Success? Learn Feasibility Analysis
1. What is the Feasibility Analysis? Why is it important before starting a business?
-Feasibility analysis is the process of determining if a business idea is viable.
-Feasibility analysis is assessment of a potential business rather than strictly a product or service idea.
- Feasibility analysis is investigative in nature and is designed to critique the merits of a proposed business.
Why is it important before starting a business?
It is important to complete the entire process, according to John W. Mullins, the author of the highly regarded book The New Business Road Test, is to avoid falling into the “everything about my opportunity is wonderful” mode. In Mullins’s view, 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.
2. What is product/service desirability analysis? What are the questions you need to ask yourself and the industry stakeholders (buyer, investors, suppliers, etc) to discover the desirability?
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 and product/service demand.
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 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?
3. Why we must explore the product/service demand? To whom we must talk to if we want to test the demand for a new product/service? What are the techniques to conduct demand research?
We must explore the product or service demand 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,
(2) utilizing online tools, such as Google Adwords and landing pages, to assess demand, and
(3) library, Internet, and gumshoe research.
category of people to talk to test the demand:
1. Potential users of the service
2. Family members of potential users of the service
3. Physicians
4. Nurses
5. Health insurance companies
6. Medicare and Medicaid personnel
7. Pharmaceutical companies
8. owners/managers of assisted living facilities and nursing homes
9. Hospital and physician office administrators
10. Founders of other companies in the home health care industry
Techniques to conduct demand research:
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.
1.Don’t be bashful. Ask people what they think about your product or service idea.
2.Take the owner of a store to lunch and discuss your ideas.
3.Spend some time browsing through stores and observe the types of toys that get the most attention. If you actually launch a business, there is simply too much at stake to rely on gut instincts and cursory information to assure you that your product or service will sell.
Collect as much information as you can within reasonable time constraints. The importance of library, Internet, and gumshoe research doesn’t wane once a firm is launched. It’s important to continually assess the strength of product or service ideas and learn from users.
A colorful example: the value of ongoing gumshoe research is provided in the “Savvy Entrepreneurial Firm” feature. In this feature, a successful company made a 180-degree turn regarding how to position a particular product simply by watching how customers interacted with the product in retail stores.
4. What is an industry attractiveness analysis? Explain about Porter’s 5 Forces 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.
-Porter’s Five Forces analysis is a framework that helps analyzing the level of competition within a certain industry. It is especially useful when starting a new business or when entering a new industry sector. According to this framework, competitiveness does not only come from competitors. Rather, the state of competition in an industry depends on five basic forces: threat of new entrants, bargaining power of suppliers, bargaining power of buyers, threat of substitute products or services, and existing industry rivalry.
Porter’s five forces are:
1. Competition in the industry
2. Potential of new entrants into the industry
3. Power of suppliers
4. Power of customers
5. Threat of substitute products
5. What aspects are important to explore in doing 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 and resource sufficiency.
1.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.This task requires the individuals starting the firm to be honest and candid in their selfassessments. 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. There are no practical substitutes for strengths in these areas. 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. In addition, a potential 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.
2.Resorce 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. An example is a start-up that will require employees with specialized skills. If a firm launches in a community that does not have a labor pool that includes people with the skill sets the firm needs, a serious resources sufficiency problem exists. Another key resource sufficiency issue 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. One quick test a start-up can administer is to see if a patent has already been filed for its product or business process idea. To test resource sufficiency, a firm should list the 6 to 12 most critical nonfinancial resources that it will need to move its business idea forward and determine if those resources are available.
6. What aspects are important to explore in doing 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. The most important issues to consider at this stage are total start-up cash needed, financial performance of similar businesses, and the overall financial attractiveness of the proposed venture.
1. 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. After determining a total figure, an explanation of where the money will come from should be provided. If the money will come from friends and family or is raised through other means, such as credit cards or a home equity line of credit, a reasonable plan should be stipulated to repay the money. Showing how a new venture’s start-up costs will be covered and repaid is an important issue. 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. Murphy’s Law is prevalent in the start-up world — things will go wrong. It is a rare start-up that doesn’t experience some unexpected expenses during the start-up phase.
2. Financial performance of similar businesses
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. Obviously, this effort will result in approximate rather than exact numbers. There are several ways of doing this, all of which involve a little gumshoe labor. Substantial archival data, which offers detailed financial reports on thousands of individual firms, is available online. The easiest data to obtain is on publicly traded firms through Hoovers or a similar source. These firms are typically too large, however, for meaningful comparisons to proposed new ventures. The challenge is to find the financial performance of small, more comparable firms. There are additional ways to obtain financial data on smaller firms. If a start-up entrepreneur identifies a business that is similar to the one he or she wants to start, and the business isn’t likely to be a direct competitor, it’s perfectly acceptable to ask the owner or manager of the business to share sales and income data. Simple observation and legwork is a final way to obtain sales data for similar businesses. This approach is suitable in some cases and in others it isn’t. For example, if you were proposing to open a new smoothie shop, you could gauge the type of sales to expect by estimating the number of people who patronize similar smoothie shops in your area, along with the average purchase per visit. A very basic way to do this is to frequent these stores and count the number of customers who come in and out of the stores during various times of the day.
3. 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. At the feasibility analysis stage, the projected return is a judgment call. A more precise estimation can be computed by preparing pro forma (or projected) financial statements, including one- to three-year pro forma statements of cash flow, income statements, and balance sheets (along with accompanying financial ratios). This work can be done if time and circumstances allow, but is typically done at the business plan stage rather than the feasibility analysis stage of a new venture’s development. To gain perspective, 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
Opinion:
In my opinion after I read all the answers of that questions and read in an e-book that I interested in learning feasibility analysis because from that I can learn how to start business with avoid the failure. I totally agree with feasibility analysis and want to do that in my future business.
reference: e-book Introduction to Entrepreneurship (chapter 3, page 75-94)
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