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Chapter 3: Feasibility AnalysisCHAPTER 3 FEASIBILITY ANALYSIS LEARNING OBJECTIVES 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. Explain what a feasibility analysis is and why it’s important. Discuss the proper time to complete a feasibility analysis when developing an entrepreneurial venture. Describe the purpose of a product/service feasibility analysis and the two primary issues that a proposed business should consider in this area. Explain a concept statement and its contents. Describe the purpose of a buying intentions survey and how it’s administered. Explain the importance of library, Internet, and gumshoe research. Describe the purpose of industry/target market feasibility analysis and the two primary issues to consider in this area. Discuss the characteristics of an attractive industry. Describe the purpose of organizational feasibility analysis and list the two primary issues to consider in this area. Explain the importance of financial feasibility analysis and list the most critical issues to consider in this area. CHAPTER OVERVIEW This chapter introduces feasibility analysis, and makes the case for the importance of feasibility analysis as a way of testing the potential viability of a business idea. The chapter stresses that the proper time to complete a feasibility analysis is after opportunity recognition but before the completion of a business plan. The value of completing a concept statement is discussed. A concept statement is a one-page description of a business idea, which an entrepreneur uses to solicit feedback about the potential viability of the idea. The four stages of feasibility analysis are introduced, including product/service feasibility, industry/target market feasibility, organizational feasibility, and financial feasibility. The major issues to consider in each stage of feasibility analysis are introduced and discussed. A feasibility analysis software product, called Feasibility Analysis Pro, is available for this textbook that provides an excellent means to enhance the value of this chapter. CHAPTER OUTLINE I. Feasibility Analysis 59 Copyright ©2012 Pearson Education Chapter 3: Feasibility Analysis A. Product/Service Feasibility Analysis 1. Product/Service Desirability a. Concept Test 2. Product/Service Demand a. Buying Intentions Survey b. Library, Internet, and Gumshoe Research B. Industry/Target Market Feasibility 1. Industry Attractiveness 2. Target/Market Attractiveness C. Organizational Feasibility Analysis 1. Management Prowess 2. Resource Sufficiency D. Financial Feasibility Analysis 1. Total Start-Up Cash Needed 2. Financial Performance of Similar Businesses 3. Overall Financial Attractiveness of the Proposed Venture II. First Screen CHAPTER NOTES I. Feasibility Analysis 1. Feasibility analysis is the process of determining if a business idea is viable. 2. As a preliminary evaluation of a business idea, a feasibility analysis is completed to determine if an idea is worth pursuing and to screen ideas before spending resources on them. 3. It follows the opportunity recognition stage but comes before the development of a business plan, as illustrated in Figure 3.1 in the textbook. 4. Although the sequence pictured in Figure 3.1 makes perfect sense, statistics show that the majority of entrepreneurs do not follow this pattern before launching their ventures. Several studies have investigated why this is the case. The consensus of the research is that entrepreneurs tend to underestimate the amount of competition there will be in the marketplace and tend to overestimate their personal chances for success. A. Product/Service Feasibility Analysis—is an assessment of the overall appeal of the product or service being proposed. 1. Product/Service Desirability a. A concept test entails showing a representation of the product or 60 Copyright ©2012 Pearson Education Chapter 3: Feasibility Analysis service to prospective users to gauge customer interest, desirability, and purchase intent. b. There are three primary purposes for a concept test: (1) to valuate the underlying premises of a product or service that an entrepreneur thinks is compelling; (2) to help develop an idea; and (3) to estimate the potential market share the product or service might command. c. A well-designed concept test, which is usually called a concept statement, includes the following: - A description of the product or service being offered - The intended target market - The benefits of the product or service - A description of how the product will be positioned relative to similar ones in the market - A brief description of the company’s management team 2. Product/Service Demand a. A buying intentions survey is an instrument that is used to gauge customer interest in a product or service. b. It consists of a concept statement or a similar description of a product or service with a short survey attached. The statement and survey should be distributed to 20 to 30 potential customers to be completed. (People who completed the concept statement test should not be asked to complete this survey.) c. One caveat is that people who say that they intend to purchase a product or service don’t always follow through; as a result, the numbers resulting from this activity are almost always optimistic. d. It’s also important to conduct library, Internet, and gumshoe research. While administering a buying intentions survey is important, more data is needed. B. Industry/Target Market Feasibility * Is an assessment of the overall appeal of the market for the product or service being produced. 1. Industry Attractiveness a. Industries vary considerably in terms of their growth rate, as shown in table 3.5 in the textbook. In general, the most attractive industries 61 Copyright ©2012 Pearson Education Chapter 3: Feasibility Analysis are characterized as the following: - Are young rather than old - Are early rather than late in their life cycles - Are fragmented rather than concentrated - Are growing rather than shrinking - Sell 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 b. In addition to evaluating an industry’s growth potential, a new venture will want to know more about the overall attractiveness of the industry it plans to enter. This can be accomplished through both primary research and secondary research. i. Primary research is research that is original and is collected by the entrepreneur. ii. Secondary research probes data that are already collected, such as those shown in Appendix 3.2. 2. Target/Market Attractiveness a. A target market is a place within a larger market segment that represents a narrower group of customers with similar needs. b. The challenge in identifying an attractive target market is to find a market that’s large enough for the proposed business but is yet small enough to avoid attracting larger competitors at least until the entrepreneurial venture can get off to a successful start. c. The sources of information to mine and tap are not as transparent when investigating target market attractiveness opposed to industry attractiveness. C. Organizational Feasibility Analysis– Is conducted to determine whether a proposed business has sufficient management expertise, organizational competence, and resources to successfully launch its business. 1. Management Prowess a. A firm should candidly evaluate the prowess, or ability, of its management team. 62 Copyright ©2012 Pearson Education Chapter 3: Feasibility Analysis b. Two of the most important factors in this area are the passion that the sole entrepreneur or management team has for the business idea and the extent to which the management team or sole entrepreneur understands the markets in which the firm will compete. 2. Resource Sufficiency a. The second area of organizational feasibility analysis is to determine whether the potential new venture has sufficient resources to move forward in order to successfully develop a product or service idea. b. The focus in organizational feasibility analysis should be on nonfinancial resources in that financial feasibility is considered separately. c. Types of nonfinancial resources that are critical to many start-ups’ success (Table 3.7) - Affordable office space - Lab space, manufacturing space, or space to launch a service business - Contract manufacturers or service providers - Key management employees (now and in the future) - Key support personnel (now and in the future) - Key equipment needed to operate the business (computers, machinery, delivery vehicles) - Ability to obtain intellectual property protection - Support of local governments and state government if applicable for business launch - Ability to form favorable business partnerships D. Financial Feasibility Analysis– Is the final stage of analysis. For feasibility analysis, a quick financial assessment is usually sufficient. 1. Total Start-Up Cash Needed a. The first issue refers to the total cash needed to prepare the business to make its first sale. An actual budget should be prepared that lists all the anticipated capital purchases and operating expenses needed to generate the first $1 in revenues. i. The financial feasibility analysis should state specifically where the money will come from to fund the venture’s start-up costs. 2. Financial Performance of Similar Businesses 63 Copyright ©2012 Pearson Education Chapter 3: Feasibility Analysis a. The second component of financial feasibility analysis is estimating a proposed start-up’s potential financial performance by comparing it to similar, already established businesses. Obviously, this number will result in approximate rather than exact numbers. b. There are several ways of doing this, all of which involve a little ethical detective work. 3. Overall Financial Attractiveness of the Proposed Venture a. A number of other factors are associated with evaluating the financial attractiveness of a proposed venture. b. Typically, these evaluations are based primarily on a new venture’s projected financial rate of return. At the macro level, the following factors should be considered to determine whether the projected return is adequate to justify the launch of the business. - 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 c. Opportunities demanding substantial capital, requiring long periods of time to mature, and having a lot of risk involved make little sense unless they provide high rates of return. 4. Overall Attractiveness of the Investment a. A number of other financial factors are associated with promising business opportunities. Examples are reflected in Table 3.8 in the textbook. II. First Screen 1. First Screen, shown in Appendix 3.1, is a template for completing a feasibility analysis. It is called First Screen because a feasibility analysis is an entrepreneur’s (or a group of entrepreneurs’) initial pass at determining the feasibility of a business idea. 2. The mechanics for filling out the First Screen worksheet are straightforward. It maps the four areas of feasibility analysis described in the chapter, accentuating the most important points in each area. 3. The final section of the worksheet, “Overall Potential,” includes a section 64 Copyright ©2012 Pearson Education Chapter 3: Feasibility Analysis that allows for suggested revisions to the business idea to improve its potential or feasibility. BOXED FEATURES: QUESTIONS FOR CRITICAL THINKING What Went Wrong? Visa Cash in Hong Kong: How Feasible Was it? 1. Describe the difference between Visa Cash and Octopus cards. Answer: The Octopus card adopts RFID technology while Visa Cash does not, forcing users to insert the card in reading machines for processing. Since the Octopus card can be used in many contactless ways, people do not need to take out their cards from their bags, allowing users to place their bags above the card reader. This design saves time and simplifies life for millions of public transportation passengers. 2. What can a start-up learn from the experience of Visa Cash about the importance of a feasibility analysis? Answer: That feasibility analysis is important for a start-up business. The management should have a good understanding about the technology trend, customer acceptance and the killing application to drive people to use including merchants and customers. 3. Can Visa Cash significantly modify its business idea to attract more customers? Answer: Since contactless operation is one of the attractiveness for customer, Visa Cash can consider in developing the new e-money with adopting RFID technology. To drive more customers to use, an incentive scheme can be developed to together with merchants to secure loyal customers. 4. Would Visa Cash be more popular where you live? Carry out a comprehensive feasibility analysis t help you decide? Answer: It is an interesting question that can arouse different discussions in different countries. However, students should have a good understanding of their market situations and customer’s preferences. Savvy Entrepreneurial Firm 65 Copyright ©2012 Pearson Education Chapter 3: Feasibility Analysis How Learning from Customers Caused a Successful Firm to Make a 180-Degree Turn on the Positioning of a Product 1. In putting wide age ranges on their products (i.e., suitable for ages 4 through 7), do you think that software companies prior to the advent of JumpStart’s gradespecific products ever thought that the wide age range caused parents angst in trying to determine if a particular product was suitable for their child? If your answer is “no,” how could companies have missed such a fundamental factor? What is the broader implication of this lesson? Answer: Most students will speculate that software companies were unaware that putting a wide age range on an educational software product caused parents angst in trying to determine if a particular product was suitable for their child. Companies missed this factor because they simply didn’t spend time observing parents buying software products. The implication of this lesson is the importance of observing first-hand customers trying to buy a product. 2. Could Gross and his team have gleaned the same type of insights they gained via directly observing parents shopping for educational software for their kids through surveys and focus groups? Explain your answer. Answer: Probably not, because they wouldn’t have know the right question to ask. Only by directly observing parents buying education software did Gross and his team observe that parents were often confused by whether a particular software product was age-appropriate for their child. They wouldn’t have thought to ask the question, in a survey or a focus group, if they wouldn’t have observed this phenomenon first hand. 3. Design a program for InstyMeds, the subject of the “You Be the VC 3.1” feature, to directly observe its customers use its service. How should InstyMeds go about it? What type of insights might emerge from this initiative? Answer: Most students will suggest one of two approaches. First, similar to what Gross and his team did, InstyMeds could station employees at InstyMeds machines to demonstrate the machines, and then watch patients interact with them. By doing this, InstyMeds may find that a particular step in the process of buying prescription medicine through the machines is confusing or difficult for patients to understand. They could then redesign that step. InstyMeds could also set up video monitoring of patients buying medicine through the machine, to obverse in a less obtrusive manner. If they pursue this step, they should place a notice on the machine that discloses that transactions are being videotaped for customer research purposes. 4. How can a start-up that hasn’t already launched apply the lessons learned from Gross’s experience with JumpStart and grade-specific software products? Answer: A start-up could conduct pilot tests of its product or service, in a single 66 Copyright ©2012 Pearson Education Chapter 3: Feasibility Analysis location or a limited number of locations, before staging a full launch. If it’s a Web-based service, it could launch in a single city or a limited geographic area before full launch to directly observe customers and solicit customer feedback. Partnering for Success Finding the Right Business Partner 1. Think about your personality and work habits. What type of person (in terms of personality and work habits) do you think you’d work well with and what type of person do you think you’d be in constant conflict with? Answer: This question makes for a good individual assignment. 2. Do you think it’s a good idea or a bad idea to form a business partnership with a close friend? How could you go about discerning if a good friend would make for a good business partner? Answer: There are both pluses and minuses involved in partnering with a good friend. On the plus side, it’s important to partner with someone you get along with, trust, and like to spend time with. On the minus side, friends are often reluctant to challenge one another when they think a mistake is being made, because they don’t want to put their friendship at risk. In the end it’s a judgment call. In regard to discerning whether a good friend would make for a good business partner, your friend should be subject to the same criteria (mentioned in the article) as any other potential business partner. It’s usually a mistake to cut your friend slack on one or more of the criteria, just because he or she is a friend. 3. Provide some suggestions, other than those mentioned in the feature, for places (online or off-line) for finding a business partner. Answer: This is a good question for a group or individual assignment. Urge your students to think about the networking events and other resources that are available at your college or university and in your local community for making connections with potential business partners. An example would be taking a business plan class. There are many examples of students who met one another in a business plan class, worked together on a business plan to fulfill class requirements, and then actually started the business after graduation. 4. Spend some time looking at LinkedIn. How could you use LinkedIn to help find a business partner? Answer: One of the main purposes of LinkedIn is to help users maintain a list of contacts with whom they have some level of relationship. As a result, if you developed a robust list of contacts, you could reach out to your contacts indicating that you’re looking for a business partner, and see if your contacts make any useful 67 Copyright ©2012 Pearson Education Chapter 3: Feasibility Analysis recommendations. REVIEW QUESTIONS 1. What is a feasibility analysis? What is it designed to accomplish? Answer: Feasibility analysis is the process of determining if a business idea is viable. As a preliminary evaluation of a business idea, a feasibility analysis is completed to determine if an idea is worth pursuing and to screen ideas before spending resources on them. 2. Briefly describe each of the four areas that a properly executed feasibility analysis explores. Answer: Product/service feasibility analysis is an assessment of the overall appeal of the product or service being proposed. Industry/target market feasibility analysis is an assessment of the overall appeal of the industry and the target market for the product or service being proposed. Organizational feasibility analysis is conducted to determine whether a proposed business has sufficient management expertise, organizational competence, and resources to successfully launch its business. Financial feasibility analysis provides a quick financial assessment of the viability of a business idea. 3. What is a product/service feasibility analysis? Answer: Product/service feasibility analysis is an assessment of the overall appeal of the product or service being proposed. 4. Describe the difference between primary research and secondary research. Answer: Primary research is research that is original and is collected by the entrepreneur. An example would be an entrepreneur distributing a concept statement of a business idea and asking for feedback. Secondary research probes data that are already collected. An example would be an entrepreneur studying industry publications to gain information about potential customers and competitors. 5. What is a concept statement? Answer: A concept statement is a preliminary description of a business. A concept statement represents the first step in a feasibility analysis. Feedback from the concept statement helps direct the remaining stages of the feasibility analysis. 6. What is a buying intentions survey, and what does it accomplish? 68 Copyright ©2012 Pearson Education Chapter 3: Feasibility Analysis Answer: A buying intentions survey is an instrument that is used to gauge customer interest in a product or service. 7. What are the two ways that entrepreneurs assess the likely product demand for the proposed product or service they are analyzing? Answer: By administering a buying intentions survey and by conducting library, Internet, and gumshoe research. 8. What is gumshoe research in the context of product/service feasibility analysis? Answer: In the context of product/service feasibility analysis, gumshoe research is doing what it takes, which may involve scrounging for information and clues wherever they can be found, to gain insight about the demand for a product idea. 9. What is industry/target market feasibility analysis? Answer: Industry/target market feasibility analysis is an assessment of the overall appeal of the market for the product or service being proposed. The two components of industry/target market feasibility analysis are industry attractiveness and target market attractiveness. 10. Describe the attributes of an attractive industry for a new venture. Answer: In general, the most attractive industries for new ventures have the following characteristics:         11. Are young rather than old Are early rather than late in their life cycle Are fragmented rather than concentrated Are growing rather than shrinking Sell 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 competitive What is a target market? Why do most start-ups focus on relatively small target markets to begin with rather than larger markets with more substantial demand? Answer: A target market is a place within a larger market segment that represents a narrower group of customers with similar needs. Most start-ups don’t have the resources needed to participate in broad markets, at least initially. Instead, by focusing on a smaller target market, a firm can usually avoid head-to-head 69 Copyright ©2012 Pearson Education Chapter 3: Feasibility Analysis competition with industry leaders and can focus on serving a specialized market very well. 12. What are some of the ways to determine the attractiveness of a small target market within a larger industry? Answer: It’s tougher to find information to determine the attractiveness of a small target market than a complete industry. Examples of places to look for information include:      13. Industry trade associations Industry trade shows Targeted library and Internet searches Contacting companies that are similar to the one you’re thinking about starting to gain first-hand access to information and insights Magazine and newspaper articles dealing with the target market or firms in the target market. What is organizational feasibility analysis? Answer: Organizational feasibility analysis is conducted to determine whether a proposed business has sufficient management expertise, organizational competence, and resources to successfully launch its business. There are two primary issues to consider in this area: management prowess and resource sufficiency. 14. Briefly describe each of the two primary issues to consider when conducting an organizational feasibility analysis. Answer: First, a potential firm should candidly evaluate the prowess, or ability, of its management team. This means that the entrepreneur must complete a selfassessment. Second, a potential firm should determine if it has sufficient resources to move forward to successfully develop a product or service idea. The focus in organizational feasibility analysis should be on nonfinancial resources in that financial feasibility is considered separately. Several areas should be examined, including the availability of office space, the quality of the labor pool in the area where the business will be located, and the possibility of obtaining intellectual property protection on key aspects of the new business. 15. What is a new-venture team? Answer: A new-venture team is the group of founders, key employees, and advisers that either manage or help manage a new business in its start-up years. 16. What is financial feasibility analysis? 70 Copyright ©2012 Pearson Education Chapter 3: Feasibility Analysis Answer: Financial feasibility analysis is determining the financial feasibility of a proposed new venture. 17. Identify and briefly describe the three separate components of financial feasibility analysis. Answer: The three primary issues to discuss when conducting a financial feasibility analysis are: capital requirements, financial rate of return, and overall attractiveness of the investment. In regard to capital requirements, an assessment of the feasibility of raising enough money to fund the capital requirements for the business is necessary. An entrepreneur should also have a good grasp on what the capital requirements for launching his or her business will be. In regard to financial rate of return, an entrepreneur must determine whether the projected return on the proposed business is adequate to justify the investment. Finally, in regard to the overall attractiveness of the investment, an entrepreneur must determine, on an overall basis, whether the potential financial returns from a proposed venture are sufficiently attractive to move forward. Table 3-6 in the chapter provides a list of factors that pertain to this topic. 18. What are some of the techniques a start-up uses to estimate its potential financial performance by comparing it to similar, already established businesses? Answer: First, substantial archival data is available online, which offers detailed financial reports on thousands of individual firms (to compare against). Second, locate a business that is similar to the one you’re starting, and if the business isn’t likely to be a direct competitor, simply ask the owner. Finally, simple observation and legwork. For example, if you were proposing to open a new smoothie shop, you could gauge the type of sales to expect by estimating the number of people, along with the average purchase per visit, who patronize similar smoothie shops in your area. 19. What are some factors that make a potential start-up attractive from an overall financial perspective? Answer: The following are factors that make a potential start-up attractive from an overall financial perspective (as reflected in Table 3.6).      Steady and rapid growing in sales during the first five years in a clearly defined market niche High percentage of recurring revenue—meaning that once a firm wins a client, the client will provide recurring sources of revenue Ability to forecast income and expenses with a reasonable degree of certainty Internally generated funds to finance and sustain growth Availability of exit opportunity 71 Copyright ©2012 Pearson Education Chapter 3: Feasibility Analysis 20. What is the purpose of a First Screen analysis? Answer: First Screen is a template for completing a feasibility analysis. It is called First Screen because a feasibility analysis is an entrepreneur’s initial pass at determining the feasibility of a business idea. If a business idea cuts muster at this stage, the next step is to complete a business plan. APPLICATION QUESTIONS 1. Kelly Myers, a friend of yours, just told you an interesting story. She was at her parents’ house over the weekend and her father saw this book lying next to her backpack. He picked it up and read Chapter 3. He told Kelly, “When you were growing up, I started and sold three successful businesses and never completed a feasibility analysis once. I wonder what the authors of your entrepreneurship book would say about that?” If you could advise Kelly about how to respond to her father, what would you tell her to say? Answer: Many start-ups may be successful without a feasibility analysis. But a feasibility analysis is still an important step to help an entrepreneur assess the potential feasibility of a business idea before a substantial amount of time and effort is expended. Many of the people who bought eBay drop-off stores, for example, probably wouldn’t have bought them if they had conducted a feasibility analysis before they invested. In addition, Kelly’s father may have completed many of the steps in a formal feasibility analysis—he just did them informally rather than formally. For example, he probably did a lot of reading about the businesses he started before he started them and talked to trusted friends about whether he was making the right decisions. He probably also penciled out whether the businesses were financially realistic. A feasibility analysis formalizes these steps and is inclusive enough that a key step isn’t overlooked. If Kelly pinned her father down he would probably admit that there is nothing in a feasibility analysis that isn’t a good use of an entrepreneur’s time to complete before a new business venture is initiated. 2. Jason Willis just applied for a bank loan to finance a smoothie restaurant that he plans to open. The banker asked Jason if he conducted any primary research to assess the feasibility of the restaurant, and Jason replied that he spent countless evenings and weekends in the library and on the Internet collecting data on the feasibility of smoothie restaurants, and he is confident that his restaurant will be successful. He said that he even did careful research to make sure that smoothie restaurants do well in demographic areas that are similar to the area where he plans to open his restaurant. If you were the banker, how would you react to Jason’s statement? Answer: Jason has a misunderstanding of what primary research is. Primary 72 Copyright ©2012 Pearson Education Chapter 3: Feasibility Analysis research is research that is collected by the person or persons completing the analysis. Administering a concept statement is an example of primary research. What Jason has done is complete secondary research, which probes data that’s already collected. Jason’s banker may appreciate the secondary research he’s done, but probably wants to see evidence that Jason has actually talked to potential customers and business partners. 3. Assume that you were one of the recipients of New Venture Fitness Drink’s concept statement. What type of feedback would you have given the company about the viability of its product idea? Answer: This is a good question for an individual or group assignment. It’s actually a fun question—students often come up with very innovative and creative ways that New Venture Fitness Drink’s business can be improved. The exercise illustrates the importance of asking for feedback. 4. Shelly Mills, who has considerable experience in the home security industry, is planning to launch a firm that will sell a new line of home security alarms that she believes will be superior to anything currently on the market. Shelly knows how to develop a concept statement and administer a buying intentions survey but is less clear about the type of library and Internet research that might be helpful in assessing the likely demand for her product. If Shelly turned to you for help, what would you tell her? Answer: There are many things that Shelly can potentially learn via Internet and library research. First, she should access and read industry reports that are available via the resources listed in Appendix 3.2 (IBISWorld and BizMiner are our favorites) about the industry she is about to enter. Second, she should ask a reference librarian for additional suggestions for trade journals, magazines, or other publications that are related to her industry. There may be a trade journal, for example, that deals with the home security industry that the library has access to. Simply browsing through several issues of the journal may give Shelly useful insights and ideas. Finally, Shelly should conduct Internet searches about her industry and see if there are blogs available to access and follow. She should also set up Google and/or Yahoo! e-mail alerts with keywords that pertain to the home security industry. 5. Assess the industry attractiveness for the industry that Songkick, the subject of the “You Be the VC 2.1” feature, will be participating in. Answer: Urge your students to use resources listed in Appendix 3.2 to complete this assignment. IBISWorld and BizMiner, in particular, are excellent resources for conducting an industry analysis. Both cover elements of the music industry that would be helpful in conducting an industry analysis for Songkick. 6. Skip ahead to Chapter 4 and look at the “You Be the VC 4.1” feature, which 73 Copyright ©2012 Pearson Education Chapter 3: Feasibility Analysis focuses on SafetyWeb. How would you access the likely demand for SafetyWeb’s service? Answer: The likely demand for SafetyWeb’s service could be accessed through all the tools discussed in the product/service feasibility analysis portion of the chapter. When administering the concept statement and buying intentions survey, it will be particularly important to query people who have children and teenagers who use social networks, and are realistic potential customers for SafetyWeb. Internet and library research will be particularly important in assessing likely demand for a product like SafetyWeb. Students are typically surprised by the quantity and quality of research that can be obtained through careful and determined Internet and library research. A little gumshoe research also couldn’t hurt. Simply talking to parents, and asking them if they have worries about the safety of the social networks that their children and teens participate in, might yield interesting results. There may also be blogs that focus on keeping kids safe online. Reading the blogs may provide insights. 7. Suppose you’re interested in opening a musical instruments store near the college or university you attend, to sell guitars, drums, and other types of musical instruments. What online resources would you draw on to conduct secondary research regarding the industry/target market feasibility of your business idea? How would you use the resources? Answer: IBISWorld and BizMiner are excellent databases to check out. For example, at the time this Instructor’s Manual was written, IBISWorld had just released a 42-page report titled “Musical Instrument & Supply Stores in the U.S.” (NAICS 45114). General Internet research is also very helpful. More powerful search engines, typically available through a university library, like LexisNexis Academic and ProQuest, may also be useful. 8. Suppose you were hired by the founders of ecoATM, the subject of the “You Be the VC 2.2” feature, to conduct a survey of potential users prior to the launch of the company. The purpose of the survey is to assess the product/service desirability and the product/service demand of ecoATM’s service. The survey has 10 questions. What 10 questions would you ask? Answer: This is a good question for a group or an individual assignment, and gives students practice formulating questions. Press your students to be as thoughtful as possible in creating appropriate questions for the survey. 9. Keith Ambrose, who is a physical therapist, is thinking about starting a firm to provide in-home therapy services for people who are suffering from sports-related injuries. Keith lives in Columbus, Ohio, and doesn’t know whether his trade area is large enough to support such a service, or whether people would pay a premium for “in-home” therapy services for sports injuries. Provide Keith suggestions for conducting primary and secondary research to answer his questions. 74 Copyright ©2012 Pearson Education Chapter 3: Feasibility Analysis Answer: First, Keith should assess how large his trade area is. In his case, his trade area is defined by how far it’s practical for him to travel to provide his inhome service. If it’s 20 miles, he could then draw a circle extending 20 miles in every direction, to determine his trade area. He could then use resources such as American Factfinder, City-Data.com, Census Bureau data, and/or data from local government authorities to determine how many people live in his trade area. The next step would be to determine the national average for how many sportrelated injuries occur per 1,000 people and how often they occur, and then extrapolate to determine how many people in his trade area are experiencing sports-related injuries. If his area includes a large number of younger people who are extremely active, then he might be justified in using a number higher than the national average to determine the number of people in his trade area who are likely experiencing sports-related injuries. Next up would be to conduct primary research to determine what percent of people who experience sports-related injuries would pay a premium for in-home service. This might involve not only talking to people with sports-related injuries, but medical practitioners who currently treat sports-related injury patients. Insurance providers would be another potential source of information. The final step would be to assess the competition that Keith has in his trade area. Keith could synthesize all the information he collected to make an informed judgment regarding whether his trade area is large enough to support his service. 10. Susan Campbell is thinking about launching a Web site to sell sports apparel for petite women. She’s designed a Web site but isn’t sure whether it’s user-friendly enough to launch. Provide Susan some concrete suggestions for how she can receive feedback on the usability of her site. Answer: Susan could conduct her own usability studies asking friends and potential clients to experiment with her Web site and provide feedback. She could also employ one of the online services featured in Table 3.4, such as userTesting or Loop 11. 11. What do you think were the 8 to 10 most important nonfinancial resources that the founders of InstyMeds, the subject of the “You Be the VC 3.1” boxed feature, needed to have in place before they launched their new venture? Answer: Suggestion are as follows:   Patents, trademarks, and copyrights where appropriate Key partnerships with prescription medicine providers, insurance providers, and hospitals to place their vending machines in 75 Copyright ©2012 Pearson Education Chapter 3: Feasibility Analysis      12. Key employees A reliable contract manufacturer to manufacture the vending machines Office space for the InstyMeds staff to work from Key people in the medical industry to endorse the InstyMeds approach Support personnel to stock and maintain the vending machines Some neighbors of yours are hoping to open a Thai restaurant near a local community college. They have a limited budget so it is very important to them to have as good an idea as possible of what their total start-up costs will be and what their first year’s sales will be. How would you recommend that they estimate the total start-up costs of opening the restaurant and their first year’s sales? Answer: There are two sensible ways to approach this task. The first is to simply construct a budget of what the costs will be. The costs should be fairly straightforward, such as the monthly lease payment for the building, an estimate of labor costs, and an estimate of utility costs, etc. There is no reason to shoot in the dark regarding these estimates. Based on the type of business you’re opening, and the facility you’ll be occupying, a utility company, for example, should be able to give you a fairly close estimate of what your utility costs will be. The second approach is to find a comparable business and interview the owner about the startup costs that he/she experienced. 13. Look at the Web site of Rufus Shirts, a company that was launched by first-time entrepreneur April Singer and makes high-end shirts for men and dresses for women. During the financial feasibility analysis stage of the process of investigating the merits of her new venture, how could Singer have gone about estimating the financial performance of Rufus Shirts by comparing it to similar, existing businesses? Answer: Students will vary in terms of their answer to this question. There are several ways that April could have approached this task. The first, and least time consuming, would be to identify Web sites that are similar to hers but aren’t direct competitors (maybe they sell jewelry instead of clothing) and simply interview the owners to see how much it cost to launch the site and how profitable it is. The second approach would be to do Internet and library research to try to identify archival data about the costs involved with launching an ecommerce Web site and estimates of subsequent profitability. April might even be able to find articles about specific Web sites that talk about how much it cost to launch them and how profitable they are. Finally, and most expensive, would be to hire consultants who specialize in ecommerce to conduct the estimates for her. 14. What are some of the red flags that would suggest that the overall financial attractiveness of a proposed new venture is poor? Which of the red flags you identified would suggest that a proposed venture isn’t realistically feasible? Answer: A sample of the red flags are as follows: 76 Copyright ©2012 Pearson Education Chapter 3: Feasibility Analysis        Initial capital investment is high The time to break even is lengthy The financial performance of similar businesses is weak Sales will be slow to develop Low percentage of recurring revenue Difficult to forecast income and expenses with a reasonable degree of certainty Ventures in the industry have a high failure rate The first three red flags are the most problematic, although each of the red flags should be taken seriously, and may suggest that the proposed venture isn’t financially feasible. 15. A friend of yours just completed a First Screen analysis for an ecommerce site that she hopes to launch to sell horse riding supplies, including saddles, tack, lead ropes, and feed buckets. She’s disappointed because she rated 10 of the 25 items on First Screen as either low or moderate potential. She says to you, “Well, that’s that. Good thing I completed a feasibility analysis. I sure don’t want to start that business.” Is your friend right? How would you advise her to interpret the results of her First Screen analysis? Answer: Your friend shouldn’t rule the business out just because 10 of the 25 items on the First Screen are rated low or moderate potential for the following reasons. First, rating a section low or moderate potential assesses the business idea “as is.” One of the most valuable aspects of the First Screen analysis is that it calls attention to these issues. Your friend may be able to go back to these issues, and find ways to improve upon her plan in ways that raise one or more of these issues into a more acceptable category. Second, the First Screen is meant to provide an overall impression of a business idea—it is not a definitive checklist. All businesses have weaknesses. So your friend should look at the potential positives of the business idea and the potential negatives, and make a judgment based on a holistic view of the business idea to determine if it’s feasible. YOU BE THE VC 3.1 Company: InstyMeds (www.instymeds.com) Business Idea: Provide patients access to prescription medications instantly after they’re prescribed by a doctor in a hospital emergency room or at an urgent care center. The prescriptions are dispensed via a vending machine that’s present in the facility. You Be the VC Scorecard InstyMeds (www.instymeds.com) 77 Copyright ©2012 Pearson Education Chapter 3: Feasibility Analysis Item Score/Comments Strength of New Venture Team 1 2 3 4 5 InstyMeds is led by Brad Schraut, who has a distinguished career developing start-up companies and leading them into successful businesses. Mr. Schraut has founded or co-founded several successful healthcare related companies. CFO Ed Zeman has over 20 years of finance experience. Robert Bang, Director of Sales, is a senior healthcare sales and marketing executive. Under his leadership, InstyMeds has developed relationships in 34 states. Strength of the Opportunity 1 2 3 4 5 The opportunity is strong. InstyMeds has now dispensed over one million prescriptions without error to patients in all 50 states. InstyMeds is also a potentially cost-saving device in an industry that’s desperate for cost-saving solutions. InstyMeds provides a real valueadd for people in rural areas who do not have access to 24-hour pharmacies. Strength of the Industry 1 2 3 4 5 The industry is strong. With the aging of the population, and more people coming into the health-care system as the result of recent health-care reforms, demand for prescription medicines is likely to continue to increase. InstyMeds is well positioned to be a premier provider of prescription medicines, particularly in rural areas. Strength of Business Model 1 2 3 4 5 The business model is novel, yet appears to be working. The fact that the company has dispensed over one million prescriptions without an error speaks to the viability of its approach. InstyMeds’ approach also appears to have the buy-in of the medical community and insurance providers. Average Score 4.25/5.0 78 Copyright ©2012 Pearson Education Chapter 3: Feasibility Analysis Decision: We would fund this firm. It has a top-notch management team, seems to have executed its business model and the physical operations of its vending machines flawlessly since launch, and appears to have the buy-in of the medical community and insurance providers. Also, as mentioned above, it’s a potential cost savings device in an industry that’s desperate for cost saving solutions. We also like the fact that InstyMeds has a compelling story and a clearly recognizable value proposition. Imagine yourself with a sick child, in the middle of the night, in a rural area that doesn’t have access to a 24-hour pharmacy. If you took your child to an emergency room and was given a prescription by the emergency room physician, you’d be awful glad if an InstyMeds machine was available in the lobby. YOU BE THE VC 3.2 Company: CADI Scientific SmartSense (www.cadi.com.sg) Business Idea: Produce and sell the first wireless patient monitoring system, enhancing patient care by continuously measuring vital medical data and transmitting the information to health practitioners. You Be the VC Scorecard CADI Scientific - SmartSense (www.cadi.com.com) Item Score/Comments Strength of New Venture Team 1 2 3 4 5 Scientist Zenton Goh founded Cadi with three colleagues Neo Sian Sheng, Ng Hon Cheong and Lim Soh Min and added strength to the company by also appointing to the board Professor Bernard Tan Tiong Gie of National University of Singapore and Dr Henry Cheng Hung a consultant obstetrician from Sinapore’s General Hospital, as well as a panel of medical advisors. Strength of the Opportunity 1 2 3 4 5 The opportunity appears to be strong. The recent H1N1 flu epidemic has brought in huge orders for Cadi Scientific’s consumer thermometer and queries about its wireless temperature and location tracking system are 79 Copyright ©2012 Pearson Education Chapter 3: Feasibility Analysis steadily rising from around the world. The global shortage of nursing staff also strengthens SmartSense’s case as an important healthcare and monitoring tool. Strength of the Industry 1 2 3 4 5 Cadi Scientific has two key opportunities. Firstly in the consumer healthcare market, where demand for clinical thermometers is high and rising thanks to the outbreak of Swine Flu. The market in the hospital sector is equally strong and Cadi Scientific has first mover advantage with its remote tracking system Strength of Business Model 1 2 3 4 5 As well as working closely with hospitals and medical advisors, Cadi Scientific is focused on developing and improving its product and on extending the range to build up its portfolio of tracking and monitoring systems. Average Score 4.5/5.0 Decision: We like this company and would fund it. It makes a solid product in an attractive segment of an industry. It is very well placed to reap the benefits of global anxieties over the outbreak of H1N1 and to become a vital resource in medical centers where staffing levels are becoming an increasing issue. CASES Case 3.1 Tommy John: The Role of Product and Industry Feasibility Analysis in Launching a Consumer Products Company DISCUSSION QUESTIONS 1. Write a concept statement for Tommy John. If Tommy John was still in the startup stage and Tom Patterson asked you to whom he should distribute the concept statement, what would you have told him? Answer: This is a good exercise for an individual or group assignment. Most students will say that if Tommy John were still in the start-up stage, and Tom Patterson asked them whom he should distribute the concept statement to, the most 80 Copyright ©2012 Pearson Education Chapter 3: Feasibility Analysis fruitful potential participants would be (1) men who wear undershirts and (2) women who buy undershirts for their husbands, sons, or significant others, and (3) store clerks and/or owners who sell undershirts and field questions about the types of undershirts that are available. 2. What type of gumshoe research did Tom Patterson benefit from when he was developing Tommy John, and what additional gumshoe research could he have conducted while he was investigating the feasibility of his business? Answer: Tom Patterson conducted several forms of gumshoe research when he was developing his product, including:        Went to several department stores and asked sales clerks if they carried men’s undershirts that would solve his problem. Sketched the type of undershirt that he wanted, and took it to a dry cleaner that he was familiar with that employed a tailor. Hired the tailor to make a prototype. Sent the initial Tommy John undershirt out to family and friends, asking for feedback. Paid for a preliminary patent search and after finding out that there was no patent on a product comparable to the one he envisioned, filed for a provisional patent. Via Internet research, found that a lot of small businesses had found success in the undershirts market. Went to stores and literally spent hours watching people buy undershirts. Studied undershirts currently on the market. Challenge your students to think of additional forms of gumshoe research Patterson could have conducted while investigating the feasibility of his business. 3. Make a list of the people whom Tom Patterson talked to about his product during the design phase. What insight(s) does this list provide you about the nature of the feasibility analysis process? Were there any tactics that Tom Patterson used to get feedback about his product that you think were particularly clever? Answer: Patterson talked to a number of people during the design phase of Tommy John’s including:       Store clerks Tailor Friends and family members Garment maker Patent attorney People who were buying undershirts in stores 81 Copyright ©2012 Pearson Education Chapter 3: Feasibility Analysis Most students will say that by talking to people at all steps in the value chain of making undershirts, Patterson gained a very broad yet detailed perspective of how undershirts are made, how they’re purchased, and what people liked and didn’t like about undershirts on the market. This knowledge invariably aided Patterson in designing and making the Tommy John undershirts that he eventually brought to market. 4. Complete a First Screen analysis for Tommy John. What do you learn from the analysis? Answer: This is a good individual or group assignment. APPLICATION QUESTIONS 1. What types of insights did Tom Patterson pick up by spending hours in stores watching people buy men’s undershirts? What role did these insights play in the final design of the product? In what ways do you think Tommy John products might be different today if Tom Patterson hadn’t spent the time watching people buy men’s undershirts that he did? Answer: Tom Patterson invariable picked up insights spending hours watching people buy men’s undershirts and talking to undershirt shoppers, that he wouldn’t have been privy to in any other way. There were two insights in particular that he gleaned: First, people either bought quickly or seemed a little confused when they looked at the alternatives. When he stopped people who bought quickly and politely asked them how they picked their brand, they would normally say that it’s the brand of undershirt they’ve been buying for years. The second thing he found out was that men only buy undershirts for about 17 years of their life. From age zero to 17 their mothers buy their undershirts, and from 34 (or whenever they get married) their wives buy them. So the majority of people who buy men’s undershirts are women. Most students will say that Patterson’s willingness to spend time watching people buy undershirts was instrumental in the way his undershirts were eventually designed and made. It’s doubtful that Patterson would have gleaned the insights he did in any way other than observing people buying undershirts. 2. The “You Be the VC 3.2” feature at the end of the chapter focuses on CADI Scientific’s SmartSense. Which of the forms of Intuit’s feasibility analysis and usability testing do you think would work for CADI Scientific? Describe how you would adapt Intuit’s practices to help CADI Scientific better understand its users and test its products. Answer: Most students will suggest that CADI Scientfic adopt the majority of what Intuit does in the area of feasibility analysis—particularly as it pertains to 82 Copyright ©2012 Pearson Education Chapter 3: Feasibility Analysis usability testing and follow-me-home testing. There is probably nothing that the founders of CADI Scientific could do that would be better than to actually watch medical staff and consumers interact with SmartSense, and interview them about whether the monitors achieve their intended purposes. Case 3.2 What Segway Learned About the Value of Feasibility Analysis the Hard Way DISCUSSION QUESTIONS 1. Why do you think Dean Kamen and his team didn’t do a better job of anticipating the problems that beset the Segway? Answer: There are three possibilities. First, the Segway was built in secrecy. As a result, even thought the device itself was extensively tested, it was probably tested by professional testers, not average people who would use the Segway in their daily lives. Thus, the usability issues weren’t uncovered. Second, the Segway was clearly a technological marvel, and Dean Kamen and his coworkers may have been so enamored with the technology behind the Segway that they felt it would sell itself, regardless of potential obstacles (like streets in New York City, a likely market, being jammed most of the day). Third, Dean Kamen and his coworkers may have succumbed to believing the hype the device was generating, and felt it was invincible. Regrettably it wasn’t, as vividly portrayed in the case. 2. Describe what you believe would have been an appropriate product/service feasibility analysis and an appropriate market/industry feasibility analysis for Segway during its development stage. Answer: Most students will follow the steps in product/service feasibility analysis and market/industry feasibility analysis in the chapter in addressing this question. Clearly the product/service feasibility analysis and the market/industry feasibility analysis Segway conducted were inadequate. 3. In what ways did Segway fail to build an ecosystem around its product? What could Segway have done, if anything, to ensure that its product would do a better job of fitting into its users’ environments and lives? Answer: The Segway was a dismal failure in building an ecosystem around its product. There were inadequacies in all areas—from how to get a Segway serviced if it needed servicing to how to park and secure a Segway if it was used to travel to work or school. Most students will argue that Segway should have conducted extensive tests to make sure the product fit into its users’ environments and lives. If they had, they may have produced a more usable product. Also, one thing Segway could have done but didn’t was to roll out the product slowly, and incent local governments to build ecosystems around the Segway to make it more 83 Copyright ©2012 Pearson Education Chapter 3: Feasibility Analysis usable. If Segway could have built some “success stories” in specific communities, then it may have gained momentum, and other communities or areas in cities may have embraced the Segway, and built out ecosystems that enabled the Segway to be used more successfully. 4. What niche market or markets do you thing Segway should have targeted initially and been successful in? Answer: Students will vary in their answers to this question. APPLICATION QUESTIONS 1. Describe a scenario in which Segway could have launched successful, built its business, and be a large and thriving business today. Answer: Students will vary in their answers to this question. 2. Think of a product you use that fits ideally into your day-to-day life. What makes the product so special? What design elements do you see in the product that makes it fit so nicely into your life. Spend a few minutes either looking at or thinking about the product. What can you learn from the product you’re thinking about that could potentially make you a better entrepreneur? Answer: Students will vary in their answers to this question. 84 Copyright ©2012 Pearson Education