Considerations in Determining Considerations in Determining the Feasibility of a New the Feasibility of a New

EnterpriseEnterprise (Part II)(Part II)

Rodney B. Holcomb

Oklahoma State University

Food & Agricultural Products Center

Primary Objectives of Primary Objectives of Feasibility PreviewFeasibility Preview

Identify key planning steps for feasibility assessment

Determine the required resources for an enterprise

Setting stop/go pointsAssistance programs for helping fund

feasibility studies

Pre-Feasibility QuestionsPre-Feasibility Questions

What are my/our goals/objectives?– Better price for my/our commodity?– Add value to my/our commodity?– Business development in my/our community?

How much can I/we put into this venture and still keep food on the table?– Sweat equity, start-up costs, and eventually

investment

A Venture Should...A Venture Should...

Be deemed worthy/unworthy on economic merits.

Be taken under consideration as a business completely separate from the farm/ranch.

Not be pursued just because of political pressure.

Be funded by at least 50% owners equity.

Now, What To Do?Now, What To Do?

Several factors to be considered for determining a course of action.– Assessment of all possible processing

possibilities for a commodity.– Catalogue all needed resources for processing.– Market research for all processing possibilities.

Growth, trends, advertising/promotion. Competition, market share, acquisitions/mergers

Market Potential for OutputsMarket Potential for Outputs

Universe of Marketable Product– Retail, foodservice, exports, fundraisers

Determinants of Market Quality– What characteristics are deemed most desirable

by customers and how can you provide them?

Wholesale Product Value– Don’t focus on retail prices.

Geographic Market PotentialGeographic Market Potential

Potential Local BuyersPotential Regional BuyersInternational Markets

– Build in expenses/steps for exporting products.

Government Programs– Potential for large volumes, low margins.– Market generation (e.g. ethanol)

Market CompetitionMarket Competition

Existing Businesses– Where they are, where they distribute products,

what brands they manufacture, etc.Businesses that have ceased operations

– Why did they cease operations?– Are their facilities/equipment for sale?

Import/Export Market– Companies, countries, barriers.

Market OpportunitiesMarket Opportunities

Best-Fit Opportunities– Brand vs. co-packing, retail vs. foodservice

Strategies for Market Approach– 4 P’s of marketing

Barriers to Market Entry– Regulatory barriers– Industry concentration– Co-product barriers

Raw Product SupplyRaw Product Supply

Supply Markets– Captured supply through investor/members? – Proximity/concentration of the commodity?

Complexity and Variability– Collection/delivery system– Quality specifications– Year-to-year variation

Raw Product CostsRaw Product Costs

Commodity valueTransaction costs

– e.g. verification and certification

Storage costsTransportation costsTax costs

Facility SpecificationsFacility Specifications

Location Factors– Picking a location that makes the most sense

from an economic standpoint.Design Factors

– Functionality, flexibility, expandability.– Thinking through the processing steps.

Further Processing Components– Making sure all the pieces fit.

Facility: Location FactorsFacility: Location Factors

Availability/costs of land and utilitiesAccess to inputs and marketsTransportation infrastructure

– Roads, rail, barge, and even air

Availability of service providersLabor and labor trainingTaxes and community attitude

Facility: Design FactorsFacility: Design Factors

Much will depend upon regulations associated with a processing venture– walls, ceilings, floors, storage facilities

Ambient vs. cold storageExpandableSuited for processing system

– Not always best to fit the system to a building

Facility: Further Processing Facility: Further Processing ComponentsComponents

Flexibility in further processingCompetent engineering designDo all pieces of equipment “speak the same

language”?Common equipment or specialty?Location and reputation of equipment

manufacturer(s)CIP or other sanitation programs

Further ProcessingFurther Processing

Value-Added Outputs– How many products? (Co-products?)– Suggestion: Start with less than 6.

Customers and Value– Always the basis for what gets produced

Estimated Product Values and Margins– Check with an “expert”

Further Processing (cont.)Further Processing (cont.)

Manufacturing Requirements– Space, prep, consolidation of activities

Production Throughput– Shrinkage, remix, waste, product loss, etc.

Necessary Equipment, Costs, and Staffing– Start shopping around– Ask around for names of potential key staff

Stop/Go PointsStop/Go Points

Build “phases” into feasibility and business planning, stop/go point at the end of each.– Phase I: Market and industry overview– Phase II: Determination of physical needs– Phase III: Assessment of “what you have” and

“what you can get”– Phase IV: Business plan

Available AssistanceAvailable Assistance

Land-grant universities and extension specialists– Value-added centers, food technology centers

State funds?– Through established assistance programs– Through your legislator

USDA Value Added Product Market Development Grants (VADG)– $40 million/year through 2007– Requires a minimum $-for-$ match

Final CommentsFinal Comments

Do your homeworkBase all decisions on economic rationaleThink like a processor, not a producerDon’t get caught up chasing “free money”“Expect it to cost twice as much to start,

take twice as long to get going, and lose twice as much as expected in the first year.”

Any Questions?Any Questions?