A feasibility study’s main goal is to
assess the economic viability of the proposed business. The
feasibility study needs to answer the question: “Does
the idea make economic sense?” The study should provide a
thorough analysis of the business opportunity, including a look at all
the possible roadblocks that may stand in the way of the cooperative’s
success. The outcome of the feasibility study will indicate
whether or not to proceed with the proposed venture. If the
results of the feasibility study are positive, then the cooperative can
proceed to develop a business plan.
If the results show that the project is
not a sound business idea, then the project should not be pursued.
Although it is difficult to accept a feasibility study that shows these
results, it is much better to find this out sooner rather than later,
when more time and money would have been invested and lost.
It is tempting to overlook the need for
a feasibility study. Often, the steering committee may face
resistance from potential members on the need to do a feasibility study.
Many people will feel that they know the proposed venture is a good
idea, so why carry out a costly study just to prove what they already
know? The feasibility
study is important because it forces the NGC to put its ideas on paper
and to assess whether or not those ideas are realistic. It
also forces the NGC to begin formally evaluating which steps to take
The NGC’s organizers will typically hire
a consultant to conduct the feasibility study. Because the consultant is
independent of the cooperative, he or she is in a better position to
provide an objective analysis of the proposed venture. The
consultant should have a good understanding of the industry as well as
the new generation cooperative model of business. He or she should
have previous experience in directly related work. To get an
estimate of the costs of a feasibility study, prepare a rough outline of
the work needed to be done. Contact several consultants and
provide them with a copy of this rough draft to see what sort of
estimates they give. When the time comes to hire a consultant,
prepare a formal request for proposals that outlines the information
that is needed and send this to several consultants.
It might be tempting to choose the
lowest-cost consultant or a personal acquaintance of one of the NGC’s
organizers, but always remember that quality work is the most important
factor when choosing a consultant. Make sure that the consultant
can provide an independent assessment of the business opportunity.
For instance, hiring an engineering firm or an equipment manufacturer to
conduct market analysis may lead to biased results in favor of
proceeding with the venture. Engineering firms and equipment
manufacturers may have an incentive to show positive results so they can
obtain contracts with the cooperative once it chooses to start up
operations. Engineering firms and equipment manufacturers are
needed in order to provide information about equipment requirements and
costs, but an independent consultant should conduct the overall
A feasibility study should examine three
- market issues
- technical and organizational
- financial overview
The primary area that the feasibility
study needs to address is potential market opportunities for the
cooperative. If an adequate level of demand does not exist for the
product and the NGC does not know how to differentiate its product so
that it can compete with established industry players, then the proposed
venture should not be pursued.
Questions that need to be answered in
this area of the feasibility study include:
- What type of industry is the NGC
planning to enter? What are its primary features?
- What are the possible target
markets for the NGC’s product? What demographic characteristics do
they possess? How large are these markets? Where are they
located? Is the market expected to grow in the future?
- Will the NGC be competing in a
mature industry or a growth industry?
- Who are the NGC’s competitors in
this market? How large are these competitors? How established are
they? How do they price their goods? How will these competitors
react to the entrance of the NGC?
- How will the NGC differentiate its
product from those of its competitors? What are the competitors’
strengths and weaknesses, and how would the NGC compare against
them? How does the NGC plan on gaining market share?
- What is the projected market share
for the NGC?
Data that can help to answer these
questions may be found in already-published information or through
primary research activities such as market surveys conducted on behalf
of the NGC. Relevant information may be found through various
sources such as government statistical publications, trade journals,
industry reports, or companies such as Dun & Bradstreet. The
Internet has also opened up new routes to obtaining information.
The answers to market-related questions
should help the NGC develop realistic estimates of the projected demand
for the NGC’s product for the first several years of operation.
Based on this projected demand, the NGC can determine its anticipated
level of business volume, which is needed in order to design the
processing facilities. If the projected business volume is not
large enough to justify a processing facility, then the project is not
Technological and organizational
This area concerns the internal set-up
of the cooperative. Questions to be answered in this area include:
Plant and equipment issues:
- What type of equipment and
technology will the business need to produce its product? What are
the costs involved? This includes both the initial purchase and
installation costs of the equipment as well as the operational costs
of running the equipment.
- Who are the potential suppliers of
this equipment? Where are they located? What sort of service and
warranties do they provide? How long will it take to acquire the
equipment and begin operations?
- Based on its projected business
volume, how much raw product will be required by the NGC? What are
the quality specifications? Will the NGC have a sufficient
membership base that can provide the raw materials?
- What are the possible locations for
the NGC’s facility? What size of facility is needed? What are the
costs of the building? Does the proposed location have adequate
access to infrastructures and services such as major highways,
railways, and utilities? Will the NGC build its own facility, or
purchase an existing location?
- Where will the facility be located
relative to the NGC’s customers? Who will be responsible for the
transportation of goods between the facility and the market? What
are the transportation costs involved?
Managerial and organizational
- Is the NGC organizational structure
the right one for this business? How important are delivery
contracts and a fixed source of supply to the success of the
- What qualifications are needed to
manage these operations? What are the key staff positions that need
to be filled?
- What type of experience should
management have? Are there potential candidates available to fill
such positions? What will be the cost factor involved in finding
and retaining acceptable candidates?
Based on the estimates that have been
gathered from the preceding sections of the study, the NGC needs to
determine its overall financial situation. Sources and uses of
financing should be listed. Questions such as the following need
to be considered:
- What are the total start-up costs
required in order to begin operations? For instance, what are the
capital costs of the land, plant and equipment, and other start-up
costs such as legal and accounting costs?
- What are the operating costs
involved? These include the daily costs involved in running the
business, such as wages, rent, utilities, and interest payments on
outstanding debt. These will determine the cash flow requirements
of the NGC.
- Based on the estimated demand, what
are the NGC’s revenue projections? How will the NGC determine its
- What are the possible sources of
financing for the NGC? Who are potential lenders? What will be
their required terms and limitations of borrowing?
- Based on the estimated revenues and
costs, what is the projected profit(loss) of the NGC? What is the
If the results of the feasibility
study indicate that the proposed venture is economically viable, then
the NGC can begin to develop a business plan.
The business plan builds on the information
that was obtained through the feasibility study, but provides a more
detailed and specific blueprint that maps out the NGC’s strategy.
A business plan is similar to operating a company on paper. It
sets out the goals of the NGC and how the NGC intends to reach those
Why write a business plan?
There are two primary purposes of a
business plan helps to obtain financing from potential lenders and
members. Basically, the business plan should provide an answer to
the question, “Why should I invest in this business?” Lenders, such
as banks, want to see that the NGC’s organizers have properly
analyzed the business opportunity and planned accordingly. Lenders
want to see that the NGC is based on realistic expectations.
Potential members want to see that the organizers of the NGC have
carefully thought out the details of the proposed venture. The
business plan becomes the primary selling tool for the NGC. It
should provide an honest and straightforward examination of the
: A business
plan provides a blueprint for the NGC to follow. It maps out the
activities of the NGC and forces the organizers to evaluate all
aspects of the business. In addition, a business plan can serve as
a benchmark against which the NGC can compare its performance, so
that it knows when it is veering off course.
The business plan should be written
in clear and concise language. Although there is no set rule, the
average length of a business plan tends to be about 30 pages. An
executive summary and table of contents are usually included at the
beginning. Business plans come in many different forms.
In general, areas that need to be
addressed in the business plan include:
Background information about the NGC
- When was the NGC formed? What
factors prompted its creation?
Industry description and outlook
- Include general industry
information such as total sales.
- Describe industry trends, including
whether or not the industry is in a growth, maturity, or decline
stage. Is the industry going through a restructuring stage? Are
firms merging or entering into strategic alliances?
- Are there potential barriers to
entry? Are there any small players in the market, or does there
seem to be some minimum efficient scale of operations? Are there
special licensing requirements? Does government regulate the
- Describe the product that the NGC
is planning to sell. Assess its strengths as well as its
- What characteristics of the product
will give it a competitive advantage over others?
- Are there any patents, trademark or
- Identify the target market.
Describe its demographic characteristics. Where is the market
located? How large is the market?
- Identify the competition. Include
estimates of their respective market shares and financial health, as
well as characteristics (such as quality, price, and brand image)
that distinguish their products from others. Assess each
competitor’s strengths and weaknesses in comparison to those of the
NGC. What will give the NGC a marketing advantage? Will it be
product quality? Price?
- Describe the distribution system.
Will the NGC sell to wholesalers and/or to retailers? Have
relationships been established with wholesalers and other
- Describe the pricing policy of the
- Describe the sales and marketing
activities of the NGC. Will the NGC have an internal sales force as
well as brokers? What sort of advertising and promotional
activities will be used? Describe the timing of market entry.
- Estimate sales levels for the first
several years. Also describe the NGC’s targeted level of market
- Remember “the 4 P’s” of marketing:
product, price, promotion, and place. Has this section included all
relevant information regarding these aspects?
- If possible, include an
organization chart showing key personnel and their functions
- Describe the skills and expertise
possessed by key management. Demonstrate why these people are
capable of managing the NGC.
- Describe managerial compensation
- This section describes how the
product will be produced. It includes a description of the physical
requirements for the business, including land, buildings, and
equipment. Describe contractual arrangements with engineering and
- Describe the workflow of the NGC:
list the procedures that are required to manufacture the product.
What sort of quality control measures will be implemented? How will
the NGC manage inventory levels?
- Describe the plant site, including
available services such as water and waste disposal. What
environmental standards must be met? What about zoning
- Explain how the NGC chose the
location for its facility. Choosing a facility location can often
be a contentious issue when forming a NGC. Producers as well as
communities will lobby the NGC’s organizers to choose a location
that meets their individual preferences. However, the site
selection should be based on economic factors that give the NGC the
best chance of success. Factors to consider when choosing a
location are its proximity to the NGC’s target market as well as to
its members, transportation costs, access to transportation routes,
taxes, and the availability and costs of utilities and labor.
- How will raw materials be procured
from the members? What procedures are in place to ensure that
members can supply raw products that consistently meet quality
specifications? What sort of producer agreement will the members be
required to sign?
- How will other supplies and
materials be obtained?
- Provide an operations schedule that
shows a detailed production timeline.
- List the number of employees that
will be required.
- This section should identify the
(potential) sources and uses of funds
- Uses of funds include:
- Start-up costs: The total funds
required to begin operations, including the capital costs of
purchasing or leasing buildings and equipment. Be sure to
include items involving professional advisory costs (such as
items involving lawyers and accountants).
- Operating costs: The amount of
money required to operate the business once it begins
operations, including the cost of raw materials and utilities
- Potential sources of funds include:
- Members: how much delivery
rights shares will be issued, and at what price?
- Lenders: how much debt will be
required? What will be the repayment, interest, and collateral
- Non-member investors: Will
investment shares be offered to non-members?
- Include projected financial
statements for the first few years, including a cash flow budget.
- Include break-even calculations
that take into account fixed and variable costs.
- Indicate the projected returns on
investment for the first several years of operation.
Clearly outline the risks involved with
the NGC. Do not attempt to gloss over the negative aspects of the
business. Anticipate problems before they occur. Include a
sensitivity analysis of key risk factors. For instance, how would
the NGC be affected if one of its competitors decided to expand its
operations? What if the cost of raw materials rose significantly
due to a poor growing season?
The president of a bank that figured
prominently in financing U.S. new generation cooperatives has outlined
five major risks that should be addressed by new ventures:
This is the primary risk to address. The
NGC must determine whether there is a market opportunity for its
product. Market risk involves assessing who your potential customers
and competitors are. One of the problems most often encountered by new
ventures is overly optimistic market projections.
The NGC must determine what type of
technology it will use and the risks associated with that technology.
Questions to ask include:
The NGC must consider the risk of
construction cost and time overruns. Construction contract problems is
another one of the most often encountered difficulties for new
cooperatives. Questions to consider include:
- Are there any new processes on
the horizon that may quickly render the cooperative’s technology
- Does the technology require a
certain minimum or maximum plant size?
- What if product specifications
need to be changed? Will the technology allow for this
- Is the brand of equipment
chosen by the cooperative well-reputed in the industry, or is it
known to have frequent breakdowns?
Usually, it is safe to assume that the
start-up period of a new cooperative will not go as smoothly as
planned. The NGC needs to ensure that it can withstand the early
operating period. Questions to ask include:
- Are estimated construction
costs reliable? Is the proposed construction timetable
- Is management capable of
evaluating construction bids from contractors and then
The NGC must determine which government
policies can affect its performance. For instance, how do government
policies affect market prices or operating costs? The NGC must also
consider whether any pertinent government policies are likely to change.
- Are the projected expenses too
low? Are the sales price assumptions reasonable?
- How low can sales prices reach
or how high can expenses get before the NGC’s ability to service
its debt is impaired?
The NGC’s business plan should address
In addition, the business plan should
address the worst case scenario. How much can the business afford
to lose and still remain viable?
Include a timeline for the activities to
be undertaken. A business plan should cover the first 3 to 5 years
Although it takes a lot of work, proper
planning is essential. In fact, one of the main reasons for
business failure is a lack of adequate planning. Always remember
the saying, “The business that fails to plan, plans to fail.”
Professional help is often required to
write a sound business plan. In addition, there are other
available resources such as books and Internet sites. Some sites,
such as the government’s Canada Business Service Centres web site, have
interactive business planners available to the public.
The business plan serves as an ongoing
guide for the NGC. It can be updated as the company begins
operations and new information is gathered.