Chap 3 entreoprnrship - entrepreneurship lecture notes PDF

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Chapter 3 FEASIBILITY ANALYSISFeasibility analysisis the process of determining if a business idea is viable. The most effective businesses emerge from a processthat includes (1) recognizing a business idea, (2) testing the feasibility of theidea, (3) writing a business plan, and (4) launching the b...

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Chapter 3 FEASIBILITY ANALYSIS Feasibility analysisis the process of determining if a business idea is viable. The most effective businesses emerge from a processthat includes (1) recognizing a business idea, (2) testing the feasibility of theidea, (3) writing a business plan, and (4) launching the business. If a businessidea falls short on one or more of the four components of feasibility analysis, itshould be dropped or rethought. Many entrepreneursmake the mistake of identifying a business idea and then jumping directly towriting a business plan to describe and gain support for the idea. Thissequence often omits or provides little time for the important step of testing thefeasibility of a business idea before the business plan is written.A mental transition must be made when completing a feasibility analysisfrom thinking of a business idea as just an idea to thinking of it as a business.A feasibility analysis is an assessment of a potential business rather thanstrictly a product or service idea. Feasibility analysis is investigative in nature and is designed to critique themerits of a proposed business. A business plan is more focused on planningand selling. The reason it’s important to complete the entire process, is to avoid falling into the “everything about my opportunity iswonder” mode. Failure to properly investigate the merits of abusiness idea before the business plan is written runs the risk of blinding anentrepreneur to inherent risks associated with the potential business andresults in too positive of a plan. Primary research is research that is collected by the person or persons completing the analysis. It normally includes talking toindustry experts, obtaining feedback from prospective customers, conductingfocus groups, and administering surveys. Secondary research probes datathat is already collected. The data generally includes industry studies, CensusBureau data, analyst forecasts, and other pertinent information gleanedthrough library and Internet research. It should be emphasized that while a feasibility analysis tests the merits ofa specific idea, it allows ample opportunity for the idea to be revised, altered,and changed as a result of the feedback that is obtained and the analysis thatis conducted. The key objective behind feasibility analysis is to put an

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idea tothe test—by talking to industry experts, surveying prospective customers,studying industry trends, thinking through the financials, and scrutinizing itin other ways. These types of activities not only help determine whether an ideais feasible but also help shape and mold the idea. Product/Service Feasibility Analysis Product/service feasibility analysis is an assessment of the overall appealof the product or service being proposed. Although there are many importantthings to consider when launching a new venture, nothing else mattersif the product or service itself doesn’t sell. There are two components toproduct/service feasibility analysis: product/service desirability and product/service demand. Product/Service Desirability The first component of product/servicefeasibility is to affirm that the proposed product or service is desirable andserves a need in the marketplace. You should ask the following questions todetermine the basic appeal of the product or service: 

Does it make sense? Is it reasonable? Is it something consumers will getexcited about?



Does it take advantage of an environmental trend, solve a problem, or fill agap 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?

The proper mind-set at the feasibility analysis stage is to get a general senseof the answers to these and similar questions, rather than to try to reach finalconclusions. One way to achieve this objective is to administer a concept test. Concept Test A concept test involves showing a preliminary description of aproduct or service idea, called a concept statement, to industry experts andprospective customers to solicit their feedback. It is a one-page document thatnormally includes the following: 

A description of the product or service. This section details the features ofthe product or service; many include a sketch of it as well.



The intended target market. This section lists the consumers or businesseswho are expected to buy the product or service.

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The benefits of the product or service. This section describes the benefitsof the product or service and includes an account of how the product orservice adds value and/or solves a problem.



A description of how the product or service will be positioned relative tocompetitors. A company’s position describes how its product or service issituated relative to its rivals.



A brief description of the company’s management team.

After the concept statement is developed, it should be shown to at least10 people who are familiar with the industry that the firm plans to enter and whocan provide informed feedback. The temptation to show it to family members andfriends should be avoided because these people are predisposed to give positivefeedback. Instead, it should be distributed to people who will provide candid andinformed feedback and advice. A short survey should be attached to the statement.Theinformation gleaned from the survey should be tabulated and carefully read. Iftime permits, the statement can be used in an iterative manner to strengthen theproduct or service idea. For example, you might show the statement to a group ofprospective customers, receive their feedback, tweak the idea, show it to a secondgroup of prospective customers, tweak the idea some more, and so on.Rather than developing a formal concept statement, some entrepreneursconduct their initial product/service feasibility analysis by simply talkingthrough their ideas with people or conducting focus groups to solicit feedback.While not a complete approach, there is merit to the give-and-take that entrepreneursexperience by talking with prospective customers rather than just handingthem a concept statement and asking them to complete a questionnaire. Theideal combination is to do both—distribute a concept statement to 10 or morepeople who can provide informed feedback and engage in verbal give-and-takewith as many industry experts and prospective customers as possible. Product/Service Demand The second component of product/servicefeasibility analysis is to determine if there is demand for the product or service.There are two techniques for making this determination: administering a buyingintentions survey and conducting library, Internet, and gumshoe research.

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Buying Intentions Survey A buying intentions survey is an instrumentthat is used to gauge customer interest in a product or service. It consists ofa concept statement or a similar description of a product or service with ashort survey attached. The statement and survey should be distributed to 20 to30 potential customers (people who completed the concept statement testshould not be asked to complete this survey). To gauge customer interest, the number of people who indicate they definitelywould buy is typically combined with the number of people who indicate theyprobably would buy. It’s getting increasingly easy to administer buying intentionssurveys. For example, Internet sites like SurveyMonkey and SurveyGizmo allowyou to set up small-scale surveys for free or for a modest fee. One caveat is that people who say that they intend to purchase a productor service don’t always follow through; as a result, the numbers resulting fromthis activity are almost always optimistic. The survey also doesn’t normally tapa scientifically random sample. Still, the results give a potential entrepreneur ageneral sense of the degree of customer interest in the product or service idea. Industry/Target Market Feasibility Analysis Industry/target market feasibility is an assessment of the overall appeal of theindustry and the target market for the product or service being proposed. Thereis a distinct difference between a firm’s industry and its target market, whichshould be clearly understood. An industry is a group of firms producing asimilar product or service, such as computers, children’s toys, airplanes, orsocial networks. A firm’s target market is the limited portion of the industrythat it goes after or to which it wants to appeal. Most firms and certainly entrepreneurialstart-ups typically do not try to service their entire industry.Instead, they select or carve out a specific target market and try to service thatmarket very well. Sprig Toys is not trying to target the entire children’s toyindustry. Its target market is parents who are willing to pay a premium forsuper-safe, environmentally friendly, educational toys.There are two components to industry/target market feasibility analysis:industry attractiveness and target market attractiveness. Industry Attractiveness Industries vary in terms of their overall attractiveness. The top three factors are particularly important.Industries that are young rather than old, are early rather than late in their lifecycle, and are fragmented rather than concentrated

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are more receptive to new entrants than industries with the opposite characteristics. You also want topick an industry that is structurally attractive—meaning start-ups can enterthe industry (in various target markets) and compete. Some industries arecharacterized by such high barriers to entry or the presence of one or twodominant players that potential new entrants are essentially shut out.Other factors are also important. For example, the degree to whichenvironmental and business trends are moving in favor rather than against theindustry are important for the industry’s longterm health and its capacity tospawn new target or niche markets. Are changing economic and societal trendshelping or hurting industry incumbents? Are profit margins increasing orfalling? Is innovation accelerating or waning? Are input costs going up ordown? Are new markets for the industry’s staple products opening up or arecurrent markets being shut down by competing industries? You can’t coverevery facet of an industry; but you should gain a sense of whether the industryyou’re entering is a good one or a poor one for start-ups. Target Market Attractiveness A target market is a placewithin a larger market segment that represents a narrower group of customerswith similar needs. Most startups simply don’t have the resources needed toparticipate in a broad market, at least initially. Instead, by focusing on asmaller target market, a firm can usually avoid headto-head competition withindustry leaders and can focus on serving a specialized market very well. It’salso not realistic, in most cases, for a start-up to introduce a completelyoriginal product idea into a completely new market. In most instances, it’s justtoo expensive to be a pioneer in each area. Most successful start-ups eitherintroduce a new product into an existing market (like Sprig Toys introducingnew toys into the existing toy market) or introduce a new market to an existingproduct (like InstyMeds is introducing vending machine sales, which is a newmarket, to prescription medicines, which is an existing product). The challenge in identifying an attractive target market is to find a marketthat’s large enough for the proposed business but is yet small enough to avoidattracting larger competitors at least until the entrepreneurial venture can getoff to a successful start. Tommy John, a maker of men’s undershirts , is an example of a company that has targeted a marketthat meets these criteria. Tommy John began in 2008 by making customfittedmen’s

undershirts, and

has

recently

expanded

to

men’s

briefs.

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Theundershirts are sold under the brand name Second Skin, based on the ideathat they fit so well they feel like a “second skin” when worn. Tommy Johnstarted by selling through a single retailer, and eventually persuaded NeimanMarcus to give its undershirts a try. Today, Tommy John undershirts are soldin Neiman Marcus stores nationwide, and are making their way into otherretailers as well. Although Tommy John operates in the $30 billion worldwidemarket for men’s undershirts, it has carved out a specialized target or nichemarket for itself and is gaining momentum. One key to its success is that ithas remained laser-focused on a clearly defined target market. The numberone

question

the

company

gets

is

when

it

will

start

producing

women’sundergarments. So far it’s resisted, preferring to remain focused on its SecondSkin line of men’s undershirts....