Business Plans
In developing a business plan a company must figure out certain key points that will help them excel at their business. Some keep points that the company should identify are:
- Who are you competitors?
- Quantify the benefits.
- Is your idea a painkiller or vitamin?
- Is the market growing or shrinking?
The market should be defined so as the company can look at its objective and be able to analyze its competition and see where they stand. Also identifying the market will enable the company to set a pricing strategy and figure out a rationale to how they should work their business.
In the market analysis the company should also analyze its products or services and figure out a cost versus benefits justification. This process is called cost analysis where the company analyzes is it worth the cost of the product or the service to the consumer and for how long.
Two other key points should also be looked at and those are:
- Delivery issues
- After-Sales issues
Here is a link for a template and an explanation on how to write a market analysis: Bizmove.
This means that the company should see how their products would be delivered to its consumers. This delivery is the next big step after selling the items to the consumers. Another point is the after-sales issues that face the company with include dealing with returns and exchanges for example.
Figuring out the sales channels and the costs and relationships with channel partners is another factor that the company should deal with because it will add cost to the final cost of the products or services. In promoting the product or service the company should find ways to motivate their sales team by picnics, fairs, or company parties.
The business plan should also include financial information about the company that forecasts what estimated costs are going to be to show to investors. This is probably is the most important part of the business plan because this is what investor look at, as said by an expert in business plans and business modeling. Some important parts that go into a business plan’s financial information is:
- Income statement, this defines where the company will make its money for example Dell sells computers and here they would explain how much money they expect to make from sales. Here are some important formulas:
o Revenues – Direct labors and materials = gross profit or loss (GP)
o GP/Revenues = Gross Margins
o GP – indirect expenses = pretax net profit and loss (PTP)
o Net Income = PTP - Taxes
- Balance sheet, this should tell the investor where money will be used and how the assets and liabilities will be balanced out.
o Follow this formula: Assets = Liabilities.
§ Assets: Current cash, accounts receivables, long-term assets and short-term assets.
§ Liabilities: Current accounts payables, long-term investments and investor owned equity.
o This is a measure of business health.
- Cash Flow Statement, this explains where the company plans to receive cash from and where they will spend the cash that is brought into the company from sales or investors. Here show investors a Path 2 Profit (P2P). Show a record of cash available to different points in time during the company’s business times. Explain how much money will be need and when to the investor. Basically follow this formula:
o Cash on Hand at Beg. Of Month + Receipts – Actual Disbursements = Cash on Hand at End of Month
Each part explained above has a cascading affect on every other part of the financial part of the business plan. Some rules that should be followed are that for startups it is pointless to show figures beyond the first year of business according to a professor in the Business School of George Washington University. According to the expert the financials of the business plan should be basically a “what if” analysis of the company.
Some tips on building a great financial section of a business plan are to start with a template and set sales forecasts. For the sales forecasts explain to the reader how the company came up with the sales forecast. Another point to make sure to hit in this part of the business plan is to:
- Look at the current economy.
- Do a lot of market research
- Find competitors and figure out your products market share.
In the business plan it is inevitable that errors will be made during forecasting and it is good to have knowledge of accounting or finance to aid in the production of the business plan. Here is an outline of how the financial part of the business plan should relate to one another.
E-commerce
E-commerce defined by an expert:
A great example of an E-commerce business is Dell. Dell is a business that has been able to integrate its value chain using the Internet. Dell has been able to crate a business that has daily Web-based sales of $15 million in 1999. It has a great supply chain that customer orders are relayed directly to suppliers via corporate intranet that send items to Dell’s factories in a Just-in-Time way of supply. Another tool that has put Dell over the top has been the opportunity for customers to track their orders from the web.
Another useful definition of electronic commerce is:
Electronic commerce is the relationship between buying and selling of goods on the electronic platform. Instead of dealing with the brick and mortar old style of shopping, shopping has taken a new form. But e-business is what builds electronic commerce. E-business is the infrastructure of e-commerce and is the value chain of the transfer of goods and services on the electronic platform.
Dell is able to use its value chain to great lengths and that is why it has succeeded over other e-commerce companies that have lost millions over the last year. This value chain can be shown in this diagram:
Dell follows this value chain and it has made it into a great company.
E-commerce is predicted to make dramatic impacts that are listed and explained as follows:
- Disintermediation – Disintermediation is the removal of the middleman. This is where consumers are now able to purchase goods or services directly from producers without extra cost attached to goods. There has been a great growth in disintermediation that will continue for a time to come. It has not taken affect in all the e-businesses that provide products or services but is beginning to infiltrate it. A big sector that has been hit has been the financial area where stocks can now be bought directly from stock companies instead of going through brokers.
- Death of Distance – The death of distance has enabled consumers and other businesses to purchase goods and sometimes services from far beyond their local scope. For example, consumers in New York are now able to browse through a record store catalog in California and purchase an album without flying to California or talking to anyone from the store. Everything can be done online.
- Frictionless Markets – A frictionless market is a market that has a new player everyday. This market also has open standards that can be used by anyone who is building an e-business. A frictionless market also implies that an e-business can do business with anyone the company would like to do business with. This allows many new markets to be formed and built upon everyday.
Here is a link to explain e-business and expand on how current e-businesses are doing and what to learn from their mistakes and gains. Business Week.
In 1985, Michael Porter designed a useful framework now know as Porter’s Five Forces Model that explains how a firm firms should contend with its competitors and itself. This plan has a great use in designing a business plan. Here is a diagram of the Five Forces Model:
Terminology
Goods vs. Services
- Good: Physical item which is delivered. Example: Furniture
- Service: an act that is performed. Example: cleaning a house
Digital vs. Physical Items
- Digital Items: All transactions are done electronically Example: Software
- Physical Items: Involve logistical activities such as transportation. Example: Toys
Degree of Commoditization of Products
- Standard/Commodity: available in large quantities, well identified. Example: HP Computers
- Custom-built or customized: Items are designed to customer specification. Example: Dell Computers
Business Model
A business model is a representation of the activities of the business. A model describes what a business is all about and helps investors and clients know what the business does and how it functions. It also defines the competitive position of the firm; identifying its value chain does this. The business model also defines the structure of the firm and how it will do business with customers. The model goes through and shows a detailed plan on how the firm plans to make money. A business model is a part of the business plan that describes what the focus of the firm will be and what the investors are basically investing in.
Internet and the Business Model
Many new Internet opportunities have arisen in the past few years that have enabled them to develop brand new services. Many new dominant players have arisen such as Dell, Amazon and Compaq to name a few.
- A great example of new opportunities is Yahoo. Yahoo was a search engine and is now expanding into an online shopping mall where users can search for products and purchase them online.
The Internet has also produced these new opportunities:
- Forms can establish direct links to customers and suppliers to expedite transactions
- Firms can bypass intermediaries to reduce the excess cost.
- New products and services can be developed by new firms everyday.
- Firms can establish themselves and make themselves a dominant player in the electronic channels of a specific industry. Example: Dell Computers in the industry of selling computer that are custom built.
The question that is affecting today’s information market is can you put a value to information. There are two values to the value of information:
-
Reach
-
Richness
o Bandwidth – the amount of information
o
Customization
o Interactivity – one way or two way communication
Example: An example of getting information across a large reach with a high richness is during the Superbowl where you have customized commercials geared toward men and football fans.
The Internet channel is a new channel that is moving sales and information away from the physical form to the digital form claimed by a professor from the Business School at George Washington University. The Internet has played a huge role because:
- Firms can provide the same level of service that they can get directly from a sales person, except they can get this without leaving there homes.
- Firms can personalize their interaction with consumers so that consumers view only what they want to see. Example: Dell computers letting customers enter a code into their site and the site customizing to the specific customer.
- Firms are able to provide new services without too much cost such as customer reviews like Amazon has put together for their books.
Some new exciting features of the Internet channel are:
- It could minimize or remove the traditional cost of sales, marketing and service that brink and mortar stores must have.
- It allows a higher level of service without excess costs.
- First-comers into the markets have a great advantage of establishing a relationship that makes it harder for followers to get into a similar market.
o Example: Ebay with its online auction house. Many have tried to follow in its footsteps but failed.
o Example: America Online is another firms that locks consumers in and makes it very difficult for long-time users get away from their easy to use Internet access browsers.
- It costs more to get a new customer that to retain an existing customer.
o The cost is 5 times more for firms to get new customers than to retain their existing customers.
- It helps to understand and use the firm’s customer’s needs ad preferences.
- Direct interaction with customers not only reduces the cost but also helps a firm’s site to understand its customers.
- It makes start-ups easier to compete because of building their own value chains and harder for established companies to compete because they must use their old value chains that might be inefficient.
A way for firms to compete in today’s market is to pirate the value chain. This would cause firms to excel in their markets. Some ways to pirate the value chain is to:
- Make it possible for a participant in the value chain to take over the role of any other participant with in the firm’s value chain.
o Example: Publishers could bypass distributors and sell directly to readers.
o Example: Amazon could decide to publish their own books.
New pirates who come into the new market are in the position to define new business rules and introduce new business models that other firm must follow to succeed in their market.
- Example: Libraries can now get journals online and do not have to get printed journals that cost more and increase storage costs.
Digital Value
Digital value mean that firms can ass services of services without adding cost. The Internet channel can also serve as a platform for innovation. Ways that digital information can have value and be created are as follows:
- Services that are created for a new segment are cheap and can be customized for the firm’s customers.
- Customer information can be used to up-sell or cross-sell. This has caused a lot of debate in the online world. Here is one perception on the idea of selling customer information. Link.
Using this digital value of information will help firms become a dominant player in their market. A way a firm can become dominant is by becoming a category destination. Factors that make businesses a category destination are:
- Physical distance is largely irrelevant.
- Growth is not cost prohibitive as it usually is in the physical world.
- Services can be differentiated for multiple customer segments.
A way to attract customers is to make the firm a customer magnet. Firms that make themselves into customer magnets could organize themselves around:
- A specific product or service. Example: Amazon and Yahoo.
- A particular segment or customers. Example: Tripod, GenXers.
- A unique business model. Example: Online auctions.
It is useful to analyze an online company in terms of some of these segments:
- logical product
- customer
- business model
Some questions that could be asked are:
- What services could an industry magnet offer that would make it efficient for customers to select and purchase products or services?
- What partnerships or alliances would be needed to establish critical mass?
- First mover advantage?
Business models can be categorized in many different ways. Categorizing through payment direction would include buy-side and sell-side. Another categorization would be what is being transacted; product and service type refers to this.
BUYER’S PERSPECTIVE
A company must also think of things from a buyers perspective. Before the purchase a buyer searches for and discovers something he/she wants or needs. They then compare place to place and negotiate the terms of the product (price, delivery, service, etc). The purchase completion entails order placement, payment, and receipt of order. After the purchase interaction one must think of customer service for the customer. It is very useful to break things down into these different categories so you can see what you offer the company in each respect.
SELLER’S PERSPECTIVE
Now with the same three processes one must take into account the sellers perspective. Before sales interaction includes dealing with customer inquiry and order planning along with cost estimation and pricing. Once a consumer has decided to buy the seller must deal with production and delivery. This includes order receipt and entry, which is followed by or done along with order selection, prioritization, and scheduling. A seller must figure out how to arrange production and delivery. Finally, after sales interaction would include billing and payments, and very importantly customer service support.
Source: Bloch, Pigneur, Segev(1996)
BENEFITS OF ONLINE COMMERCE
There are many benefits for consumers. These benefits include:
- Cheaper prices through bargain hunting, comparison shopping
- Convenience brought about through anytime shopping and any location
- More variety and cheaper to search for variety
- There is better information
VALUE ADDED
Making products/services available anytime, anywhere gives
a business the ability to reach more customers. The Internet also provide for customer self-service with their
ability to do things for themselves.
Bundling of related goods and services is much easier and gives a
company more breadth to work with. This
also provides customization in product, advertising, promotions, and service
which makes the customer happier and more likely to use the service again.
BUSINESS MODEL EVOLUTION
1. Connect Time-
This model was led by AOL in which the business charges for amount of usage or “connection” to the service. Content providers charged AOL for amount of time and number of people who used their sites. But, once AOL left this model and other free service providers came into business this model went away.
2. Advertising Model-
This is the model that led the huge boom in the stock market and e-commerce money. Based on the generation of revenues through advertising. Was huge boost for economy and getting the Internet base business going. Crashed when the stock market crashed and investors saw too many of these site. Must have hug number of hits to be able to be successful.
3. E-Commerce Model-
This type of model is based on the buying and selling of services or products on the net. Generates money through selling customer info, service, or a product that can be used.
As a expert in the area stated,
It is very important to remember that what may seem like a great business model know could be out of the picture in six months. It is very hard to understand how the market will react to different types of businesses.
TERMINOLOGY
Types of E-Commerce Business Models
Business to Consumer-(B2C) This model is based on the regular business of offering a product or service to a consumer.
Business to Business- (B2B) This model is based on business to business dealings, where two businesses interact with each-other.
Consumer to Consumer-(C2C) This model is based on consumers selling things to each other over the net, or trading things with each other. An example of this would be Ebay.com.
EXAMPLES of E-COMMERCE-
- E-shops
- E-Malls
- Aggregators like Lending Tree
- E-Zines
- Virtual Communities
- Information Brokerages
TECHNOLOGY ADOPTION LIFECYCLE
Most firms fall between the gap between early adopters to early majority. Portals and exchanges are in this “chasm” right now. To make it through the chasm a company must make sure that it has a reasonable number of customers to buy into their models.
THE CHASM
Moore’s "chasm" is the gulf between early adopters and the early majority.
