Business Prospects as an Environmentally Sustainable Enterprise - Case Study Example

AP Furniture: Analysis of Business Prospects As an Environmentally Sustainable Enterprise Section A: Business Ideology & Offered Products Individuals, in general, seem to focus more and more on engaging in environmentally friendly activities nowadays. As society is taking up an approach highlighting environmental sustainability, corporations and their carbon footprint on the planet appears to be an important point of consideration before investors, suppliers and customers decide to engage with them; which is an important factor that determines a company’s CSR policies and disclosures (Klinpikul & Srichandr, 2010). Home and office furnishings has paved another way for spreading environmentalism. The growing trends have developed a thriving niche market for these products. Purchasing Eco-friendly furniture not only reduces an individual’s carbon footprint but also curbs the effects of deforestation such as soil erosion, flooding and global warming (Çinar, 2005). Among other merits, eco-friendly products are also clean form any chemicals or toxins that may be harmful to human health. While the benefits associated with the product are numerous, some consider this range of furnishing as less creative and boring due to the use of recycled material in its production. This is one of the factors that have contributed to the launch of our new business idea ‘AP Furniture’. AP Furniture would not only tend to the needs of environmentally conscious individuals but also those who believe that to purchase eco-friendly furniture would be compromising on style. Creativity, durability and minimalism along with affordability are the concepts behind our new business. Made from fillings and fabric that are 100% recyclable, we have designed our furnishing to not only appear classy but also be sturdy and hard-wearing. Some customers do not prefer couches and chairs to be manufactured using 100% recycled material. We will therefore provide them the option to select sustainable material as an alternative to 100% recycled (Abdul, 2008). Sustainable material is produced using wood that comes from fast-growing trees. And certified suppliers ensure that for every tree that is used, at least one tree is planted against it. We intend to primarily target the M25 zone London market for this purpose. The products offered by AP Furniture would be household (couches, dining tables, dining chairs) and office related furnishings (office chairs and tables). Our selected supplier, Garratt Timber Supplies Ltd is certified by the Program for the Endorsement of Forest Certification (PEFC) UK division, and is situated in Wandsworth, London. For eco-friendly paints and varnishes our other supplier would be AURO UK. AP Furniture intends to carry out low cost but rigorous ‘below the line’ marketing activities at the local car boot sales, social networking websites, pamphlet distribution and at via word-of-mouth. Provided that the business would initiate with significant discounted prices compared to market averages, we are optimistic about a considerable growth in sales within the first few months of business. Intending to launch our brand into the niche market we have formulated a competitive benchmarking strategy before setting a price range for the product line. Out of a few names in 150 mile proximity, Green Woods Furniture is a reputed prior-established brand that we will consider for our benchmarking strategy. The company head-sales center is situated in Bristol while various sales points distributed in several cities including London. Sales prices for identical products offered by Green Woods Furniture are as follows. Item Price Per Unit (£) Couch (3.5 Sitter) 1665 Dining Chair 415 Dining Table (7ftx3ft) 1595 Office Table (1ftX4ft) 1995 Office Chair (2ftX2.5ft) 715 Green Woods Furniture being an established name in the eco-friendly niche market can be singled-out amongst a few industry leaders. AP Furniture, on the other hand, is a start-up business with lesser customer confidence and higher anticipated financial volatility. It is, therefore, reasonable to set our price range lower than what is generally charged by market leaders. Section B: Unit Costs, Budgeted Income & Prospective Growth Per Unit Costs and Selling Prices We have obtained the following material cost statements from our vendors for each unit of identical products that our competitor offers. Couch (3.5 Sitter) £ Beech wood 325 Serpentine Springs 100 Duratec Fibers 75 Recycled Bottle Fillings 80 Fabric 200 Unit Material Cost 780 Dining Chair £ Ash wood 80 Walnut 100 Polish 13 Unit Material Cost 193 Dining Table (7ftx3ft) £ Oak Wood 310 Walnut 400 Polish 30 Cost 740 Office Table (1ftX4ft) £ Cherry 450 Walnut 300 Glass 151 Polish 25 Cost 926 Office Chair (2ftX2.5ft) £ Ash wood 225 Leather 86 Duratec Fibers 21 Cost 332 Estimating the remaining variable cost component for our products we have formulated the following per unit cost statement. Couch Dining Chair Dining Table Office Table Office Chair Material Cost 780 193 740 926 332 Labor Cost 392 100 383 478 172 Variable Overheads 160 39 153 192 68 Variable Cost Per Unit (£) 1332 332 1276 1596 572 January 1st to January 8th Item Units Sold Variable Cost(£) Sales Revenue(£) Couch (3.5 Sitter) 100 133200 141500 Dining Chair 126 41832 44478 Dining Table (7ftx3ft) 100 127600 135600 Office Table (1ftX4ft) 24 38304 40704 Office Chair (2ftX2.5ft) 150 85800 91200 500 426736 453482 January 9th to January 16th Item Units Sold Variable Cost (£) Sales Revenue (£) Couch (3.5 Sitter) 105 139860 148575 Dining Chair 132 43924 46702 Dining Table (7ftx3ft) 105 133980 142380 Office Table (1ftX4ft) 25 40219 42739 Office Chair (2ftX2.5ft) 158 90090 95760 525 448073 476156 January 17th to January 24th Item Units Sold Variable Cost (£) Sales Revenue (£) Couch (3.5 Sitter) 110 146853 156004 Dining Chair 139 46120 49037 Dining Table (7ftx3ft) 110 140679 149499 Office Table (1ftX4ft) 26 42230 44876 Office Chair (2ftX2.5ft) 165 94595 100548 551 470476 499964 January 25th to January 31st Item Units Sold Variable Cost(£) Sales Revenue(£) Couch (3.5 Sitter) 116 154196 163804 Dining Chair 146 48426 51489 Dining Table (7ftx3ft) 116 147713 156974 Office Table (1ftX4ft) 28 44342 47120 Office Chair (2ftX2.5ft) 174 99324 105575 579 494000 524962 Relative selling prices, according to competitive benchmarking, have been set at 85% of the market average as contributed by Green Woods Furniture. Item Price Per Unit (£) Competitive Price Per Unit (£) Couch (3.5 Sitter) 1665 1415 Dining Chair 415 353 Dining Table (7ftx3ft) 1595 1356 Office Table (1ftX4ft) 1995 1696 Office Chair (2ftX2.5ft) 715 608 Budgeted Income Statement & Cash Budget In order to form a cash budget for the first month of the business certain assumptions need to be made which are as following: Sales units are expected to grow by 5% every period during the month. Fixed Cost Payments are made at the end of each month Fixed costs of £112369 are incurred every month Opening cash balance is assumed to be nil as business is a start up Bank loan of £10000 (10%) is received in the beginning, repayable at the end of the year. The following projected sales and corresponding variable cost position can be obtained applying the above principles. A forecast Cash Budget can therefore be summarized as follows; Cash Budget (January 2014)   Jan1st-8th Jan 9th-16th Jan 17th-24th Jan 25th-31st Opening Cash - 36,746 64,829 94,317 Bank Loan 10,000 - - - Sales 453,482 476,156 499,964 524,962 Variable Cost Payments (426,736) (448,073) (470,476) (494,000) Fixed Cost Payments - - - (112369) Closing Cash Balance (£) 36,746 64,829 94,317 £ 12910 The budgeted income statement can be generated as follows: Budgeted Income Statement (January 2014) Sales Revenue £1954564 Variable Cost (1839286) Contribution 115279 Fixed Cost (112369) Operating Income £ 2910 Forecast Growth for First Year of Business For one year growth forecast for the business the following assumptions will be made Sales revenue is expected to grow by 3% each month in February and March, falling to a steady 1% for the remaining nine months Variable production costs are 94% of total sales revenue and this is likely to remain the same, however, for the same level of production they will increase alongside a 2% annual inflation. Fixed costs will increase alongside a 2% annual inflation AP Furniture Growth Forecast 2014 2014 Sales Revenue (£) Variable Cost Contribution Fixed Cost Operating Income (£) January 1954564 1839286 115279 112369 2910 February 2013201 1896194 117007 112594 4414 March 2073597 1953080 120517 112819 7699 April 2094333 1972610 121723 113045 8678 May 2115276 1992336 122940 113271 9669 June 2136429 2012260 124169 113497 10672 July 2157793 2032382 125411 113724 11687 August 2179371 2052706 126665 113952 12713 September 2201165 2073233 127932 114180 13752 October 2223177 2093966 129211 114408 14803 November 2245408 2114905 130503 114637 15866 December 2267863 2136054 131808 114866 16942             Sensitivity Analysis Sensitivity analysis for the business’s projected growth for the year can be computed using margin of safety and break even sales methodology. For break-even sales units the following fixed cost allocation to the five products can be made as follows. Item Units sold Unit Price Unit Variable Cost Fixed Cost Allocated Couch 431 1415 1332 272672 Dining Chair 543 353 332 343529 Dining Table 431 1356 1276 272672 Office Table 103 1696 1596 65163 Office Chair 647 608 572 409324   2155     1363360 Break-even sales can be computed via formula Px = Vx+ FC Where, for each item: p: price per unit, x: number of units, v : variable cost per unit and FC is total fixed cost allocated to each item. 1. Couch Break-even sales units (x) = FC / [p-v] So x = 272672 / [1415 – 1332] Break-even sales = 3285 units MOS = Actual Sales – Break even sales MOS = 431 – 3285 = (2854) 2. Dining Chair Break-even sales units (x) = FC / [p-v] So x = 343529 / [353- 332] Break-even sales = 16359 units MOS = 543- 16359 = (15816) 3. Dining Table Break-even sales units (x) = FC / [p-v] So x = 272672 / [1356-1276] Break-even sales = 3408 units MOS = 431- 3408 = (2977) 4. Office Table Break-even sales units (x) = FC / [p-v] So x = 65163 / [1696-1596] Break-even sales = 652 units MOS = 103 - 652 = (549) 5. Office Chair Break-even sales units (x) = FC / [p-v] So x = 409324 / [608-572] Break-even sales = 11370 units MOS = 647 - 11370 = (10723) Risk & Uncertainty Risks associated with the projected cash flows of a new business are considered to be relatively high compared to a prior established enterprise like our competitor Green Wood Furniture. For instance, our anticipated growth rate in sales is derived from market trends that we have assessed with the level of marketing activities we wish to undertake for AP Furniture. The growth rate for the first month is therefore highest during the whole year as we expect to carry a rigorous promotional routine before and during the first month of business. As we intend to provide trendy as well as highly durable eco-friendly products at very modest introductory prices, our pricing strategy can be termed as market penetration, as opposed to market skimming that our competitor currently offers. With a very low mark-up on our production costs, we will not be charging high premiums while still incurring the same level of variable costs of production on our products. However, there is uncertainty attached to whether we will be able to meet our target expectations on sales growth during the first year of business. Provided that the target growth in sales is not achieved, we can expect significant losses in the first year as our business would still be incurring a number fixed overhead costs such as rent and utilities etcetera (some of which are paid on an annual basis). An over-all 16% growth in sales can appear to be over-ambitious for a start-up business; however the growth in sales revenue does not incorporate any increase in sales prices but only in unit sales that we anticipate as a result of launching in the eco-friendly market niche in contrast to traditional (McPeak, et al., 2010). Recommendations The two major issues associated with our business are: 1. Product Positioning to achieve the desired level of sales during the first few months of business & 2. Countering uncertainties due to high fixed cost Appropriate actions need be taken to curb these risks before we enter the eco-friendly market niche. Managing fixed costs is one factor that may prove to be more challenging. In order to achieve our desired production level fixed costs in terms of factory space, rent and other utilities need to be borne by the company (Patterson, 2006). We understand that these costs are likely to be much higher within M25 zone London due to its commercial worth. A low cost production location (within 100 miles) can be selected by the company to minimize our fixed costs; however the distance to our production center would incur transportation and other logistics costs as well. The company needs to perform a cost versus benefit analysis for both options and select the better one. Achieving the desired level of sales is the other issue for AP Furniture, which is affected by several economic factors. The rigorous marketing campaign, especially before the launch of business, is likely to create awareness and even attract a significant customer base. However, brand loyalty established by our competitors may be difficult to challenge. Environmentally friendly products mostly target a niche within the market that may be more sensitive to product specifications than the traditional customer base. AP Furniture needs to assess whether a strong marketing strategy, itself, would be sufficient to attract its competitors’ customer base. The only plausible strategy that can be used is using market penetration pricing. Also, in order to introduce the product quality and durability to a prospective customer’s demonstrative promotion would be necessary (Purohit, 2012). The company can use local car boot sales and bazaars to carry this out. Section C: Issues Specific to New Eco-Friendly Businesses & Conclusion Specific Factors Influencing Environmentally Friendly Business AP furniture intends to launch itself as an environmentally friendly furniture business in the London market. However, one of the most important issues that AP Furniture and other green businesses would face is that, they intend to target a specific market niche as opposed to the entire customer base. Environmental awareness is a growing trend in the developed world. Still, however, the awareness is limited to segment of customers only. Product positioning can specifically be even more challenging for a new business when the segment is being catered to by exiting market leaders. Unless a certain level of product differentiation is achieved the new business cannot expect to thrive equally in the market niche. AP Furniture intends to bring about this differentiation via trendiness and affordability. Another point to consider for budding eco-friendly businesses, is the use of 100% recycled material for manufacturing products. The essence of environmental sustainability lies within recycling and up cycling; however customers, in general, perceive recycled material as a compromise on the product quality. This is one reason why sustainable material is used as an alternative to recycled (Purohit, 2012). Conclusion The analysis on AP Furniture’s business proposal and projected cash-flows has opened up a new avenue for consideration for budding entrepreneurs. The growing affiliation toward environmental sustainability within the society has shaped the way businesses perceive their duty of care, which is no more just toward their stakeholders of the business but also towards the environment and eco-system. It should be pointed out that corporate challenges, of a new enterprise such as AP Furniture, appear to be much larger than what are for businesses operating in the traditional market. Furniture businesses that are not focused on eco-friendly products are able to manage more innovation with style and design due to the availability of various forms of material that they can work with (Pereira & Vence, 2012). However, increasing market inclination toward the greener form of living is one factor that is likely to help us meet our targets, if not possible immediately then at least in the longer term. If newly established businesses such as AP Furniture focus more on highlighting the importance of reducing the carbon footprint, not only would resources be better utilized but the likelihood of the new businesses developing into thriving enterprises would increase significantly. List of References Abdul, U 2008, Eco-friendly foam for the furniture market, Canadian Plastics, vol 66, no. 8, pp. 6-6. Çinar, H 2005, Eco-design and furniture: Environmental impacts of wood-based panels, surface and edge finishes, Forest Products Journal, vol 55, no. 11, pp. 27-33. Klinpikul, N & Srichandr, P 2010, Status of Eco-design in Thai Furniture Industry, Key Engineering Materials, vol 490, no. 1, pp. 769-772. McPeak, C, Devirian, J & Seaman, S 2010, Do Environmentally Friendly Companies Outperform the Market?, Journal of Global Business Issues, vol 4, no. 1, pp. 61-68. Purohit, HC 2012, Product Positioning And Consumer Attitude Towards Eco-Friendly Labeling and Advertisement: An Analytical Study, Journal of Management Research, vol 12, no. 3, pp. 153-162. Patterson, D 2006, Managing Project Cost Risk, AACE International Transactions, vol 1, no. 1, pp. IT51-IT57. Pereira, Á & Vence, X 2012, Key business factors for eco-innovation: an overview of recent firm-level empirical studies, Cuadernos de Gestión, vol 12, no. 1, pp. 73-103. Read More