One of the first things you need to consider is whether or not there is a market for your new product or service idea. There are three areas to assess, which include the size of the total market, the share you can reasonable expect to gain, and the window of opportunity.
Conduct some industry research to determine the total market size for your product or service. Let’s assume your new product is a dress shoe for women. With some basic online research the footwear industry in 2012 was $64B, with 13% in women’s dress shoes. So, you know you have an $8B industry. Next, you need to determine what percent of that industry you can reasonably attain. There are multiple brands of women’s dress shoes, so you need to be extremely conservative in your estimate. In such a large industry, with so many well-known competitors, a new company cannot expect but a very small fraction of the business. Let’s assume one-third of one percent at best. This comes to $26,400,000. Most likely you will be collecting royalties from an established shoe manufacturer, and a reasonable amount is around 8%. This leaves you with $2,112,000 in revenue.
Now you need to look at the window of opportunity. In other words, is the market in the financial position to purchase your product and is your product going to appeal to them? Let’s assume it is truly a revolutionary design that has a detachable heel shaft, so women can alter shoe to be a healed shoe or a flat. This at least sets you apart from the competitors. You can reasonably assume that women are going to continue to want and need dress shoes for multiple occasions. Nothing in your market research suggests that women are going to stop buying dress shoes. So, it is safe to assume the window of opportunity is open for your new product idea.
Management Team Capital
It is important to assess who as at the helm of your company to determine whether or not it can be managed well. Many businesses go under, not because of a lack of revenue, but because the management team does not have the adequate skills and mindset to operate the company. There are three areas to assess: human capital, social capital, and psychological capital.
Human capital is the value of the knowledge, abilities, skills, and experience a person brings to an organization. When considering who to bring onto the top management team of an entrepreneurial venture, potential candidates are often evaluated on things such as previous entrepreneurial experience, knowledge of the industry and market, years of education, past work experience, and technical knowledge directly related to a product, service, or process.
Next, is social capital, which is the value of actual or potential assets and resources a person can acquire for an organization based on who he or she knows, particularly in your industry. When considering who to bring onto the top management team of an entrepreneurial venture, potential candidates are often evaluated on things such as their reputation in the business community, what associations they belong to, and people they know who can provide financial assets, information, or other resources to the organization.
The final component is psychological capital. While human capital refers to “what you know” and social capital refers to “who you know”, psychological capital is reflected in person’s self-view or sense of self-esteem. Thus, one could look at psychological capital as a person’s sense or view of his or her ability to utilize the human and social capital he or she brings to an organization in a productive manner.
For all three categories, how does your management team stack up? Not everyone needs to be strong in all three categories, but there needs to be a strong balance between all three components among the members of the top management team to ensure you are capable of managing the company.
The final component of a feasibility analysis is financial viability. There are four critical elements to consider: how much capital you need to start the business, how much profit per unit you can expect to generate, how quickly revenue is likely to be generated from repeat customers, and how much the industry is expected to grow in three to five years.
Start-up capital includes one-time start-up expenses such as real estate or major equipment plus at least three months of operating capital such as employee wages and inventory supplies. You need to calculate this to determine if you can raise enough money to launch the business.
Profit-per-unit is another factor to consider. Previously, the assumption was that $2,112,000 was the amount of revenue you could possibly attain during your first year of operation. How much profit is that per pair of shoes, and is that enough to cover the cost of each pair of shoes minus all the other expenses tied to the business such as paying employees, your lease, management team salaries, and other operating expenses?
Repeat business provides more profit to a start-up than new customers in the long-term. How often will potential customers buy a pair of your shoes? Are they likely to just buy one pair per year, or will they buy multiple pairs? Conduct some research to find out how many pairs of dress shoes an average woman buys in a year, and then apply that to your own business. The more repeat purchases you can acquire, the better for your financial viability.
Industry growth in the next three to five years is another factor to research. Is the industry you are going into expected to grow, remain stable, or decline? This requires further research for the management team. Hopefully, you are entering a growing industry or one that has remained stable for several years.
Before you begin writing a business plan to execute the business, conduct a feasibility analysis to determine if your market is right, the management team is capable, and if it is financially viable for you to launch your business. If it turns out to be feasible, you can use a great deal of the information you collected to write your business plan.