Formation of Business Idea - Assignment Example

Entrepreneurship Table of Contents Part 1: Formation of Business Idea 3 About the Business 3 SWOT 3 Financial Planning 4 Fund 4 Break Down of Sales 5 Cash Flow Forecast 5 Breakeven Analysis 6 Marketing Elements 6 Product 6 Price 7 Place 7 Promotion 7 Part 2: Critical Analysis of Business Plan 8 Introduction of Business Idea 8 Merits of the Opportunity 9 Market Research 12 Financial Planning 16 Start-Up Expenses 16 Financial Viability and Robustness 17 Estimation of Revenue and Expenses 17 Estimated Balance Sheet 19 Skills, Resources, Personal Networks, Limitations 19 Conclusion 23 References 24 Part 1: Formation of Business Idea About the Business Pack-a-Stack is a UK based company, which is specialised in selling products such as backpacks and luggage’s. The main objective of the company is to attract the prospective customers of the UK through its range of product offerings. The company will sell these products by opening its stores in various regions of the UK. Therefore, the viability of the business position of the company can be determined based on the SWOT analysis, which has been conducted in the following. SWOT Strengths It has been apparently identified that Pack-a-Stack will have various strengths while functioning in the business markets of the UK. One of the strengths generally include the effective utilisation of cost leadership strategy, wherein the company would import products from either India or China due to which the company can tag a lesser price for its backpacks and luggage’s as compared to its customers. Most vitally, the competency level of Pack-a-Stack would be quite high, as it would recruit skilled and experienced employees that will certainly help the company in marketing and selling its broad assortment of product offerings. Weaknesses The initial start-up capital for Pack-a-Stack will be quite high, due to which the company might be exposed to various investments related risk. Likewise, another weakness for the company would be that the customers’ bargaining power would be quite high as the customers might opt for other brands. Opportunities Pack-a-Stack can expand its market share by entering into a new business market. The company will also have a future scope of diversification by entering into the tourism industry through its brand recognition. Threats Pack-a-Stack while entering into the business market of the UK will face a huge threat relating to entry of its competitors. Likewise, change in the economic condition of the UK might result in reduction of demand for backpacks and luggage’s, which would make quite difficult for the company to sustain in the UK business market. Financial Planning Fund It is expected that the fund for the business will be collected from two sources namely bank loan and owners capital. In order to finance the launching activities such as creation of infrastructure, purchase of stocks and assets and hire employees among others, a loan amount of £76, 000 would be required. On the other hand, personal capital of about £53, 000 will be used in order to spend for the purpose of marketing and other administrative aspects. Break Down of Sales Pack-a-Stack believes that it can accomplish satisfactory sales in the next twelve months by providing quality products to the customers. It is expected that in the first year, the business would achieve sales of about £83, 000. Eventually, due to several marketing activities and considering the demand of products, it is anticipated that sales will be double within two years. Cash Flow Forecast The cash flow of the business need to be observed carefully. Pack-a-Stack will have the advantage of conducting business on cash basis rather than credit basis. After covering the initial investment and start-up expenses, the business would become sustainable. The cash flow has been reflected in the following table. Table 1: Forecasted Cash Flow of Pack-a-Stack for Three Years Cash received (amounts in Pounds) Year 1 Year 2 Year 3 Cash sales 83000 150000 310000 Total cash inflow 83000 150000 310000 Expenditures Year 1 Year 2 Year 3 Cash spending 50000 55500 66000 Loan repayment 0 11000 11000 Total cash outflow 50000 66500 77000 Cash balance 33000 83500 233000 Breakeven Analysis Breakeven is the sales volume wherein the amount of revenue is equivalent to amount of expenses. The formula is: Breakeven = fixed expenses × sales/contribution Contribution = Sales - variable expenses of sales Sales in this context would be £83, 000 and variable expenses are expected as £41, 000. The fixed expenses of the business would be £40, 000. Thus, contribution = 83000 – 41000 = £42000. Breakeven sales = 40000 × 83000/42000 = £79, 047. Thus, the aforesaid calculation signifies that within the sales value of £79, 047, Pack-a-Stack would experience no profit and no loss. Marketing Elements The marketing elements of Pack-a-Stack have been described below by discussing the following four elements. Product Pack-a-Stack will develop ranges of products that would include different types of backpacks and luggage’s. Backpacks would be developed for college students, professional men, trendy women and small kids. Similarly, luggage’s would be of smaller size, mid-size and larger size based upon the requirements of the customers. Price Pack-a-Stack will use penetration pricing wherein the company will initially set the price of its products at a relatively lower price, which would attract more customers to buy the same. This would ensure that the company would increase its market share by making the customers switch to the brands of the company with low pricing strategy. Place Pack-a-Stack will establish its business in the UK as it has been viewed that there are numerous potential customers in the business markets of the nation. Moreover, the company will set up retail stores in appropriate locations that are not closer to other retail stores of luggage’s and backpacks. In addition, the stores would be set up in such a place, which would assure that they it visible to the customers. Promotion Pack-a-Stack will use newspapers so as to promote its products in terms of posting advertisements. Similarly, the company will also use social media to make the customers to acquire a brief understanding about the company and its products. The company will also use TV advertising, which would help in promoting its wide product ranges. Radio will also be an effective process to reach the older group of customers, which would make these customers to get attracted with the products of Pack-a-Stack. Effective promotion strategies such as using social media, newspaper and TV advertisement along with radio will provide a platform to the company for brand recognition. Future In future, it is expected that Pack-a-Stack will achieve satisfactory market share in the UK business market. Based on the market scenario and assuming the potentiality of sales, it is probable that the business will attain competitive advantage in the UK market. Pack-a-Stack will need to follow differentiation strategy by providing quality and unique products to the customers so that they perceive the business better than other competitors. Furthermore, in the upcoming period, it is expected that Pack-a-Stack will enhance the number of retail outlets in the UK. Part 2: Critical Analysis of Business Plan Introduction of Business Idea Pack-a-Stack is a company, which would be dealing with backpack and luggage business based in the UK. The company will provide the most comprehensive selections of backpacks and luggage bags in the domestic market of the UK and possibly take order through mail and internet. By providing most complete selection of products through the employment of knowledgeable and supportive employees, it is expected that Pack-a-Stack will quickly gain significant market share. The country i.e. the UK has been selected due to its attractiveness as economic, technological, corporate and judicial arenas. People who love to visit and often opt for trips or holidays would definitely purchase backpacks and luggage for travelling purpose. Pack-a-Stack will sale quality products for satisfying family, business persons and young individuals’ luggage requirements. Pack-a-Stack has recognised three key aspects that are required to gain success in the market. The first is to satisfy the customers’ requirements by providing most inclusive product selection. The second key of success is to observe the market environment in order to ensure competitive advantage. In addition, the third is to maintain strict financial system in order to gain control over the expenses. Pack-a-Stack’s competitive advantage would be the ranges of products provided to its intended customers and the knowledgeable employees. While other stores in the UK do not possess comprehensiveness in backpack and luggage products due to diversity factor, this company will fully concentrate on these two items. Travelling and tourism is a part of life of the UK people and they might go for travel in order to enjoy memorable moments or to gain relaxation from regular lifestyle. Therefore, they will look forward to the products of Pack-a-Stack, depending on the way it reaches to the target customers. Presently, there are few retailers that provide backpack and luggage products through retail stores. However, such retailers do not have extensive range of products and thus possess limited inventories. Pack-a-Stack would be founded on the premise that customers will find every type of baggage solutions under one roof. Merits of the Opportunity The central question of any new business is to when and how to identify an opportunity, which is worth following. Basically, entrepreneurship or new business has been stated as an opportunity, which is followed irrespective of availability of resources. It signifies the conversion of deep research into commercially viable products and services. According to the economist Joseph Schumpeter, entrepreneurial innovation acts as major aspect of economic development. The economist argued that competitive environment results in finding innovative way of conducting business. Schumpeter described the activity of innovation as ‘creative destruction’, which helps in generating substantial profits (McDaniel, 2005). At the core of new business, there are three aspects namely opportunity recognition, opportunity assessment and opportunity realisation that require to be taken into concern. While these activities are straightforward in nature, extensive skills are required in order to make a successful business. The aforesaid aspects have been discussed in detail in the following. Opportunity Recognition Opportunity recognition is the first phase of starting a new business. Thus, it is vital to seek new opportunities throughout the entire lifetime of any business. In order to stay competitive and make unique position in the market, there lays the need of continuously identifying the opportunities as these continue to change and evolve. Opportunity recognition necessitates observing similar situations but imagining something different (Baron, 2013). Opportunity Assessment Opportunity assessment phase is where entrepreneurs usually become prominent in the entrepreneurship procedure. In this particular phase, an entrepreneur requires to evaluate possible approaches and business models as well as to conduct market research and economic evaluation for bringing the business idea in economically successful way. It is during this phase, there lays the requirement for crafting a business plan by determining the products, target market requirements, competitors and competitive advantages. Similar to opportunity recognition, opportunity assessment is often viewed to be a continuous process in any business. In this phase, there lays the need of determining the market fluctuations and forces that might influence the business at large. The most difficult challenge for a new business can be apparently observed as to make correct decisions and to determine whether these decisions tend to be more advantageous in making alternative routes (Hisrich, n.d.). Opportunity Realisation In opportunity realisation phase, there lays the need of taking advantage of the situations and implementing every great thought discovered from the above discussed two phases. This phase is quite challenging and impulsive for any new start up business. It is a combination of conducting different activities and also dealing with inimitable persons in unique circumstances. In this phase, there often lays the need of developing a team, raising funds for conducting business operations, developing effective marketing plans along with sales method and applying these ideas effectually (Cha & Bae, 2010). Concerning this aspect, it can be stated that the new business of Pack-a-Stack is in the opportunity assessment phase. The opportunities for conducting this business have arrived by understanding the market scenario. In recent years, the demand for luggage products has increased considerably. Although this industry was negatively impacted by economic recession in the year 2009, however, from mid-2010, the market conditions have recovered. Furthermore, the demand of backpacks and luggage bags are also subjected to growth in the travelling industry. In the preceding five years, i.e. from 2004 to 2008, the international luggage industry has demonstrated upward trend and generated with CAGR of about 4.85% (Research and Markets, 2010). In the UK, bag and luggage industry continued to perform robustly. This growth has been fuelled by new product development, product quality and product durability. It is further expected that the sales volume will increase, as the economy of the UK is optimistically becoming strong (Euromonitor, 2013). Thus, it might provide great opportunity for Pack-a-Stack to conduct business in the UK. Market Research Pack-a-Stack has planned to enter into the business market of the UK by introducing backpacks and luggage bags that have been witnessed to grow in terms of demand. It is considered that Pack-a-Stack has used a systematic approach, which ensured fulfilling the requirements of the people in the UK through offering them with their respective preferred products. Initially, the first approach used by the company for researching the market of the UK was interviewing the people who have already been in this industry for the preceding few years. By interviewing these people it could be derived that the demand of luggage and bag industry in the UK is quite high. Moreover, feedback from the customers of the UK regarding the usage of bags and luggage’s was also taken into concern as an approach to understand the potentiality of the market. Annual report of other bag and luggage companies was also taken into concern, which helped in providing an in-depth understanding of the luggage industry performance in the UK. It could be revealed that most of the people like to enjoy vacations in the UK due to which they purchase various luggage and bags. Most of the business people also purchase bags to use these for making short business trips. Therefore, it can be affirmed that the approaches taken into concernfor market research have considered almost all the aspects, which are required for a luggage industry to enter into the UK business markets. It would be vital to mention that the most effective approach for Pack-a-Stack is to analyse the market scenario of the UK. According to the CBI market survey of 2008, the nation consumed luggage’s and other bags that amounted to almost 1.5 billion Euros, which increased up to 3.2% as compared to the year 2004. However, the production of these luggage’s and bags fell down to 2.2% from 2008 to 2004. This was mainly because the imports of bags and luggage’s in the UK increased to 7.2% that amounted to 1.4 billion Euros. The companies belonging to the UK imported most of the bags and luggages from developing countries as the cost of production regarding the same is relatively lower (CBI Market Survey, 2010). The figure and table below provides a clear understanding about the consumption of luggage’s in the UK. Table 2: Consumption of luggage in UK from 2004-2008 [million units] Source: (CBI Market Survey, 2010). Fig. 1: Consumption of Luggage and Other Products in the UK in 2008 (CBI Market Survey, 2010). Market segmentation is an important aspect to take the business forward, which would help Pack-a-Stack to identify its target market. Segmenting the target market can be duly considered as one of the useful aspects on behalf of the company. In relation to the company, segmentation has been done by considering gender and purchasing behaviour of the consumers (Experian Ltd, n.d.). Therefore, after segmenting the market based upon gender in the UK, it could be revealed that women covers almost 90% of market for luggage’s and hand bags, while men accounts for the remaining 10% of the market. It has been viewed that 7.7% and 6.6% of women and men respectively in the UK have purchased luggage’s in the year 2008. Moreover, it has also been revealed that men are mostly interested in buying luggage’s that are more durable and last for a longer time. On the other hand, women buy these sort of products that appear to be more fashionable and have a good design (CBI Market Survey, 2010). Purchasing behaviour of the consumers has been segmented into three categories that include the disinterested, the self- rewarders and the fashionistas. In relation to the disinterested consumers present in the UK, it has been apparently observed that almost half of the customers in the UK do not actually care about what they are purchasing. These type of consumers are mostly older with low income who does not think much in the process of purchasing the goods. Self- rewarders are the group of consumers that cover almost one-third of luggage’s and bags consumption in the UK. These consumers mostly fall under the younger and middle-age group who pay attention on what products that they are actually purchasing. The fashionistas are the group of consumers who tends to purchase fashionable products, pay attention and think a lot during the purchasing process. Therefore, it is considered that Pack-a-Stack should mainly target the self- rewarders who covers most of the luggage market in the UK. Moreover, the company should also target the disinterested and the fashionistas people group for marketing and selling its luggage’s and backpacks who might contribute to generate revenue for the company. However, the primary focus of Pack-a-Stack should be the self- rewarders group of customers, who found to be more potential for the company (CBI Market Survey, 2010). Market trend in the UK is also an important aspect for Pack-a-Stack to consider, which would provide an idea regarding the demand for luggage and backpacks in the market. It has been apparently viewed that online sales in the nation has been growing continuously and the main reason for this growth is the offer provided by these online portals for bags and luggage’s. Moreover, the trend for smaller luggage’s also had an upward growth wherein most of the people in the UK use this smaller luggage’s and compact backpacks in budget airlines. Similarly, the price of luggage’s and backpacks has been continuously increasing instead of the recession being faced by the economy of the UK. In addition, consumers are opting for casual kind of luggage’s instead of formal luggage’s as the casual ones are quite cheaper than the formal ones (CBI Market Survey, 2010). Therefore, from the aforesaid study it could be revealed that the business for luggage’s and backpacks is quite favourable in the UK business market. Financial Planning Pack-a-Stack is seeking towards taking a loan of about £76, 000 in order to execute the business plan. The company intends to use this fund in order to establish and develop the business. Furthermore, additional £53, 000 would be used from owners’ capital and this fund would be spend for the purpose of incurring marketing as well as other expenses. The loan amount would be repaid over seven years. Start-Up Expenses Pack-a-Stack anticipates an initial capital requirement of about £100, 000 in order to start the business operations. The fund would be required in order to launch the business, purchase inventories along with machineries, employing key personnel and funding the working capital. Any other extra financing, which is mandatory for the business would be taken into concern in form of short-loans from other investors. The start-up requirements for Pack-a-Stack has been demonstrated in the following table. Table 3: Expected Start-Up Requirements for Pack-a-Stack Start-Up Expenses Amounts in Pounds Legal expenses 2000 Stationery and Brochures 500 Consultation fees 2000 Rent 1500 Others 25000 Total Start-Up Expenses 31000 Start Up Assets Cash in hand 10000 Inventory 30000 Long-run assets 29000 Total Start Up Assets 69000 Total Start Up Requirements 100000 Financial Viability and Robustness In order to attain success, there lays the need of understanding the financial viability of the business. Business plan is subjected to time as well as money and thus in order to evaluate its viability, there is the need to assess its estimated expenses and revenues. Such assessment would determine whether the business would generate the required revenues in order to satisfy the financial objectives. In this similar context, it can be stated that the business plan of Pack-a-Stack would be considered as viable if it possesses strong balance sheet, healthy performance with respect to profit and better cash flow (Veryard Projects Ltd, 2005). Estimation of Revenue and Expenses The estimated revenues and expenses for three years have been detailed in the following table. Concerning the estimations, it is assumed that access to funding would be sufficient in order to maintain the business activities. Furthermore, the amount of account receivable would be quite small and the business will carry out only cash transactions. Table 4: Estimated Revenue ad Expenses of Pack-a-Stack Revenue (Amounts in Pounds) Year 1 Year 2 Year 3 Cash from sales 83000 150000 310000 Cost of sales 41000 63000 120000 Gross margin 42000 87000 190000 Expenses Payroll 40000 45000 55000 Marketing expenses 5000 5500 6000 Depreciation 1500 1500 1500 Rent 1500 1500 1500 Loan repayment 0 11000 11000 Insurance 3500 3500 3500 Total operating expenses 51500 68000 78500 EBIT -9500 19000 111500 Interest 4500 4500 4500 EBT -14000 14500 107000 Tax 0 2900 21400 Net Profit/Loss -14000 11600 85600 The above depicted revenue and expenditure estimations are based on the business performance of Pack-a-Stack of previous years and it is expected that the business will incur loss in first accounting year and gradually earn profit from succeeding years. The marketing and payroll expenses are also expected to increase because it is forecasted that in future, the business will grow and additional employees will be needed. Estimated Balance Sheet The projected balance sheet (see table 5) of Pack-a-Stack demonstrates an increase in the net profit by second accounting year. It is expected that within third year, the earnings after tax on sales would be about £85, 600. Pack-a-Stack expects to establish a business with the possibility of raising strong profits. It is also projected that the business would flush with strong asset and cash at the end of three years and it is planned to use more funds for making constant growth. Table 5: Estimated Balance Sheet of Pack-a-Stack for Three Years Assets Year 1 Year 2 Year 3 Liabilities Year 1 Year 2 Year 3 Current assets Cash in hand 30000 35000 40000 Account payable 4000 6500 7800 Inventory 45000 50000 55000 Loan 76000 65000 54000 Net profit/loss -14000 11600 85600 Capital 64000 67000 85200 Total current assets 75000 85000 95000 Long-term assets 69000 53500 52000 Total assets 144000 138500 147000 Total liabilities 144000 138500 147000 Thus, based on the projected financial aspects, it can be stated that the idea of opening a backpack and luggage business in the UK would be a feasible idea, concerning the market trends and potentials of generating substantial revenues. Skills, Resources, Personal Networks, Limitations Pack-a-Stack requires to determine the required skills in order to successfully initiate its business of luggage and backpacks in the UK. Human resource skills must be given utmost consideration that will totally influence its business performance. Therefore, it is considered that the company must hire skilled personnel who have the capability and experience of marketing luggage’s and bags in the UK. This in turn will help the company to effectively launch its product in the UK. Furthermore, in the initial start-up of the business, it is considered that the requirement of workforce must be efficiently planned, which would determine the number of employees required in performing the operations of the company (DSDBI, 2014). Pack-a-Stack will require at least 7 staff, wherein 1 person would be the manager or the owner of the business, 2 cashiers for maintaining the monetary transactions of the company, 3 personnel for marketing the products and 1 person for office maintenance of the company. Training the sales personnel effectively should be the prime focus of the company as they would be the one who will provide an understanding to the customers regarding the company and its products. In relation to the resources, it is considered that human resources must match the competency level, which is required for a company to initiate luggage or bag business. On the other hand, financial resources must be adequate for the company, which would certainly meet the requirements of the business at large. The company must establish an efficient supply chain for timely supplying of products, which would play a major role in meeting the customers and market demands for the products. Marketing resources such as the marketing team must be managed in such a manner, who would ensure that the business will perform especially marketing operations successfully. In this case, it is considered that the manager must take an initiative of motivating its marketing team, which would in turn increase their self-morale and confidence. This will certainly help the marketing team in attracting huge number of customers by confidently interacting with them and providing them the information regarding the products being sold by the company. Infrastructural resources would also act as a major factor in making the customers to get attracted to the products of Pack-a-Stack as the customers in the UK might have the tendency of buying products from those companies that have a good infrastructure. Likewise, technological resources should also be determined so that the products are advertised in the UK market efficiently, resulting in increasing the market share for the company. In this case, social media can be used by the company to promote its products in the competitive business market of the UK (Voss, n.d.). Pack-a-Stack must possess a personal network in its supply chain of products, which is totally different from its competitors. The formation of such supply chain network would certainly determine whether the company would attain superior competitive position in the UK market as compared to its competitors. As it has been apparently observed that the cost of production in the UK for bags and luggage’s is quite high as compared to the developing countries, therefore, it is considered that the company must import these products from either India or China because of having lower production cost. Importing products from these nations would provide a cost advantage to the company so that Pack-a-Stack can sell its product in the UK at a lower price as compared to its competitors. In relation to determine the limitations for Pack-a-Stack, it can be ascertained that the company would be subjected to various risks in the UK market as it competitors might provide a tough competition. Moreover, the budget allocated by the company for its operation might not be sufficient because the initial start-up capital for the company in the UK might be quite high. In addition, the resources used by the company might not meet the actual business requirements to sustain in the UK business market. Conclusion Pack-a-Stack is planning to start its business in the UK with the products of backpacks and luggage’s. The notion of starting the business in the UK can be duly considered as a good idea as there will be high demand for backpacks and luggage’s in the UK business market. According to various market researches, it can be apparently viewed that the UK is a prospective market for starting the business of Pack-a-Stack as the demand for backpacks and luggage’s has been ever growing in the nation. Although, the UK economy faced recession, there was no reduction in the sales of these products. In the process of market research, it could also be learnt that the market trends must be taken into concern by the company that will provide a brief understanding regarding the purchasing trends of the UK customers. In relation to the financial plan, it can be affirmed that the proposed plan is quite viable for the business but it is expected that the business would incur loss in the first year of its initiation and there lays the possibility of obtaining profits in the succeeding years. References Baron, R. A., 2013. Opportunity Recognition as Pattern Recognition: How Entrepreneurs “Connect the Dots” to Identify New Business Opportunities. Academy of Management Perspectives, pp. 104-119. CBI Market Survey, 2010. The Luggage and Leather Goods Market in the United Kingdom. Market Intel, pp. 1-18. Cha, M. S. & Bae, Z. T., 2010. The Entrepreneurial Journey: From Entrepreneurial Intent to Opportunity Realization. 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[Online] Available at: http://photos.state.gov/libraries/vietnam/171343/PDF/Opportunity%20Assessment%20and%20the%20Entrepreneurial%20Process.pdf [Accessed April 10, 2014]. McDaniel, B. A., 2005. A Contemporary View of Joseph A. Schumpeter’s Theory of the Entrepreneur. Journal of Economic Issues, Vol. 39, No. 2, pp. 485-489. Research and Markets, 2010. Global Luggage and Leather Goods Market - Opportunity in Developing Regions. Consumer and Personal. [Online] Available at: http://www.researchandmarkets.com/reports/1281182/global_luggage_and_leather_goods_market [Accessed April 10, 2014]. Voss, G. V., No Date. Resources & Capabilities. Appear Under Strengths & Weaknesses in the SWOT Analysis. [Online] Available at: http://gvoss.cox.smu.edu/ResourcesCapabilities.htm [Accessed April 09, 2014]. Veryard Projects Ltd, 2005. Business Viability. Business and Organizations. [Online] Available at: http://www.users.globalnet.co.uk/~rxv/orgmgt/viability.pdf [Accessed April 09, 2014]. Read More