barringer e4 im 03 ge version

8/17/2019 Barringer e4 Im 03 GE Version

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Chapter 3: Feasibility Analysis

CHAPTER 3

FEASIBILITY ANALYSIS

LEARNING OBJECTIVES

1. Explain what a feasibility analysis is and why it’s important.2. Disc ss the proper time to complete a feasibility analysis when de!elopin" an

entreprene rial !ent re.3. Describe the p rpose of a prod ct#ser!ice feasibility analysis and the two primary

iss es that a proposed b siness sho ld consider in this area.$. Explain a concept statement and its contents.%. Describe the p rpose of a b yin" intentions s r!ey and how it’s administered.&. Explain the importance of library' (nternet' and " mshoe research.). Describe the p rpose of ind stry#tar"et mar*et feasibility analysis and the two

primary iss es to consider in this area.+. Disc ss the characteristics of an attracti!e ind stry.,. Describe the p rpose of or"ani-ational feasibility analysis and list the two primary

iss es to consider in this area.1 . Explain the importance of financial feasibility analysis and list the most critical

iss es to consider in this area.

CHAPTER OVERVIEW

/his chapter introd ces feasibility analysis' and ma*es the case for the importance offeasibility analysis as a way of testin" the potential !iability of a b siness idea. /hechapter stresses that the proper time to complete a feasibility analysis is after opport nityreco"nition b t before the completion of a b siness plan. /he !al e of completin" aconcept statement is disc ssed. A concept statement is a one0pa"e description of a

b siness idea' which an entreprene r ses to solicit feedbac* abo t the potential !iabilityof the idea.

/he fo r sta"es of feasibility analysis are introd ced' incl din" prod ct#ser!icefeasibility' ind stry#tar"et mar*et feasibility' or"ani-ational feasibility' and financialfeasibility. /he ma or iss es to consider in each sta"e of feasibility analysis areintrod ced and disc ssed.

A feasibility analysis software prod ct' called Feasibility Analysis ro' is a!ailable forthis textboo* that pro!ides an excellent means to enhance the !al e of this chapter.

CHAPTER OUTLINE

(. Feasibility Analysis

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A. rod ct#4er!ice Feasibility Analysis1. rod ct#4er!ice Desirability

a. Concept /est2. rod ct#4er!ice Demand

a. 5 yin" (ntentions 4 r!ey

b. 6ibrary' (nternet' and 7 mshoe 8esearch5. (nd stry#/ar"et 9ar*et Feasibility1. (nd stry Attracti!eness2. /ar"et#9ar*et Attracti!eness

C. r"ani-ational Feasibility Analysis1. 9ana"ement rowess2. 8eso rce 4 fficiency

D. Financial Feasibility Analysis1. /otal 4tart0;p Cash


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ser!ice to prospecti!e sers to "a "e c stomer interest' desirability' and p rchase intent.

b. /here are three primary p rposes for a concept test: @1 to !al ate the nderlyin" premises of a prod ct or ser!ice that an entreprene r

thin*s is compellin"B @2 to help de!elop an ideaB and @3 to estimate the potential mar*et share the prod ct or ser!ice mi"ht command.

c. A well0desi"ned concept test' which is s ally called a conceptstatement' incl des the followin":

0 A description of the prod ct or ser!ice bein" offered 0 /he intended tar"et mar*et 0 /he benefits of the prod ct or ser!ice 0 A description of how the prod ct will be positioned relati!e to

similar ones in the mar*et

0 A brief description of the company’s mana"ement team 2. rod ct#4er!ice Demand

a. A b yin" intentions s r!ey is an instr ment that is sed to "a "ec stomer interest in a prod ct or ser!ice.

b. (t consists of a concept statement or a similar description of a prod ctor ser!ice with a short s r!ey attached. /he statement and s r!eysho ld be distrib ted to 2 to 3 potential c stomers to be completed.

@ eople who completed the concept statement test sho ld not be as*ed to complete this s r!ey.

c. ne ca!eat is that people who say that they intend to p rchase a prod ctor ser!ice don’t always follow thro "hB as a res lt' the n mbersres ltin" from this acti!ity are almost always optimistic.

d. (t’s also important to cond ct library' (nternet' and " mshoe research.hile administerin" a b yin" intentions s r!ey is important' more data

is needed.

5. (nd stry#/ar"et 9ar*et Feasibility

(s an assessment of the o!erall appeal of the mar*et for the prod ct or ser!ice bein" prod ced.

1. (nd stry Attracti!eness

a. (nd stries !ary considerably in terms of their "rowth rate' as shown in table 3.% in the textboo*. (n "eneral' the most attracti!e ind stries

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are characteri-ed as the followin":

0 Are yo n" rather than old 0 Are early rather than late in their life cycles 0 Are fra"mented rather than concentrated

0 Are "rowin" rather than shrin*in" 0 4ell prod cts or ser!ices that c stomers m st ha!e rather than want to ha!e 0 Are not crowded 0 Ga!e hi"h rather than low operatin" mar"ins 0 Are not hi"hly dependent on the historically low price of a *ey raw material' li*e "asoline or flo r' to remain profitable

b. (n addition to e!al atin" an ind stry’s "rowth potential' a new !ent re will want to *now more abo t the o!erall attracti!eness of the ind stry it plans to enter. /his can be accomplished thro "h

both primary research and secondary research. i. rimary research is research that is ori"inal and is collected by the entreprene r.

ii. 4econdary research probes data that are already collected' s ch as those shown in Appendix 3.2.

2. /ar"et#9ar*et Attracti!eness

a. A tar"et mar*et is a place within a lar"er mar*et se"ment thatrepresents a narrower "ro p of c stomers with similar needs.

b. /he challen"e in identifyin" an attracti!e tar"et mar*et is to finda mar*et that’s lar"e eno "h for the proposed b siness b t is yetsmall eno "h to a!oid attractin" lar"er competitors at least ntilthe entreprene rial !ent re can "et off to a s ccessf l start.

c. /he so rces of information to mine and tap are not as transparentwhen in!esti"atin" tar"et mar*et attracti!eness opposed to ind stryattracti!eness.

C. r"ani-ational Feasibility AnalysisH (s cond cted to determine whether a proposed b siness has s fficient mana"ement expertise' or"ani-ationalcompetence' and reso rces to s ccessf lly la nch its b siness.

1. 9ana"ement rowess

a. A firm sho ld candidly e!al ate the prowess' or ability' of its mana"ement team.

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b. /wo of the most important factors in this area are the passionthat the sole entreprene r or mana"ement team has for the

b siness idea and the extent to which the mana"ement team or sole entreprene r nderstands the mar*ets in which the firm

will compete.

2. 8eso rce 4 fficiency

a. /he second area of or"ani-ational feasibility analysis is to determine whether the potential new !ent re has s fficient reso rces to mo!e forward in order to s ccessf lly de!elop a prod ct or ser!ice idea.

b. /he foc s in or"ani-ational feasibility analysis sho ld be on nonfinancial reso rces in that financial feasibility is considered

separately.

c. /ypes of nonfinancial reso rces that are critical to many start0 ps’ s ccess @/able 3.)

0 Affordable office space 0 6ab space' man fact rin" space' or space to la nch a ser!ice b siness

0 Contract man fact rers or ser!ice pro!iders 0 Iey mana"ement employees @now and in the f t re 0 Iey s pport personnel @now and in the f t re 0 Iey e> ipment needed to operate the b siness @comp ters' machinery' deli!ery !ehicles 0 Ability to obtain intellect al property protection 0 4 pport of local "o!ernments and state "o!ernment if applicable for b siness la nch 0 Ability to form fa!orable b siness partnerships

D. Financial Feasibility AnalysisH (s the final sta"e of analysis. For feasibilityanalysis' a > ic* financial assessment is s ally s fficient.

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a. /he second component of financial feasibility analysis is estimatin" a proposed start0 p’s potential financial performance by comparin" it

to similar' already established b sinesses. b!io sly' this n mber will res lt in approximate rather than exact n mbers.

b. /here are se!eral ways of doin" this' all of which in!ol!e a little ethical detecti!e wor*.

3. !erall Financial Attracti!eness of the roposed =ent re

a. A n mber of other factors are associated with e!al atin" the financial attracti!eness of a proposed !ent re.

b. /ypically' these e!al ations are based primarily on a new !ent re’s pro ected financial rate of ret rn. At the macro le!el' the followin"

factors sho ld be considered to determine whether the pro ectedret rn is ade> ate to stify the la nch of the b siness.

0 /he amo nt of capital in!ested 0 /he ris*s ass med in la nchin" the b siness 0 /he existin" alternati!es for the money bein" in!ested 0 /he existin" alternati!es for the entreprene r’s time and efforts

c. pport nities demandin" s bstantial capital' re> irin" lon" periods of time to mat re' and ha!in" a lot of ris* in!ol!ed ma*e little sense nless they pro!ide hi"h rates of ret rn.

$. !erall Attracti!eness of the (n!estment

a. A n mber of other financial factors are associated with promisin" b siness opport nities. Examples are reflected in /able 3.+ in thetextboo*.

((. First 4creen

1. First 4creen' shown in Appendix 3.1' is a template for completin" a feasibilityanalysis. (t is called First 4creen beca se a feasibility analysis is anentreprene r’s @or a "ro p of entreprene rs’ initial pass at determinin" thefeasibility of a b siness idea.

2. /he mechanics for fillin" o t the First 4creen wor*sheet are strai"htforward.(t maps the fo r areas of feasibility analysis described in the chapter'accent atin" the most important points in each area.

3. /he final section of the wor*sheet' !erall otential' incl des a section

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that allows for s ""ested re!isions to the b siness idea to impro!e its potential or feasibility.

BOXED FEATURES: QUESTIONS FOR CRITICAL THINKING

What We t W!" #$=isa Cash in Gon" Ion": Gow Feasible as itK

1. Describe the difference between =isa Cash and ctop s cards.

Answer: /he ctop s card adopts 8F(D technolo"y while =isa Cash does not'forcin" sers to insert the card in readin" machines for processin". 4ince the

ctop s card can be sed in many contactless ways' people do not need to ta*e o ttheir cards from their ba"s' allowin" sers to place their ba"s abo!e the cardreader. /his desi"n sa!es time and simplifies life for millions of p blic

transportation passen"ers.

2. hat can a start0 p learn from the experience of =isa Cash abo t the importanceof a feasibility analysisK

Answer: /hat feasibility analysis is important for a start0 p b siness. /hemana"ement sho ld ha!e a "ood nderstandin" abo t the technolo"y trend'c stomer acceptance and the *illin" application to dri!e people to se incl din"merchants and c stomers.

3. Can =isa Cash si"nificantly modify its b siness idea to attract more c stomersK

Answer: 4ince contactless operation is one of the attracti!eness for c stomer'=isa Cash can consider in de!elopin" the new e0money with adoptin" 8F(Dtechnolo"y. /o dri!e more c stomers to se' an incenti!e scheme can be de!elopedto to"ether with merchants to sec re loyal c stomers.

$. o ld =isa Cash be more pop lar where yo li!eK Carry o t a comprehensi!efeasibility analysis t help yo decideK

Answer: (t is an interestin" > estion that can aro se different disc ssions indifferent co ntries. Gowe!er' st dents sho ld ha!e a "ood nderstandin" of theirmar*et sit ations and c stomer’s preferences.

Sa%%& E t!e'!e e(!)a* F)!+

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Gow 6earnin" from C stomers Ca sed a 4 ccessf l Firm to 9a*e a 1+ 0De"ree / rn onthe ositionin" of a rod ct

1. (n p ttin" wide a"e ran"es on their prod cts @i.e.' s itable for a"es $ thro "h ) ' doyo thin* that software companies prior to the ad!ent of L mp4tart’s "rade0

specific prod cts e!er tho "ht that the wide a"e ran"e ca sed parents an"st intryin" to determine if a partic lar prod ct was s itable for their childK (f yo ranswer is no' how co ld companies ha!e missed s ch a f ndamental factorK

hat is the broader implication of this lessonK

Answer: 9ost st dents will spec late that software companies were naware that p ttin" a wide a"e ran"e on an ed cational software prod ct ca sed parents an"stin tryin" to determine if a partic lar prod ct was s itable for their child.Companies missed this factor beca se they simply didn’t spend time obser!in"

parents b yin" software prod cts. /he implication of this lesson is the importanceof obser!in" first0hand c stomers tryin" to b y a prod ct.

2. Co ld 7ross and his team ha!e "leaned the same type of insi"hts they "ained !iadirectly obser!in" parents shoppin" for ed cational software for their *ids thro "hs r!eys and foc s "ro psK Explain yo r answer.

Answer: robably not' beca se they wo ldn’t ha!e *now the ri"ht > estion to as*.nly by directly obser!in" parents b yin" ed cation software did 7ross and his

team obser!e that parents were often conf sed by whether a partic lar software prod ct was a"e0appropriate for their child. /hey wo ldn’t ha!e tho "ht to as* the> estion' in a s r!ey or a foc s "ro p' if they wo ldn’t ha!e obser!ed this

phenomenon first hand.

3. Desi"n a pro"ram for (nsty9eds' the s b ect of the Mo 5e the =C 3.1 feat re'to directly obser!e its c stomers se its ser!ice. Gow sho ld (nsty9eds "o abo titK hat type of insi"hts mi"ht emer"e from this initiati!eK

Answer: 9ost st dents will s ""est one of two approaches. First' similar to what7ross and his team did' (nsty9eds co ld station employees at (nsty9eds machinesto demonstrate the machines' and then watch patients interact with them. 5y doin"this' (nsty9eds may find that a partic lar step in the process of b yin" prescriptionmedicine thro "h the machines is conf sin" or diffic lt for patients to nderstand./hey co ld then redesi"n that step. (nsty9eds co ld also set p !ideo monitorin"of patients b yin" medicine thro "h the machine' to ob!erse in a less obtr si!emanner. (f they p rs e this step' they sho ld place a notice on the machine thatdiscloses that transactions are bein" !ideotaped for c stomer research p rposes.

$. Gow can a start0 p that hasn’t already la nched apply the lessons learned from7ross’s experience with L mp4tart and "rade0specific software prod ctsK

Answer: A start0 p co ld cond ct pilot tests of its prod ct or ser!ice' in a sin"le

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location or a limited n mber of locations' before sta"in" a f ll la nch. (f it’s aeb0based ser!ice' it co ld la nch in a sin"le city or a limited "eo"raphic area

before f ll la nch to directly obser!e c stomers and solicit c stomer feedbac*.

Pa!t e!) # ,"! S(--e..Findin" the 8i"ht 5 siness artner

1. /hin* abo t yo r personality and wor* habits. hat type of person @in terms of personality and wor* habits do yo thin* yo ’d wor* well with and what type of person do yo thin* yo ’d be in constant conflict withK

Answer: /his > estion ma*es for a "ood indi!id al assi"nment.

2. Do yo thin* it’s a "ood idea or a bad idea to form a b siness partnership with aclose friendK Gow co ld yo "o abo t discernin" if a "ood friend wo ld ma*e for

a "ood b siness partnerKAnswer: /here are both pl ses and min ses in!ol!ed in partnerin" with a "oodfriend. n the pl s side' it’s important to partner with someone yo "et alon"with' tr st' and li*e to spend time with. n the min s side' friends are oftenrel ctant to challen"e one another when they thin* a mista*e is bein" made'

beca se they don’t want to p t their friendship at ris*. (n the end it’s a d"mentcall. (n re"ard to discernin" whether a "ood friend wo ld ma*e for a "ood

b siness partner' yo r friend sho ld be s b ect to the same criteria @mentioned inthe article as any other potential b siness partner. (t’s s ally a mista*e to c tyo r friend slac* on one or more of the criteria' st beca se he or she is a friend.

3. ro!ide some s ""estions' other than those mentioned in the feat re' for places@online or off0line for findin" a b siness partner.

Answer: /his is a "ood > estion for a "ro p or indi!id al assi"nment. ;r"e yo rst dents to thin* abo t the networ*in" e!ents and other reso rces that are a!ailableat yo r colle"e or ni!ersity and in yo r local comm nity for ma*in" connectionswith potential b siness partners. An example wo ld be ta*in" a b siness planclass. /here are many examples of st dents who met one another in a b siness

plan class' wor*ed to"ether on a b siness plan to f lfill class re> irements' andthen act ally started the b siness after "rad ation.

$. 4pend some time loo*in" at 6in*ed(n. Gow co ld yo se 6in*ed(n to help find a b siness partnerK

Answer: ne of the main p rposes of 6in*ed(n is to help sers maintain a list ofcontacts with whom they ha!e some le!el of relationship. As a res lt' if yode!eloped a rob st list of contacts' yo co ld reach o t to yo r contacts indicatin"that yo ’re loo*in" for a b siness partner' and see if yo r contacts ma*e any sef l

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recommendations.

REVIEW QUESTIONS

1. hat is a feasibility analysisK hat is it desi"ned to accomplishK

Answer: Feasibility analysis is the process of determinin" if a b siness idea is!iable. As a preliminary e!al ation of a b siness idea' a feasibility analysis iscompleted to determine if an idea is worth p rs in" and to screen ideas beforespendin" reso rces on them.

2. 5riefly describe each of the fo r areas that a properly exec ted feasibility analysisexplores.

Answer: rod ct#ser!ice feasibility analysis is an assessment of the o!erall appeal

of the prod ct or ser!ice bein" proposed. (nd stry#tar"et mar*et feasibilityanalysis is an assessment of the o!erall appeal of the ind stry and the tar"et mar*etfor the prod ct or ser!ice bein" proposed. r"ani-ational feasibility analysis iscond cted to determine whether a proposed b siness has s fficient mana"ementexpertise' or"ani-ational competence' and reso rces to s ccessf lly la nch its

b siness. Financial feasibility analysis pro!ides a > ic* financial assessment ofthe !iability of a b siness idea.

3. hat is a prod ct#ser!ice feasibility analysisK

Answer: rod ct#ser!ice feasibility analysis is an assessment of the o!erall appealof the prod ct or ser!ice bein" proposed.

$. Describe the difference between primary research and secondary research.

Answer: rimary research is research that is ori"inal and is collected by theentreprene r. An example wo ld be an entreprene r distrib tin" a conceptstatement of a b siness idea and as*in" for feedbac*. 4econdary research probesdata that are already collected. An example wo ld be an entreprene r st dyin"ind stry p blications to "ain information abo t potential c stomers andcompetitors.

%. hat is a concept statementK

Answer: A concept statement is a preliminary description of a b siness. A conceptstatement represents the first step in a feasibility analysis. Feedbac* from theconcept statement helps direct the remainin" sta"es of the feasibility analysis.

&. hat is a b yin" intentions s r!ey' and what does it accomplishK

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Answer: A b yin" intentions s r!ey is an instr ment that is sed to "a "ec stomer interest in a prod ct or ser!ice.

). hat are the two ways that entreprene rs assess the li*ely prod ct demand for the proposed prod ct or ser!ice they are analy-in"K

Answer: 5y administerin" a b yin" intentions s r!ey and by cond ctin" library'(nternet' and " mshoe research.

+. hat is " mshoe research in the context of prod ct#ser!ice feasibility analysisK

Answer: (n the context of prod ct#ser!ice feasibility analysis' " mshoe research isdoin" what it ta*es' which may in!ol!e scro n"in" for information and cl eswhere!er they can be fo nd' to "ain insi"ht abo t the demand for a prod ct idea.

,. hat is ind stry#tar"et mar*et feasibility analysisK

Answer: (nd stry#tar"et mar*et feasibility analysis is an assessment of the o!erallappeal of the mar*et for the prod ct or ser!ice bein" proposed. /he twocomponents of ind stry#tar"et mar*et feasibility analysis are ind stryattracti!eness and tar"et mar*et attracti!eness.

1 . Describe the attrib tes of an attracti!e ind stry for a new !ent re.

Answer: (n "eneral' the most attracti!e ind stries for new !ent res ha!e thefollowin" characteristics:

•

Are yo n" rather than old• Are early rather than late in their life cycle• Are fra"mented rather than concentrated• Are "rowin" rather than shrin*in"• 4ell prod cts or ser!ices that c stomers m st ha!e rather than want to

ha!e• Are not crowded• Ga!e hi"h rather than low operatin" mar"ins• Are not hi"hly dependent on the historically low price of a *ey raw material'

li*e "asoline or flo r to remain competiti!e

11. hat is a tar"et mar*etK hy do most start0 ps foc s on relati!ely small tar"etmar*ets to be"in with rather than lar"er mar*ets with more s bstantial demandK

Answer: A tar"et mar*et is a place within a lar"er mar*et se"ment that represents anarrower "ro p of c stomers with similar needs. 9ost start0 ps don’t ha!e thereso rces needed to participate in broad mar*ets' at least initially. (nstead' byfoc sin" on a smaller tar"et mar*et' a firm can s ally a!oid head0to0head

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competition with ind stry leaders and can foc s on ser!in" a speciali-ed mar*et!ery well.

12. hat are some of the ways to determine the attracti!eness of a small tar"et mar*etwithin a lar"er ind stryK

Answer: (t’s to "her to find information to determine the attracti!eness of a smalltar"et mar*et than a complete ind stry. Examples of places to loo* for informationincl de:

• (nd stry trade associations• (nd stry trade shows• /ar"eted library and (nternet searches• Contactin" companies that are similar to the one yo ’re thin*in" abo t startin" to "ain first0hand access to information and insi"hts• 9a"a-ine and newspaper articles dealin" with the tar"et mar*et or firms in the tar"et mar*et.

13. hat is or"ani-ational feasibility analysisK

Answer: r"ani-ational feasibility analysis is cond cted to determine whether a proposed b siness has s fficient mana"ement expertise' or"ani-ationalcompetence' and reso rces to s ccessf lly la nch its b siness. /here are two

primary iss es to consider in this area: mana"ement prowess and reso rces fficiency.

1$. 5riefly describe each of the two primary iss es to consider when cond ctin" anor"ani-ational feasibility analysis.

Answer: First' a potential firm sho ld candidly e!al ate the prowess' or ability' ofits mana"ement team. /his means that the entreprene r m st complete a self0assessment. 4econd' a potential firm sho ld determine if it has s fficient reso rcesto mo!e forward to s ccessf lly de!elop a prod ct or ser!ice idea. /he foc s inor"ani-ational feasibility analysis sho ld be on nonfinancial reso rces in thatfinancial feasibility is considered separately. 4e!eral areas sho ld be examined'incl din" the a!ailability of office space' the > ality of the labor pool in the areawhere the b siness will be located' and the possibility of obtainin" intellect al

property protection on *ey aspects of the new b siness.

1%. hat is a new0!ent re teamK

Answer: A new0!ent re team is the "ro p of fo nders' *ey employees' andad!isers that either mana"e or help mana"e a new b siness in its start0 p years.

1&. hat is financial feasibility analysisK

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Answer: Financial feasibility analysis is determinin" the financial feasibility of a proposed new !ent re.

1). (dentify and briefly describe the three separate components of financial feasibilityanalysis.

Answer: /he three primary iss es to disc ss when cond ctin" a financialfeasibility analysis are: capital re> irements' financial rate of ret rn' and o!erallattracti!eness of the in!estment.

(n re"ard to capital re> irements' an assessment of the feasibility of raisin" eno "hmoney to f nd the capital re> irements for the b siness is necessary. Anentreprene r sho ld also ha!e a "ood "rasp on what the capital re> irements forla nchin" his or her b siness will be. (n re"ard to financial rate of ret rn' anentreprene r m st determine whether the pro ected ret rn on the proposed

b siness is ade> ate to stify the in!estment. Finally' in re"ard to the o!erall

attracti!eness of the in!estment' an entreprene r m st determine' on an o!erall basis' whether the potential financial ret rns from a proposed !ent re ares fficiently attracti!e to mo!e forward. /able 30& in the chapter pro!ides a list offactors that pertain to this topic.

1+. hat are some of the techni> es a start0 p ses to estimate its potential financial performance by comparin" it to similar' already established b sinessesK

Answer: First' s bstantial archi!al data is a!ailable online' which offers detailedfinancial reports on tho sands of indi!id al firms @to compare a"ainst . 4econd'locate a b siness that is similar to the one yo ’re startin"' and if the b siness isn’tli*ely to be a direct competitor' simply as* the owner. Finally' simple obser!ationand le"wor*. For example' if yo were proposin" to open a new smoothie shop'yo co ld "a "e the type of sales to expect by estimatin" the n mber of people'alon" with the a!era"e p rchase per !isit' who patroni-e similar smoothie shops inyo r area.

1,. hat are some factors that ma*e a potential start0 p attracti!e from an o!erallfinancial perspecti!eK

Answer: /he followin" are factors that ma*e a potential start0 p attracti!e from ano!erall financial perspecti!e @as reflected in /able 3.& .

• 4teady and rapid "rowin" in sales d rin" the first fi!e years in a clearlydefined mar*et niche

• Gi"h percenta"e of rec rrin" re!en e?meanin" that once a firm wins a client' the client will pro!ide rec rrin" so rces of re!en e• Ability to forecast income and expenses with a reasonable de"ree of certainty• (nternally "enerated f nds to finance and s stain "rowth• A!ailability of exit opport nity

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2 . hat is the p rpose of a First 4creen analysisK

Answer: First 4creen is a template for completin" a feasibility analysis. (t is calledFirst 4creen beca se a feasibility analysis is an entreprene r’s initial pass at

determinin" the feasibility of a b siness idea. (f a b siness idea c ts m ster at thissta"e' the next step is to complete a b siness plan.

APPLICATION QUESTIONS

1. Ielly 9yers' a friend of yo rs' st told yo an interestin" story. 4he was at her parents’ ho se o!er the wee*end and her father saw this boo* lyin" next to her bac*pac*. Ge pic*ed it p and read Chapter 3. Ge told Ielly' hen yo were"rowin" p' ( started and sold three s ccessf l b sinesses and ne!er completed afeasibility analysis once. ( wonder what the a thors of yo r entreprene rship boo*

wo ld say abo t thatK (f yo co ld ad!ise Ielly abo t how to respond to herfather' what wo ld yo tell her to sayK

Answer: 9any start0 ps may be s ccessf l witho t a feasibility analysis. 5 t afeasibility analysis is still an important step to help an entreprene r assess the

potential feasibility of a b siness idea before a s bstantial amo nt of time andeffort is expended. 9any of the people who bo "ht e5ay drop0off stores' forexample' probably wo ldn’t ha!e bo "ht them if they had cond cted a feasibilityanalysis before they in!ested. (n addition' Ielly’s father may ha!e completedmany of the steps in a formal feasibility analysis?he st did them informallyrather than formally. For example' he probably did a lot of readin" abo t the

b sinesses he started before he started them and tal*ed to tr sted friends abo twhether he was ma*in" the ri"ht decisions. Ge probably also penciled o t whether the b sinesses were financially realistic. A feasibility analysis formali-es thesesteps and is incl si!e eno "h that a *ey step isn’t o!erloo*ed. (f Ielly pinned herfather down he wo ld probably admit that there is nothin" in a feasibility analysisthat isn’t a "ood se of an entreprene r’s time to complete before a new b siness!ent re is initiated.

2. Lason illis st applied for a ban* loan to finance a smoothie resta rant that he plans to open. /he ban*er as*ed Lason if he cond cted any primary research toassess the feasibility of the resta rant' and Lason replied that he spent co ntlesse!enin"s and wee*ends in the library and on the (nternet collectin" data on thefeasibility of smoothie resta rants' and he is confident that his resta rant will bes ccessf l. Ge said that he e!en did caref l research to ma*e s re that smoothieresta rants do well in demo"raphic areas that are similar to the area where he plansto open his resta rant. (f yo were the ban*er' how wo ld yo react to Lason’sstatementK

Answer: Lason has a mis nderstandin" of what primary research is. rimary

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research is research that is collected by the person or persons completin" theanalysis. Administerin" a concept statement is an example of primary research.

hat Lason has done is complete secondary research' which probes data that’salready collected. Lason’s ban*er may appreciate the secondary research he’sdone' b t probably wants to see e!idence that Lason has act ally tal*ed to potential

c stomers and b siness partners.

3. Ass me that yo were one of the recipients of estion for an indi!id al or "ro p assi"nment. (t’sact ally a f n > estion?st dents often come p with !ery inno!ati!e and creati!eways that


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foc ses on 4afety eb. Gow wo ld yo access the li*ely demand for 4afety eb’sser!iceK

Answer: /he li*ely demand for 4afety eb’s ser!ice co ld be accessed thro "h allthe tools disc ssed in the prod ct#ser!ice feasibility analysis portion of the chapter.

hen administerin" the concept statement and b yin" intentions s r!ey' it will be partic larly important to > ery people who ha!e children and teena"ers who sesocial networ*s' and are realistic potential c stomers for 4afety eb.(nternet and library research will be partic larly important in assessin" li*elydemand for a prod ct li*e 4afety eb. 4t dents are typically s rprised by the> antity and > ality of research that can be obtained thro "h caref l anddetermined (nternet and library research. A little " mshoe research also co ldn’th rt. 4imply tal*in" to parents' and as*in" them if they ha!e worries abo t thesafety of the social networ*s that their children and teens participate in' mi"htyield interestin" res lts. /here may also be blo"s that foc s on *eepin" *ids safeonline. 8eadin" the blo"s may pro!ide insi"hts.

). 4 ppose yo ’re interested in openin" a m sical instr ments store near the colle"eor ni!ersity yo attend' to sell " itars' dr ms' and other types of m sicalinstr ments. hat online reso rces wo ld yo draw on to cond ct secondaryresearch re"ardin" the ind stry#tar"et mar*et feasibility of yo r b siness ideaKGow wo ld yo se the reso rcesK

Answer: (5(4 orld and 5i-9iner are excellent databases to chec* o t. Forexample' at the time this (nstr ctor’s 9an al was written' (5(4 orld had streleased a $20pa"e report titled 9 sical (nstr ment O 4 pply 4tores in the ;.4.@ estions. hat 1 > estions wo ld yo as*K

Answer: /his is a "ood > estion for a "ro p or an indi!id al assi"nment' and "i!esst dents practice form latin" > estions. ress yo r st dents to be as tho "htf l as

possible in creatin" appropriate > estions for the s r!ey.

,. Ieith Ambrose' who is a physical therapist' is thin*in" abo t startin" a firm to pro!ide in0home therapy ser!ices for people who are s fferin" from sports0relatedin ries. Ieith li!es in Col mb s' hio' and doesn’t *now whether his trade areais lar"e eno "h to s pport s ch a ser!ice' or whether people wo ld pay a premi mfor in0home therapy ser!ices for sports in ries. ro!ide Ieith s ""estions forcond ctin" primary and secondary research to answer his > estions.

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Answer: First' Ieith sho ld assess how lar"e his trade area is. (n his case' histrade area is defined by how far it’s practical for him to tra!el to pro!ide his in0home ser!ice. (f it’s 2 miles' he co ld then draw a circle extendin" 2 miles ine!ery direction' to determine his trade area. Ge co ld then se reso rces s ch as

American Factfinder' City0Data.com' Cens s 5 rea data' and#or data from local"o!ernment a thorities to determine how many people li!e in his trade area.

/he next step wo ld be to determine the national a!era"e for how many sport0related in ries occ r per 1' people and how often they occ r' and thenextrapolate to determine how many people in his trade area are experiencin"sports0related in ries. (f his area incl des a lar"e n mber of yo n"er people whoare extremely acti!e' then he mi"ht be stified in sin" a n mber hi"her than thenational a!era"e to determine the n mber of people in his trade area who are li*elyexperiencin" sports0related in ries.


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• Iey employees• A reliable contract man fact rer to man fact re the !endin" machines• ffice space for the (nsty9eds staff to wor* from• Iey people in the medical ind stry to endorse the (nsty9eds approach• 4 pport personnel to stoc* and maintain the !endin" machines

12. 4ome nei"hbors of yo rs are hopin" to open a /hai resta rant near a localcomm nity colle"e. /hey ha!e a limited b d"et so it is !ery important to them toha!e as "ood an idea as possible of what their total start0 p costs will be and whattheir first year’s sales will be. Gow wo ld yo recommend that they estimate thetotal start0 p costs of openin" the resta rant and their first year’s salesK

Answer: /here are two sensible ways to approach this tas*. /he first is to simplyconstr ct a b d"et of what the costs will be. /he costs sho ld be fairlystrai"htforward' s ch as the monthly lease payment for the b ildin"' an estimate of labor costs' and an estimate of tility costs' etc. /here is no reason to shoot in thedar* re"ardin" these estimates. 5ased on the type of b siness yo ’re openin"' andthe facility yo ’ll be occ pyin"' a tility company' for example' sho ld be able to"i!e yo a fairly close estimate of what yo r tility costs will be. /he secondapproach is to find a comparable b siness and inter!iew the owner abo t the start0

p costs that he#she experienced.

13. 6oo* at the eb site of 8 f s 4hirts' a company that was la nched by first0timeentreprene r April 4in"er and ma*es hi"h0end shirts for men and dresses forwomen. D rin" the financial feasibility analysis sta"e of the process ofin!esti"atin" the merits of her new !ent re' how co ld 4in"er ha!e "one abo testimatin" the financial performance of 8 f s 4hirts by comparin" it to similar'existin" b sinessesK

Answer: 4t dents will !ary in terms of their answer to this > estion. /here arese!eral ways that April co ld ha!e approached this tas*. /he first' and least timecons min"' wo ld be to identify eb sites that are similar to hers b t aren’t directcompetitors @maybe they sell ewelry instead of clothin" and simply inter!iew theowners to see how m ch it cost to la nch the site and how profitable it is. /hesecond approach wo ld be to do (nternet and library research to try to identifyarchi!al data abo t the costs in!ol!ed with la nchin" an ecommerce eb site andestimates of s bse> ent profitability. April mi"ht e!en be able to find articlesabo t specific eb sites that tal* abo t how m ch it cost to la nch them and how

profitable they are. Finally' and most expensi!e' wo ld be to hire cons ltants whospeciali-e in ecommerce to cond ct the estimates for her.

1$. hat are some of the red fla"s that wo ld s ""est that the o!erall financialattracti!eness of a proposed new !ent re is poorK hich of the red fla"s yoidentified wo ld s ""est that a proposed !ent re isn’t realistically feasibleK

Answer: A sample of the red fla"s are as follows:

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• (nitial capital in!estment is hi"h• /he time to brea* e!en is len"thy• /he financial performance of similar b sinesses is wea* • 4ales will be slow to de!elop• 6ow percenta"e of rec rrin" re!en e• Diffic lt to forecast income and expenses with a reasonable de"ree of certainty• =ent res in the ind stry ha!e a hi"h fail re rate

/he first three red fla"s are the most problematic' altho "h each of the red fla"ssho ld be ta*en serio sly' and may s ""est that the proposed !ent re isn’tfinancially feasible.

1%. A friend of yo rs st completed a First 4creen analysis for an ecommerce site thatshe hopes to la nch to sell horse ridin" s pplies' incl din" saddles' tac*' leadropes' and feed b c*ets. 4he’s disappointed beca se she rated 1 of the 2% items

on First 4creen as either low or moderate potential. 4he says to yo ' ell' that’sthat. 7ood thin" ( completed a feasibility analysis. ( s re don’t want to start that b siness. (s yo r friend ri"htK Gow wo ld yo ad!ise her to interpret the res ltsof her First 4creen analysisK

Answer: Mo r friend sho ldn’t r le the b siness o t st beca se 1 of the 2% itemson the First 4creen are rated low or moderate potential for the followin" reasons.First' ratin" a section low or moderate potential assesses the b siness idea as is.

ne of the most !al able aspects of the First 4creen analysis is that it callsattention to these iss es. Mo r friend may be able to "o bac* to these iss es' andfind ways to impro!e pon her plan in ways that raise one or more of these iss esinto a more acceptable cate"ory. 4econd' the First 4creen is meant to pro!ide ano!erall impression of a b siness idea?it is not a definiti!e chec*list. All

b sinesses ha!e wea*nesses. 4o yo r friend sho ld loo* at the potential positi!esof the b siness idea and the potential ne"ati!es' and ma*e a d"ment based on aholistic !iew of the b siness idea to determine if it’s feasible.

YOU BE THE VC 3/0

C"+'a &: (nsty9eds @www.instymeds.com

B(.) e.. I1ea: ro!ide patients access to prescription medications instantly after they’re prescribed by a doctor in a hospital emer"ency room or at an r"ent care center. /he prescriptions are dispensed !ia a !endin" machine that’s present in the facility.

Y"( Be the VC S-"!e-a!1I .t&2e1.

@www.instymeds.com

))Copyri"ht 2 12 earson Ed cation


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Ite+ S-"!e C"++e t.

4tren"th of


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De-).)" : e wo ld f nd this firm. (t has a top0notch mana"ement team' seems to ha!eexec ted its b siness model and the physical operations of its !endin" machinesflawlessly since la nch' and appears to ha!e the b y0in of the medical comm nity andins rance pro!iders. Also' as mentioned abo!e' it’s a potential cost sa!in"s de!ice in an

ind stry that’s desperate for cost sa!in" sol tions. e also li*e the fact that (nsty9edshas a compellin" story and a clearly reco"ni-able !al e proposition. (ma"ine yo rselfwith a sic* child' in the middle of the ni"ht' in a r ral area that doesn’t ha!e access to a2$0ho r pharmacy. (f yo too* yo r child to an emer"ency room and was "i!en a

prescription by the emer"ency room physician' yo ’d be awf l "lad if an (nsty9edsmachine was a!ailable in the lobby.

YOU BE THE VC 3/6

C"+'a &: CAD( 4cientific 4mart4ense @www.cadi.com.s"

B(.) e.. I1ea: rod ce and sell the first wireless patient monitorin" system' enhancin" patient care by contin o sly meas rin" !ital medical data and transmittin" theinformation to health practitioners.

Y"( Be the VC S-"!e-a!1CADI S-)e t),)- 7 S+a!tSe .e

@www.cadi.com.com

Ite+ S-"!e C"++e t.

4tren"th of


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steadily risin" from aro nd the world. /he "lobalshorta"e of n rsin" staff also stren"thens 4mart4ense’scase as an important healthcare and monitorin" tool.

4tren"th of the (nd stry 1 2 3 5 %

Cadi 4cientific has two *ey opport nities. Firstly in thecons mer healthcare mar*et' where demand for clinicalthermometers is hi"h and risin" than*s to the o tbrea*of 4wine Fl . /he mar*et in the hospital sector ise> ally stron" and Cadi 4cientific has first mo!erad!anta"e with its remote trac*in" system

4tren"th of 5 siness 9odel 1 2 3 5 %

As well as wor*in" closely with hospitals and medical

ad!isors' Cadi 4cientific is foc sed on de!elopin" andimpro!in" its prod ct and on extendin" the ran"e to b ild p its portfolio of trac*in" and monitorin"systems.

A!era"e 4core $.%#%.

De-).)" : e li*e this company and wo ld f nd it. (t ma*es a solid prod ct in anattracti!e se"ment of an ind stry. (t is !ery well placed to reap the benefits of "lobalanxieties o!er the o tbrea* of G1


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fr itf l potential participants wo ld be @1 men who wear ndershirts and @2women who b y ndershirts for their h sbands' sons' or si"nificant others' and @3store cler*s and#or owners who sell ndershirts and field > estions abo t the typesof ndershirts that are a!ailable.

2. hat type of " mshoe research did /om atterson benefit from when he wasde!elopin" /ommy Lohn' and what additional " mshoe research co ld he ha!econd cted while he was in!esti"atin" the feasibility of his b sinessK

Answer: /om atterson cond cted se!eral forms of " mshoe research when hewas de!elopin" his prod ct' incl din":

• ent to se!eral department stores and as*ed sales cler*s if they carriedmen’s ndershirts that wo ld sol!e his problem.

• 4*etched the type of ndershirt that he wanted' and too* it to a dry cleanerthat he was familiar with that employed a tailor. Gired the tailor to ma*e a

prototype.• 4ent the initial /ommy Lohn ndershirt o t to family and friends' as*in" for

feedbac*.• aid for a preliminary patent search and after findin" o t that there was no

patent on a prod ct comparable to the one he en!isioned' filed for a pro!isional patent.

• =ia (nternet research' fo nd that a lot of small b sinesses had fo nds ccess in the ndershirts mar*et.

• ent to stores and literally spent ho rs watchin" people b y ndershirts.• 4t died ndershirts c rrently on the mar*et.

Challen"e yo r st dents to thin* of additional forms of " mshoe researchatterson co ld ha!e cond cted while in!esti"atin" the feasibility of his b siness.

3. 9a*e a list of the people whom /om atterson tal*ed to abo t his prod ct d rin"the desi"n phase. hat insi"ht@s does this list pro!ide yo abo t the nat re of thefeasibility analysis processK ere there any tactics that /om atterson sed to "etfeedbac* abo t his prod ct that yo thin* were partic larly cle!erK

Answer: atterson tal*ed to a n mber of people d rin" the desi"n phase of/ommy Lohn’s incl din":

• 4tore cler*s• /ailor • Friends and family members• 7arment ma*er • atent attorney• eople who were b yin" ndershirts in stores

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9ost st dents will say that by tal*in" to people at all steps in the !al e chain ofma*in" ndershirts' atterson "ained a !ery broad yet detailed perspecti!e of how

ndershirts are made' how they’re p rchased' and what people li*ed and didn’tli*e abo t ndershirts on the mar*et. /his *nowled"e in!ariably aided atterson in

desi"nin" and ma*in" the /ommy Lohn ndershirts that he e!ent ally bro "ht tomar*et.

$. Complete a First 4creen analysis for /ommy Lohn. hat do yo learn from theanalysisK

Answer: /his is a "ood indi!id al or "ro p assi"nment.


1. hat types of insi"hts did /om atterson pic* p by spendin" ho rs in storeswatchin" people b y men’s ndershirtsK hat role did these insi"hts play in thefinal desi"n of the prod ctK (n what ways do yo thin* /ommy Lohn prod ctsmi"ht be different today if /om atterson hadn’t spent the time watchin" people

b y men’s ndershirts that he didK

Answer: /om atterson in!ariable pic*ed p insi"hts spendin" ho rs watchin" people b y men’s ndershirts and tal*in" to ndershirt shoppers' that he wo ldn’tha!e been pri!y to in any other way. /here were two insi"hts in partic lar that he"leaned: First' people either bo "ht > ic*ly or seemed a little conf sed when theyloo*ed at the alternati!es. hen he stopped people who bo "ht > ic*ly and

politely as*ed them how they pic*ed their brand' they wo ld normally say that it’sthe brand of ndershirt they’!e been b yin" for years. /he second thin" he fo ndo t was that men only b y ndershirts for abo t 1) years of their life. From a"e-ero to 1) their mothers b y their ndershirts' and from 3$ @or whene!er they "etmarried their wi!es b y them. 4o the ma ority of people who b y men’s

ndershirts are women. 9ost st dents will say that atterson’s willin"ness tospend time watchin" people b y ndershirts was instr mental in the way his

ndershirts were e!ent ally desi"ned and made. (t’s do btf l that atterson wo ldha!e "leaned the insi"hts he did in any way other than obser!in" people b yin"

ndershirts.

2. /he Mo 5e the =C 3.2 feat re at the end of the chapter foc ses on CAD(4cientific’s 4mart4ense. hich of the forms of (nt it’s feasibility analysis and

sability testin" do yo thin* wo ld wor* for CAD( 4cientificK Describe how yowo ld adapt (nt it’s practices to help CAD( 4cientific better nderstand its sersand test its prod cts.

Answer: 9ost st dents will s ""est that CAD( 4cientfic adopt the ma ority ofwhat (nt it does in the area of feasibility analysis?partic larly as it pertains to



25/26


sability testin" and follow0me0home testin". /here is probably nothin" that thefo nders of CAD( 4cientific co ld do that wo ld be better than to act ally watchmedical staff and cons mers interact with 4mart4ense' and inter!iew them abo twhether the monitors achie!e their intended p rposes.

Case 3.2hat 4e"way 6earned Abo t the =al e of Feasibility Analysis the Gard ay

DISCUSSION QUESTIONS

1. hy do yo thin* Dean Iamen and his team didn’t do a better ob of anticipatin"the problems that beset the 4e"wayK

Answer: /here are three possibilities. First' the 4e"way was b ilt in secrecy. As ares lt' e!en tho "ht the de!ice itself was extensi!ely tested' it was probably tested

by professional testers' not a!era"e people who wo ld se the 4e"way in theirdaily li!es. /h s' the sability iss es weren’t nco!ered. 4econd' the 4e"way wasclearly a technolo"ical mar!el' and Dean Iamen and his cowor*ers may ha!e beenso enamored with the technolo"y behind the 4e"way that they felt it wo ld sellitself' re"ardless of potential obstacles @li*e streets in estion.Clearly the prod ct#ser!ice feasibility analysis and the mar*et#ind stry feasibilityanalysis 4e"way cond cted were inade> ate.

3. (n what ways did 4e"way fail to b ild an ecosystem aro nd its prod ctK hatco ld 4e"way ha!e done' if anythin"' to ens re that its prod ct wo ld do a better

ob of fittin" into its sers’ en!ironments and li!esK

Answer: /he 4e"way was a dismal fail re in b ildin" an ecosystem aro nd its prod ct. /here were inade> acies in all areas?from how to "et a 4e"wayser!iced if it needed ser!icin" to how to par* and sec re a 4e"way if it was sed totra!el to wor* or school. 9ost st dents will ar" e that 4e"way sho ld ha!econd cted extensi!e tests to ma*e s re the prod ct fit into its sers’ en!ironmentsand li!es. (f they had' they may ha!e prod ced a more sable prod ct. Also' onethin" 4e"way co ld ha!e done b t didn’t was to roll o t the prod ct slowly' andincent local "o!ernments to b ild ecosystems aro nd the 4e"way to ma*e it more



26/26


sable. (f 4e"way co ld ha!e b ilt some s ccess stories in specificcomm nities' then it may ha!e "ained moment m' and other comm nities or areasin cities may ha!e embraced the 4e"way' and b ilt o t ecosystems that enabled the4e"way to be sed more s ccessf lly.

$. hat niche mar*et or mar*ets do yo thin" 4e"way sho ld ha!e tar"eted initiallyand been s ccessf l inK

Answer: 4t dents will !ary in their answers to this > estion.


1. Describe a scenario in which 4e"way co ld ha!e la nched s ccessf l' b ilt its b siness' and be a lar"e and thri!in" b siness today.

Answer: 4t dents will !ary in their answers to this > estion.2. /hin* of a prod ct yo se that fits ideally into yo r day0to0day life. hat ma*es

the prod ct so specialK hat desi"n elements do yo see in the prod ct that ma*esit fit so nicely into yo r life. 4pend a few min tes either loo*in" at or thin*in"abo t the prod ct. hat can yo learn from the prod ct yo ’re thin*in" abo t thatco ld potentially ma*e yo a better entreprene rK

Answer: 4t dents will !ary in their answers to this > estion.

barringer e4 im 03 ge version

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