In a volatile economy where businesses seek to diversify revenue streams in order to mitigate the risk associated with a particular industry, a feasibility study serves as a crucial part of the business diversification and investment evaluation process.
Although this may be an unfamiliar term, every business has carried out a feasibility study one way or another; from researching on your proposed products to deciding on the specific products to offer as a company. A feasibility study is a detailed assessment of the practicality of a proposed business or project. Feasibilities studies are aimed at assessing the viability of a proposed business or project considering various factors which may affect the success of the proposed project or business. The feasibility study covers several areas of a business such as the market (industry), technical, financial etc. and although profitability is a key indicator of the viability of a business or a project, identifying other factors such as capital requirement, market size, acceptability of proposed products by consumer, man power requirement, macroeconomic conditions, regulatory overview, challenges and associated risks are very crucial.
The scope of a feasibility study can vary depending on the complexity of the proposed project or business, but it typically includes an evaluation across the following factors – technical, market, legal, operational, environmental etc.
Feasibility studies assist the management team in discovering vital information on the nature of the proposed business or project. This information will help the management team make well-informed decision as well as investors or lenders.
In line with strategic objectives, companies commonly expand operations into new or unrelated products, services, markets, or industries; this is known as business diversification.
Although companies may have different reasons for business diversification, most times, the goal is to reduce the overall risk of the business, enhance growth opportunities, generate new sources of revenue and strengthen the overall business portfolio. Diversification is significant regardless of the goal and time horizon as it helps to reduce volatility, serve as a mitigating factor against harsh economic cycles safeguard one against harsh market cycles, and exposure to myriad of opportunities for return.
Diversification can take various forms such as product diversification and market diversification:
- Product diversification is a strategy employed by a company to increase profitability and achieve higher sales volume through the development of new products. This is expanding in the same market with different products.
- Market diversification is a risk-reduction strategy used by businesses to help expand into new markets and industries and achieve greater profitability. This can be attained by diversifying new products and services in new markets or targeting new customers. For example, the diversification of European companies into American and African markets.
The importance of Feasibility Studies in Business Diversification
Feasibility studies play a crucial role in business diversification by providing businesses with a comprehensive evaluation of the potential benefits, risks, and viability of proposed projects or businesses. A feasibility study is usually conducted after the proposed project has been pitched but before the final decision has been made.. The feasibility study helps businesses to identify market opportunities and challenges, narrow business alternatives, identify the costs and benefits and, provide more information before a final decision is made. Feasibility study helps businesses make informed decisions about whether or not to pursue diversification opportunities, ensuring that new ventures align with their strategic objectives and maximize their chances of success.
Specific reasons feasibility studies are important for business diversification:
1. Identification of opportunities: Feasibility studies help businesses identify and assess potential market opportunities for new products, services, or business models by analyzing market size, consumer demand trends, consumer needs, competitive landscape and product superior characteristics. By regularly evaluating the market landscape and conducting feasibility studies, businesses adapt to the dynamic market environment, respond to emerging trends and challenges, and, identify and maximize new opportunities.
2. Financial Assessment: This includes analyzing initial capital cost requirements, projected revenue streams, operating expenses, and potential returns on investment. The proposed project or business is now analyzed with selected profitability criteria to determine if the project is financially feasible and aligns with their overall financial goals.
3. Technical Assessment: This involves evaluating the technical requirement and the availability of important technology, expertise, and resources needed for successful development of the new project or businesses. Technical assessments provide necessary information that concerns resource allocation and risk mitigation.
4. Manpower and Organizational Assessment: This involves evaluating the company’s current capabilities, expertise, and resources to manage and operate the new business effectively. By identifying potential management and operational challenges, businesses can develop strategies to address these gaps and ensure the successful implementation of the new venture.
5. Risk Assessment: This includes the identification of potential risks, analyzing the likelihood and impacts of such risks, and, developing appropriate mitigating strategies for such risks. These risks include market risks, macroeconomic risks, technological risks, operational risks, financial risks and force majeure risks.
In addition, investors and partners often rely on feasibility studies to assess the viability and potential return on investment of new ventures. In investor relations and discussions, feasibility studies are important in convincing investors of the competency of the company and the profitability of the project.
The feasibility study helps to answer important questions that assess the successful execution of the project. Such questions include:
- What is the strategic motive for the diversification?
- What are the opportunities inherent in the diversification?
- What is the total addressable market size and the total serviceable market size?
- What is the size of the initial capital requirements?
- What are the projected revenues, cashflow and return on investment associated with th3 project?
- What are the projected operating expenses?
- How profitable is the project?
- What are the technical requirements of the project?
- What are the manpower requirements of the project?
- What are the associated risks and mitigation strategies associated with this project?
- What is the macroeconomic environment of the proposed market?
- What are the recent trends, key success factors and challenges associated with this project?
- What is the regulatory environment associated with the project?
- Does this diversification align with the company’s overall strategic goals, objectives, missions and visions.
- What is the proposed business and operating model associated with this project?
- What are the other strategic benefits associated with the diversification?
Business diversification is a strategic approach that offers a range of benefits, including risk reduction, revenue growth, and increased resilience. However, it requires comprehensive analysis, detailed planning and strategic execution to ensure that diversification aligns with the company’s overall strategic goals and enhances its long-term competitiveness.
Feasibility studies are essential tools for businesses seeking to diversify their operations, explore new opportunities, and make informed decisions that align with their strategic objectives and maximize their chances of success. By conducting a thorough feasibility study, businesses can identify viable diversification opportunities, assess potential risks and challenges, develop effective mitigation strategies, and ultimately enhance their overall growth and sustainability.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.