Project Formulation

Type of Objectives in Project formulation i. General Objectives ii. Operational Objectives

Stages of Project Formulation: 1. Feasibility Analysis 2. Economic Analysis 3. Technical Analysis 4. Input Analysis 5. Financial Analysis 6. Social cost-benefit analysis 7. Pre-investment analysis

FEASIBILITY ANALYSIS

What Is Feasibility Analysis?

Feasibility Analysis
Preliminary evaluation of idea to determining if its worth

pursuing Provides more secure notion that a business idea is viable

Did analysis, feasible business: Intuit (Quicken, Quickbooks, etc.)
Personal experience, observed others, surveyed customers

Did analysis, not feasible: Retailing Insights (grocery cart)

Determined not a sufficient scale for advertising, needed large proportion of grocery stores Dropped idea, focused on core competency, developed Trakus

No analysis, failed firm: Iridium (satellite phones)

Too complex technology, too long to develop, new technology took over, line of sight to satellite, large phone, low battery power

Preparing a Concept Statement

Components of Concept Statement (similar to elevator
pitch components)
Description of the product or service Description of target market

Benefits of the product or service (value proposition)

Description of product/service differentiators Description of how product/service sold/ distributed

Description of the founder(s) of the firm

When To Conduct a Feasibility Analysis

Timing of Feasibility Analysis
After concept statement evaluation
After opportunity recognition, before business plan Before a lot of resources are invested

Feasibility Analysis
Figure 3.1 Role of feasibility analysis in developing successful business ideas

Overview of Full Feasibility Analysis

(4 forms of feasibility analysis)
Product/Service Feasibility
Composed of two primary tests Concept testing Usability testing

Industry/Market Feasibility
Three primary issues a proposed business should consider: Industry attractiveness Market timeliness Identification of a niche market.

Organizational Feasibility
There are two primary issues to consider in this area: Management prowess Resource sufficiency

Financial Feasibility
The most important issues to consider at this stage are: Capital requirements Financial rate of return Overall attractiveness of the investment

Product/Service Feasibility

Product/Service Feasibility Analysis

Assessment of overall appeal of proposed product/service

Main idea: before rushing to development, be sure product/service is what prospective customers want

Two components of product/service feasibility analysis:

1. Concept testing 2. Usability testing

Product/Service Feasibility: 1st Component

Concept Testing
Purpose: Gauge customer interest, desirability, purchase

intentions
Involves showing a representation of product/service to

prospective users
Occurs before the prototype stage Websites and graphic designs are taking this to a new level

Concept test concept statement

Concept test: tests feasibility of specific product/service idea Concept statement: is a preliminary evaluation of entire business idea

Product/Service Feasibility: 3 reasons to conduct

1. Validate underlying premises of product/ service idea

Use phone interviews, focus groups, watch consumers perform tasks, customer advisory boards
Ex: PepsiCo developed model of 5 types of teens and tries to predict how trends move through teen populations

2. Help developing idea

Iteratively show idea to potential customers and make changes along the way Ex: IDEO product development firm

3. Estimate potential market share

Survey questions Market research surveys

Caution: Numbers always optimistic

Product/Service Feasibility: 2nd Component

Usability Testing
Purpose: determine ease-of-use and users perceptions of

using product
While tempting to rush a product/service to market usability tests are good investments of resources Eliminate potentially frustrating aspects of product/services Involves creating a physical prototype and giving it to users, measuring usage results, and making modifications as necessary

Iterative in nature
Also called: user tests, beta tests, or field trials

Product/Service Feasibility: 5 Benefits

1. Getting product right the first time

2. Create a beta (or early adopter community)

3. Avoid obvious flaws in product/service design
MobileStar wireless hotspots

4. Use time and resources more efficiently 5. Potentially identify complementary product/

service offerings
iPod accessories

Overview of Full Feasibility Analysis

Product/Service Feasibility
Composed of two primary tests Concept testing Usability testing

Industry/Market Feasibility
Three primary issues a proposed business should consider: Industry attractiveness Market timeliness Identification of a niche market.

Organizational Feasibility
There are two primary issues to consider in this area: Management prowess Resource sufficiency

Financial Feasibility The most important issues to consider at this stage are:
Capital requirements Financial rate of return Overall attractiveness of the investment

Industry/Market Feasibility Analysis

Industry/Market Feasibility Analysis

Purpose: assess overall appeal of the market 3 primary issues to consider:
1. Industry attractiveness, 2. Market timeliness, and 3. Identification of a niche market

Industry/Market Feasibility Analysis: Industry Attractiveness

Issue 1: Industry Attractiveness
Primary determinant of feasibility is attractiveness of

industry chosen
Characteristics of attractive industries:
Large and growing (growth is very important)

Industries are important to customers (e.g., must haves vs. likes)

Early in the industry lifecycle to avoid price competition Industries are not crowded with competitors

How to assess industry attractiveness?

Forces in the broad environment (e.g., technological, sociocultural/demographic, political/legal, economic, global trends) Porters Five Forces analysis (well cover next week) Other primary and secondary research

Industry/Market Feasibility Analysis: Market Timeliness

Issue 2: Market Timeliness
Will the market be receptive to the product/service? If its a modification on existing offerings (e.g., cell phones

with cameras) ask:

Is the window of opportunity open? Are customers buying? Are competitors making money?

If its a breakthrough product/service (e.g., Yahoo with

internet search engines, eBay with online auctions, etc.) ask:

Can we capture a first-mover advantage?
Example: Microsoft in computer operating systems

Will we suffer from a second-mover advantage?

Example: IBM vs. Dell in personal computer retailing

Industry/Market Feasibility Analysis: Niche Markets

Issue 3: Identification of a Niche Market
Niche markets are places in larger market segments that

represent narrower groups of customers

2 reasons for new firms to sell to niche markets:
Allows a firm to establish itself in industry and avoid competing against major competitors (e.g., specialty retailers vs. Wal-Mart) Allows a firm to focus on serving specialized markets very well Avoids trying to be everything to everybody in a broad market

Successful example: buyandhold.com and small scale

investments
Problematic example: Iridium and satellite phones (tried to

serve everyone)

Overview of Full Feasibility Analysis

Product/Service Feasibility
Composed of two primary tests Concept testing Usability testing

Industry/Market Feasibility
Three primary issues a proposed business should consider: Industry attractiveness Market timeliness Identification of a niche market.

Organizational Feasibility
There are two primary issues to consider in this area: Management prowess Resource sufficiency

Financial Feasibility The most important issues to consider at this stage are:
Capital requirements Financial rate of return Overall attractiveness of the investment

Organizational Feasibility Analysis

Organizational Feasibility
Purpose: determine if business has sufficient

skills/resources to bring product/service to market successfully

Non-financial factors important to consider here
2 primary issues to consider:

1. Management prowess 2. Resource sufficiency

Organizational Feasibility Analysis: Management Prowess

Issue 1: Management Prowess
Firm must evaluate the ability of the management team
Determine if has the passion and expertise to launch the

venture 2 most important factors in this area:

Passion the solo entrepreneur/founding team has for the idea Extent the entrepreneur/founding team understands the markets in which the firm will participate

Ventures with established networks have an advantage

Successful Example: eBay

Failed Example: Garden.com (e.g., no gardening/ gardening

retail expertise

Organizational Feasibility Analysis: Resource Sufficiency

Issue 2: Resource Sufficiency
Assessment of resources needed to launch proposed

venture Focus is on nonfinancial resources:

Availability of affordable office or lab space, Likelihood of government support, Labor pool quality, Proximity to key suppliers, customers, and similar firms (clusters) Likelihood of strategic partnerships, Likelihood of attaining IP

To test resource sufficiency: list critical nonfinancial

resources needed to move idea forward successfully

If resources not available, it may be impractical to proceed with the business idea

Overview of Full Feasibility Analysis

Product/Service Feasibility
Composed of two primary tests Concept testing Usability testing

Industry/Market Feasibility
Three primary issues a proposed business should consider: Industry attractiveness Market timeliness Identification of a niche market.

Organizational Feasibility
There are two primary issues to consider in this area: Management prowess Resource sufficiency

Financial Feasibility The most important issues to consider at this stage are:
Capital requirements Financial rate of return Overall attractiveness of the investment