PROJECT CONCEPTION AND PROJECT FEASIBILITY:Feasibility Analysis

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LESSON 08

PROJECT CONCEPTION AND PROJECT FEASIBILITY

Broad Contents

Project Conception

Stages of Project Conception

What is Feasibility Assessment?

Types of Feasibility

Tangible and Intangible Benefits

8.1

Project Conception:

Conception of an Industrial Project is the initial step in the process of defining the actual scope

of a project. Project conception generally starts with a manifestation of a requirement or an

opportunity that will benefit the corporate interests, and culminates when one or more

preliminary options have been formulated which will, theoretically, satisfy the company's

expectations as originally presented.

The process presented here although illustrated by an industrial project has features directly

translatable to conceptual evolution in many diverse applications. The fact that the project in

question has been deferred is not uncharacteristic of the fate of many programs during the

conceptual phase.

8.2

Stages of Project Conception:

Initial conceptualization of a project has various degrees of complexity, depending on the nature

of the specific project and the particular analysis and approval procedures used by a company.

The company's planning strategy may require formulations of programs involving several

projects. Conception of the overall program should then precede conception of the individual

specific projects.

The conceptual stage involves the following activities:

1. Definition of a requirement or an opportunity that commands the interests of the company.

2. Formulation of a set of preliminary alternatives capable of fulfilling the initial requirement.

3. Selection of alternative(s) that might satisfy the requirements in terms and conditions

attractive to the company.

A brief description of each of these activities in a specific situation and in an organized

environment follows:

Definition of the Requirement of Opportunity:

The continuity of efficient operations and the opening of the new business areas are the

main drives for capital investments for industrial firms. Investment opportunities are

detected through operational analysis of current performance and by forecasts of the

most likely future scenarios.

Initially, the scope of any new investment is likely to be vague. Subsequent definition

involves consideration of all available relevant facts, required resource sand constraints

associated with the original idea.

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Figure 8.1: Project Initiation

Preliminary Formulation of the Alternatives:

Project conception continues with development of alternatives capable of fulfilling the

expressed objectives. The preliminary formulation of alternatives is important as it sets

the pace of the subsequent definition and elaboration of the project scope. During this

phase, the company calls upon the experience and creativity of its technicians, manager

and directors to generate an adequate group of alternatives to fulfill the expressed need.

Initial Selection of Alternatives:

After the alternatives have been identified, comparative analyses are made in order to

select the most beneficial and to reject the least attractive. The selection process

employs a basic feasibility analysis of each alternative the establishment of criteria that

will allow the identification of the most attractive options. At this point, further

consideration of the rejected alternative is terminated along with the need to prepare

elaborate definitions for them.

The cost, schedule, profitability, and other salient advantages and disadvantages of each

of the selected alternatives are assessed in terms of order of magnitude. Difference

among the options is sought still without establishing precise project parameters.

8.3

Feasibility Analysis:

A feasibility study is an analytical tool used during the project planning process, shows how a

business would operate under an explicitly stated set of assumptions. These assumptions include

the technology used (the facilities, types of equipment, manufacturing process, etc.) and the

financial aspects of the project (capital needs, volume, cost of goods, wages etc.).

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8.4

What is Feasibility Assessment?

As the name implies, a feasibility study is an analysis of the viability of an idea. The feasibility

study focuses on helping answer the essential question of "should we proceed with the proposed

project idea?" All activities of the study are directed toward helping answer this question.

Feasibility studies can be used in many ways but primarily focus on proposed business ventures.

Farmers and others with a business idea should conduct a feasibility study to determine the

viability of their idea before proceeding with the development of the business. Determining

early on that a business idea will not work saves time, money and heartache later.

A feasible business venture is one where the business will generate adequate cash flow and

profits, withstand the risks it will encounter, remain viable in the long-term and meet the goals

of the founders. The venture can be a new start-up business, the purchase of an existing

business, an expansion of current business operations or a new enterprise for an existing

business. Information file, a feasibility study outline is provided to give guidance on how to

proceed with the study and what to include. Also, information file, how to use and when to do a

feasibility study helps through the process and also to get the most out of the study.

A feasibility study is only one step in the business idea assessment and business development

process. Reviewing this process and reading the information below will help put the role of the

feasibility study in perspective.

A feasibility study is usually conducted after producers have discussed a series of business ideas

or scenarios. The feasibility study helps to "frame" and "flesh-out" specific business

alternatives so they can be studied in-depth. During this process the number of business

alternatives under consideration is usually quickly reduced.

During the feasibility process you may investigate a variety of ways of organizing the business

and positioning your product in the marketplace. It is like an exploratory journey and you may

take several paths before you reach your destination. Just because the initial analysis is negative

does not mean that the proposal does not have merit if organized in a different fashion or if

there are market conditions that need to change for the idea to be viable. Sometimes limitations

or flaws in the proposal can be corrected.

A pre-feasibility study may be conducted first to help sort out relevant alternatives. Before

proceeding with a full-blown feasibility study, you may want to do some pre-feasibility analysis

of your own. If you find out early on that the proposed business idea is not feasible, it will save

you time and money.

However, if the findings lead you to proceed with the feasibility study, your work may have

resolved some basic issues. A consultant may help you with the pre-feasibility study, but you

should be involved. This is an opportunity for you to understand the issues of business

development.

A market assessment may be conducted to help determine the viability of a proposed product in

the marketplace. The market assessment will help you identify opportunities in a market or

market segment. If no opportunities are found, there may be no reason to proceed with a

feasibility study. If opportunities are found, the market assessment can give focus and direction

to the construction of business alternatives to investigate in the feasibility study. A market

assessment will provide much of the information for the marketing section of the feasibility

study.

The conclusions of the feasibility study should outline in depth the various alternatives

examined and the implications and strengths and weaknesses of each. The project leaders need

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to study the feasibility study and challenge its underlying assumptions. This is the time to be

skeptical.

Do not expect one alternative to "jump off the page" as being the best one. Feasibility studies do

not suddenly become positive or negative. As you accumulate information and investigate

alternatives, neither a positive nor negative outcome may emerge. The decision of whether to

proceed often is not clear-cut. Major stumbling blocks may emerge that negate the project.

Sometimes these weaknesses can be overcome. Rarely does the analysis come out

overwhelmingly positive. The study will help you assess the tradeoff between the risks and

rewards of moving forward with the business project.

Remember, it is not the purpose of the feasibility study or the role of the consultant to decide

whether or not to proceed with a business idea; it is the role of the project leaders.

The go/no-go decision is one of the most critical in business development. It is the point of no

return. Once you have definitely decided to pursue a business venture, there is usually no

turning back. The feasibility study will be a major information source in making this decision.

This indicates the importance of a properly developed feasibility study.

A feasibility study is not a business plan. The separate roles of the feasibility study and the

business plan are frequently misunderstood. The feasibility study provides an investigating

function. It addresses the question of "Is this a viable business venture?" The business plan

provides a planning function. The business plan outlines the actions needed to take the proposal

from "idea" to "reality."

The feasibility study outlines and analyzes several alternatives or methods of achieving business

success. So, the feasibility study helps to narrow the scope of the project to identify the best

business model. The business plan deals with only one alternative or model. The feasibility

study helps to narrow the scope of the project to identify and define two or three scenarios or

alternatives. The consultant conducting the feasibility study may work with the group to identify

the "best" alternative for their situation. This becomes the basis for the business plan.

The feasibility study is conducted before the business plan. A business plan is prepared only

after the business venture has been deemed to be feasible. If a proposed business venture is

considered to be feasible, then a business plan constructed that provides a "roadmap" of how the

business will be created and developed. The business plan provides the "blueprint" for project

implementation. If the venture is deemed not to be feasible, efforts may be made to correct its

deficiencies, other alternatives may be explored, or the idea is dropped.

Project leaders may find themselves under pressure to skip the "feasibility analysis" step and go

directly to building a business. Individuals from within and outside of the project may push to

skip this step.

Reasons given for not doing feasibility analysis include:

We know it is feasible. An existing business is already doing it.

Why do another feasibility study when one was done just a few years ago?

Feasibility studies are just a way for consultants to make money.

The feasibility analysis has already been done by the business that is going to sell us the

equipment.

Why not just hire a general manager who can do the study?

Feasibility studies are a waste of time. We need to buy the building, tie up the site and bid

on the equipment.

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The reasons given above should not dissuade you from conducting a meaningful and accurate

feasibility study. Once decisions have been made about proceeding with a proposed business,

they are often very difficult to change. You may need to live with these decisions for a long

time.

From a financial perspective, project selection is basically a two -part process. First, the

organization will conduct a feasibility study to determine whether the project can be done. The

second part is to perform a benefit-to-cost analysis to see whether the company should do it.

The purpose of the feasibility study is to validate that the project meets feasibility of cost,

technological, safety, marketability, and ease of execution requirements. It is possible for the

company to use outside consultants or Subject Matter Experts (SMEs) to assist in both

feasibility studies and benefit-to-cost analyses. A project manager may not be assigned until

after the feasibility study is completed.

As part of the feasibility process during project selection, senior management often solicits

input from Subject Matter Experts (SMEs) and lower level managers through rating models.

The rating models normally identify the business and/or technical criteria against which the

ratings will be made. Once feasibility is determined, a benefit-to-cost analysis is performed to

validate that the project will, if executed correctly, provide the required financial and non-

financial benefits. Benefit-to-cost analyses require significantly more information to be

scrutinized than is usually available during a feasibility study. This can be an expensive

proposition.

8.5

Types of Feasibility:

Feasibility is of the following types:

Technical Feasibility:

This area reviews the engineering feasibility of the project, including structural, civil

and other relevant engineering aspects necessitated by the project design. The technical

capabilities of the personnel as well as the capability of the projected technologies to be

used in the project are considered. In some instances, particularly when projects are in

third world countries, technology transfer between geographical areas and cultures

needs to be analyzed to understand productivity loss (or gain) and other implications

due to differences in topography, geography, fuels availability, infrastructure support

and other issues.

Managerial Feasibility:

Demonstrated management capability and availability, employee involvement, and

commitment are key elements required to ascertain managerial feasibility. This

addresses the management and organizational structure of the project, ensuring that the

proponent's structure is as described in the submittal and is well suited to the type of

operation undertaken.

Economic Feasibility:

This involves the feasibility of the proposed project to generate economic benefits. A

benefit-cost analysis (addressing a problem or need in the manner proposed by the

project compared to other, the cost of other approaches to the same or similar problem)

is required. A breakeven analysis when appropriate is also a required aspect of

evaluating the economic feasibility of a project. (This addresses fixed and variable costs

and utilization/sales forecasts). The tangible and intangible aspects of a project should

be translated into economic terms to facilitate a consistent basis for evaluation. Even

when a project is non-profit in nature, economic feasibility is critical.

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Financial Feasibility:

Financial feasibility should be distinguished from economic feasibility. Financial

feasibility involves the capability of the project organization to raise the appropriate

funds needed to implement the proposed project. In many instances, project

proponents choose to have additional investors or other sources of funds for their

projects. In these cases, the feasibility, soundness, sources and applications of these

project funds can be an obstacle. As appropriate, loan availability, credit worthiness,

equity, and loan schedule still be reviewed as aspects of financial feasibility analysis.

Also included in this area are the review of implications of land purchases, leases and

other estates in land.

Cultural Feasibility:

Cultural feasibility deals with the compatibility of the proposed project with the

cultural environment of the project. In labor-intensive projects, planned functions must

be integrated with the local cultural practices and beliefs. For example, religious beliefs

may influence what an individual is willing to do or not do.

Social Feasibility:

Social feasibility addresses the influences that a proposed project may have on the

social system in the project environment. The ambient social structure may be such that

certain categories of workers may be in short supply or nonexistent. The effect of the

project on the social status of the project participants must be assessed to ensure

compatibility. It should be recognized that workers in certain industries may have

certain status symbols within the society.

Safety Feasibility:

Safety feasibility is another important aspect that should be considered in project

planning. Safety feasibility refers to an analysis of whether the project is capable of

being implemented and operated safely with minimal adverse effects on the

environment. Unfortunately, environmental impact assessment is often not adequately

addressed

complex

projects.

Political Feasibility:

Political considerations often dictate directions for a proposed project. This is

particularly true for large projects with significant visibility that may have significant

government inputs and political implications. For example, political necessity may be a

source of support for a project regardless of the project's merits. On the other hand,

worthy projects may face insurmountable opposition simply because of political factors.

Political feasibility analysis requires an evaluation of the compatibility of project goals

with the prevailing goals of the political system.

Environmental Feasibility:

Often a killer of projects through long, drawn-out approval processes and outright

active opposition by those claiming environmental concerns. This is an aspect worthy

of real attention in the very early stages of a project. Concern must be shown and

action must be taken to address any and all environmental concerns raised or

anticipated. This component also addresses the ability of the project to timely obtain

and at a reasonable cost, needed permits, licenses and approvals.

10.

Market Feasibility:

This area should not be confused with the Economic Feasibility. The market needs

analysis to view the potential impacts of market demand, competitive activities, etc. and

market share available. Possible competitive activities by competitors, whether local,

regional, national or international, must also be analyzed for early contingency funding

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and impacts on operating costs during the start-up, ramp-up, and commercial start-up

phases of the project.

8.6

Tangible and Intangible Benefits:

Estimating benefits and costs in a timely manner is very difficult. Benefits are often defined as:

· Tangible benefits for which dollars may be reasonably quantified and measured.

· Intangible benefits that may be quantified in units other than dollars or may be identified

and described subjectively.

Costs are significantly more difficult to quantify, at least in a timely and inexpensive manner.

The minimum costs that must be determined are those that specifically are used for comparison

to the benefits. These include:

The current operating costs or the cost of operating in today's circumstances.

Future period costs that are expected and can be planned for.

Intangible costs that may be difficult to quantify. These costs are often omitted if

quantification would contribute little to the decision-making process.

There must be careful documentation of all known constraints and assumptions that were made

in developing the costs and the benefits. Unrealistic or unrecognized assumptions are often the

cause of unrealistic benefits. The go or no-go decision to continue with a project could very

well rest upon the validity of the assumptions.

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