Technical and economic feasibility studies

Technical and economic feasibility studies Methodology and useful tools

Table of contents • Methodology • Methodology overview • Offer analysis • Strategic segment analysis • Competitive position • Business plan • Useful tools

Legal environment Venture Cap Competitors Start-up IP Ex-employer Customers Market prices End-users A technical and economic feasibility study aims at transforming an idea or an innovative technology into a structured project • The way is long from an idea or a technology to a successful company • An entrepreneur faces diverse issues from market sizing to intellectual property and has to deal with the different and numerous stakeholders of his industry Examples of constraints and stakeholders • The technical and economic study will help the entrepreneur to define his offer and his strategy

Methodology overview • The methodology will progress through four stages which answer each to a main question for the client: • Which offer based on our idea or technology will match an unmet need ? • Is the strategic segment I target attractive and what is required to success ? • Which model should we build to be successful on that segment ? • What are the next steps ? Offer analysis Strategic segment analysis Competitive position Business plan

The first goal to reach is to transform an innovative technology or an idea into a solution for an unmet need • Séparer capacité de l’offre à répondre aux besoins et attentes des clients / utilisateurs finaux (parfois différents)

Strategic segment analysis is mandatory in order to build an appropriate value offer and the suitable business model • The future enterprise will work on a specific value network, deal with specific competitors which want to sell a similar product to the same clients • The first step is to define the pertinent strategic segment and its borders • The segment’s size and dynamics will be part of its attractiveness • In order to pick up the key success factors and to define a successful business model, the structure of the segment must be analyzed • The analysis structure should then be the following: Define the targeted strategic segment Analyze the segment’s size and dynamics Analyze the competitive structure and forces Define the key success factors

Strategic segmentation is the basis of a pertinent further analysis • Marketing segmentation is the process of dividing the market into homogeneous groups of customers, who respond similarly to a particular mix marketing of the four Ps –product, price, place, promotion • Market segments must be distinguished from strategic segments which are those segments who require distinct value networks rather than just changes in the marketing mix • For example in the airline industry flag carriers and low-cost companies are on two different strategic segments with their own value network, and a flag carrier could not be successful on low cost segment by keeping the same value network (cf. British Airways selling its subsidiary GO to EasyJet) • Strategic segments regroup actors submitted to similar “forces” and who share the same key success factors Identify a strategic segment Elements of identification Clients • Value network • Economic model • Competitive forces • Key success factors • Competitive advantage sources New entrants Products Rivalry Suppliers Clients Substitute products Source: Strategor, Chap. 2, From Market segments to strategic segments, Harvard BS Press

Very premium Perfume Cognac and spirits Champagne Premium Wine and spirits Champagne and wine LVMH Wine Leather and fashion … Retailing Segmentation is an iterative process which must lead to the appropriate level with an arborescence principle • The appropriate level of segmentation is key: • Too detailed: confusion in the recommendations • Too rough: “economic journalism” risk • Each sector has its “natural” segmentation criteria, eg. (production process x product) for industry • First stages are generally obvious but as the segmentation progresses it becomes more complex and conceptual Example: LVMH activities • The segmentation can be finally tested by placing the competitors on a matrix (eg. products/clients)

How to proceed to study a segment’s dynamics ? 1 Market picture • Data may not always exist on the segment’s volume and value and the size must be assessed with a market sizing (eg. basically unit sales x price per unit) • A particular attention must be paid to the completeness of demand growth drivers analysis • Major shifts can (sometimes) be anticipated (eg. music industry) and consist in a threat or an opportunity for the start-up 3 • Quantification of segment’s volume/value • Past growth on a long period Projected dynamics 2 • Underlying demand growth drivers • Pricing growth drivers • Possible shifts Structure of the segment and breaks • Segment’s structure • Breaks affecting competitors

The maturity level of the strategic segment is a key point to define to understand the actors’ strategy and measure the attractiveness Evolution of sales and profits of an activity Sales and profit Start Growth Maturity Decline Sales Profit Time Source: Strategor, Chap. 2

The useful dimensions of a strategic analysis can be summarized with Porter’s five forces • The five forces diagram summarizes the useful dimensions for an activity and competition analysis: • Vertical relationships between suppliers and their clients, and the retailers or clients of those ones • External forces: other industries (innovation or substitutes) and governments and laws A renovated approach of Porter’s five forces Suppliers What is the bargaining power of suppliers? Are there any entry barriers? Which ones? Is there a risk of substitution products? Rivalry between existing firms New entrants / Substitutes Regulation / governments Is the activity threaten by regulation? What is the bargaining power of clients? Clients Source: Strategic choices and competition, M.E. Porter, Strategor

The attractiveness of a strategic segment takes into account all the dimensions previously analyzed Valuation statement of a segment attractiveness • The intrinsic attractiveness of a segment must be corrected with the success capacity of the firm on this segment Source: Strategor, Chap. 4

1 Identify the KSF of the segment 2 Weight the different criteria The mastery level of the key success factors (KSF) defines the competitive position of the firm (1/3) • Competitive position mixes external approach – the strategic segment – and internal approach –resources and skills of the firm – to diagnose the strategic position of the firm • The KSF must be few: 3 to 5 maximum • They must define the key elements which distinguish competitors and not those mastered by all • KSF are resources, skills, assets specific to an activity and mandatory for a firm to success • Their identification is based on an experimental approach where four sources must be analyzed: • Demand: growth drivers, clients types, bargaining powers… • Competition: entry barriers, concentration level… • Direct competitors: what distinguishes the best competitors? • Financial structure ratios: major costs, capital intensity… • There are dominant KSF and the KSF must therefore be classified • An acceptable weighting won’t be exhaustive but reduced to 5 KSF • The result will be validated with objective data and confronted to operational management perception Source: Strategor, Chap. 4

3 Evaluate the mastery level 4 Evaluate globally The mastery level of the key success factors (KSF) defines the competitive position of the firm (2/3) • The performance of the firm and the main competitors must be evaluated • The evaluation must be simple (eg. 0 to 5) with an even number scale to avoid medium ratings • This stage implies to collect lots of data on the competitors to get objective information • By multiplying the ratings and the weights and adding up all the ratings, a global evaluation is obtained • A visual display can be used to transcribe the results and identify the advantages and disadvantages • The strengths and weaknesses of the firm can be easily extracted Source: Strategor, Chap. 4

The mastery level of the key success factors (KSF) defines the competitive position of the firm (3/3) Radar chart of competitive position (example) Competitive profile example Source: Strategor, Chap. 4

What ? What business model ? • Who gets the most value added from the offer ? Who is ready to pay ? How much ? • Key success factors • Best practices • With whom ? (team, collaborations…) • How much ? (financial projections, financing…) • Customers acquisition plan • Costs projections • Barriers to entry ? • Which barriers am I able to build to protect my business? • Choose the best scenario: ROA, sustainable competitive advantage…

Technical and economic feasibility studies