Entrepreneurial Opportunity - Denver Steel Mills - Case Study Example

ENTREPRENEURIAL OPPORTUNITY ANALYSIS Student’s Name Institutional Affiliation Brief Description of the Company Denver Steel Mills is a company that is engaged in the production of steel-related products for the purpose of constructions. Founded, in the early 2000s, the firm is based in Sydney, Australia. It seeks to serve both the local and foreign markets steel markets; with a potential of extending its overall operations into New Zealand and later into one of the most developed Asian economies: South Korea. The company mission and vision rests with the development of new advanced steel related products that incorporates modern technological features. Currently, the firm only depends largely on the conventional production processess thus, a need to come up with an effective production plan. The owners of the company set out on a mission to ascertain identifying the different level of challenges that entrepreneurs of production companies face on a day-to-day basis whenever they opt to adopt current technological advancements into the organizations within their early stages of development. Smith, being the inexperienced one, was not aware whether or not the introduction of the new technological concept would be of any benefit to the company. It was indeed clear that intensive analysis should be conducted. Protection It is important to comprehend the fact that Denver’s business model was based on a unique proposition put forward by the two owners in regards to affordable production process that incorporate modern-day technological advancements. Following this line of reasoning, it was crucial that protection of not only their human resources skills but also adoption of customised software applications was protected against intrusion and unnecessary transfer by different rival companies. To make sure that the protection of the entire idea was indeed in place, the company’s owners made sure to patent their software applications against possible expositions from these competitors. Protection of this new feature also extended to the company coming up with efficient ways of employee retention programs like always updating salary and benefit perks to the most skilled workers so that could not be pouched by rival companies. This idea was put forward by McBride, who had previously worked in engineering firms; and had witnessed firsthand the level of employee turnover that emanated from poor pay. Despite the fact that the firm was not currently making enough profits, the two owners agreed that fair remuneration packages were indeed imminent component to consider for future success. Stakeholder Analysis A start up business, for most cases, has limited stakeholders in place. This is attributed to the fact that the company is usually relatively small in relation to its overall operations. For this case at hand, the immediate stakeholders include; the investors; employees, banking institutions, government agencies and surrounding community. Investors are the immediate owners of the company who also double up as the management team. In the beginning, the two investors of the company: Derry Smith and Peter McBride embarked on a mission to cover the shortages experienced in the current Australian steel industry. They focused their energies on production of steel products that were both affordable and quality in nature. To achieve this, these investors made sure to come up with distinct ways of adopting modern engineering technological features into the production unit. Having been experienced in matters technological application and implementation before; McBride, admitted the urgency of this decision. It was indeed necessary for the company to come up with effective and efficient ways of incorporating technological features into the production without affecting their level of capacity. The decision was also met with the challenges of being expensive and required additional capital. To make a reality of this decision, the company needed a form of financing. This is for the mere fact that the two investors had already exhausted their savings into initiating operations of the company. They had also borrowed part of the operational money from immediate friends and family members hence had explored all the possible equity channels except for bank loans. A bank loan was imminent and thus, they two investors proceeded to engage one of the local banks for funds. At this point, it can be noted that the bank is a crucial external stakeholder that had now little control of operations considering the fact that they had to produce their six-month revenue streams before they could be guaranteed of short-term borrowing arrangement. Government agencies that are concerned with environmental checks and regulation are yet another important external stakeholder of the company. It was necessary that the company adhere to the current production rules and regulations as put forward by the law. This means that the company’s operations would always check upon their dust emissions into the atmosphere while also ensure to treat all wastage that were being released into a nearby water stream. A failure to adhere to this stipulations, it was imminent that the company would face extensive fines and penalties. To ensure that production went on successfully and without any form of hitch, both Smith and McBride made sure that they engaged the surrounding communities. These communities had a direct influence of the operations of the company because they exerted external influence and thus, controls on how operations would be achieved. To counter possible retaliations from this stakeholders; the company engaged in extending their support through local charity programmes as well as giving a first priority of employing the most qualified personnel from the communities around. Team The two owners had an idea of starting small before they could expand operations. Smith would always argue about the cost of production in regards to the cash flows of the company. Prior to the day of commencing operations; Smith reached out to his friend McBride about the challenge. “I think we should not pay much attention to the number of workers’ to start with and in fact, concentrate more on the amount and quality of equipment” he proposed. From this point onwards, McBride understood that his friend did not comprehend the benefits that accrue from developing a well-functioning team that would oversee operations from the very start of the operations. It was indeed somehow a challenge for him to convince his friend about the notion of selecting and recruiting the best skills in the industry. At this moment in time, McBride emphasized on the need for having only the qualified personnel into joining the company and that were little time and resources to recruit and train new staff especially those freshly graduated from colleges and different universities across the country. It was noted after great consultancy from outside outsourcing companies that in order to develop a workable and effective team, the two owners could only access them through a recruiting agency. Sources of Finance The process of adopting a distinct software application technology into enhancing operations of the company was a paramount project on its own. There were numerous platforms for which the owners would have ensured to access fund for this new project. This project needed at least $30,000 in total costs that covered such expenses as system design and implementation; maintenance; training of existing staff and hiring additional staff that were familiar with the way the system operated for purpose of ensuring efficiency even within the every first year of implementation. i) Debt Funding Option Taking a closer look at the credit score for both of these owners, it was ascertained that they were both positioned fairly and could each borrow at least $120,000 that could help finance the project and reinvest the balance into furthering operations to even greater heights. They had also an option of borrowing loans from different institutions that focused on assisting SME’s growth and development. They one day visited a local micro-finance institution and were surprised that the company could borrow as much $100,000. Despite these rather well-ascertained options, the two agreed that debt funds would not be the better option especially since Denver Steel Mills was still not posting enough cash flows that would be needed in covering for the principal amount of the debt and the interest rates therein. In essence, the two options provided the business with a minimum period of between 2 and 3 years for completing the repayment of the entire amounts borrowed. They would risk this; since the most of the business within the industry were now facing economic downturns especially due to intensive competition of foreign-produced items. ii) Equity Option The two then decided to explore possible equity funding options available and they were more than surprised to find out that all along there groups of people that had developed interest into the business. First, McBride’s relatively wealthy businessman that had extensive experience in starting and then selling-off successful SMEs indicated that he was willing to offer the company with $250,000 for a 15% stake of the entire common shares held at the time. Secondly, Smith had his immediate friend since high school express his interest in being part of the company and offered in excess of $200,000 for 10% stake of common share and 5% of royalty repayment from income, which meant that this royalty repayment would only be settled in full when the principal was covered completely. Again before settling any of the two options, the two took some time off in order to reminisce about their company in regards to its overall valuation. In essence, more to this, McBride indicated at the very first instance of their meeting that he did not feel it was right having a family member as a shareholder in the business as this would complicate matters and especially their relationships. Smith also indicated that despite the friend’s offer, it was indeed very important to access the situation and establish whether or not the business would sustain operations while still paying off royalties from the already suppressed cash flows at the time. iii) Crowdfunding Option Being a new term that was coined that just recently especially with the introduction and spread of internet across the globe, crowd funding refers to a specific model where people come together through a series of virtual interconnection and pool cash resources in order to provide assistance to small organizations (Archak, 2010). Taking this option, research indicated that there were 50/50 chance rate for SMEs that especially were focused on access funds for technological-based projects. Apart from this, there were more than enough such projects that were still laying idle and unfunded in popular crowd sourcing websites like TopCoder.Com hence there posed a risk of lagging the project from this option. Value Proposition A value proposition is a very important component of a company’s overall operational activities. It is formulated with the purpose of expounding on how a company’s product would help solve customer’s immediate problems or even improve on their underlying condition; it seeks to deliver particular set of benefits and, also informs a potential customer on the importance of them only choosing to purchase from the company and from the immediate level of rivals (O'Dell & Jackson Grayson Jr, 1999). The below is a value proposition for this company “For Customers That Value Quality Over Quantity, Our Steel Products Will Serve That Purpose For You”. The Company seeks to ensure that steel products availed to customers adhere to the minimum quality standards of the market (Frow & Payne, 2011). In fact, the customers are allowed an opportunity to access free training on the different types of steel such that they can make informed decisions prior to engaging on a purchasing decision. Proposed Solution & Rationale behind the Decision In coming up with an effective solution, both of the investors came at a standstill and even resorted to seeking more advice from external parties. Despite the fact that the process of coming up with an effective decision, it was agreed that the need for incorporating technological systems into production was unparalleled. It was now a necessity to select the best finance options as well as the size of the team needed for efficient production capacity. Both of them agreed that they would go for a company loan to fund the technological advancement since it attracted somehow low interest rates as opposed to personal borrowings. Both of the investors were optimistic of the company’s future operations and indicated that they would certainly experience improved growth in terms of expansion and cash flows hence it would be able to pay off interest expense and principal amounts in full by the second year of implementation of the system. Equity funds were not considered because it would have resulted to loss of control of operations and revenues to additional party and the two investors were not yet ready for that; Smith noted that it took the “blood and sweat” to attain minimum operational process and that they would not replace that with mere funds. Crowd sourcing was also overruled especially since it constituted extensive initial placement processess and required intensive amounts of time resource to achieve full results. References List Archak, N., 2010. Money, glory and cheap talk: analyzing strategic behavior of contestants in simultaneous crowd sourcing contests on TopCoder. Com. in Proceedings of the 19th international conference on World Wide Web (pp. 21-30). ACM. Frow, P. & Payne, A., 2011. A stakeholder perspective of the value proposition concept. European journal of marketing, vol.45, no.1/2, pp.223-240. O'Dell, C. & Jackson Grayson Jr, C., 1999. Knowledge transfer: discover your value proposition. Strategy & Leadership, vol.27, no.2, pp.10-15 Read More