1Chapter 4 Business Plan Copyright 2008 Prentice Hall Publishing

Conducting a Feasibility Analysis

and Crafting a Winning

Business Plan

2Chapter 4 Business Plan Copyright 2008 Prentice Hall Publishing

Feasibility AnalysisFeasibility Analysis Entrepreneurs do not lack Entrepreneurs do not lack

creative ideas,creative ideas,but…but…

Is a particular idea a viable Is a particular idea a viable foundation for creating a foundation for creating a successful business? successful business?

Feasibility study addresses the Feasibility study addresses the question: “Should we proceed question: “Should we proceed with this business idea?”with this business idea?”

3Chapter 4 Business Plan Copyright 2008 Prentice Hall Publishing

Feasibility StudyFeasibility Study NotNot the same as a business plan. the same as a business plan. Serves as a filter, screening out Serves as a filter, screening out

ideas that lack the potential for ideas that lack the potential for building a successful business building a successful business beforebefore an entrepreneur commits an entrepreneur commits the necessary resources to the necessary resources to building a business plan. building a business plan.

An investigative tool.An investigative tool.

4Chapter 4 Business Plan Copyright 2008 Prentice Hall Publishing

Industry and Industry and Market FeasibilityMarket Feasibility

Product or ServiceProduct or ServiceFeasibilityFeasibility

FinancialFinancialFeasibilityFeasibility

Elements of a Feasibility Elements of a Feasibility AnalysisAnalysis

5Chapter 4 Business Plan Copyright 2008 Prentice Hall Publishing

Industry and Market Feasibility

Product or ServiceProduct or ServiceFeasibilityFeasibility

FinancialFinancialFeasibilityFeasibility

Elements of a Feasibility Elements of a Feasibility AnalysisAnalysis

6Chapter 4 Business Plan Copyright 2008 Prentice Hall Publishing

Industry and Market Industry and Market Feasibility AnalysisFeasibility Analysis

Two areas of focus:Two areas of focus:1.1. Determining how attractive Determining how attractive

an industry is overall as a an industry is overall as a “home” for a new business.“home” for a new business.

2.2. Identifying possible niches a Identifying possible niches a small business can occupy small business can occupy profitably. profitably.

7Chapter 4 Business Plan Copyright 2008 Prentice Hall Publishing

Five Forces ModelFive Forces Model Five forces interact with one another Five forces interact with one another

to determine the setting in which to determine the setting in which companies compete and, hence, the companies compete and, hence, the attractiveness of the industry:attractiveness of the industry:

1.1. Rivalry among companies in the Rivalry among companies in the industryindustry

2.2. Bargaining power of suppliersBargaining power of suppliers3.3. Bargaining power of buyersBargaining power of buyers4.4. Threat of new entrantsThreat of new entrants5.5. Threat of substitute products or Threat of substitute products or

servicesservices

8Chapter 4 Business Plan Copyright 2008 Prentice Hall Publishing

Five Forces ModelFive Forces Model

Industry Competito

rs

Rivalry Among Existing Firms

Buyers

Bargaining PowerBargaining Powerof Buyersof BuyersSuppli

ers

Bargaining PowerBargaining Powerof Suppliersof Suppliers

Substitutes

Potential

EntrantsThreat ofThreat ofNew EntrantsNew Entrants

Threat of Threat of SubstituteSubstituteProducts or Products or ServicesServices

9Chapter 4 Business Plan Copyright 2008 Prentice Hall Publishing

Five Forces ModelFive Forces Model

Industry Competito

rs

Rivalry Among Existing Firms

Buyers

Bargaining PowerBargaining Powerof Buyersof BuyersSuppli

ers

Bargaining PowerBargaining Powerof Suppliersof Suppliers

Substitutes

Potential

EntrantsThreat ofThreat ofNew EntrantsNew Entrants

Threat of Threat of SubstituteSubstituteProducts or Products or ServicesServices

10Chapter 4 Business Plan Copyright 2008 Prentice Hall Publishing

Rivalry Among Rivalry Among CompaniesCompanies

Strongest of the five forcesStrongest of the five forces Industry is more attractive when:Industry is more attractive when:

Number of competitors is large, or, Number of competitors is large, or, at the other extreme, quite smallat the other extreme, quite small

Competitors are not similar in size Competitors are not similar in size or capacityor capacity

Industry is growing fastIndustry is growing fast Opportunity to sell a differentiated Opportunity to sell a differentiated

product or service existsproduct or service exists

11Chapter 4 Business Plan Copyright 2008 Prentice Hall Publishing

Five Forces ModelFive Forces Model

Industry Competito

rs

Rivalry Among Existing Firms

Buyers

Bargaining PowerBargaining Powerof Buyersof BuyersSuppli

ers

Bargaining PowerBargaining Powerof Suppliersof Suppliers

Substitutes

Potential

EntrantsThreat ofThreat ofNew EntrantsNew Entrants

Threat of Threat of SubstituteSubstituteProducts or Products or ServicesServices

12Chapter 4 Business Plan Copyright 2008 Prentice Hall Publishing

Bargaining Power of Bargaining Power of SuppliersSuppliers

The greater the leverage of The greater the leverage of suppliers, the less attractive the suppliers, the less attractive the industry.industry.

Industry is more attractive when:Industry is more attractive when: Many suppliers sell a commodity Many suppliers sell a commodity

productproduct Substitutes are availableSubstitutes are available Switching costs are lowSwitching costs are low Items account for a small portion Items account for a small portion

of the cost of finished productsof the cost of finished products

13Chapter 4 Business Plan Copyright 2008 Prentice Hall Publishing

Five Forces ModelFive Forces Model

Industry Competito

rs

Rivalry Among Existing Firms

Buyers

Bargaining PowerBargaining Powerof Buyersof BuyersSuppli

ers

Bargaining PowerBargaining Powerof Suppliersof Suppliers

Substitutes

Potential

EntrantsThreat ofThreat ofNew EntrantsNew Entrants

Threat of Threat of SubstituteSubstituteProducts or Products or ServicesServices

14Chapter 4 Business Plan Copyright 2008 Prentice Hall Publishing

Bargaining Power of Bargaining Power of BuyersBuyers

Buyers’ influence is high when Buyers’ influence is high when number of customers is small and cost number of customers is small and cost of switching to a competitor’s product of switching to a competitor’s product is low. is low.

Industry is more attractive when:Industry is more attractive when: Customers’ switching costs are highCustomers’ switching costs are high Number of buyers is largeNumber of buyers is large Customers want differentiated productsCustomers want differentiated products Customers find it difficult to collect Customers find it difficult to collect

information for comparing suppliersinformation for comparing suppliers Items account for a small portion of Items account for a small portion of

customers’ finished productscustomers’ finished products

15Chapter 4 Business Plan Copyright 2008 Prentice Hall Publishing

Five Forces ModelFive Forces Model

Industry Competito

rs

Rivalry Among Existing Firms

Buyers

Bargaining PowerBargaining Powerof Buyersof BuyersSuppli

ers

Bargaining PowerBargaining Powerof Suppliersof Suppliers

Substitutes

Potential

EntrantsThreat ofThreat ofNew EntrantsNew Entrants

Threat of Threat of SubstituteSubstituteProducts or Products or ServicesServices

16Chapter 4 Business Plan Copyright 2008 Prentice Hall Publishing

Threat of New Threat of New EntrantsEntrants

The larger the pool of potential new The larger the pool of potential new entrants, the less attractive an industry is.entrants, the less attractive an industry is.

Industry is more attractive to new Industry is more attractive to new entrants when:entrants when:

Advantages of economies of scale are absent.Advantages of economies of scale are absent. Capital requirements to enter are lowCapital requirements to enter are low Cost advantages are not related to company Cost advantages are not related to company

sizesize Buyers are not loyal to existing brandsBuyers are not loyal to existing brands Government does not restrict the entrance of Government does not restrict the entrance of

new companies new companies

17Chapter 4 Business Plan Copyright 2008 Prentice Hall Publishing

Five Forces ModelFive Forces Model

Industry Competito

rs

Rivalry Among Existing Firms

Buyers

Bargaining PowerBargaining Powerof Buyersof BuyersSuppli

ers

Bargaining PowerBargaining Powerof Suppliersof Suppliers

Substitutes

Potential

EntrantsThreat ofThreat ofNew EntrantsNew Entrants

Threat of Threat of SubstituteSubstituteProducts or Products or ServicesServices

18Chapter 4 Business Plan Copyright 2008 Prentice Hall Publishing

Threat of SubstitutesThreat of Substitutes Substitute products or services Substitute products or services

can turn an industry on its head.can turn an industry on its head. Industry is more attractive to new Industry is more attractive to new

entrants when:entrants when: Quality substitutes are not readily Quality substitutes are not readily

availableavailable Prices of substitute products are Prices of substitute products are

not significantly lower than those not significantly lower than those of the industry’s productsof the industry’s products

Buyers’ switching costs are highBuyers’ switching costs are high

19Chapter 4 Business Plan Copyright 2008 Prentice Hall Publishing

Five Forces MatrixFive Forces Matrix

20Chapter 4 Business Plan Copyright 2008 Prentice Hall Publishing

Business PrototypingBusiness Prototyping

Entrepreneurs test their Entrepreneurs test their business models on a small business models on a small scale before committing scale before committing serious resources to launch a serious resources to launch a business that might not work. business that might not work.

Recognizes that a business Recognizes that a business idea is a hypothesis that needs idea is a hypothesis that needs to be tested before taking it to be tested before taking it full scale. full scale.

21Chapter 4 Business Plan Copyright 2008 Prentice Hall Publishing

Industry and Industry and Market FeasibilityMarket Feasibility

Product or ServiceFeasibility

FinancialFinancialFeasibilityFeasibility

Elements of a Feasibility Elements of a Feasibility AnalysisAnalysis

22Chapter 4 Business Plan Copyright 2008 Prentice Hall Publishing

Product or Service Product or Service Feasibility AnalysisFeasibility Analysis

Determines the degree to which a Determines the degree to which a product or service idea appeals to product or service idea appeals to potential customers and identifies the potential customers and identifies the resources necessary to produce it. resources necessary to produce it.

Two questions:Two questions: Are customers willing to purchase our Are customers willing to purchase our

good or service?good or service? Can we provide the product or service to Can we provide the product or service to

customers at a profit? customers at a profit?

23Chapter 4 Business Plan Copyright 2008 Prentice Hall Publishing

Product or Service Product or Service Feasibility AnalysisFeasibility Analysis

Primary research – collect data Primary research – collect data firsthand and analyze it.firsthand and analyze it. Customer surveys and questionnairesCustomer surveys and questionnaires Focus groupsFocus groups

Secondary research – gather data Secondary research – gather data that already has been compiled and that already has been compiled and analyze it. analyze it.

PrototypesPrototypes In-home trialsIn-home trials

24Chapter 4 Business Plan Copyright 2008 Prentice Hall Publishing

Industry and Industry and Market FeasibilityMarket Feasibility

Product or ServiceProduct or ServiceFeasibilityFeasibility

FinancialFeasibility

Elements of a Feasibility Elements of a Feasibility AnalysisAnalysis

25Chapter 4 Business Plan Copyright 2008 Prentice Hall Publishing

Financial Financial Feasibility AnalysisFeasibility Analysis

Capital requirements – must have an Capital requirements – must have an estimate of how much start-up capital estimate of how much start-up capital is required to launch the business.is required to launch the business.

Estimated earnings – forecasted Estimated earnings – forecasted income statements.income statements.

Return on investment – combining the Return on investment – combining the previous two estimates to determine previous two estimates to determine how much investors can expect their how much investors can expect their investments to return. investments to return.

26Chapter 4 Business Plan Copyright 2008 Prentice Hall Publishing

The Business The Business PlanPlan

A written summary of:A written summary of: an entrepreneur’s proposed business an entrepreneur’s proposed business

ventureventure its operational and financial detailsits operational and financial details its marketing opportunities and strategyits marketing opportunities and strategy its managers’ skills and abilities. its managers’ skills and abilities.

Best insurance against launching a Best insurance against launching a business destined to fail or business destined to fail or mismanaging a potentially successful mismanaging a potentially successful company. company.

27Chapter 4 Business Plan Copyright 2008 Prentice Hall Publishing

The Business Plan:The Business Plan:Three Essential Three Essential

FunctionsFunctions1.1. Guiding the company by charting Guiding the company by charting

its future course and defining its its future course and defining its strategy for following it.strategy for following it.

2.2. Attracting lenders and investors Attracting lenders and investors who will provide needed capital.who will provide needed capital.

3.3. Demonstrating that the Demonstrating that the entrepreneur understands the entrepreneur understands the business venture and what will business venture and what will make it succeed. make it succeed.

28Chapter 4 Business Plan Copyright 2008 Prentice Hall Publishing

A Plan Must Pass Three A Plan Must Pass Three TestsTests

The Reality Test - The Reality Test - proving that :proving that : a market really does exist for your product or a market really does exist for your product or

service. service. you can actually build or provide it for the cost you can actually build or provide it for the cost

estimates in the plan.estimates in the plan. The Competitive Test The Competitive Test - evaluates: - evaluates:

a company’s position relative to its customers.a company’s position relative to its customers. management’s ability to create a company that management’s ability to create a company that

will gain an edge over its rivals.will gain an edge over its rivals. The Value Test The Value Test – proving that:– proving that:

a venture offers investors or lenders an a venture offers investors or lenders an attractive rate of return or a high probability attractive rate of return or a high probability of repayment.of repayment.

29Chapter 4 Business Plan Copyright 2008 Prentice Hall Publishing

Why Take the Why Take the Time to Build a Time to Build a Business Plan?Business Plan?

Although building a plan Although building a plan does not guarantee success, does not guarantee success, it does increase your chances it does increase your chances of succeeding in business.of succeeding in business.

A plan is like a road map A plan is like a road map that serves as a guide on a that serves as a guide on a journey through unfamiliar, journey through unfamiliar, harsh, and dangerous harsh, and dangerous territory. Don’t attempt the territory. Don’t attempt the trip without a map!trip without a map!

30Chapter 4 Business Plan Copyright 2008 Prentice Hall Publishing

Key Elements of a Key Elements of a Business PlanBusiness Plan

Title Page and Table of ContentsTitle Page and Table of Contents Executive SummaryExecutive Summary Mission StatementMission Statement Company HistoryCompany History Business and Industry ProfileBusiness and Industry Profile

The relationship among mission, goals, and objectives.

Mission

Goals

Objectives

32Chapter 4 Business Plan Copyright 2008 Prentice Hall Publishing

Key Elements of a Key Elements of a Business PlanBusiness Plan

Title Page and Table of ContentsTitle Page and Table of Contents Executive SummaryExecutive Summary Mission StatementMission Statement Company HistoryCompany History Business and Industry ProfileBusiness and Industry Profile Business StrategyBusiness Strategy Description of Description of

Products/ServicesProducts/Services

33Chapter 4 Business Plan Copyright 2008 Prentice Hall Publishing

Features versus Features versus BenefitsBenefits

FeatureFeature – a descriptive fact about – a descriptive fact about a product or service (“an a product or service (“an ergonomically designed, more ergonomically designed, more comfortable handle”).comfortable handle”).

BenefitBenefit – what a customer gains – what a customer gains from the product or service from the product or service feature (“fewer problems with feature (“fewer problems with carpal tunnel syndrome and carpal tunnel syndrome and increased productivity”). increased productivity”).

34Chapter 4 Business Plan Copyright 2008 Prentice Hall Publishing

Key Elements of a Key Elements of a Business PlanBusiness Plan

Marketing StrategyMarketing Strategy Competitor AnalysisCompetitor Analysis Description of Description of

Management TeamManagement Team Plan of OperationPlan of Operation Forecasted Financial Forecasted Financial

StatementsStatements Loan or Investment Loan or Investment

ProposalProposal

(continued)(continued)

35Chapter 4 Business Plan Copyright 2008 Prentice Hall Publishing

Guidelines for Guidelines for PreparingPreparing

a Business Plana Business Plan Remember: No one can create your plan Remember: No one can create your plan forfor

you.you. Potential lenders want to see financial Potential lenders want to see financial

projections, but they are more interested in projections, but they are more interested in the the strategiesstrategies for reaching those projections. for reaching those projections.

Show how you plan to set your business apart Show how you plan to set your business apart from competitors; don’t fall into the “me from competitors; don’t fall into the “me too” trap.too” trap.

Identify your target market and offer Identify your target market and offer evidence that customers for your product or evidence that customers for your product or service exist. service exist.

36Chapter 4 Business Plan Copyright 2008 Prentice Hall Publishing

Tips on PreparingTips on Preparinga Business Plana Business Plan

Make sure your plan has an attractive Make sure your plan has an attractive cover. (First impressions are crucial.)cover. (First impressions are crucial.)

Rid your plan of all spelling and Rid your plan of all spelling and grammatical errors. grammatical errors.

Make your plan visually appealing. Make your plan visually appealing. Include a table of contents to allow Include a table of contents to allow

readers to navigate your plan easily. readers to navigate your plan easily. Make it interesting. Make it interesting.

(Continued)(Continued)

37Chapter 4 Business Plan Copyright 2008 Prentice Hall Publishing

Tips on PreparingTips on Preparinga Business Plana Business Plan

Your plan must prove that the business Your plan must prove that the business will make money (not necessarily will make money (not necessarily immediately, but eventually).immediately, but eventually).

Use spreadsheets to generate financial Use spreadsheets to generate financial forecasts.forecasts.

AlwaysAlways include cash flow projections. include cash flow projections. Keep your plan “crisp” – between 25 Keep your plan “crisp” – between 25

and 50 pages long.and 50 pages long. Tell the truth – Tell the truth – alwaysalways. .

(Continued)(Continued)

38Chapter 4 Business Plan Copyright 2008 Prentice Hall Publishing

The “Five Cs” The “Five Cs” of Creditof Credit CapitalCapital CapacityCapacity

CollateralCollateral CharacterCharacter ConditionsConditions

39Chapter 4 Business Plan Copyright 2008 Prentice Hall Publishing

Presenting the PlanPresenting the Plan Demonstrate enthusiasm, but don’t be Demonstrate enthusiasm, but don’t be

overemotional.overemotional. Know your audience thoroughly. Know your audience thoroughly. ““Hook” investors quickly with an up-Hook” investors quickly with an up-

front explanation of the venture, its front explanation of the venture, its opportunities, and its benefits to them.opportunities, and its benefits to them.

Hit the highlights; focus on the details Hit the highlights; focus on the details later.later.

Keep your presentation simple – 2 or 3 Keep your presentation simple – 2 or 3 major points. major points.

40Chapter 4 Business Plan Copyright 2008 Prentice Hall Publishing

Presenting the PlanPresenting the Plan Avoid overloading your audience Avoid overloading your audience

with technological jargon.with technological jargon. Use visual aids.Use visual aids. Close by reinforcing the nature of Close by reinforcing the nature of

the opportunity. the opportunity. Be prepared (with details) for Be prepared (with details) for

potential investors’ questions.potential investors’ questions. Follow up with every investor to Follow up with every investor to

whom you make your presentation.whom you make your presentation.

(Continued)(Continued)