BADM 336 Chapter 3

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T/F: Completing a feasibility analysis requires both primary and secondary research.

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T/F: If a proposed new venture moves beyond the feasibility analysis stage, complete pro forma (or projected) financial statements that demonstrate the firm's financial viability for the first one to three years of its existence must be completed.

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T/F: Murphy's Law is prevalent in the start-up world—things will go wrong! It is a rare start-up that doesn't experience some unexpected expenses during the start-up phase.

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T/F: To test resource sufficiency, a firm should list the 6 to 12 most critical nonfinancial resources that it will need to move its business idea forward and determine if those resources are available.

concept statement

a preliminary description of a business that includes descriptions of the product or service being offered, the intended target market, the benefits of the product or service, the product's position in the market, and how the product or service will be sold and distributed

concept test

a representation of the product or service to prospective users to gauge customer interest, desirability, and purchase intent

industry attractiveness and target market attractiveness

two components to industry/target market feasibility analysis:

(1) talking face-to-face with potential customers, (2) utilizing online tools, such as Google AdWords and landing pages, to assess demand, and (3) library, Internet, and gumshoe research.

3 commonly utilized methods for determining if there is demand for the product or service:

product/service feasibility, industry/target market feasibility, organizational feasibility, and financial feasibility

4 key areas of a feasability analysis:

-A description of the product or service. -The intended target market. -The benefits of the product or service. -A description of how the product or service will be positioned relative to competitors. -A brief description of the company's management team.

A concept statement is a one-page document that normally includes the following:

These evaluations are based primarily on a new venture's projected sales and rate of return (or profitability), as just discussed. At the feasibility analysis stage, the projected return is a judgment call. A more precise estimation can be computed by preparing pro forma (or projected) financial statements, including one- to three-year pro forma statements of cash flow, income statements, and balance sheets

A number of other factors are associated with evaluating the financial attractiveness of a proposed venture.

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Another common approach to assessing product demand is to use online tools, such as administering surveys, utilizing Q&A sites, and conducting online marketing research (adwords and landing pages). Surveys are most effective in validating what you've learned from face-to-face interviews, rather than collecting initial data.

In some instances, you have to pause and think carefully about who the potential customer is. The idea is to gauge customer reaction to the general concept of what you want to sell. Entrepreneurs are often surprised to find out that a product idea that they think solves a compelling problem gets a lukewarm reception when they talk to actual customers. You should also talk to as many of the relevant players in an industry as possible. Sometimes this involves a complex list of people, but it is necessary to fully vet the initial feasibility of an idea and get comprehensive feedback.

Determine demand: (1) talking face-to-face with potential customers

this effort results in approximate rather than exact numbers. substantial archival data, which offers detailed financial reports on thousands of individual firms, is available online. The easiest data to obtain is on publicly traded firms through Hoovers or a similar source. These firms are typically too large, however, for meaningful comparisons to proposed new ventures. The challenge is to find the financial performance of small, more comparable firms. If a start-up entrepreneur identifies a business that is similar to the one to be started, and the business isn't likely to be a direct competitor, it is perfectly acceptable to ask the owner or manager of the business to share sales and income data. Simple observation and legwork is a final way to obtain sales data for similar businesses. A very basic way to do this is to frequent these stores and count the number of customers who come in and out of the stores during various times of the day.

Financial performance of similar businesses

primary research

Research that is original and is collected firsthand by the entrepreneur by, for example, talking to potential customers and key industry participants. (talking to prospective customers, getting feedback from industry experts, conducting focus groups, and administering surveys)

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T/F: A mental transition must be made when completing a feasibility analysis from 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 than strictly a product or service idea. The reason it is important to complete the entire process is to avoid falling into the "everything about my opportunity is wonderful" mode.

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T/F: After the concept statement is developed, it should be shown to at least 25 people who are familiar with the industry that the firm plans to enter and who can provide informed feedback. The temptation to show it to family members and friends should be avoided because these people are predisposed to give positive feedback. Instead, it should be distributed to people who will provide candid and informed feedback and advice. Prospective customers are the richest source of valuable feedback.

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T/F: Although industries that fit the characteristics shown in Table 3.4 are normally the best place for start-ups to locate, older industries that haven't seen much innovation represent opportunities for disruption.

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T/F: Business ideas at the feasibility analysis stage should always be seen as fluid and subject to change. It is important to be completely candid when completing First Screen for your business idea. No business scores "high potential" on every item. There is also no definitive way of discerning, after the worksheet is completed, if an idea is feasible. First Screen, like the feasibility analysis itself, is meant to convey an overall impression or sense of the feasibility of a business idea.

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T/F: Feasibility analysis is investigative in nature and is designed to critique the merits of a proposed business. A business plan is more focused on planning and selling.

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T/F: If a business idea falls short on one or more of the four components of feasibility analysis, it should be dropped or rethought. Many entrepreneurs make the mistake of identifying a business idea and then jumping directly to developing a business model (see Chapter 4) to describe and gain support for the idea. This sequence often omits or provides little time for the important step of testing the feasibility of a business idea.

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T/F: In some cases, it will be decided that the idea is not feasible. Although regrettable, it is better to know early rather than later if an idea doesn't have sufficient merit to become a business.

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T/F: It is also not realistic, in most cases, for a start-up to introduce a totally original product idea into a completely new market. In most instances, it is just too expensive to be a pioneer in each area. Most successful start-ups either introduce a new product into an existing market or introduce a new market to an existing product.

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T/F: It is important to keep a concept statement relatively short (no more than one page) to increase the likelihood that it will be read. The concept statement is followed by a short buying intentions survey. The information gleaned from the survey should be tabulated and carefully read. The statement can be used in an iterative manner to strengthen the product or service idea.

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T/F: It should be emphasized that while a feasibility analysis tests the merits of a 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 that is conducted. The key objective behind feasibility analysis is to put an idea to the test—by eliciting feedback from potential customers, talking to industry experts, studying industry trends, thinking through the financials, and scrutinizing it in other ways. These types of activities not only help determine whether an idea is feasible but also help shape and mold the idea.

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T/F: Most start-ups simply don't have the resources needed to participate in a broad market, at least initially. Instead, by focusing on a smaller target market, a firm can usually avoid head-to-head competition with industry leaders and can focus on serving a specialized market very well.

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T/F: Normally, utilizing an AdWords and landing page campaign wouldn't be the only thing you'd do to assess demand. Also, It's strictly a judgment call regarding how many clicks represent an encouraging response to your product idea.

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T/F: One approach to finding qualified people to talk to about a product or service idea or to react to a concept statement is to contact trade associations and/or attend industry trade shows. ttending trade shows in the industry in which you have an interest will place you in direct contact with numerous people who might be of assistance. Online surveys are also useful to reach a large number of people quickly.

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T/F: Rather than developing a formal concept statement, some entrepreneurs conduct their initial product/service feasibility analysis by simply talking through their ideas with prospective customers or conducting focus groups to solicit feedback. The ideal combination is to do both—distribute a concept statement to 25 or more people who can provide informed feedback and engage in verbal give-and-take with as many additional prospective customers and industry experts as possible.

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T/F: The challenge in identifying an attractive target market is to find a market that is large enough for the proposed business but yet is small enough to avoid attracting larger competitors, at least until the entrepreneurial venture can get off to a successful start.

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T/F: The focus in organizational feasibility analysis is on nonfinancial resources. The objective is to identify the most important nonfinancial resources and assess their availability. Another key resource sufficiency issue is the ability to obtain intellectual property protection on key aspects of the business. This issue doesn't apply to all start-ups; but, it is critical for companies that have invented a new product or are introducing a new business process that adds value to the way a product is manufactured or a service is delivered. One quick test a start-up can administer is to see if a patent has already been filed for its product or business process idea.

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T/F: Two of the most important factors in this area (management prowess) are the passion the solo entrepreneur or the management team has for the business idea and the extent to which the management team or solo entrepreneur understands the markets in which the firm will participate.

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T/F: While it is generally easy to find good information to assess the attractiveness of an entire industry, discerning the attractiveness of a small target market within an industry is tougher, particularly if the start-up is pioneering the target market. Often, under these circumstances, information from more than one industry and/or market must be collected and synthesized to make an informed judgment.

product/ service desirability

The first component of product/service feasibility is to affirm that the proposed product or service is desirable and serves a need in the marketplace. You should ask yourself, and others, the following questions to determine the basic appeal of the product or service: Does it make sense? Is it reasonable? Is it something real customers will buy? Does it take advantage of an environmental trend, solve a problem, or fill 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? The best way to answer these questions is to "get out of the building" and talk—and, more importantly, listen to—potential customers.

An actual budget should be prepared that lists all the anticipated capital purchases and operating expenses needed to get the business up and running. After determining a total figure, an explanation of where the money will come from should be provided. Avoid cursory explanations such as "I plan to bring investors on board," or "I'll borrow the money." If the money will come from friends and family or is to be raised through other means, such as credit cards or a home equity line of credit, a reasonable plan should be stipulated to repay the money. Showing how a new venture's start-up costs will be covered and repaid is an important issue. When projecting start-up expenses, it is better to overestimate rather than underestimate the costs involved.

Total start up cash needed

gumshoe

a detective or an investigator that scrounges around for information or clues wherever they can be found.

industry

a group of firms producing a similar product or service, such as PIlats and Yoga studios, and solar panels.

Feasibility Analysis

a preliminary evaluation of a business idea to determine if it is worth pursuing

Financial Feasibility analysis

a preliminary financial assessment of a new venture that considers the total start up cash needed, financial performance of similar businesses, adn hte overall financial attractiveness of the proposed venture.

landing page

a single web page that typically provides direct sales copy, like "click here to buy a Hawaiian vacation"

-The amount of capital invested -The risks assumed in launching the business -The existing alternatives for the money being invested -The existing alternatives for the entrepreneur's time and efforts

a start-up's projected rate of return should be weighed against the following factors to assess whether the venture is financially feasible:

Organizational feasibility analysis

a study conducted to determine whether a proposed business has sufficient management expertise, organizational competence, and resources to be successful 2 key areas: management prowess and resource sufficiency

confirmation bias

a tendency to search for information that validates your preconceptions Want to avoid this. Make sure to ask questions that allow for a wide range of responses.

prowess

ability of a initial management team, whether it is a sole entrepreneur or a larger group Managers with extensive professional and social networks have an advantage in that they are able to reach out to colleagues and friends to help them plug experience or knowledge gaps. In addition, a potential new venture should have an idea of the type of new-venture team that it can assemble.

product/service feasibility analysis

an assessment of hte overall appeal of hte product or service being proposed 2 components: product/service desirability and product/service demand

industry/target market feasibility

an assessment of the overall appeal of the industry and the target market for the product or service being proposed

secondary research

data collected previously by someone else for a different purpose (data generally includes industry studies, Census Bureau data, analyst forecasts, and other pertinent information gleaned through library and Internet research)

product/market fit

fit between the benefits your product or service offers and what your prospetive customers need and require.

new venture team

the group of founders, key employees, and advisors that move a new venture from an idea to a fully functioning firm (help manage a new business in its start-up years)

target market

the limited group of individuals or businesses that a firm goes after or tries to appeal to at a certain point in time. (within the industry) Most firms, and certainly entrepreneurial start-ups, typically do not try to service an entire industry. Instead, they select or carve out a specific target market and try to service that group of customers particularly well.

-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 or 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 a key raw material, like gasoline or flour, to remain profitable You also want to pick an industry that is structurally attractive—meaning start-ups can enter the industry (in various target markets) and compete effectively.

the most attractive industries have these characteristics