7 Assessing the viability of enterprise and selection of the product

P.G. Padma Gowri

epgp books

 

 

Introduction:

 

Modern world have many challenges that impact billions of people across the globe. Environmental degradation, food insecurity, lack of healthcare and access to clean water are some of the issues requiring a new way of thinking. To meet these challenges, a new cadre of social entrepreneurs, cutting across generational, ethnic and socioeconomic boundaries, are building solutions in the form of social ventures that seek both sustainable revenue and scalable impact.

 

Objectives:

  • To know about Business Viability
  • Basics of Business project proposal
  • To know about various components of product selection.

Business Viability

 

The Dimensions of Business Viability Model is a general framework that assists the entrepreneur in identifying individual tasks (decisions) in validating the Business Concept. The Dimensions of Business Viability Model will validate the Business Concept by the core dimensions of:

  • Market Viability
  • Technical Viability
  • Business Model Viability
  • Management Model Viability
  • Economic and Financial Model Viability and
  • Exit Strategy Viability.

  The Business feasibility Study findings will be assessed by potential investors and stakeholders regarding their credibility and depth of argument. At the core of the Business feasibility Study decision making process is a Business Viability Model assessment which provides the necessary commercial decision making data Business viability for entrepreneurs not only reflects the likelihood of the business venture succeeding, but also its ability to deliver the entrepreneurial objectives such as creating wealth.

 

In the art of business start-ups survival and prosperity will be affected by a wide range of commercial factors, many of which are linked to the personal qualities of the entrepreneur.

 

The steps of a Business Viability Analysis are not rigid and frequency needs modification to best fit the business situation being assessed. Proactive planning through developing a business viability model that best fits a given industry allows the entrepreneur efficiently and cost effectively to evaluate a number of Business Concepts before determining the best one. A typical Business Viability Analysis requires one to four months for completion, depending on the size of the proposed business venture, the complexity of the business model and the availability of data.

 

Components of Business Viability

 

Each dimension of the business viability model will contain components which evaluate individual characteristics of the enterprises business venture’s viability. In developing the model, to best fit the business, the entrepreneur will need to structure each dimension under examination.

 

Market Viability

  • Market Environment e.g. size, sustainability, potential market, target market, potential value
  • Competitors
  • Similar Products
  • Pricing
  • Packaging
  • Distribution to markets
  • Promotion/Advertising

Technical Viability

  • Capacity
  • Availability and quality of resources, inclusive of raw materials, labour and professional expertise
  • Supply chain implications
  • Manufacturing process
  • Ability to apply IP(intellectual property)

Business Model Viability

  • Uniqueness of model in terms of competitive advantages
  • Ability of competitor to duplicate
  • Ability to create value through priority knowledge & process i.e. IP
  • Ability to create wealth
  • Ability to duplicate and delegate i.e. documentation of tacit & explicit knowledge

Management Model Viability

  • Application of knowledge & skills
  • Training
  • Employee management and recruitment
  • Management of intellectual property
  • Management of risk
  • Ability to delegate staff
  • Ability to measure business process

Economic and financial viability

  • Start up costs
  • Working Capital
  • Operating costs
  • Raw material costs
  • Overall return on investment
  • Overall profitability
  • Breakeven point

General consideration of assessing the viability of enterprise

 

The nature of the goods or services: level of complexity

 

Projects involving a complex procurement, such as payroll services and centralized information technology services, are higher risk than simple supplies procurements. More complex, high value and relatively important projects will normally be subjected to a formal risk management process. This should include consideration of the need for and scope of financial viability assessment.

 

Value of the procurement

 

Projects involving a large value procurement are generally more risky than those involving a small value procurement. However, procurement value should not be used as the sole indicator of project risk.

 

In assessing financial viability risk, the value of procurement within a project should consider both the context of relative value to the entity and in the context of relative value to the tenders or potential suppliers.

 

Other factors

o    General economic factors

o    The tightness of the labour market

o    Levels of demand for the required service

o    Understanding of profit margins in the relevant industry

o    Maturity of the relevant industry

o    The capacity of businesses to supply

 

Feasibility Study – an Important aspect of Project Management

 

As the name implies, feasibility study is used to determine the viability of an idea. The objective of such a study is to ensure a project is legally and technically feasible and economically justifiable. It tells us whether a project is worth the investment.

 

Feasibility studies are useful to businesses in many ways. Some of the reasons why organizations conduct feasibility studies are as follows:

  • Not every project is doable.
  • Not every project should be taken up. This will engage useful resources and block their use on other tasks.
  • Not every project makes effective use of the resources of an organization.

 

A feasibility study involves taking a judgment call on whether a project is doable. The two criteria to judge feasibility are cost required and value to be delivered. A well-designed study should offer a historical background of the business or project, a description of the product or service, accounting statements, details of operations and management, marketing research and policies, financial data, legal requirements and tax obligations. Generally, such studies precede technical development and project implementation.

 

Business project proposal:

 

A business proposal is a written offer from a seller to a perspective buyer. Business proposal are often a key step in a complex sales process.

 

Components of project proposal:

  • Market survey of the products you propose to manufacture.
  • Characteristics of the Location.
  • Land and building requirements.
  • Requirements and availability of Plant and Machinery.
  • Requirement of other utilities namely power, water, steam etc.
  • Assessment of Working Capital requirements.
  • Technology tie-up.
  • Raw materials specifications.
  • Manpower requirements.
  • Schedule of Implementation.
  • Estimates of Project Cost.
  • Tie-up of finance.

  Product selection:

 

Product selection is a very delicate and complex exercise. Very often institutions like the small industries services institute and district industries centers come into contact with entrepreneur, who are keen to start industries but are not decided on which product to select. Depending upon the market segment, availability of raw materials, investment criteria, technical knowledge and availability of skilled man power, entrepreneur should select a product line. Generally, products are classified under the following categories:

 

1.      Engineering

2.      Non-Engineering

3.      Food-loose type

4.      Demand –based

5.      Technology- based

6.      Need – based.

 

Entrepreneur’s classifications:

 

First categories entrepreneur are called as Technocrat entrepreneur who have good family background and is clear in thinking about the product he is going to select for his venture.

 

The second categories of entrepreneur are those who have no technical education but are experienced and also have identified certain products but have not decided which to select among these products.

 

The third category of entrepreneur are those who neither possess technical qualification nor possess experience nor have any idea about any product but are interested in starting a industry of their own and make a success out of it. In dealing with this category of entrepreneur institute like district industries canters (DICs), Small industries service institute (SISIs) and banks have to take extra care in advising them of product line.

 

Criteria for selecting a product:

  1. Availability of markets
  2. Availability of technology
  3. Availability of necessary finance
  4. Availability of raw materials
  5. Availability of other infrastructural facilities like power, water, skilled labour, transport etc.,

The product line can be classified into following areas:

  1. Consumer durables (steel, furniture, electrical irons , voltage stabilizer , water heater)
  2. Consumer non- durables (plastic items, cosmetic items, readymade, garments, food items)
  3. Industrial non-durables (bolts and nuts, screws, springs)
  4. Intermediate goods (paints and varnish, pharmaceutical formulations, dyestuff)

 

An entrepreneur may select a product according to his own capacity and motivation. As an innovative entrepreneur he may design a new product or copy an established product or improve upon an existing product in terms of additional uses, comfort or cost effective. The economic viability of a product should cover the following demand aspects:

  1. Volume of existing demand in the domestic market
  2. Volume of existing demand in the export market
  3. Volume of aggregate existing demand in all market
  4. Volume of potential demand
  5. The degree of import substitution
  6. Degree of substitution of an existing product.
  7. The volume of demand by big units for ancillary products

 

The relevant information on these aspect may be obtained from various technical publication, state development agencies, industrial houses, developing ancillary, units, giant public sector units like ITI, CAL, BHEL, ONGC, etc., in respect of the development of the product that they now import from other country and from the various research laboratories of CSIR and NRDC etc., in certain cases consultants may be hired for product selection from the board industry groups.

 

Small scale enterprises in our country produce most of the products required for our day to day requirements such as : Readymade garments ,leather footwear, detergents soaps, detergent liquids ,plastic items like buckets, jerry –cans , office trays, lunch boxes, flasks , thermometers , steel furniture , stoves, leather boxes , wallets and purses, food items , vermicelli , macaroni , jams, jellies, squashes, marmalade, pickles , condiments and so on. More than 5000 products which could be classified under mechanical, chemical, electronic, glass and ceramics, food items, leather and Ancillaries are being farmed out by the small scale sector in our country.

 

Preparation of Project Report:

 

It is necessary to prepare project report according to the format of the loan application of the concerned terms lending institution. An entrepreneur may get these reports done by a consultant or technical consultancy organization.

 

The report normally covers important items like source of finance – long term and short term, availability of machinery and technical knowledge , sources of labour and raw materials , market potential and overall profitability.

 

All these are systematic which is estimated and presented balancing the opportunities and constraints. It has not always been possible for consultant to submit reports which could be straight away relied upon by financial or licensing agencies. It is felt that the developmental agencies themselves should play a more positive role in the preparation of feasibility reports, the project report being compiled by the entrepreneur should accomplish the actual task of providing a Birds-eye-view of the entire spectrum of activity.

 

I. Technical feasibility :

 

Technical feasibility would encompass factors such as description of the product, specification to be adopted, raw materials available as per requirements, outline of “Manufacturing process inclusive of a “flow chart process”, quality control measures, power supply and availability of water, transport facilities and communication network.

 

II. Economic viability:

 

Essentially involves compilation of demands for domestic and export markets, most appropriate installed capacity requirements in regard to capital assets, evaluation of the production costs, capturing a substantial share of market sale, revenue expected, suitable price structure and so on.

 

III.Financial implications:

 

Project costs covering “Non-recurring expenses” such as land and buildings, Plant and Machinery, equipment’s, preoperative expenses, and so on and “Recurring Expenses” such as working capital needs, Raw material needs, wages for personal and so on will have to be worked out in detail. The probable cost of production over a period of 5 years to be assigned and expenses such as fixed and variable expenses and break even analysis should be presented. Besides, profit per month, percentage of profit on total investment and percentage of profit on expected sale should also be computed and furnished.

 

IV.Managerial competency:

 

The new entrepreneur manager entering the small scale section should devote his full attention to the new venture and should consider the product line chosen as a “major Economic Activity”. He should develop keen desire to adopt, “Modern Management Practices” for ensuring successful growth. He should endeavor to out his product in the market in his own style in an “Innovative Spirit” without blindly imitating other brands. He should maintain up to date records pertaining to actual production, sales effected every month, in addition to gathering useful data on “POTENTIAL CUSTOMERS”, “NEW MARKET SEGMENTS”, “CHANGESIN   FASHIONS”,    “DESGINS”, “STYKLES” etc., The new entrant must emerge itself as a “CUSTOMER SATISFYING” and “CUSTOMER CREATING” organization.

 

Various steps involved in project selection:

 

Idea Generation:

 

Product ideas or investment opportunities come from different sources such as business/financial newspapers, research institutes, consulting firms, natural resources, Universities, competitors etc., The starting point for idea generation could be a simple analysis of the business’s strengths and weakness. Ideas could also be generated through brainstorming, desk research and various types of management consensus procedures.

 

Evaluation:

 

Screening of the product ideas is the first step for evaluation. Such criteria as potential value of the product, time money and equipment required, fitting of potential product into the business’s long range sales plan and availability of qualified people to handle its marketability need be thoroughly considered.

 

Each identified product/investment opportunity needs to be adequately evaluated. A pre-feasibility study of the product market, technical and financial aspect is necessary at this stage to have a clear picture of the associated cost and benefits. The pre-feasibility is a preliminary version of a feasibility study. It is similar to a feasibility study except that it is less detailed. It is usually carried out for large and complex product/project to determine whether to proceed in more elaborate feasibility study

 

Choice: A choice is made of product which has been found to be commercially viable, technically feasible and economically desirable. At this stage, necessary machineries are set in motion.

 

Conclusion:

 

A feasibility study evaluates the project’s potential for success, therefore perceived objectivity is an important factor in the credibility of the study for potential investors and lending institutions.

 

In order to obtain accurate market information for ascertaining the product viability the entrepreneur may take up a market survey either by himself or with the help of a consultants hired for product selection from the board industry groups. In order to obtain accurate market information for ascertaining the product viability the entrepreneur may take up a market survey either by himself or with the help of a consultant.

 

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References:

  • https://en.wikipedia.org/wiki/Viability_study
  • https://www.knowledgebase-script.com/…/enterprise-wiki-software-criteria-for-selecti… www.sciencedirect.com/science/article/pii/S0963868704000484
  • www.entrepreneurshipsecret.com/8-factors-to-be-considered-in-products-selection/
  • www.industryweek.com/product…/product-selection-vs-product-development