Conducting a Feasibility Analysis

Introduction:

For many entrepreneurs, the easiest a part of launching a business is arising with a thought for a new business concept or approach. As you learned in Chapter 2, entrepreneurs do not lack creativity and are responsible for some of the world’s most important innovations. Business success, however, requires much more than just a great new idea. Once entrepreneurs develop a thought for a business, the subsequent step is to subject it to a feasibility analysis to work out whether or not they can transform the thought into a viable business. A feasibility analysis is a process of determining whether an entrepreneur’s idea may be a viable foundation for creating a successful business. Its purpose is to work out whether a business idea is worth pursuing. If the thought passes the feasibility analysis, the entrepreneur’s next step is to create a solid business plan for capitalizing on the thought. If the thought fails to pass muster, the entrepreneur drops it and moves on to the subsequent opportunity. He or she has not wasted valuable time, money, energy, and other resources creating a full-blown business plan, or worse, launching a business that’s destined to fail because it’s supported a flawed concept. Although it’s impossible for a feasibility study to ensure an idea’s success, conducting a study reduces the likelihood that entrepreneurs will spend an excessive amount of their time pursuing fruitless business ventures.

A feasibility study is not the same as a business plan; both play important, separate roles in the start-up process. A feasibility study answers the question, “Should we proceed with this business idea?” Its role is to serve as a filter, screening out ideas that lack the potential for building a successful business, before an entrepreneur commits the necessary resources to build a business plan. A feasibility study primarily is an investigative tool. It is designed to give an entrepreneur a picture of a particular business idea’s market, sales, and profit potential. Will a ski resort located here attract enough customers to be successful? Will customers during this community support a sandwich shop with a retro rock-n-roll theme? Can we build the merchandise at an inexpensive cost and sell it at a price customers are willing and ready to pay? Does this entrepreneurial team have the power to implement the thought successfully?

3.1 Feasibility Defined

What are the characteristics that indicate an energy business is feasible?

When land, fuel, technology, team, customers, and permits are available and when putting these ingredients together makes financial, social, and environmental sense, then a business is possible. Determining the feasibility of a business doesn’t guarantee that it’ll be funded or implemented-too many other things outside of your control can fail but it does set the stage for presenting the business to reasonable people for technical and financial participation. The goal of a Feasibility Analysis is for you to demonstrate that the pieces of the business can be put together well enough to present them to others.

3.2 Conducting a Feasibility Analysis

A feasibility analysis consists of three interrelated components: industry and market feasibility analysis, a product or service feasibility analysis, and financial feasibility analysis. See fig 4.1

3.3 Industry and Market Feasibility Analysis

When evaluating the feasibility of a business idea, entrepreneurs find a basic analysis of the industry and targeted market segment an honest start line. The focus in this phase is twofold: to work out how attractive an industry is overall as a “home” for replacement business, and to spot possible niches a little business can occupy profitably. The first step in assessing industry attractiveness is to color an image of the industry with broad strokes, assessing it from a “macro” level. Answering the following questions will help:

1. How large is the industry?

2. How fast is it growing?

3. Is the industry as a whole profitable?

4. Is the industry characterized by high-profit margins or razor-thin margins?

5. How essential are its products or services to customers?

6. What trends are shaping the industry’s future?

7. What threats does the industry face?

8. What opportunities does the industry face?

9. How crowded is the industry?

10. How intense is the level of competition in the industry?

11. Is the industry young, mature, or somewhere in between?

Addressing these questions helps entrepreneurs to determine whether the potential exists for sufficient demand for their products and services. A useful tool for analyzing an industry’s attractiveness is the five forces model developed by Michael Porter of the Harvard Business School (see Figure 4.2). Five forces interact with one another to determine the setting in which companies compete and hence the attractiveness of the industry: The rivalry among the companies competing in the industry, the bargaining power of suppliers to the industry, the bargaining power of buyers, the threat of new entrants to the industry, and the threat of substitute products or services.

Rivalry Among Companies Competing in the Industry The strongest of the five forces in most industries is the rivalry that exists among the businesses competing in a particular market. Much like the horses running in the Kentucky Derby, businesses in a market are jockeying for positions in an attempt to gain a competitive advantage. When a company

creates an innovation or develops a unique strategy that transforms the market, competing companies must adapt or run the risk of being forced out of business. This force makes markets a dynamic and highly competitive place. Generally, the industry is more attractive when the following conditions hold:

1. The number of competitors is large or, at the other extreme, quite small (fewer

2. than five).

3. Competitors are not similar in size or capability.

4. The industry is growing at a fast pace.

5. The opportunity to sell a differentiated product or service is present.5

3.4 FEASIBILITY STUDY

Feasibility literally means whether some idea will work or not. It knows beforehand whether there exists a sizeable marketplace for the proposed product/service, what would be the investment requirements and where to urge the funding from, whether and wherefrom the required technical know-how to convert the thought into a tangible product may be available, and so on. In other words, a feasibility study involves an examination of the operations, financial, HR and marketing aspects of a business on an ex-ante (Before the venture comes into existence) basis. Thus, you may simultaneously read this lesson and the lessons on marketing, finance, etc. to have a better idea of the issues involved. What we present hereunder may be a brief outline of the problems impinging

upon the varied aspects of the feasibility of the proposed project.

By now, you’d have understood that feasibility may be a multivariate concept; that’s, a project has to be viable not only in technical terms but also in economic and commercial terms too. Moreover, there always is a possibility that a project that is technically possible may not be economically viable. For instance, you can construct a dust-free factory in Rajasthan, but it is more economically sensible to do so in Chandigarh/ Bangalore. So whilst we take up the varied aspects of feasibility one by one, it must not mislead into believing that there’s a sequence in which there are not any interdependencies.

1. MARKET ANALYSIS

2. FINANCIAL ANALYSIS

3. TECHNICAL ANALYSIS

4. ECONOMIC ANALYSIS

5. ECOLOGICAL ANALYSIS

6. LEGAL AND ADMINISTRATIVE

3.4.1 MARKET ANALYSIS

A market, whether a place or not, is the arena for interaction among buyers and sellers. From the seller’s point of view, market analysis is primarily concerned with the aggregate demand of the proposed product/service in the future and the market share expected to be captured. The success of the proposed project clearly hinges on the continuing support of the customers. However, it is very difficult to identify the market for one’s product/service. After all, the whole universe cannot be your market. You have to carefully segment the market according to some criteria such as geographic scope, the demographic and psychological profile of the potential customers, etc. It is a study of knowing whom all comprise your customers, for this you require information on:

Ø Consumption trends.

Ø Past and present supply position

Ø Production possibilities and constraints

Ø Imports and Exports Competition

Ø Cost structure

Ø Elasticity of demand

Ø Consumer behavior, intentions, motivations, attitudes, preferences, and requirements

Ø Distribution channels and marketing policies in use

Ø Administrative, technical and legal constraints impinging on the marketing of the product

Ø

3.4.2 FINANCIAL ANALYSIS

The objective of the monetary analysis is to work out whether the proposed project is getting to be financially viable within the sense of having the ability to satisfy the burden of servicing debt and whether the proposed project will satisfy the return expectations of those who provide the capital. While conducting a financial appraisal certain aspect has got to be looked into like:

Ø Investment outlay and price of the project

Ø Means of financing

Ø Projected profitability

Ø Break-even point

Ø Cash flows of the project

Ø Investment worthiness judged in terms of varied criteria of merit

Ø Projected financial position

3.4.3 TECHNICAL ANALYSIS

The issues involved within the assessment of technical analysis of the proposed project may be classified into inputs, throughputs, and outputs.

· Input Analysis: Input analysis is especially concerned with the identification, quantification, and evaluation of project inputs, that is, machinery and materials. you’ve got to make sure that the proper kind and quality of inputs would be available at the proper time and price throughout the lifetime of the project. You have to enter into long-term contracts with potential suppliers; in many cases, you have to cultivate your supply sources. When Macdonald entered India, they developed sustainable sources of supply of potatoes, lettuce, and other ingredients for his or her burgers. The activities involved in developing and retaining supply sources are mentioned as supply chain management.

· Throughput Analysis: It refers to the production/operations that you simply would perform on the inputs to feature value. Usually, the inputs received would undergo a process of transformation in several stages of manufacture. Where to locate the facility, what would be the sequence, what would be the layout, what would be the standard control measures, etc. are the problems that you simply would learn in greater detail in subsequent lessons.

3.4.4 ECONOMIC ANALYSIS

Economics is the study of costs- and- benefits. About the feasibility of the study, the entrepreneur is concerned whether the capital cost, as well as the cost of the product, is justifiable vis-à-vis the price at which it will sell at the marketplace. For example, technically, silver can be extracted from silver bromide, (a chemical used for processing the X-ray and photo films); but, the cost of extraction is so high that it would not be economically feasible to do so. Likewise, until recently cost of harnessing solar power was prohibitively high. This cost-benefit analysis goes into financial calculations for profitability analysis that we discussed under financial analysis. At this stage it is also useful to distinguish between the economic and commercial feasibility; whereas economic feasibility leads one to the unit cost of the product, commercial feasibility informs whether enough units would sell.

3.4.5 ECOLOGICAL ANALYSIS

In recent years, environmental concerns have assumed a great deal of significance especially for projects, which have significant ecological implications like power plants and irrigation schemes, and for environment polluting industries (like bulk drugs, chemicals, and leather processing). The concerns that are usually addressed include the following:

· What is the likely damage caused by the project to the environment?

· What is the cost of restoration measures required to ensure that the damage to the environment is contained within acceptable limits?

3.4.6 LEGAL AND ADMINISTRATIVE

Think of the plight of the entrepreneur who worked on the idea of laundry to cater to hotels and hospitals, finds it eminently feasible only to learn subsequently that ‘laundry’ does not figure as an industry within the executive definition of SSI as applicable thereon date. Another entrepreneur in Kalyani (West Bengal) developed an Ayurvedic preparation only to find that the office of DIC did not have an expert to validate the project; the product had to be marketed as a confectionary item! What is implied from these examples is that the entrepreneur has got to make certain also of the executive and legal issues involved within the project. These include a choice of the form of business organization, registration and clearances, and approvals from the diverse authorities.