Components of a Feasibility Analysis Report

The main purpose of a feasibility analysis report is to help decide whether a given project or a business opportunity is feasible from both technical and financial perspectives. This is crucial for making well-informed business decisions.

 

A typical feasibility analysis shall be compromised of the following elements:

Project Scope

This defines the nature of the project, its objectives, the business opportunity, and how the project shall address this business opportunity.

Market Research

This is one of the most important elements of a feasibility analysis. The market research should include the following:

·         Analysis of market opportunities and identifying potential customers

·         Investigating demand trends for the products to be offered

·         Studying the competitive environment and substitutes

·         Determining product differentiation factors

·         The marketing plan, detailing how to reach for customers, retain them, pricing, and marketing positioning strategy.

Business Requirements

These are the essential requirements that are needed for the project to achieve its objectives. Business requirements include:

·         Technical Requirements: include the potential locations and space requirements for the project, facilities management, machinery and equipment, sources of supply, and systems and software.

·         Organizational requirements: include legal requirements, the manpower plan, and analysis of business processes.

The Financial Plan

This is a very important and critical component of any feasibility analysis. The purpose of the financial plan is to show how profitable the project or the business opportunity is likely to be. The financial plan shall include:

·         Startup costs: these are the costs needed for the business to be ready for starting operations. These costs include fixed assets, and information systems.

·         Funding details: including funding needs and the suggested sources of funds.

·         Operating costs: these are the ongoing costs of doing business. These costs include raw materials, sales and marketing expenses, salaries, rent and facilities, and maintenance costs. A proper cost analysis is required.

·         Revenue Projections: These are linked to the market research section.

·         Projected financial statements: these shall include financial information projected for at least three years. The main financial statements to be included are: the balance sheet and the profit and loss statement. The statement of cash flows may be included as well.

·         Financial and Investment analysis: payback period, breakeven analysis, and IRR are essential to the investment decision making process.

·         Future expansion plans: this is linked to the marketing research as well. Funding needs as well as profitability analysis is required.

 

To conclude, the feasibility analysis helps summarize the major aspects of a project or a business opportunity in a structured and organized form. Moreover, it assists project and business managers plan their business more professionally, and aids investors in their decisions.

 

By:

Hattem AlHajery

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Customer Needs and Business Opportunities

Customer needs are constantly changing, often in unpredictable ways.

Customers may not be able to define their needs, in such cases businesses need to educate these customers, by leading rather than only responding.

Henry Ford once said: “If I have asked customers what they wanted, they would have told me: a faster horse”.

Who knows how transportation might have looked like nowadays if Ford just tried to research new ways to make horses faster!

If your customers don’t know their needs, you will have to educate them.

 

Organizations do not have to listen all the time to the voice of their customers, but sometimes they may choose to find out on their own ways to serve those customers better.

 

There are two approaches that can be followed while dealing with customer needs: businesses may focus on meeting existing needs, or create opportunities from potential business prospects.

Business opportunities may be found when businesses seek to provide solutions that meet unmet customer needs.

Entrepreneurs can create business opportunities by creating new products that satisfy needs customers were not aware that they exist.

Steve Jobs said: “Some people say: ‘Give the customers what they want’. But that is not my approach. Our job is to figure out what they are going to want before they do”.

 

Therefore, business opportunities can be found, or can be made.

 

Whether the development of new products is made to meet existing or newly-created needs, innovation management needs to be executed by organizations and entrepreneurs.

 

Written by:

Hattem AlHajery, CMA, CDIF.

Customer Needs and Business Opportunities

Entrepreneurship at Any Age: Doris Drucker and Visivox

Introduction

In the chapter named “Entrepreneurship at Any Age” from the book “Entrepreneurship and Innovation: Global Insights from 24 Leaders”, Doris Drucker explains how entrepreneurship is not limited to young people, and what it takes to be a successful entrepreneur. Then she moves on to describing a product she invented called “Visivox”, and how it has been developed from an idea to a final product.
This article explores the lessons learned from Mrs. Drucker’s experience, and outlines the key challenges and opportunities for improvement.

Key Learnings

Successful entrepreneurs are those who are Looking forward, opportunists with optimistic outlook, energetic, patient, and preservative, willing to take risks, able to convert ideas into salable products, and aware of the right timing to bring their ideas to life.

An entrepreneur at any age can be successful as long as he/she possesses these qualities, and in reasonably good physical and mental health.

You can always start your own venture, just do it.

Visivox is an illustration of how opportunities can be made. The market initially was not completely defined. Over time, the product developed and new markets emerged. In order for opportunities to be made, interactive learning process from customers, business partners and employees is essential.

Testing the product is essential for a successful business idea. Samples from Visivox have been built and shown to potential buyers. The lean startup methodology can be a good methodology to test whether this is the right product that satisfies customers needs.

It is essential to acquire the right resources needed to convert the idea into a product that customers need. Mrs. Drucker, during the development of Visivox, was able to secure the relevant resources needed. These mainly include human resources, and materials. A make or buy decision had to be taken, where Mrs. Drucker decided to make the product instead of outsourcing. An entrepreneur needs to decide which of the value chain activities are to be made, and which ones to be outsourced.

Every entrepreneur faces the challenge of converting the startup into a sustainable and scalable business. The initial market for Visivox (professional speakers) was not big enough for the product, market research was done in order to expand the market for the product and grow the business. A successful business idea is the one that creates/meets customer demand leading to a profitable business.

Innovation is a key success factor for entrepreneurs. Innovation involves creating a market where new customers are served. Innovation should be an integral part of the business model, starting from the identification of customer needs, and the generation of ideas that satisfy those needs, to the listing of required activities, how they are linked, and by whom shall they be performed. Visivox started as an idea that is targeted to meet existing customer needs that no other product satisfies, and making the product available and affordable to those customers.

Challenges and Improvement Opportunities

Challenges include: entry of competitors to the same market to provide products that meet the same market needs of Visivox, emergence of substitutes, new technologies may cause existing products to be obsolete.

After meeting the needs of Visivox’s customers, it is recommended to increase the profitability of the product by addressing customer segments who are willing to pay more. This can be achieved by improving the performance of product, and adding more features to the product.

Conclusion

As long as the entrepreneur possesses the right formula for success, he/she can start his/her own venture regardless of his/her age. It is never too late.

Always seek opportunities for success. If you can not find them, create them.

It is essential to test the market and learn about customer needs.

Acquiring the right resources is critical to business success.

Innovation has to be embedded in the entire business activities.

Written by:

Hattem AlHajery, CMA, CDIF.

Make or Buy Decisions in the Oil and Gas Industry

Introduction

Technological advances as well as markets restructuring in the last two decades have strongly impacted the oil and gas industry, which is characterized by large sums of investments along the entire value chain activities. These activities include, but are not limited to: acquisition of licenses, development of wells, exploration and production, drilling, transmission, gas liquefaction, and regasification.

Due to the sophisticated level of operations, investment in high technology and skilled labor is required. Moreover, the economic viability of the minerals that may exist in the wells being explored is highly uncertain.

Hence, contracts involved in the oil and gas industry are commonly complex in nature.

Parties involved in a contract that includes highly specific assets are in the “condition of bilateral dependency” (Williamson, 1998), where the investment of the parties in this contract locks them into the relationship to some degree (Besanko, et al., 2013). As a result of this contract, “the buyer cannot turn to alternative sources of supply and obtain the item on favorable terms” (Williamson, 1981).

Make or Buy?

According to (Eikeland, et al., 2004), vertical integration entails the development of business activities along the oil and gas supply chain.

A number of vertically-integrated monopolies exist, but relying on the market – decision to buy – is a common practice due to the large number of complex activities in the vertical chain. Takeovers represent a common form of a buy decision.

The main benefits of using the market mainly relate to the economies of scale that can be achieved by organizations that specialize in certain products and services, in addition to the accumulation of experience and know-how at those organizations (Besanko, et al., 2013). A vertically-integrated organization may not be able to achieve these benefits.

Also bureaucracy effects within large organizations can be avoided when management relies on the market.

Despite the benefits of sourcing from the market, management may still prefer vertical integration – decision to make – for several reasons. On the top of these is the concern of confidentiality, where management worries about the leakage of private information, which is the organization’s principle source of competitive advantage (Besanko, et al., 2013). Another important reason why management may forgo the market is to avoid the lack of coordination of production flows through the vertical chain in the case of a buy decision.

Another key concern against using the market is the costs associated with contracts. Organizations use contracts to list the rights and obligations pertaining to the parties involved, in addition to the course of actions in case one party has not fulfilled any of the contractual obligations. Even with these benefits that contracts provide, the costs associated with them need to be carefully studied.

Transaction Cost Economics (TCE)

Transaction costs are those costs associated with using the market, which can be eliminated when vertical integration takes place within the organization. “The primary purpose of TCE is to explain why transactions in certain institutional arrangements operate with different degrees of efficiency” (Yang, et al., 2012).

According to (Joskow, 2010), “Transaction cost-based theories of vertical integration focus on the implications of incomplete contracts, asset specificity, information imperfections, incentives of opportunistic behavior, and the costs and benefits of internal organization”.

Oil and gas companies commonly employ long-term contracts as “a particular organizational form that is situated somewhere between full vertical integration and short-term, market-based trading” (Hirschhausen & Neumann, 2008). In this context, “Long-term contracts can help to minimize the transaction costs for two parties engaging in a commitment involving significant specific assets but where full vertical integration is not feasible” (Hirschhausen & Neumann, 2008).

Conclusion

Transaction costs economics postulates that there are benefits and costs associated with both internal integration and market transactions. Organizations assess each of the two scenarios to select the less costly and more efficient decision.

In spite that vertical integration avoids the transaction costs associated with the market, the potential costs of internal hierarchy needs to be considered, which for many organizations may still be more relevant to employ for a variety of valid reasons. (Eikeland, et al., 2004) show that even though upstream companies moved towards specialization, the market trend was implementing strategic shift at vertical integration in the natural gas supply chain.

Due to technological advances and structural changes pertaining to the oil and gas industry, the need to invest in asset-specific contracts is being reduced and “the industry moves towards more market-oriented coordination mechanisms” (Hirschhausen & Neumann, 2008).

(Hirschhausen & Neumann, 2008) argue that asset specificity of investments pertaining to upstream and downstream operations has been reduced, thus reducing issues of quasi-rent negotiations.

Hattem AlHajery, CMA, CDIF.

References

Besanko, D., Dranove, D., Shanley, M. & Schaefer, S., 2013. Economic of Strategy. 6th ed. s.l.:John Wiley & Sons, Inc.

Eikeland, P. O., Hasselknippe, H. & Sæverud, I. A., 2004. Energy sector integration in Europe: The role of leading upstream oil & gas companies (Summary version), Oslo: Fridtjof Nansen.

Hirschhausen, C. v. & Neumann, A., 2008. Long-Term Contracts and Asset Specificity Revisited: An Empirical Analysis of Producer–Importer Relations in the Natural Gas Industry. Rev Ind Organ, Volume 32, pp. 131-143.

Joskow, P. L., 2010. Vertical Integration. The Antitrust Bulletin, 55(3), p. 545.

Williamson, O. E., 1981. The Economics of Organization: The Transaction Cost Approach. American Journal of Sociology, 87(3), pp. 548-577.

Williamson, O. E., 1998. Transaction Cost Economics: How It Works; Where It Is Headed. De Economist, 146(1), pp. 1-36.

Yang, C., Wacker, J. G. & Sheu, C., 2012. What Makes Outsourcing Effective? A Transaction-Cost Economics Analysis. International Journal of Production Research, 50(16), p. 4462–4476.