Chapter 4
- 1. Conducting a Feasibility Analysis and Crafting a Winning Business Plan Copyright © 2011 Pearson Education, Inc. Publishing as Prentice Hall CHAPTER 4
- 2. Feasibility Analysis Entrepreneurs do not lack creative ideas, but … Is a particular idea a viable foundation for creating a successful business? Feasibility study addresses the question: “Should we proceed with this business idea?” Copyright © 2011 Pearson Education, Inc. Publishing Ch. 4: Feasibility Analysis & Business Plan as Prentice Hall 4 - 2
- 3. Feasibility Analysis A feasibility study: Is not the same as a business plan. 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. Is an investigative tool. Copyright © 2011 Pearson Education, Inc. Publishing Ch. 4: Feasibility Analysis & Business Plan as Prentice Hall 4 - 3
- 4. Elements of a Feasibility Analysis Industry and Market Feasibility Product or Service Feasibility Financial Feasibility Copyright © 2011 Pearson Education, Inc. Publishing Ch. 4: Feasibility Analysis & Business Plan as Prentice Hall 4 - 4
- 5. Elements of a Feasibility Analysis Industry and Market Feasibility Product or Service Feasibility Financial Feasibility Copyright © 2011 Pearson Education, Inc. Publishing Ch. 4: Feasibility Analysis & Business Plan as Prentice Hall 4 - 5
- 6. Industry and Market Feasibility Analysis Two areas of focus: 1. Determining how attractive an industry is overall as a “home” for a new business. 2. Identifying possible niches a small business can occupy profitably. Copyright © 2011 Pearson Education, Inc. Publishing Ch. 4: Feasibility Analysis & Business Plan as Prentice Hall 4 - 6
- 7. Five Forces Model Five forces interact with one another to determine the setting in which companies compete and, hence, the attractiveness of the industry: 1. Rivalry among companies in the industry 2. Bargaining power of suppliers 3. Bargaining power of buyers 4. Threat of new entrants 5. Threat of substitute products or services Copyright © 2011 Pearson Education, Inc. Publishing Ch. 4: Feasibility Analysis & Business Plan as Prentice Hall 4 - 7
- 8. Five Forces Model Potential Entrants Threat of New Entrants Industry Competitors Rivalry among existing firms Bargaining Power of Buyers Buyers Bargaining Power of Suppliers Suppliers Threat of Substitute Products or Services Substitutes Copyright © 2011 Pearson Education, Inc. Publishing Ch. 4: Feasibility Analysis & Business Plan as Prentice Hall 4 - 8
- 9. Five Forces Model Potential Entrants Threat of New Entrants Industry Competitors Rivalry among existing firms Bargaining Power of Buyers Buyers Bargaining Power of Suppliers Suppliers Threat of Substitute Products or Services Substitutes Copyright © 2011 Pearson Education, Inc. Publishing Ch. 4: Feasibility Analysis & Business Plan as Prentice Hall 4 - 9
- 10. Rivalry Among Companies Strongest of the five forces Industry is more attractive when: Number of competitors is large, or, at the other extreme, quite small Competitors are not similar in size or capacity Industry is growing fast Opportunity to sell a differentiated product or service exists Copyright © 2011 Pearson Education, Inc. Publishing Ch. 4: Feasibility Analysis & Business Plan as Prentice Hall 4 - 10
- 11. Five Forces Model Potential Entrants Threat of New Entrants Industry Competitors Rivalry among existing firms Bargaining Power of Buyers Buyers Bargaining Power of Suppliers Suppliers Threat of Substitute Products or Services Substitutes Copyright © 2011 Pearson Education, Inc. Publishing Ch. 4: Feasibility Analysis & Business Plan as Prentice Hall 4 - 11
- 12. Bargaining Power of Suppliers The greater the leverage of suppliers, the less attractive the industry. Industry is more attractive when: Many suppliers sell a commodity product Substitutes are available Switching costs are low Items account for a small portion of the cost of finished products Copyright © 2011 Pearson Education, Inc. Publishing Ch. 4: Feasibility Analysis & Business Plan as Prentice Hall 4 - 12
- 13. Five Forces Model Potential Entrants Threat of New Entrants Industry Competitors Rivalry among existing firms Bargaining Power of Buyers Buyers Bargaining Power of Suppliers Suppliers Threat of Substitute Products or Services Substitutes Copyright © 2011 Pearson Education, Inc. Publishing Ch. 4: Feasibility Analysis & Business Plan as Prentice Hall 4 - 13
- 14. Bargaining Power of Buyers Buyers’ influence is high when number of customers is small and cost of switching to a competitor’s product is low. Industry is more attractive when: Customers’ switching costs are high Number of buyers is large Customers want differentiated products Customers find it difficult to collect information for comparing suppliers Items account for a small portion of customers’ finished products Copyright © 2011 Pearson Education, Inc. Publishing Ch. 4: Feasibility Analysis & Business Plan as Prentice Hall 4 - 14
- 15. Five Forces Model Potential Entrants Threat of New Entrants Industry Competitors Rivalry among existing firms Bargaining Power of Buyers Buyers Bargaining Power of Suppliers Suppliers Threat of Substitute Products or Services Substitutes Copyright © 2011 Pearson Education, Inc. Publishing Ch. 4: Feasibility Analysis & Business Plan as Prentice Hall 4 - 15
- 16. Threat of New Entrants The larger the pool of potential new entrants, the less attractive an industry is. Industry is more attractive to new entrants when: Advantages of economies of scale are absent. Capital requirements to enter are low Cost advantages are not related to company size Buyers are not loyal to existing brands Government does not restrict the entrance of new companies Copyright © 2011 Pearson Education, Inc. Publishing Ch. 4: Feasibility Analysis & Business Plan as Prentice Hall 4 - 16
- 17. Five Forces Model Potential Entrants Threat of New Entrants Industry Competitors Rivalry among existing firms Bargaining Power of Buyers Buyers Bargaining Power of Suppliers Suppliers Threat of Substitute Products or Services Substitutes Copyright © 2011 Pearson Education, Inc. Publishing Ch. 4: Feasibility Analysis & Business Plan as Prentice Hall 4 - 17
- 18. Threat of Substitutes Substitute products or services can turn an industry on its head. Industry is more attractive to new entrants when: Quality substitutes are not readily available Prices of substitute products are not significantly lower than those of the industry’s products Buyers’ switching costs are high Copyright © 2011 Pearson Education, Inc. Publishing Ch. 4: Feasibility Analysis & Business Plan as Prentice Hall 4 - 18
- 19. Five Forces Matrix Copyright © 2011 Pearson Education, Inc. Publishing Ch. 4: Feasibility Analysis & Business Plan as Prentice Hall 4 - 19
- 20. Business Prototyping Entrepreneurs test their business models on a small scale before committing serious resources to launch a business that might not work. Recognizes that a business idea is a hypothesis that needs to be tested before taking it full scale. Copyright © 2011 Pearson Education, Inc. Publishing Ch. 4: Feasibility Analysis & Business Plan as Prentice Hall 4 - 20
- 21. Elements of a Feasibility Analysis Industry and Market Feasibility Product or Service Feasibility Financial Feasibility Copyright © 2011 Pearson Education, Inc. Publishing Ch. 4: Feasibility Analysis & Business Plan as Prentice Hall 4 - 21
- 22. Product or Service Feasibility Analysis Determines the degree to which a product or service idea appeals to potential customers and identifies the resourced necessary to produce it. Two questions: 1. Are customers willing to purchase our product or service? 2. Can we provide the product or service to customers at a profit? Copyright © 2011 Pearson Education, Inc. Publishing Ch. 4: Feasibility Analysis & Business Plan as Prentice Hall 4 - 22
- 23. Product or Service Feasibility Analysis Primary research: Collect data firsthand and analyze it. Customer surveys and questionnaires Focus groups Secondary research: Gather data that already has been compiled and analyze it. Prototypes In-home trials Copyright © 2011 Pearson Education, Inc. Publishing as Prentice Hall 4 - 23 Ch. 4: Feasibility Analysis & Business Plan
- 24. Elements of a Feasibility Analysis Industry and Market Feasibility Product or Service Feasibility Financial Feasibility Copyright © 2011 Pearson Education, Inc. Publishing Ch. 4: Feasibility Analysis & Business Plan as Prentice Hall 4 - 24
- 25. Financial Feasibility Analysis Capital requirements –an estimate of how much start-up capital is required to launch the business. Estimated earnings – forecasted income statements Return on investment – Combining the previous two estimates to determine how much investors can expect their investments to return. Copyright © 2011 Pearson Education, Inc. Publishing Ch. 4: Feasibility Analysis & Business Plan as Prentice Hall 4 - 25
- 26. The Business Plan A written summary of: An entrepreneur’s proposed business venture The operational and financial details The marketing opportunities and strategy The managers’ skills and abilities. A business plan is the best insurance against launching a business destined to fail or mismanaging a potentially successful company. Copyright © 2011 Pearson Education, Inc. Publishing Ch. 4: Feasibility Analysis & Business Plan as Prentice Hall 4 - 26
- 27. The Business Plan: Two Essential Functions 1. Guiding the company by charting its future course and defining its strategy for following it. 2. Attracting lenders and investors who will provide needed capital. Copyright © 2011 Pearson Education, Inc. Publishing Ch. 4: Feasibility Analysis & Business Plan as Prentice Hall 4 - 27
- 28. A Plan Must Pass Three Tests 1. The Reality Test – proving that : A market really does exist for your product or service. You can actually build or provide it for the cost estimates in the plan. 2. The Competitive Test – evaluates: A company’s position relative to its competitors. Management’s ability to create a company that will gain an edge over its rivals. 3. The Value Test – proving that: A venture offers investors or lenders an attractive rate of return or a high probability of repayment. Copyright © 2011 Pearson Education, Inc. Publishing Ch. 4: Feasibility Analysis & Business Plan as Prentice Hall 4 - 28
- 29. Why Take the Time to Build a Business Plan? Although building a plan does not guarantee success, it does increase your chances of succeeding in business. A plan is like a road map that serves as a guide on a journey through unfamiliar, harsh, and dangerous territory. Don’t attempt the trip without a map! Copyright © 2011 Pearson Education, Inc. Publishing Ch. 4: Feasibility Analysis & Business Plan as Prentice Hall 4 - 29
- 30. Key Elements of a Business Plan Title Page and Table of Contents Executive Summary Vision and Mission Statement Company History Business and Industry Profile Our Business Plan Copyright © 2011 Pearson Education, Inc. Publishing Ch. 4: Feasibility Analysis & Business Plan as Prentice Hall 4 - 30
- 31. FIGURE 4.3 Mission, Goals and Objectives Copyright © 2011 Pearson Education, Inc. Publishing Ch. 4: Feasibility Analysis & Business Plan as Prentice Hall 4 - 31
- 32. Key Elements of a Business Plan Title Page and Table of Contents Executive Summary Mission Statement Company History Business and Industry Profile Business Strategy Description of Products/Services The Business Plan Copyright © 2011 Pearson Education, Inc. Publishing Ch. 4: Feasibility Analysis & Business Plan as Prentice Hall 4 - 32
- 33. Features vs. Benefits Feature – a descriptive fact about a product or service: “an ergonomically designed, more comfortable handle” Benefit – what a customer gains from the product or service feature: “fewer problems with carpal tunnel syndrome and increased productivity” Copyright © 2011 Pearson Education, Inc. Publishing Ch. 4: Feasibility Analysis & Business Plan as Prentice Hall 4 - 33
- 34. Key Elements of a Business Plan (continued) Marketing Strategy Document market claims Show customer interest Competitor Analysis The Business Plan Description of Management Team Plan of Operation Projected Financial Statements Loan or Investment Proposal Our Business Plan Copyright © 2011 Pearson Education, Inc. Publishing Ch. 4: Feasibility Analysis & Business Plan as Prentice Hall 4 - 34
- 35. Guidelines for Preparing a Business Plan Remember: No one can create your plan for you. Potential lenders want to see financial projections, but they are more interested in the strategies for reaching those projections. Show how you plan to set your business apart from competitors; don’t fall into the “me too” trap. Identify your target market and offer evidence that customers for your product or service exist. Copyright © 2011 Pearson Education, Inc. Publishing Ch. 4: Feasibility Analysis & Business Plan as Prentice Hall 4 - 35
- 36. Tips on Preparing a Business Plan Make sure your plan has an attractive cover. (First impressions are crucial.) Rid your plan of all spelling and grammatical errors. Make your plan visually appealing. Include a table of contents to allow readers to navigate your plan easily. Make it interesting. Copyright © 2011 Pearson Education, Inc. Publishing Ch. 4: Feasibility Analysis & Business Plan as Prentice Hall 4 - 36
- 37. Tips on Preparing a Business Plan (continued) Your plan must prove that the business will make money (not necessarily immediately, but eventually). Use spreadsheets to generate financial forecasts. Always include cash flow projections. Keep your plan “crisp” – between 25 and 40 pages long. Tell the truth – always. Copyright © 2011 Pearson Education, Inc. Publishing Ch. 4: Feasibility Analysis & Business Plan as Prentice Hall 4 - 37
- 38. The “5 Cs” of Credit Capital Capacity Collateral Character Conditions Copyright © 2011 Pearson Education, Inc. Publishing Ch. 4: Feasibility Analysis & Business Plan as Prentice Hall 4 - 38
- 39. Presenting the Plan Demonstrate enthusiasm, but don’t be overemotional. Know your audience thoroughly. “Hook” investors quickly with an up-front explanation of the venture, its opportunities, and its benefits to them. Hit the highlights; focus on the details later. Keep your presentation simple – 2 or 3 major points. Copyright © 2011 Pearson Education, Inc. Publishing Ch. 4: Feasibility Analysis & Business Plan as Prentice Hall 4 - 39
- 40. Presenting the Plan (continued) Avoid overloading your audience with technological jargon. Use visual aids. Close by reinforcing the nature of the opportunity. Be prepared (with details) for potential investors’ questions. Follow up with every investor to whom you make your presentation. Copyright © 2011 Pearson Education, Inc. Publishing Ch. 4: Feasibility Analysis & Business Plan as Prentice Hall 4 - 40
- 41. Conclusion There are no guarantees for success. Creating a business plan will be valuable primarily because of the process itself. The business planning process may provide insight to increase the chances for success. The business plan: Entrepreneurs benefit; lenders and investors demand it! Copyright © 2011 Pearson Education, Inc. Publishing Ch. 4: Feasibility Analysis & Business Plan as Prentice Hall 4 - 41
- 42. All rights reserved. No part of this publication may be reproduced, stored in a retrieval system, or transmitted, in any form or by any means, electronic, mechanical, photocopying, recording, or otherwise, without the prior written permission of the publisher. Printed in the United States of America. Copyright © 2011 Pearson Education, Inc. Publishing Ch. 4: Feasibility Analysis & Business Plan as Prentice Hall 4 - 42