Chapter 3

Feasibility Analysis
Bruce R. Barringer
R. Duane Ireland

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 Chapter Objectives
1 of 3

1. Explain what a feasibility analysis is and why it’s

important.
2. Discuss the proper time to complete a feasibility
analysis when developing an entrepreneurial venture.
3. Describe the purpose of a product/service feasibility
analysis and the two primary issues that a proposed
business should consider in this area.
4. Explain a concept statement and its components.
5. Describe the purpose of a buying intentions survey
and how it’s administered.
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 Chapter Objectives
2 of 3

6. Explain the importance of library, Internet, and

gumshoe research.
7. Describe the purpose of industry/market feasibility
analysis and the two primary issues to consider in
this area.
8. Discuss the characteristics of an attractive industry.
9. Describe the purpose of organizational feasibility
analysis and list the two primary issues to consider
in this area.

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 Chapter Objectives
3 of 3

10. Explain the importance of financial feasibility

analysis and list the most critical issues to consider
in this area.

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 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.

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 When To Conduct a Feasibility Analysis

• Timing of Feasibility Analysis

– The proper time to conduct a feasibility analysis is early
in the thinking through of the prospects for a new
business.
– The thought is to screen ideas before a lot of resources
are spent on them.

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 Feasibility Analysis

•Components of a Properly Conducted Feasibility Analysis

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 Industry/Target Market
Feasibility
Product/Service Feasibility

Organizational Feasibility

Financial Feasibility

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 Forms of Feasibility Analysis

Industry/Target Market
Product/Service Feasibility
Feasibility

Organizational Feasibility Financial Feasibility

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 Outline for a Comprehensive Feasibility
Analysis

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 Product/Service Feasibility

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 Product/Service Feasibility Analysis
1 of 2

Purpose
• It is an assessment of the overall
Product/Service appeal or attractiveness of the
Feasibility Analysis product or service being proposed.
• Before a prospective firm rushes
a new product or service into
development, it should be sure
that the product or service is what
prospective customers want.

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 Product/Service Feasibility Analysis
2 of 2

Components of product/service feasibility analysis

Product/Service Product/Service
Desirability Demand

Buying intention survey or

Conduct a research

Administer a Concept test

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 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?

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 Product/Service Desirability
2 of 3

• Second, Administer a Concept Test

– A concept statement should be developed.
– A concept statement is a one-page description of a business
that is distributed to people who are asked to provide
feedback on the potential of the business idea.
– 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.

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 Product/Service Desirability
3 of 3

New Venture
Fitness Drink’s
Concept Statement

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 Product/Service Demand
1 of 6

• Product/Service Demand
– There are two steps to assessing product/service demand.
– Step 1: Administer a Buying Intentions Survey
– Step 2: Conduct Library, Internet, and Gumshoe research

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 Product/Service Demand
2 of 6

• Buying Intentions Survey

– Is an instrument that is used to gauge customer interest in
a product or service.
– It consists of a concept statement or a similar description of
a product or survey with a short survey attached to gauge
customer interest.

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 Product/Service Demand
3 of 6

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 Product/Service Demand
4 of 6

• Library, Internet, and Gumshoe Research

– Evidence that there will be healthy demand for your
product or service must be accumulated.
– The second way to assess the demand for a product or
service is by conducting library, Internet, and gumshoe
research.

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 Industry/Target Market
Feasibility Product/Service Feasibility

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Industry/Target Market Feasibility Analysis
1 of 2

Purpose
• It 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.

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 Industry/Target Market Feasibility Analysis
2 of 2

Components of industry/target market

feasibility analysis

Target Market
Industry Attractiveness
Attractiveness

• Are young rather than old

To find a market that is large enough for the proposed • Are early rather than late in their life cycle
business but is yet small enough to avoid attracting larger • Are fragmented rather than concentrated
competitors at least until the entrepreneurial venture can get • Are growing rather than shrinking
$
off to a successful start •Are not crowded 3-23
• Have high rather than low profit margins
 Target Market Attractiveness
1 of 2

• As mentioned, a target market is a place within a

larger market segment that represents a narrower
group of customers with similar needs.
• 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 at least until
the entrepreneurial venture can get off to a
successful start.
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 Industry Attractiveness
2 of 2

Characteristics of Attractive Industries

• 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 not crowded
• Have high rather than low profit margins

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 Industry/Target Market
Feasibility
Product/Service Feasibility

Organizational Feasibility

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 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.

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 Organizational Feasibility Analysis
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Components of organizational
feasibility analysis

Management Prowess Resource Sufficiency

• Management expertise/skills, abilities • Tangible

• Passion • Intangible
• Understand the market • HR

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 Management Prowess

• Management Prowess
– A proposed business should candidly evaluate the prowess,
or ability, of its management team to satisfy itself that
management has the passion and expertise to launch the
venture.
– 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.

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 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.
– 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.

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 Resource Sufficiency
2 of 2

Examples of nonfinancial resources that may be critical

to the successful launch of a new business
• Affordable office space

• Lab space, manufacturing space, or space to launch a service business

• Availability of contract manufacturers or service providers
• Key management employees (now and in the future)
• Key support personnel (now and in the future)
• Ability to obtain intellectual property protection
• Ability to form favorable business partnerships

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 Industry/Target Market
Feasibility
Product/Service Feasibility

Organizational Feasibility

Financial Feasibility

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 Financial Feasibility Analysis
1 of 2

Purpose
• Is the final component of a
Financial Feasibility comprehensive feasibility analysis.
Analysis • A preliminary financial assessment
is sufficient.

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 Financial Feasibility Analysis
2 of 2

Components of financial
feasibility analysis

Total Start-Up Cash Financial Performance of

Needed Similar Businesses
reports available
Overall Financial
Attractiveness of the
Proposed Venture
Ability to forecast income and expenses
with a reasonable degree of certainty

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 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.

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 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.
– 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.
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 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.

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 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

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 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.

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publishing as Prentice Hall

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