Starting and Developing a New Venture - Assignment Example

Starting and Developing a New Venture Part A Q1. You are Leighton. Undertake a CAMPARI analysis of Mr. Sorefoot’s business proposal. With the details given by Mr. Sorefoot regarding his business proposal for Bounce Sports, as a small business adviser, a CAMPARI analysis would provide a comprehensive assessment to evaluate and assess the necessary facets of Mr. Sorefoot’s business proposal, to wit: Character. The personal traits and attributes of Mr. Sorefoot are relevant factors which shape his behavior and pattern of decision making. In his plan to set up a new business venture, Bounce Sports, it is eminent that the following dominant traits and characteristics are exhibited: (1) strength in character and disposition; (2) risk taking tendencies; (3) a sports enthusiast and an ex-professional rugby player means he is disciplined, highly skilled in his endeavor, and knowledgeable in the line of business he plans to venture in; (4) experienced as exemplified by his work as a salesman with Backlash Batteries; and (5) has established links with local sports clubs making it an asset for promotional activities. However, it is also noteworthy to detail that Mr. Sorefoot’s character is also blemished by the fact that he had a previous libel case when he was a professional rugby player. This would tarnish his overall proposal for the new venture and his sincerity in repayment of the proposed loan. Although his wife of 10 years, Mrs. Sorefoot had minimum working experience during their married life, she had previous job as an accountant, which is an advantage in taking care of the financial aspects of the proposed business venture. They have established both personal (joint) tract records and credit history with the bank where I (Mr. Leighton) work as a small business advisor. In fact, they currently maintain as ISA (Investment Savings Account) and a Current Account and were able to facilitate three successive mortgages over a time period with the bank. Ability. With Mr. Sorefoot’s sports experience and expertise, he is considered knowledgeable in the line of business he plans to delve into. He has the capability in terms of product awareness, being a sports enthusiast and an ex-professional rugby player. His association with local sports clubs provides him with relevant linkages of target markets and customer groups of which he mentioned as composed primarily of the general public – but specifically identified school children, teenagers, middle aged men, as well as impulse and dedicated buyers. Management. In terms of managerial skills, Mr. Sorefoot lacks the experience, orientation, and formal training on managing and operating a business venture. His experience as a salesman is insufficient to cover other important functions of management such as planning, organizing, directing and controlling all aspects of their proposed venture. In addition, the business aim stipulated in the proposal is for “the business to provide adequate income for my family” – which is a personal goal rather than a corporate objective. This aim limits the growth objective of the business since there was no focus or direction for strategies outlining future success. There was no mention if Mr. Sorefoot took any courses in Business and/or Management and Entrepreneurship. His salesman skills would assist him in the marketing and promotional aspects of his product lines. His wife’s educational background and experience as an accountant for KPMG is a plus factor to take care of the financial aspects of the business. However, the overall managerial skill and entrepreneurial training to devise strategies and direct the business into an efficient and effective operation in the midst of competition is not present. Purpose. The business proposal presented by Mr. Sorefoot was clear of the amount needed from the bank totaling £50,000. Their equity participation in the venture is £30,000 making total start up costs of £80,000. Mr. Sorefoot needs a working capital overdraft of £10,000 to be utilized during the first 12 months of trading. With a projected gross profit of £140,000 for the first year and a projected net income of £56,000 (year 2), Mr. Sorefoot would have a projected monthly earning of about £2,333 per month. With the £50,000 loan, he has to pay £600 per month, leaving the spouses with £1,733 per month. This would also cover the existing mortgage payment of £600 per month, as noted under item number 2 of Bank Information on Proprietor. If they opt to slowly account for the working capital overdraft of £10,000, he would have to reserve an estimated £833 per month for 12 months – which would still leave the spouses a clean £300 per month for their personal use. The proposal of Mr. Sorefoot specifically requested for a bank loan. The financial institution can offer as an alternative, a Hire Purchasing and Leasing (HP&L) Loan which opts to pay his suppliers directly rather than releasing the proceeds directly to Mr. Sorefoot. For the best interest of the bank, the risk of utilizing the loan for other non-business related expenses would be minimized if the HP&L loan would be considered in lieu of the bank loan. Amount. In order to analyze the risk that the bank would take if the loan application of Mr. Sorefoot would be accommodated, the following data would have to be evaluated: Loan amount : £50,000 Equity : £30,000 ISA : £10,000 Current Acct : £1,000 Regular Income: £1,750 As seen, the spouses have established a credit history and joint track record on their savings and current account. They have three successive mortgages from the bank, to date, with one outstanding mortgage requiring monthly payments of £600 a month and appropriate covered by a property worth £250,000. Even with the £10,000 working capital overdraft, they would be able to pay the required £600 a month from business earnings for the £50,000 loan; as well as the estimated £833 per month for 12 months for the working capital overdraft. Therefore, there is a minimum risk to the bank in terms of repayment. This will still leave the spouses a conservative estimated net income after financial expenses of £300 per month from the proposed business venture. In evaluating the amount of loan versus the equity participation of Mr. Sorefoot in the business venture, it can be deduced that the bank’s exposure is 62.5% as contrasted to 37.5% of Mr. Sorefoot’s exposure. To minimize the bank’s risk in this regard, there is still the alternative option of selling this property worth £250,000 to ultimately pay the mortgage on that property and use the proceeds as additional investment for his business. Repayment. At the very conservative estimate of projected amounts, Mr. Sorefoot would still be able to generate just enough income to cover operating expenses and financial obligations. With the market size and projected growth in the sports wear industry, there is ample opportunity for growth and increase in potential income for the new venture. As identified and presented under Purpose and Amount, the total loan would need monthly payments of £600; as well as the estimated £833 per month for 12 months for the working capital overdraft. Both of these financial expenses could be covered by the projected net income of £2,333 per month. In effect, not only do the spouses have the ability to pay; but also, their character, track record and credit history have confirmed the fact that they have settled previous mortgages enabling them to avail of new ones. Insurance. This portion aims to analyze the risks associated with running a new business venture. From the proposal, Mr. Sorefoot noted that he, with his wife, plans to run the business on a day to day basis. The question to take into account here is: what if something happens to either or both of them; considering that Mr. Sorefoot has a recurring illness? As Leighton, to protect the interests of the bank, the mortgage redemption insurance which usually accompanies mortgages should be reviewed in the light of the risks identified. Further, this can be discussed with Mr. Sorefoot to make his aware of the need to make alternative plans regarding employing part time help as and when it is required. By bringing this point, Mr. Sorefoot could incorporate projected salaries for an additional personnel, in cases of emergencies, illness, accidents, or any fortuitous events which are likely to happen in the near future. Based on the information provided would you help Mr. Sorefoot to set up his business? Why? With the results of the CAMPARI analysis, I would assist Mr. Sorefoot in setting up his new business because of the following reasons: (1) there is a substantial opportunity in terms of market potential and growth as indicated that the current sports clothing and footwear market is approximately £1 billon; (2) their unique selling points are strengths with can be harnessed as a marketing strategy to gain substantial market share in the sportswear market; (3) bank risks are minimized in terms of Mr. Sorefoot’s credit history and track record and by utilizing the HP&L loan instead of the regular bank loan to ensure that proceeds would be utilized to pay suppliers of sportwear products; (4) Mr. Sorefoot’s knowledge of the products which they would be marketing is a plus factor due to his experience as an ex-professional rugby player with substantial links in the local sports clubs and schools; and (5) the financial projections show that the business would give the spouses initially a positive income to survive and ultimately succeed in this growing business. Q2. Mr. Sorefoot is keen to grow the business from the outset. He is aware that as the business grows there will be a need for a more professionally managed organization but is worried that this transition may have a negative impact upon the Business’ competitive advantage. As Leighton, discuss the advantages and disadvantages of an entrepreneurially managed firm with particular reference to Mr Sorefoot’s business proposal. If and when Mr. Sorefoot determines that his business venture needs to transcend from a sole proprietorship to a professionally managed enterprise, it would be helpful to make him aware of the following pertinent concepts: As averred by Littumen (2000 : 295), “starting up a new firm is very much an individual decision, which is why the individual’s qualities as an entrepreneur are central in the investigation of entrepreneurship”. The characteristics of the owner exemplify the direction that the venture undertakes. However as stipulated by Raposo, Paco & Ferreira (2008: 408), a professionally managed enterprise has the following advantages: (1) it encourages creativity; (2) there would be a shift in goals from his previous objective of providing adequate income for his family to focus on a more identified organizational goal centering on profit motivation; (3) it engages on risk taking activities which could be specific or momentary, depending on the accomplishment of aspirations; (4) it would permit delegation of responsibilities to subordinate managers; (5) it utilizes a consultative process to make business decisions and (6) adapts and adjusts to the competitive factors in the environment. On the other hand, by moving towards a professionally managed enterprise, Mr. Sorefoot would have to be prepared of the following consequences or disadvantages: (1) losing sole authority due to the “need for autonomy and independence” (Raposo, et.al. 2008: 410) for decision making process of the business; (2) need to recruit, train appropriate personnel to fill the organizational ladder; and (3) institution of more internal controls (Raposo, et.al. 2008: 409) as required to the development of a higher level of efficiency. As the demands of the business increases due to growth and expansion, Mr. Sorefoot would soon realize that there is a need to evolve from the simple sole proprietorship his business has today, to a more professionally managed enterprise in the future. The success of this enterprise would forever remember the legacy that he and his wife are able to achieve. An expansion would not necessarily mean a negative connotation to its competitive advantage. On the contrary, it would reinforce to the minds of its clientele that his business has to transcend to a more professional and sophisticated enterprise to better serve their growing needs. In addition, the characteristics of an entrepreneur should be taken into account, to wit: (1) individual attributes; (2) risk taking; (3) need for achievement; (4) locus of control, self-confidence and optimism; (5) profit motivation; (6) creativity; and (7) other motivational factors and personal values. (Raposo, et.al. 2008: 408) In this regard, the attributes of Mr. Sorefoot with regard to his future plans for the business venture would dictate the path of growth the business would take. His degree of perception for risks (either a risk taker or risk averse individual) linked to his personal goals would determine if he is bound to take higher risks. Other factors such as motivation, values, need for achievement and the degree of control which he plans to delegate are all relevant in transcending from a small business to an entrepreneurially managed firm. Part B Q3. Franchising or buying an exiting business offers the nascent entrepreneur with a greater probability of success than a traditional business start-up. Discuss. A prospective entrepreneur searching for a business venture would definitely be better off investing in an existing business which already has a successful product or service. A traditional business start up contains all the risks including uncertainty in profitability prospects for the new venture. Without any track record or financial performance to back up a new product or service, a traditional business start-up would be considered more risky and more time, money and effort consuming. By investing in an existing business, an entrepreneur would be better off in terms of having an existing track record for the business. The advantages associated in buying an existing business are: (1) less risky; (2) the hard work was already done for the entrepreneur; (3) less costly; and (4) success and income is assured. (Lecture and tutorial notes on Franchising and Buying an Existing Business, p. 47) Hitt, Ireland & Hoskisson (2003) emphasized that by buying an existing business, the entrepreneurs is assured of more predictable returns on his investment. One would be accorded with faster entry in the market, a rapid access to new capabilities and new product entry would be easier in the markets currently served by the firm. (pp. 219 – 221) On the other hand, the disadvantages associated with this option are: (1) recent environmental concerns such as the location, levels of trade and competition should be considered as reasons why the owner sold this existing business; (2) internal problems should be taken into consideration – employee base, skills competence and culture; (3) departure of the current owner – the focus and vision including employees’ loyalty are relevant in deciding on the direction with which the business would now evolve. There are relatively more benefits to franchising as against starting up a new venture using the traditional means. The advantages associated with franchising are: (1) assistance in start-up of the venture; (2) there is an established basis for judging performance and future success; (3) the business is readily recognized; (4) it has high purchasing power; (5) it has an established strategy of advertising and promotion; and (6) systems and procedures are already developed. (Lecture and tutorial notes on Franchising and Buying an Existing Business, p. 54) The franchisor takes care of providing specifications for assets, manpower resources and training, and an established clientele base. In addition, although the franchisors “get franchise fee, franchise royalty, discount from vendors, better lease options, and better discounts on equipment and raw materials” (Marlborough 2005, par. 5), these indicate that the entrepreneur could avail of economies of scale and competitive advantage in terms of suppliers and equipment. The only disadvantages to this option are: (1) there are restrictions in terms of authority and direction which would be dictated by the franchisor; (2) the payment of the franchise fee can sometimes be considered more that what an entrepreneur or businessman would spend if the traditional start up costs are considered. The rationale for this is that the success of the franchise, its customer base, and the training accorded to the personnel have been computed in monetary terms and somehow inputted in the franchising fee. (3) a period of termination as stipulated in the agreed contract between the franchisor and franchisee; and (4) unrealistic expectations due to performance of other franchises. Marlborough (2005) averred that “even though penetrating the market is easier with franchisees, it might involve a lot more legalities when compared to that of an individually owned business. This might ensure taking up more time before the franchise being able to attain a strong footing in the market.” (par. 7) Rather than venturing into a product or service which could be a total failure and could mean substantial monetary loss for the entrepreneur, several businessmen opt to go into franchising as the most lucrative option. When deciding which option is best suited for the entrepreneur, one should take into account choosing the right business depending on one’s interests and expertise; among other relevant factors including costs and risks associated with investing in a new venture. The 4Ps in marketing would assist the entrepreneur in making strategic decisions regarding his business. One should always evaluate the product, place, price and promotion when deciding which particular option would be undertaken. Both franchising and buying an existing business gives greater advantages to a prospective entrepreneur as against the traditional business start up. All factors that interplay in the decision making process should be appropriate to the needs and goals of the investor. The vision and mission of the new venture would cater to the preferences of the entrepreneur. Part C Q5. Critically evaluate the strategies a small firm can pursue to achieve growth. According to Storey (1994: 144), strategy is defined “to be the actions which are taken by the small business owner once in business”. A small firm’s strategies depend on which particular phase of growth it is currently undergoing. According to Greiner (1972) there are five key dimensions which guide businesses in building a model of organizational development, to wit: (1) age of the organization; (2) size of the organization; (3) stages of evolution; (4) stages of revolution; and (5) growth rate of the industry. In addition, there are five phases of growth as presented: (1) period of creative evolution; (2) period of sustained growth under able and directive leadership; (3) period of delegation; (4) a period of coordination; and (5) a period of collaboration. Depending on which phase a small business is in, an appropriate business strategy is employed to achieve growth. Storey identified fourteen elements of business strategy, to wit: (1) workforce training; (2) management training; (3) external equity; (4) technological sophistication; (5) market positioning; (6) market adjustments; (7) planning; (8) new product introduction; (9) management recruitment; (10) state support; (11) customer concentration; (12) competition; (13) information advice; and (14) exporting. However, not all elements are necessary for a small firm to achieve growth. The most important elements are: external equity (“growing firms are much more likely to have owners who share equity with external individuals or organizations” (ibid. p. 154); market positioning (identifying a market niche where they can offer their competitive advantage); new product introduction (which focus on innovation and a pioneering spirit); and management recruitment (the ability of owners to maintain a professional pool of managerial skills to assist them in the strategic decision making process). Depending on which phase the small business is in, an appropriate strategy is applied. During the period of creative evolution, all energies are concentrated in making and selling a new product. (Greiner 1972 pp. 41- 42). Strong management skills and strong leadership styles are needed during this period to answer to the needs of the customers as they react to the new product being introduced. During the period of sustained growth, the following strategies are implemented: (1) a more functional structure is established; (2) a well structured accounting and inventory system is developed; (3) incentives, budgets, and work standards are adopted; and (4) communication becomes more formal and impersonal. (ibid p. 42) When the period of delegation comes, senior management delegates authority to plant and territorial managers and profit centers and bonuses are utilized as motivational factors to increase productivity during this phase. The coordination phase reflects some centralization in functions, as required, with closer control and monitoring at the headquarters. Finally, the collaboration phase focuses on problem solving through teamwork. Economic rewards are given to team performance and training is geared towards development of behavioral skills to enhance teambuilding and conflict resolution. “Social control and self-discipline take over formal control”. (ibid. p. 43) The relevant factors to consider when designing strategies at various phases are as follows: (1) know where you are in the developmental sequence; (2) realize that new solutions breed new problems; (3) anticipate key requirements at various points; (4) the impact of governmental regulations and policies should be considered; (5) diagnosed problems and proposed solutions should aid accountants and consultations in the decision-making process (Greiner 1972: 45 - 46). A small business undergoing a developmental sequence is advised to take into account five management factors in making strategic decisions. The five factors to be considered are: (1) managerial style; (2) organizational structure; (3) extent of formal systems; (4) major strategic goals; and (5) the owner’s involvement in the business. (Churchill & Lewis 1983: 31). A conservative owner could decide on low-growth strategies by employing a no change stance or focusing on limited special opportunities. By focusing on their strengths and competencies in the market niche they have firmly established, this strategy could be a successful move for the business firm. If the owner of the small business would decide to expand, the following strategies are available: acquisition of competitors (small competitors in the same business could be acquired to expand its market); vertical integration (a conservative growth strategy which keeps the company close to its core competence and experience in the industry); geographical expansion (building new firms and enlarging marketing organizations by acquiring competition in other territories); and diversification (expanding by adding product lines and/or venturing to other business concerns). Pursuing growth means being able to conquer barriers or constraints to achieving organizational goals. From among the identified barriers to growth, the following factors are the most prominent: (1) financial budget, (2) level of demand of the product or service in the market, (3) managerial and human resource skills, and (4) increasing competition, among others. (Storey 1994: 155) The critical factor for a small business is to identify which constraint prevents it from pursuing its goals to grow and succeed. By being able to address these barriers, a small business would be able to develop the appropriate growth strategy and ensure its success in its well identified market niche. The differences in the application of a concept of strategy to a modest small business mean that the ability to conceive of a business in strategic terms must be evaluated in terms of the owners’ goals for the firm. Those involved in the strategic process should be concerned with how a strategy can be evaluated so that it may be continued, amended, or abandoned as appropriate. 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