Why Is a Feasibility Study Needed?
Starting a new business project is inherently risky because there is no guarantee that a new company, product or service will be profitable. A feasibility study is an analysis that attempts to assess whether a new project has the potential to succeed. Feasibility studies are commonly used in the early stages of planning new ventures to help managers decide whether to go forward with new projects. Feasibility studies technically aren't required to launch new ventures, but they can provide valuable insights that help managers make better decisions and avoid costly mistakes.
A feasibility study typically includes a market analysis that looks at the current state and direction of a market and whether a new venture would be viable in the market. For example, if an inventor creates a new type of skateboard, market research he conducts as part of a feasibility study might show little interest exists for the new design. In this case, the inventor might save himself time and money by scrapping the project.
Even if consumers are interested in a new product or service, a business can't succeed unless it can produce and deliver the product to customers at a price that is profitable. A feasibility study can assess the start-up and operational costs of a venture and make revenue projections to estimate whether a project is likely to be profitable. If a product is too expensive to produce to be profitable, managers can look into ways to cut costs to make it financially feasible.
Many external factors can harm the profitability of a business. Conducting a feasibility study can help managers identify threats such as market competition, unfavorable laws and new technologies that might affect a project's chances of success. Identifying threats early on gives managers the opportunity to take action to mitigate the impact they might have on a business as a new venture proceeds.
Small businesses often focus on selling products and services to small segments, or niches, within larger markets that have specific needs and preferences. A feasibility study can help business managers identify niches in markets. For instance, a feasibility study might reveal that certain demographic groups within a market are willing to pay extra for product features that are not currently available, giving a new company the chance to profit by fulfilling the need.