Feasibility analysis is the process of determining if a business idea is viable. Feasibility analysis is investigative in nature and is designed to critique the merits of a proposed business.
According to John W. Mullins, failure to properly investigate the merits of a business idea before developing a business model and a business plan is written runs the risk of blinding an entrepreneur to inherent risks associated with the potential business and results in too positive of a plan.
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.
Product/Service Feasibility Analysis
Product/service feasibility analysis is an assessment of the overall appeal of the product or service being proposed.
There are two components to product/service feasibility analysis: product/service desirability and product/service demand.
A. Product/Service Desirability
Product/service feasibility is to affirm that the proposed product or service is desirable and serves a need in the marketplace.
1. 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.
Concept statement 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.
The second component of product/service feasibility analysis is to determine if there is a demand for the product or service. Three commonly utilized methods for doing this include talking face-to-face with potential customers, utilizing online tools, such as Google Adwords and landing pages, to assess demand, and library, Internet, and gumshoe research.
1. Talking Face-to-Face with Potential Customers
The only way to know if your product or service is what people want is by talking to them. One approach to finding qualified people to talk to about a product or service idea or to react to a concept statement is to contact trade associations and/or attend industry trade shows.
2. Utilizing Online Tools
Another common approach to assessing product demand is to use online tools, such as Google AdWords and landing pages (advertisement).
3. Library, Internet, and Gumshoe Research
The third way to assess demand for a product or service idea is by conducting a library, Internet, and gumshoe research. While talking to prospective customers is critical, collecting secondary data on the industry is also helpful.
Simple gumshoe research is also important for gaining a sense of the likely demand for a product or service idea. A gumshoe is a detective or an investigator that scrounges around for information or clues wherever they can be found.
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.
A. Industry Attractiveness
In general, the most attractive industries have the characteristics depicted below.
- Are young rather than old
- Are early rather than late in their life cycle
- Are fragmented rather than concentrated
- Are growing rather than shrinking
- Are selling products or services that customers “must-have” rather than “want to have”
- Are not crowded
- Have high rather than low operating margins
- Are not highly dependent on the historically low price of key raw material, like gasoline or flour, to remain profitable
B. Target Market Attractiveness
A target market is a place within a larger market segment that represents a narrower group of customers with similar needs.
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.
A. Management Prowess
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.
B. 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.
Financial Feasibility Analysis
Financial feasibility analysis is the final component of a comprehensive feasibility analysis. For feasibility analysis, a preliminary financial assessment is usually sufficient; indeed, additional rigor at this point is typically not required because the specifics of the business will inevitably evolve, making it impractical to spend a lot of time early on preparing detailed financial forecasts.
A. Total Start-Up Cash Needed
This first issue refers to the total cash needed to prepare the business to make its first sale. An actual budget should be prepared that lists all the anticipated capital purchases and operating expenses needed to get the business up and running.
Avoid cursory explanations such as “I plan to bring investors on board” or “I’ll borrow the money.”
Many new ventures look promising as ongoing concerns but have no way of raising the money to get started or are never able to recover from the initial costs involved. When projecting start-up expenses, it is better to overestimate rather than underestimate the costs involved.
B. Financial Performance of Similar Business
The second component of financial feasibility analysis is estimating a proposed start-up’s potential financial performance by comparing it to similar, already established businesses.
C. Overall Financial Attractiveness of the Proposed Venture
A number of other factors are associated with evaluating the financial attractiveness of a proposed venture. These evaluations are based primarily on a new venture’s projected sales and rate of return (or profitability), as just discussed.
A start-up’s projected rate of return should be weighed against the following factors to assess whether the venture is financially feasible:
- The amount of capital invested
- The risks assumed in launching the business
- The existing alternatives for the money being invested
- The existing alternatives for the entrepreneur’s time and efforts
