Conducting a Feasibility Analysis and Crafting a Winning
Business Plan
Learning Objectives
1. Discuss the
steps involved in subjecting a business idea to a feasibility analysis.
2. Explain why
every entrepreneur should create a business plan as well as the benefits of
developing a plan.
3. Describe the
elements of a solid business plan.
- Explain the “Five Cs of Credit” and why they are important to potential lenders and investors reading business plans.
5. Describe the keys to making an effective
business plan presentation.
Class Instruction
Introduction
An entrepreneur needs a
well-conceived and factually based business plan to increase the likelihood of
success. Research has documented that companies that perform business planning
outperform those that do not. Conducting a feasibility analysis is the first
step in developing an effective business plan.
A business model defines
the process a company applies to generate sales and profit and is comprised of
these seven components:
1.
A definition of
your target customers and how your company will reach them
2.
The customer
value proposition your company offers
3.
Point of
differentiation
4.
Pricing
5.
Selling process
6.
Distribution
system
7.
Customer support
Conducting a Feasibility Analysis LO1
For many entrepreneurs, coming up
with an idea for a new business concept or approach is easy. A feasibility
analysis is the process of determining if the idea is a viable
foundation for creating a successful business. If the idea meets the necessary
criteria, the entrepreneur’s next step is to build a solid business plan for
capitalizing on the idea. If the idea fails, the entrepreneur abandons it and
moves on to the next opportunity. It is about learning, being efficient, and
increasing the chances for success before investing resources.
Conducting a feasibility study
reduces the likelihood that entrepreneurs will pursue fruitless business
ventures.
A
feasibility study is not the same as a business plan.
A feasibility
study is an investigative tool to answer the question, “Should we proceed
with this business idea?” It serves
as a filter, screening out ideas that lack the potential for building a
successful business, before an entrepreneur commits the
necessary resources to building a business plan.
A business
plan is a planning tool for transforming an idea into reality.
Feasibility
studies are particularly useful when entrepreneurs have generated multiple
ideas for business concepts and must winnow their options down to the “best
choice.”
A feasibility
analysis consists of three interrelated components:
1.
An industry and market feasibility analysis,
2.
A product or service feasibility analysis, and
3.
A financial feasibility analysis.
Addressing these questions helps
entrepreneurs determine whether the potential for sufficient demand for their
products and services exists. We will first explore techniques to assess the “Industry
and Market Feasibility” aspect of the Feasibility Analysis.
When evaluating the feasibility of a
business idea, entrepreneurs find a basic analysis of the industry and targeted
market segments a good starting point. The focus in this phase is two-fold:
1) To
determine how attractive an industry is overall as a “home” for a new business,
and;
2) To
identify possible niches a small business can occupy profitably.
Porter’s
Five Forces model evaluates five key forces that determine
the setting in which companies compete. Hence, the attractiveness of the
industry based upon these five considerations:
1) The rivalry among the companies competing in
the industry,
2) The bargaining power of suppliers to the
industry,
3) The bargaining power of buyers,
4) The threat of new entrants to the industry,
and
5) The threat of substitute products or services.
Rivalry
among companies competing in the industry – The strongest of the five forces in most industries is
the rivalry that exists among the businesses competing in a particular market. This
force makes markets a dynamic and highly competitive place. An industry is
generally more attractive when:
·
The number of competitors is large, or, at the other
extreme, fewer than five.
·
Competitors are not similar in size or capability.
·
The industry is growing at a fast pace.
·
The opportunity to sell a differentiated product or
service is present.
Bargaining
power of suppliers – The
greater the advantage that suppliers of key raw materials or components have,
the less attractive is the industry. An industry is generally more attractive
when:
·
Many suppliers sell a commodity product to the companies
in it.
·
Substitute products are available for the items
suppliers provide.
·
Companies find it easy to switch suppliers or to
substitute products.
·
When the items suppliers provide the industry account
for a relatively small portion of the cost of the industry’s finished products.
Bargaining
power of buyers – Buyers
have the potential to exert significant power over businesses. When the number
of customers is small and the cost of switching
to a competitor’s product is low, buyers have a high
level of influence. An industry is generally more attractive when:
·
Industry customers’ “switching
costs” are high
·
The number of buyers is large
·
Customers demand differentiated products
·
Customers find it difficult to gain access to
information about buyers
·
The products companies sell account for a small portion
of the cost of their customers’ finished goods.
Threat of new entrants – The larger the pool
of potential new entrants to an industry, the greater is the threat to existing
companies in it. This is particularly true in industries where the barriers to
entry, such as capital requirements, specialized knowledge, access to
distribution channels, and others are low. An industry is generally more
attractive to new entrants when these factors exist:
·
Economies of scale
are absent
·
Capital
requirements to enter are low
·
Cost advantages
are not related to company size
·
Buyers are not
brand-loyal
·
Governments do
not restrict new companies from entering the industry
Threat
of substitute products or services – Substitute products or services can turn an entire
industry on its head. An industry is generally more attractive when:
·
Quality substitutes are not readily available
·
Prices of substitute products are not significantly
lower that those of the industry’s products
·
Buyer’s switching costs are high
After
surveying the power these five forces exert on an industry, entrepreneurs can
evaluate the potential for their companies to generate reasonable sales and
profits in a particular industry to answer the question, “Is this industry a
good one for my business?” Note that the lower the score for an industry, the
more attractive it is.
Business prototyping enables entrepreneurs to test their
business models on a small scale. Business prototyping recognizes that every
business idea is a hypothesis that needs to be tested. If the test supports the
hypothesis and its accompanying assumptions, it is time to launch a company. If
the prototype fails, the entrepreneur scraps the business idea with only
minimal losses and turns to the next idea.
A
product or service feasibility analysis
determines the degree to which a product or service idea appeals to potential
customers and identifies the resources necessary to produce the product or
provide the service. This portion of the feasibility analysis addresses two
important questions:
1.
Are customers
willing to purchase our goods and services?
2.
Can we provide
the product or service to customers at a profit?
Getting that feedback might involve using engaging in
primary research such as customer surveys and focus groups, gathering secondary
customer research, building prototypes, and conducting in-home trials can help
answer these questions. Information gained through primary or secondary
research may also prove invaluable.
The financial feasibility analysis of
a venture is the final component of the feasibility analysis.
This step involves assessing these three elements:
1. Capital requirements
2. Estimated earnings
3. Return on investment
Wise entrepreneurs take the time to test their
ideas to determine the viability of the concept as a business.
Why Develop a Business Plan? LO 2
The plan serves
as an entrepreneur’s road map to building a successful business. It describes
the direction the company is taking, what its goals are, where it wants to be,
and how it plans to get there.
The business plan
serves three essential functions:
1.
The business plan provides an operational guide for action and success;
2.
The business plan attracts lenders, and;
3.
The business plan is a reflection of its creator.
A viable business plan is capable of
passing three “tests” including:
1.
The reality test
2.
The competitive test
3.
The value test
A business plan
can increase your chances for success and serve as a guide through uncertain
and new experiences.
The Elements of a Business Plan LO 3
Every business plan
is unique. There are many resources available to use as a guide. The seemingly
overwhelming task of building a business plan is easily broken down into
workable parts that any student or entrepreneur can undertake. Plans may
include the following:
·
Executive Summary
·
Mission Statement
·
Company History
·
Business and Industry Profile
·
Objectives
·
Business Strategy
·
Description of Firm’s Product/Service
·
Marketing Strategy
·
Documenting Market Claims
·
Competitor Analysis
·
Description of the Management Team
·
Plan of Operation
·
Forecasted or Pro-Forma Financial Statements
·
The Loan or Investment Proposal
In addition, there
are ten tips on preparing your business plan that can save time and help to
create a more cohesive and impressive overall plan.
1.
Have a cover
2.
Check for spelling and grammar
3.
Create a visual appeal
4.
Include a table of contents
5.
Make it interesting and compelling
6.
Demonstrate its profit potential
7.
Use spreadsheets
8.
Include cash flow projections
9.
Keep it concise and “crisp”
10.
Tell the truth – always!
What Lenders and Investors Look for in a Business
Plan LO 4
Bankers and other lenders include
the “five Cs” of credit as a part of their evaluation of the credit-worthiness
of loan applications. The higher a business scores on the evaluation, the
greater its chance will be of receiving a loan based on these five criteria:
1.
Capital
2.
Capacity
3.
Collateral
4.
Character
5.
Conditions
Making the Business Plan Presentation LO 5
Keys to making
an effective business plan presentation include the following:
·
Demonstrate enthusiasm, but don’t be too emotional.
·
Know your audience.
·
“Hook” investors quickly with an up-front explanation of the new
venture, its opportunities, and the benefits to them.
·
Keep it simple and to the point.
·
Avoid the use of technological terms.
·
Use visual aids.
·
Close by reinforcing the nature of the opportunity and the related
benefits to investors.
·
Be prepared for questions.
·
Follow up with every investor to whom you make a presentation.
Business Plan Format — contents and sources
Review the
business plan outline in the text. This
may also be an opportunity to show the business plan outline from “Business
Plan Pro” as an example to the class. Emphasize that although business plans
may vary regarding the order of information, good business plans contain the
same basic elements.
Conclusion
There are no
guarantees for entrepreneurial success. The “binder with the plan” is not as
valuable as the planning process itself. The business plan process may provide
insight and clarity of vision. Learning as much as possible before launching
the business can save the entrepreneur frustration and money!
The business
plan: Entrepreneurs benefit from it; lenders and investors demand it!
Chapter Overview
1.
Discuss the steps involved in subjecting a business idea to a feasibility
analysis.
·
A feasibility analysis consists of
three interrelated components: an industry and market feasibility analysis, a
product or service feasibility analysis, and a financial feasibility analysis.
The goal of the feasibility analysis is to determine whether an entrepreneur’s
idea is a viable foundation for creating a successful business.
2.
Explain why every entrepreneur should create a business plan. Explain the
benefits of preparing a plan.
·
A business plan serves two essential
functions. First and most important, it guides the company’s operations by
charting its future course and devising a strategy for following it. The second
function of the business plan is to attract lenders and investors. Applying for
loans or attempting to attract investors without a solid business plan rarely
attracts needed capital.
·
Preparing a sound business plan
clearly requires time and effort, but the benefits greatly exceed the costs.
·
Building the plan forces a potential
entrepreneur to look at his or her business idea in the harsh light of reality.
It also requires the owner to assess the venture’s chances of success more
objectively. A well-assembled plan helps prove to outsiders that a business
idea can be successful.
·
The real value in preparing a
business plan is not so much in the plan itself as it is in the process the
entrepreneur goes through to create the plan. Although the finished product is
useful, the process of building a plan requires an entrepreneur to subject his
or her idea to an objective, critical evaluation. What the entrepreneur learns
about his or her company, its target market, its financial requirements, and
other factors can be essential to making the venture a success.
3.
Describe the elements of a solid business plan.
·
Although a business plan should be
unique and tailor-made to suit the particular needs of a small company, it should
cover these basic elements: an executive summary, a mission statement, a
company history, a business and industry profile, a description of the
company’s business strategy, a profile of its products or services, a statement
explaining its marketing strategy, a competitor analysis, owners’ and officers’
résumés, a plan of operation, financial data, and the loan or investment
proposal.
4.
Explain the five Cs of credit and why they are important to potential lenders
and investors reading business plans.
·
Small business owners need to be
aware of the criteria bankers use in evaluating the creditworthiness of loan
applicants—the five Cs of credit: capital, capacity, collateral, character, and
conditions.
·
Capital—Lenders expect small
businesses to have an equity base of investment by the owner(s) that will help
support the venture during times of financial strain.
·
Capacity—A synonym for “capacity” is
“cash flow.” The bank must be convinced of the firm’s ability to meet its
regular financial obligations and to repay the bank loan, and that takes cash.
·
Collateral—Collateral includes any
assets the owner pledges to the bank as security for repayment of the loan.
·
Character—Before approving a loan to
a small business, the banker must be satisfied with the owner’s character.
·
Conditions—The conditions (interest
rates, the health of the nation’s economy, industry growth rates, and so no)
surrounding a loan request also affect the owner’s chance of receiving funds.
5.
Understand the keys to making an effective business plan presentation.
·
Lenders and investors are favorably
impressed by entrepreneurs who are informed and prepared when requesting a loan
or investment.
·
Tips include the following:
demonstrate enthusiasm about the venture but don’t be overemotional; “hook”
investors quickly with an up-front explanation of the new venture, its
opportunities, and the anticipated benefits to them; use visual aids; hit the
highlights of your venture; don’t get caught up in too much detail in early
meetings with lenders and investors; avoid the use of technological terms that
will likely be above most of the audience; rehearse your presentation before
giving it; close by reinforcing the nature of the opportunity; and be prepared
for questions.
Self-Study Quiz
1. What is the purpose of conducting a feasibility analysis?
A) The feasibility analysis helps
you to discern whether you will be able to gather enough capital to start the
business.
B) The feasibility analysis will
allow you to qualify for governmental loan programs.
C) The feasibility analysis helps
you to determine whether your idea is a viable foundation for a successful
business.
D) The feasibility analysis allows
you to know which firm will be best to use for manufacturing your prototype.
E) The feasibility analysis
determines whether there are governmental constraints that will not allow you
to start your business.
Correct Answer: C- See pages 127–128
2. The five forces model ________.
A) Helps an entrepreneur gauge the
overall attractiveness of an industry
B) Was originally designed to meet
the needs of horse breeders to determine which of their horses to keep and
which to sell
C) Has been replaced since with
the nine forces model
D) Can be used to gauge which
competitor has the strongest position in the marketplace
E) Allows for an understanding of
the political-legal, sociocultural, economic, technological, and global forces
surrounding a firm
Correct Answer: A - See "Industry and Market Feasibility Analysis," pages
128–132.
3. Which of the following conditions would make an industry more
threatening to new entrants?
A)
Less presence of economies of scale
B)
High capital requirements
C)
Buyers with low brand loyalty
D)
Laissez-faire governmental policies in the market
E)
Few competitors within the industry
Correct Answer: B - See "Industry and Market
Feasibility Analysis," page 131.
4. Which of the following, primary research or secondary research, is
considered to be more important in a feasibility analysis?
A)
Secondary research
B)
Primary research
C)
Both primary research and secondary research
D)
Neither has a large impact on a feasibility analysis
E)
Feasibility analysis is over rated
Correct Answer: C - See "Product or Service Feasibility Analysis," pages
135–136.
5. A sound financial feasibility analysis includes a thorough
investigation of ________.
A)
market demand, product awareness, and monthly budgetary data
B)
start-up capital requirements, estimated earnings, and return on investment
C)
interest rates, angel investor interest, and monthly budgetary data
D)
competitor earnings, interest rate data, and estimated earnings
E)
previous years' earnings, estimated earnings, and monthly budgetary data
Correct Answer: B - See "Financial Feasibility Analysis," page 137.
6. Why is it important to develop a business plan?
A)
The business plan will be required by the landlord should you choose to lease
office space.
B)
The presence of a business plan virtually guarantees business success upon
start-up.
C)
The business plan will allow your employees to know what they are supposed to
do on a daily basis.
D) The business plan will help you
chart out the company's course of action and devise a strategy for success.
E) The business plan will
guarantee the awarding of a Small Business Administration-backed loan to your
business.
Correct
Answer: D - See "Why Develop a Business Plan?" page 138.
7. Which of the following is true of the executive summary of a
business plan?
A) Executive summaries should
contain brief information about the firm's business model, its target markets,
its founding team, and its financial highlights.
B)
Executive summaries should appear first, but should be written after the rest
of the business plan.
C) Executive summaries should be
at least 5 pages long and provide information about the strategy of the firm.
D)
Executive summaries should contain information about the pricing and cost
structure of the firm.
E)
A and B are true.
Correct Answer: E - See "The Elements of a Business Plan," page 143–144.
8. When describing your firm's marketing strategy, which of the
following is NOT a factor in defining your target market?
A)
Describing where potential customers live and work
B)
Estimating the ages, income level, and other pertinent demographics
C)
Estimating the number of goods that each customer would buy
D)
Understanding needs and wants
E)
Determining the basis of differentiation in the minds of the target market
Correct Answer: C - See "Marketing Strategy," pages 146–148.
9. What financial statements are necessary to include in a business
plan for either an existing business or startup?
A)
Monthly sales forecast, income statement, balance sheet
B)
Balance sheet, operating ratio statement, break even statement
C)
Balance sheet, cash flow statement, sales statement
D)
Ratio analysis, balance sheet, income statement
E)
Balance sheet, income statement, cash flow statement
Correct Answer: E - See "Pro Forma (Projected) Financial Statements" pages
150–153.
10. When delivering a business plan presentation to investors and
creditors, it is a good idea to ________.
A)
be as detailed as possible, covering all of the points of the business plan
B)
keep it simple and use visual aids
C)
use technical terminology to emphasize your knowledge of the industry
D)
improvise as you present your speech to emphasize your personality
E)
allow all of the founders of the business an opportunity to present their
contributions to the venture
Correct
Answer: B - See "Making the
Business Plan Presentation," page 156.
Chapter
Review
Multiple Choice
1. The customers you would most like to
attract are referred to as your:
A) competition
B) market segments
C) target market
D) demographics.
2. Demographics are data that
describe a group of people in terms of their:
A) income
B) tastes
C) opinions
D) needs.
3. Psychographics are data that
describe a group of people in terms of their:
A) lifestyle habits
B) personality traits
C) opinions
D) all of these.
4. By continually evaluating
your market, you can respond to changes in all of the following except:
A) government
B) communities
C) consumer tastes
D) competitors’ offerings.
5. A description of the
characteristics of the person or company that is likely to purchase a product
or service is a:
A) target market
B) customer
profile
C) psychographic profile
D) demographic summary
6. Most products and services
appeal to
A) a large number of people
B) the demographic market
C) a market
segment
D) none of these.
7. Data that helps you determine
how often potential customers use a particular service is called:
A) a customer profile
B) demographic data
C) psychographic data
D) use-based data.
8. Data that helps you determine
where your potential customers live and how far they will travel to do business
with you is called:
A) use-based data
B) geographic data
C) census data
D) secondary data.
9. Secondary data are found:
A) in government publications
B) on the Internet
C) in newspapers
D) all of these.
10. Which of the following is
not a way to collect primary data?
A) Focus groups
B) Consumer
opinion blogs
C) Surveys
D) Observation
11. The data collected in a
telephone survey are:
A) secondary data
B) primary data
C) population data
D) computer data
12. Finding hidden patterns and
relationships in customer data is called:
A) data warehousing
B) data collection
C) data mining
D) data evaluation.
13. Touch points are areas where
a customer:
A) likes a particular product
B) might have contact
with a company
C) enjoys shopping in a mall
D) will try a new service.
14. Customer relationship management:
A) focuses on
understanding customers as individuals
B) focuses on understanding customers as groups
C) provides demographic and psychographic data
D) none of these
15. In designing a survey, you
should consider all of the following except:
A) length of the survey
B) how you plan to administer it
C) when you can
get the best information
D) the purpose of each question.
16. A good questionnaire should:
A) have
easy-to-answer questions
B) be at least two pages long
C) help you find suppliers
D) explain in detail why you are conducting the survey.
17. A small business selling
specialty items will likely face __________ from a large retailer.
A)demographic competition
B) incidental competition
C) indirect
competition
D) unfocused competition
18. All of the following can
provide information about direct competition except:
A) the Postal Service
B) the telephone directory
C) the Chamber of Commerce
D) observation methods.
19. As an entrepreneur, you may
find that indirect competitors:
A) are more
difficult to locate than direct competitors
B) are usually located in malls or shopping centers
C) make most of their money selling the same product or service that
you sell
D)none of these.
20. Small businesses may have
difficulty competing with large retailers because large retailers:
A) develop more complete customer profiles
B) can keep larger
quantities of products in stock
C) have a larger target market
D) offer superior service.
21. Competitive analysis does
all of the following except:
A) list competitors
B) summarize competitor products and prices
C) identify threats from a competitor
D) research a
competitor’s business plan.
22. Competitors should be
analyzed concerning their:
A) prices
B) locations
C) strengths and weaknesses
D) all of these.
23. Customer feedback is
considered a type of:
A) problem-solving
B) market research
C) target market
D) customer profile.
24. All of the following are
strategies designed to maintain customer loyalty except:
A) providing store-specific credit cards
B) locating in a
city center
C) listening to customers and responding to feedback
D) having more convenient hours than other businesses
True or False
25. Entrepreneurs estimate
demand for their products and services by identifying their target market.
True
False
26. Understanding
your customers allows you meet customer demands.
True
False
27. Demographics describe a
group of people in terms of their tastes, opinions, personality traits, and
lifestyle habits.
True
False
28. Marital status,
family size, and age are useful data for identifying your target market.
True
False
29. A customer
profile should include demographic data but not psychographic data.
True
False
30. Segmenting your
target market is usually not necessary because most markets are small.
True
False
31. Data that helps
you determine how often potential customers use a particular service is called
a customer profile.
True
False
32. A market segment
is made up of people with common characteristics.
True
False
33. Customers should
never be profiled based geographic data.
True
False
34. A marketing
strategy identifies customers that you can better serve than your competitors,
but it cannot help you determine the size of your market.
True
False
35. To gather
information for market research, you can use either secondary data or primary data
but not both.
True
False
36. Information
collected for the very first time to fit a specific purpose is primary data.
True
False
37. Focus groups are
in-depth interviews with target customers.
True
False
38. The first step in
primary market research is to select a research method.
True
False
39. Collecting
primary data can be expensive and time-consuming.
True
False
40. Secondary data
are found in already published sources.
True
False
41. Observation is
the best research method if you want to find out people’s opinions.
True
False
42. Economic trends
and industry forecasts help determine the kind of primary data research to
perform.
True
False
43. A survey question
should not be included if the response serves no specific purpose.
True
False
44. You will not need
to use your market research information until after you have developed a plan
of action.
True
False
45. An opportunity
for success exists when a customer need is being unmet by a competitor.
True
False
46. To convince
customers to buy from you instead of your competition, you need information about
your competitors.
True
False
47. Secondary data
resources and observation can help you learn about your direct competitors.
True
False
48. Your indirect
competitors are those businesses that make most of their money selling products
or services that are the same as or similar to yours.
True
False
49. One reason why
small entrepreneurs can compete successfully with large retailers is because
large retail chains carry more than one product line.
True
False
50. Large businesses
often drive out smaller businesses by offering lower prices and more jobs.
True
False
51. Analyzing the
strengths and weaknesses of your competition is a waste of resources.
True
False
52. Your analysis of
competitors should include their prices, locations, and facilities.
True
False
53. A few customer
complaints are not important if your business has a better location and better
prices than your competition.
True
False
54. Superior service,
easy return policies, and frequent-buyer programs are some of the strategies
you can use to maintain customer loyalty.
True
False
55. The first step in
the market research process is to determine the data needed.
True
False
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