Chapter 4
Feasibility Analysis
Bruce R. Barringer
R. Duane Ireland
Copyright © 2016 Pearson Education Ltd. 3-1
Chapter Objectives
1 of 2
1. Explain what a feasibility analysis is and why it’s
important.
2. Describe a product/service feasibility analysis,
explain its purpose, and discuss the two primary
issues that a proposed business should consider in
this area.
3. Describe an industry/market feasibility analysis,
explain its purpose, and discuss the two primary
issues to consider when completing this analysis.
Copyright © 2016 Pearson Education Ltd. 3-2
Chapter Objectives
2 of 2
4. Explain what an organizational feasibility analysis
is and its purpose and discuss the two primary issues
to consider when completing this analysis.
5. Describe what a financial feasibility analysis is,
explain its importance, and discuss the most critical
issues to consider when completing this analysis.
6. Describe a feasibility analysis template and explain
when it is important for entrepreneurs to use this
template.
Copyright © 2016 Pearson Education Ltd. 3-3
What Is Feasibility Analysis?
• Feasibility analysis is the
process of determining whether
a business idea is viable.
• It is the preliminary evaluation
Feasibility Analysis of a business idea, conducted
for the purpose of determining
whether the idea is worth
pursuing.
Copyright © 2016 Pearson Education Ltd. 3-4
Feasibility Analysis
• Decision Point:
•If a business idea falls short in one or more components of
feasibility analysis, it should be dropped or rethought.
•Common Entrepreneurial Mistake:
•Many entrepreneurs skip feasibility analysis and jump
directly to developing a business model.
•This results in inadequate testing of the business idea’s
viability.
Copyright © 2016 Pearson Education Ltd. 3-5
Purpose and Nature of Feasibility
Analysis
•Mental Shift Required:
Move from thinking of an idea as just an idea → to viewing it as a
potential business.
•Focus:
•Feasibility analysis assesses a potential business, not just a product
or service.
•It separates investigative work (testing idea merits) from
planning/selling work (business plan development).
•Investigative vs. Planning:
•Feasibility analysis: Investigative, designed to critique and test the
business idea.
•Business plan: Planning and selling-oriented
Copyright © 2016 Pearson Education Ltd. 3-6
When To Conduct a Feasibility Analysis
• Timing of Feasibility Analysis
– The proper time to conduct a feasibility analysis is early in
thinking through the prospects for a new business.
– The thought is to screen ideas before a lot of resources are
spent on them.
• Components of a Properly Conducted Feasibility
Analysis
– A properly conducted feasibility analysis includes four
separate components, as discussed in the following slides.
Copyright © 2016 Pearson Education Ltd. 3-7
Importance of Feasibility Analysis
• Avoids the “everything about my opportunity is
wonderful” mindset.
• Prevents entrepreneurs from being blinded to risks by
over-optimistic thinking.
• Ensures realistic evaluation before developing the
business model or business plan.
Copyright © 2016 Pearson Education Ltd. 3-8
Importance of Feasibility Analysis
• Flexibility of the Process
• Feasibility analysis allows for revision and
refinement of the idea.
• Feedback and research help reshape and improve
the concept.
• Main goal: Test and validate the idea through real-
world insights and data.
Copyright © 2016 Pearson Education Ltd. 3-9
Research Required
• Primary Research:
– Data collected firsthand by the analyst.
– Includes customer interviews, expert feedback, focus groups,
and surveys.
• Secondary Research:
– Uses existing data sources such as:
• Industry studies
• Census Bureau data
• Analyst forecasts
• Library and Internet research
Copyright © 2016 Pearson Education Ltd. 3-10
Feasibility Analysis
• Key Objective
• Put the business idea to the test by:
– Gathering feedback from potential customers
– Consulting industry experts
– Studying market and industry trends
– Analyzing financial aspects
– Critically evaluating feasibility and risks
Copyright © 2016 Pearson Education Ltd. 3-11
Feasibility Analysis
Role of feasibility analysis in developing business ideas.
Copyright © 2016 Pearson Education Ltd. 3-12
Forms of Feasibility Analysis
Industry/Target Market
Product/Service Feasibility
Feasibility
Organizational Feasibility Financial Feasibility
Copyright © 2016 Pearson Education Ltd. 3-13
Outline for a Comprehensive Feasibility
Analysis
Copyright © 2016 Pearson Education Ltd. 3-14
Product/Service Feasibility Analysis
1 of 2
Purpose
• Is an assessment of the overall
Product/Service appeal of the product or service
Feasibility Analysis being proposed.
This means that before launching a product or
• Before a prospective firm rushes
service, a company must ensure that it meets
the needs and preferences of potential a new product or service into
development, it should be sure
customers.
that the product or service is what
prospective customers want.
Copyright © 2016 Pearson Education Ltd. 3-15
Product/Service Feasibility Analysis
2 of 2
Components of product/service
feasibility analysis
Product/Service Product/Service
Desirability Demand
Copyright © 2016 Pearson Education Ltd. 3-16
Product/Service Desirability
1 of 3
First, ask the following questions to determine the basic
appeal of the product or service.
• Does it make sense? Is it reasonable? Is it something consumers
will get excited about?
• Does it take advantage of an environmental trend, solve a
problem, or take advantage of a gap in the marketplace?
• Is 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?
Copyright © 2016 Pearson Education Ltd. 3-17
Product/Service Desirability
1 of 3
•Aim to gain a general sense of answers to key questions, not to
reach final conclusions.
•The best method is to “get out of the building” — a phrase
emphasizing the importance of engaging directly with potential
customers.
Copyright © 2016 Pearson Education Ltd. 3-18
Product/Service Desirability
2 of 3
• Second, Administer a Concept Test
– A concept test is an effective tool for gathering feedback and
advice from prospective customers.
– Helps validate the business idea and refine it based on real-world
insights.
– A concept statement should be developed.
– The feedback will hopefully provide the entrepreneur:
• A sense of the viability of the product or service idea.
• Suggestions for how the idea can be strengthened or “tweaked” before
proceeding further.
3-19
Copyright © 2016 Pearson Education Ltd.
Product/Service Desirability
2 of 3
• Definition:
A concept test involves presenting a preliminary description
of a product or service idea — known as a concept statement
— to industry experts and prospective customers for
feedback.
• Purpose:
– To solicit feedback and evaluate feasibility of the product or service
idea.
– Helps determine customer interest and identify areas for improvement.
• Format:
– Typically a one-page document.
3-20
Copyright © 2016 Pearson Education Ltd.
Contents of a Concept Statement
• Description of the Product or Service
– Outlines the key features and functions.
– May include a sketch or illustration of the product or service.
• Intended Target Market
– Identifies the consumers or businesses expected to purchase the offering.
• Benefits of the Product or Service
– Explains the value proposition: how the product adds value or solves a
problem.
– Highlights the unique benefits for customers.
• Positioning Relative to Competitors
– Describes how the product or service is situated in the market compared to
rivals.
– Clarifies the competitive advantage or differentiation.
• Brief Description of the Management Team
– Summarizes the background and expertise of the people behind the idea. 3-21
Copyright © 2016 Pearson Education Ltd.
Product/Service Desirability
3 of 3
New Venture
Fitness Drink’s
Concept Statement
Copyright © 2016 Pearson Education Ltd. 3-22
Product/Service Demand
1 of 4
• Product/Service Demand
– There are two steps to assessing product/service demand.
– Step 1: Talking Face-to-Face with Potential Customers.
– Step 2: Using Online Tools, Such as Google AdWords and
Landing Pages, To Assess Demand.
Copyright © 2016 Pearson Education Ltd. 3-23
Product/Service Demand
2 of 4
• 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.
– The idea is to gauge customer reaction to the general
concept of what you want to sell, and tweak, revise, and
improve on the idea based on the feedback.
– In some cases, talking with potential customers will cause
an entrepreneur to abandon an idea.
• Entrepreneurs are often surprised to find that a product idea they
think solves a problem gets lukewarm reception when they talk to
actual customers.
Copyright © 2016 Pearson Education Ltd. 3-24
Product/Service Demand
2 of 4
Copyright © 2016 Pearson Education Ltd. 3-25
Product/Service Demand
3 of 4
• Utilizing Online Tools, Such as Google AdWords and
Landing Pages, to Assess Demand
– The second way to assess demand is to utilize online tools
to gauge reaction from potential customers.
– Some entrepreneurs purchase text ads on search engines
that show up when a user is searching for a product that is
close to their idea. If the searcher clicks on the text ad, they
are directed to a landing page that describes the idea. There
may be a link on the landing page that says “For future
updates please enter your e-mail address.” Demand for the
idea can be assessed by how many people click on the text
ad and enter their e-mail address.
Copyright © 2016 Pearson Education Ltd. 3-26
Product/Service Demand
4 of 4
• Utilizing Online Tools, Such as Google AdWords and
Landing Pages, to Assess Demand (continued)
– A variety of additional online tools are available to help
assess the demand for a new product or service.
– Examples include:
• Sites that provide feedback on business ideas (Foundersuite,
Quirky).
• Market Research (CrowdPicker, Google Trends).
• Online Surveys (Survey Monkey, Google Consumer Surveys).
• Q&A Sites (Quora, Stack Overflow).
Copyright © 2016 Pearson Education Ltd. 3-27
Product/Service Demand
4 of 4
• Third method: Library, Internet & Gumshoe Research
– Complements customer interviews and concept tests
– Combines primary and secondary research for reliable
insights
– Goal: Evaluate market demand and industry trends
Copyright © 2016 Pearson Education Ltd. 3-28
Product/Service Demand
4 of 4
• Third method: Library, Internet & Gumshoe Research
Library: Use university databases, industry reports, and trade
journals
Internet:
– Simple web searches reveal market articles & data
– Answers key questions:
– Is the industry growing?
– Who is the target market?
– What drives customer buying decisions?
Copyright © 2016 Pearson Education Ltd. 3-29
Product/Service Demand
4 of 4
• Third method: Library, Internet & Gumshoe Research
Gumshoe = “detective-style” research
– Talk to people about your idea
– Observe customers in stores
– Visit or volunteer in relevant environments
– Purpose: Gain real-world insights beyond data
– Continue research after launch
– Monitor trends, learn from users, refine products
Copyright © 2016 Pearson Education Ltd. 3-30
Industry/Target Market Feasibility Analysis
1 of 2
Purpose
• Is an assessment of the overall
appeal of the industry and the
Industry/Target Market target market for the proposed
Feasibility Analysis business.
• An industry is a group of firms
producing a similar product or
service.
• A firm’s target market is the
limited portion of the industry it
plans to go after.
Copyright © 2016 Pearson Education Ltd. 3-31
Industry/Target Market Feasibility Analysis
2 of 2
Components of industry/target market
feasibility analysis
Target Market
Industry Attractiveness
Attractiveness
Copyright © 2016 Pearson Education Ltd. 3-32
Industry Attractiveness
1 of 2
• Industry Attractiveness
– Industries vary in terms of their overall attractiveness.
– In general, the most attractive industries have the
characteristics depicted on the next slide.
– Particularly important—the degree to which environmental
and business trends are moving in favor rather than against
the industry.
Copyright © 2016 Pearson Education Ltd. 3-33
Industry Attractiveness
2 of 2
Characteristics of Attractive Industries
Copyright © 2016 Pearson Education Ltd. 3-34
Industry Attractiveness
1 of 2
Other Factors
• Environmental & business trends:
– Are they moving for or against the industry?
• Economic & societal shifts:
– Do they help or hurt existing firms?
• Profit margins:
– Are they increasing or declining?
• Innovation:
– Is it accelerating or slowing down?
• Input costs:
– Are costs rising or falling?
• Market dynamics:
– Are new markets emerging or current ones shrinking?
Copyright © 2016 Pearson Education Ltd. 3-35
Target Market Attractiveness
• Target Market Attractiveness
– The challenge in identifying an attractive target market is to
find a market that’s large enough for the proposed business
but is yet small enough to avoid attracting larger
competitors.
– Assessing the attractiveness of a target market is tougher
than assessing the attractiveness an entire industry.
– Often, considerable ingenuity must be employed to find
information to assess the attractiveness of a specific target
market.
Copyright © 2016 Pearson Education Ltd. 3-36
Organizational Feasibility Analysis
1 of 2
Purpose
• Is conducted to determine
Organizational Feasibility whether a proposed business has
Analysis sufficient management expertise,
organizational competence, and
resources to successfully launch
a business.
• Focuses on non-financial resources.
Copyright © 2016 Pearson Education Ltd. 3-37
Organizational Feasibility Analysis
2 of 2
Components of organizational
feasibility analysis
Management Prowess Resource Sufficiency
Copyright © 2016 Pearson Education Ltd. 3-38
A proposed business should
Management Prowess
honestly assess the strength and
capability of its management team
to ensure they have the necessary
passion and skills to successfully
start the venture.
• Management Prowess
– A proposed business should candidly evaluate the prowess, or
ability, of its management team to satisfy itself that management
has the requisite passion and expertise to launch the venture.
– This requires honest and candid self-assessment by those starting
the firm.
– Two of the most important factors in this area are:
• The passion that the sole entrepreneur or the founding team has for the
business idea.
• The extent to which the sole entrepreneur or the founding team understands
the markets in which the firm will participate.
These two areas crucial and cannot be effectively replaced or
substituted by other skills or resources.
Copyright © 2016 Pearson Education Ltd. 3-39
Management Prowess
Additional Factors Defining Management Prowess
• Professional and social networks provide a strong advantage
— allowing managers to fill experience or knowledge gaps
through contacts.
• The business should have a clear idea of the type of new-
venture team it can assemble.
– A new-venture team includes founders, key employees,
and advisers who manage or assist in managing the start-up
during its early years.
• If founders can identify highly capable individuals likely to
join the firm or serve as board members/advisers, it adds
credibility to the venture’s organizational feasibility.
Copyright © 2016 Pearson Education Ltd. 3-40
Management Prowess
Partnering for Success
• Many potential business founders discover during their
assessment of management prowess that they might benefit
from partnering with one or more individuals.
– Having partners can complement their skills, expand
networks, and increase overall management capability.
• Practical tips and guidance for finding an appropriate
business partner are provided in the feature titled
“Partnering for Success.”
Copyright © 2016 Pearson Education Ltd. 3-41
Resource Sufficiency
1 of 2
• Resource Sufficiency
– This topic pertains to an assessment of whether an
entrepreneur has sufficient resources to launch the
proposed venture.
• Focus is on nonfinancial, not financial, resources —
identifying the most important ones and evaluating their
availability.
• Example: If a start-up needs employees with specialized skills
but the local labor pool lacks such talent, it faces a resource
sufficiency problem.
Copyright © 2016 Pearson Education Ltd. 3-42
Resource Sufficiency
1 of 2
• Resource Sufficiency
– To test resource sufficiency, a firm should list the 6 to 12
most critical nonfinancial resources that will be needed to
move the business idea forward successfully.
• If critical resources are not available in certain areas, it may be
impractical to proceed with the business idea.
Copyright © 2016 Pearson Education Ltd. 3-43
Resource Sufficiency
1 of 2
Intellectual Property Considerations
• A key resource issue is the ability to secure intellectual
property (IP) protection for critical aspects of the business.
• This is vital for firms with new products or innovative
business processes.
• A quick test: check whether a patent already exists using
Google Patents ([Link]/patents).
• While not a substitute for a patent attorney, this gives a
preliminary indication of potential conflicts.
Copyright © 2016 Pearson Education Ltd. 3-44
Resource Sufficiency
2 of 2
Examples of nonfinancial resources that may be critical
to the successful launch of a new business
Copyright © 2016 Pearson Education Ltd. 3-45
Financial Feasibility Analysis
1 of 2
Purpose
• Is the final component of a
Financial Feasibility comprehensive feasibility analysis.
Analysis
• Detailed financial forecasts are not
required early on, as the business
concept will evolve over time.
•A preliminary financial assessment
is sufficient.
Copyright © 2016 Pearson Education Ltd. 3-46
Financial Feasibility Analysis
2 of 2
Components of financial
feasibility analysis
Total Start-Up Cash Financial Performance of
Needed Similar Businesses
Overall Financial
Attractiveness of the
Proposed Venture
Copyright © 2016 Pearson Education Ltd. 3-47
Total Start-Up Cash Needed
• Total Start-Up Cash Needed
– The 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 generate the first $1 in revenues.
– The point of this exercise is to determine if the proposed
venture is realistic given the total start-up cash needed.
– After estimating total costs, a clear explanation of where the money
will come from must be provided.
– Avoid vague statements like “I’ll find investors” or “I’ll borrow the
money.”
Copyright © 2016 Pearson Education Ltd. 3-48
Total Start-Up Cash Needed
• Provide a thoughtful and realistic funding plan for covering
initial cash needs.
• If funding comes from friends, family, credit cards, or home
equity lines, include a reasonable repayment plan.
• Showing how start-up costs will be covered and repaid is
critical to financial feasibility.
• Many ventures fail to launch or recover because they cannot
raise sufficient start-up capital.
• When projecting costs, it is better to overestimate than
underestimate — unexpected expenses are common .
Copyright © 2016 Pearson Education Ltd. 3-49
Financial Performance of Similar
Businesses
• Financial Performance of Similar Businesses
– Estimate the proposed start-up’s financial performance by
comparing it to similar, already established businesses.
– Results will be approximate, not exact, but still valuable
for early assessment.
– This process requires research and data gathering
Copyright © 2016 Pearson Education Ltd. 3-50
Financial Performance of Similar
Businesses
• Financial Performance of Similar Businesses
– There are several ways to doing this, all of which involve a
little ethical detective work.
• First, there are many reports available, some for free and some that
require a fee, offering detailed industry trend analysis and reports
on thousands of individual firms.
• Second, simple observational research may be needed. For
example, the owners of New Venture Fitness Drinks could estimate
their sales by tracking the number of people who patronize similar
restaurants and estimating the average amount each customer
spends.
Second, basic observational research might be required. For instance, the owners of New Venture
Fitness Drinks could predict their sales by observing how many people visit comparable
restaurants and estimating the average amount each customer spends.
Copyright © 2016 Pearson Education Ltd. 3-51
Financial Performance of Similar
Businesses
• Financial Performance of Similar Businesses
• SECP (Securities and Exchange Commission of Pakistan) –
public financial filings of listed companies.
• PSX (Pakistan Stock Exchange) – provides annual and
quarterly reports for publicly traded firms (useful for trend
analysis).
• SMEDA (Small and Medium Enterprises Development
Authority) – offers sector-specific feasibility reports with
average sales, costs, and profit margins for local industries.
• P@SHA (Pakistan Software Houses Association) – gives
ICT sector data useful for tech start-ups.
Copyright © 2016 Pearson Education Ltd. 3-52
Overall Financial Attractiveness of the
Proposed Venture
1 of 2
Overall Financial Attractiveness of the Proposed
Investment
• A number of other financial factors are associated with
promising business start-ups.
• In the feasibility analysis stage, the extent to which a
business opportunity is positive relative to each factor is
based on an estimate rather than actual performance.
• The table on the next slide lists the factors that pertain to
the overall attractiveness of the financial feasibility of the
business idea.
Copyright © 2016 Pearson Education Ltd. 3-53
Overall Financial Attractiveness of the
Proposed Venture
2 of 2
Financial Factors Associated With Promising Business
Opportunities
• Steady and rapid growth in sales during the first 5 to 7 years in a clearly
defined market niche.
• High percentage of recurring revenue—meaning that once a firm wins a
client, the client will provide recurring sources of revenue.
• Ability to forecast income and expenses with a reasonable degree of
certainty.
• Internally generated funds to finance and sustain growth.
• Availability of an exit opportunity for investors to convert equity to cash.
Copyright © 2016 Pearson Education Ltd. 3-54
First Screen
• First Screen
– Shown in Appendix 3.1 is a template for completing a
feasibility analysis.
– It’s called “First Screen” because it’s a tool that can be
used in the initial pass at determining the feasibility of a
business idea.
– If a business idea cuts muster at this stage, the next step is
to complete a business plan.
he First Screen is a template used for carrying out a feasibility
analysis, which means checking whether a business idea is
practical and worth pursuing. If the business idea passes this first evaluation (meaning
it looks promising in terms of market demand, financial
It’s called the “First Screen” because it serves as the initial potential, and team capability), then the entrepreneur
evaluation tool — like a first test — to quickly determine if the can move on to the next step, which is creating a
idea has potential. detailed business plan.
Copyright © 2016 Pearson Education Ltd. 3-55