Innovation and product development in the manufacturing industry
A Report Outlining Main Arguments for and Against the Use of Feasibility Studies to Determine Potential Business Success
Table of Contents
Example of a feasibility study and discussion. 6
Assessment of feasibility study. 10
Recommendations for the Organization. 13
A Report Outlining Main Arguments for and Against the Use of Feasibility Studies to Determine Potential Business Success
Introduction
Feasibility study is the process of analyzing and evaluating the potential of a business or a project that has been proposed. This study entails extensive researches and investigations on the possibility of business success or failure, thus, the information collected becomes pertinent in decision making. The need for feasibility studies has been growing owing to the increase in the number of business failure especially during their first five years of operations. As a result, investors are more willing to spend and finance such studies as they evaluate the validity of a business idea. Specifically, feasibility studies answer the question raised by an entrepreneur regarding the need to either seize or cease a project idea. It has been established that the application of feasibilities studies is extensive such that the information collected from the evaluation can be used in myriads of ways apart from the primary role which is to approve a proposed venture (Lumpkin & Dess, 2006, p 142). The information is as important to banks, venture capitalists and other primary stakeholders as it is to the entrepreneur since it acts as a business plan and thus stating the weaknesses and strengths of a proposed business.
Essentially, competitive analyses and financial analysis could be helpful in determining if a given idea might be a waste of time and resources thus saving the stakeholders the resources that could have otherwise gone to waste. On the same note, it is appreciated that a venture that is economically viable and feasible has to promise that it will generate cash flows that will be profitable. For the entrepreneur to be assured of sustainability, risk assessments have to be conducted so as to identify the intensity of risks the business is likely to face both in the short run and long run. By so doing, the probability of its meeting the goals set by the founders of the business are met. Unlike some entrepreneurs have been made to believe that feasibility studies can only be performed on start-up business ventures, Young (2010, p 380) is of the thought that existing businesses can still conduct feasibility evaluations. This is likely when making arrangements for mergers and takeovers, transfer of businesses or even when an organization wants to launch a new product. Based on this introduction, this report seeks to assess the feasibility of the Community Crusaders business plan which is a sole proprietorship owned by Ian White. The mission of the company makes it vulnerable to financial risks. As a result, the need to outline the main arguments for and against the use of feasibility studies to determine potential business success is raised.
Literature Review
The area of feasibility study and its application in business has not elicited much research in the past. This implies that the topic, unlike other topics related to entrepreneurial business management has not attracted much attention among business researchers and theorists. According to Dana (2010, p 47), feasibility studies also known as feasibility analysis, can combatively be referred to as a cost-benefit analysis. The analysis seeks to evaluate the effectiveness of a new system or a new expansion before it is added onto the business. He further suggests that feasibility studies can be sub divided into two schools of thought; time based study and cost based study. Dana (2010, p 47) goes ahead to argue that the information derived in both studies provide a comprehensive assessment of the organization in terms of profit margins and levels of stability. For instance, the cost based study majors on analysing the probability of a business to be sustainable and successful by calculating operational and developmental costs. Operational costs denotes costs realized during production thus they are necessary in facilitating the functional aspects of the business while developmental costs form the bulk of acquiring the factors of production and setting up a business. Pinson, (2004, p 54) seconds that making calculations related to costs could be helpful in evaluating the chances that a business will either fail or succeed. For example, undertaking a cost analysis on the Community Crusader business venture will enable Mr White to get the near accurate operational and developmental costs for setting up the project. Cost based evaluations often include deep routed considerations that entail a full analysis of the macro environment and the microenvironment. Economic factors are ranked highly while other influential factors such as government regulations and policies or political factors come in handy when calculating costs to be incurred by Community Crusaders business.
Dana (2010, p 50) describes the second sub-division for feasibility studies as being time-based. This explanation is made in form of a hypothesis, which is grounded on the need to establish the time that it will take for the entrepreneur to start enjoying the profits. Such a study is focused on timing, thus, it analyzes the future of a business in terms of profitability. It takes into account commodity value as well as inventories held by the organization. Time based studies are therefore focused determining the ability of the firm to generate profits over an extended period. It is therefore advisable that Community Crusader has to undertake a time based evaluation or study of the proposed community growth start-ups after which Mr. White can decide on the projects that will have a higher chance of sustainability based on estimated calculations of Net Present Value (NPV) and Internal Rate Returns (IRR) (Georgakellos & Marcis, 2009, p 231). Mr. White will find these two studies to be of extreme importance to the business startup as the time based study will estimate the duration required to gain back the money invested in the various high risk ventures. Unlike Danev who classified feasibility studies based on time and cost, O’Brien and Marakas, (2011, p 488) identified five sub divisions of feasibility studies that can be applied to businesses. The different areas include; technical, economic, operational, legal and scheduling. Technological feasibility comes handy with system evaluations, which can be helpful to the Community Crusaders Company when analysing whether the technical expertise of the employees and their ability to contribute towards continued organizational success. In fact, the feasibility study makes provisions for a section where a brief description on the company’s prospects can be made. Secondly, the report gives an analysis of human and economic factors while making provisions for possible solutions to identified problems. In fact, the first stages of the analysis often entail and analysis of the business in terms of its technical requirements and legality.
In the event that the business activities to be undertaken by Community Crusaders are illegal according to the law, then the idea will not go through the other stages of the study. This section is contained in the legal feasibility study where all the components of the system are analysed for compliance. For instance, the tax system, the Information and Technology system, the inventory system and all the other systems will have to be tested for compliance (Ciavarella & Buckholtz, 2011, p 490). The third grouping is operational feasibility, which measures the ability for the management to handle emergencies, solve problems, resolve conflicts and embrace random opportunities. Assessments made at this stage also ascertain the possibility that the business will fit into the competitive pressures set by the industry in which it intends to operate. The nature of operations undertaken by Mr White as the manager for Community Crusaders has to ensure that it conforms to a design that promises efficiency, reliability, supportability, usability, maintainability, disposability, affordability and sustainability (Brinkman, 2010, p 19). In order to be effective, operation feasibility has to be undertaken during the early stages of business design so that the different organization processes can be synchronized in a way that will maximize on profitability. The process of meeting operational efficiency for Community crusaders has to be aided by the input of operation engineers as well as managerial experience. This is because, it is often believed that a system that incorporates operational and technical characteristics into its design increases the chances that it will serve the purpose it was intended for.
Nykiel, (2007, p 22) identifies that there are more advantages of carrying out feasibility studies on a business start-up since the section on economic feasibility helps determine the economic benefits likely to be gained from undertaking a given business venture. The process of assessing this feasibility includes identification and quantification of the expected benefits by use of a cost/benefit analysis. On the other hand, technical feasibility is focused on analysing the technical resources held by an organization and how these resources can be applied to the proposed system so as to increase on the chances of business success (Bentley & Whitten, 2007, p 32). Basically, this section entails a comprehensive evaluation of the software and hardware. Schedule feasibility is an equivalent of the time based analyses. In the event that Mr White delayed the completion of the Community Crusader Company, then there will be an increased chance that the business will fail. The section on scheduling seeks to estimate the time frame for undertaking business projects and the cost implications associated with delayed completion. In reality, increasing the payback period could reduce the chances of business success thus it becomes advantageous for the owner of Community Crusaders to consider undertaking a feasibility study. Other authors seeking a more classified analysis of a start-up business are likely to go an extra mile into considering other feasibility factors such as the market feasibility, resource feasibility, cultural feasibility and financial feasibility.
Example of a feasibility study and discussion
An example of a feasibility study in support of the literature theory stated in the previous section is shown in the XYZ Company, which intends to invest in the production of widget parts. The objective of the project is to determine the appropriateness or the feasibility of producing plastic widgets. The information provided by the company include part drawings of the projected design, description of the part requirements, production information and other information that was requested by the feasibility advisor. The executive summary for the feasibility study identified that the manufacturing process required various components, which included an injection mould made of a polypropylene material. The problem arose from the fact that there were several types of moulds and each would have a considerable impact on the sustainability and profitability of the business. The materials included the single cavity, centre sprue gate (SC, CSG), single cavity, hot runner edge gated (SC, HREG) 3 and multiple tab gates or fan and the two cavity, hot runner edge gated, multiple tab gates or fan (TC, HREG) (Benjamin & Fabrycky, 2010, p 90). A feasibility study for this project could only be possible after the identification of material estimates and the moulding process, tools to be used and the costs of the parts as shown
in the figure below.
Figure 1: Tooling and Purchased Cost Estimate
This table makes it subtle that the project of manufacturing widgets is complicated by the fact that the machinery used differ in quality and costs. Additionally, the total cost of a machine might be cheap but the spare parts are so costly. This implies that the XYZ Company will have to incur more costs when the machine breaks down than if it had purchased a machine that is expensive but has low cost spare parts. Apparently, an advantage of feasibility study is made evident in this case since it provides a comprehensive report on the estimated costs for the tool and that of the spare parts. This advantage is seconded by a chart which presents a graphical representation of the relationship between the part costs and the possible production volume. As a result, it enables XYZ to have a basis for decision making and this becomes the prerequisite for
determining potential business success.
Chart 1: Part cost versus production volume
The executive summary of the feasibility study for XYZ factory depicts a summary of the findings made after the feasibility study, recommendations made and the conclusion. In part, the study identifies that the two-cavity tool is likely to produce low cost widget parts with a cost range that is medium. All the estimates fall within the range of data given by the management at XYZ except for SC, HREG, which exceeds the annual cost of the produced parts. A decision is not determined at this time on the best production tool to select among the three and so the feasibility study is important helping guide the recommendation process. It is only after the study that it is made lurid on the best tool, operation design and additional costs that will be incurred in assembling the parts, decorating and packaging them. In so doing, it is established that XYZ has to consider making sure that the maximum cost for the produced products does not exceed $5.00. The recommendation made at the end of the study shows that the feasibility study guided the feasibility advisors into giving a conclusion that was unlike the request posed by the owner of the XYZ Company. Because of this, it is essential that the management alters their plan to suit the advice given by the advisors since they have a foresight of the hurdles the business is likely to face in selecting between the three given production machines.
The feasibility study used in the case of XYZ Company follows the theoretic outline presented by Dana, (2010, p 52). The framework used includes the classification of the study into two parts; cost based and time based. The cost based analysis helps in determining the costs of the machines to be acquired by XYZ and the estimations for the costs of the products as well as the spare parts. The analysis is made over an extended period of time which then assures the management that the statistical data presented in the report is well researched and that there is a higher probability that the venture will be profitable if a given machine is preferred instead of the other (Deakins & Freel, 2009, p 41). This is strategically done by calculating and distinguishing developmental costs from the operational costs. The cost based information is elaborated in the part cost and tooling estimations section which stages a coherent discussion weighing between the use of a PTC spreadsheet to estimate the costs or a local tool maker. The calculations on the part costs are made using spreadsheets from PTC. Ostensibly, PTC uses estimations derived from cycle times, material costs, machine costs and tool costs. Several inputs are needed when making the spreadsheets for feasibility studies. The resultant figures show the estimated amounts of money to be paid by XYZ Company when purchasing molded parts from a molder. The other production costs are varied according to volume of widgets produced and these costs include the cost of the tools (10% amortization) over an extended period of 5 years and a scrap rate of 5%. The probability that XYZ could manufacture these parts in-house is also considered in the analysis. On the other hand, the time based feasibility study comes in handy in seconding the findings made in the first research (Herrmann, 2009, p 90). It uses the time series charts to present evidence on the possibility that the business will be profitable over an extended period of time. The feasibility study relating to the case of XYZ analyses the possibility of breaking even with the sales and costs in the near future even as the machines might start to break down.
Assessment of feasibility study
As a feasibility advisor for the Community Crusaders start-up business owned by Mr. Ian White, it is necessary to conduct a feasibility study that will match up to the organization proposed mission of investing in the high growth start-up projects in the community. The importance of these assessments is raised with the realization that most of the proposed projects are have high financial risk. According to economics, high-risk ventures are often more profitable since most investors tend to shy away from such projects (Gelderen & Bosma, 2008). In the event that Mr. White becomes successful in the proposed high growth community start-ups, then there is a higher chance that he will be very successful. But prior to making such a decision, it is mandatory to consider the financial costs and time implications associated with undertaking these high risk projects. The realization that similar firms or firms operating in competing business environments have incorporated the use of feasibility studies should act as a trigger that will help in identifying the near proximal facts related to undertaking the proposed projects (Hmieleski & Corbett, 2006, p 45). Therefore, the following considerations have to be made by Mr. White when making a decision on whether or not to use feasibility studies. First, he has to answer the question: why undertake a feasibility study?
The answer to this question lies in the facts presented in the following argument where the pros and the cons of feasibility studies are highlighted while also a comparison is made between the use of feasibility study and a business plan. First of all, Mr. White must be aware that coming up with a new venture is a difficult process. It is not only involving but tiring and time consuming. In spite of this, most of these ideas do not materialize to become as big as the entrepreneurs ever imagined. In fact, some of the businesses that become operational fail in the first six months. Thus, before making any investment, it is very advisable to ascertain the economic viability of the project. The advantages to be realized from the project have to outweigh the disadvantages and the potential risk factors likely to be experienced. A feasibility study is the most preferred tool to achieving these objectives. Without it, then the number of start-up failures could be much higher. High growth community projects are often capital intensive and involving in terms of expenditure, planning and operations. The importance of feasibility studies is therefore seen in its ability to identify areas of focus while providing alternatives that could be undertaken by the entrepreneur so as to maximize on the expected returns or increase the chances of business success (Jeffrey, 2007, p 37). This scenario is supported by the case study on XYZ where the management is notified on the availability of three manufacturing machine. Each of the machines has its advantages and disadvantages thus the management has to make a decision based on the information.
The second major reason for using feasibility studies is to narrow the alternatives faced by an entrepreneur. There are instances under which an entrepreneur might have several business proposals. As much as each of these proposals might look lucrative when analyzed from an entrepreneurs’ viewpoint, a feasibility study might help identify finer details that will make one of the projects stand out from the rest thus, the project will be prioritized over the others. The third advantage is that the feasibility studies provide information that is substantial to guide decision making. Apart from the documentation of important quantitative information, it is an evidence that an entrepreneur took time to investigate on the subtle factors associated with investing in a certain project. These documents are vital when soliciting for external financing for the projects. On the flip side, using feasibility studies has been associated with certain limitations or demerits. The feasibility study cannot substitute a business plan. The plan comes after a feasibility study especially when the project is in its developmental stages. A business plan tends to respond to the issues raised in the feasibility study where most of the outcomes identified in the feasibility study will form a basis for writing a business plan. First of all, the feasibility study does not identify new concepts or ideas regarding the project. The ideas have to be identified by the entrepreneur before the study can be conducted. The feasibility study is therefore dependent on the assumptions developed by the entrepreneur thus an impartial or unrealistic proposal will lead to a misleading study thus its effectiveness will be significantly reduced. According to Michele (2008, p 111), the leaders of a business might be pressured into skipping a feasibility analysis because there is a high chance that an existing business has succeeded and so are the chances that the new venture will succeed. At times the reports presented by the feasibility advisors and consultants do not reflect the real time information that can guide an entrepreneur into making viable decisions. This means that the read advantages of a feasibility study can only be realized if the study is done accurately.
There are differences between a feasibility study and a business plan. Whereas a feasibility study investigates the possibility of success, a business plan provides an outline towards the realization of the proposal made in the feasibility study. A feasibility study is an affirmation that a business is likely to succeed thus it can help narrow down different project scenarios while a business plan will only deal with one project (James, 2014, p 9). A feasibility study is followed by a business plan, which means that in the event the feasibility study discontinues a certain project a business plan will not be made.
Recommendations for the Organization
Reflecting on the discussions derived from the case study of XYZ Company, assessments and critical thoughts revolving around the need to conduct feasibility studies, it is evident that a feasibility study plays a pivotal role in managing start-up ventures. As a feasibility advisor, I will encourage Mr. White to consider writing up the business proposals for the different high growth community projects then they can be studies by use of the two classifications identified in the literature review. The sub-groupings for the feasibility study to be conducted will include undertaking a cost based and time based feasibility study on these businesses (Matson, 2010, p 90). The cost based study will identify all the economic parameters concerning financing and financial risks while time based studies will identify the time frame for initiating the project and the possibility of breaking even. On a general scale, the feasibility study for Community Crusaders has to follow the following format which begins with an executive summary section. It is in this section that assumptions are documented which then leads to making of inferences on the important findings and recommendations. The introduction section describes the projects and makes a justification on why the community development project is viable. It also introduces the general settings of the project and the needs identified in the immediate environment/ market needs. Third section has to state the industry background where basic information on the industry, feasibility and implications and the economic conditions identified in the industry. The fourth section has to contain information on marketing where the market potential will be analysed, the attributes of the market will be noted in relation to the limitations or ease of entering and penetrating the market. Technical and operational characteristics will form the bulk of the fifth section which will handle concerns regarding labour supply, technical skills, location considerations and the operational capacity and the subsequent efficiency of the Community Crusaders project. Sixth section will consider financial projections such as; revenues, net income, costs, capital requirements, pro forma cash flow statements, accumulated equity and financial plan for the company. The seventh section will have a summary and recommendation for the project followed by an appendix section.
Conclusion
In conclusion, feasibility studies provide a window through which an investor can peep into the viability of a business idea and determine if it is worth risking both time and money. A standard feasibility study has to entail a summarized cost and time analysis which is sub-divided into groupings that will facilitate guiding the data collection process (Justis & Kreigsmann, 2009, p 39). The finance section and marketability section represent the most important sections thus they have to be meticulous. The finance section analyzes the financial risks and implication of the business on the industry as a whole. While assessing financial risks, it has to be noted that the high risk ventures are often more profitable since most investors tend to shy away from such projects. But prior to making such a decision, it is mandatory to consider the financial costs and time implications associated with undertaking these high risk projects. The realization that similar firms or firms operating in competing business environments have incorporated the use of feasibility studies should act as a trigger that will help in identifying the near proximal facts related to undertaking the proposed projects. Likewise, the marketing section incorporates a critical look at the market factors that would either undermine or promote the marketability of the products and services. The market analyses are important when investing in high growth community investments since it assesses the potential of selling the products and services to the community. A feasibility study, therefore, identifies the potential output of a project thus the management has a decision to make between continuing with the project or abandoning it in the event that the output falls below the desired input.
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