The 2008-2009 University of Dayton Business Plan Competition

Coaching Session three: Feasibility Analysis

Coaching and the Elevator Pitch

This week, more on the opportunity, and a first cut on the finances

Let’s start with a fun exercise

Here is the problem to solve We have a huge honking trade deficit with

China Worse, most of our exports are knowledge,

most of theirs are physical goods What is the problem/opportunity? Shipping

cargo containers?

Once they send it here, do we send it back empty?

What solutions can you think of?

I’ll put some of my own thoughts on the next slide

Some ideas

New design—a “fold-flat” container. Put doors on the end, and rent them as temporary

storage units Put in windows, and make them portable offices Load them with garbage, and ship to Chinese Dumps How about goodwill items to be sorted for Africa? Build affordable houses out of them for the poor

I was serious!

Building house of the poor--this concept was a winning Business Plan Competition at Notre Dame University

But I still think I thought of it first!

What does this have to do with feasibility analysis?

We can see the problem, and come up with creative solutions

Now we need to refine them, to make them viable

Why do feasibility analysis?

To see if the opportunity can actually be implemented profitably

To identify means to refine the opportunity such that it can be implemented profitability

It’s okay if after doing this you walk away—it means you could cut your losses

Four questions to ask before you start the feasibility analysis

1. What is the product or service being offered?2. Who is the customer?3. How do you get the product to the customer?4. What is the benefit?

Features vs. benefits

Features are what you offer Benefits are what people demand They are not the same

Example: offering unique furniture is not a benefit—pieces that drive demand to a retailer’s store is a benefit.

People assume having a unique feature means you have no competition—wrong!

– If your product drives demand for other products, retailer much more enthusiastic about carrying it

Feasibility Analysis

Competitive Organizational Technical Market Financial

Competitive Feasibility

Why your product and not a competitor’s? Is that difference something your competitor

can match, or not?– Level of effort to match?

Can you protect your product from being copied.

Are you the right fit, or is someone else?

Is someone else a better fit than me?

I went to Paris to present a paper at a conference—had a lot of fun-thanks for sending me!

While walking to the Eifel tower, an 8 year old pickpocket tried to steal my wallet.– I let him go.

I came up with an idea for a business

Trojan Horse credit cards!

Imagine a credit card in your wallet that looks real, but is actually fake—when someone tries to use it, it sounds an alarm.

What if you could also place temp holds on your real cards the first time this one is used?

But who should really launch this?– Visa, Amex, M/C, Discover, not me– This fails the competitive feasibility analysis—for

me

Organizational Feasibility

How much of the product/service is within your control, and how much is not?

Do you need a license to sell? What skills does the organization need to

succeed (hint, not everyone org needs every functional area—much can be outsourced)

Technical Feasibility (assumes you can actually build it) Key Questions

Is a key part of the solution patented by someone else? Can you patent a key part of the solution? Commodity vs. value-added

– *hint: easy to rent tech people overseas)

Can you acquire the resources needed to make it happen?

Can IPRs protect your solution?– Lightcycles Christmas lights story

Financial FeasibilityBreak Even Analysis

How much do you have to sell to cover your fixed costs? (fixed = rent, utilities, salaries etc.)

Unit sale price-COGS (Cost of Goods Sold) = CM (Contribution margin)

– Include sales commissions and other costs directly traceable to the sale

Each sale “contributes” an amount towards covering your fixed costs

Financial FeasibilityA quick example

Suppose you decide to open a store selling futons You sell Futons for $200, you get them for $125. Your contribution margin is $75 (37.5% of the sales

price) If fixed costs are $5,000 a month, then BEP is

5000/75= 67 futons a month. About 16 a week, 2-3 a day depending on the number of days a week you’re open.

Financial Analysis Market AnalysisBreak Even: now that you know BEP

How feasible is it to sell 16 futons a week?– How big of a market do you need to sell 16 futons a

week? – How hard is it to reach that market?– How long until I can build to 16 futons a week in

sales?

The Penetration rate

Penetration rate—what percent of a market do you have to sell through to break even?– More than 25% becomes a problem.– Less than 2% is also a problem (invites competition)

BEP/Market size=Penetration rate

Penetration rates and Elevator Pitches

If you can state a healthy BEP and penetration rate, it makes your case stronger.

“Our BEP only requires an 8% penetration of the UD undergraduate market”

Market Feasibility: Market size, Clusters

Suppose I plan to start in a local market– What percent of the market do I need to convert to customers

in order to be profitable?– What percent have to be repeat customers?

UD vs. OSU. With 6,500 undergrads, a business that requires selling to 2,500 undergrads each year means getting almost half the campus to buy your product

But at OSU, with 50,000 undergrads, that’s only 5%: which is much more reasonable.

But Dayton, X, Miami, UC, & OU equal OSU in size

Correct—but if your product requires a physical presence, you need five sites, employees for five sites, ads in five sites

You’ll have higher costs and more coordination issues, probably lower margins

This is why Penetration rate is so crucial!

A failed idea from the recent past

Problem: UD doesn’t permit permanent furniture on porches.

– Lawn chairs can only seat one person Solution: Folding love seats—can hold 2-3 people, but

isn’t permanent, satisfies campus housing issues– Make them for $15, sell them for $40, $25 CM.

Market Feasibility issue: How many porches at UD are there (a few hundred). Is there a business here? Not more than a micro-business

More about clusters

Suppose you can identify 100,000 people who are likely to buy your product—how do you reach them?– The closer they are to being clustered in a

meaningful sense, the more feasible the idea– Need not be geographical

“End-Notes” example, sells to Doc students

The more means it takes to reach them the less feasible

The internet may help you create a cluster

If you sell a product that has a loyal following, but very niche, the internet may be the only way to cluster

Clusters are aggregations—the easier to cluster, the more feasible

Refining the idea (three slides)

Just because the numbers don’t work at first doesn’t mean the idea is doomed—try different solutions to see if it can be made better

What else can you do to improve the analysis?

Find new sources of income from the same business– Can you finance it?

Train users in it? Set-up/tear-down/delivery? Upgrade users to a nicer product? Add bonus features?

Can you lower costs?

Increasing the contribution margin reduces the penetration rate, making more markets feasible

An entrepreneurial mindset to resource usage (ways to lower costs)

Physical Relational Org Financial Intellectual/Human Tech

Purchase

Borrow

Share

Lease

Rent

Outsource

Contract

License

Clever

How best then to evaluate an opportunity (13 slides)

Think about the following– Value added– Growth– Protection from competition

What is the product/service you offer?What business are you in?

How you define this matters!– Define in terms of the customer problem being

solved Danger! By defining the business you’re in

narrowly enough, you can claim competitors really aren’t there. (Hint: they are there)

– I.e. The cold-sandwich expedited preparation delivery industry

(excludes subway and blimpies)

Who is the customer?

Phrase it another way—who do I have to please?

Suppose you wanna sell spaghetti sauce—the real customer are grocery stores, not end consumers. You have to please both!

Know where you fit in the industry’s field

What is a Champion Opportunity?

Champion is a series of questions designed to lead you towards moving forward, refining, or otherwise rejecting an opportunity concept.

Champion is a mnemonic for eight evaluative areas to consider.

Before you write the B-plan, answer these questions, looking for bugs to fix

For each letter then,

Ask if the questions lead to a benefit, an obstacle, a source of advantage, or a fatal flaw.

For obstacles and fatal flaws, it suggests you must go back to the drawing board.

For benefits and advantages, it means you should ask if you can sustain them or not.

A champion opportunity

Should possess no fatal flaws, should not face critical obstacles, and should be reasonably sustainable

Look for a CHAMPION Opportunity

C competitive advantage/competitor analysisH harvest A attributes of the Entrepreneur/opportunity fitM market P productI investmentO outcomes (non-financial)N network

A CHAMPION Opportunity

Should reflect well on all of these questions, and more as well.

Fatal flaws should not exist. It isn’t important to be the best at everything,

but you should have something compelling about your product.

Gimme a C!Competitive Advantage/ Competitor Analysis

Employ Porter’s five forces model How much of your idea results from a unique

resource? Can you protect that resource? At what cost? Are there reasonable substitutes? Who is your competition? What is the nature of the

competition? Who makes the profits within the most commonly

accepted business model for this industry?

Gimme an H!(Harvest)

How do the players get out? Are you wanting to buy out others (e.g. a roll-up), or be

bought out? Can it go public? Is this designed to be self sustaining? Are you the primary link of value? If so, how do you

leave?*

*(you will leave someday, it’s called death)

Gimme an A!Attributes of the entrepreneur

What skills does the entrepreneur (you) possess? What type of business are they seeking (growth, lifestyle, etc.)?

How well does it fit their personality, goals, and lifestyle? How big do they want to be? How much experience do they have for this given industry? What skills has the entrepreneur recruited to complement their

own? E.g. How good is the supporting cast? Is this entrepreneur the right person to exploit this opportunity, or

is someone else more appropriate?

Gimme an M!Market

Customers:– Do customers recognize they exist? Or must you educate them to their need?– Are they clustered, or spread out?– How do they currently meet their needs?

How cyclical is it?– Does this generate large profits, or small ones?– Does this have large potential?

Market dynamics– How big is the market, and who is already there? – Can you split an existing market into smaller ones?– How vulnerable is your market to being split?– How well does information flow in a market?

Gimme a P!Product

How unique is your product?– If technology drives the uniqueness, how long before it is obsolete, or replicable?– If relationship drives the uniqueness, how large can your idea growth before being

constrained? Can the relationships be leveraged? Will you create competitors? In terms of the generic strategies, where do you fit?

– Are you a niche player, low cost, or premium brand? How important is service? Is this an impulse buy?

– Does it require commitment from the buyer? Is this a product in search of a market, or a market in search of a

solution?

Gimme an I!Investment/Income

Accounting measures– Profits after tax– Gross margins– ROI/ROA/ROE

Cash flow issues– BEP– Payback period– Size of initial investment

Can it be staged, incremental investment– Free cash flow– AFN

Do you have any room for error?– How important are high margins/high market share?

Gimme an O!Outcomes (non financial)

How is the timing for the opportunity? Are you ahead of the times, behind the times?

– Are you a “me—too!” opportunity? What risks are you taking for this venture?

– How do you define risk? What opportunity costs are you taking?

– What stress does this opportunity create? Are there any fatal flaws that you can see? Are there benefits to investors in pursuing this even if it

fails?

Gimme an N!Network

In terms of Ackerlof’s “law of lemons”, have you differentiated yourself as an entrepreneur?

How well developed is your group of contacts—do you know who all you need to turn to?

Do you recognize when you must turn to others for help?

What is your reputation among external resource providers?

– Are you well known in the industry? How many people are already on board?

Overall, is it a champion idea?

Category Grade CommentCHAMPION

A final thought

Although protecting ideas are important, execution matters more:– You’ll have to share a lot of detail with people in

order to get good advice.