FEASIBILITY PLANNING Dr S. UDAYASHANKAR Professor MSNM BESANT INSTITUTE OF PG STUDIES MANGALORE
CHAPTER CONTENTS Planning Planning
paradigm for for new ventures
Stages of
growth model
Fundamentals
of a good feasibility plan
Components of
feasibility plan
MODEL FOR NEW VENTURES No
universally accepted accepted “Model” of entrepreneurship.
Similarities
among the models suggest a paradigm, a paradigm, or
a general pattern of how to progress from an abstract idea to achieving sustained sales. Paradigm
encompasses a feasibility plan.
Different
models suggest different sequences for
creating new ventures.
THE FOUR STAGE GROWTH MODEL The four stage growth model is the general paradigm for new venture development. It consists of distinct activities essential for a new venture to progress from an idea to a substantial enterprise. The four stages are: 1. PRE-START-UP STAGE 2. START-UP STAGE 3. EARLY GROWTH STAGE 4. LATER GROWTH STAGE
PRE-START-UP STAGE
The period during which entrepreneurs plan the venture and do the preliminary work of obtaining resources and getting organized prior to start-up. Entrepreneurs will try to answer questions about production, operations, markets, competitors, costs, financing, and potential profits.
PRE-START-UP ACTIVITIES I. DEFINING BUSINESS CONCEPT What is the purpose of the venture? What does the entrepreneur want to accomplish with the business? II. PRODUCT-MARKET STUDY Product research: Is the product or service feasible? Realistic? Market research: Who will buy? Where are they? What niche? What competitors exist?
PRE-START-UP ACTIVITIES III. FINANCIAL PLANNING
Financial projections: What cash is needed? How will income be generated? What expenses are expected? What is invested? Borrowed? What is needed to meet operating requirements? IV. PRE-START-UP IMPLEMENTATION The entrepreneur must find resources, purchase beginning inventory, hire those needed at start-up, and obtain necessary licenses, permits, leases, facilities, and equipment.
START-UP STAGE It is the initial period of business when the entrepreneur must position the venture in a market and make necessary adjustments to assure survival. The start-up stage has no definite time frame, and there are no models to describe what a business does during this stage. The two objectives of the entrepreneurs are: 1. to meet operating objectives such as satisfying revenue and cost targets, and 2. to position the venture for long term growth.
EARLY GROWTH STAGE
A period of rapid development and growth when the venture may undergo major changes in markets, finances, and resource utilization. A period of intense monitoring, and growth can occur at different rates along a long continuum, ranging from slow growth through higher sales to explosive growth through quantum changes in consumer demand.
LATER GROWTH STAGE
The evolution of a venture into a large company with active competitors in an established industry when professional management may be more important than entrepreneurial verve. Companies reaching this stage often “go public” with stock offerings. Family fortunes turn into corporate equity positions, private investors convert their holdings into publicly traded securities, and management teams replace the entrepreneurial cadre.
UNDERSTANDING THE FOUR STAGE GROWTH PARADIGM During
the pre-start-up stage, the focus is on product, service, and market planning. The start-up stage requires entrepreneurs to focus on implementation and early positioning. During the early growth stage, they are concerned with rapid changes in sales and resources. During the later growth stage, they must make a successful transition from personally managed enterprises to professionally managed companies.
FUNDAMENTALS OF A FEASIBILITY PLAN
A feasibility plan covers the full range of business planning activities, but it does not require the depth of research or details expected for an established enterprise. A feasibility plan is an outline of potential issues to address and a set of guidelines to help an entrepreneur make better decisions.
FUNDAMENTALS OF A FEASIBILITY PLAN Feasibility
plan should be an honest plan with wellsupported information. It should clearly identify products, services, markets, and the founders. It should be easy to read, complete, and accurate. Abstract language has to be avoided. It is wise to include a strong “nondisclosure statement” that states information in the plan is proprietary and cannot be copied, disclosed, shared, or otherwise compromised. This is to protect entrepreneurs from having their ideas stolen. Make the plan readable by keeping it short.
COMPONENTS OF A FEASIBILITY PLAN 1. Executive Summary 2. Business concept 3. Product or Service 4. Market research and analysis 5. Market Plan 6. Manufacturing or operations 7. Entrepreneurial team 8. Financial documentation
KEY ELEMENTS OF EXECUTIVE SUMMARY 1. Venture defined: Describe the purpose and nature of the
business 2. Product or Service: Describe the product or service to be sold. 3. Market characteristics: Describe market size, location,
and customers. 4. Entrepreneurial team: Describe the founders, key
people, and their roles. 5. Financial summary: Describe estimates of revenue and
expenses, founder’s equity, debt and capital needed.
BUSINESS DESCRIPTION Describe
evolutionary steps that led to the business formation. Explain the nature of market demand. Is the firm responding to an established demand, or is it trying to establish a new product or service in untested markets? Explain the nature of the business by clearly stating how the firm will operate and what the founders intend to accomplish. Explain the firm’s technological profile including description of equipments, wholesale networks, foreign licensing agreements etc.
PRODUCTS OR SERVICES Describe
the distinctive characteristics of the product, how it works or is used, materials, costs, methods of manufacturing, proprietary protection (patents, trade marks, or copyrights), and potential competing (substitute) products. Most new products also will require validated testing, and many will require approval by regulatory agencies. For example, dental instruments and products have to be approved by the Food and Drug Administration (FDA). Restaurants and medical testing laboratories have to meet government health and safety requirements. Educational institutions are required to meet educational credential standards and comply with central and state regulations.
MARKET RESEARCH AND ANALYSIS The most important and most difficult part of the plan. Provide a credible summary of potential customers, markets, competitors, and assumptions about pricing, production, and distribution. All of them must relate to the future period of operations, not merely describe what exists at the pre-start-up stage. 1. IDENTIFY POTENTIAL CUSTOMERS: Demographic profile of customers - Characteristics of customers, age, sex, education, income, occupation, etc. Buying habits and relevant information for new venture.
MARKET RESEARCH AND ANALYSIS 2. EVALUATE MARKETS:
Future markets and trends or changes. Window of business opportunity Niche position information 3. ANALYZE COMPETITORS: Existing competitors with similar products/services Future competitors and ease of entry Industry structure
MARKET RESEARCH AND ANALYSIS 4. DESCRIBE ASSUMPTIONS:
Market niche for positioning firm Pricing approach used in plan Distribution or method of making a market 5. SALES FORECAST: Indicate the quantity of sales and expected gross sales revenue during the plan period.
ELEMENTS OF THE MARKETING PLAN The following are the main marketing activities: PRODUCT OR SERVICES: Quality and reliability, use, and how the product or service will be positioned in growth markets. PRICING SYSTEM: Pricing methods, discounts, quantity and bulk prices, methods to set prices. PROMOTIONAL STRATEGIES: Strategy of combining appropriate uses of public relations, advertising, displays, events, demonstrations, personal sales, etc.
ELEMENTS OF THE MARKETING PLAN DISTRIBUTION
CHANNELS: Use of market channels including retail, wholesale, catalog, telemarketing, personal sales representatives, or other approaches. SERVICES AND WARRANTIES: Description of service-after-sale policies, repair services, guarantees, and product warranties. MARKETING LEADERSHIP: Define leadership roles, persons responsible for marketing and sales.
MANUFACTURING OR OPERATIONS PLAN This is important for ventures that manufacture, design, or sell products, as well as for service firms that require capital equipment. The following are the main elements of manufacturing or operations plan: 1. FACILITIES: Facilities include fixtures, furniture, equipment, parking space, and renovations necessary to open for business. Equipment lists are usually prepared so that potential investors can evaluate lease-buy decisions and identify collateral. Start-up costs for renovations, fixtures, and equipment installation should be itemized because they represent “sunk costs” – costs that are essential and unrecoverable if the venture fails to open for business.
MANUFACTURING OR OPERATIONS PLAN
2. INVENTORY MANAGEMENT: Entrepreneurs have to explain their inventory control systems. Inventory must be purchased well in advance of sales. Inventory expenses will always precede sales revenue. Poor inventory and purchasing controls can result in “stock -outs” during peak periods and excessive inventory stockpiled during periods of poor sales. Poor inventory management may lead to business failure. 3. HUMAN RESOURCE REQUIREMENTS: Human resource requirements should be estimated with details of the number of personnel and types of skills needed.
MANUFACTURING OR OPERATIONS PLAN
4. OPERATIONS:
R & D, manufacturing process, service structure, quality control, safety and maintenance activities should be described.
5.
LEGAL AND INSURANCE ISSUES: Entrepreneurs should consider insurance and legal protection to their business to avoid disasters.
THE ENTREPRENEURIAL TEAM •
Entrepreneurs must take care to profile the entrepreneurial team honestly and effectively. They should emphasize team members’ strengths, past successes, and positive characteristics. Each person’s role in the new venture should be described briefly, including board members or investors who may not be involved directly in operations yet be able to influence decisions.
FINANCIAL DOCUMENTATION Financial statements for a new venture, called pro formas, are projections based on previously defined operating and marketing assumptions. The important financial documents are the following: Profit and loss statement or income statement showing revenue, cost of goods sold, operating expenses, and net income. Cash flow budget showing actual cash flow rather than accrual income Projected balance sheet summarizing assets and liabilities. Break-even analysis.
RESPONSIBILITY FOR FEASIBILITY PLAN The entrepreneur knows everything about the proposed business and, therefore, the entrepreneur is ultimately responsible for feasibility planning. No outsider will have the same vision and motivation. The entrepreneur can get assistance from various people and agencies to create the plan, but the responsibility of its composition rests entirely on the entrepreneur. It is a toolbox of decision-making criteria and a synopsis of expectations, objectives, and essential activities.
QUESTIONS
1.
Discuss the concept of a planning paradigm for new ventures. 2. What do you mean by ‘Feasibility Plan’? Explain the fundamentals of feasibility plan. 3. Explain the major components of an effective feasibility plan. 4. Explain in detail with examples ‘Technical feasibility’ and ‘Economic viability’ of a business opportunity. 5. Describe the four stage growth model of entrepreneurship.
QUESTIONS
6. Contrast entrepreneurial roles during various 7. 8. 9. 10.
transition stages. Discuss the role of an entrepreneur during various transition stages of a venture Develop a feasibility plan for a new venture incorporating the common elements. Discuss the important stages of the life cycle of an entrepreneurial venture. Discuss how an entrepreneur can manage life cycle of a venture.
