Business Idea

Selection and UNIT 8 BUSINESS PLAN FEASIBILITY

Feasibility

Structure
8.0 Objectives
8.1 Introduction
8.2 Project Feasibility Analysis
8.3 Technical Analysis
8.3.1 Technical Appraisal
8.4 Market Feasibility Analysis
8.5 Financial Analysis
8.6 Environmental Analysis
8.6.1 SWOT Analysis
8.6.2 PESTLE Analysis
8.6.3 QUEST
8.6.4 CPM
8.6.5 ETOP Analysis
8.7 Let Us Sum Up
8.8 Key Words
8.9 Answers to Check Your Progress
8.10 Terminal Questions

8.0 OBJECTIVES
After studying this unit, you should be able to:
x explain the meaning of project feasibility analysis;
x explain technical feasibility of business;
x discuss market analysis of a project;
x forecast financial projections of a project;
x explain the application of the break-even point for the new venture;
x explain and understand environmental analysis of a business or a project;
and
x conduct SWOT, PESTLE QUEST, CPM and ETOP analysis.

8.1 INTRODUCTION
In unit 7, you have learnt about the business plan and DPR preparation (what
elements should be there in the document). The next step is to check the
feasibility of your business idea. Unless the idea is feasible it should not be
attempted to convert it into a business venture as all the efforts and resources
will go waste. Feasibility study is a means to investigate the potential
outcome of a project, but most of entrepreneurs are ignorant of this before
166 setting up a business. Feasibility Report is a detailed study that examines the
profitability, feasibility, and effectiveness of a proposed investment Business Plan
Feasibility
opportunity.
It is estimated that one of the hundreds idea can be proved to be
commercially viable. Therefore, it is necessary to conduct business feasibility
study in order to ascertain its viability in advance and safeguarding from
employing time and resources to ill-fated business ideas or projects.

Feasibility study is conducted by analysing the business from various aspects

like- technical analysis, environmental analysis, financial analysis, market
feasibility analysis, etc. Let us now take you into a detail discussion on it.

8.2 PROJECT FEASIBILITY ANALYSIS

Feasibility which can also be termed as workability literally means whether
some idea will work or not. It is the preliminary evaluation of a business idea,
conducted for the purpose of determining whether the idea is worth
pursuing. Feasibility analysis takes the guesswork (to a certain degree) out of
a business launch, and provides an entrepreneur with a more secure notion
that a business idea is feasible or viable. It means knowing beforehand
whether there exists a sizeable market for the proposed product/ service?
What would be the investment requirements and where to get the funding
from? Whether and where from the necessary technical know- how to convert
the idea into a tangible product may be available and so on. In other words,
feasibility study involves an examination of the technical, financial, HR and
marketing aspects of a business on ex ante (before the venture comes into
existence) basis.

Feasibility studies also can provide a company's management with crucial

information that could prevent the company from entering blindly
into risky businesses. Business feasibility study is used to support the
decision-making process of the business based on the cost-benefit analysis of
the business or the project viability. Feasibility study is to be conducted even
before the commencement of a formal business plan. A business feasibility
study is heavily dependent on market research and analysis. The findings and
recommendations of business feasibility study gives insights to the investors
to judge the commercial viability of the project before investing their money
into it. The entrepreneur also should make sure in advance that there are no
major road blocks in the way of success before launching the business or a
project.
As the name implies, these studies ask: Is this project feasible? Do we have
the people, tools, technology, and resources necessary for this project to
succeed? Will the project get us the return on investment (ROI) that we need
and expect? Basically, it is a COST-BENEFIT Analysis.

The goals of feasibility studies are as follows:

x To understand thoroughly all aspects of a project, concept, or plan.
x To become aware of any potential problems that could occur while
implementing the project.
167
 Business Idea x To determine if, after considering all significan
nt factors, the project is
Selection and
Feasibility viabble—that is, worth undertaking.

Importaance of Feasibility Studies: Feasibility studies are important to

businesss development. They can allow a business to o address where and how
will it opperate. They can also identify potential obstaacles that may impede its
operations and recognize the amount of funding it will need to get the
businesss up and running. Feasibility studies aim for marketing strategies that
could heelp convince investors or banks that investingg in a particular project or
businesss is a wise choice. It aims to provide the basic information for
effectivee decision making with respect to the prroposed investment. By
showingg the market potentialities, technical and finaancial implications of the
proposedd opportunities, the feasibility report enab bles the entrepreneur to
accept oor reject the project. It also helps to asssist the entrepreneur in
developiing future plans for the organization and serves as the basis for
measurinng the performance of the proposed business..
Feasibiliity analysis is different for different purrposes. However, every
feasibilitty analysis should consist of Technical Analysis, Market Analysis,
Financiaal Analysis and Environmental Analysis. See Figure 8.1

Market
Analysis

Project
Technical Financiaal
Analysis Feasibilty Analysis
Analysis

Environment
Analysis

Figure 8.1 Project Feasibility Analy

ysis

Let us noow try to understand each of them one by onee.

8.3 TECHNICAL ANALYSIS

The techhnical feasibility refers to the ability of the process
p to take advantage
of the cuurrent state of art technology in pursuing fu urther improvement. The
technicaal capability of the personnel as well as the caapability of the available
technoloogy in relation to the requirements of the prop posed project idea should
168 be consiidered and the extent of compatibility shou uld be studied. Technical
feasibility also involves the evaluation of the hardware, software, and other Business Plan
Feasibility
technical requirements of the proposed system. For projects concerning
manufacturing activities, technical analysis is must. It lays out details on how
will a good or service be delivered, which includes transportation, business
location, technology needed, materials and labour. Technical analysis can be
done by answering to the following questions:
x Is the technology proposed to be used the latest technology?
x What is the likelihood of the proposed technology becoming obsolete in
the near future?
x Is the technology proposed to be used a process technology?
x Is the technology proposed to be used available indigenously?
x In case of imported technology, is the technology freely available?
x Is the technology proposed to be used cost effective in the long run?
x Is the technology proposed to be used capable of producing goods and
services according to the requirements and satisfaction of the customers?
x Is there any ongoing or additional research and development needs?

Once you have explored the answer of these questions, you need to do
technical appraisal. Only after getting positive response from technical
analysis you should move further.

8.3.1 Technical Appraisal

It involves critical study of the following aspects besides technology. These
are:

1) Scale of Operations: This section needs description of the scale of

operations and the estimated growth in the future.
2) Raw materials: It gives a complete detail about the selection of raw
materials to be used, name and address of the suppliers, terms of
contract, cost and quality of raw materials to be used. It includes
information such as whether volume discounts will be available as your
business grows or if you plan to manufacture your parts at some point of
time. It also needs to mention if its available locally or needs to be
imported. If it needs to be imported then the import duty and other
agreements should be discussed. The durability of materials from which
the product is made is also required to be considered. The detailed
analysis of raw materials as an input of production has to be carried out
considering availability, cost and quality.

3) Location of the Project: Location of the business affects the success of
the business and thus it becomes important to select the location for the
business carefully. The important factors which determine the selection
of project location are following:

x Availability of land (proper acreage and reasonable costs).

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 Business Idea x The impact of the project on the environment and the approval of the
Selection and
Feasibility concerned institutions for license.
x The costs of transporting inputs and outputs to the project location
(i.e., the distance from the markets).

x Availability of various services related to the project such as

availability of extension services or veterinary or water or electricity
or good roads etc.

4) Technical Know How: It involves selection of the experts and the
professionals for their expertise in required technical know-how to be
used in the business. It also needs analysis of reasonable utility and the
accepted rate of obsolescence of technology.
5) Calculating Labour Requirements: In this section, a list of the number
and types of employees needed to run the business is prepared which
may be employed in the future as your business grows. One may break
labour into categories if necessary:
x Senior Level Management
x Office and Clerical Support
x Production or Distribution Staff
x Professional Staff (i.e., lawyers, accountants, engineers, marketing)
x Fulfilment (i.e., mail room, shipping department)

6) Possibility of Collaborative Agreements: If the organization plans to

collaborate in future or as start-up then it should be analysed in this
section. Collaboration may facilitate the managerial, financial and
technological availability to the organisation.
7) Plant Layout: A plant layout study is an engineering study used to
analyse different physical configurations for a manufacturing plant. Plant
layout is the most effective physical arrangement, either existing or in
plans of industrial facilities. These may be arrangement of machines,
processing equipment and service departments to achieve greatest co-
ordination and efficiency of 4 M's (Men, Materials, Machines and
Methods) in a plant. The adequate layout may help in smooth operations
of manufacturing.

8) Project Scheduling and Implementation: It should describe the project

implementation schedule. The schedule is an important time
management document that defines and schedules the major phases
of project work being carried out to fulfil the desired project objectives
and achieve the expected outcomes. The well documented scheduling
may facilitate smooth process of production.
9) Product Design: The product design refers tofunctional design of the
product and the attractiveness in appearance. It involves flexibility,
permitting ready modification of the external features of the product to
meet demands or technological and competitive changes. It should have
170
 descriptions of how will users use and buy the product. It also needs Business Plan
Feasibility
description of how the product can be expanded and modified in future.
The results of these investigations provide a basis for deciding whether a new
venture is feasible from technical point of view or not.

Check your progress A

1) What do you mean by Project Feasibility analysis?

2) Why should you carry out the Project Feasibility Studies?

3) What is Technical Analysis?

4) State whether the following statements are True or False:

i) It is necessary to conduct feasibility study before launching a

project.

ii) Feasibility study is conducted to test the viability of the project.

iii) Businesses should not consider about any collaborative agreements

in advance.

iv) It is not important to consider the sources of raw materials.

v) Technical know-how is a part of technical analysis.

5) Fill in the Blanks:

i) Plant layout is the most effective ……………………….. of a
manufacturing plant.
ii) For projects concerning ………………….. activities, technical
analysis is must.

iii) Technical feasibility also involves the evaluation of the

……………………………, ……………………………, and other
technical requirements of the proposed project.

iv) The findings and recommendations of business feasibility study

gives insights to the investors to judge the ………………………..
of the project before investing their money into it.

v) A business’s feasibility study is heavily dependent …………………

8.4 MARKET FEASIBILITY ANALYSIS

This is one of the most important sections of the feasibility study as it
examines the marketability of the product or services and convinces investors
that there is a potential market for the product or services. If a significant
market for the product or services cannot be established, then there is no
project. Market Feasibility is all about how will the real-world market be
reacting towards a particular development. It is concerned with gaining the
in-depth knowledge and doing a deep analysis of market and knowing how is
the target market going to respond towards particular project/product.
171
 Business Idea Assemblling and analysing relevant information about the marketability of
Selection and
Feasibility new vennture are essential for judging its potential su
uccess. Market feasibility
studies sshould include a description of the industry, current market analysis,
competittion, anticipated future market potential, poteential sources of revenue,
and sales projections.

Three m
major areas in this type of analysis are:
x Inveestigating the full market potential and id
dentifying customers for
goods or services
x Anaalysing the extent to which the enterprise might exploit this potential
marrket
x Usinng market analysis to determine the opportun
nities and risks associated
withh the venture.

To addrress these areas various sources can be ussed like market data of
customeers demand patterns, seasonal variations in
i demand, government
policies affecting demand; range of prices of substitutes goods,
complem mentary goods and the prices of compettitor’s goods; customer
spendingg and purchasing power; major competitorrs and their competitive
strength.

Market feasibility can be tested by following the below

b steps (See Figure
8.2):

Industry Analysis

Demand of the Product

Potential Markets

Customer Segmentation and Targeeting

Marketing Strategies

Costs, Pricing methods and Profitab

bility

Competitors Analysis

Figure 8.2 Steps in Market Feasibility Analysis

A

1) Industry Analysis: While conducting industry analysis

a the entrepreneur
shouuld describe the industry in which the entreepreneur wishes to enter.
He/sshe should also ascertain the size of the indusstry and the market share
expeected, growth rate expected and the outlook. It should also reflect the
trennds of demand and supply factors and a briief description about the
forcces that drive the market whether it be innov vations, cultural changes
172 or reegulations.
2) Demand of the product: It involves investigating and forecasting the Business Plan
Feasibility
demand of the product in advance by using methods like expert’s
opinion, customer’s survey, sales forecasts, trend analysis, Delphi
method, jury of expert method, etc. the forecasting of demand will
facilitate in ascertaining the current and future demand patterns, seasonal
variations in demand, purchasing power of the target market, government
policies affecting demand. It also should provide description of what
level of actual product demand can be ascertained correctly. Some of the
demand forecasting techniques are as follows:

x Jury of Expert Method: The researcher identifies the experts on

the commodity whose demand forecast is being attempted. He/She
further probes with them on the likely demand for the product in the
forecast period. This method consists of securing views of the
salesmen and/ or sales management personnel. There may be many
variations. The entrepreneur has to ascertain precise demand
condition with the help of the expert.

x Delphi method: The Delphi method is a facilitated process of

gaining consensus within a group of anonymous participants. The
facilitator sends a forecast questionnaire to each member of the
Delphi group. Anonymity is critical in this method to prevent a few
group members from dominating the decision. When the
questionnaire is returned, the responses are statistically summarized
and then sent back out to the group. Under Delphi method opinions
are collected from experts and efforts are made to match them.

x Market Experiments: Market experiments (actual or simulated) are

performed to generate demand forecasts. A potential problem with
survey method is that survey responses may not translate into actual
consumer behaviour. Consumers do not necessarily do what they say
that they are going to do. This weakness can partially be overcome
by use of market experiments designed to generate data prior to the
full-scale introduction of a product or implementation of a policy.

x Trend Analysis: Under this method, the demand is forecasted by

analysing past records of sales data of the target customers. In this
method, a large amount of reliable data is required for forecasting
demand. In addition, this method assumes that the factors, such as
sales and demand, responsible for past trends would remain the same
in future.
x Survey Method: Survey method is one of the most common and
direct methods of forecasting demand in the short term. This method
encompasses the future purchase plans of consumers and their
intentions. In this method, an organization conducts surveys with
consumers to determine the demand for their existing products and
services and anticipate the future demand accordingly.

3) Potential markets: Potential market is the part of the total population
that has shown some level of interest in buying a particular product or
service. This section aims at identifying the market potential and who
173
 Business Idea will buy the product. The entrepreneur makes a detailed analysis of
Selection and
Feasibility market and the products and determines the potential market
accordingly.
4) Customer Segmentation and Targeting: A target market is the specific
group of people you want to reach with your marketing strategy. They
are the people who are most likely to buy your products or services, and
they are united by some common characteristics, like demographics and
behaviours. Knowledge of the target market provides a basis for
determining the appropriate marketing action strategy that will
effectively meet its needs. The defined target market will usually
represent one or more segments of the entire market. The entrepreneur
should also distinguish between end users of the products and its
customers. Market segmentation means dividing the whole population
into small homogenous group on the basis of demographics factors such
as age, income, occupation, gender, etc. The geographical factors;
psychographic factors and relevant behavioural factors such as frequency
of purchases, reasons for buying the product are considered. Considering
these factors the entrepreneur responds more effectively to the needs of
more homogeneous consumers. It is essential to identify the target
market segment in order to judge the feasibility of the product in the
market.

5) Marketing strategies: The marketing mix is a crucial tool to help

understand what the product or service can offer and how to plan for a
successful product offering. It means formulating various strategies with
regard to marketing mix of the firm i.e., formulating strategies
concerning the 4 Ps- product mix, price mix, promotion mix and place
mix which are discussed in detail in chapter 6.

6) Cost, Pricing Methods and Profitability: It involves ascertaining

various costs involved in marketing of the product and the method which
will be used to calculate and fix the price of the product. Price is the
revenue generated by the firm, therefore the entrepreneur must analyse
the cost price and profitability to obtain the expected amount of profit.
7) Competitors Analysis: Competitor analysis refers to an assessment of
the strengths and weaknesses of current and potential competitors
relative to those of your own product or service. A competitive
analysis is a critical part of market feasibility analysis. It should describe
both the direct and indirect competition. It should also identify the key
competitors of the business and their market share, their strategies,
strengths and weaknesses. It should give details about how their product
can be differentiated by that of competitors and is their product able to
meet the unmet needs of the customers in unique way. The entrepreneur
should also aim to determine the possible reactions of the competitors on
their product launch and the estimation of the time required by the
competitors to imitate your product/ service. Entrepreneur should also
describe strategies to respond to these reactions.
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 It is needless to mention here that market feasibility analysis gives green Business Plan
Feasibility
signal to go further. If market analysis says that the project is not viable
the project is to be dropped then and there. If market feasibility analysis
gives possible indication to go further than you need to do financial
analysis.

8.5 FINANCIAL ANALYSIS

Financial analysis is the process of evaluating businesses, projects, budgets,
and other finance-related transactions to determine their performance and
suitability. Typically, financial analysis is used to analyse whether an entity is
stable, solvent, liquid, or profitable enough to warrant a monetary investment.
The primary purpose of doing a financial analysis of a project is to evaluate
the project's profitability or cost-effectiveness relative to some alternative
project or investment. Frequently, the results of the financial analysis are
used to compare alternative projects to select which ones should be
implemented.

Financial analysis will include analysis of data with regard to:

1. Capital requirements: It refers to the fixed capital requirement of the
project and its time frame during which the capital will be required.
Various components of capital cost of a project/business are:
™ Land and building
™ Plant and machinery
™ Electricals
™ Transportation
™ Knowledge and Consultancy fees
™ Miscellaneous assets
™ Preliminary expenses
™ Margin money for working capital

2. Sources of Capital: There are various sources with which capital can be
generated which are as follows:
™ Ordinary shares
™ Preference shares having pre-determined rate of dividend
™ Debentures
™ Bonds
™ Term loans
™ Deferred credits
™ Capital investment subsidy
™ Lease financing
™ Public deposits etc.

175
 Business Idea Before selecting any of these options, the entrepreneur has to carefully
Selection and
Feasibility analyse the costs of raising capital from these sources.
Cost of capital can be calculated as follows:

i) Cost of Equity Capital: The cost of equity is the return (often
expressed as a rate of return) a firm is required to pay to its equity
shareholders, to compensate for the risk they undertake by investing
their capital. It is calculated as:
ࡰ૚࢞૚૙૙
Ce (%) = ࡼ૚
Ψ

Where D1= dividend per share

And P1= market price of equity share

If the dividend is expected to grow at a rate of G% every year, then the

cost of equity capital will be calculated as
ࡰ૚࢞૚૙૙
Ce (%) = ࡼ૚
Ψ+ G%

ii) Cost of Debt Capital: The cost of debt is the effective interest rate a
company pays on its debts. It is the cost of debt, such as bonds and loans,
among others. It is calculated as:
Cd (%) = C(1-t) %

Where Cd= after tax cost of debt

C= before tax cost of debt

t= tax rate

iii) Cost of retained earnings: The cost of retained earnings is

the earnings foregone by the shareholders. In other words, the
opportunity cost of retained earnings may be taken as the cost of retained
earnings. It is equal to the income that the shareholders could have
otherwise earned by placing these funds in alternative investments. The
formula for calculating this is the same as that of cost of equity.

iv) Cost of Preference Share Capital: Cost of preference share capital is

that part of cost of capital in which we calculate the amount which is
payable to preference shareholders in the form of dividend with fixed
rate.
஽௜௩௑ଵ଴଴
Cp (%) = ௉
Ψ

Where, Cp= cost of preference share

Div= stated preference dividend

P= Issue price of preference share

v) Weighted Average Cost of Capital: Weighted Average cost of capital

is the sum of all the above costs. It is calculated when the entrepreneur
176 uses more than one sources of finance.
 3. Working capital: Workinng capital is the difference between a Business Plan
Feasibility
company’s current assets, such as cash, accounts receivable and
inventories of raw materiials and finished goods, and its current
liabilities, such as accounts payable. It is basically the analysis of
firm’s liquidity position. Coompanies are required to make analysis of
working capital requiremennts at various stages of the project as well
as day-to-day expenses. It hhelps to ascertain the requirements of cash
by ascertaining the timee periods required for raw materials
procurements to work in pprogress to selling the goods and finally
realizing money from the ddebtors. Longer the time taken to convert
raw materials into sales rrealisation, higher shall be the required
working capital. Various staages of working capital requirement are as
follows (Figure 8.3):

Raw Mterial
Procurement

Sales Work-in-
Realization progress

Finished
Debtorss
Goods

Figure 8.3 W
Working Capital Cycle

4. Financial history, if any

5. Potential sources of funds like debt financing or equity financing or other
lending institutions.
6. Required borrowing capital
7. Repayment conditions
8. Fixed and variable costs
9. Projected profitability and returrn on investments
10. Financial Analysis such as:

™ Profit and Loss analysis: Youur income statement that subtracts the costs
of the business from the earninngs over a specific period of time, typically
a quarter or a year. It is recoommended to show income statement of
initial three years where first yyear’s projections will be made on monthly
or quarterly basis and secondd- and third-year’s projections on annual
basis. In preparation of the proo forma income statement, sales by month
must be calculated first. As indicated above, sales may be projected
177
 Business Idea using many different techniques. The pro forma income statements also
Selection and
Feasibility provide projections of all operating expenses for each of the months
during the first year.
™ Cash-flow analysis: Cash flow is not the same as profit. Profit is the
result of subtracting expenses from sales, whereas cash flow results from
the difference between actual cash receipts and cash payments. An
overview of the cash you anticipate will be coming into your business
based on sales forecasts, minus the anticipated cash expenses of running
the business. It is also called the income statement of the project. It is
recommended to show cash flows of initial three years where first year’s
projections will be made on monthly or quarterly basis and second- and
third-year’s projections on annual basis.
™ Break-even analysis: Demonstrates the point when the cost of doing
business is fully covered by sales. The break-even analysis helps you in
determining what do you need to sell, monthly or annually, to cover your
costs of doing business. You need to determine the break-even point. To
calculate breakeven point, the entrepreneur should determine variables
like selling price, variable cost and fixed cost of the product. It gives the
quantity that a firm should sell in order to be in no profit no loss
situation.
™ Balance sheet: The entrepreneur should also prepare a projected balance
sheet depicting the condition of the business at the end of the first year.
In other words, it tells the entrepreneur a measure of the company’s
solvency. The balance sheet will require the use of the proforma income
and cash flow statements to help justify some of the figures.
Assumed and anticipated balance sheet of the project’s financials is required
to be prepared. This includes including assets that represents everything that
is owned by the company; liabilities which represents everything that the
company owes to creditors; and equity which represents excess of assets over
liabilities. Balance sheet should be projected for the initial three years. Every
business transaction affects the balance sheet, but because of the time and
expense, as well as need, it is common to prepare balance sheets at periodic
intervals (i.e., quarterly or annually). Thus, the balance sheet is a picture of
the business at a certain moment in time and does not cover a period of time.
™ Ratio Analysis: It gives various ratios regarding the profitability and
viability of business and associated risks by calculating returns on
investment, debt-equity ratio, etc.

Various important ratios are:

i) Performance Drivers:
ே௘௧௉௥௢௙௜௧ሺ௔௙௧௘௥௜௡௧௔௡ௗ௧௔௫ሻ
a) Return on Shareholder’s Funds (%)= ௌ௛௔௥௘௛௢௟ௗ௘௥ ƍ ௦௙௨௡ௗ௦

ை௣௘௥௔௧௜௡௚௣௥௢௙௜௧௕௘௙௢௥௘࢏࢔࢚ࢋ࢘ࢋ࢙࢚
b) Return on Total Assets (%) = ࢀ࢕࢚ࢇ࢒ࢇ࢙࢙ࢋ࢚࢙

ii) Profitability Drivers:

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 ࡺࢋ࢚௉௥௢௙௜௧ Business Plan
a) Net Margin (%) = ௌ௔௟௘௦ Feasibility
ீ௥௢௦௦௉௥௢௙௜௧
b) Gross Margin (%) = ௌ௔௟௘௦
ை௩௘௥௛௘௔ௗ௖௢௦௧௦
c) Overhead Costs (%) = ௌ௔௟௘௦

iii) Assets Efficiency:

ௌ௔௟௘௦
a) Capital/ Net Assets Turnover= ே௘௧௔௦௦௘௧௦
ௌ௔௟௘௦
b) Debtor Turnover= ஽௘௕௧௢௥௦
ௌ௔௟௘௦
c) Fixed Assets Turnover= ி௜௫௘ௗ஺௦௦௘௧௦

iv) Liquidity Drivers:

஼௨௥௥௘௡௧஺௦௦௘௧௦
a) Current Ratio= ஼௨௥௥௘௡௧௅௜௔௕௜௟௜௧௜௘௦
஼௨௥௥௘௡௧஺௦௦௘௧௦௘௫௖௟௨ௗ௜௡௚ௌ௧௢௖௞
b) Quick Ratio= ௖௨௥௥௘௡௧௟௜௔௕௜௟௜௧௜௘௦

v) Risk Drivers:

ௌ௔௟௘௦ି஻௥௘௔௞௘௩௘௡ௌ௔௟௘௦
a) Margin of safety= ௌ௔௟௘௦

After getting positive result from financial analysis, you are determined that
the proposed project is more likely to be potentially profitable.

8.6 ENVIRONMENTAL ANALYSIS AND

REGULATIONS
You have learnt about technical feasibility, market feasibility and financial
analysis. Let us now learn about the environmental analysis and regulation.
The external environment consists of a general environment and an operating
environment. The general environment consists of the economic, political,
cultural, technological, natural, demographic and international environments
in which a company operates. The operating environment consists of a
company's suppliers, customers, market intermediaries who link the company
to its customers, competitors and the public. Both the general and operating
environments provide business opportunities, harbour uncertainties and
generate risks to which a business must adapt.
The environmental analysis refers to conditions and factors external to the
company which are outside of the company’s control, that might affect its
sales, market, costs, and so forth. These are often grouped into kinds of
factors, such as the common PESTLE, which stands for political, economic,
social, technological and legal factors that might affect the company. It can
be analysed by SWOT analysis. It aims at highlighting non-economic factors
that may affect the performance of the firm. It includes factors such as:
x Government policies with regard to particular industry.
x Government incentives for special zones for location of the plant.
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 Business Idea x Wasste disposable plans, if required.
Selection and
Feasibility x Poliitical Stability.
x Envvironment Regulations.
x Reggulations related to operations of the business.

An orgaanization relies on strengths to capture opportunities and recognize

weaknessses to avoid becoming a victim of environmeental threats. A company
performss an environmental analysis to gain an understanding of these
strengthss, weaknesses, opportunities and threats .Th he company then gathers
informattion about the selected set of environmenttal factors that are most
likely too impact business operations. For example, thhe company might review
governm ment and industry reports and surveys that relay information about
trade barrriers that companies face in particular countrries.

Variouss Techniques of Environmental Analysis arre as follows:

8.6.1 SWOT Analysis

A SWOT T analysis is a method used to evaluate the business' Strengths,
Weaknesses, Opportunities, and Threats. Using a SWOT S analysis helps to
identify areas that business can improve and maximize opportunities present
in the environment, while simultaneously determ mining negative factors
(threats)) that might hinder the chances of success. Neew businesses should use
a SWOT T analysis as a part of their planning processs. There is no “one size
fits all” plan for your business, and thinking abou ut your new business in
terms off its unique ‘SWOT’ will put you on the right track right away.

OPPORTUNITY

STRENGTHS
SWOT WEAKNESS
ANALYSIS

THREATS

Figure 8.4 SWOT Analysis

1) Streengths (internal, positive factors): Strengtths describe the positive

attriibutes, tangible and intangible, internal to you
ur organization. They are
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 within your control. It cann be the competitive advantage over Business Plan
Feasibility
competitors, new technology, eetc.
2) Weakness (internal, negativee factors): Weaknesses are aspects of your
business that detract from thhe value you offer or place you at a
competitive disadvantage. Youu need to enhance these areas in order to
compete with your best comppetitor. It aims at analysing what lacks in
your business model, is your loocation or technology poor, etc.
3) Opportunitiesexternal, posiitive factors): Opportunities are external
attractive factors that represent reasons your business is likely to prosper.
4) Threats(external, negative ffactors): Threats include external factors
beyond your control that couldd place your strategy, or the business itself,
at risk. You have no control oover these, but you may benefit by having
contingency plans to address thhem if they should occur.

8.6.2 PESTLE Analysis

There are many companies the worrld over, that conduct PESTLE analysis on
their brands in order to ascertain strrategies for the future or else to understand
the market before launching them. IIt is a fundamental tool of market planning
and strategizing that must be carriedd out to comprehend market trends and the
systematic risks involved. It is an acronym for political, economic, social,
technological and legal factors. Leet us learn them.

Political
Factors

Ecological
Social Factors
Fcators

PESTLE
ANALYSIS

Technological
Legal Factors
Fcators

Economic
Factors

Figure 8..5 Pestle analysis

1) Political Factors: It refers to vvarious regulations and policies framed by

the government like initiatives taken, subsidies provided, duties imposed
any other special policies with regard to particular industry etc. It is also
affected by various factors succh as the party in power, attitude towards
the business, political stability and the form of government.
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 Business Idea 2) Economic Factors: It includes factors such as GDP, income of the
Selection and
Feasibility consumer, their purchasing power, standard of living, inflation rates,
disposable income, exchange rates, interest rates, unemployment rates,
money supply etc.
3) Social-cultural Factors: It includes factors such as lifestyles and
attitudes of the customers, cultural backgrounds, social classes and
status, concern for fitness and healthy diets, postponement of having
children, consumption pattern of people, tastes and preferences etc. of
the target market.
4) Technological Factors: It involves study of various technological
changes, investments in research and development, state of technology
development, Innovation level etc.
5) Legal Factors: It involves study of various laws like consumer
protection laws, labour laws; product safety issues competition laws etc.
6) Ecological Factors: It includes various policies with regard to climate
changes, wastage disposal laws, land, water and air pollution, global
warming and green house effects etc.

8.6.3 QUEST
QUEST is an acronym for Quick Environment Scanning Technique. This
method uses scenario’s Building for environmental analysis:
1) Managers make observations about major events and trends in the
environment.
2) They speculate on wide range of issues that are likely to affect the future
of the organisation.
3) A report is prepared summarizing the issues and their implications to the
firms two or three scenarios.
4) The report of scenarios is required by strategy part based on which they
identify feasible options.

8.6.4 CPM
CPM is an acronym for Competitive Profile Matrix. The Competitive
Profile Matrix (CPM) is a tool that compares the firm and its rivals and
reveals their relative strengths and weaknesses. In order to better understand
the external environment and the competition in a particular industry, firms
often use CPM.
It starts with assigning weights to various critical factors indicating the
importance of success for each critical factor. After assigning the weights, the
rating is assigned to the firm and competitors based on the factor ranging
from 1 (major weakness) to 4 (major strength). The score is the result of
weight multiplied by rating. Each company receives a score on each factor.
Total score is simply the sum of all individual score for the company. The
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firm that receives the highest total score is relatively stronger than its Business Plan
Feasibility
competitors.

Firm Competitor A Competitor B

Critical success Factors Weight Rating Score Rating Score Rating Score
1. Market share 0.10 4 .40 4 .4 3 .3
2. Product Quality .25 3 .75 3 .75 3 .75
3. Customer Loyalty .05 4 .2 4 .2 3 .15
4. Price competitiveness .10 2 .2 3 .3 2 .2
5. Sales Distribution .10 4 .4 3 .3 2 .2
6. Customer Service .10 3 .3 2 .2 1 .1
7. Global Expenses .10 2 .2 3 .3 4 .4
8. Advertising, etc. .05 1 .5 4 .2 2 .1
Total 1 .97 .94 1.03

8.6.5 ETOP Analysis

Environment Threat and Opportunity (ETOP) Analysis is a management
tool that analyses environmental information and determines the relative
impact of threats and opportunities for the systematic evaluation of the
environment. ETOP process involves dividing the environment into different
environmental sectors and then analysing the impact of each sector on the
organisation.
ETOP gives a clear picture to the strategies about each aspect of the business
environment, the various individual factors within each sector which affect
the business favourably or otherwise. It consists of a three-step process:
x List all environmental factors
x Access Impact of Each factor
x Get a Big Picture

It provides a clear picture of all the environmental factors and shows which
factors have a favourable impact and which have an adverse impact.

Environmental Factors Nature Of Impact Impact Of The Sector

Economic Factors x Rising income levels

x Price competition

Social Factors x Changes in Lifestyle

x Changes in
customer’s tastes
Technological Factors x Product becomes
unique
x Acquisition of New
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 Business Idea technology needed
Selection and
Feasibility and expenses
Customer Behaviour x Loyalty in purchase
x Buyer’s preferences
for differentiated
goods

Suppliers x High input costs

x Improved quality

Check Your Progress B

1) What do you mean by market feasibility analysis?
2) What is financial analysis?

3) What is PESTLE analysis?

4) State whether the following statements are True or False:

i) Social factors involve study of various laws.

ii) It is necessary to make financial projections for first year only.
iii) The primary purpose of doing a financial analysis of a project is to
evaluate the project's profitability.

iv) Profit is the result of subtracting expenses from sales, whereas cash
flow results from the difference between actual cash receipts and
cash payments.
v) A competitive analysis is a critical part of market feasibility
analysis.

5) Fill in the Blanks:

i) …………………… demonstrates the point when the cost of doing

business is fully covered by sales.
ii) …………………… means dividing the whole population into small
homogenous group.

iii) ………………………….. is the part of the total population that has

shown some level of interest in buying a particular product or
service.

iv) …………………………….. concerns about formulating strategies

concerning the 4 Ps.

v) An organization relies on …………………………….. to capture

opportunities.

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 vi) The entrepreneur should also prepare a projected Business Plan
Feasibility
………………………….. depicting the condition of the business at
the end of the first year.

6) Multiple Choice Questions:

i) ……………………….. is not a part of SWOT analysis
a) Weakness
b) Strength
c) Opportunities
d) Tricks

ii) ……………………. is not a part of PESTLE Analysis

a) Political
b) Legal
c) Strengths
d) Economical

iii) ……………………. are the internal positive factors.

a) Strengths
b) Weakness
c) Tricks
d) Strategies

iv) ………………….. involves policies and regulations framed by the

government.
a) Legal factors
b) Economic factors
c) Political factors
d) Technological factors

v) ……………………. tells the entrepreneur the condition of the

company at the end of the financial year.
a) Cash Flow Statement
b) Balance Sheet
c) Income Statement
d) Ratios

8.7 LET US SUM UP

Feasibility analysis takes the guesswork (to a certain degree) out of a
business launch, and provides an entrepreneur with a more secure notion that
a business idea is feasible or viable.
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 Business Idea Business feasibility study is used to support the decision-making process of
Selection and
Feasibility the business based on the cost-benefit analysis of the business or the project
viability. Feasibility study is to be conducted even before the commencement
of a formal business plan. Feasibility studies are important to business
development. They can allow a business to address where and how will it
operate. They can also identify potential obstacles that may impede its
operations and recognize the amount of funding it will need to get the
business up and running.

Every feasibility analysis should consist of Technical Analysis, Market

Analysis, Financial Analysis and Environmental Analysis.

The technical feasibility refers to the ability of the process to take advantage
of the current state of art technology in pursuing further improvement.
Technical feasibility also involves the evaluation of the hardware, software,
and other technical requirements of the proposed system. Technical appraisal
involves the study of various aspects which include: Scale of Operations,
Raw materials, Location of the Project, Technical Know How, Calculating
Labour Requirements, Possibility of collaborative Agreements, Plant Layout,
Project scheduling and implementation and Product Design.

Market Feasibility is all about how will the real-world market be reacting
towards a particular development. Market feasibility studies should include a
description of the industry, current market analysis, competition, anticipated
future market potential, potential sources of revenue, and sales projections.
Market feasibility can be tested by analysing Industry, Demand of the
product, Potential markets, Customer Segmentation and Targeting, Marketing
strategies, Cost, Pricing Methods and Profitability and Competitors Analysis.

Financial analysis is the process of evaluating businesses, projects, budgets,

and other finance-related transactions to determine their performance and
suitability. Typically, financial analysis is used to analyse whether an entity is
stable, solvent, liquid, or profitable enough to warrant a monetary investment.
The projected income statement provides a sales estimate in the first year
(monthly basis) and projects operating expenses each month. These estimates
are determined from the appropriate budgets, which are based on marketing
plan projections and objectives.
Cash flow is not the same as profit. It reflects the difference between cash
actually received and cash disbursements. Some cash disbursements are not
operating expenses (e.g., repayment of loan principal); likewise, some
operating expenses are not a cash disbursement (e.g., depreciation expense).
Many new ventures have failed because of a lack of cash, even when the
venture is profitable.
The entrepreneur should also prepare a projected balance sheet depicting the
condition of the business at the end of the first year. In other words, it tells
the entrepreneur a measure of the company’s solvency. The balance sheet is a
picture of the business at a certain moment in time and does not cover a
period of time.

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Break even analysis gives the quantity that a firm should sell in order to be in Business Plan
Feasibility
no profit no loss situation. Ratio Analysis gives various ratios regarding the
profitability and viability of business and associated risks.

The environmental analysis refers to conditions and factors external to the

company which are outside of the company’s control, that might affect its
sales, market, costs, and so forth. These are often grouped into kinds of
factors, such as the common PESTLE, which stands for political, economic,
social, technological and legal factors that might affect the company. It can
be analysed by SWOT analysis which stands for strengths, weaknesses,
opportunities and threats.

8.8 KEYWORDS
Break-Even Point: The point at which there is no profit and no loss.

Competitors Analysis: Competitor analysis is an assessment of the strengths

and weaknesses of current and potential competitors relative to those of your
own product or service.

Feasibility Study: It means whether some idea will work or not. It is the
preliminary evaluation of a business idea, conducted for the purpose of
determining whether the idea is worth pursuing or not.

Financial analysis: It is the process of evaluating businesses, projects,

budgets, and other finance-related transactions to determine their
performance and suitability

Market Feasibility: It is concerned with gaining the in-depth knowledge and

doing a deep analysis of market and knowing how the target market is going
to respond towards particular project/product.

Market segmentation: Itmeans dividing the whole population into small

homogenous group on the basis of demographics, geographical,
psychographic and behavioural factors.

PESTLE Analysis: It is an acronym for political, economic, social,

technological and legal factors.
Plant Layout: It refers to the physical arrangement, either existing or in
plans of industrial facilities i.e. arrangement of machines, processing
equipment and service departments to achieve greatest co-ordination and
efficiency of 4 M's (Men, Materials, Machines and Methods) in a plant.

SWOT Analysis: A SWOT analysis is a method used to evaluate

the business' Strengths, Weaknesses, Opportunities, and Threats.
Target Market: A target market is the specific group of people you want to
reach with your marketing message. They are the people who are most likely
to buy your products or services, and they are united by some common
characteristics, like demographics and behaviours.

Technical feasibility: It means the evaluation of the hardware, software, and

other technical requirements of the proposed project. 187
 Business Idea
Selection and 8.9 ANSWERS TO CHECK YOUR PROGRESS
Feasibility
A) 4.i True, iiTrue, iii.False, iv.False, v.True
5. i.physical arrangement; ii.manufacturing; iii. hardware, software;
iv.commercial viability, v. market research and analysis
B) 4. i.False, ii.False, iii.True, iv.True, v.True
5. i.Breakeven Point, ii.Market Segmentation, iii.Target Market,
iv.Marketing Mix, v.Strengths, vi.Balance sheet
6. i. d ii. c iii.a iv. c v. b

8.10 TERMINAL QUESTIONS

1) Why is it important to conduct feasibility analysis before launching a
product?
2) Explain the important questions that are required to be answered by the
entrepreneur while conducting technical analysis?
3) Briefly explain the Projections required to me made in financial analysis.
4) Why is it important to conduct Market feasibility analysis? Briefly
describe the components of market feasibility analysis.
5) What are the various demand forecasting methods?
6) What aspects of environmental analysis is required to be done before
launching the project?
7) Write short notes on:
x Market segmentation and targeting
x SWOT analysis
x PESTLE analysis
x Breakeven analysis

Note: These questions will help you to understand the unit better. Try to
write answers for them. But do not submit your answers to the University for
assessment. These are for your practice only.

FURTHER READINGS
x Hisrich, R. D., Peters, M. P., and Shepherd, D. A.
2016.Entrepreneurship, Indian Edition, Mc Graw Hill Education; (Part
three, Chapter 8).
x Kaplan J. M. and Warren, A. C. 2015.Patterns of Entrepreneurship
Management, Wiley; (Part one, Chapter 4).
x Kaulgud, A. 2003. Entrepreneurship Management, Thomson; (Chapter 9)
x Kuratko, D. F. and Rao, T.V. 2016.Entrepreneurship, A south-asian
perspective, Cengage Learning; (Part two, Chapter 10).
x Roy R. 2009. Entrepreneurship, Oxford; (Section three, Chapter 12)
x Zimmerer T.W. & Scarborough N. M., 2013. Essentials of
Entrepreneurship and Small Business Management, PHI Leaning;
(Section II, chapter 4)
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