A feasibility analysis is an important tool to help an organization asses the viability of starting a new value-added business, or re-organizing or expanding an existing business. It provides important information needed to make the critical decision of whether to go forward with a business venture. The purpose of the Feasibility is to make sure that the company is on the right track. The goal of feasibility analysis is to enable the organization to determine whether or not to proceed with a project and to identify any important risks associated with the project. The feasibility of a project can be ascertained in terms of technical factors, economic factors, or both. A feasibility study is documented with a report showing all the ramifications of the project. It is a preliminary study undertaken before real work of a project starts to ascertain the likelihood of the project’s success. A feasibility study helps in finding alternative solutions to a problem and presents recommendation on the best alternative.
Types of Feasibility Analysis:
1. Technical Feasibility
The goal of the Technical Feasibility is to asses the extent to which the system can be successfully designed, developed and installed. It refers to the ability of the process to take advantage of the current state of the technology in pursuing further improvement. The organization should consider the technical capability of the personnel as well as the capability of the available technology. A Technical Feasibility study involves questions such as whether the technology needed for the system exists, how difficult it will be to build, and whether the firm has enough experience using that technology. The assessment is based on an outline design of system requirements in terms of Input, Output, Fields, Programs and Procedures. The goal of a Technical Feasibility Study is to analyze the key system features to validate the design and reduce technical risks. The organization must use the appropriate techniques in order to effectively investigate complex system behaviour under key conditions and prove the robustness of a new design. The project size must be given consideration. This includes the number of people, length of time to complete and the number of distinct features. Compatibility must also be assessed. New technology and applications must integrate with the existing technology.
2. Economic Feasibility
Economic Feasibility involves the feasibility of the proposed project to generate economic benefits. There are two important aspects of evaluating the economic feasibility of a new industrial project – Benefit analysis and Breakeven analysis. To facilitate a consistent basis for evaluation, the organization must translate the tangible and intangible aspects of a project into economic terms. Economic Feasibility Study involves questions such as whether the firm can afford to build the system, whether its benefits should substantially exceed its costs, and whether the project has higher priority and profits than other projects that might use the same resources. The Economic Feasibility Analysis should be performed to identify the financial risk associated with the project. The firm must identify the costs and benefits, assign values to costs and benefits, determine cash flow, determine Net Present Value (NPV), determine Return on Investment (ROI) and calculate breakeven points.
3. Operational/Organizational Feasibility
Operation or Organizational Feasibility aims to answer the question: will the system be accepted by its users and incorporated into the ongoing operations of the organization? Organizational Feasibility study often involves questions like whether the system has enough support to be implemented successfully, whether it brings an excessive amount of change and whether the organization can absorb the new system. This Study involves Stakeholder Analysis and strategic Alignment. Strategic Alignment aims to understand how well the goals of the project align with business objectives. A stakeholder is any person, group of organization that will be affected by the system or has influence over the development of the system. There are three kinds of stakeholder (customers, developers and the project champion). The customers are the ones who pay for the system and are responsible for making decisions. The developers negotiate with the customers about requirements, conflicts, etc. Developers include analysts, designers, programmers, etc. The project champion is considered the most important stakeholder. Project champions are the one who initiate and promote the project by providing time, resources and political support.
4. Market Feasibility
Marketing Feasibility study includes the analysis of single and multi-dimensional market forces that could affect the commercialization or success of a project’s actual revenue potential. The market variability and impact on the project must be taken into consideration. The market must be analyze to view the potential impacts of market demand, competitive activities, etc. and divertible market share available
I think the most important type of feasibility analysis is the Operational/Organizational Feasibility. I think that the most important factor in the organization is the human factor or the social factor. The success of a project is determined by social factors – technology is just secondary. The acceptance of the personnel or stakeholders and organizational integration will determine if the new system or technology is successful or not.
Methods of Project Evaluation
Project Evaluation
A project is a means to an end. Evaluating how the project has functioned as a means, as well as evaluating its outputs and outcomes is very important to an organization. Carrying out a project is usually a complex task involving a number of people, functioning as a project team. Monitoring the processes during the formative stage of the project (planning, design and development) can help in diagnosing problems and allow suitable corrective action to be taken. Critically reflecting on processes upon completion of the project (output and/or implementation stage) can inform the firm of future projects. Project evaluation aims to control the implementation and planning of project activities with regard to the objectives to be achieved.
Project Evaluation Methods (Economic/Financial Models)
1. Payback Method – is the number of years required to return the original investment from the net cash flows. It is also known as Payback Period.
2. Net Present Value Method (NPV) – is the method of evaluating project that recognizes the money received immediately is preferable to money received at some future date. This approach finds the present value of expected net cash flows of an investment, discounted at cost of capital and subtract from it the initial cash outlay of the project. If the present value is positive the project will be accepted; it its negative, the project should be rejected.
3. Profitability Index – is also known as Benefit Cost Ratio or Present Value Index. It is calculated by taking the present value of cash inflows divided by the present value of cash outflows.
Economic models are often used as project selection tools. They are familiar to managers, and they are accepted for other types of investment analysis in the firm. However, according to Cooper (1993), economic models have limited applications and they require financial data as input (p. 172).
Alternative Project Evaluation Method:
1. Benefit Measurement Models
Benefit measurement models require a well-informed respondent or group to provide subjective information regarding characteristics of the project under consideration. Such methods typically avoid conventional economic data, such as projected sales, profit margins, and costs, but rely more on subjective assessments of strategic variables, such as fit with corporate objectives, competitive advantage, and market attractiveness. Included in this category are checklists and their extension, scoring models (Cooper 1993, p.170). Benefit measurement techniques rely on the subjective inputs of characteristics that are likely to be known. Benefit measurement techniques recognize the lack of concrete financial data at earlier stages of the project and the fact that financial analysis is likely to yield unreliable results. Because of limited information and because only a tentative commitment is required during the early stages of the project, benefit methods are the most logical evaluation tool.
2. Portfolio Selection Models
The original portfolio selection models were highly mathematical, and employed techniques such as linear, dynamic, and integer programming. The objective is to develop a portfolio of new and existing projects to maximize some objective function (for example, the expected profits), subject to a set of resource constraints (Cooper 1993, p.171). According to Cooper (1993), portfolio models are conceptually appealing, and perhaps the most rigorous, mathematically based portfolio models see more visibility in textbooks and journal articles than in corporate offices (p. 172). The major obstacle is the amount of data required--information on the financial results, resource needs, timing, and probabilities of completion and success for all projects. Much of this information is simply not available, and when it is, its reliability is suspect. Portfolio approaches also provide an inadequate treatment of risk and uncertainty; they are unable to handle multiple and interrelated criteria; and they fail to recognize interrelationships with respect to payoffs of combined utilization of resources. Finally, managers perceive such techniques to be too difficult to understand and use.
3. Market Research Approaches
Market research screens are usually used for relatively simple consumer products. Market research techniques, when used as a decision tool, assume that the sole criterion for moving ahead with a new product project is expected market acceptance. The assumption here is that strategic, technological, and production issues are not relevant (or can be easily dismissed). Given a strictly market based screening decision, it makes sense to use a variety of market research-based techniques ranging from consumer panels and focus groups to perceptual and preference mapping (Cooper 1993, p.171). Market research techniques see some degree of use in screening new product projects. For relatively simple new products, this may make sense. However, often there are considerations other than simply market acceptance that must be evaluated prior to proceeding with a project. Before you move ahead with a market-research screen, the project should, at minimum, meet a set of "must" and "should" screening criteria (Cooper 1991, p. 173).
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