Barringer E4 Im 03 GE Version

Chapter 3: Feasibility Analysis
CHAPTER 3
FEASIBILITY ANALYSIS
LEARNING OBJECTIVES
1.
2.
3.
4.
5.
6.
7.
8.
9.
10.
Explain what a feasibility analysis is and why its 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 its 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
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Copyright 2012 Pearson Education
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 Analysisis 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
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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 companys 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 dont always follow through; as a result, the numbers
resulting from this activity are almost always optimistic.
d. Its 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
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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 industrys 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 thats 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.
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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 ventures start-up costs.
2. Financial Performance of Similar Businesses
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a. The second component of financial feasibility analysis is estimating a

proposed start-ups 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 ventures
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 entrepreneurs 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
entrepreneurs (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
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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 customers preferences.
Savvy Entrepreneurial Firm
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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 JumpStarts 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 didnt 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 wouldnt 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 wouldnt have thought to ask the
question, in a survey or a focus group, if they wouldnt 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 hasnt already launched apply the lessons learned from
Grosss experience with JumpStart and grade-specific software products?
Answer: A start-up could conduct pilot tests of its product or service, in a single
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location or a limited number of locations, before staging a full launch. If its 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 youd work well with and what type of
person do you think youd be in constant conflict with?
Answer: This question makes for a good individual assignment.
2.
Do you think its 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, its 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 dont want to put their friendship at risk. In the end its 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. Its 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 youre looking for a business partner, and see if your contacts make any useful
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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?
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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 dont 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
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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: Its 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 youre 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?
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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 youre starting, and if the business isnt
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 revenuemeaning 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
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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 entrepreneurs 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 wouldnt have bought them if they had conducted a feasibility
analysis before they invested. In addition, Kellys father may have completed
many of the steps in a formal feasibility analysishe 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 isnt overlooked. If Kelly pinned her
father down he would probably admit that there is nothing in a feasibility analysis
that isnt a good use of an entrepreneurs 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 Jasons
statement?
Answer: Jason has a misunderstanding of what primary research is. Primary
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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 thats
already collected. Jasons banker may appreciate the secondary research hes
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 Drinks
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. Its
actually a fun questionstudents often come up with very innovative and creative
ways that New Venture Fitness Drinks 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
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focuses on SafetyWeb. How would you access the likely demand for SafetyWebs
service?
Answer: The likely demand for SafetyWebs 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 couldnt
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 youre 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 Instructors 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 ecoATMs 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 doesnt 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
Answer: First, Keith should assess how large his trade area is. In his case, his
trade area is defined by how far its practical for him to travel to provide his inhome service. If its 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. Shes designed a Web site but isnt sure whether its 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
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 years sales will be. How would you recommend that they estimate the
total start-up costs of opening the restaurant and their first years 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 youre opening, and
the facility youll 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 arent 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 isnt realistically feasible?
Answer: A sample of the red flags are as follows:
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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 isnt
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. Shes disappointed because she rated 10 of the 25 items
on First Screen as either low or moderate potential. She says to you, Well, thats
that. Good thing I completed a feasibility analysis. I sure dont 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 shouldnt 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 ideait 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 its feasible.
YOU BE THE VC 3.1

Company: InstyMeds (www.instymeds.com)
Business Idea: Provide patients access to prescription medications instantly after theyre
prescribed by a doctor in a hospital emergency room or at an urgent care center. The
prescriptions are dispensed via a vending machine thats present in the facility.
You Be the VC Scorecard
InstyMeds
(www.instymeds.com)
77
Item
Score/Comments
Strength of New Venture

Team
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
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 thats 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
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
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
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, its a potential cost savings device in an
industry thats 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 doesnt 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, youd 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
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 Sinapores
General Hospital, as well as a panel of medical advisors.
Strength of the Opportunity
The opportunity appears to be strong. The recent H1N1

flu epidemic has brought in huge orders for Cadi
Scientifics consumer thermometer and queries about its
wireless temperature and location tracking system are
79
steadily rising from around the world. The global

shortage of nursing staff also strengthens SmartSenses
case as an important healthcare and monitoring tool.
Strength of the Industry
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
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
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
mens 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 Johns including:
Store clerks
Tailor
Friends and family members
Garment maker
Patent attorney
People who were buying undershirts in stores
81
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 theyre purchased, and what people liked and didnt
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.
1.
What types of insights did Tom Patterson pick up by spending hours in stores
watching people buy mens 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 hadnt spent the time watching people
buy mens undershirts that he did?
Answer: Tom Patterson invariable picked up insights spending hours watching
people buy mens undershirts and talking to undershirt shoppers, that he wouldnt
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 its
the brand of undershirt theyve 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 mens
undershirts are women. Most students will say that Pattersons willingness to
spend time watching people buy undershirts was instrumental in the way his
undershirts were eventually designed and made. Its 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
Scientifics SmartSense. Which of the forms of Intuits feasibility analysis and
usability testing do you think would work for CADI Scientific? Describe how you
would adapt Intuits 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 analysisparticularly as it pertains to
82
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 didnt 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 werent 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 wasnt, 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 areasfrom 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 didnt was to roll out the product slowly, and
incent local governments to build ecosystems around the Segway to make it more
83
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.
1.
Describe a scenario in which Segway could have launched successful, built its
business, and be a large and thriving business today.
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 youre thinking about that
could potentially make you a better entrepreneur?
84

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Chapter 3: Feasibility Analysis

Explain what a feasibility analysis is and why its important.

Chapter 3: Feasibility Analysis

A. Product/Service Feasibility Analysis

Chapter 3: Feasibility Analysis

service to prospective users to gauge customer interest, desirability,

Chapter 3: Feasibility Analysis

are characterized as the following:

Chapter 3: Feasibility Analysis

Chapter 3: Feasibility Analysis

a. The second component of financial feasibility analysis is estimating a

The amount of capital invested

c. Opportunities demanding substantial capital, requiring long periods

Chapter 3: Feasibility Analysis

Describe the difference between Visa Cash and Octopus cards.

Savvy Entrepreneurial Firm

Chapter 3: Feasibility Analysis

Chapter 3: Feasibility Analysis

location or a limited number of locations, before staging a full launch. If its a

Chapter 3: Feasibility Analysis

What is a feasibility analysis? What is it designed to accomplish?

What is a product/service feasibility analysis?

Describe the difference between primary research and secondary research.

What is a concept statement?

What is a buying intentions survey, and what does it accomplish?

Chapter 3: Feasibility Analysis

Answer: A buying intentions survey is an instrument that is used to gauge

What is gumshoe research in the context of product/service feasibility analysis?

What is industry/target market feasibility analysis?

Describe the attributes of an attractive industry for a new venture.

Are young rather than old

Chapter 3: Feasibility Analysis

Industry trade associations

What is organizational feasibility analysis?

What is a new-venture team?

What is financial feasibility analysis?

Chapter 3: Feasibility Analysis

Answer: Financial feasibility analysis is determining the financial feasibility of a

Chapter 3: Feasibility Analysis

What is the purpose of a First Screen analysis?

Chapter 3: Feasibility Analysis

research is research that is collected by the person or persons completing the

Chapter 3: Feasibility Analysis

Keith Ambrose, who is a physical therapist, is thinking about starting a firm to

Chapter 3: Feasibility Analysis

Patents, trademarks, and copyrights where appropriate

Chapter 3: Feasibility Analysis

Chapter 3: Feasibility Analysis

Initial capital investment is high

YOU BE THE VC 3.1

Chapter 3: Feasibility Analysis

Strength of New Venture

InstyMeds is led by Brad Schraut, who has a

The opportunity is strong. InstyMeds has now

The industry is strong. With the aging of the population,

The business model is novel, yet appears to be working.

Chapter 3: Feasibility Analysis

YOU BE THE VC 3.2

You Be the VC Scorecard

Strength of New Venture

Scientist Zenton Goh founded Cadi with three

The opportunity appears to be strong. The recent H1N1

Chapter 3: Feasibility Analysis