A Market Feasibility Study

Created by Barry Sullivan

Illinois MBA 2004

[email protected]

Phase 1Target Market Identification

Phase 2Prospective Positioning

Phase 3Implementation Planning

A Market Feasibility StudyA Market Feasibility Study

Define Define Customer Customer

NeedsNeeds

Define Define Customer Customer

NeedsNeeds

Conduct Conduct Internal Internal AnalysisAnalysis

Conduct Conduct Internal Internal AnalysisAnalysis

Conduct Conduct Competitive Competitive

AnalysisAnalysis

Conduct Conduct Competitive Competitive

AnalysisAnalysis Determine Determine Target Target MarketMarket

Determine Determine Target Target MarketMarket

Evaluate Evaluate Financial Financial ViabilityViability

Evaluate Evaluate Financial Financial ViabilityViability

Plan Value Plan Value OptimizationOptimizationPlan Value Plan Value

OptimizationOptimizationEvaluate Evaluate Industry Industry

EnvironmentEnvironment

Evaluate Evaluate Industry Industry

EnvironmentEnvironment

Define Define Potential Potential MarketsMarkets

Define Define Potential Potential MarketsMarkets

Data GatheringData Gathering Analysis & EvaluationAnalysis & Evaluation

Consistent Client Interaction & InputConsistent Client Interaction & Input

1.

2.3.

5.

4.

6.

7. 8.


Illinois MBA 2004

[email protected]

1. Define Customer Needs1. Define Customer Needs

• Evaluate alignment of provided benefit with the needs of customers

Objective

• Interest/ Needs Survey

• Laddering Interviews

• Prototyping

Sub-Process

Tools

Define the benefit to be provided or

the void to be filled with the new

alternative

Define the benefit to be provided or

the void to be filled with the new

alternative

Translate perceived benefit

into necessary features & attributes

Translate perceived benefit

into necessary features & attributes

Rank the measurable

attributes by their respective

importance to customer

Rank the measurable

attributes by their respective

importance to customer

Evaluate client’s product

performance in terms of weighted

attributes

Evaluate client’s product

performance in terms of weighted

attributes

• Approach this objectively—avoid a “client bias”

• Is this a B2B or B2C situation?

• What do customers want? Does this new product give it to them?

• Does this new alternative better serve their needs?

Tips & Key ?s

Briefly examine the level of customer

satisfaction provided by

existing alternatives

Briefly examine the level of customer

satisfaction provided by

existing alternatives

Consider the relative customer risks and costs of switching from existing benefit-

provisionary source, if any, to new alternative

Consider the relative customer risks and costs of switching from existing benefit-

provisionary source, if any, to new alternative

Make preliminary judgments as to

the product’s overall

attractiveness in light of existing

alternatives

Make preliminary judgments as to

the product’s overall

attractiveness in light of existing

alternatives

• Perceived benefit desired/ required by customer

• Product attributes associated with said benefit & relative importance to customer

• Early determination of client product’s marketability (attractiveness to customer)

Outputs


Illinois MBA 2004

[email protected]

1.1 Interest/ Needs Survey1.1 Interest/ Needs Survey

• Develop for distribution and reclamation a survey targeted for the informational needs of the team

• Assign appropriate and meaningful metrics for ready compilation

• Accumulate and interpret acquired data without bias

Process

• Be careful during survey creation not to inadvertently formulate or include questions that may contain a bias

• Collecting data is important, but the analytical interpretation is essential to the engagement

Tool

Notes/ Implications

1. Please rate the importance of the following attributes in your selection of a retail store by circling the appropriate number. Not At Extremely All Important ImportantPrice 1 2 3 4 5 6 7Product selection 1 2 3 4 5 6 7Operating hours 1 2 3 4 5 6 7Payment methods 1 2 3 4 5 6 7Merchandise quality 1 2 3 4 5 6 7Product Refundability 1 2 3 4 5 6 7Customer service 1 2 3 4 5 6 7Location 1 2 3 4 5 6 716. The following is a list of items that can be purchased from a Target vending machine. Please rate the likelihood that you would purchase these products from the vending machine by circling the appropriate number. Not at All Extremely Likely to Purchase Likely to PurchaseSun block 1 2 3 4 5 6 7Aspirin 1 2 3 4 5 6 7Lip balm 1 2 3 4 5 6 7Hand Lotion 1 2 3 4 5 6 7Mouthwash 1 2 3 4 5 6 7Toothpaste 1 2 3 4 5 6 7Toothbrush 1 2 3 4 5 6 7Soap bar 1 2 3 4 5 6 7Music CD 1 2 3 4 5 6 7CD carrier 1 2 3 4 5 6 7Notebook 1 2 3 4 5 6 7Disposable Camera 1 2 3 4 5 6 7Camera Film 1 2 3 4 5 6 7

Representative questions from a recent survey pertaining to Target vending machines

The Objective: to determine a target market need for vending machines of this nature, as well as consumer receptiveness to vending machines of this nature


Illinois MBA 2004

[email protected]

1.2 Laddering Interviews1.2 Laddering Interviews

• 1-on-1 interviewing technique capable of establishing key consumer associations between product attributes and meaningful values

• By repeatedly asking probing questions of consumers, a value map specific to the relevant provided benefit can be developed that associates attributes to consequences, and consequences to values

• This probing allows greater understanding of consumer behaviors, wants, and needs

• The resulting ladder of perceptual orientations is useful for distinguishing between products in a given product class

Process

• Key Questions: “Why do people not buy my product?” & “Why do people buy my product?”

• It is most beneficial to conduct multiple interviews, with both non-users and product champions to acquire the most valuable insights into consumer motivations and behaviors

• Marketing, specifically advertising efforts should be focused upon consequences (middle ladder levels); i.e. Diet Coke ads should illustrate a consumer gaining the respect of others through physical appearance

Tool

Notes/ Implications

No Caloric Content

Desire to be athletic and attractive

Gain respect of others through

physical appearance

Weight is key determinate of

social acceptance for women

Self-evaluation determined by appearance

SELF ESTEEM SOCIAL ACCEPTANCE

Society values youthful

appearances

Bright, energetic, youthful

appearance

Bottle

Ready-to-transport

containers

Available almost

anywhere

Immediate fulfillment of

need

Reward / Compensation

ACCOMPLISHMENT•Interviewer elicits as many product attributes from the respondent as possible and then probes further…

•Interviewer: You indicated that you enjoy Diet Coke because it doesn’t have calories. Why is this important to you?

•Respondent: I like to stay fit.

•Staying fit is important to you?

•Sure, I like to look good.

•Why is looking good important to you?

•I want to look good; people are judged by their appearance. I care what others think o f me.

•Do you feel that you are being judged?

•Of course! People are constantly judging me; and as a woman it is all about appearance.

•What specifically about appearance do you think is important?

•For women? Weight is the biggest issue.

Hierarchical Value Map: Diet Coke (1 champion/ 2 attributes)Representative interview questions (posed to Diet Coke champion)


Illinois MBA 2004

[email protected]

1.3 Customer Prototypes1.3 Customer Prototypes

• Imagine and define people within specific target segments in an attempt 1) to gain a multi-dimensional view of the customer for whom the client will provide benefit and 2) to gain insight into the unarticulated needs of said customer

• Base profile on certain key ?s: Why does she/he use require this benefit? How does this person see her/himself? What is important to her/him? What are her/his ambitions? Who does she/he want to impress? What is her/his idea of the perfect vacation?

• Repeat this process until customer profiles begin to overlap, and then compile common characteristics/ goals/ values for client’s marketing mix

Process

• The results of this profile-layering have significant importance to the client’s ultimate marketing strategy

Tool

Notes/ Implications

Horacio Castro has just entered the United States illegally at the age of seventeen. Crossing the border with the aid of an established smuggling organization, Mr. Castro is eager to recover his US$3,500 cost of entry into America. Mr. Castro has settled in Chicago to reap the benefits of the city’s large labor market, and to utilize his existing familial ties within the city. Mr. Castro is here primarily to earn money, the vast majority of which will be sent to his rural home in the Durango Province of Mexico. In Mexico, his mother and five younger siblings will use the money to improve the drainage of their small field and purchase those necessities which they cannot provide for themselves. Horacio’s motivations are clear: earn as much money as possible to facilitate a quick return to his Mexican homeland. He has chosen this path as opportunities in Mexico are limited for a man lacking formal education and familial influence. Learning the meat-packing trade from his uncle, Horacio has secured a position in the same plant in which his uncle has labored for twelve years. While his expenses are low (he lives with his uncle’s family free of charge), Horacio recognizes the economic advantages associated with English abilities. His supervisor is a bilingual immigrant from Mexico City, valued for his ability to understand and communicate the motivations of both laborers and management. Horacio wants to emulate this successful supervisor and not his uncle, who having never learned English is still a laborer. In his mind, Horacio struggles with the barriers: he has little educational training, no English-speaking acquaintances, little disposable income with which to procure an education, no knowledge of the available educational opportunities, and little available time with which to take any classes. Horacio is discouraged by the barriers, but he feels there must be a way to learn English.

Not-For-Profit Adult English-Language Education--segment-specific customer


Illinois MBA 2004

[email protected]

2. Evaluate Industry Environment2. Evaluate Industry Environment

• Determine the client’s ability to enter and compete within the industry

• Identify potential opportunities for further exploration

Objective

• Structure-Conduct-Performance Articulation

• Porter’s Five Forces Model

• Externalities Mapping

Sub-Process

Tools

Determine chief economic traits of

the industry (growth rates,

trends)

Determine chief economic traits of

the industry (growth rates,

trends)

Identify the drivers of change

within the industry

Identify the drivers of change

within the industry

Determine the impact of external entities upon the

industry (government

regulation, social goodwill, etc.)

Determine the impact of external entities upon the

industry (government

regulation, social goodwill, etc.)

Identify barriers to entry, if any, &

evaluate them with respect to client’s

strengths/ weaknesses

Identify barriers to entry, if any, &

evaluate them with respect to client’s

strengths/ weaknesses

• Do existing industry players actively discourage new entrants?

• Is the industry growing? Has the industry been stable? Is growth likely to continue?

• Is technology an issue? If so, where along the curve are current alternatives?

Tips & Key ?s

Identify the relative strengths & weaknesses of existing industry

players

Identify the relative strengths & weaknesses of existing industry

players

Identify key success factors within industry

Identify key success factors within industry

Make a judgment as to overall

industry attractiveness

Make a judgment as to overall

industry attractiveness

• List of industry players ranked according to strength/ position

• Clear understanding of resources & capabilities required for industry success

Outputs


Illinois MBA 2004

[email protected]

2.1 Structure-Conduct-Performance Articulation2.1 Structure-Conduct-Performance Articulation

• To identify the structure of the industry, the dominant conduct of incumbents, and the resulting performance of firms

• To define the relationships illustrated at right, the following industry conditions must first be considered:

ConsumerElasticity of demandSubstitutesSeasonalityRate of growthLocationLumpiness of ordersMethod of purchase

ProductionTechnologyRaw materialsUnionizationProduct durabilityLocationScale economiesScope economies

Process

• Threat of entry is stronger when…entry barriers are low, a sizable pool of entry candidates exists, incumbents are unwilling or unable to contest a newcomer’s entry efforts, and/or newcomers can expect to earn attractive profits

Tool

Notes/ Implications

Structure•Numbers of buyers•Numbers of sellers

•Barriers to entry facing new firms•Product differentiation

•Vertical integration•Diversification

Conduct•Advertising and marketing•Research and development

•Pricing behavior•Plant investment

•Legal tactics•Product choice

•CollusionPerformance

•Profits•Product quality

•Production efficiency•Technical progress/ progressiveness

•Allocative efficiency•Equity


Illinois MBA 2004

[email protected]

2.2 Porter’s Five Forces Model2.2 Porter’s Five Forces Model

•Assess strength of each of the five competitive forces (Strong? Moderate? Weak? )

•Explain how each force acts to create competitive pressure. What are the factors that cause each force to be strong or weak?

•Decide whether overall competition (the combined effect of all five competitive forces) is brutal, fierce, strong, normal/moderate, or weak

Process

• Key questions to better understand the ferocity of competition within the industry: Is price competition vigorous? Active efforts to improve quality? Are rivals racing to offer better customer service? Lots of advertising/sales promotions? Active product innovation? Active use of other weapons of rivalry?

Tool

Notes/ Implications

Substitutes: Low to Moderate Increasing competition from hand held/ portable computing devices

Supplier Power: Very High

Intel and Microsoft extract all industry

profits.

Buyer Power: High and RisingLow switching

costs, Less brand loyalty.

Resellers and retailers

have grip on end users

Threat of Entry: Moderate to HighLow capital costs of manufacturing

Relatively easy to assemble PCsSome brand recognition and loyalty

Rivalry: Very HighIntense price competition

Excess capacity and saturation. Some brand

recognition, but PCs thought of as commodities

Personal Computer Industry


Illinois MBA 2004

[email protected]

2.3 Externalities Mapping2.3 Externalities Mapping

• Define and evaluate the impact of existing and potential forces outside of the industry that may impact the industry and/ or the firm

• With externalities more clearly defined, threats and opportunities can be more easily identified and anticipated

Process

• It is important to evaluate external forces in both the near and far terms, as the client’s survivability and sustainability are key foci for analysis

Tool

Notes/ Implications

Legislation and

Regulation

Societal Values

and LifestylesPopulatio

n

Demographics

Technology

The Economy at Large

CLIENT

Suppliers Substitutes

Buyers

PotentialEntrants

Rival Firms

IMMEDIATE

INDUSTRY AND COMPETITIVE

ENVIRONMENT


Illinois MBA 2004

[email protected]

3. Define Potential Markets3. Define Potential Markets

• Define markets within which the client’s product is appropriate and potentially well-received

• Divide the large market into smaller ‘pieces’, or customer groups with similar needs and/or desires

Objective

• Segmentation Scheme

• Product Sector Articulation

Sub-Process

Tools

Define the markets available to client in terms

of size, age, maturity,

technology, etc.

Define the markets available to client in terms

of size, age, maturity,

technology, etc.

Specify the characteristics of each market and

their overall alignment with the

client’s product and goals

Specify the characteristics of each market and

their overall alignment with the

client’s product and goals

Identify the key players in each

potential market and their

respective positions within

said market

Identify the key players in each

potential market and their

respective positions within

said market

Rank the available markets by

attractiveness/ receptiveness to client’s product

Rank the available markets by

attractiveness/ receptiveness to client’s product

• Where can we play, and who is playing already? Against whom will we compete most successfully?

• Is this a B2B or B2C situation?• Quick calculations with realistic

assumptions often prove useful:To estimate market size for new garage

storage devices we have the following…•65M garages, 68% of which are ≥2 car; given 1.5% of available population invests $1K; potential for $1B sales

Tips & Key ?s• List of markets by potential receptiveness

• Ranked list of existing competitors within identified markets

Outputs


Illinois MBA 2004

[email protected]

3.1 Segmentation Scheme3.1 Segmentation Scheme

•Define distinct customer groups with that have one or more problems/ needs which could be solved/ serviced in one or more ways

1.Establish segment variables that yield mutually exclusive and exhaustive segments2.Develop Segment Profiles3.Evaluate Segments for their viability and preliminary “attractiveness”

Process

• Segmentation scheming not only defines potential markets, but also serves as an essential component of the client’s ultimate marketing mix decision

Tool

Notes/ Implications

Determine Which Segmentation Variables to UseDetermine Which Segmentation Variables to Use

Develop Market Segment ProfilesDevelop Market Segment Profiles

Evaluate Relevant Market SegmentsEvaluate Relevant Market Segments

Segmentation VariablesUser-Related•Demographics: Age, Gender, Race, Ethnicity, Income, Education, Occupation, Family Size, Family Life Cycle, Religion•Social Class•Geographic: Region, Urban, Rural, City Size, County Size, State Size, Market Density, Climate, Terrain•Lifestyles & Psychographics

Behavioral•Benefits•Usage•Price•Brand•Situational

Measurable• Size, purchasing power, profiles of segments can be measured

Actionable•Must be able to attract and serve the segments

Substantial •Segments must be large or profitable enough to serve

Differential •Segments must respond differently to different marketing mix elements & actions

Accessible •Segments must be effectively reached and served

Are acquired segments viable?


Illinois MBA 2004

[email protected]

3.2 Market Sectoring Analysis3.2 Market Sectoring Analysis

•Establish current market make-up in hopes of identifying sectors within which client could best position for success

Process

• Sectoring provides a nice snapshot of customer groups as defined by the existing market; it can also be used to identify “holes” in structure representative of unfulfilled customer groups

Tool

Notes/ Implications

Toy Market Sectors 13%

9%

7%

6%

9%9%

19%

5%

2%8%

9%

4%

Dolls/Figures

Activity/ ConstructionGames

Indoor Games

Infant/Pre-School Toys

Model-Wheeled Vehicles

Soft/Plush Toys

Outdoor Games

Other Toys and Games

Intelligent Toys

Consoles

Console Games

Computer Games


Illinois MBA 2004

[email protected]

4. Conduct Competitive Analysis4. Conduct Competitive Analysis

• Determine the conditions upon client’s industry entrance

• With conditions established, threats and opportunities can be better evaluated and anticipated

• Identify opportunities for client introduction

Objective

• Positioning Articulation

• Perceptual Mapping

• Value Mapping

Sub-Process

Tools

Determine the strengths/

weaknesses of each competitor

within each available market

Determine the strengths/

weaknesses of each competitor

within each available market

Understand the characteristics of each competitor

that grants survivability in short and long

terms

Understand the characteristics of each competitor

that grants survivability in short and long

terms

Identify voids within the market

for possible exploitation by

client

Identify voids within the market

for possible exploitation by

client

Determine the ability of

competition to counter client's

introduction

Determine the ability of

competition to counter client's

introduction

• Will competitors have the ability to react? How quickly?

• Will customers make the switch? What are their costs of switching?

• Do not underestimate the speed and ferocity of competitive reaction

Tips & Key ?s• List of those factors which dictate and indicate success within

the industry

• Clear understanding of which existing players will move/ be able to counter client’s actions

Outputs


Illinois MBA 2004

[email protected]

4.1 Positioning Articulation4.1 Positioning Articulation

•Determine the competitive positioning within the marketplace•Identify holes, potentially representative of untapped markets, for further exploration

Process

• With positioning articulated, unfulfilled customer groups or needs can more readily be identified

Tool

Notes/ Implications

High Student Participation

Low Student Participation

Primarily Fortune 500

Primarily Start-up Companies

Quality Management Consortium

Austin Power

Center for Experiential Learning

The MBA Consulting

Project

Business Consulting Network

Freeman Consulting Group

Darden Business Projects

OSBI

Community Consulting

Carlson

MBA Consulting Program

Student-Staffed Consulting


Illinois MBA 2004

[email protected]

4.2 Perceptual Mapping4.2 Perceptual Mapping

•Evaluate the current players and their respective abilities in light of all-important consumer perceptions

Process

• By mapping perceptions, the relative strengths & weaknesses of competitors becomes clear

• What are the respective foci of competitors, and how do consumers perceive them in the marketplace?

Tool

Notes/ Implications

Mildness

Overall Cleaning

Cutting Grease

Removing baked-on foods

Leaves dishes shiny

Best Value for money

Long-lasting suds

Most pleasant fragrance

Competitor#1#2#3

50%

100%

Liquid Detergent Market


Illinois MBA 2004

[email protected]

4.3 Value Mapping4.3 Value Mapping

•Determine the current value-price orientation prevalent in the industry•Define the customer groups to which major competitors cater (price-sensitive or quality-focused)•Identify areas of the existing value orientation scheme within which client could capture value

Process

• Use the acquired value map to identify holes in the market’s current pricing scheme; where large gaps exist between products on the value line, there exists opportunity for new product introduction

Tool

Notes/ Implications

Pepsodent Regular

$1.00

$1.20

$1.40

$1.60

$1.80

$2.00

$2.20

$2.40

$2.60

$2.80

$3.00

Perceived Benefits

Pri

ce

Colgate Classic

Colgate PlusPepsodent

ProfessionalReach Regular

Aquafresh Flex

Oral-B Regular Oral-B

Indicator

Reach Advanced

Perceived Performance

Pri

ce

Price Value Map of the Toothpaste Industry, 1992


Illinois MBA 2004

[email protected]

5. Conduct Internal Analysis5. Conduct Internal Analysis

• Determine the client’s ability to successfully launch her/his provided benefit

Objective

• Activity Map• TWOS Matrix

Sub-Process

Tools

Determine internal strengths &

weaknesses of client

Determine internal strengths &

weaknesses of client

Identify areas to be improved in

both the short and long terms and

prescribe methods to effect stated improvements

Identify areas to be improved in

both the short and long terms and

prescribe methods to effect stated improvements

Evaluate the client’s existing

and likely resources and

capabilities with respect to key

success factors of industry and

available markets

Evaluate the client’s existing

and likely resources and

capabilities with respect to key

success factors of industry and

available markets

Make judgments as to the viability of client’s success (begin formulating

likely scenarios representative of

varying degrees of success)

Make judgments as to the viability of client’s success (begin formulating

likely scenarios representative of

varying degrees of success)

• Take care to avoid the “client-bias;” all analysis should be realistic and not overly-optimistic

• Is now the time? Does the client have in place what is necessary to be successful?

Tips & Key ?s• Understanding of client’s ability to effect a successful product

launch

• Realistic view of existing resources & capabilities, and the relative strength or weakness of each

Outputs


Illinois MBA 2004

[email protected]

5.1 Activity Map5.1 Activity Map

• Evaluate the existing strategic coherence of the client’s current and planned activities

• Identify the higher-level activities and then list those actions undertaken and policies adopted to support main actions/ initiatives

Process

• The more relationships/ linkages that exist among current activities, the more coherent and integrated is the firm’s strategy

• Planned activities can and should be evaluated for cohesion with existing activities

Tool

Notes/ Implications

Low prices

Frequent Departures

Lean and

productive crew

Point-to-Point flights

Limited Passenger Amenities

High aircraft utilization

No meals

No assigned seats

No transfers

No connections

Standard fleets

Limited use of travel agents

Automatic Ticketing machines

High employee compensation Employee Stock

ownership

Flexible Union contracts

15 min.turnaround

Southwest Airlines


Illinois MBA 2004

[email protected]

5.2 TWOS Matrix5.2 TWOS Matrix

• Complete the matrix as shown, with careful focus upon recommendations arising from the analysis

Process

• This model can at times seem academic in nature, but the recommendations that can be created as a result of completing are often of use; however, avoid specific references to SWOT/TWOS matrices analysis in client communications and deliverables

Tool

Notes/ Implications

Strengths (S)

List internal strengths

Weaknesses (W)

List internal weaknesses

Opportunities (O)

List external opportunities

SO Strategies

Generate strategies here that use strengths to take

advantage of opportunities

WO Strategies

Generate strategies here that take advantage of

opportunities to overcome weaknesses

Threats (T)

List external threats

ST Strategies

Generate strategies here that use strengths to

avoid threats

WT Strategies

Generate strategies here that minimize weaknesses

and avoid threats


Illinois MBA 2004

[email protected]

6. Determine Target Market6. Determine Target Market

• Select the appropriate target customer group by evaluating alignment of the client’s provided benefit and resources/ capabilities with the needs of customers

Objective

• Use sound judgment and offer recommendation based in previous analytical outcomes

Sub-Process

Tools

Match the clients

resources & capabilities

with those of the available

markets

Match the clients

resources & capabilities

with those of the available

markets

Best align the benefit to be

provided with the needs of

customer comprising

each available market

Best align the benefit to be

provided with the needs of

customer comprising

each available market

Identify key aspects of

target market above, on, and

below the surface (size,

income levels, complementary

preferences, etc.)

Identify key aspects of

target market above, on, and

below the surface (size,

income levels, complementary

preferences, etc.)

Select given analysis the

necessary and appropriate

target to maximize impact for

client

Select given analysis the

necessary and appropriate

target to maximize impact for

client

• What benefit is the client providing, and to whom can she/he best provide it?

• Who is the client selling to? Who is the end-consumer?

• Refine judgments as to the market’s receptiveness

Tips & Key ?s• Final determination of target market replete with

major/ minor characteristics

Outputs


Illinois MBA 2004

[email protected]

7. Evaluate Financial Viability7. Evaluate Financial Viability

Objective

• Pro Forma Financials w/ Scenario Analysis

• Sensitivity Analysis• Monte Carlo Simulation

Sub-Process

Tools

Define all investments necessary to

launch and beyond

Define all investments necessary to

launch and beyond

Establish likely scenarios for analysis by

defining key variables (customer

reception, pricing issues, distributor

acceptance market

penetration)

Establish likely scenarios for analysis by

defining key variables (customer

reception, pricing issues, distributor

acceptance market

penetration)

Assess the financial viability

of launch with respect to each

scenario and with due consideration to client’s stated

objectives

Assess the financial viability

of launch with respect to each

scenario and with due consideration to client’s stated

objectives

Assign probabilities

where possible and calculate a

range for client’s return on

investment

Assign probabilities

where possible and calculate a

range for client’s return on

investment

• Be careful to include for analysis all costs, immediate and future, actual and opportunity

• What do customers want? Does this new product give it to them?

• Does this new alternative better serve their needs?

• Make informed assumptions as necessary

Tips & Key ?s

Make final judgment: Should the client go ahead with this project?Make final judgment: Should the client go ahead with this project?




Outputs

• Define likely scenarios and determine immediate and long-term survivability given each

• This is the “go” or “no go” stage, in which the team must make final judgments as to overall feasibility


Illinois MBA 2004

[email protected]

7.1 Pro Forma Financials7.1 Pro Forma Financials

• Establish the available facts and allow for the necessary variables

• Devise a form which accounts for these considerations at different variable values

• Employ facts/ fixed numbers wherever possible, constraints whenever applicable, and various revenue states dependent upon penetration scenarios

• Assign probabilities where possible to allow for final determinations

• Make assumptions when necessary to further the analysis (oftentimes the number of assumptions far outweigh hard facts)

Process

• Fixed costs and per-unit variable costs can usually be treated as facts, while revenues are entirely dependent upon the degree of market penetration

• Projects that do not meet established objectives (profit %, break-even, positive NPV, risk mitigation, etc.) should not be pursued further

Tool

Notes/ Implications

Pro Forma Statement (Monthly)

Constraint: Average Dinner Price* $46.07

Revenue $138,660.12

Variable Costs $42,012.38

Fixed Salaries $38,000.00

Materials and Supplies $4,500.00

Depreciation (Equipment) $4,000.00

Advertising $15,000.00

General Overhead $30,000.00

Fixed Costs $60,046.88

Total Direct Costs $102,059.25

Contribution/ Profit $36,600.87

New Restaurant…Yes or No?


Illinois MBA 2004

[email protected]

7.2 Sensitivity Analysis7.2 Sensitivity Analysis

• Identify the variables to be used and establish ranges for their likely values

• Use these ranges to calculate the multiple outcomes dependent upon variable levels

• Eliminate those variable combinations, if any, that are unlikely are immaterial

• Use the remaining outcomes to calculate a representative final figure

Process

• Dependent upon the values assigned to each variable, NPV results are positive or negative; in the above example the outcomes are most often positive

• Eliminating unlikely scenarios often helps to clarify the resultant outcomes (ie those values close to zero for each variable are unlikely given P&G’s dominance, and can therefore be eliminated from actual consideration)

Tool

Notes/ Implications

NPV Analysis using 2 variables to evaluate the introduction of a new brand

P&G Liquid Detergent Market


Illinois MBA 2004

[email protected]

8. Plan Value Optimization8. Plan Value Optimization

• Develop key recommendations to capture value

• Dependent upon project scope, this may be only preliminary in nature while still reflecting the wealth of accumulated analysis

Objective

• Strategic planning cumulative of all acquired information and completed analysis

Sub-Process

Tools

Business Strategy:How will the

client extract value by providing

benefit?(Differentiation or

Cost Strategy?)

Business Strategy:How will the

client extract value by providing

benefit?(Differentiation or

Cost Strategy?)

Marketing Strategy:

How can the client best position the

benefit to be provided?

Marketing Strategy:

How can the client best position the


Operating Strategy:

How should the client deliver the


Operating Strategy:

How should the client deliver the


Risk Strategy:Identify the

elements of risk and account/

prescribe for their mitigation as

possible

Risk Strategy:Identify the

elements of risk and account/

prescribe for their mitigation as

possible

• What benefit is the client providing and to whom, and how will he/she extract value (ie make money)?

• Is now the time for an “all-in” commitment? Or is the client better-positioned by waiting for market forces and/or additional capabilities?

Tips & Key ?s

Exit Strategy: Provide for the

client options for abandonment if/

when exit becomes

appropriate

Exit Strategy: Provide for the

client options for abandonment if/

when exit becomes

appropriate

Determine the efficacy of staged

involvement to minimize overall

risk exposure during pre-launch

Determine the efficacy of staged

involvement to minimize overall

risk exposure during pre-launch

Develop for application a

means of monitoring success on

relevant measures to facilitate continuous

improvement

Develop for application a

means of monitoring success on

relevant measures to facilitate continuous

improvement




Outputs

Documents

A Market Feasibility Study