New Venture Creation Notes 2024-2025 PDF

24-25 NEW VENTURE CREATION Module administered by: Sydney Medupe Email Address: [email protected] Gaborone Campus Plot No:50661, Fairgrounds International, P/Bag 137, Gaborone, Botswana Tel: (+267)3953 062 Fax: (+267)3919 118...

24-25 NEW VENTURE CREATION Module administered by: Sydney Medupe Email Address: [email protected] Gaborone Campus Plot No:50661, Fairgrounds International, P/Bag 137, Gaborone, Botswana Tel: (+267)3953 062 Fax: (+267)3919 118 Francistown Plot No:31403, Mo at Street, P/Bag 137, Francistown, Botswana Tel: (+267)2410 558 Fax:(+267)2410 534  Module Learning Outcomes Analyse the theoretical underpinnings and concepts that have shaped the evolution of the field of entrepreneurship. Demonstrate a critical understanding of what entrepreneurship is and who entrepreneurs are. Demonstrate a critical understanding of what constitutes an entrepreneurial mind-set. Critically analyse the stages involved in discovering, evaluating and developing opportunities for venture creation. Demonstrate an analytical ability to explore the interaction of entrepreneurship with the economy and society, and the evolutionary stages of venture creation. Demonstrate independent thinking and critical reasoning skills in assessing the viability of new venture opportunities. Explore and critically evaluate t he processes surrounding the growth of, and exit from, entrepreneurial ventures. ICE BREAKER  ENTREPRENEURSHIP AND SMALL, MEDIUM AND MICRO ENTERPRISES (SMMEs) IN PERSPECTIVE. By the end of this topic learners should be able to; Explain the domains of entrepreneurship, leadership and management Distinguish between the entrepreneurial and managerial functions of an entrepreneur Analyse the entrepreneurial and managerial success factors that contribute to successful entrepreneurship Understand the effects of entrepreneurship on the economy Appreciate that entrepreneurs can conduct business at various levels based on their entrepreneurial activities Understand that entrepreneurs have unique characteristics that distinguish them from other individuals New venture creation  Introduction New ventures or start-ups are normally defined as fountains of creative ideas since new products or services are introduced to the market by new ventures.( Criscuolo et al. 2012). Venture creation involves organizing, planning and establishing new organizations Venture creation is key subject of entrepreneurship and deals with the interaction between individuals and the environment.  Small Medium Enterprises (SMEs) SMEs receive a lot of attention in all countries because of their ability to create employment. SMEs are firms with less that 250 employees {micro less than 10, small 10-49, medium 50-249 and large 250+ employees} SMEs are regarded as facilitators of innovative business operations development. SMEs  Small Business It is considered to an entrepreneurial activity which has a small market share Small business are independent because they do not form part of larger enterprises and their ownership are relatively free from outside control in its principal decision. Generally, a small business is one that is independently owned and operated and not dominant in its field of operation. They may never grow large, as the owner may prefer a more stable and less aggressive approach to running the business.  What it takes to manage growth in a small Managing finances Having the right talent Having systems in place Training and coaching for personal development in order to be the best Understand your outcome and vision Understand your market Have a growth strategy Have a marketing strategy  Obstacles of Growth in SMEs SMEs are the backbone of business as they constitute most dynamic firms in emerging economies but seem to encounter many challenges when it comes to their growth. Finance is the most common obstacle faced by SMEs High taxes also act as an impediment for growth as most SMEs would not be able to pay these taxes Poor and incompetent management skills. Political instability can also be an impediment for growth Complicated policy and standards can become an obstacle to growth especially if SMEs are to acquire a certain licensing that is too demanding. 10 The Process of New venture creation  Entrepreneurship A multifaceted phenomenon that cannot be pinned down to one definition. The definition is normally influenced by the context in which it is used for. Entrepreneurship is defined by Raposo et al. (2011) as the main driving force of change in a market economy, bringing about the use of resources and introducing new products, processes and organizational structures.  Entrepreneurship Shane & Venkataraman (2000) define entrepreneurship by linking it to the examination, discovery and exploitation of opportunities. Defining entrepreneurship by other fields Economics- is an aspect which needs to be given attention by those who are concerned with economic growth. Innovation- the administration process of generating and managing innovation.  Intrapreneurship Is the act of behaving like an entrepreneur while working within a large organization. Innovative companies such as Google, Apple, 3M etc support intrapreneurship as a way of harnessing creativity from its employees. Examples of intrapreneurship include the following; Google-Gmail, Google Maps etc Apple- iPhone, iTunes etc  Technopreneurship It is the application of innovative and technical science, knowledge and skills to create products or services that solve problems. Technopreneurship is the leading form of entrepreneurship as most processes are automated. Most university spinoffs are technopreneurs. Eg. of technoprenuers- Apple, SAP, Facebook etc. Theories of entrepreneurship Economic theory Risk bearing theory Innovation theory X-efficiency theory Market equilibrium theory Theory of change Theory of cultural values  Entrepreneur According to Joseph Schumpeter, entrepreneurs are innovators who use the process of crushing the status quo of the existing products and services in order to develop new product and services. (Incremental or disruptive innovators). Drucker views entrepreneurs as individuals searching for change and explore and exploit the opportunities available.  Entrepreneurship Finance specialists: define entrepreneurs as people able to evaluate and calculate financial risks; Management specialists: think that entrepreneurs develop visions to organize their activities and excel at organizing people and using resources; Marketing specialists: define entrepreneurs as people who identify opportunities, di erentiate themselves and adopt customer-oriented thinking.  Entrepreneurship Economists: tend to agree that entrepreneurs, associated with innovation, are the driving forces of economical development; Psychologists, sociologists and anthropologists: underline the entrepreneur’s personal characteristics of creativity, risk-taking, need for achievement, internal locus of control; Operations management specialists: see entrepreneurs as good distributors and coordinators of resources; 19  Entrepreneurship and Small business Entrepreneurship Small Business Behaviour Strive to achieve much Satisfied with success more that just success Innovation Proactive Reactive Motive Passionate about the Driven by profits not business passion. Market share Large market share Smaller market share Mindset Continuously seeking to Retention of the same start new ventures. business structure. Ownership structure Private limited and public Proprietorship and limited partnership Sources of finance Venture capitalist Independently owned and operated Domains of Entrepreneurship Leadership and management  Management What is Management? It is an activity which involves directing, monitoring, organising and leading the resources in order to achieve a common goal of the business. Management (as a process) is the pillar to the survival of any business entity regardless of it size or industry. Management (as a noun) is a group of people entitled or entrusted with management duties which will lead to success of an organisation. Management plays a critical role in the running of an organisation.  Entrepreneurial Leadership Is the ability organise, manage and direct a group of people by displaying the entrepreneurial behaviour and creating an entrepreneurial organisation. Entrepreneurial leaders have capacity to mentor and nurture entrepreneurial individual to reach their potential in terms of their creativity. Entrepreneurial leaders understand the they should be proactive in creativity as a way of creating value for their customer and in creating a competitive advantage.  Attributes of an entrepreneurial leader Communication skills Vision Supportive Self-belief Shares success Involved Create an atmosphere conducive for growth Honesty Perseverance Learning  Traits of entrepreneurs There is a huge debate on whether entrepreneurs are born or are nurtured. Entrepreneurs are therefore both made or born but they normally have some key traits. These traits include: o Risk bearer o Opportunity explorer o Perseverance o Planner o Creative and innovative o Motivator Entrepreneurship and economy Entrepreneurship and economics have the following elements in common; job creation, competition, risk taking, learning and experimentation. Entrepreneurship also links to economic in the following aspects; Entrepreneurship creates new firms Entrepreneurship contributes to national income (contribution to GDP) Entrepreneurship creates social change Entrepreneurship leads community development Entrepreneurship enhances international trade Entrepreneurship leads to diversity in products and services Entrepreneurship and economic growth The correlation between entrepreneurship and economic growth is the concept of competitiveness which can be viewed as a composite measure of economic outcome. Competitiveness is how capable firms and industries are, in terms of gaining market share and so the levels of entrepreneurial activities are linked to the levels of GDP. Competition is one of the motivations for government to promote entrepreneurship as a way of stimulating economic opportunities (OECD, 1998).  Tutorial Activity 1 Generate a business idea. Discuss how you would take it through the new venture creation process. How will the domains of entrepreneurship affect your business idea? Activity 2 Read about Bill Gates, Mark Zuckerberg and Jeff Bezos. What do they have in common?  BASIC BUSINESS CONCEPTS AND THE BUSINESS ENVIRONMENT. By the of this topic learners must be able to: 1) Explain the motivation for setting up a business; 2) Analyse the relationship between the business and its establishment; 3) Distinguish between the terms ‘branch of industry’ and ‘production branch’; 4) Arrange the three sectors in which businesses are grouped and provide suitable examples; 5) Draw an industrial column for a product to illustrate the route it follows; from the raw material stage, to delivery, to the customer; 6) Describe the micro environment of the business; 7) Explain the market environment and the variables which influence the business’s growth and existence; 8) Identify the macro environment and all the forces and influences which affect the business. Motivation for setting up a business  Relationship between the business and its establishment What is business? Business is any human activity directed towards producing or acquiring wealth through buying or selling goods. It is therefore an activity that adds value to the economy. Business characteristics would include the following; Investment. Profit generation Enhancement to the society Provide good and services Establishment is where the business is taking place, warehouse, retail, online etc. Production Branch/ types of industries  Branch of industry and production branch A production branch can be defined as all the enterprises that use more or less the same production processes or perform the same activities A branch of industry on the other hand refers to all the enterprises that produce or sell more or less the same products or provide the same services. Business sectors  Business Sectors There are three business sectors or business levels; the primary, secondary and tertiary. The primary sector deals more sourcing of raw material which include farming, fishing, mining. Majority of process in this sector do not require too high skilled labour or professionals. This sector services the secondary sector which add value to products produced on primary sector.  Business Sectors Secondary/Manufacturing sector focuses more on value addition. Raw materials are turned into product. E.g. wood to table, raw diamond to a jewelry. Contributes a lot to the economy than primary sector Tertiary/Service sector deals more with provision of services to the market. It is characterized by high skilled labour and professionals Advancements in technology have augmented this sector and in developed countries it is the largest source of revenue.  Micro environment The micro environment consists of factors in the company’s immediate environment”. These factors affect the performance of a company and its ability to serve the customers. Micro environment consists of customers, suppliers, competitors, public and market intermediaries. There are three variables of the micro environment; The vision, mission and objectives of the business Its management Its resources Market or Task Environment Market Environment The market consists of people who have needs to be met and have the financial power to purchase goods or services. It is also consisted of the following; suppliers, intermediaries and competitors. Management plays a crucial in the market as it has to have full understanding of the consumer needs, their purchasing power and buying behaviour. Management therefore ought to understand the variable of the macroenvironment affecting the market. E.g. demographics, socio cultural factors etc. Macro environment The macro environment consists of the economic and non- economic variables that provide opportunities and threats to firms. This is largely uncontrollable and, therefore, firms adjust their operations to these environmental factors. PESTEL Macroenvironment variables have an effect on the market environment and on management decision making. Tools for analysing the internal and external business environment SWOT PESTEL Porter’s five forces Bow-tie diagram SWOT Analysis SWOT Analysis Is a scan of both the internal and external environment and a vital part of strategic planning process. It provides information which is relevant and important in matching the firm’s resources and capabilities to the competitive environment it operates on. The internal factors would be classified as strengths and weaknesses while the external factors would be opportunities and threats. Strengths These are the firm’s resources and capabilities that can be used to create competitive advantage. Such as; Patents Strong brand names Good reputation Cost advantage Exclusive access to high grade natural resources Favourable access to distribution channels 7/29/2 46 024 Weaknesses Could be considered as the absence of certain strengths in a firm such as; Lack of patent protection Weak brand name Poor reputation High cost structure Lack of access to the best natural resources Lack of access to key distribution channels Inexperienced human resources 7/29/2 47 024 Opportunities These are new opportunities that will be surfaced by the external analysis such as; An unfilled customer need Arrival of new technology Loosening of regulations Removal of international trade barriers Availability of funding 7/29/2 48 024 Threats Changes in external environment may present threats to the firm such as; Shifts in customer tastes Emergence of substitute products New Regulations Increased trade barriers Economy meltdown Natural disasters and epidemics 7/29/2 49 024 PESTEL Analysis Political These factors will include the type government, the stability of a country in terms of politics e.g. democratic, less corrupt. Other forces would include competition policy, industry regulations, government spending, tax policies, business policies and incentives The state, local, and foreign governments are major regulators, deregulators, subsidizers, employers, and customers of organizations. 50 PESTEL Economic Economic factors are external factors that have a direct effects on the potential attractiveness of various strategies. These factors include, inflation, tax rates, availability of credit, interest rates, exchange rates and consumer spending and income PESTEL Socio-cultural These will include culture, demographics and other aspects such as perceptions, lifestyle, consumer tastes and consumer tastes Changes in cultures, changes in consumer buying behavior, changes in gender and marital statuses, immigration and emigration rates, life expectancy rates as well as pollution control.  PESTEL Technological Forces Revolutionary technological changes and discoveries are having a dramatic impact on organizations. Technology is a crucial factor for business environment because change in technology can add value to the consumer. Technological forces would include access to internet, technological skills and knowledge, adoption of mobile technology, new production processes, big data and dynamic pricing. PESTEL Environmental These factors include regulations which seek to protect the environment Sustainability and carbon emissions PESTEL Legal Factors Another important factor which deal with the policies, regulations, agreements that a business needs to pay attention to. Legal Variables includes: Government regulations, changes in tax laws, special tariffs, number of patents changes in patent laws, employment law, minimum wage, Health and Safety laws, environmental legislation Porter’s Five Forces  Bargaining Power of buyers The bargaining power of consumers intensifies the level of competitiveness in the industry. To gain customer loyalty firms may offer warranties or special services. It is concentrated or purchases large volumes relative to seller sales. The products it purchases from the industry represent a significant fraction of the buyer’s cost or purchases. The products it purchases from the industry are standard or undifferentiating. It faces few switching costs. 7/29/2 57 024  Bargaining power of suppliers The intensity of competition is high in an industry which is dominated by a few suppliers, few substitute raw materials, or when the cost of switching raw materials is high. It is dominated by a few companies and is more concentrated than the industry it sells to. It is not obliged to contend with other substitute products for sales to the industry. The industry is not an important customer of the supplier group. The supplier’s product is an important input to the buyer’s business. The supplier group’s products are differentiated or it has built up switching cost. 7/29/2 58 024  Threat of substitute products The presence of substitute products puts a ceiling on the price that can be charged before consumers will switch to the substitute product. Are subject to trends improving their price- performance trade off with the industry’s product Are produced by industries earning high profits 7/29/2 59 024  Threat of new entrants If firms can enter an industry easily, the intensity of competitiveness among firms increases. Barriers to entry may include large capital requirements, undesirable location and strong brand preferences. Strategists should therefore identify potential new firms entering the market and monitor their strategies and come up with the appropriate retaliatory response 7/29/2 60 024  Rivalry among existing firms Changes in strategy pursued by one firm can be met with countermoves which include enhancing quality, lowering prices, increasing advertising and adding new product features In instances where rivalry among competing companies intensifies, industry profits decline and firms will embark on huge marketing efforts to stay afloat Numerous or equal/ balanced competitors Slow industry growth High fixed or storage costs Lack of differentiation or switching cost Diverse competitors High strategic stakes 7/29/2 61 024 Rivalry between existing firms Bow-tie Analysis  Bow-Tie Analysis Bow tie analysis (BTA) is a barrier-based risk management tool. It uses diagrams to communicate several factors which has the capacity to negatively affect the business leading to undesirable outcome.). The use of visual communication alerts a bigger audience of hazardous scenarios.  Tutorial Activity 1 Choose from the following list and do both external and internal analysis using all the tools discussed in class. Commercial bank in Botswana Insurance company in Botswana 5* Hotel built by the seaside in Thailand Weapon manufacturing company (location of your choice) Activity 2 Classify the business into the industry it falls under and the business sector.  Business environment By the end of this topic learners should be able to: 1) Identify the stages of setting up a business; 2) Define creativity; 3) Determine your own level of creativity; 4) Improve the creativity of a team by using various creativity techniques; 5) Creatively generate business ideas using structures methods/techniques; 6) Distinguish between non-feasible and feasible ideas; 7) Develop and refine a business idea. Setting up a business  Setting up a business The process of setting up a business can be summed up into three stages namely; 1. Develop a Business Plan 2. Acquire Finances 3. Meet Legal Requirements (Ownership, registration, intellectual property rights) Reading homework Read about CIPA, their mandate, the process of registering and operating a business in Botswana and IP rights. Creativity Class Activity Using the items below (a metal hanger and a plastic bottle of coke) write a list of things you can use or create using each item. The team with the longest list would be winners of this challenge To take a free creativity test click the link below http://www.testmycreativity.com/  Creativity Organizations are increasingly search for ways to improve creativity and efficiency in terms of the performance of employees and the organization as a whole in order to gain and maintain a competitive advantage. Creativity can be defined as the interaction among aptitude, process, and environment by which an individual or group produces a perceptible product that is both novel and useful as defined within a social context. Organizational creativity is considered as a function of the creative outputs of its constituents and contextual effects such as organizational culture, rewards, resources. A creative organization is characterized as any business entity whose main source of income comes from the production of novel and appropriate ideas, processes, products or services to tackle clients’ problems or opportunities identified.  Creativity At individual level it can be associated with being artistic and the ability to produce new ideas and solve problems. At a societal level it can be associated with new inventions, new social programs and scientific findings. The late Steve Jobs describes creativity as the ability to connect experiences and synthesise them to new things. Being creative does not necessarily mean the product will be a radically invention it can be a simple idea of changing the way things are done or by simply improving the benefits of a certain product. Having the experience of using a certain product nurtures the creative thinking of how that product can be improved.  Creativity “Creativity is a great motivator because it makes people interested in what they are doing. Creativity gives hope that there can be a worthwhile idea. Creativity gives the possibility of some sort of achievement to everyone. Creativity makes life more fun and more interesting.” De Bono. It is through creativity that a competitive strategy is made, and it is through creativity that a firm becomes innovative. Creativity is vital at all stages of a product. The process of creativity 1. Information: this is gathering of information, thus using observation and perception to identify problem and trying to find ways of solving them. 2. Incubation: generating ideas to solve an identifies problem, this would involve a lot of convergent thinking. 3. Illumination: Generation of solutions using the ideas which were generated in stage two, here divergent thinking is used. The process of creativity 4. Verification: All ideas and solution are evaluated in terms of how realistic and novel they are, which resources would be needed to attain them. 5. Communication: Here experts are consulted to give their opinion or assess the idea. Experts will give feedback to enable the entrepreneur to refine the idea. 6. Validation: this is more like pilot testing or market testing of the idea. It involves societal evaluation. Creativity and thinking  Convergent thinking It can be referred to as reasoning or rational thinking. It is considered to be rigid, methodical or stereotyped It uses facts It has a single correct answer In terms of problem solving, it tends to follow a repetitive pattern or by using a known method. It is measured by intelligence tests such as numerical reasoning and financial reasoning.  Divergent thinking Also known as creative, imaginative or original thinking. It yields several responses and options There is no single answer to a problem, various methods can be used. It is trait for creative people. It is measured by creativity tests, thus novelty of ideas, originality and flexibility. Creativity techniques  Creative techniques SCAMPER Random input: development of words, pictures or images using random methods. Problem reversal: seeing a problem in the reverse form, analysing what everybody else is not doing Association technique: linking or associating unrelated concepts. Discontinuity principle: breaking away from the norm, doing thing differently.  SCAMPER Substitute: find part of your concept, product or process that you can replace for enhanced results. Combine: How can you combine different ideas, e.g. Apple when they disrupted the market. Adapt: Being aware of external factors and adapting to them. Modify: what can be done to improve the value of the product? Put to other use: Ways of using the product than the initial intended use or current use. Eliminate: Getting rid of waste processes. Reverse: Might lead to more ideas when you re-arrange/reverse the current product/service. Random Input  Problem reversal Problem reversal is a good and easy process for improving products and services. It is used by asking the exact opposite of the question intended to be asked and use the result appropriately. How do we make sure that fewer people take the car to their work?’. Swapping the key words, you could rephrase this challenge as ‘How do we make sure that fewer cars take people to their work?’ Association technique Read the story of all sorts/ liquorice sweets Discontinuity  Idea generation It is the starting point of all enterprises. Ideas can be generated from brainstorming, coming up with better ways of doing things, finding ways of converting hobbies into entrepreneurial activities, recycling and reusing of products, adopting new technologies etc. Creativity plays a critical role in idea generation, thus entrepreneurs ought to be creative to come up new ideas which could be transformed into business opportunities. In terms of intrapreneurship organisations normally allows employees to have brainstorming sessions as well as allow them to communicate their ideas.  Idea generation Research is also another form of generating new ideas, thus it allows an aspiring entrepreneur to understand the market needs, the supply and demand for a particular product or service. Scientist come up with new ideas as a result of constant research. The availability of resources is also a source of idea generation, for example if there is availability of reed people living in that particular area might come up with ideas of basket weaving.  Selection of an idea After idea generation the best idea that can be profitable is selected. The following are considered in idea selection; Compatibility: is the idea compatible with the interests and skills of the entrepreneur? Resources: What resources are need to explore that particular idea, is it easy to acquire all those resources? Costs: Is it something that is affordable? External environmental factors: Consider cultural aspects, political factors, demographics etc Regulations: Are there policies in place creating a conducive environment for that particular idea to be explored? These will include trade policies, export policies, exchange rates etc. Opportunity recognition  Feasibility analysis A crucial step in the process of business set up. It is about how realistic, how viable and how possible it is to implement the idea. The entrepreneur ought to be aware of the external environment. It is all about establishing whether the idea/ opportunity is worth pursuing or not.  Industry/ Market Feasibility Analysis Industry/ market feasibility analysis is an assessment of the overall appeal of the market for the product or service being proposed. For feasibility analysis, there are three primary issues that a proposed business should consider: 1. Industry attractiveness; 2. Market timeliness; 3. Identification of a niche market.  Industry Attractiveness An industry that is growing is more attractive because it is more receptive to new entrants and new product introductions. In general, the most attractive industries are characterised as the following: Being large and growing (growth more important than size). Sell products/ services that customers must have. Being fairly young and early in PLC (product life cycle) as price competition is not so intense. Not being crowded.  Market Timeliness The factors to consider vary, depending on whether a prospective business is planning to introduce a breakthrough new product or service or one that is an improvement on those currently available. For a new business that are developing potentially breakthrough product or service, the issue is whether to try to capture a first-mover advantage is vitally important. Market Timeliness If the product or service is an improvement on those already available in the marketplace the following must be considered: 1. Is the window of opportunity for the product or service open or closed. 2. Study the economics of the marketplace to determine the current dynamics of the industry and if the timing for a new business is good.  Identifying a Niche Market A niche market is a place within a larger market segment that represents a narrower group of customers with similar interests. Most successful entrepreneurial firms do not start by selling to broad markets. The challenge in identifying an attractive niche market is that it must be large enough to support a proposed business yet small enough to avoid initial direct head-to- head competition with industry leaders. If a clearly defined niche cannot be identified, it is difficult to envision the industry/ market feasibility of a new venture. Dr Benefits of doing a feasibility study  Feasibility sample checklist Parameter Analysis result Core competencies Competition intensity Cost SWOT Market size Human resources and other resources  Tutorial Activity 1 Watch the two videos What did you learn from the videos?  Tutorial Activity 2 Applying your creativity and using the approach of your choice generate ideas that you believe have the potential to be successful. Select the best idea to implement. Justify your choice. Activity 3 Do a feasibility study for your business. Use the checklist provided to do your study. What is the final deduction from your study? If its feasible, is it sustainable? Justify. The viability of a business idea 1) Understand what a viable business idea entails. 2) Determine whether a need exists for a product or a service. 3) Compile customer profiles. 4) Define the mission and objectives for a business. 5) Understand the term ‘expected market share’. 6) Distinguish between different market segmentations. 7) Determine the break-even point for the business. 8) Determine whether a sustainable profit can be made. Characteristics of a viable business idea/business opportunity The idea should result in a product or service that creates value for the customer. The product or service should be attractive in such a way that the customer would like to buy it. The product should be well timed and the target market should be big. The window opportunity should be open and should remain open for some time to allow the business to establish itself. Potential profit growth Should be able to create a competitive advantage  Customer needs Direct Need Latent Need (requires probing to find) Constant Need Variable Need General Need Niche Need  Customer Profiling A customer profile can be defined as a collection of information about a customer. This information will include demographic data, attitudes, preferences, and other behavioural characteristics.  Market share Market share is the size or the portion that a particular firm possesses within a larger market. Market share and profitability are closely related. Business with a larger market share have a higher ROI. Market share of a particular business can change as they will respond to external factors. Market share  Market segmentation This is whereby the market is broken down into groups displaying common characteristics, behaviours and attitudes. Segments could be in terms of demographics segments, geographic segments, income segments and behavioural segments. The aim of market segmentation is to understand the need and forecast reaction and demand. Market segmentation Business objectives Objectives of organisations Objectives of organisations: Profit maximisation Sales maximisation Revenue maximisation Growth Survival Market penetration  Profit maximisation The objective of for-profit organisation is to maximise profit. Profit is total revenue less the cost of the resources used in the business. [Total revenue is the price of goods and services , multiplied by the quantity sold (PQ) Profit =PQ- cost of labour, land etc.] Sell more by lowering prices and by having special promotions Reduce sales price Offer new products or services Increase sales price Sales maximisation  Revenue maximisation Revenue maximisation is a theoretical objective of a firm which attempts to sell at a price which achieves the greatest sales revenue. This would occur at the point where the extra revenue from selling the last marginal unit (i.e. the marginal revenue, MR, equals zero). If marginal revenue is positive, an extra unit sold must add to total revenue and revenue maximisation will not have been reached. Only when marginal revenue is zero will total revenue have been maximised. Growth  Growth Growth is crucial to the long-term survival of a business. It makes it easier to acquire assets, attract new talent and fund investments. It also drives business performance and profit. Why is growth in business important? Growth can be good for business for many different reasons. For example, it may allow you to: take advantage of new opportunities expand your products or services attract more customers increase sales employ more staff Survival Market penetration  Cost accounting For a business to achieve its objective of profitability and to ease the process of budgeting they need to understand how much it costs to produce a single unit. Cost accounting also assists in determining the price of a product.  Manufacturing costs Manufacturing costs are expenses incurred to transform raw material into finished goods. There are three types of manufacturing costs namely: direct materials, direct labour and overhead cost. Direct materials: cost of all raw materials/ components that are used to produce a particular product. Direct labour: the amount paid to an employee to produce a particular product. Overhead: manufacturing expenses which cannot be traced to a single unit.  Types of Venture Costs Direct Indirect Variable Fixed Stepped Semi-variable 7/29/2 119 024  Direct Costs Include both material used to produce a produce and labour needed. They will also include the other cost such as the distribution of product. Costs that can be identified specifically with a particular sponsored project, or venture activity. 7/29/2 120 024 Direct Costs Salaries, wages, and fringe benefits of employees engineers, and other scientific professionals. Materials and supplies such as chemicals, glassware, compressed gases and liquids, and research supplies Other direct costs such as travel, consulting services, equipment, toll charges, express mail, subject costs, animal care, and subcontracts 7/29/2 121 024 Indirect Costs Indirect costs are “those [costs] that are incurred for common or joint objectives and therefore cannot be identified readily and specifically with a particular sponsored project, or activity. 7/29/2 122 024  Indirect Costs Services of the accounting staff Salaries of personnel engaged in a broad range of departmental support activities Cost of utilities for a building housing multiple research projects and other functions Office supplies, postage, local telephone and, communications infrastructure Depreciation on building and improvement and equipment Cost of Interest Cost of Library 7/29/2 123 024  Fixed Costs Fixed Costs : Cost that remains constant as activity level changes E.g. rent of a factory , Factory Lighting Electricity 7/29/2 124 024 Fixed Costs 7/29/2 125 024 Variable costs It is a cost that increases/decreases directly in line with any change in activity level. 7/29/2 126 024 Variable Costs 7/29/2 127 024  Stepped Costs Cost which is fixed over a relatively short range of activity and then increases in steps e.g. 1 Supervisor is required for 20 employees, then 3 supervisors are needed for 60 employees. 7/29/2 128 024 Semi-variable costs Costs which have a fixed element and also a variable element for example: i. Telephone bills ii. Water bills TC= FC + ( VC x Units) 7/29/2 129 024 Break-even point  Breakeven point Total cost = Total Revenue. It is the point where the business in neither making profit nor a loss. Break-even analysis allows the entrepreneur to compare alternative cost and revenue estimates in order to determine the acceptability of each price. Breakeven Point Formula: BE(Q) = TFC SP-VC/cabbage units BE(Q) = 10000 = 5000 cabbage units 5-3 BE(S) = 5000 cabbages x 5 = 25 000 7/29/2 132 024 Breakeven point It costs Laura P12000 to produce 500 cell phones. Her variable cost per unit is P3. Calculate her breakeven point. Breakeven Analysis (Graphical) 7/29/2 134 024  Cash budget It is used as a planning tool by business in being proactive in their financials. It is a forecast of expenses, payments, revenue etc. It is prepared on a shorter timeframe as compared to other financial statements. It enables organisations to identify loophole in their debt collection system. It can be used as a preventive measure of a financial crisis. Cash budget  Tutorial Activity 1 Using the Lisa Cleaning Services case study, identify different types of costs. Calculate her breakeven point for month 5 and 6. Activity 2 You own a hotel in the Okavango delta, create a customer profile for your hotel. During covid-19 pandemic how are you going to achieve the objectives of profitability and survival?  Tutorial Activity 3 Classify the following according to their type of customer need. Body tattoo, smart watch, household robot vacuum cleaner, clothing, food supplements, antiaging moisturizer, household water filter, Activity 4 In your opinion, based on 2019,2020 and 2021, how have the pandemic affected the insurance companies. Do you think their budget for 2021 left a surplus or a deficit? Why? What would they take into consideration when drawing the budget for 2022?  The Business Plan Objectives: 1) Understand the purpose of a business plan. 2) Identify and describe the potential users of a business plan. 3) Explain the character of a business plan. 4) Understand the preparation phase in writing a business plan. 5) Comprehend the different structures of a business plan. 6) Draft a basic business plan  Planning A business plan is an important tool for managing and growing your business. A well-designed plan lays out a vision of growth and the steps needed to get there. A plan is also an essential communications tool for attracting financing as well as managers and staff as your business grows. Users of a business plan Internal External Entrepreneur Potential customers Management team Lenders Employees Suppliers Investors  Business Plan Dehydrated plan: A short version of a business plan which highlights only the most important issues and projections for the business. Comprehensive plan: a full detailed business plan.  Components and format of a business Plan Cover page Table of contents Executive summary Introduction Management plan Marketing plan Production/Operations plan Financial plan Appendices Cover page It will contain the following; Company name, address, contact details and website. Tagline and company logo Name and contact person Date on which the plan was prepared Disclaimer Number of copy  Executive summary A description of the opportunity An explanation of the business concept An industry overview The target market The competitive advantage The economics of the opportunity The management team The amount and purpose of the money being requested (Answer all the WH questions)  Company Description When and where is the business to be started? What is the history of the company? What are the firms objectives? What changes have been made in the structure of the company? What is the primary product or service? What customers will be served? What are the current and projected economic status of the industry?  Making an effective written presentation Insist on confidentiality Use good grammar Limit the presentation to a reasonable length Go for an attractive , professional appearance Provide solid evidence for any claims Describe the product in lay terms Emphasise the qualifications of the management team Analyse the market 7/29/2024 ORGANISATIONAL/ MANAGEMENT PLAN 148  The Organisation/ Management Plan 1. Form of Business (Sole ,Partnership ,Company) 2. Ownership 3. Vision Statement 4. Mission Statement 5. Objectives 6. Organisation Structure 7. Management team 7/29/2 149 024  Types of ownership Entrepreneur should decide on the ownership structure Ownership will determine the form of Business Ownership i) Sole Proprietorship- Individual ii) Partnership iii) Company/Corporation 7/29/2 150 024  Sole Proprietorship Is when the business is owned by one person. In a small business, the owner will also be the decision maker. Sole proprietorship is the simplest form of ownership and the easiest to start. All the profits become the property of the owner. The owner is responsible for all debts. Sole proprietorships are common in boutiques, agriculture, retail 7/29/2 151 024  Advantages and disadvantages Advantages Ease of start-up and closure because most of the time start-ups do not require contracts, agreements and other legal issues. Ease of making decisions Disadvantages The proprietor personally held liable for all the debt associated to the business. 7/29/2 152 024  Partnership There are two types of partnership being; limited partnership and unlimited partnership. Limited partnership A limited partner is a business partner who invests in the business but is not involved in the management of the business. The profits are shared between limited partner and the general partner/s. There could be more than one general manager in the co-ownership of business. 7/29/2 153 024 Partnership Unlimited liability Partnership It is also referred to as general partnership, thus all the partners are involved in the management of the business and they share the profits as well as share the liability of debts. 7/29/2 154 024  Advantages of partnerships Ease of start-up Availability of capital and credit Personal interest Combined skills and business knowledge Retention of profits No special taxes 7/29/2 155 024 Disadvantages of partnerships Unlimited liability Management disagreements Lack of continuity 7/29/2 156 024  Rights and duties of partners Partnership agreement is a document that states explicitly the rights and duties of a partner Oral partnership agreement is legal and binding. In partnership each party has agency power, which means that a decision by one partner binds all of the firm even if some of the partners were not consulted. Agency power: is the ability of any one partner to legally bind the other partners.  Termination of partnership Death, incapacity or withdrawal of a partner ends a partnership and requires liquidation or reorganisation of the business. Liquidation often results in substantial losses to all partners. Following the death of partner the business can continue running provided the remaining partners pay the descendants’ interest. Mission and Vision statements Mission and vision are important management tools and cannot not be detached from strategy.  Mission Statement It is an explicit statement of values It explains why an organisation exist and communicates the type of business the organisation offers. A well crafted mission statement defines the key areas and purposes that differentiates the organisation from others. It is vital for the long-term goals and the success and survival of the organisation. It is also vital in developing and implementing strategic plan. Mission Statement Mission statement is the starting point for the creation and allocation of roles as well as the structure of the organisation, therefore the foundation of the organisation.  Effective Mission Statements They must assist all employees to live up to the values expressed in the statement. It should be helpful to address all areas of the organisation such as HR, Finance etc. An effective mission statement must be short, memorable, market focused and inspiring.  Effective Mission Statement Effective mission statement will ensure that; ❖ All employees are striving for the same goal ❖ All employees are abide by the principles of the organisation ❖ All employees adhere to the same set standard of the organisation ❖ All employees to contribute in building and protecting the reputation of the organisation  Characteristics of a Mission Statement Broad in scope, excluding percentages and ratios Length should be fewer than 150 words Inspirational Identifies the utility of the firm’s products Social responsibility of the firm should be highlighted Indicates that the firm is environmentally responsible Reconciliatory Enduring  Characteristics of a Mission Statement Includes the following 9 components Customers Markets Products/services Technology, Concern for survival/growth, Philosophy, Self concept, Concern for public image, Concern for employees Developing Mission statements 1. Identify the values of the organisation 2. Research- view mission statements for other organisations 3. Brainstorming 4. Consolidate ideas based on how they support the values 5. Submit to top management 6. Distribution of draft statements 7. Modification and feedback followed by the final statement. Organisations can develop statement through groups of managers or a consultant can be engaged to develop the statements  Vision statement Is an important aspect of the organisation as it describes what the organisation aspires to become. The vision focuses on answering the question ‘where’ that where do you want to see the organisation in the future.  Vision statement The vision statement should be established first and foremost which indicates what an organization aspires to achieve in the long term. Vision statements indicate what an organization would want to achieve in future. The purpose is to gain commitment from employees. A vision statement should normally be phrased in one sentence and various managers should have an input when developing the statement. Vision statements should not be too broad, long and ambiguous but rather short and precise.  Effective Vision Statements It will portray a picture of a highly desirable future of the organisation Gives more emphasis on the real impact the organisation wishes to have on its customers. It brings customers, employees, management and investors together The Process of developing vision and mission statements The majority of managers should be involved in formulation of vision and mission statements in order to gain commitment to the firm’s implementation and evaluation of strategies. Some organizations make use of focus groups while others engage consultants in the development of vision and mission statements. The Process of developing vision and mission statements Research confirms that there is a positive relationship between mission statements and measures of financial performance. In summary, vision and mission statements provide the following benefits to the firm: a) Provide direction b) Achieve clarity of purpose for everyone in the firm  The Process of developing vision and mission statements c) Provision for a basis for all other strategic planning activities which include the establishment of objects, development of strategies and organizational structures. d) Provision for a focal point for all the stakeholders of the firm e) Resolution of managers’ divergent opinions f) Promotion of shared expectations amongst everyone in the firm Business Vision and Mission cont’ g) Projectionof a sense of intent to all stakeholders h) Project an organized, motivated organization worthy of support i) Achieve higher organizational performance j) Achieve synergy between managers and employees.  Business Vision and Mission cont’ The components of a mission statement a) Customers b) Products or services c) Markets: Where does the firm compete? d) Technology e) Survival and growth f) Philosophy: Basic beliefs, values, aspirations g) Self concept: Firm’s major competitive advantage, eg experienced staff. h) Public image: Social responsibility to the community; environmental concerns i) Employees: Are they valued by the firm? Business Vision and Mission cont’ Evaluation and Writing Mission Statements Group Exercise and Presentation: Using a hypothetical example, craft a company’s mission statement of your choice based on the knowledge you have acquired on mission statements.  Business Vision and Mission cont’ Evaluation of mission statements requires good personal judgment since there is no one best mission statement for a particular firm. The statement should motivate all stakeholders to action.  Organisational Structure The main purpose of organisational structure is to minimise the external and internal uncertainties. It defines the internal organisation in terms of levels of decision making as well as activities such as coordination, supervision and task allocation. Organisations have different structures depending on the objectives of the organisation. 7/29/2 177 024 Types of organisational structures 1. The Functional Structure: This is the most widely used structure which is based on grouping similar tasks and activities by business functions such as sales, marketing, finance, human resources and production. Advantages include: simple and inexpensive; there is specialization; minimizes the need for elaborate control systems as well as quick decision making. Disadvantages include: Accountability is forced at the top; it minimizes career development; low employee and manager morale; leads to short term, narrow thinking and the delegation of authority and responsibility is not encouraged. 7/29/2 178 024 Types of organisational structures 2. The Divisional Structure/ product structure The divisional structure/decentralized structure can be organized in four ways namely: by geographic area, by product or service, by customer or by process. Advantages Accountability is clear Creates career development chances Promotes delegation of authority Leads to internally competitive climate Allows strict control and attention to products and customers. 7/29/2 179 024  Types of organisational structures Disadvantages Duplication of functional activities Can be costly Requires skilled management force There can be internal competition among divisions which can be dysfunctional Can lead to limited sharing of resources and ideas. 7/29/2 180 024 Types of organisational structures The Matrix Structure A matrix structure is a complex structure where there is dual reporting, it depends on both horizontal and vertical flows of authority. It is normally used in construction, healthcare and research. Advantages Clear project objectives Easy to shut down a project Facilitates use of special personnel Shared functional resources 7/29/2 181 024  Types of organisational structures Disadvantages It is costly Violates unity of command principle Creates dual lines of budget authority Requires excellent vertical and horizontal communication Creates shared authority and reporting Creates dual sources of rewards and punishment. 7/29/2 182 024 Organisational structures 7/29/2 183 024 Management Team Provide brief resume of Team (include yourself): 1.Person/Job Specification Mention Names , Experience , Qualifications and other competences of your management team Age 7/29/2 184 024  Management Team Provide Responsibilities/Duties i. CEO/GM/MD ii. Operations/Production Supervisor iii. Sales/Marketing Supervisor iv. Accounts/Finance Supervisor 7/29/2 185 024  TOP MGNT Duties 1. Formulates the Strategic direction of the venture. 2. Defines the purpose of the organisation and to establish realistic goals and objectives 2. Coordinate the formulation and implementation of goals and objectives to the organization’s stakeholders. 3. Ensures the most effective use of organization’s resources by focusing the resources on the key priorities. 4. Provides a base from which progress can be measured and establish a mechanism for change when needed. 5. Bring together of everyone’s best and most reasoned efforts. 7/29/2 186 024 Marketing Plan Objectives Learners should be able to: Demonstrate understanding of doing internal and external analysis. (PESTEL, SWOT, Porter’s five forces) Write-up a competitor profile Do a market research Write a marketing plan (pricing, target market, positioning, segmentation) Demonstrate understanding of marketing mix 7/29/2 187 024 The Business and its Environment This an explicit understanding of the business, what it required and understanding the industry and market in general. Business is about competition therefore a firm has to be aware what it posses in terms of resources to pursue a particular opportunity.  INDUSTRY & COMPETITVE ANALYSIS Competition and competitiveness are terms that are commonly used in business. The terms are linked to the strive of an organisation to be successful in gaining market share. Competition and competitiveness are common terms because business is about competition and winning customers. These two terms are part of strategic management because for a business to be competitive it must have a strategy to gain that competitiveness. In business competition can be viewed as a rivalry between organisations 7/29/2 189 024  Competition Objectives of competition: Underlying variable of competition (Price, Quality, Quantity etc) Aimed level of achievement Competitive process 7/29/2 190 024  Competitiveness Competitiveness can be defined as the ability to provide products or services that are more efficient and effective, and provide more value than those of rivalry organisations. It can also be defined as the firms ability to be more successful and profitable than rivalry or competing firms. Due to globalisation and internationalisation of organisations competitiveness has now become a pivotal phenomenon in shielding local firms from the threats posed by international firms. 7/29/2 191 024  Industry Analysis Industry analysis can be defined as an instrument which enables an organisation to understand its position in the markets in comparison to other organisations providing similar products and services. It can also be viewed as knowledge of the forces surrounding an industry which is important in crafting a business strategy or strategy planning. Industry analysis is considered to be a complex concept which is time consuming but needs to be thoroughly done in order to yield best information that will be used for competitive strategy. 7/29/2 192 024  Industry analysis tools There are various categories for analysis; External business environment Strategy Analysis- Internal capabilities Strategy definition Strategy Implementation Performance measurement 7/29/2 193 024 External business environment External Business Audit The purpose of the external audit is to finalise on the opportunities that could be exploited by an organisation as well as threats that the organisation ought to be aware of. The main aim of the external audit is to identify key factors that the organisation must react to in order to be successful. Key external factors include, economic, political, environmental, technological, competitive forces, global etc. The process of external audit involve both the management and employees. 7/29/2 194 024  Importance of External audits Allows organisations to come up with ways of adapting to change before it hinders the business Allows organisation to craft a strategy to exploit available untapped opportunities It allows organisation to create a cushion so that they can mitigate the impacts of possible threats. 7/29/2 195 024  Importance of External audits Changes within the internal and external environment of the firm necessitate the need for adjusting the vision, objectives, implementation and evaluation of strategies. As such, strategic management is not an event but an ongoing process which does not end, hence managers need to continuously scan both the internal and external environment and create appropriate strategic response. 7/29/2 196 024 Tools used for external audit Refer to tools in topic 2 7/29/2 197 024  Tutorial Activity 1 Critically analyse the following mission statements. To advance knowledge and skills in business education through teaching and learning, research and community engagement to meet the needs of the economy. We provide the lowest cost and fastest banking financial and life events services for all businesses and individuals from cradle to grave of all income groups in Botswana and beyond. We provide our services and products through a team of high performing staff and strategic partners and state of the art technology which enables a proactive service to our clients while create wealth for our stakeholders which will l lead to more wealth and jobs for Botswana and its citizens.  Tutorial Activity 3 Do an organogram for your business idea, explain the roles of all employees and their skills and qualification. Do an industry/competitor analysis for your business. Marketing Research Is the process or processes which connects the firm to its prospective customer, current customers. It allows the firm to get insights into what are the expectations of the customers, the market trends, industry trends etc. It is systematic and objective in doing the following; Identification Collection Analysis Dissemination Use of information 7/29/2 200 024  Marketing Research Marketing research therefore plays a role in the betterment of decision making as well as identifying and solving problems. Market research can be classified into two categories; Problem identification research Problem solving research 7/29/2 201 024 Problem identification research This type of research is helpful in bringing to surface the problems that might exist but are not yet known. The problems might be the once that are going to surface in the future. It is done to identify potential threats and opportunities. This research will include market potential, brand image, forecasting, market share etc. 7/29/2 202 024  Problem solving research This marketing research seeks to bring solutions to the existing problems as well as forecasted problems in the market. This research will solve specific problems in; Market segmentation, Product and product positioning Pricing Promotion Distribution channel 7/29/2 203 024 Types of marketing research Qualitative The collection of non numerical data, this includes focus groups, interviews, observation, digital and mobile ethnography. Qualitative Data collected would in numerical form such as surveys, using statistical information, etc 7/29/2 204 024  Marketing research process Define the Objective & Your Problem Determine Your “Research Design” Design & Prepare Your “Research Instrument” Collect data Data analysis Findings, Conclusions and Recommendations 7/29/2 205 024  Marketing research stages Step 1 : Identify the information needed (overview of the company, product benefits, unique selling point, pricing) Step 2: Searching for secondary data Step 3: Collecting primary data (use of observation and questioning methods) Step 4: Interpreting the data gathered 7/29/2 206 024  Marketing Research There are instances where a firm might not be able to conduct market research such as; Limited resources When the window of opportunity has closed When a decision to pursue the opportunity has been made When the needed information is already available  Marketing strategy It can be characterised by; Analysing the business environment and defining specific customer needs Matching activities or products to customer segments Implementing programmes that achieve a competitive position Marketing strategy addresses three elements; Customers, competitors, internal corporate issues. Marketing strategy addresses the following; Market segmentation, market target, positioning, perceptual 7/29/2 208 024 Marketing strategy principles Undifferentiated: Mass marketing targeting all segments with same products Differentiation: Target at least two segments Concentration : Targets one specific market segment 7/29/2 209 024  Market segmentation This is whereby the market is broken down into groups displaying common characteristics, behaviours and attitudes. Segments could be in terms of demographics segments, geographic segments, income segments and behavioural segments. The aim of market segmentation is to understand the need and forecast reaction and demand. 7/29/2 210 024  Market Segmentation Unsegmented marketing strategy: A strategy that defines the total market as a target market. Multisegmented strategy: A strategy that recognises different preferences of individual market segments and develops a unique marketing mix each. Single segmented strategy: A strategy that recognises the existence of several distinct market segments but focuses only on the most profitable segment.  Targeting Target market is a set of customers sharing common needs and wants hence a firm decides to target that particular group It involves evaluating and selecting market segments which surfaces a lot of opportunities to be explored and exploited sustainably. It seeks to build long term relationships with customers. 7/29/2 212 024  Product positioning After the selection of target market firms then decide how they are going to compete with other firms in that market segment. Marketing professional normally refer to position as value proposition Product positioning is determined by how customers view the product in relation competing products. The competitive position should be based on matching product attributes to customer need. 7/29/2 213 024  Product positioning Positioning strategies Offer more for less- good quality at low price Offer more for more- high prices luxury products with prestige value Offer more for the same- introducing new features and better performance for the same price. Offer less for much less- basic and low price 7/29/2 214 024 Marketing Mix 7/29/2 215 024  Product/Service What products/services a firm provides and what constitutes those products/services provided such as; Design, Technology, Usefulness, Convenience, Value, Quality, Packaging, Branding accessories and warranties. 7/29/2 216 024  Pricing How our services are priced, , is it per semester, per number of modules, per number of credits, by the type of course etc. Types of pricing strategies include the following; Cost-plus, consumer led, competitive, penetration, skimming, premium, and economy 7/29/2 217 024  Pricing strategies Based on the Cost of production and venture strategy:- 1.Price skimming strategy- Charging high prices ,usually at introduction 2. Market penetration strategy- Charging low prices to attract consumers 3.Market level strategy-You charge same prices as those of competitors. If you charge more than competitors , customers will not buy the product and if you charge low prices ,customers will be suspicious of the quality of your product ,hence they don’t buy your product.Prices are normally charged on generic products eg sugar ,maize meal ,tomatoes 4.Leader pricing strategy :Reduced selling prices compared to the cost (50% /20%dicount/sale) 5.Bait pricing strategy : Use some products to act as baits to customers eg lowly priced product at display but different inside. 7/29/2 218 024  Place Where will the product/service be sold, in the case of BAC, will it be through distance learning, online learning or from the classroom? In terms of the location of the campus, is it a good location? Is it accessible by target market? Types of place include; Wholesalers, own store, direct sales, online sales, mail order. 7/29/2 219 024 Distribution Strategy ( The PLACE) How the product reaches the final consumer: 1. Selective : making a product or group of products available only in certain markets 2. Exclusive: single retailer to offer the product within a particular market and retailer not o carry competing brands 3. Open/Intensive distribution : product line is distributed to as many markets as possible 4. Direct distribution : No intermediary 5. Internet Marketing: Advertising ,actual product etc 7/29/2 220 024  Promotion This is how the customer will find out about you, thus how you will communicate with customers to make them aware of your brand. Promotion include the following; Advertising, public relations, sponsorship, sales promotion, personal selling, direct mail, social media, digital content. 7/29/2 221 024  People These are the people who are involved in selling and supporting the service to the customer. These people will include; Advice and sales support, Customer service and Aftersales backup. 7/29/2 222 024 Process How the service gets to the customer How successful are the processes managed such as quality assurance and quality management. 7/29/2 223 024  Physical Evidence This is about evidence that proves that marketing was successful and that the product is out there for customers and serving its purpose. Physical evidence include machines, equipment layout, buildings layout, colour etc This include; Packaging, paperwork (invoices, tickets, dispatch notes), vehicle signage, internet/webpages, furnishings, brochures, uniforms, buildings (offices and headquarters) awards 7/29/2 224 024 Production/Operations Plan Learning Objectives Learners should be able to: Define a Production plan Demonstrate an appreciation of the value chain concept Explain the stages of production (Inbound, operations and Outbound logistics) elements Demonstrate how a production/operations plan is developed 7/29/2 226 024  Production/operations plan Is the foundation for managing business processes, thus scheduling of events, programs and responsibilities that entails the actions necessary to accomplish the goals and objectives of an organisation. It can be defined as any activity or group of activities that takes one or more inputs, transforms and modify or add value to them and thus producing outputs for customers. 7/29/2 227 024 Production Plan In manufacturing it will start with raw materials as inputs and process to transform those raw materials to products ready to be purchased by customers. Production/operations plan communicates the priorities of an organisation and create accountability 7/29/2 228 024  Benefits of production plan Important in determining the efficiency and profitability of service delivery, e.g choosing cheaper transformation processes Allows the company to assess its capacity to deliver promised services. Enables managers to efficiently direct flow of material as well as the utilisation of people and equipment and to respond to customer requirements. 7/29/2 229 024 Components of production plan 7/29/2 230 024  Components of production plan Input – Raw material, information, customers Process- changes of physical characteristics, changes in the location of raw materials, changes in ownership, changes in physiological or psychological state of customers Output- transaction, product, service 7/29/2 231 024  Supply chain It can be viewed a network of all individuals, organisations, resources, activities and technology involved in the creation and sale of a product, from the delivery source materials from the supplier to the manufacturer, through to its delivery to the end user. Any firm no matter what it sells whether goods or services will have suppliers at some stage 7/29/2 232 024  Supply chain Supply chains should be viewed as strategic assets. Successful companies view their supply chains as a strategic differentiator and therefore they keep refining their supply chains by constantly finding ways of adding more value to improve performance, by so doing their supply chain will stay ahead of their competitors. Woolworths is a very good example which values its supply chain and this has been there competitive strategy and had brought positive outcomes. 7/29/2 233 024  Supply chain analysis The term Supply Chain analysis is used to refer to the overall group of economic agents that contribute directly to the determination of a final product. Supply chain analysis can also be viewed as a process of evaluating each stage of a business that is delivering a product to customers. The analysis requires an evaluation of each step, from the time the business purchases the raw products until the final product reaches the customer. The purpose of the analysis is to determine which stages of the process can be shortened, refined, or made better, to shorten the time it takes to deliver the product to customers without compromising the quality of the product or the customer service level of the business. 7/29/2 234 024 The Value Chain Analysis 7/29/2 235 024  Inbound Logistics Raw Materials needed (Name(s) ,Quantity) Supplier of Raw Materials Main Supplier names ,addresses Alternative supplier Substitute Raw materials Cost of Raw Materials (Use Current market rates) Transport costs from supplier to your business 7/29/2 236 024  Inbound and outbound Logistics It is basically the classification of logistics into material management and physical distribution. It involves the procedures and modes of transport that will be used or followed It also include storage and movement of raw materials and finished goods Based on the inbound and outbound logistics organizations can be classified into four categories 7/29/2 237 024  Inbound and outbound Balanced System Heavy inbound Heavy outbound Reverse System 7/29/2 238 024  Inbound and outbound Balanced System This involves organisations receiving raw materials and other components from different suppliers with different geographical locations and then the org. will ship its finished products to various places. Heavy inbound It involves organisations which have heavy input but very simple output, for example aircraft manufacturing companies will use so many parts and components but the final product is one airplane. 7/29/2 239 024  Heavy outbound The outbound is more complex and heavy as opposed to the inbound, eg. Oil refinery plants or chemical companies Modes of transport will include, pipeline, rail, road Reverse logistics This involves companies which have the flow of outbound and inbound due to the products they produce, customer might return products when they have reached their life span , so the company can use the old parts or recycle to make other products. 7/29/2 240 024  Outbound Logistics Gavin’s 8 Dimensions of quality Performance-operating characteristics of a product/ service Features-extras to supplement the main characteristics Reliability- what may go wrong and how often Conformance-match specification and actual Durability –how long the product may last and how robust Serviceability- ease ,speed ,cost and friendliness of a service Aesthetics-appearance, style class and impression Perceived Quality- the feel ,finish and reputation 7/29/2 241 024  Waste Waste is a profitless or useless activity Venture owner should avoid waste Waiting time Inappropriate processes Unnecessary inventory Unnecessary movements Defective products Lateness at meetings ,work and absenteeism Unnecessary travel Red tape ,costly cultural practices Poor machine layout ,slowness. 242 7/29/2 024  Location plan This is where the business or manufacturing will be located. There various factors which determines the choice of a good location such as; Person preferences Environmental conditions Resource availability Customer accessibility Site availability and cost 7/29/2 243 024  Customer accessibility Cut shipping costs Busy streets 7/29/2 244 024 Personal preference Familiarity with the community Desired lifestyle Desire to improve a particular community 7/29/2 245 024 Resources availability Closeness to raw material Suitability of supply and labour Availability of adequate transportation 7/29/2 246 024 Site availability and cost Depending on affordability entrepreneurs has the following options for their businesses; Incubation Leasing Buying Neighbour mix Security and safety Services offered 7/29/2 247 024  Tutorial Activity 1 Do market segmentation for your product Which segment will be your target market? Justify. Do the 7Ps of marketing for your business. Activity 2 Discuss the process of producing your product, from raw material to final product. Do a supply chain analysis for your business. BUSINESS FINANCIAL PLAN  Financial Plan A financial plan is a detailed evaluation of a company's current income and future financial state by using current known variables to predict future income, asset values and withdrawal plans. It can also be viewed as a roadmap of how they company will source start-up funds and how it will generate income. It assists managers determine if they can achieve the organization's goals.  FINANCIAL PLAN It is the most important aspect of the business plan because it is the part investors or financiers are particularly interested in. An unclear financial plan may lead to failure to secure financial assistance. A financial plan validates the business plan by confirming that the objectives are achievable from a financial perspective  Sources of finance Personal savings/bootstrapping Family and friends Banks Government guaranteed loans Offices of economic development Finance companies Venture capitalists Angels Grants  Source(s) of Capital There are two basic types of funding available to businesses Debt and Equity are essentially the ways in which companies can raise capital (money). i. Debt Financing is when a company takes out a loan that generally has a defined time period and interest rate attached to the transaction. ii. Equity Financing: Equity financing is the method of raising capital by selling company stock/shares to investors. 7/29/2 253 024  Debt Financing A loan from: i. business, ii. bank, iii. friends, iv. family member and making a pledge to pay it back with interest. 7/29/2 254 024  Debt Financing: Advantages and Disadvantages Advantages: i. the lender has no control over your business, once you pay the loan back, your relationship with the financier ends. ii. the interest you pay is tax deductible. iii. it is easy to forecast expenses because loan payments do not fluctuate. Disadvantages i. Debt is a bet on your future ability to pay back the loan. ii. Debt is an expense, and you must pay expenses on a regular schedule. 7/29/2 255 024  Equity Financing Equity financing involves investors: i. Owner’s Savings ii. could offer shares of your company to family, friends and other small investors, iii. also involves venture capitalists or angel investors. 7/29/2 256 024  Venture Capitalists An investor who either provides capital to startup ventures or supports small companies that wish to expand but do not have access to public funding. An angel investor or angel (also known as a business angel or informal investor or angel funder) is an affluent individual who provides capital for a business start-up, usually in exchange for convertible debt or ownership equity 7/29/2 257 024  Advantages -Equity Investor takes all of the risk/returns. Entrepreneur has more cash available because there are no loan payments. investors take a long-term view and understand that growing a business takes time. 7/29/2 258 024  Disadvantages- Equity Disadvantages: In order to gain the funding, Entrepreneur has to give the investor a percentage of company. Entrepreneur to share profits and consult with new partners any time you make decisions affecting the company. NB:The only way to remove investors is to buy them out 7/29/2 259 024  Purpose of Financial Plans It shows: Solvency- ie assists in evaluating changes in net worth/ growth in your business account. Profitability –assists in monitoring earnings ability to generate income Liquidity – assists in estimating cash flow and debt repayment ability. paying the bills when due 7/29/2 260 024  Financial Plan Financial viability is generally evaluated from three perspectives: Solvency Profitability Liquidity 7/29/2 261 024  Solvency Compares the assets invested (what you own) in the business with the liabilities – what you owe and your net worth). It is the ability to keep the firm running by meeting its long-term obligations. Requires an up-to-date statement of financial position.  Profitability Measures the earnings of the business and expenses. Businesses require an income statement. Optionally use average net income for the projected years.  Liquidity Measures the ability of the business to generate cash to meet short term obligations. Requires a cash flow statement, usually projected for next year or more. 7/29/2 264 024  Financial plan The tools used to communicate a business’s financial situation are: Statement of financial position - solvency Income statement - profitability Cash flow plan – liquidity Statement of financial position/Balance Sheet A snapshot of how funds are invested in a business (assets) and the financing methods used (liabilities and owner’s equity) at a given point in time. The balance sheet, also called the statement of financial position, is the third general purpose financial statement prepared during the accounting cycle. 7/29/2 266 024  Statement of financial position/ Balance sheet Is a financial statement that summarizes venture assets, liabilities and shareholders' equity at a specific point in time and gives investors an idea of what the venture owns (Assets) and owes (Liabilities) and the amount invested by the owners(Equity)  Elements of a balance sheet Fixed Assets Current Assets Long term Liabilities Current liabilities Statement of Financial position/Balance sheet  Income statement An income statement measures how much income the business is making in relation to the resources used to produce that income. Income statement  Cash Flow Plan A cash flow plan is a projection of all sources and uses of cash during a specified planning period. It evaluates the business’s ability to meet loan payments and other financial obligations on time. 7/29/2 272 024  Cash flow statement Is one the financial statements that put more emphasis on the inflow and out flow of cash in an organisation. It can also be viewed as a report on how cash was generated and how it was used. Just like other financial statements it has a time frame.  Cash flow statement There are two types of cash flow being direct and indirect. Direct cash flow is simpler and shorter as opposed to Indirect and it suits small businesses. Indirect Cash flow is more complex and is made up of three categories. (Operating activities, Cash flow from Investing activities and Cash flow from financing activities) It is suitable for big organisations with a lot of transactions such as paying dividends to shareholders etc Cash flow statement  Activity Give any example of your venture asset ,liability , expense, Which Statement shows : Assets ,Liabilities and capital Sales ,Cost of sales ,Gross Profit and Net Profit Cash getting into and out of your Business Which Pro-forma Statement shows Owners’ discipline in Cash Management Which Statements can you prepare to prove that your Business will be viable. 7/29/2 276 024 Tutorial Activity 1 Using your business idea, which type of financing would be suitable and why? How much do you need to start the business? Do the breakdown of spending the money. Tutorial Activity 2 Prepare projected financial statements for two years.  Setting up a business 1) Define the factors to be considered when choosing the form of business. 2) Identify the labour legislation that should be considered when establishing a business. 3) Determine the procedures that must be followed to set up a specific form of business. 4) Understand the factors to be considered when choosing the location.