When someone anticipates starting a new business, they often forget about the importance of performing a thorough market feasibility study. In this sense, the question often becomes, is a market feasibility study more important than a business plan? It most certainly is! In fact, no new business venture should ever move forward without having first secured its future with the information that can only come from a feasibility study. The business plan dictates how the company will operate, its approaches, finances, management structure, product or service offering and ultimately, how it will approach a healthy market. However, it can only do that if there’s a market to approach. More importantly, the new business venture can only succeed if the conditions of that market allow it. So, what is a market feasibility study?
The Importance of the Market Feasibility Study
The intention of the feasibility study is to secure the new business venture’s success by assessing the economic viability of the market. Its sole purpose is to answer the question: “Is this market worth pursuing?”. In this sense, the feasibility study doesn’t evaluate the strategy of the new business venture or its business plan. Instead, it focuses its analysis on the health of the market.
The study answers those pertinent questions about the market’s longevity, its potential for growth and ultimately, its willingness to allow the new business to enter. After all, a solid business idea and approach has no chance of succeeding if the market itself is on a decline or if the conditions of the market aren’t conducive to the new business venture’s product offering or strategy.
Why do Entrepreneurs Ignore Market Feasibility Studies?
A number of entrepreneurs shy away from performing the market feasibility study. It’s often seen as an added expense and a step that one can afford to skip. Perhaps the biggest reason is because entrepreneurs believe so strongly in their business idea, that the mere mention of failure is immediately rejected. Some take the view that the feasibility study will simply reaffirm what they already know – this being that the market is healthy, secure and that the company will succeed.
Unfortunately, most new businesses fail and this is one truth every aspiring business owner must come to terms with. Entrepreneurs must understand that the only way to protect their investment is to first assess the economic viability of their proposed business venture in its market. What’s the alternative? Well, someone could spend a considerable amount of time and money trying to make the business succeed, only to find out later that it never had a chance. Now, doesn’t it make sense to know beforehand?
Feasibility studies force new business ventures to put ideas down on paper, assess the viability of their target market and to lay the groundwork for proceeding with a business plan. In essence, if the outcome of the study is positive, then the business plan can proceed. If the outcome is negative, then the business plan shouldn’t move forward.
Therefore, the answer to that aforementioned question is pretty obvious. Not only is the market feasibility study more important than the business plan, it’s actually the essential first step towards starting a new business. Clear the roadblocks first, and then start the business plan.
What Questions Does the Market Feasibility Study Answer?
There are essentially three aspects to the market study. First, it must clearly identify the current and future market conditions. Second, it must answer questions relating to operational requirements. Finally, it must touch on the company’s future market success by establishing whether or not there’s a need for the company’s product or service. Each of these questions are focused on the market’s willingness to accommodate the proposed new business.
Every market dictates success or failure by its member companies and the customers who buy in that market. These are essentially the market players and determine the potential success of the new business venture by defining the conditions under which that new business can enter. We’ll review each of these questions in detail.
1. Identify the Current & Future Market Conditions:
This portion of the analysis is focused on the market’s health, or lack thereof. Feasibility studies must take a long-term view towards its assessment of the market. They should look 5, 10, 15 and sometimes 25 years into the future. While shorter estimates are more accurate, it’s still vital to look beyond just a 5 & 10 year horizon. These estimates must not only provide information on the market’s health and future, but must also clearly define the new business venture’s market share expectations in its first year, and subsequent years.
- Is the market healthy and growing or has it stagnated and in a decline phase?
- Are there any competing technologies that will ultimately make the market and industry obsolete and outdated?
- Is the market large enough to accept a new player, or is it too small to accommodate another competitor?
- Who are the dominant players in the market?
- Where are these dominant players located and does the new business venture have a better chance of success by focusing on a smaller geographical region?
- What are the strengths and weaknesses of the competition and can the new business venture capitalize on these?
- How large is the market relative to customer demand?
2. Understand Operational Requirements:
The second portion is not to be confused with the operational requirements as defined within a business plan. Instead, the focus is on the market’s ability to allow the new business venture to secure access to raw materials, parts and equipment as well as to clearly define the technological requirements or knowledge needed for the business to succeed.
The approach is to focus on the market’s ability to provide these essential services to the new business. For instance, if the company wanted to purchase equipment, but the equipment was only made by one or two equipment manufactures, and they both had a 2 to 3 year backlog, isn’t it best to know that before hand?
- Will the new business venture be successful in securing raw materials & parts?
- Does the market provide multiple options on equipment & machinery?
- What are the standard financing options and terms for capital expenditures?
- What are the standard supplier & customer payment terms within the market and how will this affect cash flow?
- What is the distance of suppliers for parts, raw materials, as well as equipment & machinery?
- Has the company clearly identified its freight costs both from suppliers, and to customers?
- Has the company decided whether to buy or lease its building and what if any impact does the building’s location have in servicing customers?
One of the most important aspects of business success is to make sure your new business venture's supply chain strategy matches your business model and your market. To read more about choosing your specific strategy, please go here.
3. What is the Need for the Company’s Product & Services?
In this case, the market may be healthy, but if that market is dominated by a couple of companies at the top, then entering that market may either be extremely difficult or incredibly easy. However, it’s important to understand the inner workings of the market in order to determine which situation applies. It’s essential to understand how customers buy, whom they buy from and the kind of companies that service them. All of these play a role in how the new venture will approach the market and ultimately, whether the customers are willing to buy its product.
- How can the new business venture distinguish its customer service excellence & product offering in the eyes of potential customers?
- Are customers interested in the product offerings or are they apprehensive of the new company’s ability to meet demand and technical requirements?
- Will the new company have to offer extended payment terms, discounts on prepayment, or even extended warranties in order to secure business? If so, what is the cost of this and can the business support it?
- What strategy does the market dictate with respect to how the product or service should be priced?
- Is the company entering a highly technical industry or is it entering one where sales are predicated on price and price alone?
The above video shows how to use a value chain analysis. This simple tool can help you identify your company's value assertion within your market. It can be used for existing businesses as well as new business ventures.
In other instances, market feasibility studies may have to include environmental impacts. However, for the most these market assessments are focused on clearing the roadblocks to entering a new industry. Companies can opt to hire consultants to perform these market assessments or can choose to go the route of analyzing this information themselves. Government publications and industry trade magazines offer fantastic insight into the overall health of a given industry.
Still, when it comes to performing a market feasibility study, focus groups and consumer surveys still play a vital role. For those looking to benefit from such an analysis, be sure to contract out the study to an independent marketing consultant. Impartiality is key! Companies should never hire consultants or entities with a vested interested in making the results look favorable.
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