Chapter 3

Feasibility Analysis
Bruce R. Barringer
R. Duane Ireland

Copyright ©2012 Pearson Education, Inc. publishing as Prentice Hall 3-1

 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 ©2012 Pearson Education, Inc. publishing as Prentice Hall 3-2

 When To Conduct a Feasibility Analysis

• Timing of Feasibility Analysis

– The proper time 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
– four separate components.

Copyright ©2012 Pearson Education, Inc. publishing as Prentice Hall 3-3

 Feasibility Analysis

Role of feasibility analysis in developing business ideas.

Copyright ©2012 Pearson Education, Inc. publishing as Prentice Hall 3-4

 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 ©2012 Pearson Education, Inc. publishing as Prentice Hall 3-5

 Product/Service Desirability
2 of 3

• Second, Administer a Concept Test

– 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.

Copyright ©2012 Pearson Education, Inc. publishing as Prentice Hall 3-6

 Product/Service Demand
1 of 6

– two steps.

– Step 1: Administer a Buying Intentions Survey

– Step 2: Conduct Library, Internet, and Gumshoe research

Copyright ©2012 Pearson Education, Inc. publishing as Prentice Hall 3-7

 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.

– Internet sites like SurveyMonkey make administering a

buying intentions survey easy and affordable.

Copyright ©2012 Pearson Education, Inc. publishing as Prentice Hall 3-8

 Product/Service Demand
3 of 6

Copyright ©2012 Pearson Education, Inc. publishing as Prentice Hall 3-9

 Product/Service Demand
4 of 6

• Library, Internet, and Gumshoe Research

– A gumshoe is a detective or an investigator that scrounges
around
– for information or clues wherever they can be found.
– Be a gumshoe. Ask people what they think about your product
or service idea.
– Reference librarians can often point you toward resources to
help you investigate a business idea, such as industry-specific
trade journals and industry reports.

– Internet searches can often yield important information about the

potential viability of a product or service idea.

Copyright ©2012 Pearson Education, Inc. publishing as Prentice Hall 3-10

 Product/Service Demand
6 of 6

•conduct a
thorough
product/service
feasibility analysis is
to
hit the streets and talk
to
potential customers.

Copyright ©2012 Pearson Education, Inc. publishing as Prentice Hall 3-11

Industry/Target Market Feasibility Analysis
2 of 2

Components of industry/target market

feasibility analysis

Target Market
Industry Attractiveness
Attractiveness

Copyright ©2012 Pearson Education, Inc. publishing as Prentice Hall 3-12

 Industry Attractiveness Characteristics
2 of 2

• 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 and 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 materials

Copyright ©2012 Pearson Education, Inc. publishing as Prentice Hall 3-13

 Target Market Attractiveness

– The challenge 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 an entire industry.

– Often, considerable ingenuity must be employed to find

information to assess the attractiveness of a specific target
market.

Copyright ©2012 Pearson Education, Inc. publishing as Prentice Hall 3-14

 III. Organizational Feasibility Analysis
1 of 2

Purpose
• Is conducted to determine
whether a proposed business has
sufficient management expertise,
organizational competence, and
resources to successfully launch
a business.

• Focuses on non-financial resources.

Copyright ©2012 Pearson Education, Inc. publishing as Prentice Hall 3-15

 III. Organizational Feasibility Analysis
2 of 2

Components of organizational
feasibility analysis

Management Prowess Resource Sufficiency

Copyright ©2012 Pearson Education, Inc. publishing as Prentice Hall 3-16

 Management Prowess (ABILITY)

– 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.

– 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.
Copyright ©2012 Pearson Education, Inc. publishing as Prentice Hall 3-17
 Resource Sufficiency
1 of 2

– 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 ©2012 Pearson Education, Inc. publishing as Prentice Hall 3-18

 Resource Sufficiency
2 of 2

Examples of nonfinancial resources that may be critical

to the successful launch of a new business
1. Affordable office space
2. Lab space, manufacturing space, or space to launch a service business
3. Availability of contract manufacturers or service providers
4. Key management employees (now and in the future)
5. Key support personnel (now and in the future)
6. Ability to obtain intellectual property protection
7. Ability to form favorable business partnerships

Copyright ©2012 Pearson Education, Inc. publishing as Prentice Hall 3-19

 IV.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.

Copyright ©2012 Pearson Education, Inc. publishing as Prentice Hall 3-20

 Financial Feasibility Analysis
2 of 2

Components

Total Start-Up Cash Financial Performance of

Needed Similar Businesses

Overall Financial
Attractiveness of the
Proposed Venture

Copyright ©2012 Pearson Education, Inc. publishing as Prentice Hall 3-21

 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.

Copyright ©2012 Pearson Education, Inc. publishing as Prentice Hall 3-22

 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.
Copyright ©2012 Pearson Education, Inc. publishing as Prentice Hall 3-23
Overall Financial Attractiveness of the
Proposed Venture/Investment
1 of 2

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 ©2012 Pearson Education, Inc. publishing as Prentice Hall 3-24

 Financial Factors Associated With Promising Business
Opportunities
2 of 2

• 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 ©2012 Pearson Education, Inc. publishing as Prentice Hall 3-25

 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.

Copyright ©2012 Pearson Education, Inc. publishing as Prentice Hall 3-26

 All rights reserved. No part of this publication may be reproduced,
stored in a retrieval system, or transmitted, in any form or by any
means, electronic, mechanical, photocopying, recording, or otherwise,
without the prior written permission of the publisher. Printed in the
United States of America.

Copyright ©2012 Pearson Education, Inc.

publishing as Prentice Hall

Copyright ©2012 Pearson Education, Inc. publishing as Prentice Hall 3-27

Copyright ©2012 Pearson Education, Inc. publishing as Prentice Hall 3-28
Copyright ©2012 Pearson Education, Inc. publishing as Prentice Hall 3-29
Copyright ©2012 Pearson Education, Inc. publishing as Prentice Hall 3-30
Copyright ©2012 Pearson Education, Inc. publishing as Prentice Hall 3-31
Copyright ©2012 Pearson Education, Inc. publishing as Prentice Hall 3-32