A feasibility analysis mainly includes three interrelated components: an industry and market feasibility analysis, a product or service feasibility analysis, and a financial feasibility analysis.
Industry and Market Feasibility Analysis
When assessing the feasibility of a business idea, entrepreneurs find a basic analysis of the industry and targeted market segments a good starting point. The focus in this phase is twofold: 1. to determine how attractive an industry is overall as a home for a new business and 2. to identify possible niches a small business can occupy profitably.
The primary step in assessing industry attractiveness is to paint a picture of the industry with broad strokes, assessing it from a macro level.
- Answering the following questions will help to determine:
- How large is the industry?
- How fast is it growing?
- Is the industry as a whole profitable?
- Is the industry characterized by high profit margins or razor-thin margins?
- How essential are its products or services to customers?
- What trends are shaping the industrys future?
- What threats does the industry face?
- What opportunities does the industry face?
- How crowded is the industry?
- How intense is the level of competition in the industry?
- Is the industry young, mature, or somewhere in between?
- Addressing these questions would aid entrepreneurs determine whether sufficient demand for their products and services exists or not.
A highly useful tool to analyze an industrys attractiveness is the five-forces model. Five forces interact with one another to determine the setting in which companies compete and hence the attractiveness of the industry: The rivalry among the companies competing in the industry, the bargaining power of suppliers to the industry, the bargaining power of buyers, the threat of new entrants to the industry, and the threat of substitute products or services.
However, the strongest of the five forces in most industries is the rivalry, which exists among the businesses competing in a particular market. Businesses in a market are jockeying for position in an attempt to gain a competitive advantage. When a company creates an innovation or develops a unique strategy that transforms the market, competing companies must adapt or run the risk of being forced out of business. This force makes markets a dynamic and highly competitive place. Generally, an industry is more attractive when the following conditions exist:
- The number of competitors is large or, at the other extreme, quite small (fewer than five).
- Competitors are not similar in size or capability.
- The industry is growing at a fast pace.
- The opportunity to sell a differentiated product or service exists.
It is all about opting for the best opportunity in the business!