entering is a good one or a poor one for start-ups.

Target Market Attractiveness

A target market is a place within a larger market segment that represent 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.

The challenge in identifying an attractive target market is to find a market that's large enough for the proposed business but yet is small enough to avoid attracting larger competitors at least until the entrepreneurial venture can get off to a successful start.

While it's generally easy to find good information to assess the attractiveness of an entire industry, discerning the attractiveness of a small target market within an industry is tougher, particularly if the start-up is pioneering the target market. Often, under these circumstances, information from more than one industry and/or market must be collected and synthesized to make an informed judgement.

Organizational Feasibility Analysis

Organizational Feasibility 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:

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. 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.

A collection of additional factors help define management prowess. Managers with extensive professional and social networks have an advantage in that they are able to reach out to colleagues and friends to help them plug experience or knowledge gaps. 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.

One thing that many potential business founders find while assessing management prowess is that they may benefit from finding one or more partners to help them launch their business.

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. 

Another key resources sufficiency issues is the ability to obtain intellectual property protection on key aspects of the business. This issue doesn't apply to all start-ups; but, it is critical for companies that have invented a new product or are introducing a new business process that adds value to the way a product is manufactured or a service is delivered.

Financial Feasibility Analysis

A financial feasibility analysis is a preliminary financial analysis of whether a business idea is worth pursuing. The most important area to consider are:

• Total Start-Up Cash Needed
• Financial Performance of Similar business
• Overall Financial Attractiveness of the Proposed Venture

A Feasibility Analysis Template

First Screen is a template entrepreneurial firms use to complete feasibility analysis. The mechanics for filling out the First Screen worksheet are straightforward. The value of the First Screen worksheet is that it draws attention to issues such as forces the founders to think about alternatives.

It is important to be completely candid when completing First Screen for your business idea. There is also no definitive way of discerning, after the worksheet is completed, if an idea is visible. First Screen, like the feasibility analysis itself, is meant to convey an overall impression or sense of the feasibility of a business idea.