Feasibility studies which failed: 4 Industry Examples
What is a Feasibility study?
The objective of such a study is to ensure a project is legally and technically feasible and economically justifiable. It tells us whether a project is worth the investment.
When it comes to a feasibility study, the following represent failure:
Costs are higher than estimated
Revenue generated indicates the product will not be profitable
Project tasks are operating past schedule
Product does not meet quality standards
It takes a lot of effort and finances to sustain performance
Peter McCarthy, in his study of why feasibility studies fail, cites the following observation of a feasibility study conducted in metallurgy: 27% of the problems in feasibility studies were in the test work, project scale-up and equipment design. The wrong composites were tested, process contaminants were not identified, mining schedules were not followed and teams did not understand the composition of the orebody.
Other reasons for failure include:
The natural desire by human beings to see things to completion even when they don’t make sense,
Lack of stakeholder involvement,
Resistance to change by management and end users,
Communication breakdown between and among teams. This can often lead to plans being off schedule, or some operational parameters being misunderstood.
Examples of projects and companies that failed because of poor or lack of feasibility studies
Project: Glass-and-plastic composite lens invented in 1979
Though it’s true that resistance by a team can lead to project failure, there are cases where the reverse is also true. In 1979, Essilor created a new type of lens from glass-and-plastic composite. One of the company’s directors felt the product would be low in quality, because he knew composite separates.
But since the other managers were over-optimistic and thought they had more expertise in the area, they ignored the remark and failed to conduct market studies. They also assumed that since their original product which had been selling since 1959 performed well, the new lens was also headed for success.
But this was not to happen. After its launch, the quality problems pointed out earlier affected performance and the lens did not get approval to sell in the USA, a key target market.
After years of struggling to keep the product afloat, a marketing analysis showed that the lens would not would only be able to sell 1.5 million units yearly and not 40 million as previously estimated. Essilor finally pulled the plug on the project in 1990, after it had cost Fr 300 million.
Project: 2004 & 2008 Industrial Projects (steel mill, power plants, fertilizer plants)
Tata, a global conglomerate headquartered in India, is another company that has seen its fair share of stalled projects. The main reason behind this is conflict with local communities over land acquisition for Tata industrial projects.
For example, in 2004, the state government sold 3000 acres of land to Tata in Kalinga Nagar to build a 6-million-ton steel plant. But with families still living on the land, it proved difficult for Tata to proceed with the project. When the company tried to build a perimeter wall in 2006, clashes with the community members erupted, leading to 14 deaths.
This is not the only Tata project that has had to suffer. In July 2008, the group terminated four industrial projects including 2 power plants, fertilizer plant and steel plant, all of which were estimated to cost $4 billion. The reason behind these failures was that the Bangladesh government was unable to provide natural gas required to run the plants.
Project: Pet supplies
Even after heavy VC investment of up to $110 million, pets.com had to eventually shut down due to over-optimism and logistical problems.
The backers of the project believed that it would be successful owing to the belief that pet owners love to spend money on their pets. But as the company soon found out, the high cost of shipping pet equipment and food which tend to be heavy, pushed up pricing. The company couldn’t sell enough high profit-margin products to keep up. Add this to the fact that the company was offering discounts, they ended up selling at below cost and within just 2 years of operations, the company eventually had to shut down in 2000.
Project: The Dash Express Car navigation system
Dash Navigation went down not because it didn’t have a good product or because of lack of financing. In fact, the navigation device was well-reviewed by customers, who said it was a great mobile web-access device and it was very interactivity.
The problem that led to product and company failure was its high price tag of $600. Even when the company reduced the price to $399 then $299, the product was still too expensive compared to almost-similar products which were selling at $100 or less.
What lessons can be learned from these failures?
To avoid ending up like some of the companies discussed above, it’s important to conduct a thorough feasibility studies at the beginning of the project and to review often.
Because the companies above did not ask critical questions, they ended up making mistakes such as
Underestimating financing needs
Overpricing their products
Basing critical decisions on subjective assumptions about the market
Misunderstand the local market
Failing to recognize opportunities in the market
This article is from our guest author Mohammad Farooq (https://in.linkedin.com/in/mohammadfarooqblr) who works as an Analyst with a keen interest in Project Management. When not spending hours at work, he goes backpacking around India. He regularly blogs about Travel, Movies, Political Issues and a lot of other things on his blog “ReveringThoughts" (http://www.reveringthoughts.com/).