Chapter 3

Feasibility Analysis
Bruce R. Barringer
R. Duane Ireland

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 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.

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 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.
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 What Is Feasibility Analysis?

• Feasibility analysis is the

process of determining
whether
a business idea is viable.
Feasibility Analysis • It is the preliminary evaluation
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
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.

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 Feasibility Analysis

Role of feasibility analysis in developing business ideas.

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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 Analysis
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Purpose
• Is an assessment of the overall
Product/Service appeal of the product or service
Feasibility Analysis 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
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Components of product/service
feasibility analysis

Product/Service Product/Service
Desirability Demand

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 Product/Service Desirability
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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
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• 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.

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 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.

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 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.

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 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).

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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.

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Industry/Target Market Feasibility Analysis
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Components of industry/target market

feasibility analysis

Target Market
Industry Attractiveness
Attractiveness

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 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.

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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 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.

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 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 of an entire industry.
– Often, considerable ingenuity must be employed to find
information to assess the attractiveness of a specific target
market.

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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

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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 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.

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 Resource Sufficiency
1 of 2

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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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 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
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Components of financial
feasibility analysis

Total Start-Up Cash Financial Performance of

Needed Similar Businesses

Overall Financial
Attractiveness of the
Proposed Venture

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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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 First Screen
Item Score/Comments
Strength of New Venture 1 2 3 4 5
Team COMMENT:

Strength of the 1 2 3 4 5
Opportunity COMMENT:

Strength of the Industry 1 2 3 4 5

COMMENT:

Strength of Business 1 2 3 4 5
Model COMMENT:

Average Score

Decision:
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