How to Conduct a Feasibility Study the Right Way
All businesses have to critically examine the actions they take, whether the business is just starting out or has been in operation for a while. Establishing the viability of an idea or action can ultimately determine whether a business succeeds or not. The best tool for determining this is by conducting a feasibility study.
In this guide, we will examine what a feasibility study entails and when it should be used. We’ll then outline the five key elements of a feasibility study and provide you with six steps for conducting one within your organization. Lastly, you’ll see some examples of feasibility studies.
WHAT IS A FEASIBILITY STUDY?
A feasibility study is a study, which is performed by an organization in order to evaluate whether a specific action makes sense from an economic or operational standpoint. The objective of the study is to test the feasibility of a specific action and to determine and define any issues that would argue against this action.
The question a feasibility study essentially tries to answer is: “Should we proceed with the specific action plan?” On top of determining whether the plan is viable, organizations can use a feasibility study for understanding the risks better and preparing for them.
It’s important to remember that a feasibility study is not the same as a business plan. A business plan provides a planning function and defines the actions needed to take a business idea into reality, whereas a feasibility study provides an investigation into a specific function and whether it’s viable.
While it’s important to conduct both plans before setting up a company, a business plan should only be conducted once the business has been deemed viable by a feasibility study.
When should a feasibility study be used?
While feasibility studies are typically conducted by business organizations, other organizations can naturally benefit from it as well. Since the study aims to discover whether an action is viable, it can help organizations to avoid costly or operationally exhausting ventures.
The study is typically used in situations where an important strategic decision needs to be taken.
This can vary and some of the example situations include:
- Change in business location
- Purchase of new equipment or software
- Acquisition of another company
- Hiring of additional employees
As mentioned above, a feasibility study is often at the core of launching a business. It can be the key to launching a successful start-up, as it helps to underline the future pain points and to determine whether the plan is viable in the first place.
Overall, a feasibility study is the perfect tool for situations where the impact is likely to be big in terms of operational or economic significance.
David E. Gumpert nailed the essential importance of a feasibility study in his book How to Really Create a Successful Business Plan. When discussing the possible failure of a feasibility study (i.e. the negative result), Gumpert wrote, “Although [an unsuccessful feasibility study] may appear to be a failure, it’s not. The failure would have been if you had invested your own and others’ money and then lost it due to barriers you failed to research in advance.”
Finally, you can watch the below video to understand the importance of a feasibility study for business success through a simple example:
CORE ELEMENTS OF A FEASIBILITY STUDY
You’ll need to study the main elements when conducting a feasibility study. While these are often all required for conducting a study, you might sometimes focus mostly on a single element or a combination of a few of them.
#1 Technical feasibility
The first element deals with technical feasibility of the proposed action plan. If your organization is introducing a new product or a service, the technical feasibility study will determine if it’s a technically viable action.
This part of the feasibility study should answer the following questions:
- What is the proposed product or service?
- Is the product or service already on sale? If not, how far is it from an existing marketplace and what will the introduction cost?
- How can you protect the product or service from the competition?
- What are the strengths of the product or service?
- What are the main benefits to customers or users?
- What resources are required for producing or providing it?
- How capable is the organization to acquire these resources?
- What are the regulatory standards surrounding the product or service and its use?
Remember the above questions can be used when you are introducing a new product or launching a business, but also if you are implementing a new product or service within your organization. For instance, if you are introducing new software, you must understand the strengths of it, as well as the resources required for implementing it.
#2 Market feasibility
The second element focuses on testing the market for the proposed action or idea. It examines issues like whether the product or service can be sold at reasonable prices or if there’s a marketplace for it.
Market feasibility should answer the following questions:
- What market segments are you targeting?
- Why would people buy the product or service?
- Who are the potential customers and how many of them are there?
- What are the buying patterns of these potential customers?
- How will you sell the product or service? Where?
- Who are your competitors? Including past, current and future competitors.
- What are the strengths and weaknesses of your competitors?
- What is your product or service’s competitive edge?
The above essentially points out to the importance of conducting market research as part of your feasibility study. Market feasibility is an important part of a feasibility study when the plan of action deals with issues such as business expansion, new product or service launch, product development and starting up a business.
#3 Commercial feasibility
Commercial feasibility is an element of the study focused on the probability of commercial success. It’s mainly focused on studying the new business or a new product or service, and whether your organization can create enough profit with it.
The questions that require answering as part of the commercial feasibility study include:
- What are the strengths and weaknesses of your business?
- What are the potential sales volumes of the product or service?
- What is the pricing structure you’ll use?
- What are the sensitivity points for your business in terms of sales?
- What is the ROI?
Furthermore, if you are conducting a feasibility study as part of launching a business, you also need to answer the following questions:
- How long can your business survive without a sale?
- How long before you break even with the product or service?
- How much money is required to start operating?
- Will your organization require external finance?
While the above points are mainly important for new businesses, any organization can benefit from thinking about them when launching a new operation.
For example, if you are adding a new product line to your business, you should use the above questions as a guide to understanding the implications to your other operations and the financial viability of the new product.
#4 Overall risk assessment
The fourth element focuses on the major risks the proposed plan can entail. The overall risk assessment part of a feasibility study examines the different ways your organization can reduce the risk of embarking on the new action.
The overall risk assessment should answer the following questions:
- What are the major risks associated with the operation?
- What is the survival outlook for each of the above risks?
- How sensitive are the profits?
- What are the best ways to minimize these risks?
The aim is to try to cover all the possibilities and create a risk assessment map, which deals with the probability of the risk and the impact it would have on the business. It’s aimed at recognizing the risks that can make or break your business from the smaller, more manageable risks.
For instance, consider your business is conducting a feasibility study in order to hire a new employee. One risk might deal with the possibility the hire is an inadequate fit and leaves after six month trial period. But your risk assessment might show that while the risk of this is relatively high, the survivability of your business doesn’t depend on it. For example, the cost of a bad hire could be low due to your recruitment strategy or the position not being essential for operations.
This is how you can create your own risk assessment map.
In addition, if you are launching a new business, the overall risk assessment should also consider one final question. Answering the question “When can your business be able to support you and itself without extra financing?” is an important part of a feasibility study. Self-sufficiency is crucial for business success, as having to borrow can hinder the long-term survivability of your business.
#5 Feasibility of purchasing an existing business
The final essential element of a feasibility study is not necessarily relevant to every business. Nonetheless, it is an important aspect to keep in mind, as it deals with the impact of acquiring a new business. This is not only relevant to new businesses, as your organization might acquire a new business as part of its growth strategy.
The purpose of this final element is to study whether purchasing an existing business is a sound investment to make. It requires your organization to answer questions such as:
- Why is the current owner selling the business?
- What is the business’ performance? If it’s poor, what are the reasons behind it?
- What is the competition like?
- What is the valuation of the assets included in the sale?
- What are the advantages and disadvantages of the current business location? Is your organization continuing operations in the same premises or not? Why?
STEPS TO CONDUCTING A FEASIBILITY STUDY
Now that we’ve examined the different core elements of a feasibility study, we can look at the steps you need to take in order to conduct a feasibility study.
Step 1: Conduct preliminary analysis
A feasibility study can be a time-consuming process and it doesn’t come without its costs. It’s therefore auspicious to start by conducting preliminary analysis. This is essentially a pre-screening of the proposed action and it examines whether a proper feasibility assessment is worth the time and money.
For example, before you conduct a feasibility study on the viability of acquiring a business, you want to check quickly the overall attainability of the action. If the acquisition is so risky that it could bankrupt your business, there’s no reason for conducting a proper feasibility study.
Preliminary assessment should consist of the following steps:
- First, you want to outline the planned idea or action. This means looking at what you are looking to achieve and why.
- Second, you should examine the market space and the commercial viability of the action. You want to get an overall feel of what type of customers are you potentially attracting.
- Third, you should examine the unique characteristics of the idea and whether they are strength or a weakness. The idea or action might have certain unique characteristics (i.e. location, price, usability) and these might help your organization.
- Fourth, you need to determine if there are insurmountable risks to the action. It’s essential to outline any risks that could possibly reduce the viability of the action or idea close to zero.
Keep in mind the above is just to get an overall feel of the idea. You don’t need to conduct full market research at this point, but simply understand whether there’s any kind of space for the action within the market.
If your preliminary analysis doesn’t find any insurmountable obstacles and the commercial viability is possibly there, you can continue with the proper feasibility study.
Step 2: Outlining the project scope and conducting current analysis
Next, you should move on to outlining the project scope by defining the area of study for the feasibility study. Do you need to look at all five elements of the study, for example?
The scope must be detailed and outline the objectives of the feasibility study clearly. It’s a good idea to examine the above five elements in terms of your action or idea and create an action plan for each section that applies to the project.
It’s essential to study the different parts of your business that might be influenced by the proposed action or idea, even when you aren’t proposing something that impacts the whole business directly (i.e. launching a new product, acquiring a business or starting a business). Actions, such as hiring new personnel to a single department, can sometimes have an impact on sectors that might not immediately seem obvious.
The key to outlining the scope is about understanding the different participants and end-users of the proposed idea or action. For instance, if you are moving the business to new premises, you have to understand the impact it’ll have on the workforce (change in commute can an impact on employee morale, etc.) and the customer (will all customers follow your business to a new location, etc.).
Finally, you also need to analyze the current situation prior to the implementation of the idea or action. You can do so by describing the weaknesses and strengths of the business. Once you’ve done this, you can study the savings and the operational benefits you are hoping to achieve with the new proposal.
Step 3: Comparing your proposal with existing products/services
You’ll also need to research the current competitive landscape in order to understand whether the proposed idea or action is viable. Whether you are implementing a new software or equipment or launching your own new product, you need to compare the proposed product or service with other similar items on the market.
This might mean you need to compare the feasibility of your chosen software (for example, accounting platform) with other products on the market. What are the benefits of your proposed choice and what are the weaknesses? Are the risks associated with your chosen software smaller or bigger than those of competitive products?
The same analysis applies when launching a new product. Part of your feasibility study must then focus on understanding what the customers are looking for and whether your proposed idea answers these needs. You should also compare the proposed product with the existing products or services and focus on the advantages, as well as disadvantages, you might have.
Learn more about Porter’s five forces in this video.
Step 4: Examining the market conditions
You also need to examine the market conditions. There are four specific points when it comes to the analyzing market in terms of feasibility.
- Defining the target market.
- Studying the buying habits of the target market.
- Understanding the sale and market share outlook of the proposal.
- Outlining the product awareness required for the use of your product or service.
The main goal of this part of the feasibility study is to understand the revenue projection for implementing the proposed idea or action. You want to have a realistic understanding of the kind of sale numbers you can expect and the scope of the promotional activities you are required to undertake.
For example, in terms of product or service awareness, you must be able to determine the type of marketing required for potential customers to understand and be able to use the item.
Step 5: Understanding the financial costs
One of the most important steps for concluding a feasibility study involves calculating the financial costs related to the proposal. No matter what type of idea or action your organization is considering, the financial cost of it can be the major point in determining its viability.
The first rule of any successful business is the need to have income or it goes bust. Therefore, any action your organization takes has to examine the impact it’ll have on the income and profit of the business.
The financial costs associated with your proposed idea or action will naturally depend on the proposal. But you have to consider the following points in all instances:
- The resources required to implement the idea or action.
- The source for these resources: internal or external financing.
- The realistic benefits of the idea or action, whether it’s sales figures, boost in productivity, or a cut in operational costs.
- The break-even schedule for the proposal. This refers to the time it takes to a point when the profits from the idea or action equal the costs associated with it.
- The financial risks associated with the idea or action. This can refer to risky market conditions, the probability of requiring more resources and so on.
- The financial cost of failure. You also need to calculate the financial cost of the worst-case scenario. This can determine whether your business has the means of embarking on this new venture or not.
The likelihood of having to use estimates in the above calculations is relatively high. It’s important to conduct proper research and to be as realistic with your figures as possible. After all, positive surprises (for example, exceeding sales figures) are not difficult to manage, unlike overly positive calculations that turn out wrong.
Step 6: Reviewing and analysing data
Finally, you need to review your feasibility study carefully and examine the findings with time. A good rule of thumb is to simply take a step back and reflect on the research before jumping into conclusions.
After your study, look around and consider the following questions:
- Are there any risks you weren’t aware of previously?
- Have the market conditions changed?
- Has the competition changed?
- Is your business situation still the same, in terms of operations and economic situation?
If the conditions have changed, you can review these parts of the feasibility study. Once you’ve reviewed your results, you can go ahead with the final decision. The feasibility study should provide you the answer of either moving ahead with the proposed idea or action, or scrapping the idea and looking for something different.
EXAMPLES OF FEASIBILITY STUDIES
Use the following examples as inspirations for your own feasibility study.
Feasibility study for setting up a bakery.
Feasibility study for setting up a water refilling station.
Feasibility study for setting up a poultry business.
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