Faculty of Business / Faculty of Management

(FOB / FOM)

PBU0035
Introduction to Business Plan

Foundation in Management

NOTES

Topic 2: Opportunity Analysis

FOSEE, MULTIMEDIA UNIVERSITY (436821-T)

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Melaka Campus, Jalan Ayer Keroh Lama, 75450 Melaka.
PBU0035 Introduction to Business Plan Topic 2

Topic 2: Opportunity Analysis

From “Preparing Effective Business Plans” by Bruce R. Barringer

FEASIBILITY ANALYSIS
 Feasibility analysis is the process of determining if a business idea is viable
 The feasibility analysis step, along with the idea screening step, is investigative in
nature and is designed to critically asses the merits of a business idea
 The most compelling facts a company can include in a business plan are the results of
its own feasibility analysis, especially feedback from industry experts and prospective
customers

1) Product/Service Feasibility
o Product/service feasibility is an assessment of the overall appeal of the product or
service being proposed
a) Product/Service Desirability
 is to affirm that the proposed product or service is desirable and serves a
need in the marketplace
 The proper mindset is to get a general sense of the answers to your product
desirability questions rather than try to reach final conclusions
 Concept Test
 A concept test involves showing a preliminary description of a product
or service idea, called a concept statement, to industry experts and
prospective customers to solicit their feedback
 A concept statement is normally a one-page document which includes
the following: (1) description of product or service, (2) intended target
market, (3) benefits of product or service, (4) description of how the
product or service will be positioned relative to competitors, (5)
description of how the product or service will be sold, and (6) a brief
description of company’s management team
 Concept statement should be shown to 5 to 10 people who are familiar
with the industry the firm hopes to enter
 Attached to the concept statement should be a survey that asks
participants to (1) tell you three things they like about the product or
service idea, (2) provide you three suggestions for making it better (tell
you whether they think the product or service idea is feasible), and (3)
share additional comments or suggestions
b) Product/Service Demand
 is to determine if there is demand for the product or service
 Buying Intentions Survey
 A buying intentions survey gauges customer interest in a product or
service
 The buying intentions survey consists of a concept statement with a
short survey attached
 The statement and survey should be distributed to 15 to 30 potential
customers

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 The statement and survey typically features a question that asks how
likely the subject would be to buy the product or service

2) Industry/Target Market Feasibility Analysis

o Industry/target market feasibility is an assessment of the overall appeal of the
industry and the target market for the product or service being proposed
o Most firms do not try to service their entire industry, only a specific target market
within the industry
o It’s important to assess both the broad industry and your specific target market
a) Industry Attractiveness
 In general, the most attractive industries for start-ups are large and
growing, are young rather than old, are early rather than late in their life
cycle, and are fragmented rather than concentrated
 Some industries are characterized by such high barriers to entry, or the
presence of one or two dominant players, that potential entrants are
essentially shut out
 You should also note the degree to which environmental and business
trends are moving in favor of rather than against the industry
b) Target Market Attractiveness
 By focusing on a target market, a firm can usually avoid head-to-head
competition with industry leaders, instead of serving a specialized market
very well
 The challenge is to find a target market that’s large enough for the
proposed business, yet is small enough to avoid attracting larger
competitors
 Often, information from more than one industry and/or market must be
collected and synthesized to make an informed judgment, especially if the
firm is pioneering a unique area of the marketplace
c) Market Timeliness
 Determine if the window of opportunity for the product or service is open
or closed
 Study the simple economics of the industry to determine whether the
timing is right for a new entrant
 Firms that fail to conduct a thorough industry and target market analysis
often find that the market is not large enough to maintain and grow the
business

3) Organizational Feasibility Analysis

o Organizational feasibility analysis determines whether a proposed business has
sufficient management expertise, organizational competence, and resources to
successfully launch its business
a) Management Prowess
 A start-up should assess the prowess, or ability, of its initial management
team
 Individuals starting the firm should conduct honest and candid self-
assessments

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 Two of the most important factors are passion for the business and
understanding of the markets in which the firm will compete
 Additional factors that define management prowess include prior
entrepreneurial experience, depth of professional and social networks,
degree of creativity, experience in cash flow management, and whether the
team has college degrees
b) Resource Sufficiency
 The focus in organizational analysis is on non-financial resources because
financial feasibility is considered separately
 Identify the 8 to 12 most important and potentially problematic non-
financial resources and assess whether they are available
 Examples of non-financial resources include office space, manufacturing
space, key management employees, key support personnel, and support
from state and local governments if applicable
 One easily overlooked resource sufficiency issue that should be considered
is proximity to similar firms, creating a cluster that can increase
productivity of the participating firms

4) Financial Feasibility
o For feasibility analysis, a preliminary financial analysis, is normally sufficient.
o The most important issues to consider at this stage are total start-up cash needed,
financial performance of similar businesses, and overall financial attractiveness of
the proposed venture
o More complete financial projections will be included in the business plan
a) Total Start-up Cash Needed
 Try to determine total cash needed to prepare the business to make its first
sale
 A detailed explanation of where the money will come from should be
provided
 If money will come from friends, credit cards, or a home equity line of
credit, a reasonable plan should be stipulated to repay the money
 When projecting start-up expenses, it is better to overestimate rather than
underestimate the costs involved
b) Financial Performance of Similar Businesses
 Estimate a proposed start-up’s potential financial performance by
comparing it to similar, already established businesses
 Utilize archival data available online, including financial reports on firms
 Some industry trade associations publish data on the sales and profitability
of firms in their industries
 Basic Internet searches are also helpful
 Simple observation and leg work can also be used to gauge the type of
sales to expect by estimating the number of customers and average
purchase amount at various times of day
c) Overall Financial Attractiveness of the Proposed Venture
 The extent to which a proposed business appears positive relative to each
factor is based on an estimate or forecast, not actual performance

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 Important factors include the extent to which sales can be expected to

grow during the first few years of the venture, percentage of recurring
revenue to anticipate, the likelihood that internally generated funds will be
available within two years, and the availability of exit opportunities for
investors if applicable

INDUSTRY ANALYSIS
 An industry is a group of firms producing a similar product or service
 Industries vary along many dimensions, including size, growth rate, structure,
financial characteristics, and overall attractiveness
 The trends affecting an industry also matter
 It is important that the industry analysis section of your business plan focus strictly on
the firm’s industry rather than the industry and the target market simultaneously
o A target market is the limited portion of an industry that a firm goes after or tries
to appeal to at a certain point in time
 It’s premature for a new firm to discuss a specific target market until an
understanding of the broader industry is obtained
 The industry analysis should appear early in the business plan because it logically
precedes the analysis of a firm’s target market and marketing strategy

1) Industry Definition
o Briefly (no more than several sentences) describe the firm’s industry
o A firm’s industry can be defined narrowly or broadly (e.g., JetBlue can be defined
as in the airline industry or in the transportation industry)
o The definition determines the scope of the firm’s overall sphere of concern
o If your firm operates in two or more industries, you should identify all the
industries that it participates in
o It may be difficult to identify an industry that matches an innovative new product
or service
- In the case of an innovative product or service, improvise by selecting
industries that represent the closest fit, and then include additional pertinent
information

2) Industry Size, Growth Rate, and Sales Projections

o This section discusses the size (in dollars), the growth rate (in percent), and the
future sales projections for the industry or industries our firm will be entering
o The key is to make sense of the numbers and present them in a way that builds the
credibility of your business plan
o There are four general rules of thumb for completing this section:
- Always display financial information, such as industry sales and growth rate,
in a multiyear format, making it easy to spot trends
- Display your information graphically if possible
- Provide information about your industry on a regional or local basis if
appropriate

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- Avoid the temptation to report only positive or flattering information about

your industry
a) Industry Size
 Industry size is normally displayed in dollars over a three- to five-year
period
 The ideal size for a start-up is large enough to allow different competitors
to serve different segments profitably but small enough that it isn’t
attracting the immediate attention of larger potential competitors
 If your industry is broken down into easily identifiable segments, it may
be appropriate to report the share (in percentage) of each segment
 Some plans also report the contribution that a specific industry makes to
its larger industry sector
b) Industry Growth Rate
 An industry’s growth rate should be reported on a percentage basis along
with an interpretation of what the numbers mean
 Some plans comment on how the industry growth rate compares to similar
industries
 If you are defining an industry that isn’t being actively tracked by a
reliable source, finding good sales data will require creativity and
persistence
c) Industry Sales Projections
 This section should report sales projections for your industry
 You can quote from established sources, but do so sparingly; readers will
want to know how you have interpreted the data
 Include concrete numbers for what you think your industry’s sales and
sales growth rate will be for the next one to three years

3) Industry Characteristics
o This section talks about the structure of your industry and lays out its competitive
landscape
o The four key issues to deal with are: industry structure, the nature of the
participants in an industry, key ratios, and the industry’s key success factors
a) Industry Structure
 Industry structure refers to how concentrated or fragmented the industry is
and whether the industry’s competitive landscape is generally attractive or
unattractive
 Report on how concentrated or fragmented your industry is
 Concentrated industries are dominated by a few large firms
 Fragmented industries include a large number of smaller companies
 Normally, an industry is concentrated if large capital investments are
required to participate, or if it has matured and consolidation has taken
place
 An industry is typically fragmented if it’s in the emergence stage of its
life cycle and/or the cost of entry is relatively low
 Most firms launch into a fragmented industry; no explanation need be
made about this approach

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 If you plan to launch into a concentrated industry, you will need to

explain how you plan to compete
 Some firms compete in concentrated industries by identifying a niche
that is less expensive to compete in, or by using innovation to lower
the cost to enter the industry
 You will also need to report on the general attractiveness of an
industry’s competitive landscape
 Attractiveness can be evaluated using Michael Porter’s “five
forces” model:
 Relatively high barriers of entry to keep out competition
 Not enough rivalry to create cutthroat competition
 No good substitutes for the basic product or service
 Limited power of suppliers to negotiate input prices up
 Limited power of buyers to force selling prices down
b) Nature of Participants
 In this brief section, you will provide your reader with a “feel” for the
nature and mixture of firms in your industry
 You want your reader to visualize how your firm will fit in or see the gap
that your firm will fill
 You should also discuss how the industry is segmented
 If you know which segment is growing the fastest and/or is the most
profitable, that’s good information to convey
 Some industries have clearly bifurcated, with the most successful
companies serving either the top end of the market or the bottom end
c) Ratios
 Report an industry’s key financial ratios and other ratios of interest
 This information provides a point of reference to compare a company’s
financial and non-financial projections against
d) Key Success Factors
 Key success factors define what an organization in the industry has to be
good at to be successful
 Most industries have 6 to 10 key factors
 Most successful firms are competent in all their industry’s key factors and
differentiate themselves by excelling in two or three areas

4) Industry Trends
o This is arguably the most important section of an industry analysis because it
often lays the foundation for a new business idea in an industry
o The two types of trends that are the most important to focus on are environmental
trends and business trends

a) Environmental Trends
 The most important environmental trends are economic trends, social
trends, technological advances, and political and regulatory changes

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 Some industries experience slow or no growth for years, and then

experience sudden upswings in growth as environmental change turns in
favor of the industry

a) Business Trends
 Other trends impact industries that aren’t environmental trends per se, but
are important to mention
 You can’t cover every possible fact affecting an industry, but you should
mention the major trends

5) Long-term Prospects
o The industry analysis should conclude with a brief statement of your beliefs
regarding the long-term prospects for the industry
o No new information should be provided at this point; rather draw from the
preceding sections of the industry analysis to support your conclusions

6) How the Industry Analysis Affects and Is Affected by Other Sections of the Plan
o Industry analysis is a foundational aspect of evaluating the merits of a prospective
business venture
o A careful analysis of a firm’s industry lays out what is realistically possible and
what isn’t realistically possible for a start-up to achieve
o Most start-ups are constrained enough by their industries that their performance
falls in line with what you would expect after reading their industry analysis
o The industry analysis affects other sections of the business plan because it is a
point of reference to work from
o It helps temper the enthusiasm of business plan writers and provides a useful
reference for a plan’s readers

MARKET ANALYSIS
 Market analysis breaks the industry into segments and zeroes in on the specific
segment (or target market) that the firm will tackle
 The market analysis section of a business plan is distinctly different from the
marketing section
 The market analysis section focuses on describing a firm’s target market, customers,
and competitors, how it will compete in the marketplace, and potential sales and
market share
 The market analysis is an extremely important section of a business plan for two
reasons:
o The market analysis helps define the nature of the business and the remainder of
the plan
o It affirms that a company has a well-thought-out target market, understands its
customers, and can generate sales in the face of competition

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 To raise investment capital, a firm must demonstrate that its target market has
sufficient potential to enable it to rapidly increase sales and return to its investors an
amount that is 5 to 20 times the original investment

1) Market Segmentation and Target Market Selection

o A firm must answer the basic question, “Who are our customers, and how will we
appeal to them?”
o In some cases, a firm will have two markets, and you should describe the
characteristics of both markets
a) Market Segmentation
 Market segmentation is the process of dividing a market into distinct
subsets (or segments) that behave in the same way or have similar needs
 Markets can be segmented in many ways, such as by geography (city,
state, country), demographic variables (age, gender, family size, income),
psychographic variables (personality, lifestyle, values), behavioral
variables (benefits sought, product usage rate, brand loyalty), and product
type (varies by product)
 There are requirements for successful market segmentation:
 Homogeneity of needs and wants within the segment
 Heterogeneity of needs and wants among segments
 Differences within the segment are small compared to differences
across segments
 The segment is distinct enough that its members can be easily
identified
 It should be possible to determine the size of the segment
 The segment should be large enough to be profitable
 The entrepreneurial process often results in the identification of new
segments of an industry that weren’t previously considered

b) Selecting a Target Market

 After a firm segments its market, it selects a segment within the market to
target
 A big mistake is to define the target market too broadly or to try to target
more than one segment simultaneously
 Focusing intently on a single market allows a firm to become an expert in
a specialized area rather than trying to spread itself too thin
 A firm should assess the size of the market to make sure it is large and
healthy enough to meet the firm’s objectives

c) Target Market Size and Trends

 Estimating the size of a target market can be tricky; in many cases, you
must literally invent a methodology for making an estimate
 The key is to explain the path that led to your conclusions
 If you are producing an enhanced version of something that is already
available, numbers will be fairly easy to get

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 Estimating the size of a target market for a market that doesn’t currently
exist, or a market that is specific to a particular location or geographic
area, is harder
 Readers will normally judge projections based on (1) the reasonableness
of the assumptions made, (2) the degree to which the numbers are
anchored in facts, and (3) the extent to which it appears that a good faith
effort was made to be as accurate as possible
 This section should also comment on industry trends that have the
potential to affect the target market positively or negatively

2) Buyer Behavior
o It’s important to include a section that deals directly with the behavior of the
consumers in a firm’s target market
o In many business-to-business start-ups, it’s important to discern specifically who
the “decision makers” are in the businesses you’ll be trying to sell to
o The length of a customer’s buying process is often an important concern
- A high-involvement purchase is one for which the buyer is prepared to spend
a considerable amount of time and effort searching
- A low-involvement purchase is one that a buyer makes with minimum thought
because it does not have much impact on his or her life

3) Competitor Analysis
o A competitor analysis is a detailed analysis of a firm’s competition
o It helps a firm understand the positions of its major competitors and the
opportunities that are available
o You should never say that you don’t have any competitors
a) Identification of Direct, Indirect, and Future Competitors
 The first step in a competitor analysis is determining who the competition
is
 You should list a handful of competitors from each category comprising
your direct competitors, indirect competitors, and future competitors:
 Direct competitors—businesses that offer a product that is very similar
to yours, targeting the same customers that you are
 Indirect competitors—offer close substitutes to the product you will be
offering, targeting the same basic need that will be met by your
product
 Future competitors—companies that are not yet direct or indirect
competitors but could move into one of these roles at any time
 You should provide a short assessment of the scope and intensity of your
competition
 The next section focuses on your competitive analysis grid, which
compares your firm to your major competitors
 The competitive analysis grid will require you to engage in competitive
intelligence, which is the process of gathering information about your
competitors
b) Competitive Analysis Grid

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 A competitive analysis grid is a tool for organizing and presenting the

information you collect about your competitors
 Show the key success factors for firms in your target market on the
vertical axis of the grid, and then show your firm along with your four
or five major direct competitors on the horizontal axis
 In each box, rate yourself relative to your competitors on each of key
success factors
 Completing the competitive analysis grid may reveal that you’re at a
disadvantage over your competitors and help you make adjustments

4) Estimate of Annual Sales and Market Share

o The final section of the market analysis focuses on computing an estimate of your
firm’s initial annual sales and market share
o There are four basic ways for a new firm to estimate its initial sales:
- Contact the premier trade associations in your industry and ask if they track
sales numbers for businesses that are similar to the business you plan to start
- Find a comparable firm, or a company that sells a comparable product
- Conduct Internet searches to try to find magazine and newspaper articles that
focus on firms in your industry
- Use a multiplication method to try to arrive at a reasonable number
o Sometimes the multiplication method gets fairly complicated, requiring that you
consider several industries and conduct primary research to get a good estimate
o The ideal scenario for start-ups is to use all four methods of estimating initial
sales, and then compare estimates

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