OPERATIONS MANAGEMENT

Lecture 8

Type of Feasibility Studies

1. Market and Real Estate Feasibility: Market feasibility study typically involves testing geographic locations for a real estate development project, and usually involves parcels of real estate land. Developers often conduct market studies to determine the best location within a jurisdiction, and to test alternative land uses for a given parcels. 2. Technology and System Feasibility: This involves questions such as whether the technology needed for the system exists, how difficult it will be to build, and whether the firm has enough experience using that technology.

Type of Feasibility Studies

3. Resource Feasibility: This involves questions such as how time is available to build the new system, when it can be built, whether it interfaces with normal operations, type and amount of resources required, dependencies, etc. 4. Cultural Feasibility: In this stage, the project s alternatives are evaluated for their impact on the local and general culture. For example, environmental factors need to be considered. Further an enterprise s own culture can clash with the results of the project.

Type of Feasibility Studies

5. Economic Feasibility: It involves questions such as whether there will be cost saving, increased revenue, increased profits and reduction in required investment exceed the costs of developing and operating a proposed system. 6. Legal Feasibility: It determines whether the proposed system conflicts with legal requirements. When an organization has either internal or external legal counsel, such reviews are typically standard. However, a project may face legal issues after completion if this factor is not considered at this stage.

Type of Feasibility Studies

7. Schedule Feasibility: A project will fail if it makes too long to be completed before it is useful. Typically this means estimating how long the system will take to develop, and if it can be completed in a given time period using some methods like payback period.

Structural Outline of A Business Feasibility Study

Cover Sheet Executive Summary Table of Contents
       

Introduction Product or Service Technology Market Environment Competition Industry Business Model Marketing and Sales Strategy

Structural Outline of a Business Feasibility Study

Table of Contents
         

Market Consumption Production/ Operating Requirements Location of plant Description of project Production Process Raw Material Management and Personnel Requirements Intellectual property Regulations/ Environmental Issues Critical Risk Factors

Structural Outline of a Business Feasibility Study

Financial Projections:
        

Balance sheet projections Income statement projections Cash Flow projections Break-even analysis Capital structure, capital requirements and strategy Expense estimates Dividend Policy Recommendations and Findings Conclusion

Executive summary
The executive summary is a summary of all key sections of the business feasibility study and should work as a separate, stand-alone document. Key points to remember: Write this document after the content section of business feasibility study is completed Although the executive summary is written last, it is presented first The executive summary should be no more than one page long

Product/ Service
Describe the enterprises, product or service in simple language. If more than one products or services then give the product mix Describe how the customers would use and buy the product or service Describe key components or raw materials that will be used in the product along with its sources and availability. Describe the plans to test the product to ensure it works as planned and is sufficiently durable. Describe plans to upgrade product or expand product line.

Technology
As necessary provide further technical information about the product or service. Describe additional or ongoing research and development needs Explain technical terms enough to be understood by everybody but not necessarily technology expert readers.

Intended Market Environment

Target Market:  Define and describe the target market. Distinguish between end users and customers  Be clear how end users and customers benefit. How and why they would buy the product or service?  What is the projected needs your product or service fulfill For Business-to-business Markets:  Who are the key players? Frequency of product purchase, replacement needs versus expansion, purchasing process  Estimates of market size, initial targeted geographic area. For business-to-consumer markets:  Demographic factors such as, income level, age, gender, education, ethnicity  Psychographic factors  Behavioral factors such as, frequency of purchase and shopping behavior

Competition
Describe the direct and indirect competition For key competitors, give market shares, resources List of all key barriers to entry Describe what is unique about the enterprise s product/service compared to the competition State how difficult it will be for the competitors to copy the enterprise s product or service. Describe how competitors will most likely react to the enterprise s product launch and the enterprise s response strategy.

Industry
Clearly define and describe the industry in which the enterprise operates. Include the size, growth rate, and outlook. Describe the demand and supply factors and trends Describe the larger forces that drive the market e.g.; innovation, cultural changes, regulation etc.

Business Model
Describe the proposed enterprise s business model. How will the enterprise generate revenue? Describe the business model in enough detail to support financial projections presented later.

Marketing and Sales Strategy

Lay out the basic marketing and sales strategies Discuss any strategic partnership the enterprise has or is planning to form Describe the distribution strategy (sell directly to customers through sales force, direct mail, or internet; sell through manufacturers representatives, wholesalers distributers or retailers) Describe the pricing strategy and justification Describe intended typical payment terms for customers Quantify the marketing budget for at least 1 year

Production/ Operating Requirements

Describe how and where the products shall be manufactured What physical premises are required? Give location, size, condition and capacity of planned production and warehouse facilities and number of shifts planned Will space be owned or leased? Will renovations be required? At what costs? How complex is the manufacturing process? Describe equipment needed and costs? If enterprise will outsource production or distribute other s material:
 Describe supply sources  Outline the relevant contract terms  Describe how the enterprise plans to protect its trade secrets & quality control

Management and Personnel

List the proposed key managers, titles, responsibilities, relevant background, experience, skills, costs. Sketch personnel requirements: what people will be needed now, in a year, in the long term? What skills and qualifications are required and what would be the financial implications?

Intellectual Property
Briefly describe patents, copyrights and trademarks obtained and in process. If enterprise is operating under a licensing agreement, give name of the licensor/assignor and also give termination or renewal dates.

Regulations and Environmental Issues

Outline non-economic forces that might affect the prospects of the firm:
 Key government regulations and the enterprise s plans for compliance.  Any environmental problems on property, plans to address the problems and their costs.  Environmental factors i.e. waste disposal plans, if needed  Political stability, if applicable  Any other regulatory or political issues. This would deal with proposed industry regulatory changes, stable versus unstable environments.

Critical Risk Factors and Start-up Schedule

Critical Risk Factors: Describe critical risks faced by the enterprise. For example, internal characteristics, uniqueness, investment, economic forecasts, change in regulations and technical obsolescence. Start-up Schedule: Sketch the major events in the life of the venture by listing the timetable/deadlines for completion of phases of venture start-up.

Financial Projections
Include a narrative highlighting key underlying assumptions and the logic governing your projections. Include financial history, if any and likely financing stages including information about funding sources and uses. Provide a page or two of footnotes for each financial spreadsheet. Some core components are of this report are: Balance Sheet Projections 3 years(ideally) &highlight inflows of capital Income Projections Year 1: Monthly or quarterly: Year 2 & 3: Annually Cash Flow Projections Year 1: Monthly or quarterly: Year 2 & 3: Annually Break-even Analysis: When firm start turn a profit Cost Benefit Analysis: Will the business provide a viable return on investment

Capital Requirements & Strategy

How much funding (equity) will the firm need and when? What projected revenue or assets does the proposed business have to secure the financing? What sources will provide the funding, i.e. investors, lending institutions etc. What ratio of debt to equity financing will occur? When will investors begin to see a return? What is the expected return on investment (ROI)?

How to conduct a Break-Even Analysis?

Break-even = Fixed Cost Contribution Margin

Contribution Margin = Sales price per unit Variable Cost per unit

Final Findings and Recommendations

Recommendations from the feasibility study regarding the viability of putting the business idea into practice should be honest, short and direct. A significant component of the findings should relate to the likelihood of success (dimensions of viability), projected return on investment and how any identified risk should be mitigated. The purpose of the feasibility study is to consolidate an argument based on factual evidence and analysis to help justify your decision in relation to the core question of whether the business venture in question is actually viable.

Sources of Help
Business Enterprise Centers Accountants Solicitor Bank Business Advisors/ Consultants Trade Associations Potential Suppliers Competitors University Library