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Preparing Feasibility Study By Khaled Ayesh, MBA  World Bank, InfoDev-funded Business and IT Incubator,  Islamic Universit...
Training Outline <ul><li>Definitions/introduction   </li></ul><ul><li>Purpose of preparing feasibilities </li></ul><ul><li...
Definition of feasibility study <ul><li>is a comprehensive study that examine the  viability  of an idea  that has a  busi...
A FRAMEWORK FOR NEW VENTURE CREATION Entrepreneur Innovative Idea Market Opportunity Venture Concept <ul><li>Test of </li>...
The Purpose of feasibility study <ul><li>For Startups micro project; </li></ul><ul><li>New established small business;  </...
Sources of Investment Opportunities <ul><li>Screening innovative ideas </li></ul><ul><li>Reviewing country importing items...
Pre-feasibility study <ul><li>Describing a Product or service </li></ul><ul><li>Describing market supply and demands </li>...
1. Describing Product or service <ul><li>Describing  product or services characteristics </li></ul><ul><li>Quality compone...
2. Describing market <ul><li>Where is the product produced? </li></ul><ul><li>What is the number of similar factory or pro...
3. Describing Production methodologies <ul><li>Describing production processes </li></ul><ul><li>Describing the type and k...
4. Describing initial inputs and infrastructure supporting services <ul><li>Availability of inputs of raw materials </li><...
5. Selecting the right location/place <ul><li>Access to market </li></ul><ul><li>Strategic location fitness </li></ul><ul>...
6. Estimating Capital & operational costs <ul><li>Estimating the costs of fixed assets: </li></ul><ul><li>Land, factory bu...
7. Estimating Revenues and Profit <ul><li>Projection of Total annual sales </li></ul><ul><li>Projection of cost of goods s...
Writing Exercise <ul><li>Work in Group of 5 person </li></ul><ul><li>Review the success stories </li></ul><ul><ul><li>أولا...
Case study-Pre-feasibility study format <ul><li>Description of a product/service </li></ul><ul><li>Description of  the mar...
Second Training Day <ul><li>Preparing feasibility study </li></ul>
Why Complete A Feasibility Study? <ul><li>A comprehensive feasibility study allows the user to </li></ul><ul><li>Determine...
1.  Marketing Study <ul><li>Market analysis of the a product/service </li></ul><ul><li>Description of the production capac...
Determine Your Market <ul><li>This is the most difficult part  </li></ul><ul><li>Should be divided into seven key parts </...
1. Consumption <ul><li>What is the current consumption of the product or service? </li></ul><ul><li>What are the current t...
1. Consumption… cont. <ul><li>What is the quality of the product that is being consumed?  </li></ul><ul><li>Who consumes t...
2. Markets <ul><li>What is the current structure of the marketplace? </li></ul><ul><li>Who is currently supplying these pr...
2. Markets ……cont. <ul><li>What are the implications for a firm who wants to expand its market? </li></ul><ul><ul><li>What...
3. Distribution System <ul><li>Will it be necessary to provide delivery services? </li></ul><ul><li>What delivery schedule...
4. Market Entry <ul><li>How will the product or service be introduced to the market? </li></ul><ul><li>Will the product be...
5. Buyers <ul><li>Will you sell directly to consumers or go through a “middleman” buyer? </li></ul><ul><li>What types of b...
5. Buyers ……cont. <ul><li>Have potential buyers expressed an interest in the product? </li></ul><ul><li>What type of purch...
6. Selling Arrangements <ul><li>What type of selling services will you need to provide? </li></ul><ul><li>Will you need to...
6. Selling Arrangements ….cont. <ul><li>How will they be selling the product?  </li></ul><ul><li>What are the costs of the...
7. Prices <ul><li>Setting a price is a critical activity in the market portion of the study. </li></ul><ul><li>The price m...
7. Prices ………cont <ul><li>To  help  determine the price, look at: </li></ul><ul><ul><li>Past prices of the industry </li><...
Consider price elasticity of demand before  changing  prices
2.  Technical Study <ul><li>Description of production methodology </li></ul><ul><li>Identifying the required equipment/tec...
Production Process <ul><li>The production process section of the study is divided into the following parts: </li></ul><ul>...
Facility Determination <ul><li>The minimum size facility to make the enterprise economically feasible must be determined. ...
3.  Financial Study <ul><li>Estimate of capital expenditures </li></ul><ul><li>Estimate of operational expenditures </li><...
Investment Capital Needs <ul><li>What is the required capital investment necessary to construct the production facility? <...
Operational Costs <ul><li>Includes items such as: </li></ul><ul><ul><li>Wage rates </li></ul></ul><ul><ul><li>Management c...
Profitability <ul><li>Given the estimated revenues from the marketing section and the estimated costs from the production ...
Profitability Measures <ul><li>Tax Profitability </li></ul><ul><ul><li>Revenues minus expenses </li></ul></ul><ul><ul><li>...
Profitability Charts <ul><li>Break-even analysis </li></ul><ul><ul><li>Shows the level of production where revenues will j...
Working Capital <ul><li>Working capital is the cash used for day-to-day expenses such as the payroll, utility bills, etc. ...
4.  Management & Organizational Study <ul><li>Identify the required organizational structure for the project, department a...
Labor <ul><li>How many employees will be required to run the production facility? </li></ul><ul><li>Compare facility needs...
5.  Socio-economic Study <ul><li>The contribution to social benefits </li></ul><ul><li>Adding value to local needs </li></...
6.  Environmental Impact assessment study <ul><li>Assessing environmental impact of the project </li></ul><ul><li>Assessin...
Case studies review <ul><li>دراسة جدوى تصنيع اعلاف دواجن لاحمة   </li></ul><ul><li>Housing Construction Company </li></ul>...
Third Training Day <ul><li>Evaluating Feasibility Study </li></ul>
Factors That Drive Costs <ul><li>Product features </li></ul><ul><li>Performance  </li></ul><ul><li>Mix & variety of produc...
Factors That Drive Differentiation <ul><li>Unique product features </li></ul><ul><li>Unique product performance </li></ul>...
Evaluating Feasibility Study <ul><li>Implementation check and  </li></ul><ul><li>Fitness of time schedules,  </li></ul><ul...
Financial Assessment <ul><li>Payback period </li></ul><ul><li>Rate of return </li></ul><ul><li>Break even analysis </li></...
Payback period <ul><li>Payback period = total $ investment/annual income </li></ul><ul><li>Example:  </li></ul><ul><li>One...
Rate of return <ul><li>Average annual accounting income from project </li></ul><ul><li> Average annual investment in the ...
Breakeven Analysis <ul><li>Breakeven point   Q BE  is the number of units that must be sold at price P such that total rev...
Use break even analysis to determine sales volume needed to become profitable
Rate of internal returns <ul><li>Internal rate of return (IRR) is the interest rate that equates the present value of futu...
Net Present value <ul><li>Identify after-tax cash flows for each period </li></ul><ul><li>2. Determine discount rate </li>...
Value of a firm is equal to the present value of its expected cash flows
Example: Valuation of Coca Cola using DCF method
Main components of an income statement  Net income Taxes Net income before taxes Total  operating expenses Operating expen...
Main components of a balance sheet  Liabilities and Owners’ Equity Assets
Cash flow is not a stand alone statement <ul><li>Balance sheet and income statement  are not considering  the timing of re...
Cash flow statement is divided to 3 sections <ul><li>Operating activities : principal operating activities of the business...
How the cash flow statement is prepared? <ul><li>There are 2 ways to prepare the operating section of the cash flow statem...
Comparative Financial Analysis: Key Ratios Profitability Leverage Activity Liquidity Type  Examples  Measures  Indicators ...
Basic ways to improve ROA and ROE
Exercise:  ROE and ROA A firm has the following financial data: Assets =$ 200,000 Liabilities = 0 Equity = $ 200,000 Reven...
Exercise:  ROE and ROA A firm has the following financial data: Assets =  $200,000 Liabilities =  0 Equity =  $200,000 Rev...
Economic Assessment <ul><li>Cost and benefit analysis </li></ul><ul><li>Can an estimate of required capital investment be ...
Environmental Assessment <ul><li>What is the expected environmental effect of the option? </li></ul><ul><li>How significan...
Information required when undertaking feasibility study <ul><li>Population statistics: </li></ul><ul><li>Demographics stat...
Income Levels <ul><li>Income per capita </li></ul><ul><li>Income distribution </li></ul><ul><li>Income and consumption dis...
Law and legal data and policies of public services <ul><li>Restriction on imports </li></ul><ul><li>Customs tariff </li></...
Data about the product/service <ul><li>Local production </li></ul><ul><li>Local demand and supply </li></ul><ul><li>Import...
Data on Product Prices <ul><li>Prices of competitors products </li></ul><ul><li>Prices of similar products </li></ul><ul><...
Competitor analysis & market intelligence studies  <ul><li>Competitor analysis  </li></ul><ul><li>Market intelligence stud...
Research and Development  <ul><li>Researchers and Scientific Centers </li></ul><ul><li>Others market researches and develo...
External Environmental Analysis Strategic Intent Strategic Mission The External Environment Analysis of general environmen...
General Environment <ul><li>Socio-cultural segment </li></ul><ul><li>Women in the workplace </li></ul><ul><li>Workforce di...
General Environment <ul><li>Economic segment </li></ul><ul><li>Inflation rates </li></ul><ul><li>Interest rates </li></ul>...
General Environment <ul><li>Political/Legal Segment </li></ul><ul><li>Antitrust laws </li></ul><ul><li>Taxation laws </li>...
General Environment <ul><li>Technological Segment </li></ul><ul><li>Product innovations </li></ul><ul><li>Applications of ...
General Environment <ul><li>Global Segment </li></ul><ul><li>Important political events </li></ul><ul><li>Critical global ...
General Environment <ul><li>Demographic Segment </li></ul><ul><li>Population size </li></ul><ul><li>Age structure </li></u...
Industry Environment <ul><li>A set of factors that directly influences a company and its competitive actions and responses...
Five Forces Model of Competition <ul><li>Identify current and potential competitors and determine which firms serve them <...
Five Forces Model of Competition Threat of New Entrants Bargaining Power of Suppliers Bargaining Power of Buyers Threat of...
Threat of New Entrants <ul><li>Barriers to entry </li></ul><ul><li>Economies of scale </li></ul><ul><li>Product differenti...
Bargaining Power of Suppliers <ul><li>A supplier group is powerful when: </li></ul><ul><li>it is dominated by a few large ...
Bargaining Power of Buyers <ul><li>Buyers (customers) are powerful when: </li></ul><ul><li>they purchase a large portion o...
Threat of Substitute Products <ul><li>Product substitutes are strong threat when: </li></ul><ul><li>customers face few swi...
Intensity of Rivalry <ul><li>Intensity of rivalry is stronger when competitors: </li></ul><ul><li>are numerous or equally ...
High Exit Barriers <ul><li>Common exit barriers include: </li></ul><ul><li>specialized assets (assets with values linked t...
Case study <ul><li>Complete feasibility study format and writing exercises:  </li></ul><ul><li>Topics to be determined: </...
Feasibility outline format <ul><li>Executive Summary </li></ul><ul><li>Regional Socio-Economic Situation (General Descript...
Writing pitfall for feasibility study <ul><li>Summary guide when writing key components </li></ul>
Feasibility Study Contents <ul><li>Venture Concept </li></ul><ul><li>Market Assessment </li></ul><ul><li>Technical Feasibi...
Feasibility Study Contents <ul><li>Venture Concept </li></ul><ul><ul><ul><ul><li>Explain clearly and concisely the princip...
Feasibility Study Contents … <ul><li>Technical Feasibility </li></ul><ul><ul><ul><ul><li>Indicate the degree of innovative...
Feasibility Study Contents … <ul><li>Your Marketing Plan </li></ul><ul><ul><ul><ul><li>Detail the marketing strategy you p...
Feasibility Study Contents … <ul><li>Managing the Supply Situation </li></ul><ul><ul><ul><ul><li>How do you plan to assure...
Feasibility Study Contents … <ul><li>Cost and Profitability Assessment </li></ul><ul><ul><ul><ul><li>Estimate funds requir...
Feasibility Study Contents … <ul><li>Plan for future action </li></ul><ul><ul><ul><ul><li>What were the strong and weak po...
Any comments? <ul><li>Thanks for participation </li></ul><ul><li>If you need any help, feel free to send your queries/ques...
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How to Prepare Innovative Feasibility Study in transitional economy

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Technical Training and Coaching Material on How to develop a feasibility studies within transitional economies, and how to assess project feasibility and investment climate in the West Bank and Gaza Strip

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  • The feasibility study examines market conditions and defines the conditions by which a demand for the product must exist. The study then summarizes these conditions by projecting a level of expected revenues that could (not should nor would) be owned by the business. The study must also provide a fairly concrete estimate of the costs associated with operating the business. These costs are divided into two separate areas. First of all, a description of the production process must be developed including investment (fixed) and operating costs. Investment costs include the plant and equipment necessary to produce the product. Operating costs include (but are not limited to) the raw material purchases required to produce the product, the labor required to operate and maintain the equipment, and the overhead required to keep the plant operating on an efficient basis. Once these two areas are developed, the profitability of the enterprise can be determined.
  • The determination of the market is the most difficult and time consuming phase of the feasibility study. There are seven distinct areas that should be examined in this phase. Each of these will be analyzed in turn.
  • The first step in developing the marketing study portion of the feasibility study is to determine the consumption patterns of your producers. In attempting to determine the current consumption of the product and the recent trends of that consumption, many sources may be available. First of all look at any industry sources or associations that may have tracked consumption over the past few years. In some cases, the government can assist. For example, the Economic Research Service tracks the consumption of many food items. Finally, you may be able to get some data from retail outlets, particularly if you are planning on supplying product to them. Grocery store owners and manager, for example, may be able to tell you how the sales of salsa has been trading through this outlet over the past few months. You also need to determine what type of product the customer is buying and how that product is being packaged. If you are interested in food processing, visit local grocery stores and talk to the owners and managers. You may also just stand in an aisle and watch what sizes people are buying of a particular product.
  • Determining the quality level of a customer’s purchase is more difficult. While some quality can be measured by the brands that certain people choose. However, you also need to determine who is purchasing product with either a perceived higher quality or lower quality. The demographics of these buyers is extremely important to capture and may either not be available from industry or government sources or may be misleading. For example, the American Bowling Association states that the average bowler has an annual income of $60,000, is married, and may or may not have children at home. However, a specific location may have a tremendous demand for a bowling facility even though very few people in the community earn $60,000 per year. In a case such as this, you may need to employ survey or interview tactics to determine exactly what a localized or regionalized demand is. The other factor that you need to account for with consumption demographics is whether the population that is most likely to demand your product is either growing or shrinking. If this population is growing, then there may be additional opportunities to develop new markets. If this population is shrinking, then it may be much more difficult to acquire market share from other firms.
  • You also need to examine the market in which the product is currently sold. First of all, what is the current structure of the market. How many firms are selling substitutes or alternatives to your product(s)? How large are these firms? Who are they? Are they primarily chair stores, mom and pop operations, speciality shops, etc.? One major concern to the new entrance to a market place is the reaction of the existing firms? Will the existing firms institute price was other intensive marketing strategies such as enhanced promotional activities? Another point to consider in the strength of the firm in the face of competition with other existing firms or in competition with newer entrance into the market. The major concern with this scenario is whether the firm has the working capital necessary to withstand a price war.
  • Another concern faces the firm that expects to increase its market share over time. There may be substantial costs incurred from market expansion activities and the firm must decide whether the revenues that are realized from market expansion may cover these costs. Finally, the firm must examine the markets it hopes to serve (particularly the location of these markets). If the firm’s target market consists of customers that are either local or live within a fairly small region, the firm maybe able to employ a relatively simple marketing strategy. However, if the firm plans to target customers on either a national or international basis, then a much different and probably much more complicated and expensive strategy must be employed. The firm which seeks to serve these larger markets must carefully analyze the costs that will be required to satisfy the needs of these customers. The firm should also be aware of any regulations that may be in effect when shipping across state or national borders. There may also be substantial costs in complying with these regulations.
  • Another major factor which the firm should address in the feasibility study is the distribution system that it will utilize in getting its product to its customers. If the business is to deal solely with a retail storefront where customers will come in and pickup their purchases, then the distribution system is probably not a concern. However, with any other type of operation, a distribution system may become a necessity. The first question that must be answered is whether the firm will need to provide delivery services. If the firm does need to provide those services, will it need to purchase delivery trucks and what delivery schedules will need to be implemented? Also, would it be more economical to purchase or lease the equipment? Both of these options have advantages and disadvantages. While purchasing a fleet of trucks does create an asset for the company, the company may end up with a lot of old trucks. Whose repair costs may be quite high. While an asset is not created in a leasing arrangement, older trucks can be turned in for newer ones on a fairly regular basis and should keep repair costs to a minimum. If the firm needs to deliver its product to customers and does not want to maintain a fleet of trucks and drivers, There are many types of common carriers and each of these have distinct advantages and disadvantages. The firm will need to identify the one(s) that has the most efficient and cost effective feature that best fit the company’s distribution plan.
  • Once the final product or service has been decided upon, the question arises as to how that product or service will be introduced to the marketplace. There are many marketing and promotional strategies that can be used to accomplish this and the business owner must decide which will be the most effective given budgetary constraints. One strategy that may be applicable to some businesses is to market the product under another business’s identity. For example, some apple butter manufacturers will put a specialty store’s label on their product and let the specialty store market the product to the final consumer. However, each firm must decide what strategy will attract and retain buyers. If you are marketing your product to WalMart, a low price is the primary concern. Other buyers, particularly final consumers, may be willing to sacrifice low prices in favor of an effective marketing campaign or superb customer service.
  • In some industries (e.g., the pet supply industry), the product manufacturer must work through a buyer or broken who then markets the product to retail outlets. If this is the marketing avenue that a firm has decided to take, then there are several concerns which must be addressed. Will the buyers be working for large brokerage houses or will they be operating as more or less independent businesspeople? Also, you must determine where the buyers are located and the geographic area that they serve. This is extremely important if the buyer must handle the product before it is shipped to the retail outlet. In this case, you will be required to make some type of shipping arrangements to get the product to the buyer. Product specifications are also very important to buyers. Their reputation depends on the products that they market to their customers. Therefore, any product that they handle must meet production and quality specifications or they cannot afford to sell your product.
  • Next, have the buyers expressed an interest in your product? Remember that these buyers are in the industry market every day and should have a good perception of what will and will not sell. If the buyer does not have an interest in marketing your product, there may be a good reason and you need to find out what that reason is. To protect yourself, you need to determine the types of purchasing commitments that buyers are willing to make. Will the buyer be able to make a large enough commitment so that you can manufacture a large enough volume of product that would be profitable? If not, you will either need to find another buyer or adjust your pricing strategies. The next question that you need to answer concerns the reliability of the buyers that your are dealing with. Most buyers are extremely scrupulous in their dealings with manufacturers. However, as with any type of position, there are some that are not interested in anything except making money for themselves and will resort to any means to accomplish that goal. You want to work with a buyer that will work for himself and for you. Finally, the firm must carefully analyze the payment schedules that will be encountered with the broker. Will the broker pay for the merchandise upon his or her receipt of the merchandise or will the merchandise be paid for when the broken receives payment from the retailer. The latter situation could have a dramatic effect on the firm’s cash flow.
  • Whether the firm is planning on marketing its products or services to buyers, retail outlets, or the final consumer, it must decide on its selling strategy and arrangements. While the rest of this section will focus primarily on an outside sales force, the same types of questions need to be answered for most other types of selling arrangements. In fact, the first question that needs to be answered deals with the type of selling services that you are going to offer. Will you need an outside sales force or will people in the manufacturing or sales facility suffice? In this same line, will you need to go through a buyer or broker as in the pet supply industry? If you do decide to go through a buyer, who is going to be responsible for staying in touch with the buyer and making sure that the buyer’s needs are continually and consistently met. If you do employ a sales force, you must determine how many sales people it will require to effectively and efficiently service your market. There is no rule of thumb to determine this number since it depends on the type of customers you are targeting, the industry you are servicing, etc. It has been said that effective salespeople are the most coveted people in business. In many cases, product or services cannot be sold without salespersons. As such, you must provide a compensation plan that not only rewards them, but also provides an incentive for them to increase performance.
  • As you develop a sales force, you must continually pay attention to the method that these people will use to market your product or services. Will they make appointments for sales calls to individual companies, make door-to-do calls to sell to individual customers, or use telemarketing methods. All of these methods have advantages and disadvantages, but it is important to remember that they all have costs that must be built into the marketing budget and incorporated into the price. Advantages, disadvantages, and costs are factors to consider when you choose a sales method(s) over others.
  • One of the most important marketing activities that you will undertake is setting a price for your products or services. Remember that the price must be high enough to cover the costs of production and provide a return to the entrepreneur, but must also be low enough to entice your customers to purchase the product or service. One of the most important factors to consider in the setting of prices is the level of production. As we will see in the following slides, production costs per unit can vary greatly with the level of production. Raw input prices may be lower when purchasing large quantities or the capital equipment costs per unit will be higher when producing small quantities of product.
  • While your production costs, marketing costs, required return for the entrepreneur, and market demand conditions will be the ultimate factors in setting the price, there are indicators that can help you to keep the price within industry bounds. These include the past prices of the industry, current price trends, buyer advice and expectations, consumer expectations and preferences, and the quality level of substitutes or complements.
  • We now move from the marketing portion of the feasibility study to the production portion. The production process is divided into five separate functions. The first function is the supply of raw materials that are available to the business for the manufacture of finished products. There are several basic questions that must be asked with regard to raw material supply. First is the raw material available in a sufficient supply and of the required quality to produce the product. Also, you must investigate the availability of future supplies of the raw product. How are current and future regulations going to affect quantity, quality, and price?
  • When analyzing the proper facility in which to produce the product, you should first determine the minimum size production facility that is required to make the enterprise economically feasible. This provides an indication of the level of marketing activity that must occur in order for the enterprise to be profitable. While planning for future expansion is certainly a concern, you don’t want to build a facility that is certain to overload your market niche.
  • There are two types of funds that must be secured in order to produce your products or services. The first to be considered is the need for investment capital that will be used to construct or purchase the manufacturing facility, retail outlets, or office building and to purchase the equipment required to produce the product. First, you must determine the level of funds that you will need to accomplish these tasks. Then, you must determine what sources are available to provide you with the funds. These sources may include personal savings, government secured or direct loans, normal financial institution loans, sales of equities, or bringing in additional investors. When examining these sources and determining the best option for your enterprise, you must be sure to consider the costs involved with each option and determine what restriction will be placed on any source of capital monies.
  • Operational costs are those costs which are required to produce the product or service. These costs can take many forms. Wage rates, management and overhead costs, raw material costs, utility expenses, and fixed operational costs such as depreciation and insurance all have a great impact on the level of operational costs that the firm must face. Once these costs are assembled, they should be broken down into a per unit basis. This is necessary to help establish a price for the product.
  • Once the revenues and costs of the enterprise are estimated, then the potential profitability of the enterprise can be analyzed. Profitability is simply the measure of revenues minus expenses. There are two ways in which profitability can be measured.
  • Tax profit is revenues minus expenses. This is the amount that you pay taxes on and is the only amount that your accountant is interested in. However, there is another type of profit that is more accurate in measuring the success of the enterprise. This measure is called economic profit and classifies the required return of the business to the entrepreneur as a necessary business cost rather than as a profit (the way that the tax profit measures the return to the entrepreneur). This means that as the breakeven point of the business is measured, the required return to the entrepreneur is included in the breakeven level of the business. If the required return is not met, then the firm may pay taxes on accounting profits, but will experience an economic loss.
  • There are several ways to show either type of profit to the entrepreneur or any type of analyst that may be looking at the statements. The first is a breakeven analysis that may show the level of production (and by implication, marketing) that must occur for the firm to break even (revenues just cover costs) or it may show the price that must occur for the firm to break even given a level of production and marketing. Another method that can demonstrate a measure of profitability is a sensitivity analysis. The sensitivity analysis can introduce a measure for risk into the feasibility study by showing the effect of different price and quantity combinations on profit.
  • Finally, one of the most important factors to the ongoing operation of the firm is the level of working capital that the firm is able to maintain over a specified time period. Working capital is simply defined as the cash that the firm is able to use to meet its day-to-day expenses. If the firm can’t meet its daily cash obligations, then vendors will cut off credit, employees will not show up for work, etc. The best method of showing the level of working capital for the time period in question is the cash flow statement.
  • Labor is a major concern for any business. While determining the number of employees that it will take to operate the production facility may seem obvious, what may not be as obvious are the factors which must be present in order to have an effective and efficient labor force. You must be aware of any of the special skills that should be possessed by your workers. You must determine whether local workers possess these skills or if they must be trained. Also, you should also remember that the local published unemployment rate may not be a good indicator of the needed labor force. Another source of concern for a business owner is from what source will management and technical personnel be obtained. While quality personnel to fill these tasks are costly in any circumstances, these costs could be substantially higher if these personnel must be relocated to the production facility.
  • 2 How to Obtain a Differentiation Advantage (cont.) Retailing and Airlines: Other examples in two domains (cont.) Airlines • Southwest Airline says, “low prices lead to freedom,” “airline with personality,” “ Click’n Save,” the “fun factor”— Differentiate on cost and fun ambiance • Midwest Express Airline says, “the best care in the air,” “high-quality travel experience,” “ The best airline in the U.S.” (7 consecutive years), “Most comfortable coach seat” (10 consecutive years); typical meal: Filet mignon with lobster, a roll with butter, spinach, mandarin salad, and chocolate banana-split cake— Differentiate on prestige, comfort • United, US Airways, Delta, American Airlines, etc. says more flights to . . ., more schedule flexibility, and if you want low cost you will need to be flexible on your schedule— Mixed For example, Delta’s Fan Fares offers travel bargains to cities hosting special sports events, concerts, exhibitions, etc., but travel is restricted to this coming weekend. United offers various “specials” from E-Fares, last minute fares “priced to go,” etc. Finally, American Airlines offers “AAdvantage Net SAAver Awards.” Like their rivals, these are next weekend travel for either fewer miles than normally required or for lower fare and “ must be purchased by Friday.” Ask Assume that you were placed in one of the above airlines’ jets, but all company logos and emblems were removed. Would be able to tell whether you were seated in a United, American, or Delta Airlines aircraft?
  • The External Environment (cont.) Where do firms find growth in poor economic times? Example: Financial Services Industry (Bank of America and NationsBank) (cont.) Target Growing Minority Market Expansion into areas where minority population is growing the fastest: • Product development: SafePay, which allows immigrants, specifically Latin Americans, to send cash back home. Competes with Monygram and Western Union. • Targeted Marketing I: Leverage outlets like Univision and Telemundo to reach Latin American population • Targeted Marketing II: Install Spanish-language option ATMs in all key markets • Diversity hiring strategy: Aggressively hire a diverse management-level workforce in order to better reflect the customer base • Customer Service I: Multilingual customer service call centers and branch personnel • Consumer Service II: Multilingual websites Punch Line Bank of America is betting on the demographic changes to generate much needed revenue growth.
  • Industry Environment Can firms anticipate new entrants to the market? (Grocery Retailing) Example 1: Wal-Mart Question How do we (Wal-Mart) leverage our strengths (fast turnover of goods, low-cost volume buying, etc.) to increase traffic and volume at our stores? In 2000 U.S. grocery sales grew by 3.4%, reaching $570 billion. Answer • Create and expand shelf space for groceries and dry good products. • Expand Supercenter Format to leverage additional shelf space: in 2001, grocery sales accounted for $17.1 billion in sales or 30% of total sales: o First Supercenter store opened in 1988; by 2000 Wal-Mart had 721 Supercenters o Supercenter openings consist of 60%-70% of new store openings within Wal-Mart o Wal-Mart projects 1,400 Supercenters by 2005 Fast Forward What share of the grocery market will Wal-Mart control in 2010?  
  • Five Forces Model of Competition Can firms anticipate new entrants to the market? (Grocery Retailing) Example 2: Traditional Supermarkets Question Given the low margins and relatively low growth of this industry, should we (traditional supermarkets) expect new entrants into our domain? In 2000 U.S. grocery sales grew by 3.4%, reaching $570 billion. Answer No new entrants are likely. Thus prepare for continued industry consolidation. Specific Case Winn Dixie (now known as WD) is a good example. It has over 1,000 stores in 14 states, primarily in the Southeast, a stronghold for Wal-Mart. WD has responded to Wal-Mart’s challenge by remodeling its stores (over 60% in the franchise), closing unprofitable stores (112 stores in 2001) and other manufacturing / distribution centers, taking a $522 million restructuring charge. Strategic Reaction I Crank up M&amp;A activity to gain economies of scale and lower its cost structure: • In 2000 WD acquired the Gooding’s Markets chain in Orlando. • In 2001 WD acquired 68 stores of Mississippi-based Jitney Jungle. (Continued on next slide.)
  • Five Forces Model of Competition (cont.) Can firms anticipate new entrants to the market? (Grocery Retailing) Example 2: Traditional Supermarkets (cont.) Strategic Reaction II Expand private label items: WD brand items carry higher profit margins than comparable national brands. Fifty-one percent of buying public purchase private label brands “every time” or “fairly often” when they shop. WD can leverage this trend. For example, its WD Chek soda is a market leader in many of WD’s core markets. Fast Forward Will WD still be in existence as an independent company in 2010?
  • Transcript of "How to Prepare Innovative Feasibility Study in transitional economy"

    1. 1. Preparing Feasibility Study By Khaled Ayesh, MBA World Bank, InfoDev-funded Business and IT Incubator, Islamic University, Gaza
    2. 2. Training Outline <ul><li>Definitions/introduction </li></ul><ul><li>Purpose of preparing feasibilities </li></ul><ul><li>Component of the feasibility study </li></ul><ul><li>How to prepare a feasibility study </li></ul><ul><li>How to analyze the investment climate </li></ul><ul><li>How to figure out external business opportunities </li></ul><ul><li>Marketing study </li></ul><ul><li>Technical study </li></ul><ul><li>Financial study </li></ul><ul><li>Financial analysis/statements/ratios </li></ul><ul><li>Environmental Impact study </li></ul><ul><li>Cost and benefits analysis </li></ul><ul><li>How to evaluate an investment projects </li></ul><ul><li>Payback period </li></ul><ul><li>Net present value/Discounted cash flows </li></ul><ul><li>Internal rate of return </li></ul>
    3. 3. Definition of feasibility study <ul><li>is a comprehensive study that examine the viability of an idea that has a business potential and advanced to a stage where the prospective project is socially responsible , commercially viable and feasible business opportunity exit . </li></ul>
    4. 4. A FRAMEWORK FOR NEW VENTURE CREATION Entrepreneur Innovative Idea Market Opportunity Venture Concept <ul><li>Test of </li></ul><ul><li>Potential </li></ul><ul><li>Prove viability </li></ul><ul><li>Create initial “prospectus” to </li></ul><ul><li>seek resources </li></ul><ul><li>Test of </li></ul><ul><li>Feasibility </li></ul><ul><li>Prove feasibility </li></ul><ul><li>Prepare for implementation </li></ul><ul><li>Gather resources </li></ul>New Venture <ul><li>Resources I </li></ul><ul><li>“ Viability” Info (general market, process, org., etc.) </li></ul><ul><li>“ Sweat” Equity </li></ul><ul><li>Resources II </li></ul><ul><li>“ Feasibility” Info (specific market, process, org., etc.) </li></ul><ul><li>Initial Equity </li></ul><ul><li>Resources III </li></ul><ul><li>Prop., Plant & Eqmt </li></ul><ul><li>Personnel </li></ul><ul><li>Management </li></ul><ul><li>Buyers </li></ul><ul><li>Suppliers </li></ul><ul><li>Advisors/Partners </li></ul><ul><li>Full Debt & Equity </li></ul>Policy Environment Industry and Market Environment
    5. 5. The Purpose of feasibility study <ul><li>For Startups micro project; </li></ul><ul><li>New established small business; </li></ul><ul><li>Expanding existing businesses; </li></ul><ul><li>Testing the technical viability, financial viability, market viability. </li></ul><ul><li>Developing new product/service, </li></ul><ul><li>Advocating the project with key governmental body, donor agency financing, </li></ul><ul><li>Selling the project for further local ownerships. </li></ul>
    6. 6. Sources of Investment Opportunities <ul><li>Screening innovative ideas </li></ul><ul><li>Reviewing country importing items </li></ul><ul><li>Assessing local community needs of public services: education, health, infrastructure, etc. </li></ul><ul><li>Projecting future demands on certain products and services </li></ul><ul><li>Examining current diversified industrial trends </li></ul><ul><li>Reviewing available skilled and workforce </li></ul><ul><li>Participating in international trade fairs/shows </li></ul><ul><li>Market intelligence studies/experts researches </li></ul>
    7. 7. Pre-feasibility study <ul><li>Describing a Product or service </li></ul><ul><li>Describing market supply and demands </li></ul><ul><li>Describing Production methodologies </li></ul><ul><li>Describing initial inputs and infrastructure supporting services. </li></ul><ul><li>Selecting the right location/place </li></ul><ul><li>Estimating Capital and operational costs </li></ul><ul><li>Estimating sales/revenues and profit </li></ul>
    8. 8. 1. Describing Product or service <ul><li>Describing product or services characteristics </li></ul><ul><li>Quality component </li></ul><ul><li>Physical shape </li></ul><ul><li>Product features/benefits/adding value </li></ul><ul><li>Ingredients/formula </li></ul><ul><li>Describe competing product </li></ul><ul><li>Describe other product Substitutes </li></ul>
    9. 9. 2. Describing market <ul><li>Where is the product produced? </li></ul><ul><li>What is the number of similar factory or providers of this type of product and in what capacities? </li></ul><ul><li>Estimating the current and future consumption pattern. </li></ul><ul><li>Any incentives provided by government </li></ul><ul><li>Reviewing to GDP/Export/Import lists/market shares. </li></ul><ul><li>Projection of market supply vs. demand </li></ul><ul><li>Similar product prices and substitute prices </li></ul>
    10. 10. 3. Describing Production methodologies <ul><li>Describing production processes </li></ul><ul><li>Describing the type and kind of equipment, technical methodologies, etc. </li></ul><ul><li>Explaining the technology used, skilled labor needed, quality control measures, </li></ul><ul><li>Process engineering, drawings, technical flow chart, </li></ul><ul><li>The type of maintenance and specialized knowledge of technicians </li></ul><ul><li>The sources and estimate the cost of machines, equipment, automation providers </li></ul><ul><li>Piloting and testing of the prototype, formula, product in the market. </li></ul>
    11. 11. 4. Describing initial inputs and infrastructure supporting services <ul><li>Availability of inputs of raw materials </li></ul><ul><li>Infrastructure services of roads, sewage, water, electricity, cleaning disposals, etc. </li></ul><ul><li>Availability of good relationships with main suppliers. </li></ul><ul><li>Governmental support and tax benefit brackets </li></ul><ul><li>Industrial zone, business support centers/incubators. </li></ul><ul><li>Bank financings </li></ul><ul><li>Other supporting industry: packaging, marketing, logistics, trade facilitation, technology, etc. </li></ul>
    12. 12. 5. Selecting the right location/place <ul><li>Access to market </li></ul><ul><li>Strategic location fitness </li></ul><ul><li>Exhibition shows </li></ul><ul><li>Access to industrial support facilities </li></ul><ul><li>Access to public infrastructure services </li></ul><ul><li>Environment friendly location </li></ul><ul><li>Socially respected location </li></ul><ul><li>Community outreach comfort </li></ul>
    13. 13. 6. Estimating Capital & operational costs <ul><li>Estimating the costs of fixed assets: </li></ul><ul><li>Land, factory building, </li></ul><ul><li>Capital Machinery, equipment, furniture and fixtures. </li></ul><ul><li>Current assets of stocks, inventory, </li></ul><ul><li>Estimating the costs of running expenses: </li></ul><ul><li>Salaries for staff, overhead utilities, rent, electricity, communications, water, fuel, maintenance, labor, distribution, advertisement, transportation, etc. </li></ul>
    14. 14. 7. Estimating Revenues and Profit <ul><li>Projection of Total annual sales </li></ul><ul><li>Projection of cost of goods sold </li></ul><ul><li>Projection of overhead, administrative and variable expenses </li></ul><ul><li>Projection of the profit margin </li></ul><ul><li>Total Sales – Cost of Goods Sold = Gross Profit </li></ul><ul><li>Gross Profit – Overhead, admin, variable expenses = Profit </li></ul>
    15. 15. Writing Exercise <ul><li>Work in Group of 5 person </li></ul><ul><li>Review the success stories </li></ul><ul><ul><li>أولا : قصة مشروع تربية الدجاج اللاحم </li></ul></ul><ul><ul><li>ثالثاً : قصة مشروع إنتاج حليب أبقار </li></ul></ul><ul><li>Chose a business opportunity </li></ul><ul><li>Start writing the following pre-feasibility study key section: </li></ul>
    16. 16. Case study-Pre-feasibility study format <ul><li>Description of a product/service </li></ul><ul><li>Description of the market </li></ul><ul><li>Description of production methodologies and technology used </li></ul><ul><li>Description of available infrastructure supporting services </li></ul><ul><li>Description of the needed labors and skilled workers </li></ul><ul><li>Description of cost estimates: Capital and operating expenditures </li></ul><ul><li>Projection to revenues and profits </li></ul>
    17. 17. Second Training Day <ul><li>Preparing feasibility study </li></ul>
    18. 18. Why Complete A Feasibility Study? <ul><li>A comprehensive feasibility study allows the user to </li></ul><ul><li>Determine if a market for a product exists </li></ul><ul><li>Develop and describe the production processes required </li></ul><ul><li>Determine the costs associated with producing the product </li></ul><ul><li>Determine if the enterprise is profitable! </li></ul>
    19. 19. 1. Marketing Study <ul><li>Market analysis of the a product/service </li></ul><ul><li>Description of the production capacity </li></ul><ul><li>Projection of the demand on this product/service </li></ul><ul><li>Estimating the future demands/supply/imports/exports on certain product/service </li></ul><ul><li>Analyze the competition and major competitors </li></ul>
    20. 20. Determine Your Market <ul><li>This is the most difficult part </li></ul><ul><li>Should be divided into seven key parts </li></ul><ul><ul><li>Consumption </li></ul></ul><ul><ul><li>Markets </li></ul></ul><ul><ul><li>Distribution system </li></ul></ul><ul><ul><li>Market entry </li></ul></ul><ul><ul><li>Buyers </li></ul></ul><ul><ul><li>Selling Arrangements </li></ul></ul><ul><ul><li>Prices </li></ul></ul>
    21. 21. 1. Consumption <ul><li>What is the current consumption of the product or service? </li></ul><ul><li>What are the current trends in consumption? Is consumption increasing or decreasing? </li></ul><ul><li>How is the product or service being consumed? (Packaging, volumes) </li></ul>
    22. 22. 1. Consumption… cont. <ul><li>What is the quality of the product that is being consumed? </li></ul><ul><li>Who consumes the product? What are their demographics? (Age, income, educational levels, marital status, family size) </li></ul><ul><li>Are these demographic segments growing or shrinking? </li></ul>
    23. 23. 2. Markets <ul><li>What is the current structure of the marketplace? </li></ul><ul><li>Who is currently supplying these products to customers? </li></ul><ul><li>What will be the reaction of these firms if a new firm enters the market? </li></ul><ul><li>Can a firm compete with existing firms or other potential entrants? </li></ul>
    24. 24. 2. Markets ……cont. <ul><li>What are the implications for a firm who wants to expand its market? </li></ul><ul><ul><li>What are the costs? </li></ul></ul><ul><ul><li>What revenues can be expected? </li></ul></ul><ul><li>Where are the markets (customers) located? Are they local, regional, national, or international? What will it cost to serve them? </li></ul>
    25. 25. 3. Distribution System <ul><li>Will it be necessary to provide delivery services? </li></ul><ul><li>What delivery schedules will be required? </li></ul><ul><li>What common carrier options are available? </li></ul><ul><li>Should the firm provide delivery itself? </li></ul><ul><li>Should delivery equipment be purchased or leased? </li></ul>
    26. 26. 4. Market Entry <ul><li>How will the product or service be introduced to the market? </li></ul><ul><li>Will the product be marketed under the company’s name or under some other name? </li></ul><ul><li>What will attract buyers? (Low prices, advertising, promotion, customer service, or some other method) </li></ul>
    27. 27. 5. Buyers <ul><li>Will you sell directly to consumers or go through a “middleman” buyer? </li></ul><ul><li>What types of buyers will purchase the product? </li></ul><ul><li>Where are they located? </li></ul><ul><li>What product specifications will they require? </li></ul>
    28. 28. 5. Buyers ……cont. <ul><li>Have potential buyers expressed an interest in the product? </li></ul><ul><li>What type of purchasing commitments are buyers willing to make? </li></ul><ul><li>How reliable are the buyers? </li></ul><ul><li>What type of payment schedules will be encountered? How severely will this affect the firm’s cash position? </li></ul>
    29. 29. 6. Selling Arrangements <ul><li>What type of selling services will you need to provide? </li></ul><ul><li>Will you need to employ a sales force or go through a buyer? </li></ul><ul><li>If you employ a sales force, how many people will this require? What is their compensation plan? </li></ul>
    30. 30. 6. Selling Arrangements ….cont. <ul><li>How will they be selling the product? </li></ul><ul><li>What are the costs of these activities? </li></ul><ul><li>Should you have sales offices located throughout your geographic market area? </li></ul><ul><li>Why have you chosen one method of selling activities over another? </li></ul>
    31. 31. 7. Prices <ul><li>Setting a price is a critical activity in the market portion of the study. </li></ul><ul><li>The price must be high enough to cover all costs and provide you a profit, but low enough that customers will purchase the product or service. </li></ul>
    32. 32. 7. Prices ………cont <ul><li>To help determine the price, look at: </li></ul><ul><ul><li>Past prices of the industry </li></ul></ul><ul><ul><li>Current price trends </li></ul></ul><ul><ul><li>Expectations of buyers (brokers) </li></ul></ul><ul><ul><li>Expectations of consumers </li></ul></ul><ul><ul><li>Quality levels of substitutes or competitors </li></ul></ul><ul><li>These factors only help you set a price. They can’t set the price for you </li></ul>
    33. 33. Consider price elasticity of demand before changing prices
    34. 34. 2. Technical Study <ul><li>Description of production methodology </li></ul><ul><li>Identifying the required equipment/technology/machinery </li></ul><ul><li>Identifying the location, space, engineering design, technical drawings, etc. </li></ul><ul><li>Description of the required energy, fuel, water, transport, logistics and other infrastructure services </li></ul><ul><li>Estimating the required raw materials, capacity, machinery maintenance, labor, IT, the size of factory, etc. </li></ul><ul><li>Preparing the manufacturing design, drawings, leveling, basement, construction, infrastructure, finishing, electricity, water, health and safety measures, labor training, etc. </li></ul><ul><li>Projection of fixed cost ad operating cost </li></ul>
    35. 35. Production Process <ul><li>The production process section of the study is divided into the following parts: </li></ul><ul><ul><li>Raw materials </li></ul></ul><ul><ul><ul><li>Availability </li></ul></ul></ul><ul><ul><ul><li>Future Supply </li></ul></ul></ul><ul><ul><li>Facility Determination </li></ul></ul><ul><ul><li>Investment Capital Needs </li></ul></ul><ul><ul><li>Labor needs </li></ul></ul><ul><ul><li>Production costs </li></ul></ul>
    36. 36. Facility Determination <ul><li>The minimum size facility to make the enterprise economically feasible must be determined. </li></ul><ul><li>Determining this size plant requires the simultaneous analysis of both demand (marketing) and supply (production including raw product). </li></ul><ul><li>The plant must be of sufficient size to maintain a low enough production cost per unit and but not large enough to overload the market niche. </li></ul>
    37. 37. 3. Financial Study <ul><li>Estimate of capital expenditures </li></ul><ul><li>Estimate of operational expenditures </li></ul><ul><li>Estimate of revenues for the coming 5 years </li></ul><ul><li>Estimate the sales over the life of the project </li></ul><ul><li>Propose financing plan and equities structure </li></ul><ul><li>Projection of the expected profits under various assumptions </li></ul><ul><li>Financial analysis and ratios </li></ul>
    38. 38. Investment Capital Needs <ul><li>What is the required capital investment necessary to construct the production facility? </li></ul><ul><li>What form of financing must be utilized to secure these funds? </li></ul><ul><li>What is the cost of these funds and what restrictions are attached to their use? </li></ul>
    39. 39. Operational Costs <ul><li>Includes items such as: </li></ul><ul><ul><li>Wage rates </li></ul></ul><ul><ul><li>Management costs </li></ul></ul><ul><ul><li>Raw material costs </li></ul></ul><ul><ul><li>Utility rate structures </li></ul></ul><ul><ul><li>Fixed Costs (Depreciation, Taxes, Interest, Insurance) </li></ul></ul><ul><li>Costs should be broken down into a per unit basis </li></ul>
    40. 40. Profitability <ul><li>Given the estimated revenues from the marketing section and the estimated costs from the production section, the profitability of the enterprise can be ascertained. </li></ul><ul><li>Profitability is defined as the excess of revenues over expenses. </li></ul><ul><li>There are two distinct measures of profitability. </li></ul>
    41. 41. Profitability Measures <ul><li>Tax Profitability </li></ul><ul><ul><li>Revenues minus expenses </li></ul></ul><ul><ul><li>This is the amount on which you pay taxes. </li></ul></ul><ul><li>Economic Profitability </li></ul><ul><ul><li>Revenues minus expenses minus a return to the owner. </li></ul></ul><ul><ul><li>This captures the value of the manage-ment input of the owner. </li></ul></ul><ul><ul><li>Excess returns are considered economic profit. </li></ul></ul>
    42. 42. Profitability Charts <ul><li>Break-even analysis </li></ul><ul><ul><li>Shows the level of production where revenues will just cover costs. </li></ul></ul><ul><ul><li>Prepare this on a tax profitability and an economic profitability basis. </li></ul></ul><ul><li>Show the effect of risk on profitability </li></ul><ul><ul><li>Prepare sensitivity analysis to determine effect of various revenue and cost streams on profitability. </li></ul></ul>
    43. 43. Working Capital <ul><li>Working capital is the cash used for day-to-day expenses such as the payroll, utility bills, etc. </li></ul><ul><li>Adequate working capital is crucial to business survival </li></ul><ul><li>The cash flow statement demonstrates the need for working capital at specific points in time </li></ul><ul><ul><li>Shows the uses of cash </li></ul></ul><ul><ul><li>Demonstrates the need for additional borrowings </li></ul></ul>
    44. 44. 4. Management & Organizational Study <ul><li>Identify the required organizational structure for the project, department and units </li></ul><ul><li>Description of the main roles and responsibilities for each department and units </li></ul><ul><li>Identifying main positions, jobs descriptions, roles and responsibilities, </li></ul><ul><li>Key competencies and skills among staff </li></ul><ul><li>Preparing management structure and HRM manual </li></ul><ul><li>Recommending of the legal entity of the project </li></ul><ul><li>Projecting the required HR and HR Development plan </li></ul>
    45. 45. Labor <ul><li>How many employees will be required to run the production facility? </li></ul><ul><li>Compare facility needs to the local labor force. </li></ul><ul><ul><li>What special skills will be required? Are these available from the current labor force? </li></ul></ul><ul><ul><li>The local unemployment rate is not necessarily an indicator of the labor force. </li></ul></ul><ul><li>Where will management and technicians come from? What costs are involved in getting them to work for you? </li></ul>
    46. 46. 5. Socio-economic Study <ul><li>The contribution to social benefits </li></ul><ul><li>Adding value to local needs </li></ul><ul><li>Offering a product/service </li></ul><ul><li>Social responsibility and community outreach support </li></ul><ul><li>Contribution to local demands and </li></ul><ul><li>Trade balance </li></ul><ul><li>Cost and benefits analysis </li></ul><ul><li>Contribution to the added value </li></ul><ul><li>Contribution to generate more investment and business opportunities and employment opportunities. </li></ul>
    47. 47. 6. Environmental Impact assessment study <ul><li>Assessing environmental impact of the project </li></ul><ul><li>Assessing the project risk assessment on: natural resources, </li></ul><ul><li>pollutions, </li></ul><ul><li>solid waste, </li></ul><ul><li>disposing industry waste and </li></ul><ul><li>biodiversities impact. </li></ul><ul><li>Other environmental risk and hazards, </li></ul><ul><li>chemical treatment, emissions, poisons, etc. </li></ul>
    48. 48. Case studies review <ul><li>دراسة جدوى تصنيع اعلاف دواجن لاحمة </li></ul><ul><li>Housing Construction Company </li></ul><ul><li>صابرين Bakeries </li></ul>
    49. 49. Third Training Day <ul><li>Evaluating Feasibility Study </li></ul>
    50. 50. Factors That Drive Costs <ul><li>Product features </li></ul><ul><li>Performance </li></ul><ul><li>Mix & variety of products </li></ul><ul><li>Service levels </li></ul><ul><li>Small vs. large buyers </li></ul><ul><li>Process technology </li></ul><ul><li>Wage levels </li></ul><ul><li>Product features </li></ul><ul><li>Hiring, training, motivation </li></ul><ul><li>Economies of scale </li></ul><ul><li>Asset utilization </li></ul><ul><li>Capacity utilization pattern </li></ul><ul><ul><li>Seasonal, cyclical </li></ul></ul><ul><li>Interrelationships </li></ul><ul><li>Order processing </li></ul><ul><li>and distribution </li></ul><ul><li>Value chain linkages </li></ul><ul><ul><li>Marketing & sales </li></ul></ul><ul><ul><li>Logistics & operations </li></ul></ul><ul><ul><li>Service </li></ul></ul>
    51. 51. Factors That Drive Differentiation <ul><li>Unique product features </li></ul><ul><li>Unique product performance </li></ul><ul><li>Exceptional services </li></ul><ul><li>New technologies </li></ul><ul><li>Quality of inputs </li></ul><ul><li>Exceptional skill or experience </li></ul><ul><li>Detailed information </li></ul><ul><li>Extensive personal relationships with buyers and suppliers </li></ul>
    52. 52. Evaluating Feasibility Study <ul><li>Implementation check and </li></ul><ul><li>Fitness of time schedules, </li></ul><ul><li>Cost estimates, </li></ul><ul><li>Viability and validity of the assumptions, </li></ul><ul><li>Financial feasibility: </li></ul><ul><ul><li>Capital expenditures, </li></ul></ul><ul><ul><li>working capital, </li></ul></ul><ul><ul><li>cash flows, </li></ul></ul><ul><ul><li>equities structures, </li></ul></ul><ul><ul><li>debt ratios, </li></ul></ul><ul><ul><li>financial analysis and profitability. </li></ul></ul>
    53. 53. Financial Assessment <ul><li>Payback period </li></ul><ul><li>Rate of return </li></ul><ul><li>Break even analysis </li></ul><ul><li>Rate of internal returns </li></ul><ul><li>Net Present value </li></ul><ul><li>Discounted cash flows </li></ul>
    54. 54. Payback period <ul><li>Payback period = total $ investment/annual income </li></ul><ul><li>Example: </li></ul><ul><li>One project spent $50,000 and earned annual income $10,000 </li></ul><ul><li>Payback period = </li></ul><ul><li>Calculate: ??? </li></ul>
    55. 55. Rate of return <ul><li>Average annual accounting income from project </li></ul><ul><li> Average annual investment in the project </li></ul><ul><li>= Return on investment (ROI) </li></ul><ul><li>Average annual investment = (Initial investment + Salvage value at end)  2 </li></ul><ul><li>Advantages of ROI method: </li></ul><ul><li>Simple to explain and compute using financial statements </li></ul><ul><li>Rate of return = average profit after tax/average total investment </li></ul><ul><li>Average profit after tax= Total annual profit/number of years </li></ul><ul><li>Average total investment = Total investment (value of starting assets) + (value of ending assets)/2 </li></ul>
    56. 56. Breakeven Analysis <ul><li>Breakeven point Q BE is the number of units that must be sold at price P such that total revenues (TR) equal total costs (TC). </li></ul><ul><li> TR = TC </li></ul><ul><li> (P  Q BE ) = [FC + (VC  Q BE )] </li></ul><ul><li> [(P - VC)  Q BE ] = FC </li></ul><ul><li> Q BE = [FC  (P - VC)] </li></ul><ul><li> Q BE = (FC  CM) </li></ul><ul><li>At breakeven, the total contribution margin equals fixed costs. </li></ul><ul><li>(CM  Q BE ) = FC </li></ul>
    57. 57. Use break even analysis to determine sales volume needed to become profitable
    58. 58. Rate of internal returns <ul><li>Internal rate of return (IRR) is the interest rate that equates the present value of future cash flows to the cash outflows. </li></ul><ul><li>By definition: PV = FV  (1 + irr ) </li></ul><ul><li>Solution for a single cash flow: irr = (FV  PV) - 1 </li></ul><ul><li>Comparison of IRR and DCF/NPV methods </li></ul><ul><li>Both consider time value of cash flows </li></ul><ul><li>IRR indicates relative return on investment </li></ul><ul><li>DCF/NPV indicates magnitude of investment’s return </li></ul><ul><li>IRR can yield multiple rates of return </li></ul><ul><li>IRR assumes all cash flows reinvested at project’s constant IRR </li></ul><ul><li>DCF/NPV discounts all cash flows with specified discount rate </li></ul>
    59. 59. Net Present value <ul><li>Identify after-tax cash flows for each period </li></ul><ul><li>2. Determine discount rate </li></ul><ul><li>3. Multiply by appropriate present-value factor (single or annuity) for each cash flow. PV factor is 1.0 for cash invested now </li></ul><ul><li>4. Sum of the present values of all cash flows = net present value (NPV) </li></ul><ul><li>5. If NPV  0, then accept project </li></ul><ul><li>6. If NPV < 0, then reject project </li></ul><ul><li>NPV is also known as discounted cash flow ( DCF ). </li></ul>
    60. 60. Value of a firm is equal to the present value of its expected cash flows
    61. 61. Example: Valuation of Coca Cola using DCF method
    62. 62. Main components of an income statement Net income Taxes Net income before taxes Total operating expenses Operating expenses Gross profit Cost of goods sold Sales
    63. 63. Main components of a balance sheet Liabilities and Owners’ Equity Assets
    64. 64. Cash flow is not a stand alone statement <ul><li>Balance sheet and income statement are not considering the timing of receipt and payment of cash in recognizing assets, liabilities, owners’ equity, income and expenses. </li></ul><ul><li>Cash flow statement tracks the timing of receipts and payments of cash to help the business analyze its cash flow situation. </li></ul><ul><li>Cash flow statements is prepared on the basis of financial information in the income statement and balance sheet. </li></ul>
    65. 65. Cash flow statement is divided to 3 sections <ul><li>Operating activities : principal operating activities of the business. Main items considered are: </li></ul><ul><ul><li>Revenues </li></ul></ul><ul><ul><li>Accounts receivable </li></ul></ul><ul><ul><li>Expenses </li></ul></ul><ul><ul><li>Accounts payable </li></ul></ul><ul><ul><li>Prepaid expenses </li></ul></ul><ul><li>Investing activities : long term items. Main items considered are: </li></ul><ul><ul><li>Fixed assets </li></ul></ul><ul><ul><li>Long-term investments </li></ul></ul><ul><li>Financing activities : how the business is financed. Main items considered are: </li></ul><ul><ul><li>Capital </li></ul></ul><ul><ul><li>Dividends </li></ul></ul><ul><ul><li>Loans </li></ul></ul><ul><ul><li>Interest </li></ul></ul>
    66. 66. How the cash flow statement is prepared? <ul><li>There are 2 ways to prepare the operating section of the cash flow statement: </li></ul><ul><li>Direct method: translates income statement items – item by item – using information in the balance sheet. For example; revenues in the income statement are translated to “cash receipts from customers” using the change the accounts receivable from the comparative balance sheet. </li></ul><ul><li>Indirect method: starts with net income in the income statement and reconciles it to net cash provided by operating activities through considering items in the balance sheet and income statement. </li></ul>
    67. 67. Comparative Financial Analysis: Key Ratios Profitability Leverage Activity Liquidity Type Examples Measures Indicators Profit after taxes Shareholder’s equity Return on Equity (ROE) Current Ratio Asset Turnover Inventory Turnover Debt/Equity Ratio Current Assets Current Liabilities Liabilities______ Shareholders’ equity Sales_________ Total Assets Sales_________ Inventory Productivity of firm’s value-adding activities Measure of financial solvency Asset use efficiency Turnaround of inventory Corporate financing; financial risk; default risk
    68. 68. Basic ways to improve ROA and ROE
    69. 69. Exercise: ROE and ROA A firm has the following financial data: Assets =$ 200,000 Liabilities = 0 Equity = $ 200,000 Revenues = $200,000 Expenses = $180,000 Complete the ratio decomposition and determine the ROA and ROE.
    70. 70. Exercise: ROE and ROA A firm has the following financial data: Assets = $200,000 Liabilities = 0 Equity = $200,000 Revenues = $200,000 Expenses = $170,000 Complete the ratio decomposition and determine the ROA and ROE.
    71. 71. Economic Assessment <ul><li>Cost and benefit analysis </li></ul><ul><li>Can an estimate of required capital investment be made? </li></ul><ul><li>Contribution to economic development </li></ul><ul><li>Contribution to job creation and employment </li></ul><ul><li>Contribution to trade balance and </li></ul><ul><li>export market </li></ul><ul><li>Contribution to added value and </li></ul><ul><li>GDP </li></ul>
    72. 72. Environmental Assessment <ul><li>What is the expected environmental effect of the option? </li></ul><ul><li>How significant is the estimated reduction in wastes or emissions? </li></ul><ul><li>Will the option affect public or operator health (positive or negative)? If so, what is the magnitude of these effects in terms of toxicity and exposure? </li></ul>
    73. 73. Information required when undertaking feasibility study <ul><li>Population statistics: </li></ul><ul><li>Demographics statistics </li></ul><ul><li>Socio-economic factors </li></ul><ul><li>Education </li></ul><ul><li>Housing Statistics </li></ul>
    74. 74. Income Levels <ul><li>Income per capita </li></ul><ul><li>Income distribution </li></ul><ul><li>Income and consumption distribution </li></ul><ul><li>Consumer preferences </li></ul><ul><li>Consumption trends </li></ul>
    75. 75. Law and legal data and policies of public services <ul><li>Restriction on imports </li></ul><ul><li>Customs tariff </li></ul><ul><li>Pricing policy </li></ul><ul><li>Regulation and de-regulation </li></ul><ul><li>Trade agreement </li></ul><ul><li>Industry free tax zones </li></ul><ul><li>Incubators </li></ul>
    76. 76. Data about the product/service <ul><li>Local production </li></ul><ul><li>Local demand and supply </li></ul><ul><li>Import/export products </li></ul><ul><li>International trends in international markets </li></ul>
    77. 77. Data on Product Prices <ul><li>Prices of competitors products </li></ul><ul><li>Prices of similar products </li></ul><ul><li>Prices of related products </li></ul><ul><li>Price wars and strategies adopted </li></ul><ul><li>Prices of wholesales and in retail prices </li></ul><ul><li>Trends on international market prices </li></ul>
    78. 78. Competitor analysis & market intelligence studies <ul><li>Competitor analysis </li></ul><ul><li>Market intelligence studies </li></ul>
    79. 79. Research and Development <ul><li>Researchers and Scientific Centers </li></ul><ul><li>Others market researches and development </li></ul><ul><li>Hi-tech industry development center </li></ul><ul><li>Technology laboratory </li></ul><ul><li>Innovation and product development institution </li></ul>
    80. 80. External Environmental Analysis Strategic Intent Strategic Mission The External Environment Analysis of general environment Analysis of industry environment Analysis of competitor environment The External Environment
    81. 81. General Environment <ul><li>Socio-cultural segment </li></ul><ul><li>Women in the workplace </li></ul><ul><li>Workforce diversity </li></ul><ul><li>Attitudes about quality of worklife </li></ul><ul><li>Concerns about environment </li></ul><ul><li>Shifts in work and career preferences </li></ul><ul><li>Shifts in product and service preferences </li></ul>
    82. 82. General Environment <ul><li>Economic segment </li></ul><ul><li>Inflation rates </li></ul><ul><li>Interest rates </li></ul><ul><li>Trade deficits or surpluses </li></ul><ul><li>Budget deficits or surpluses </li></ul><ul><li>Personal savings rate </li></ul><ul><li>Business savings rates </li></ul><ul><li>Gross domestic product </li></ul>
    83. 83. General Environment <ul><li>Political/Legal Segment </li></ul><ul><li>Antitrust laws </li></ul><ul><li>Taxation laws </li></ul><ul><li>Deregulation philosophies </li></ul><ul><li>Labor training laws </li></ul><ul><li>Educational philosophies and policies </li></ul>
    84. 84. General Environment <ul><li>Technological Segment </li></ul><ul><li>Product innovations </li></ul><ul><li>Applications of knowledge </li></ul><ul><li>Focus of private and government-supported R&D expenditures </li></ul><ul><li>New communication technologies </li></ul>
    85. 85. General Environment <ul><li>Global Segment </li></ul><ul><li>Important political events </li></ul><ul><li>Critical global markets </li></ul><ul><li>Newly industrialize countries </li></ul><ul><li>Different cultural and institutional attributes </li></ul>
    86. 86. General Environment <ul><li>Demographic Segment </li></ul><ul><li>Population size </li></ul><ul><li>Age structure </li></ul><ul><li>Geographic distribution </li></ul><ul><li>Ethnic mix </li></ul><ul><li>Income distribution </li></ul>
    87. 87. Industry Environment <ul><li>A set of factors that directly influences a company and its competitive actions and responses </li></ul><ul><li>Interaction among these factors determine an industry’s profit potential </li></ul><ul><li>Threat of new entrants </li></ul><ul><li>Power of suppliers </li></ul><ul><li>Power of buyers </li></ul><ul><li>Product substitutes </li></ul><ul><li>Intensity of rivalry </li></ul>
    88. 88. Five Forces Model of Competition <ul><li>Identify current and potential competitors and determine which firms serve them </li></ul><ul><li>Conduct competitive analysis </li></ul><ul><li>Recognize that suppliers and buyers can become competitors </li></ul><ul><li>Recognize that producers of potential substitutes may become competitors </li></ul>
    89. 89. Five Forces Model of Competition Threat of New Entrants Bargaining Power of Suppliers Bargaining Power of Buyers Threat of Substitute Products Rivalry Among Competing Firms Five Forces of Competition
    90. 90. Threat of New Entrants <ul><li>Barriers to entry </li></ul><ul><li>Economies of scale </li></ul><ul><li>Product differentiation </li></ul><ul><li>Capital requirements </li></ul><ul><li>Switching costs </li></ul><ul><li>Access to distribution channels </li></ul><ul><li>Cost disadvantages independent of scale </li></ul><ul><li>Government policy </li></ul><ul><li>Expected retaliation </li></ul>
    91. 91. Bargaining Power of Suppliers <ul><li>A supplier group is powerful when: </li></ul><ul><li>it is dominated by a few large companies </li></ul><ul><li>satisfactory substitute products are not available to industry firms </li></ul><ul><li>industry firms are not a significant customer for the supplier group </li></ul><ul><li>suppliers’ goods are critical to buyers’ marketplace success </li></ul><ul><li>effectiveness of suppliers’ products has created high switching costs </li></ul><ul><li>suppliers are a credible threat to integrate forward into the buyers’ industry </li></ul>
    92. 92. Bargaining Power of Buyers <ul><li>Buyers (customers) are powerful when: </li></ul><ul><li>they purchase a large portion of an industry’s total output </li></ul><ul><li>the sales of the product being purchased account for a significant portion of the seller’s annual revenues </li></ul><ul><li>they could easily switch to another product </li></ul><ul><li>the industry’s products are undifferentiated or standardized, and buyers pose a credible threat if they were to integrate backward into the seller’s industry </li></ul>
    93. 93. Threat of Substitute Products <ul><li>Product substitutes are strong threat when: </li></ul><ul><li>customers face few switching costs </li></ul><ul><li>substitute product’s price is lower </li></ul><ul><li>substitute product’s quality and performance capabilities are equal to or greater than those of the competing product </li></ul>
    94. 94. Intensity of Rivalry <ul><li>Intensity of rivalry is stronger when competitors: </li></ul><ul><li>are numerous or equally balanced </li></ul><ul><li>experience slow industry growth </li></ul><ul><li>have high fixed costs or high storage costs </li></ul><ul><li>lack differentiation or low switching costs </li></ul><ul><li>experience high strategic stakes </li></ul><ul><li>have high exit barriers </li></ul>
    95. 95. High Exit Barriers <ul><li>Common exit barriers include: </li></ul><ul><li>specialized assets (assets with values linked to a particular business or location) </li></ul><ul><li>fixed costs of exit such as labor agreements </li></ul><ul><li>strategic interrelationships (relationships of mutual dependence between one business and other parts of a company’s operation, such as shared facilities and access to financial markets) </li></ul><ul><li>emotional barriers (career concerns, loyalty to employees, etc.) </li></ul><ul><li>government and social restrictions </li></ul>
    96. 96. Case study <ul><li>Complete feasibility study format and writing exercises: </li></ul><ul><li>Topics to be determined: </li></ul><ul><ul><li>Agribusiness </li></ul></ul><ul><ul><li>Retail Industry </li></ul></ul><ul><ul><li>Service industry </li></ul></ul><ul><ul><li>Manufacturing industry </li></ul></ul><ul><ul><li>ICT </li></ul></ul><ul><ul><li>others </li></ul></ul>
    97. 97. Feasibility outline format <ul><li>Executive Summary </li></ul><ul><li>Regional Socio-Economic Situation (General Description of the current situation). Most likely including brief on your local economy. </li></ul><ul><li>Legal Study </li></ul><ul><li>Financial Plan </li></ul><ul><li>Project Implementation Schedule </li></ul><ul><li>Market Study and Marketing </li></ul><ul><li>Detail Description of Activities </li></ul><ul><li>Environmental protection </li></ul><ul><li>Control </li></ul><ul><li>Financial Analysis and Projections </li></ul><ul><li>11) Social Economic Effects / Multiplier effects, related studies </li></ul><ul><li>12) Options Analysis on different hypothesis and scenarios </li></ul>
    98. 98. Writing pitfall for feasibility study <ul><li>Summary guide when writing key components </li></ul>
    99. 99. Feasibility Study Contents <ul><li>Venture Concept </li></ul><ul><li>Market Assessment </li></ul><ul><li>Technical Feasibility of your idea </li></ul><ul><li>Your Marketing Plan </li></ul><ul><li>Managing the Supply Situation </li></ul><ul><li>Conduct cost and profitability assessment </li></ul><ul><li>Plan for future action </li></ul>
    100. 100. Feasibility Study Contents <ul><li>Venture Concept </li></ul><ul><ul><ul><ul><li>Explain clearly and concisely the principal concept underlying your venture and what sets it apart from other businesses </li></ul></ul></ul></ul><ul><li>Market Assessment </li></ul><ul><ul><ul><ul><li>Describe the profile of your principal target customers </li></ul></ul></ul></ul><ul><ul><ul><ul><li>Indicate current market size, trends and seasonal patterns </li></ul></ul></ul></ul><ul><ul><ul><ul><li>How do you plan to test your idea? </li></ul></ul></ul></ul><ul><ul><ul><ul><li>Describe any market research or customer surveys you plan to conduct </li></ul></ul></ul></ul><ul><ul><ul><ul><li>Assess the nature of your competition </li></ul></ul></ul></ul><ul><ul><ul><ul><li>Estimate your expected sales and market share </li></ul></ul></ul></ul>
    101. 101. Feasibility Study Contents … <ul><li>Technical Feasibility </li></ul><ul><ul><ul><ul><li>Indicate the degree of innovativeness of your venture idea and the risks associated with it </li></ul></ul></ul></ul><ul><ul><ul><ul><li>Does it need to be subjected to some form of technical evaluation or assessment? </li></ul></ul></ul></ul><ul><ul><ul><ul><ul><li>Does the business need accreditation? </li></ul></ul></ul></ul></ul><ul><ul><ul><ul><ul><li>Do you have a prototype? Has it been tested from a technological point of view? Will it have the specifications to meet the needs and expectations of the market? </li></ul></ul></ul></ul></ul><ul><ul><ul><ul><ul><li>Can it be mass produced? Job shop production? Sub contracted? </li></ul></ul></ul></ul></ul>
    102. 102. Feasibility Study Contents … <ul><li>Your Marketing Plan </li></ul><ul><ul><ul><ul><li>Detail the marketing strategy you plan to use </li></ul></ul></ul></ul><ul><ul><ul><ul><li>Describe your marketing plan including your sales strategy, advertising and promotion plans, pricing policy and channels of distribution. </li></ul></ul></ul></ul>
    103. 103. Feasibility Study Contents … <ul><li>Managing the Supply Situation </li></ul><ul><ul><ul><ul><li>How do you plan to assure continuing access to critical supplies of raw materials and component parts at reasonable prices? </li></ul></ul></ul></ul><ul><ul><ul><ul><li>Will you produce or subcontract your production? </li></ul></ul></ul></ul>
    104. 104. Feasibility Study Contents … <ul><li>Cost and Profitability Assessment </li></ul><ul><ul><ul><ul><li>Estimate funds required to set up your business </li></ul></ul></ul></ul><ul><ul><ul><ul><li>Develop short-term financial projections including: </li></ul></ul></ul></ul><ul><ul><ul><ul><ul><li>Cash flow forecasts </li></ul></ul></ul></ul></ul><ul><ul><ul><ul><ul><li>Pro forma profit and loss statements </li></ul></ul></ul></ul></ul><ul><ul><ul><ul><ul><li>Pro forma balance sheet </li></ul></ul></ul></ul></ul><ul><ul><ul><ul><ul><li>Break even analysis </li></ul></ul></ul></ul></ul>
    105. 105. Feasibility Study Contents … <ul><li>Plan for future action </li></ul><ul><ul><ul><ul><li>What were the strong and weak points of your venture idea? </li></ul></ul></ul></ul><ul><ul><ul><ul><li>Did your assessment indicate the business was likely to be profitable? </li></ul></ul></ul></ul><ul><ul><ul><ul><li>Is it sufficiently attractive to proceed with the development of a complete business plan? </li></ul></ul></ul></ul>
    106. 106. Any comments? <ul><li>Thanks for participation </li></ul><ul><li>If you need any help, feel free to send your queries/questions through: </li></ul><ul><li>Consulting Group for Development, CGD </li></ul><ul><li>By: Khaled Ayesh </li></ul><ul><li>Chief Technical Advisor and Team Leader </li></ul><ul><li>Email: [email_address] </li></ul><ul><li>Jawwal: +972-599-689118 </li></ul>
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