November 21, 2023
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:
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.