A feasibility analysis is the process of determining whether a business idea is viable or not, or in other words, whether or not the idea is worth pursuing. A feasibility study is conducted in the early stages of thinking through the prospects for a new business in order to screen ideas before spending a lot of resources on them.
There are four types of feasibility analysis; product/service feasibility analysis,
industry/target market feasibility analysis, organizational feasibility analysis, and financial feasibility analysis.
Product/ service feasibility analysis
The purpose of a product/ service feasibility analysis is to do an overall assessment of the appeal of the product or service being proposed. Before a firm rushes into developing a new product or service, it should be sure that this product or service is something the customer actually wants. There are a few steps to do this:
Product / service desirability: First, we need to ask some questions to determine the appeal of the product or service. For example: Does it make sense? Is it reasonable?
Next, we need to create a concept statement. 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. This provides the entrepreneur with a sense of the viability of the product idea and suggestions for how the idea can be strengthened before proceeding further.
Product / service demand: In order to determine the product/ service demand, you need to talk to potential customers face to face, and use online tools, such as google adwords to assess the demand of your product/ service.
2. Industry/ target market feasibility analysis
The aim of an industry/ target market feasibility analysis is to assess the overall appeal of the industry and the target market for the proposed business. To determine this you will need to research two things; the industry attractiveness, and target market attractiveness.
Industry attractiveness: industries vary in terms of their overall attractiveness and the degree to which environmental and business trends are moving in favor of them rather than against them.
Characteristics of attractive industries
Early in their life cycle
Growing not shrinking
Fragmented not concentrated
Produce products that are ‘must have’ not ‘want to have’
Not crowded
High operating margins
Not highly dependent on the low prices of materials to make profit
Target market attractiveness
Assessing the attractiveness of a target market is tougher than assessing the attractiveness of an entire industry, because understanding a certain target market within an industry takes a lot more in depth research than to understand the attractiveness of the overall industry. The challenge in identifying an attractive target market is to find a market that is large enough for the proposed business idea, yet small enough to not attract large competitors.
3) Organizational feasibility analysis
Organizational feasibility analysis is conducted to determine whether a proposed business idea has sufficient management expertise, organizational competence, and resources to successfully launch a business, and it focuses on non financial resources. An organizational feasibility analysis should include two things.
Management process: a proposed business idea should candidly evaluate the ability of its management team to satisfy itself that its management has the requisite passion and expertise to launch the venture The two most important characteristics in any management team is that they share the same passion that the sole entrepreneur has for the business idea, and that they understand the market in which the firm will participate.
Resource sufficiency: whether or not the entrepreneur has the sufficient resources to launch the proposed venture.
To test sufficiency, the firm should list 6 to 12 of the most critical non-financial resources that will be needed to move forward with the business idea successfully. If the resources are unavailable, it may be impractical to proceed with the business idea. Examples of non-financial resources are:
Affordable office space
Lab space/ manufacturing space
Ability to obtain intellectual property
Ability to form business partnerships
4) Financial feasibility analysis
Financial feasibility analysis is the final component of a comprehensive feasibility analysis and includes three important factors: total start-up cash needed, financial performance of similar businesses, and overall financial attractiveness.
Total start up cash needed: 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 analysis is to determine if the proposed venture is realistic given the total start up cash needed.
Financial performance of similar businesses: estimates the proposed start up’s financial performance by comparing it to similar, already established businesses. There are many reports available to gather his information, some are for free and some require a fee, offering a detailed industry trend analysis and reports on thousands of individual firms.
Overall financial attractiveness: a number of other financial factors are associated with promising business start ups, some of these factors are:
Steady and rapid growth in sales during the first 5 to 7 years in a clearly defined market niche
High percentage of recurring revenue
Ability to forecast income and expenses with a reasonable degree of certainity
Internally generated funds to finance and sustain growth
Availability of an exit opportunity for investors to convert equity to cash