MGT602 Final Theme 8-13 PDF

Entrepreneurship (MGT602) ::: Technical articles Theme-8 :: Business Idea and Business Plan Business plan is considered as the backbone of an entrepreneurial venture. Business plan helps entrepreneurs the most, to start a business. Irrelevant to a business success, it is obvious that every entrepre...

Entrepreneurship (MGT602) ::: Technical articles Theme-8 :: Business Idea and Business Plan Business plan is considered as the backbone of an entrepreneurial venture. Business plan helps entrepreneurs the most, to start a business. Irrelevant to a business success, it is obvious that every entrepreneur has some kind of business plan whether formal or informal business plan. Although a business plan does not guarantee the success of a business venture but it is good to have one. Different attributes of a business plan provide exclusive support to help manage and sustain a business unit. Therefore, it is critical to understand the basics of a business plan. For this one needs to know that any business activity is based on an idea (a business idea/a thought to start a business). A business idea is considered as a thought in someone’s mind. Moreover, it could be in the written form, but still it is has no physical existence until it is transformed into a physical business activity. A business plan is that tool which assists the connectivity between a business idea and a physical business. Or a business plan is that ladder through which a business idea travels from space (thoughts in mid) to the earth (physical presence of a business unit). Hence, it is clarified that a business idea itself has no relevance to an entrepreneurial venture in the absence of a business plan. WHY BUSINESS PLAN IS PREPARED? It is a dream for an entrepreneur to convert his/her dream (a business idea) into a practice. The business plan is prepared to transform a business idea into a practical business. For example: your business idea is to open an automobile workshop or to setup an advertising agency for digital marketing services. In any of these cases you will definitely need a written business plan to convert your thoughts into a physical business. FOR WHOM BUSINESS PLAN IS PREPARED? The essence of this question is to identify the potential users/beneficiaries of a business plan. Broadly a business plan has two types of users: internal and external users. Internal users are entrepreneurs themselves who get immediate guidelines to start a business through a step by step approach. Potential employees are also the beneficiaries of a business plan document i.e. skill full employees of a business setup can become the part of a newly hired team by an entrepreneur (a new business being established on the basis of a business idea). In this case the entrepreneur must have a business plan to attract, guide and retain the newly employed human resources. SYED ALI SHAH (CITI CAMPUS MULTAN) 1 Entrepreneurship (MGT602) ::: Technical articles External users are customers who can pre order or initiate a transaction in advance with the entrepreneur. Customers deem to analyze an entrepreneur’s plan to conduct a business, its inputs and outputs in detail and then decide whether to collaborate with the startup or not. In the same way, suppliers and investors identify the potential benefits of being the part of a business startup. WHAT IS THE EXTENT OF A BUSINESS PLAN? It is very important to know the depth of a business plan. The length and the depth of a business plan depends upon the following factors. 1. The entrepreneur itself: Orientation of the entrepreneur decides the depth of a business plan. An entrepreneur with a deep orientation to a business will enlist more attributes, requirements and details of a business setting within the business plan document. Ability/Education of an entrepreneur will also affect the length and details of a business plan. A more educated entrepreneur will be able to know even minor details of a business startup and hence such an input will deepen the content of a business plan. An entrepreneur’s choice, preference and ability to understand the importance of a business plan also affects its depth directly. It is quite possible that an entrepreneur may consider the business plan a mere formality while the other one may take it very seriously. 2. The complexity of the business: The nature of a business decides the extent of a business plan. The level of complexity is different for different businesses. The business plan requirements for a cement factory would be different (much complex) from fast food restaurant or a barber shop (less complex). It is critical to understand that, the more complex a business is, lengthier its business plan will be. The complexity and depth of a business plan will help to reduce business risk and avoid unwanted mistakes. Thus it is recommended to write an in-depth business plan in case of a complex business. It is not a healthy notion to avoid writing an in-depth business plan due to its complexity and robust technical requirements. 3. The level of competition: The magnitude of competition will decide the details of a business plan. The science of competition acts just like complexity factor. More competition will require more information and knowledge based input to help devise a business plan. 4. The level of uncertainty: Being uncertain is a characteristic of a human’s life. Similarly it applies to the business planning process. The increasing level of uncertainty demands an increase in the rigor of a business plan. 5. Availability of time and monetary resources: It is the luxury of time and available resources which decide the length of planning a business idea and writing it in the form of a business plan document. Time, the length of the window opportunity and the financial resources will guide you in deciding the ingredients of a business plan. SYED ALI SHAH (CITI CAMPUS MULTAN) 2 Entrepreneurship (MGT602) ::: Technical articles WHAT ARE THE FEATURES OF A BUSINESS PLAN? Comprehensiveness: A business plan must be comprehensive enough to cover all the aspects of a new business startup. A comprehensive business plan must tell you about the entry, survival, growth and exit of a business startup. In this context a business plan document must answer the questions: How to start a business? How to run a business? How to close a business? What is the plan B? Communication: The foremost feature of a business plan is the quality of communication. A business plan is that prime document which serves as an ambassador of your business idea to all the stakeholders i.e. formal and informal investors. Therefore, a business plan must be taken care with the basics of communication i.e. The message should be complete, coherent, correct, concrete, concise, clear and courteous. The communication factor has so much impact on the health of a message that it can blur the importance of a quality content if not communicated properly. Guidance: A business plan must be comprehensive enough and well communicated that it can guide its internal and external users. Formal planning process: A business plan must include the formal procedural steps in order to make it comprehensive, duly communicated and a subtle source of guidance for its stakeholders. WHAT IS STRATEGIC ARRANGEMENT/CONTENTS OF A BUSINESS PLAN? It is very necessary to understand the strategic arrangement, sequence and the content of a business plan and its sequence. Usually a business plan has the following parts. A. Title/cover page Remember HEADINGS, can be asked in MCQs. Title page is usually prepared after the completion of a business plan document. Title page is not just a formality rather it is a first impression of your business idea. A title page must have Name of the business, Logo of the firm, Nature of the business (retail, manufacturing, services etc.), Legal status (sole proprietor, partnership or corporate), Name of the key entrepreneurs, Investment (finances), Statement of confidentiality (confidentiality of the document and its rightful ownership), Email and Location address of the business (mobile number, office address, social media ID etc.) B. Table of contents Table of contents is a gateway for the readers about the information inside a business plan. It guides the reader about how to explore a business plan. The reader will lose interest in case any misguidance found in the table of contents. Thus it is very crucial to align the inside content with the table of contents. SYED ALI SHAH (CITI CAMPUS MULTAN) 3 Entrepreneurship (MGT602) ::: Technical articles C. Executive summary The executive summary gives a summarized view of the whole business plan. Executive summary is crucial in the sense that it can make or break the interest of the reader or the potential stakeholder of your business plan. An executive summary of a business plan usually contains 2-3 pages and have small paragraphs. It must be originally written (must not be a replica of any other document) after the completion of whole business plan document and later it needs a careful review before making it part of the business plan document. D. Management plan Management plan has the following particulars. 1. The introduction of the management team: name and address of the proprietors/entrepreneurs, qualification of the entrepreneurs (degree, skills, diploma etc.), experience of the entrepreneurs (internships, projects, volunteer work, formal business experience) and current responsibilities (role played by each resource). 2. Hierarchy of the management team describes about the team structure and reporting structure. 3. Total number of jobs: number of employees, the job description (job responsibilities and roles) for each employee and skill requirements for each job. 4. Human resource Policy: Hiring process, training and development evaluation and reward system are the part of human resource policy statement. An entrepreneur must adhere to the government regulations for small businesses and minimum wage rates etc. E. Total product and service plan It is very useful to clarify and write the product or service being offered by the business startup at this stage. It exclusively helps the reader to know that what a particular business will offer i.e. manufacturing, distribution, trading, servicing, consultancy, sales or retail. It gives the reader a detailed note about the product mix (a mineral water product will have its packaging and sizing details) or a service mix (a college/education services will have details of its degree programs). F. Operations and production plan Usually a business plan’s scope is wide enough to cater the products and services both. A business plan is equally valuable and indispensable for both manufacturing concerns and services businesses. More often a business startup may offer a blend of both: services and products. A services business has an operations plan only, whereas a manufacturing business has both: an operation plan and a production plan. Operations and business plan is a very technical section of the business plan because your investors, suppliers, contractors and potential stakeholders observe, read and analyze the details of this technical information given in this section, precisely to check SYED ALI SHAH (CITI CAMPUS MULTAN) 4 Entrepreneurship (MGT602) ::: Technical articles the soundness of the business plan. Collectively, operations and production plan has the following particulars. 1. Input/supply/purchase plan: It lists down the raw material requirements for the manufacturing process. It includes the list of suppliers and also mentions the potential reasons to select those suppliers. Supply schedule and payment plan is also a part of this section. Storage facility and transportation system information is also a part of it. 2. Production plan: It includes the detail about production plant (layout, covered area and design etc.). It includes the description of tools, machinery, equipment, technology, facilities (different types of technologies and variety in production options) and total capacity (ability to produce certain number of unites in a day or in a month) of the production unit. 3. Total quality management system: The description of quality management system is very critical part of a business plan. It is very tactical to write the total quality management system in detail. Usually an entrepreneur has not much understanding of these details so it is advised to consult a professional quality manager in order to complete this section of a business plan. 4. Outbound logistics plan: This section contains the detail about how the manufactured goods will travel/reach to the market and become accessible to market players i.e. wholesalers, distributers, retailers etc. G. Financial plan Formally, financial plan is the last section of a business plan document. The financial plan is considered as the heart and soul of a business plan along with the marketing plan. A financial plan must answer these three questions. 1. How much finance is required? It is foremost important to exactly calculate, know and write the total amount of capital (financial resources) required to start a business. This information is valuable to be made part of the title page as well. 2. Where to get finance from? Financial plan should also tell you the sources of finance. It mentions different avenues of financial resources e.g. banks, microfinance institutions, NGOs or other informal sources e.g. personal savings, borrowing from friends and family members. 3. Utilization and recording of financial results? The details regarding the utilization of resources is very much necessary to mention here. This section comprises details of how, when and for which function of a business, money is required. This section is prerequisite with the information extracted from sales forecasting documents and requirement sheets. Pro-forma financial statements (estimated statements) are prepared to depict SYED ALI SHAH (CITI CAMPUS MULTAN) 5 Entrepreneurship (MGT602) ::: Technical articles the projections of output of future business processes. Pro-forma income statement, balance sheet and cash flow statement are prepared on monthly, quarterly, bi annually or annually basis. H. Appendix An appendix or annexure is another important and informal part of a business plan document. It includes supporting documents i.e. resumes/CVs of entrepreneurs, legal documents (registration, agreements, contracts etc.), pictorial information (location map, animated visuals, cite graphics etc.). You may also attach information about the advance order from the customers if any or any other related information which you consider valuable to attract potential stakeholders of the business plan. Note: It is recommended to draw a raw business plan according to your dream business idea and keep practicing alongside the learning about different sections of a business plan. Hopefully this exercise will be helpful you to finalize your business plan. SYED ALI SHAH (CITI CAMPUS MULTAN) 6 Entrepreneurship (MGT602) ::: Technical articles Theme-9 :: NABC and Business Model Canvas: Presenting a Business Idea It is important to know that a business idea whether it is sourced from your daily routine, the problems you see in the society or from the unmet needs of the people around you (i.e. water resources, health issues, energy issues, travelling, food and so many other problems) is initially in a raw form. Once you have identified a business opportunity and have prepared a rough business idea sketch in your mind, the very next critical phase it refine that business idea. You need some resources to start that business and it is not necessary that you have all the resources with you to start that business at once. You need others’ help in order to materialize your thoughts. You may find help from your immediate family members, other investors or from the open market sources. In each condition you need to present your business idea in a meaningful, structured and organized way. There are numerous ways to present a business idea but we need to find one which is convenient, easy to understand and smoothly presentable. Abbreviation Here we present the Need Approach Benefits Competition (NABC) approach, a framework to better structure and present your business idea. NABC is originally presented by Stanford University. As we all know that the effective pitching of your business idea to the potential investors and other stakeholders is very critical. So a very smart presentation of the business idea is an ideal approach to reach potential stakeholders of a business idea. Stanford Research Institute defined NABC approach as “An important client or market need addressed by a unique approach with compelling benefits when compared against the competition or alternatives” Let’s understand NABC importance with the help of an example. Suppose feel hungry and sitting in you Virtual University Campus at the lunch time. After a little ponder you have decide to go to a nearest tuck shop, a place that is trusted by you for good quality food with economical price. You avoid to go farther and other market places to avoid unnecessary fatigue and wastage of time. You need to do a little activity here; that is to attribute this moment of thinking, analysis and decision making (finding a suitable, quick and affordable food option) to NABC components. This activity will enable you to find insights to NABC components from an entrepreneur’s perspective. An entrepreneur actually needs to exactly refine and structure his business idea by considering the Need, Approach, Benefits and Competition factors of the services or goods being offered to the market. NABC components are collectively considered as the backbone of a business idea pitching sequence and content. It elaborates the Need you are addressing (the actual problem in consideration), the Approach you are using to address the issue/need (tools, strategies, plans etc.), the Benefits this business idea will provide (financials, profits, needs fulfillment etc.) and finally the details about the market Competition (competitors, industry dynamics etc.). SYED ALI SHAH (CITI CAMPUS MULTAN) 7  Entrepreneurship (MGT602) ::: Technical articles NEED It is indeed important to know the individual components of NABC one by one. First component is Need. Need must identify the customer and the market you are offering product to. It is important to remember here that any service or good can sustain, grow and survive whose market exists with its customers and their demands. You need to be very clear with what need of the market or the customers your aim to fulfill. And also need to identify needs with large enough market which can offer sustainable market opportunity. An entrepreneur answers the following question at this stage of NABC preparation. What is the need? What is its market size? Is it sufficient enough to be a potential investment opportunity? Another thing to be remembered during need identification is that you need to build a solid case on an authentic facts based evidence (either through a survey, a statistical report, a market research or a concrete observation) which argues that a particular need/opportunity exists in the market. Clearly pinpointing the need, its market size, sustainability potential and its scientific evidence are the basic parameters to build a convincing argument in front of potential stakeholders of your business idea. APPROACH After clearly pinpointing the need, the next phase is to finalize the approach through which that need will be fulfilled. Approach discusses the tool, resources, mechanism, plan and strategy to fulfill the needs of the target customers. It is most important to keep your approach simple, smooth, updated and state of the art to meet the dynamic market demands. BENEFITS After identifying the need and devising a sound approach to serve that need now it is the time to list the benefits of the idea being presented to the stakeholders. The benefits package must be unique or sometimes it could be closer to other people’s offering in the same target market. This will be your point of difference to other players in the market. At this stage you have to precisely list down the details about the benefits you are offering to the unserved market and customers. Usually market or customers demand three types of products or services. Customers need low cost, economical, high quality, better quality products and services simultaneously and so you need to give them a reason to switch to your offer and leave the previous one if any. Your benefit must be substantial enough to conquer the market battle. It is to remember here that this portion of a business idea presentation can become a reason to win or lose for you. SYED ALI SHAH (CITI CAMPUS MULTAN) 8 Entrepreneurship (MGT602) ::: Technical articles COMPETITION After refining the need, approach, benefits of a business idea now this is the time work on the competition factor. It is the dilemma of the startups or the novel entrepreneurs that the focus too much on their approach to do the business. They are very much product centered and thus ignore the marketing forces i.e. competition. Thus they are more tilted towards thinking about approach factor and least bother about the market competition. We develop an exaggerated view of our product and contrarily we underestimate others products and services. We must be rightly critical to our own approach and must lookup that how competition can affect our business idea. It is equally important to precisely present the details about your current and potential competitors. You also need to elaborate how competition can affect your business proposition and how you are better than your competitors. All you need to do is answer what you will do? How will you do it? What are its benefits? Who are your competitors? You identified the need with some research based evidence, devised a fascinating approach, and described well versed benefits but you have half-heartedly analyzed your competition. This notions say that you have incomplete information about your business idea and it will be difficult for you to pitch your business idea effectively. Important need, with unique approach, compelling benefits and smooth competition description is the output of NABC framework. Example of Uber (Car riding service) Let’s take the example of how Uber (Ride sharing services) has successfully identified and addressed the customers’ need of travelling. Uber has successfully identified a market (a set of customers) who do not have their own vehicles and those customers also find public transport a low quality option. Uber aims to serve the market by offering an affordable, reliable and quality transportation service. Uber has used a unique, state of the art approach to fix the travelling needs of the customers. Uber has used android based application platform to connect the different market forces. Uber application is being used as a technology driven modern tool to connect customers (people with travelling needs), captains/drivers (people who have their own vehicles and they choose to earn livelihood through ride sharing services) and a third party (Uber as an entrepreneur itself). It is easy to understand that Uber application simply inputs the customer call in form of travel destination and fetch that call to the interested drives on board. Once the ride service offer is accepted and the ride has been completed the driver collects the payment directly from the passenger. In this way need of the customers is fulfilled using a dedicated technological tool. Uber has offered low cost/economical, affordable and simultaneously high/better quality ride sharing services. The mentioned service package when compared to ordinary riding service (conventional cab services high cost and low quality) or public transport (low cost low quality) prompts numerous benefits to the customers. Uber services are affordable and it’s fair calculating and fair collecting mechanism is transparent and standardized thus offers a much contended and mutually agreed transaction of services between the two parties. Uber has outperformed its competitors by offering reliable, better, cheaper and faster services. SYED ALI SHAH (CITI CAMPUS MULTAN) 9  Entrepreneurship (MGT602) ::: Technical articles BUSINESS MODEL CANVAS Once business idea is refined through NABC and you have a presentable, articulated and nourished NABC framework of your business idea. The next step is to develop a business model canvas to further elaborate your business idea. Just like an artist uses a canvas or a blank paper two draw his thoughts and craft a master piece of art with symbols, gestures, lines and colors, the entrepreneur draws his business model canvas in the same way. The basic difference between NABC and business model canvas is that the purpose of NABC framework is to structure your business idea whereas the business model canvas draws a detailed picture of your business idea. Wikipedia defines the business model canvas as “The Business Model Canvas is a strategic management template used for developing new business models and documenting existing ones. It offers a visual chart with elements describing a firm's or product's value proposition, infrastructure, customers, and finances assisting businesses to align their activities by illustrating potential trade- offs” Source: https://en.wikipedia.org/wiki/Business_Model_Canvas By looking at the definition you will be able to understand the individual segments of business model canvas and their utility. Business model canvas answers the following questions to the readers or the viewers. 1. How do you acquire customers? 2. How do you plan and manage the relationship with the new customers? 3. How do you charge your customers? 4. What is your revenue model? 5. How much do you charge your customers? 6. Can you calculate your revenues for the next month, quarter and year? 7. What assets are available to you or under your control? 8. Who are your key partners? 9. What key activities do you need to engage in to deliver your value proposition? 10. What are your fixed, variable costs and how you calculate your future costs? 11. Does your revenue forecast demonstrates increase profitability towards the end of the forecast period? The detailed general framework of a business model canvas is shown in table1. SYED ALI SHAH (CITI CAMPUS MULTAN) 10 Entrepreneurship (MGT602) ::: Technical articles Table 1: Business Model Canvas with general questions Vagi-Fresh (Example of a business Idea) A novel entrepreneur dreams to convert his business idea into a business empire. In fact he wants to materialize his business idea into a workable physical business. Let’s take an example of a business idea “The idea is to offer everyday fresh vegetables on a bicycle based mobile outlet to the households” The Need Q-What is the important customer and market need? Answer: Unavailability of fresh and cut vegetable at competitive rates at the door step is a problem SYED ALI SHAH (CITI CAMPUS MULTAN) 11 Entrepreneurship (MGT602) ::: Technical articles for the households. Issue of managing buying of fresh vegetable and cutting it for meal preparation as faced by the working women (As reported by working women) is an addressable problem. This need analysis is based on the facts: Total population of Pakistan has exceeded 200 million with women about 49%. There are 32 million households in Pakistan. About 24% of women are the part of the workforce. The Approach Q-What is the unique approach to addressing this need? Answer: Bicycle based mobile outlet of vegetables having cool box installed in it for keeping the vegetable fresh throughout the day, offering fresh whole vegetables, fresh cut vegetables and fresh boiled vegetables ready to be cooked. Outlet will work under the brand name Vagi-fresh and be supported by a website where customers, working women, may order fresh vegetables of choice 24 hours before the delivery to be made at the door steps. Vagi-Fresh will start as one outlet aiming at the chain of outlets. The Benefit Q-What are the specific benefits resulting from the approach? Answer: Availability of fresh and hygienic vegetables to working women throughout the day (Quality/Standard Product). Availability at the door step in desired form, whole/cut/boiled (Convenience). At competitive prices (Affordability/Low Cost for Customer) Q-Why must we win? Answer: Because we are offering what the target market exactly wants. The Competition Q-How/Why are the offered benefits superior to the competition/alternatives? Answer: Standardized quality, availability at the door step, in the desired form and at affordable prices make our offering superior to the competition. Everyone has alternatives. We must be able to tell our client or partner why our solution represents the best value. Conventional vegetable shops offer heterogeneous quality and usually do not suit to the working women owing to their work-life schedule. Our solution offers utmost convenience with quality and affordability. Our Pitch Standardized Quality at your door step within an affordable price. What else one can desire…………………………………… SYED ALI SHAH (CITI CAMPUS MULTAN) 12  Entrepreneurship (MGT602) ::: Technical articles Just like NABC framework for Vagi-fresh we also need to build its business model canvas. Table 2 answers all the questions of basic concern in a business model canvas. Table 2: Business Model Canvas with Vegi-Fresh example Study Below Table Please watch the video lectures uploaded on VULMS for the topics related to interview based discussion on angel investment, venture capitalist and loan applications Video lecture 123: Angel investors and venture capitalist Video lecture 124: the investors' perspective on loan applications Note: It is advised to form NABC framework and business model canvas according to your dream business idea and keep practicing alongside the learning about different particulars of both approaches. Hopefully this exercise will be helpful you to form an effective NABC framework and a presentable business model canvas of your business idea. Never forget that perfection is hidden behind the iteration (practicing and rethinking and again practicing the content you are producing). SYED ALI SHAH (CITI CAMPUS MULTAN) 13  Entrepreneurship (MGT602) ::: Technical articles Theme 10 :: The marketing and legal aspects of an entrepreneurial venture Now we will be discussing marketing and different aspects of marketing. First we will start with the definition of marketing given by Philip Kotler. According to Kotler and Armstrong, Marketing is “the process by which companies create value for customers and build strong customer relationships in order to capture value from customers in return”. This definition has some components that are process, value for customer, customer relationship, goodwill and profit. Moving on we will be talking about need. We have earlier talked about NABC (Need approach benefit and competition). Whenever you discuss or talk about a business idea, the first thing that is considered with the business idea is the need. So, need is identified at the first place whenever you are designing any product or service. So what is need? NEED / WANT / DEMAND Need is a state of felt deprivation. (Kotler and Armstrong) Anything that you feel is lacking in you is called need. Let’s see when this need is converted into want. According to Philip Kotler and Armstrong, want is “The form human needs take as they are shaped by culture and individual personality”. Your need becomes your want based on the culture, weather and belief system of the area you are living in. This want finally takes the shape of demand. What is demand? Demand is “Human wants that are backed by buying power”. (Kotler and Armstrong) How this need, want or demand is fulfilled? It is fulfilled through market offering. For fulfilling need, want and demand of customers, businesses make market offerings. Kotler and Armstrong define Market offerings as “some combination of products, services, information, or experiences offered to a market to satisfy a need or want”. In marketing, you would have heard about 4 P’s or 7 P’s. This is an important and main framework of marketing which explains which aspect to keep in mind during the marketing process. What are 4 P’s of Marketing? Product: what are the design, quality and attribute of the product? Price: what will be the price of the product? 4 Ps is MOST IMPORTANT TOPIC Place: what will be your market place? Promotion: how will you inform your customer about your product service or experience? In case you are offering a service, there mostly 7 P’s of service marketing are considered. Along with the 4 Ps three more Ps are added making it product, price, place, promotion, process, people and physical evidence. SYED ALI SHAH (CITI CAMPUS MULTAN) 14  Entrepreneurship (MGT602) ::: Technical articles Now coming towards market, it says that Market is “the set of all actual and potential buyers of a product or service” (Kotler and Armstrong). There can be many types of markets like business markets, customer markets and online markets. Business markets: when selling to the business Customer markets: when selling to customer Online markets: when selling through digital media and not through physical markets Marketing Strategy will be briefly discussed here and detail will be given in later modules. While designing a marketing strategy, following steps are involved. 1. Identify the customer need 2. Choose your value proposition 3. Design a consistent brand and message 4. Select your target audience 5. Select the marketing/social channel for your startup 6. Build your referral network 7. Assemble smart marketing team 8. Become your product’s loyal user 9. Be vigilant to customer’s feedback 10. Relationship marketing Coming to the next topic, we will be discussing customer relationship management. You will have to develop a relationship between your customer and your business. Customer Relationship Management (CRM) IMPORTANT “The overall process of building and maintaining profitable customer relationships by delivering superior customer value and satisfaction” (Kotler and Armstrong) SYED ALI SHAH (CITI CAMPUS MULTAN) 15  Entrepreneurship (MGT602) ::: Technical articles The building blocks of CRM include deliver customer value and delight your customer. Customer value is very important. While purchasing a product, whatever benefit or value I attach to your product, I will be comparing it to alternate products by the competitors. If the value or promise you are offering is better as compared to the competitors, then I will be buying your product. There to understand Customer-perceived value, let’s have a look at its definition, “The customer’s evaluation of the difference between all the benefits and all the costs of a marketing offer relative to those of competing offers.” (Kotler and Armstrong) Delighting customer relates to satisfying the customer. So, how to delight the customer? Customer will be delighted if you exceed his or her expectations and how will you do it? You can do it by exceeding his or her expectations through customer experience, customization and personalize communication, feedback mechanism, relationship marketing and build/join communities. A very important framework is available to select the kind of customer that you are interested to maintain your relationship with. Philip Kotler has given a framework for customer classification on two bases; one is potential profitability and second is projected loyalty. Based on which there are following classifications of customers. Strangers Butterflies True friends Barnacles Strangers These have low potential profitability and little projected loyalty. They have just once purchased your product and might not purchase in future again. There is little fit between the company’s offerings and their needs. So the strategy for such customers should be not to invest anything in them. KEEP in MIND Dif. Butterflies They are potentially profitable but not loyal. They need the product and might buy your product and then again when the need arises they might buy the product of some other brands. They will not wait for your brand to offer discount, they will avail the discounts of any brand to fulfill the needs. SYED ALI SHAH (CITI CAMPUS MULTAN) 16  Entrepreneurship (MGT602) ::: Technical articles There is good fit between the company’s offerings and their needs. Therefore, the strategy should be to capture as much of their business as possible in the short time during. True friends They are profitable as well as loyal. They are your true friends. They need your product and they have strong fit between their needs and the company’s offerings. Strategy for them should be to build continuous relationship and investments should be made to delight these customers and nurture, retain, and grow. Barnacles They are highly loyal but not very profitable. They will show interest in your product but will eventually not buy your product. They have limited fit between their needs and the company’s offerings. They are very problematic also. They might be demanding a lot from your product. You may be providing them customized service to fulfill their demands but they will later on tell that they are not interested in your product. So for them strategy is to fire them Moving on we will discuss different marketing tactics used by businesses to gain customer attention like buzz marketing and guerrilla marketing. Firstly let’s see what buzz marketing is. “Creating a word of mouth or talk around product service or experience that consumers view as authentic” Buzz marketing is done by using any entertaining way or news to draw people’s attention towards the brand instantaneously. Which means you read a news or saw a Facebook teaser that got your attention instantly and started talking about it. That is buzz marketing. What companies do in buzz marketing is that they hire celebrities, opinion leaders and influencers (like you tubers) who start talking about the product and show that they are using this newly launched product or they talk about a product about to be launched. This is how buzz marketing is done. Viral marketing, undercover marketing, diffusion marketing and product seeding are certain other names for Buzz marketing. Buzz marketing is used under various situations: Buzz marketing can be used under following circumstances: When you have to enter the market, you need to sensitize your market and your customer at that time you can use it. When you are launching a new product, service or any experience, you may be using buzz marketing. When you are opening a new outlet. You might have seen in big malls that on certain shops it is written Coming Soon. SYED ALI SHAH (CITI CAMPUS MULTAN) 17  Entrepreneurship (MGT602) ::: Technical articles While expanding business. When you are entering a new market segment. Which MKT Strategy can be used in Promotional Campaign? Buzz marketing can be used as a promotional campaign. In today’s era of digital marketing, the widely used technique is buzz marketing. After buzz marketing, check out another tactic that is Guerrilla marketing. Guerrilla marketing is the strategy that involves unconventional and low cost marketing tactics that produce maximum results. It has two main features; its low cost and it brings maximum customer engagement. It may involve any unconventional design or unconventional event in a market place that grabs your attention and you are involved in it and enjoys it, its guerilla marketing. Jay Conrad levinson coined the term guerilla marketing in his book named guerrilla marketing in 1984. This word was inspired from guerrilla warfare. In this warfare different small tactics are used to surprise the enemy like ambush, sabotage, raid and surprise. So the basic purpose of guerrilla marketing is to surprise the customer to such an extent that the customer enjoys the experience. Now we will see when guerrilla marketing can be used. In Pakistan the use of guerilla marketing is very limited as compared to other parts of the world. What you do in this marketing, you engage the customers and customer starts enjoying your aesthetics sense. This kind of marketing was basically for small firm but large companies use this marketing to a wider extent. There are different types of guerrilla marketing. Outdoor guerrilla marketing Indoor guerrilla marketing Event ambush guerrilla marketing Experiential guerrilla marketing TARGETING is Important in Marketing Targeting your customers is a critical part of marketing function. There are certain Market targeting strategies. First thing to do is to see how to choose the right customers to serve? After dividing the market into various segments of distinct customers which may be based on psychology, age, income. Then the next step is targeting the market. Targeting means once you have divided the market into various segments now you will be choosing one or multiple segments to offer your product or service. So, in short targeting it that segment/segments that you are going to serve. SYED ALI SHAH (CITI CAMPUS MULTAN) 18 Entrepreneurship (MGT602) ::: Technical articles Before targeting the segment we have to evaluate the segments. There are two options for this evaluation. Philip Kotler has given two yard sticks for evaluation first being segment’s attractiveness and second is firm’s objective and resources. Segment’s attractiveness: For evaluating the segments attractiveness, once you have divided the market into segments based on any element like income age, psychographics etc, you must have the important information about size and growth, profitability, economies of scale are available and competition. By measuring these you can know how attractive the segment is that you plan to target. After this you will check what the objectives of your firm are and what are the resources of your business and determine that will these be enough and fit to fulfill the needs of the segment you are selecting. How to target the market. There are multiple strategies: For young and upcoming entrepreneurs the one leading area of weakness is Marketing Research and marketing intelligence. Information and knowledge is an important resource in this era. For information market research is critical. So let’s see what market research is. Marketing research is systematic design, collection, analysis, and reporting of data and findings relevant to specific marketing situation faced by a company (Philip Kotler). Now let’s have a look at the situations where information is required. It could be a Business opportunity for which information is required. It may be market growth for which information is gathered. It may be competition about which data is collected. Moving on let’s see why Marketing Research is required. Marketing research is needed for the following reasons. It is conducted for any of the following situations arise to identify problem, to evaluate segment attractiveness, to evaluate a business opportunity, market survey for customers’ preference, product preference test, sales forecasting, integrated marketing communication strategies evaluation, evaluation competition, product and/or market expansion and price change. Now let’s study the Marketing Research Process. This process is very simple: Step1: Define the problem/opportunity Step2: Define the objectives of marketing research Step3: Develop a complete research plan Step4: Identify data sources SYED ALI SHAH (CITI CAMPUS MULTAN) 19 Entrepreneurship (MGT602) ::: Technical articles Step5: Selecting of sampling method and data collection Step6: Analyze the collected data Step7: Present the findings Step8: Make an informed decision Marketing Intelligence is a great success factor for entrepreneur. According to business dictionary marketing intelligence is: “Primarily external data collected and analyzed by a business about markets that it anticipates participating in with the intention of using it in making decisions”. (http://www.businessdictionary.com/definition/marketing-intelligence.html) Considering the importance of Marketing Intelligence big firms develop Marketing Intelligence System. Philip Kotler defines it as: “A set of procedures and sources used by the management to obtain everyday information about development in the marketing environment”. (Philip Kotler) Moving on we will be discussing design your market offering(s) or how your product or service is designed. Let’s see how Philips Kotler defined product and service. “Product is anything that can be offered to market for attention, acquisition, use or consumption that might satisfy a need or want”. (Kotler and Armstrong) and secondly what service is; “Service is anything or benefit that one party can offer to another that is essentially intangible and does not result in any ownership of anything”. There are certain levels of product and services which include core benefit, actual product and augmented product. Mostly firm stay at the core level while designing the product or service but many of them add certain additional flavors to their product like brand name, level of quality and packaging etc. If you want to reach augmented level then according to Kotler you may offer delivery at the door step, credit facility cash on delivery, installation, after sales service etc. Deciding about all these levels is important because it will have impact on the pricing of the final product. When we talk about product and Service Classification, we see that whatever business is going on SYED ALI SHAH (CITI CAMPUS MULTAN) 20  Entrepreneurship (MGT602) ::: Technical articles it can broadly be divided into two categories i.e. consumer products and industrial product. Consumer products are offered to end consumer including convenience, shopping and specialty product while industrial products are offered to firms for further processing or for use in conducting the business. There are certain attributes of product and services. Product and service comprises of product Quality, Product Features, product style and design. Along with all these another important aspect is Unique Selling Proposition (USP). Entrepreneurship.com defines it as: “The factors or consideration presented by a seller as the reason that one product or service is different from better than that of the competitors”. (https://www.entrepreneur.com/encyclopedia/unique-selling-proposition-usp) Product design and product quality are other significant areas to be discussed. Product quality seems to be a simple concept yet it is very deep and complex. Let’s have a very simple definition of Product quality. Product quality is defined as zero defect product or service. The American Society for Quality defines “quality as characteristics of product or service that bear on its ability to satisfy stated or implied customer needs”. Product quality is: The leading positioning tool Directly related to performance of product or service Directly linked with value for customer Directly related to customer satisfaction Ensure long term relationship with customer Dimensions of product quality include level of quality and consistency and commitment with quality. What does it means by quality? Quality revolves around these eight dimensions. Design of product and service is also important and is a little more complex and detailed than style. It is directly linked with customer value and satisfaction, ensure long term relationship with customers. While designing the product or service, its specifications are considered crucial at this stage. So an entrepreneur must write these specifications. Consider yourself as a customer now. Whenever you go to buy an expensive product, you check all its specifications before making the purchase decision. The business dictionary.com defines product specifications as: “Written statement of an item's required characteristics documented in a manner that facilitate its SYED ALI SHAH (CITI CAMPUS MULTAN) 21  Entrepreneurship (MGT602) ::: Technical articles procurement or production and acceptance”. http://www.businessdictionary.com/definition/product-specification.html) Another definition given by Kotler says that product specification is: “The stage of the business buying process in which the buying organization decides on and specifies the best technical product characteristics for a needed item”. In business buying, if your written specifications for the product, you may be involved in three different business buying situations ; straight rebuy, modified rebuy and new task rebuy. Now looking at each concept one by one. Kotler has defined these three concepts in his book Principles of Marketing. “A business buying situation in which the buyer routinely reorders something without any modifications called straight rebuy”.( Kotler and Armstrong) “Business buying situation in which the buyer wants to modify product specifications, prices, terms, or suppliers called modified rebuy”. (Kotler and Armstrong) “A business buying situation in which the buyer purchases a product or service for the first time called new task”. (Kotler and Armstrong) Packaging and labeling defines your product. It is very important because it involves cost and grabs the customer’s attention. Packaging helps to keep the product safe. Your packaging should be convenient and safe for the customer and customer should be happy to carry the product without hassle. Labeling is also very important in certain products because legal issues may be involved like medicine. What is packaging? Lets’ have a look at two different definitions of packaging. “The wrapping material around a consumer item that serves to contain, identify, describe, protect, display, promote and otherwise make the product marketable and keep it clean.” (https://www.entrepreneur.com/encyclopedia/packaging) “Packaging involves designing and producing the container or wrapper for a product.” (Kotler and Armstrong) SYED ALI SHAH (CITI CAMPUS MULTAN) 22  Entrepreneurship (MGT602) ::: Technical articles While designing a product, it might have multiple layers of packaging. It may involve primary package, secondary package and shipping or third package. Packaging is known as the product's face. So, there are certain packaging concerns as given below: ✓ Product container ✓ Packaging design and functionality ✓ Packaging color and quality ✓ Packaging size ✓ Packaging durability ✓ Packaging cost Packaging also attracts the attention. For example the Candy packaging ideas grabs the attention of the kids. Therefore, packaging is important because it results in influencing consumer, assurance of the product quality, brand recognition and brand reinforcement. Labeling is very critical for certain industries especially where regulatory authority is monitoring it. Lets’ see a simple definition of labeling: “Display of information about a product on its container, packaging or the product itself” Businessdictionary.com also gives a very good definition of labeling as: “For several types of consumer and industrial products, the type and extent of information that must be imparted by a label is governed by the relevant safety and labeling is a part of the packaging. Labeling ranges from shipping laws.” You may further explore it on http://www.businessdictionary.co Labeling is has broad meaning it includes simple tags to complex graphics. After packaging and labeling let’s move on towards placement of product and/or service.So, for an entrepreneur an important question is where to sell the product? What will be your market, customers and how to access them? Placement is related to accessing the customer. You may be selling the business product or consumer products but how will your customer access your product is important. Therefore, placement is the distribution options available to you to access your customer to deliver the customer value. It may be online, physical outlet or door to door selling. Given below is the simple definition of Place/Access. SYED ALI SHAH (CITI CAMPUS MULTAN) 23 Entrepreneurship (MGT602) ::: Technical articles “What new distribution options are there for customers to experience our product e.g. online, instore, mobile etc.” Placement includes all the matters related to supply chain management, geographical locations, distribution channels and display of the product. For placement, it matters a lot in which market are your dealing. Is it consumer markets, industrial markets, government markets, global markets or virtual market? There are some important questions related to display like: How to get dominating shelf space? Where to display the product e.g. own display center or shopping mart, departmental store or convenience shop? What are shelf plan to maintain the inventory? What is the shelf life of the product? After place, next P that is going to be discussed is price. Price is a really sensitive area whether you are planning to start the business; you are designing the product or already doing business which you want to expand. Price is the only p that is source of revenue while remaining P’s involve / incur cost. A general definition of Price is: “The amount of money which is required and given in payment for buying something including product, service or experience”. Another definition by businessdictionary.com is: “A value that will purchase a finite quantity, weight, or other measure of a good or service”. (http://www.businessdictionary.com/definition/price.html) Consumer psychology and pricing are linked to each other as pricing may be the first factor a price conscious consumer is considering while making a purchase decision. While checking the pricing, the consumer may be considering and comparing all the following areas like consumers process the price information, previous purchases (last paid price), market survey, formal communication, informal communication, online sources, competitors’ price, expected future price and price sensitive customers. Before studying the pricing strategies, first we will see what pricing objective is because pricing strategies are designed based on your pricing objectives. So, there could be different objectives on which pricing is based like survival, maximum current profit, maximum market share (market penetration), new product pricing, product quality leadership and partial cost recovery. Price strategies usually depends on what product, service or experience you are offering to the SYED ALI SHAH (CITI CAMPUS MULTAN) 24 Entrepreneurship (MGT602) ::: Technical articles customer, what is your competitors’ price of similar and alternate products and whoyou’re your customers/ what is your target market? While selecting any of the price strategies, it depends upon business life cycle stage your business is in. You may choose any pricing strategies from new product pricing strategies, psychological pricing and product-line pricing strategies. Let’s see one by one what these pricing strategies are. 1. New Product Pricing Strategies When a company is bringing in new product into the market, it usually charges marketskimming pricing which means they charge high price in the start and then with the passage of time lowers the price. Another option is market-penetration pricing. In this pricing strategy, you want that when your new product is being launched, it sells in bulk as compare to your competitors so you offer a price which is competitively low and at the same time offering some additional features in comparison to your competitors. 2. Psychological Pricing It is based on the psyche of the customer and it may include reference pricing, bundle pricing, multiple unit pricing and everyday low pricing. 3. Product-Line Pricing Strategies This strategy is important for those entrepreneurs who are on the growth stage and wants to increase their product line. It is based on product line for which two different pricing are used named as captive and premium. Captive pricing is for products that must be used along with the main product. Main product in a product line priced at low while related product and/or line of product price higher. For example, shaver with replaceable blades which is the main product is priced low but the replaceable blades are priced a little higher. You may charge Premium pricing which is pricing different model at different prices depending on their quality and features. Price is the factor that brings revenue. While discussing price, one thing that is very important is price change and price wars. Being an entrepreneur, if you have decided to change the price of your product then you have to consider how your competitor will respond to it. There could be multiple reasons for price change like cost inflation, over/less demand, price competition, nature of product and product life and promotional campaign. SYED ALI SHAH (CITI CAMPUS MULTAN) 25  Entrepreneurship (MGT602) ::: Technical articles When prices are changed, there are certain reactions to price change. Both customer and competitors will respond to change in price. Reaction by customers: He will be happy if price decreases while he will be annoyed if prices increase. Reaction by competitors: They will also react towards your change in price for that they may respond in any of the following ways: 1. Maintain the price 2. Maintain the price with some value addition 3. Reduce the price 4. Increase the price and improve the quality 5. Launch a low price line Price war is a very critical moment and entrepreneur should be able to survive the war. Investopedia defines price war as: “A price war is a competitive exchange among rival companies who lower the price points on their products, in a strategic attempt to undercut one another and capture greater market share. A price war may be used to increase revenue in the short term, or it may be employed as a longerterm strategy.” (https://www.investopedia.com/terms/p/price-war.as) While businessdictionary.com defines it as: “Market situation in which (usually two) powerful competitors try to suppress each other's market share by progressively reducing prices until one of them retreats, at least temporarily”. (http://www.businessdictionary.com/definition/price-war.html) After seeing price, price changes and price war, marketing communication mix is going to be discussed. Communication mix is significant because if you are launching a product in the market then you have to communicate with your customers to inform them about your product. The way you inform them is called communication strateiges or marketing communication strategies or mix. Kotler defines Marketing Communications Mix as: “The specific blend of promotion tools that the company uses to persuasively communicate customer value and build customer relationships” (Kotler and Armstrong) SYED ALI SHAH (CITI CAMPUS MULTAN) 26 Entrepreneurship (MGT602) ::: Technical articles Marketing Communications Mix includes advertising, sales promotion, personal selling, public relations, direct marketing and digital marketing. Looking at their definition one by one, as given by Philips Kotler, are: Advertising: Any paid form of non-personal presentation and promotion of ideas, goods, or services by an identified sponsor Source: (Kotler and Armstrong) Sales promotion: “Short-term incentives to encourage the purchase or sale of a product or service” (Kotler and Armstrong) Personal selling: “Personal presentation by the firm’s sales force for the purpose of making sales and building customer relationships.” (Kotler and Armstrong) Public relations (PR): “Building good relations with the company’s various publics by obtaining favorable publicity, building up a good corporate image, and handling or heading off unfavorable rumors, stories, and events.” (Kotler and Armstrong) Direct Marketing: “Direct connections with carefully targeted individual consumers to both obtain an immediate response and cultivate lasting customer relationships” (Kotler and Armstrong) Therefore, all these tools are available to communicate with the customers, you may use any of these tools individually or in combination. When you are using multiple tools, it is called integrated marketing communication. Integrated marketing communications (IMC) as defined by Kotler is: “Sensibly integrating and coordinating the company’s multiple communications channels to communicate a clear, reliable, and convincing and persuasive message about the product, service and/or organization”. (Kotler and Armstrong) In integrated marketing communications, there are different strategies like social media, SMS marketing, blogs and influencers, news channels, vlogs, website and website banners, search engine optimization and local cable advertising. It is the decision of the entrepreneur to pick and choose any of these communication tools either individually or in combination. But the essence of using these tools is to inform the customer about their offerings. Another important concept of marketing is brand. Brand is your business identity. Pakistani entrepreneurs are lacking the brand development skills. Therefore, this area needs special SYED ALI SHAH (CITI CAMPUS MULTAN) 27 Entrepreneurship (MGT602) ::: Technical articles attention of the entrepreneurs. There are various definitions of brand. One discussed below if taken from Investopedia.com: “A brand is an identifying symbol, mark, logo, name, word and/or sentence that companies use to distinguish their product from others”. (https://www.investopedia.com/terms/b/brand.asp) While brand building, it is important to get legal protection for your brand so that no one else can use or copy your brand name. Such kind of protection is called trademark. Investopedia.com defines trademark as: “Legal protection given to a brand name is called a trademark”. (https://www.investopedia.com/terms/b/brand.asp) While discussing brand, another important concept is brand identity. Let’s see how Investopedia.com defines it. “Brand identity is the visible elements of a brand, such as color, design, and logo, that identify and distinguish the brand in consumers' minds.”(https://www.investopedia.com/terms/b/brandidentity.asp) Branding is important for the business and there are numerous reasons for its importance as it provides business Identity, helps in building recognition and customer relationship, being an implicit quality promise, leads to customer loyalty, generates new customers, wins customer and market place trust and provides edge on competitors. Brand development is a complex process. There are some brand development strategies but these are critical for those businesses that are planning to expand. For these strategies, there are two things: either you are dealing with existing or new product category or you are using existing or new brand name. Therefore, ultimately it generates four strategies to select from. Kolter defines these strategies in the following way. Line extension “Extending an existing brand name to new forms, colors, sizes, ingredients, or flavors of an existing product category” (Kotler and Armstrong) Multi brand “Multi Brand Companies often market many different brands in a given product category” (Kotler and Armstrong) SYED ALI SHAH (CITI CAMPUS MULTAN) 28  Entrepreneurship (MGT602) ::: Technical articles Brand extension “Companies extend a current brand name to new or modified products in a new category.” (Kotler and Armstrong) New Brands “If the power of existing brand name is fading, a new brand name is needed.” (Kotler and Armstrong) It is up to the entrepreneur that which brand development strategies he will use but brand building is very crucial in today’s era. At the end, it is again emphasized that Pakistani entrepreneurs should make utmost efforts towards brand development to reap maximum benefits of their business struggle. Note: Please watch the video lectures uploaded on VULMS for the topics related to explicit and implicit promises of brands and businesses and brand building. Video lecture 135: Explicit and implicit promises of brands and businesses Video lecture 145: Brand building SYED ALI SHAH (CITI CAMPUS MULTAN) 29 Entrepreneurship (MGT602) ::: Technical articles Theme-11a :: Management Aspects of Business Ventures To become a successful entrepreneur, one must be good at managing the venture. The management related considerations for an entrepreneur include decision making, leadership behavior, organizational structures and processes, clusters & networks, creating resilience, technological systems, departmentalization, and HR policies. Decision-Making is an important aspect of any business venture as entrepreneur makes decision every single hour of every single day. These decisions can be minor decisions to major strategic decisions. How these decisions are made vary from one entrepreneur to another entrepreneur? Some entrepreneurs make decisions on their own while others take the opinion of employees or other friends and family. Some entrepreneurs also rely on expert opinion to make decisions especially in case of strategic decisions. Being an entrepreneur, which decision making style you opt is an important thing which he/she should consider while operating a business venture. Leadership behavior is another important aspect of management of a business venture. Which leadership style you opt for, decides the loyalty of your employees or team. It has been observed that employees are most loyal to the organization that they stick to the same organization for 30 years if the leader is good. Organizational structure and processes are the important things to operate the firm in an organized way. In the beginning of a new venture development, the organization structures are usually blur and every employee reports to the owner. But as the firm grows, the structures must have to be clear in terms of reporting and teams. On the other hand, processes should be clear even in the beginning. Another important aspect of a firm’s management is the Clusters & networks of an entrepreneur. Before starting a business venture, an entrepreneur must decide the industry he/she will enter. He must see if he has any networks and associations in that industry. Networking and associations with other businessmen and entrepreneurs are of utmost importance for an entrepreneur especially in the initial stages of new venture development. Being resilient and creating resilience in teams is the key to the success of any firm. Whether it is the development stage of a business venture or the growth stage, an entrepreneur can face setbacks or any uncertainties which should be faced by being resilient. In those times, it is the entrepreneur who must manage resources and make decisions which are in the favor of the firm. These setbacks can be the result of entrepreneur’s bad decisions or competitors but there are certain uncontrollable factors (like COVID 19) which can be the reason of these setbacks. Entrepreneur must also see which Technological systems are needed by the firm. As this is the era of technology and a lot of tasks have been digitized. For these tasks, you do not need any human resource. Some business models are based on technology, so they need more technological systems than others where human capital is more important. In the initial stages of new business development, there are no separate departments for each business function. Usually, one team performs several functions. But in the growth stage of business venture, departmentalization can be a major concern for an entrepreneur. On the other hand, whether it is the initial stage or growth stage, an entrepreneur must devise the HR policies. It should be clearly decided which financial or non-financial rewards would be given to employees and when. Which type of contracts would be SYED ALI SHAH (CITI CAMPUS MULTAN) 30 Entrepreneurship (MGT602) ::: Technical articles built with the employees and which actions would be taken against the employees who are involved in any fraudulent activities. What is Organizational Structure? An organizational structure is defined as “a visual presentation of a company’s structure showing what employees do, decision making style, span of control, and chain of command”. In the initial stages of venture development, organizational structures are blurred and usually all employees report to the entrepreneur or CEO. But as the organization grows, it becomes important to define the organization structures and chain of command. Organizational structures are classified in terms of functions, products, markets, and geographical location. Functional Organizational Structure departmentalizes an organization based on the common job functions e.g., marketing, finance, human resource, management, operations and IT. It is the most common structure organizations adopt. In small scale firms, if you want to make teams, you can give responsibility to some people of marketing function and some of finance function. Usually, one team is handling two or multiple tasks. Following is the pictorial representation of functional organization structure. Product-Based Structure divides an organizational structure based on products. It is ideal for organizations with multiple specialized products. If an organization is dealing with multiple specialized products, it can make separate teams for each product each performing all the functions of marketing, finance, research, and operations independently. For example, an entrepreneur dealing with clothing as well as beauty products can make two separate teams. Each team will do the marketing separately. Similarly, all other functions (finance, HR, research, and operations) would be performed separately by each team. Market-Based Structure divides an organizational structure based on industries, markets, or customers. Some entrepreneurs deal with different markets like government market, consumer market, and B2B market. For those entrepreneurs, the organization structure would be market based. There will be separate teams for each market served by the firm. If a firm deals with local market and international market, there will be two separate teams for both markets who will perform each organizational function independently. Geographical Structure deals with division of an organizational structure on the basis of geography. This is mostly adopted by the entrepreneurs who deal with import and export business. For example, if the firm deals with Canadian market and UAE market, there will be two separate teams SYED ALI SHAH (CITI CAMPUS MULTAN) 31  Entrepreneurship (MGT602) ::: Technical articles for both the markets. Dif. b/w Flat & Tall Flat Structure deals with an organizational structure where employees are only a few steps away from senior leadership and decision making is centralized. In the beginning of the start-up, organizational structures are usually flat where employees report directly to the owner or CEO. Tall Structure deals with multiple layers of reporting and decentralized decision making. In the growth stage of business venture, when an entrepreneur has a big team, there are multiple layers of employees. Each layer of employees’ report to the upper layer. For example, labors report to the line managers and the line manager reports to the senior manager. Further, senior manager reports to the middle manager who reports to the manager operations. How the structure of small setup is different from large firms. 1. Blur organizational structures 2. Centralized decision making 3. Multiple roles of managers 4. Need for growing firms 5. Lack of R&D and human resource development (we don’t see it in small business) 6. Flexibility of organizational structure (you can change the structure easily in small firm not in the large firms.) Legal Forms of the Business There are four basic legal forms of business which are: sole proprietorship, partnership, joint stock Company, and nonprofit organization. Sole proprietorship is a business owned and operated by a single person who enjoys the whole profit and bears all the loss. This form of business has unlimited liability which means in case of non-payment of debt, the proprietor’s business property as well as personal property will be taken to pay off the debt. Some of the characteristics of sole proprietorship business are: Single ownership No need of registration of business No documentation required (except for some businesses like pharmacy where documentation is needed) No separate legal entity from the proprietor Small scale business Tax on owner’s income (No double taxation) Unlimited liability SYED ALI SHAH (CITI CAMPUS MULTAN) 32  Entrepreneurship (MGT602) ::: Technical articles Sue and can be sued in the name of the owner Sole manager Business commencement and closure is on the will of the single owner Another legal form of business is partnership which is a legal entity formed by two or more people. The partners are personally responsible for all the losses and debts and partnership has unlimited liability. A partnership can be a partnership at will when it is open-ended. A partnership at will is formed to carry out a general business without specifying the time of termination of partnership business or without specifying the duration of partnership. On the other hand, a partnership can also be a particular partnership which is formed for a particular project and terminated as soon as the project is completed. Usually, it is not mandatory for firms to register a partnership, but it is recommended to register a partnership to get the legal protection. A Partnership deed is usually prepared in order to get a partnership registered. Some of the characteristics of partnership are: At least two individuals are required to form a partnership Unlimited liability of all partners collectively and individually Profit is shared equally or in agreed ratio Voluntary registration No perpetual succession/continuity For transfer of share, mutual consent of all partners is needed SECP has introduced a relatively new concept in partnership business in May 2018, that is limited liability partnership (LLP) where the liability of all partners will be limited to the extent of their investment except for one partner whose liability would be unlimited. LLP is form of business which is near to the corporate form of business in terms of some of its characteristics. The two main characteristics which distinguishes the LLP from general partnership is: Separate legal entity (it is the main characteristic of corporate form of business where the firm is separate from the owners. It can sue and be sued in its own name.) Perpetual succession (in general partnership, in case of death of a partner, partnership gets dissolved but in the case LLP it will continue. The death or insanity of any partner will not affect the existence of partnership). Partnership Act 1932 explains the detailed procedure of registering and dissolution of partnership, right and duties of partners. Another legal form of business is non-profit organization. A nonprofit organization is a business that has been granted tax-exempt status because it serves a special cause and provides public benefit. This type of organizations supports the government. Some of the characteristics of nonprofit organizations are: SYED ALI SHAH (CITI CAMPUS MULTAN) 33  Entrepreneurship (MGT602) ::: Technical articles They are formed for the public service or benefiting the society. Donations which are given to NGOs are tax deductible. If you show it in your tax return, you will get the tax rebate or exemption. NGOs itself pay no tax on the received donations or on any other income earned through fundraising activity. Entrepreneur can also start a nonprofit organization. Abdul Sattar Edhi is the example of NGO entrepreneur who started a nonprofit organization which has all the systems and processes, but it works for public service instead of profit making. A nonprofit organization can be started at local level, district level, divisional level, or provincial level in Pakistan whereas it can be registered under Punjab government welfare department if any individual wants to start it in the vicinity of province Punjab. Another basic and most common form of business is corporation. There are four types of corporations which are: 1. SMC or single member company is a limited liability private company owned by a single director/member. This type of company was introduced by SECP in Companies Act 2017. The purpose of introducing SMC was to facilitate the sole proprietor. It gives the sole proprietor the benefit of limited liability. 2. Limited liability partnership: SECP has introduced a relatively new concept in partnership business in May 2018 that is limited liability partnership (LLP) where the liability of all partners will be limited to the extent of their investment except for one partner whose liability would be unlimited. LLP is form of business which is near to corporate form of business in terms of some of its two characteristics perpetual succession and limited liability. 3. Private limited company: it is the form of corporation started by two or more people. It is registered with SECP. The liability of members of a private company is limited to the extent of their investment. The shares of private limited company are not offered to the public for purchase. All the profit is divided among the shareholders. Private limited company is not listed on the stock exchange for trading. 4. Public limited company: a public limited company is owned by the shareholders and managed by the directors who are selected by the shareholders. Shareholders get the profit in form of dividend. The shares of a public limited company are offered to the public for purchase hence public limited company is listed on stock exchange. It is registered with SECP under the Companies Ordinance 1984. The liability of the shareholders is limited in public limited company. For a public limited company, it is mandatory to show all the financial statements publicly hence it is more open to public as compared to the private company. SYED ALI SHAH (CITI CAMPUS MULTAN) 34 Entrepreneurship (MGT602) ::: Technical articles Theme 11(b) :: Introduction to financial management Financial management means managing finances effectively. Every business needs to manage the finances. For entrepreneurs, arranging the funds and managing those funds and earning maximum profit is a must. Profitability, liquidity, efficiency and stability are the major financial objectives of a firm. Finances that are needed for a business are considered as cash inflows and expenses are cash outflows. Capital expenditures are usually fixed expenses. Finances required for entrepreneurs are usually from their own or from family or friends. Loans and other finances are the other sources of funds for entrepreneurs. Forecasting helps in having idea about financial requirements. If entrepreneurs decide to have debt, they need to forecast whether they will be able to pay interest rate or not. Banks are an important source of finance. Other financial institutions and debt financing organizations can also finance startups. There is no specific guaranteed source of financing for a particular type of business. Business with weak cash flows and low growth rate must go for personal funds or from family/friends. Businesses with low risk, healthy balance sheet and good management can go for debt financing. Businesses having unique idea and high growth rate can go for equity financing. When we discuss about financial management in context of entrepreneurship, preparation of financial statements is an important element. Financial statements of a business can be either historical financial statements or proforma financial statements. Historical financial statements are required by SECP and are based on past performance. These are usually made on quarterly, half yearly or yearly basis. Pro forma statements are made on the basis of projections and are of equal importance. Income statement is one of the historical statements and is prepared over a period of time whereas balance sheet is prepared for point in time. Statement of cash flows deals with cash inflows and cash outflows. Income statement is created by stating net sales and adding any sales returns and subtracting direct expenses which gives income before interest and taxes. After adjusting interest and taxes we get net income/profit/loss. The basic accounting equation is Assets=Liabilities + Owner’s Equity. Assets can be either current assets or fixed assets. Current assets fall within period of 1 year. Fixed assets are for more than a year. Current assets are liquid which means that can be easily converted into cash. Fixed assets are usually land and machinery. For balance sheet their depreciation amount is deducted to get proper value. As far as liabilities are concerned, they are also long and short term. The sequence of making financial statements is a must. Firstly, income statement is prepared then balance sheet and after that cash flow statements are prepared. Most of the information in cash flow statement is taken from income statement and cash flow statement. There are three sections of cash flows, Cash flows from operating activities, cash flows from investing activities and cash flows from financing activities. For cash flows from operating expenses, sources of cash are added and uses of cash are subtracted. Figures in this statement that might be increased or decreased can be taken from balance sheet or income statement. Net cash flows from operating, investing and financing activities are adjusted and then we can get the figure of cash flows at the end of the year which can be easily compared with the amount at the start of the year. Proforma financial statements are similar to historical statements but they show projected figures rather than actual amounts. These can be used as a planning tool as well and can be a source to SYED ALI SHAH (CITI CAMPUS MULTAN) 35 Entrepreneurship (MGT602) ::: Technical articles control the expenses. These statements can be used if the firm requires funding. There are three proforma financial statements, Proforma income statement, proforma balance sheet, proforma statement of cash flows. For proforma income statement, sales are projected for upcoming years as compared to actual figure of current year. Cost of sales is considered as percentage of sales so the same is projected for upcoming years. Some facts and figures are known for example depreciation expenses. Taxes and interest are also certain percentages so these can also be calculated. When starting new venture and actual figures from current and previous years is not present, statements of competitors or industry’s average figures and can used. For proforma balance sheet, assets and liabilities are projected and this way the statement is prepared. Similarly, proforma statement of cash flows is prepared. Ratio analysis is a tool to determine financial health or operational efficiency of a company. Actual sales figures cannot be compared so ratios are used. Ratio analysis is done to compare company performance with others and to compare performance of company departments with each other. It is also done to analyze future trends. Some ratios measure profitability, liquidity and some overall financial stability of a company. Return on assets, return on equity, and net profit margin are part of profitability ratios. Liquidity ratios include current ratios and quick ratios. Financial stability ratios include Total debt ratios and debt as equity. By performing ratio analysis, it becomes quite evident where the company actually stands. Break-even is the point when total revenue is equal to total cost. At this point cost is covered but still profits are not earned. There are two types of costs, fixed costs and variable costs. Variable costs are costs that change with changes in production levels. These can be costs of materials used in production. Fixed costs remain the same regardless of sales. These can be rent, insurance and wages. Breakeven analysis helps businesses make decisions about prices, costs and level of sales. This analysis is used to predict future results. Total cost is fixed cost plus variable cost. So, total cost changes with change in variable cost. After covering variable cost the amount that is left to cover fixed cost is called unit contribution. Breakeven analysis is an important planning tool. SYED ALI SHAH (CITI CAMPUS MULTAN) 36 Entrepreneurship (MGT602) ::: Technical articles Theme 12 :: Growth of Entrepreneurial Firms and Globalization This technical article can be divided into three categories which are following: Handling Business Growth It’s important that an entrepreneur should not only be able to start the business but he should be able to handle the challenges of business growth. Some of the models and strategies commonly taught in entrepreneurship are following: Business Growth Model (Part 1) Once a business is started, it is important to understand the dynamics associated with the growth of a business. Therefore, understanding different business-growth models is also important for an entrepreneur. Such models and frameworks give a better thinking pattern to an entrepreneur. There are two famous models for the business growth. The first is “business growth model” that emphasizes existence, survival, success, growth/takeoff and resource maturity. The very first phase of the business growth model is existence in which the entrepreneur starts the process of acquiring and retaining the customers. Products and services are delivered and showcased to the new and existing customers. The next phase of the business growth model is survival. Young entrepreneurs often confuse this stage of survival with success. However, it is a stage between the existence and success of a business. In the survival phase, the entrepreneur realizes that the business idea is workable for further progress of the business or not. At this stage, often, a slight increase in the product sales and revenue is observed for which the entrepreneur starts getting encouragement. Hence, often the business achieves a breakeven point at this stage or at least gets closer to it. The third stage is success at which the company becomes able to maintain good customers. Business starts having profit as its income exceeds the breakeven point. At this stage, the entrepreneur carefully needs to differentiate between the sales and the profit. Often, the entrepreneurs get excited that increased sale is a source of income and that might be confusing because it is necessary to exclude all expenditures from income to determine the actual profit of a venture. At this stage, the entrepreneur starts developing brand rapport. The business also becomes capable of facing the competition in the market at the success stage. The fourth phase after success is the take-off. At this stage, the entrepreneur starts thinking about the further growth of the business. The fifth stage of the business growth model is resource maturity. At this stage, the entrepreneur tries for better financial management, product and service diversification and hence all specialized activities are performed separately at this stage at the departmental level within the organizational unit. Research has shown that at this stage, the entrepreneur often starts compromising further growth and tends to maintain a steady stream of income. SYED ALI SHAH (CITI CAMPUS MULTAN) 37 Entrepreneurship (MGT602) ::: Technical articles Greiner Growth model of business (Part 2) This model was presented in the Harvard Business Review and presents the detail of potential challenges for entrepreneurs while having business growth. In this model, each growth phase is made up of a period of relatively stable growth, followed by a crisis. This model can be elaborated clearly through a graph which is given below. This graph of the Greiner Growth model of business shows that over time, as the organizational size and business keeps growing, then a business has to face six phases and five challenges. As per this model, the business initially grows through creativity, then through proper direction, delegation, coordination, collaboration and alliances. However, each stage of such business growth is met with a crisis that a business has to deal with. In this model, creativity is the very first phase of business growth. Cost reduction, existence and survival remain the focus of this phase. Usually, when an entrepreneur comes out of an incubation centre then he/she enters this phase of creativity. Usually, informal communication takes place at this stage between entrepreneurs and other stakeholders such as customers. Phase 2 in this model is direction. You have to give proper direction to the people working with and under you. However, this stage also brings this crisis of leadership. A leader has to be able to work for the venture himself and has to provide an enabling environment to the people working under him. Phase 3 is the delegation stage. In different functions, the entrepreneur has to delegate the work as he cannot perform every task himself. Leaders are often used to of keeping the work under their own SYED ALI SHAH (CITI CAMPUS MULTAN) 38  Entrepreneurship (MGT602) ::: Technical articles supervision for every activity. Therefore, this stage of delegation comes with the crisis of autonomy. For example, the person dealing with sales should have the autonomy to provide a discount on product or service up to a certain limit etc. At this stage, employees also start demanding autonomy for their work. Phase 4 of business growth is coordination. At this stage, businesses are often having significant growth. All the departments coordinate with each other under a defined hierarchy. However, in the coordination phase, an entrepreneur has to deal with the crisis of control. Phase 5 in this business growth model is collaboration. At this stage business often has a significant growth with separate departments. Often rules and policies get so mature at this stage that they slow down the decision making. Such issues create red tape barriers in the organizations. Phase 6 of this business growth model is growth through alliances. Sometimes, when a business reaches the stage of maturity and it is difficult for the business to grow on its own then alliances with other strategic partners are formed. But such alliances should be carefully made. Entrepreneurs often face such difficult crises in the business. It can be concluded that business growth is not easy. Entrepreneurs have to face a crisis in the business such as those related to marketing, finance or leadership. It is also important to maintain the structure of the business. Preparing for growth (part 1) For expanding the business, preparation is the key. Once the brand name establishes, then the business needs expansion. It is important to understand a few concepts concerning preparation for growth. The first concept is the industrial life cycle. The industrial life cycle refers to the gradual development of an industry through five common stages. Those five stages are: 1. Introduction (Embryonic stage) 2. Growth 3. Shakeout 4. Maturity 5. Decline Many industries evolve and then decline very soon. Like reel camera and Symbian phone technology market has declined now. Therefore, an entrepreneur should not enter an industry that is at the decline stage. Consumer demands also change from time to time. SYED ALI SHAH (CITI CAMPUS MULTAN) 39 Entrepreneurship (MGT602) ::: Technical articles IT revolution, environmental factors and machine revolution have also caused a decline in many industries. If an industry is at an evolution phase, then it is better to enter in that industry for a new business. After the initial phase, the growth phase starts. For example, if the online business was a success in the recent past then many new entrants came into it. Home-based banking is another example. At the maturity phase, the environment for a new entrant is very tough. An entrepreneur should not opt for an industry that is at the decline phase. Then there is another concept which is the product life cycle as the products can also be categorized with respect to their life cycle stages. The stages of the product life cycle are 1. Introduction 2. Growth 3. Maturity 4. Decline. SYED ALI SHAH (CITI CAMPUS MULTAN) 40  Entrepreneurship (MGT602) ::: Technical articles For example, initially, the mobile phone was used only for making a call or SMS. Then, the simple mobile phone market nearly declined and smartphones entered the market initially with Symbian technology and then with the Android technology. Now, even more experiments are being conducted for even greater evolution in the smartphone industry, so that, they could hold their maturity stage. Companies try to sustain this stage through research and development. Initially, products consume greater expenses such as for advertisement. In America, companies often launch their products at the decline phase in another region or country where that product was not earlier available. For business growth, different factors are the source of entrepreneurial resources. For example, entrepreneurial intuition, knowledge and information, brand/business identity, team, finance, technology, customers and network are the resources for an entrepreneur to have business growth. These resources, if utilized effectively then they help the business at different stages. Preparing for growth through Acquisition and mergers (part 2) As discussed earlier, for business growth, three decisions are very important which are given below: 1. Life cycle stage of the industry 2. Product life cycle stage 3. Available entrepreneurial resources Other than those three factors, there are strategic measures for the growth of a business such as acquisition and merger. In small businesses, mergers and acquisitions are not that difficult but they are not easy in large businesses as many factors have to be kept in mind. In a merger, two companies combine their business and form one company that represents both entities. However, in the acquisition, one company takes over another company by purchasing it and the company that is acquired remains in the total control of the acquirer. The basis of merger and acquisition are often following: 1. Financial 2. Tender-based