CHAPTER 10
Feasibilities
There are entrepreneurs who believe that the time it takes to complete feasibilities or due diligences risks the idea being stolen by competitors. The truth is that this may occur but it is better to have an idea stolen than to rush into implementing an idea that will be costly. There are times when critical dealbreakers are not immediately ascertained, which could result in financial ruin. In fact, you will find that funders always undertake their own feasibility, whether you have undertaken one or not.
This chapter thus highlights the following:
• Organizational and staff feasibility studies.
• Competitive analysis.
• In-depth market and financial feasibility studies.
In conducting a feasibility study, factors need to be identified and analyzed before an idea is implemented. In this chapter, The Rainmaker demonstrates how to assess the variables that may determine the success of such an idea and ultimately the business as a whole.
The normal process of feasibility is as follows:
• Define the issue (often called the problem) that you wish to review.
• Conduct research and international best practice identification on this issue.
• Undertake financial modeling and ratio analysis.
• Compare industry peers to your company or idea.
• Undertake scenario brainstorming sessions.
• Identify the most likely potential outcome of decisions made.
• Conduct follow-up evaluations.
• Make a final decision.
In feasibility studies, the problem is carefully set out in a formal document. The board’s wishes and intentions are then documented. The problem and board wishes are then compared to the outcomes of the feasibility and are considered after in-depth discussions. This is followed by either a request for additional research or a decision made as to the steps to be undertaken for its implementation.
The feasibility study investigates and assesses information under three general categories:
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Required info |
Feasibility variables |
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Inputs |
• Environmental inputs that influence the problem such as weather or geologic factors. • All inputs which you believe are necessary for the problem to meet a planned demand. • Categorized these as useful or not useful in effecting control of your systems. |
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Outputs |
• Desired: the results of a process that meets management targets Not desired: The results of a process that has been negatively influenced (political, or socioeconomic) the results and thus targets. |
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Parameters |
• These are established maximum and minimum expected results that are used to measure forecast capabilities of the existing market/product or service. • Ask: How will this change management strategy? |
The total feasibility study can be broken down into six areas, which are discussed below.
Feasibility 1: Technical Viability
The aim of this feasibility is to determine whether your company has the resources to produce a product or service. In a technical feasibility study, the following factors need to be analyzed.
• Do you have competent and technically trained staff to produce the product or service?
• Do you have enough space and correct infrastructure to deliver the required product or service?
• Do you have the right machinery to produce the product or service?
• Have you carried out product design and quality standards?
Have you considered where this product and service will be based? Is it close to consumers and raw materials? Will it be easy to transport to your market?
Such a study should always be conducted before proceeding with a corporate strategy.
Feasibility 2: Organizational Structure Viability
Even if you have the best organizational structure that money can buy, it would be useless anywhere in the world if you don’t have skilled and experience staff to operate within that structure. The obvious fault many entrepreneurs make is to attempt to carry out all the tasks themselves. This often results in burnout and failure. It is rather simple; your duty is to run the company and to appoint people who will undertake specific tasks for you.
Remember that your organization has specific goals to accomplish and this can only be achieved through research, which ultimately determines what the best and most reliable structure for your business is. Therefore, assess the following issues when undertaking an organizational viability study:
• Be specific about the type of organizational structure that you will need.
• Your structure must be flexible enough to account for future changes in the market.
• Assess the type of personnel needed, such as experience, skill, and seniority.
• Ask whether your board has enough experience to lead planned tasks.
It is at this point that critical decisions must be made. If the above two feasibilities are not positive, then the process must be stopped and reviewed to reassess the stated problem.
Feasibility 3: Analysis of Competition
Entrepreneurs being enthusiastic about launching a new product or even a new business is not uncommon. However, they need to take cognizance of competition and what they may do to influence the outcome of their launch and ultimately their profits.
This statement is relevant to companies that successfully launched products in the past. The essence is that your new product is not competition-proof, and you may become the target of either direct or indirect competition (or both):
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Type of competition |
Definition |
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Direct |
Defined as the number of similar products and services offered in the same target market. |
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Indirect |
Defined as potential entry of substitutes to compete with your product. |
Given the basic economic principles of supply and demand, you are expecting to offer consumers a new product when their financials are already under strain. Always ask yourself this question: Why should they change to your product? Take note of the following:
• How many competitors are there in your industry, that is, the number of similar products already on the market and their respective market shares?
• How successful are these competitors, and will their strategies influence your proposed business?
• Do you have a competitive advantage? Ask yourself what your competitive edge is?
• What do you anticipate your competitors will do when you launch your product or company?
• Have you conducted a SWOT analysis on your competitors to identify possible weaknesses that may offer you opportunities to enter the market?
• How will you handle your competitors’ strengths?
• Identify substitutes and assess potential influence on your profits from both local and foreign companies?
• Is the market large enough to absorb additional products without negative influences on profits?
• Are industry growth rates rising or falling?
As a starting point, use the following simple and useful technique to establish a competitor profile:
State the nature of your industry. There are generally four main categories, namely, mining, financial, property, and industrial.
Establish the major players within the industry and then do the same for your product.
Selecting a Competition Strategy
Selecting a competition strategy is difficult.
Porter’s Five Forces (outlined in later chapters) states that only the top two or three players in the market are likely to have enough capacity to compete on price. This is particularly true for small and medium-sized enterprises (SMEs), which are often too easily copied. Pricing is critical and can be the defining activity that leads to failure or success. There is a tendency among SMEs to always try and compete on price, a strategy that cannot succeed.
The ideal strategy for SMEs is establishing a niche market; however, finding the correct niche and ensuring that it is large enough to support your growth strategy is a difficult part for many would-be entrepreneurs.
There are three rules to implementing sound niche market strategies:
• Identify and meet market needs: The promises you make to the market must have special appeal to consumers.
What can you provide that’s new and compelling?
Identify the unique needs of potential buyers.
Can you alter your product or service to meet this expected demand?
A starting point could be to assess all product or service variations.
• Understand your market: When approaching a niche market, it’s critical to have an in-depth knowledge of the product or service.
Essentially, you need to communicate to the niche audience information that will attract them to your product.
Consequently, market and sales must be well coordinated.
• Conduct peer analysis: Before moving further, assess direct competitors to determine what your competitive edge is and use that aspect to your benefit.
If you have no direct competition, assess why is it so. You may discover that other companies have tried and failed to launch similar products or services.
Conduct a thorough assessment of the market to test market receptiveness to the product or service; usually conducted through market surveys.
The bulk of SMEs try to compete, or intend to compete, on the basis of price and then wonder why so many of them fail.
As a funder, the best way to mitigate risk is to get the SME owner to think entrepreneurially and to focus on profit and not sales maximization.
SMEs can also allow the owner to be more entrepreneurial in the niche market than elsewhere. One can create a niche market and recreate it regularly as an entrepreneur. A niche market is conducive to developing and honing the entrepreneur’s skills.
Note: One way to determine the competitors in any industry within a defined location is to look at the sectors listed in the country’s stock exchange. These sectors set out the main competitors and will give you an extremely sound idea of the strength and size of the market and products sold. It will also provide you with statistics on the current business cycle.
Feasibility 4: Market Viability
The market viability study will inform whether there is sufficient demand on the market to make the launch of your business or product a success.
Rainmakers are often astounded by the lack of management’s knowledge about the nature and size of the market, and they see this as a major reason why businesses run into trouble or even fail. The market feasibility study will help you to avoid getting into markets with little potential and will highlight the following:
• Market potential: potential customers, motivation and decisions to buy particular products, and reasons why they would change to your product.
• Forecast: potential market share, costs of entry, and ratios to achieve profits.
• Break-even point: Will your business be able to generate sufficient sales to break even within a predetermined timeframe?
Feasibility 5: Financial Viability
This study aims to assess whether the business or the launch of a new product will be financially viable.
It will enable you to determine whether your business can operate profitability and to calculate capital required, expected operating costs, and the timeframe to break even. Other variables determined include mark-up percentage, cash flow requirements, and anticipated profit. In fact, experts suggest that you start with the following:
• A calculation of your start-up costs.
• How you will finance these?
• Assessing the break-even point.
• Will funders wait for you to reach a profitability status?
Feasibility 6: Market Research
To reduce the risks of poor or uninformed business decision-making, systematically follow the steps listed here:
• What is the objective of the research?
• Define the target market.
• Collect data making use of the following:
Secondary sources (existing sources)
Primary sources (original research conducted by yourself or a contracted company).
• Assess and interpret the data.
• Brainstorm and draw conclusions.
The important starting point is to clearly define your target market. Being too general is pointless. This leads to excessive and too often expensive research. For instance, if you are a junior miner in the coal industry, with the aim of expanding operations, it would be useless to have your defined market as general mining.
In this example, the defined market would be coal, and the location would be the area to be expanded. However, this does not mean that general mining shouldn’t be researched on to place the coal industry in context of the commodities cycle. In fact, all research should use the following systematic steps:
The idea is to gather information on global, regional, and local markets to be able to conduct structural analysis and subsequently find the true value of the industry. This places you in a more informed position to make relevant and ultimately profitable decisions.
To gage investors’ and customers’ sentiment, a survey should be conducted with a representative sample of the target population, which should be analyzed by statisticians. Data collection can also be done by using existing sources of media and research files, for instance, the World Bank, International Monetary Fund (IMF), or United Nations (UN). Although useful, data gathered from secondary sources often are not specific enough to carry out structural analysis.
Be careful not to steer research arbitrarily. As such, conclusions must be fair and realistic.
Rainmaker Observation: The completion of research does not signal the launch of your company or product. First, you need to resolve the issues that have come up during the research, then you can reassess and launch.