Chapter 3 - Assessing market feasibility and viability Flashcards
Entrepreneurial orientation
Entrepreneurial orientation involves coming
up with business ideas, and taking efforts to evaluate them to see whether those
ideas will be feasible and viable in the long run.
Three stages in setting up a business
- Idea stage - During this stage, entrepreneurs identify business ideas that they intend to
convert into a business. This stage includes, amongst other important issues, generating a variety of business ideas, cultivating a creative attitude, initial screening and finally testing feasibility. Feasibility testing is a crucial stage, since if the idea is not practical, it is an indication that the business may not succeed and that another business idea should be identified instead. - Planning stage - This stage refers to the process of doing a thorough investigation of the ideas to
determine whether a business idea will make a profit and can be marketed. Viability can be defined as a forecast of interest in the business, its products sales forecasts expressed in units at a particular price and the anticipated costs linked to the sales
of the products. - Implementation stage - Once the business idea is assessed as feasible and viable, it can be implemented
by starting an enterprise. During this stage, the entrepreneur organises all the production means to ensure that the business starts well without challenges. This includes, for example, applying for a loan, renting premises and contributing
start-up capital.
Feasibility
At essence, feasibility
assessment calls on an entrepreneur’s ability to examine a business idea and to
then see whether it can be converted into a business.
A business idea will either be feasible or non-feasible:
Feasible business idea: This is an idea with potential for being converted into a business.
Non-feasible idea: This is an idea without any potential of being converted into an enterprise. A business idea that is not feasible means the entrepreneur
should leave the idea and start from the beginning to identify another idea.
Steps in performing a feasibility study
- Do I want to do what the idea suggests?
- Is there a market for the idea?
- Can I satisfy the customers?
- Can I get the ideas to my customers?
Reasons for doing a feasibility test:
It is done when one intends assessing the cost for starting a business. A feasibility study is done when one intends to buy an existing business:
It also done when you want to apply for finance.
It is further done to determine whether the business idea can develop into a business.
The investigative process identifies new opportunities.
A feasibility study identifies the reasons for not continuing with the business idea.
Effectuation
Effectuation is a logic of entrepreneurial expertise that both novice and experienced entrepreneurs
can use in the highly unpredictable start-up phase of a business to reduce failure costs for the entrepreneur.
Effectuation is defined as a way of thinking that serves entrepreneurs in the process of opportunity identification and new venture creation.
Effectuation is important for entrepreneurs and prospective entrepreneurs who are anticipating to improve the state of the world and the lives
of individuals through the creation of firms, products, markets and services.
Effectuation principles
- Bird-in-principle = What it means is that one needs to start taking action based on what you have at hand, who you are, what you know, and who you know.
- Affordable loss principle = In this case, it is important to limit the risk by understanding what they can afford to lose.
- Lemonade principle = In this regard, it is important to take into account surprises that arise from uncertain situations, remaining flexible
- Patchwork quilt principle = This principle embraces the establishment of partnerships with people and organisations willing to make a commitment to
jointly create a venture or market with you. - Pilot in the plane principle = This principle is more concerned with activities over which entrepreneurs have direct control, anticipating that their actions
will result in the desired results.
Viability
A business often conducts a viability study to determine the potential profit that may be yielded in a new business idea. Viability refers to the process of estimating three things (Strydom & Niewenhuizen, 2007):
- How much interest there is in the business and its products
- The expected sales (calculated on the basis of particular prices for products)
- The expected costs relating to the sales of the product.
Viability test
Determine the market potential: Carry out market research to establish whether there is a need for the product; determine the mission and objectives
and do market analysis to calculate the expected market share.
Determine the profit potential: This step involves calculating the expected
income and cash flow projections.
Focus areas for market research
Needs analysis: Finding out whether there is a need for the product
Customer profile: Identifying who is likely to buy the products or services
Market share: Determining how many products or units of service the entrepreneur can sell
Price analysis: Establishing what the entrepreneur can charge for products or services.
Formula for expected income
Calculate the total cost per unit + add a percentage profit to the cost price = expected income
Types of costs
Fixed costs are costs that remain the same in total, regardless of the number of
units produced. Examples are costs relating to salaries or rental. These costs are fixed in total but will vary per unit depending on the number of units produced.
Variable costs are costs that are fixed per unit. Examples of variable costs are raw materials and hourly wages. These costs increase proportionally with the
number of units manufactured or produced.
Direct costs refer to the costs of manufacturing of a product. These are costs for direct labour, including wages for workers involved in the production of
products or services.
Indirect costs are costs that cannot be allocated directly to the manufacturing of the product.
Breakeven point
The formula for calculating the breakeven point is the following:
TI = FC + (VC × X)
Where:
P = Price per unit
X = Quantity produced/number of units
TI = Total income
Total income is calculated as = P × X (Price × Quantity produced)
Total cost = FC + VC × X
FC = Fixed cost
VC = Variable cost
The calculation could also be written as:
UBEPx = FC/(P – V)
Where:
UBEPx = Number of units to be produced at breakeven
FC = Fixed costs
(P – V) = Price per unit minus variable cost per unit.
Lowering breakeven point
- Increasing prices - In many instances entrepreneurs are wary to increase their prices because they
are afraid that they may lose customers. This could result in a situation where entrepreneurs do not increase prices. - Lowering direct costs - Buying materials at lower cost can lower the breakeven point. However,
entrepreneurs need to be meticulous about purchasing quality material. There is also a need for the inventory of materials to be controlled properly to avoid loss
and aging of materials. - Exercising control over fixed expenses - Entrepreneurs have to be cautious when implementing the process of cutting fixed costs and to take into account the entire plan of the business. The cutting of
fixed expenses may cause uncertainty to workers at the business when the process is not carefully thought through - Increasing production or sales - If entrepreneurs can increase production and sales, this will result in higher profit margins which will reduce the breakeven point. Efforts have to be taken to ensure that the products are appealing to customer
Deciding on selling price
Total cost per unit + percentage profit = selling price
