WCU ENT CLASS BLOG

I would love entering the international market to sell my product or service.  I welcome the opportunity and it would be the ultimate goal.  Thinking like a macro-entrepreneur going global and allowing for your product and service to better the lives of people worldwide would be very fulfilling.

United States is very business friendly and safe and hence a great place to begin your business and build capital.  Sooner or later when you get big enough and gain enough market shares in the US, you can set your sight on the international market.  Look at Google and Yahoo and it attempts to be a global company.

All the things which make us a very successful country are the things that the international community needs in order to develop.  Not only exporting our goods but also our ideas of the free market, the rule of law and protection of individual and minority rights should be exported.

There are a host of developing countries that have an appetite for American goods and businesses.  BRIC countries of Brazil, Russia, India and China have been growing at high economic rate. Those are opportunities that should not be missed.  Doing the environmental scanning and market research one can be establish its products there.  Look at how mobile phones have taken over the world.

The difficulty of entering a foreign market is the corruption, entrenched interests and the poor safeguard for individual rights against the politically connected.  I would love to market my goods and services to India.  But, in order for a business to succeed there you need the political connection and pay off the right people.  You also worry if an entrenched interest would just take over your idea by force if my idea is shown to be profitable.  It is very questionable if the Indian government would protect my business rights.  Justice is rarely served in the world and that’s why United States is far ahead and will be for years to come.

Just in time inventory system is basically not allowing inventory to rot in your shelf or in the warehouse.  Allowing goods to stay on the shelf will eventually lead to discounting of goods and goods in the warehouse cost rent to storage companies.

Dell is the poster child for just in time inventory system as the customer goes to the website customizes its computer and the computer is made to order.  This allows Dell to keep its inventory low.  Have in JIT inventory system allows you to cater to the needs of the customer versus having to coax the customer to buy a model sitting in your shop.  The key benefits of JIT are low inventory and wastage, High quality production and higher customer responsiveness.

The disadvantage of JIT system is that you are very dependent on your suppliers.  You need a very good relationship with supplier’s in-order to pull this off.  Suppliers have to be reliable.  The supplier depends on the manufacturer, the manufacturer depends on the supplier and the customer depends on both. If a layoff or strike occurs one company may not produce as much product and this can affect the next company in the chain.   If there is a sudden rise in cost of raw materials then it would have been advantageous to have the final product sitting on your shelf or warehouse.

Overall JIT is the new tool in town.  Some of the companies that utilize it and have reduced costs are Toyota, McDonalds and Dell.  For a new entrepreneur it should be something they should think about in building an advantage over your competitors.

Environmental scanning is defined as “the way in which management gathers relevant information about events occurring outside the company in order to guide the company’s future course of action.” It is the search to identify trends that create business opportunities and pose challenges to the continued success of the organization.
Changes, events, and trends in the environment continually send signals and messages which the organization can detect and use it to adapt to new conditions. Today, information gathered through environmental scanning is critical for the organizational survival and success. Scanning focuses on the identification of emerging issues and potential pitfalls that affect the organization’s future. The information helps the organization learn the influences from the environment and how to respond strategically to ensure success.
Small business entrepreneur do not have the capability of creating a formal stand alone environmental scanning unit. Entrepreneur can use informal sources such as business associates, friends, customers, and other counterparts. An optometrist can actually use sales reps and vendors that will usually tell the business about what changes other practices are implementing and what they find to be successful.
It is good for an entrepreneur to take that information and pass it along to members within their organization. This allows the whole organization to learn from the information and will possibly lead to more business success.

Environmental scan is usually a basic answer to some of these questions you ask yourself and your organization1.

How do you expect the demand for your type of product/service to change in the future? Why?
What are the trends that will affect demand? Consider demographic, economic, regulatory, and technological changes as well as global business trends that may affect demand?
What trends will affect the way you conduct your business?
How do economic conditions affect the demand for your type of product/service?
Competition
Who are your strongest competitors? For each one, describe their product/service, image, typical customer, pricing, marketing, and how they differentiate themselves. What do they do best? What is their weakness?
Market Segments
For each of your market segments, describe what a typical customer is like, using the following descriptors.
Demographic (relevant factors such as age, gender, educational level, ethnicity, income level)
Geographic (where they live)
Psychographic (lifestyle and attitudes)
Buying considerations (primary reasons customers purchase your product/service, such as benefits, price, convenience, service, and status)
What other market segments might be attractive for your business?

Reference:

1) Fastrac Growth Venture. Take charge of your business. Kauffman foundation of Kansas city. http://www.entrepreneurship.org/uploadedfiles/Documents/Environmental_Scanning_Worksheet.pdf

There are various advantages when you start a business from scratch. You have a clean history, clean inventory, and the excitement of something new. You get to choose the name of the company, Location, employees, equipment and furnishing. If successful, the satisfaction of knowing you did it all yourself, from the ground up. Starting fresh is probably lowest-cost approach of getting into business.

Starting from scratch presents some distinct disadvantages. They include the difficulty of building a customer base, marketing the new business, hiring employees and establishing cash flow. You have to do that all without a track record or reputation to go on.

In most cases, buying an existing business is less risky than starting from scratch. When you buy a business, you take over an operation that’s already generating cash flow and profits. You have an established customer base, reputation and employees who are familiar with all aspects of the business. And you don’t have to reinvent the wheel–setting up new procedures, systems and policies–since a successful formula for running the business has already been put in place.

On the downside, buying a business is often more costly than starting from scratch. However, it’s easier to get financing to buy an existing business than to start a new one. Bankers and investors generally feel more comfortable dealing with a business that already has a proven track record. In addition, buying a business may give you valuable legal rights, such as patents or copyrights, which can prove very profitable. Buying a business is not a sure winner. If you’re not careful, you could get stuck with obsolete inventory, uncooperative employees or outdated distribution methods.

There are two ways to buy a business they are either buying the business stock of the company or buying the assets off the company.

In a stock sale, the buyer purchases the outstanding stock issue by the selling corporation – or in the case of an LLC, the outstanding membership interests. If you buy the stock of the corporation, those liabilities become your liabilities. You can get a “hold harmless” agreement from the seller that indemnifies you against such undeclared liabilities. But it’s up to you to tell the creditors about this clause and to try and get the seller to honor the clause. That can cost valuable time and money as you may have to pursue the issue in court. Seller’s shareholders will pay taxes on the appreciation in their shares. Sellers will usually prefer stock sales due to the advantageous tax position as well as the assumption of liabilities (creating a clean break for the seller’s shareholders).

When buying a company’s assets, you can buy intangible assets, such as the name of the firm, customer lists, patents, trademarks and contracts. Importantly, you can opt to not buy certain assets that you don’t want. When purchasing the assets of a business, there is an implicit tax advantage to the buyer. That’s because they can “mark up” their newly acquired assets to fair market values and start depreciating them. This can reduce corporate taxes. On the downside, an asset acquisition can be very expensive. The asset-by-asset purchasing process is complicated and also opens the possibility that the seller may raise the price of desirable assets to off-set losses from undesirable ones. Typically the selling company will distribute the sale proceeds to its shareholders via a dividend. With the exception of a pass through entity, the selling company will pay taxes on the asset sale, and the shareholders will pay taxes on the dividend.

Most sellers of a business prefer selling stock because that form of business sale gives them tax-favored capital gains treatment. When possible, many business buyers prefer to purchase the assets of the business instead of purchasing the stock. This form of business sale minimizes the risks of contingent liabilities.

The 4 C’s of credit. There are 4 C’s that the bank looks at to determine your credit worthiness. Those are Character, Capacity, Capital and Conditions.
Bank looks at your character by your past performances. How you handle your financial affairs, business and personal accounts. After all, would you extend credit to some one who has a history of late payments, no payments and defaults? Please remember that no matter how good your cash flow and cash position, a bank will quickly reject your application, if your credit history is sub par. Clearly, then, the wise business owner will ensure that his/her business dealings are also building good character and integrity.
Character is most often determined by looking at the credit history, particularly as it is stated in the credit score (FICO score). Factors that will affect your credit score include: Late payments, Delinquent accounts, Available credit and Total debt. This might just be the most important C of credit.
Capacity refers to the ability of the business to generate cash flow in order to pay back the loan. New business having no track record is considered a risky investment for the bank. You really have to prove the math in your business plan if you are a new business. But, If you are buying an existing business, capacity is easier to determine because business that can show a positive cash flow (where income exceeds expenses) for a sustained period of time has a good chance of getting a business loan.
Capital is the next C. Banks are security conscious; so having capital (assets) helps the bank feel more secure. In addition, having capital can substantially reduce your cost of borrowing. Every business has assets, whether it be accounts receivable, inventory, equipment etc. . When you sit down with a banker, make sure you discuss collateral use it to your advantage. Bank consider capital, but with some hesitation, because if your business folds, they are left with assets that have depreciated and they must find someplace to sell these assets, at liquidation value. You can see why, to a bank, cash is the best asset.
Conditions are the state of the business you are representing. Right now banks will be hesitant to give building developers loans to develop housing units because of the real estate downturn. But if you are representing a business model that has a good ability to repay thier loans and your field is booming then chances are good that you can get a loan. Private dental offices have a much easier time getting business loan according to some business bankers.
So build your character, capacity, capital and wait for the right conditions to apply for a business loan. If you do your homework then you will succeed.

The 2006 ACFE Report to the Nation on Occupational Fraud and Abuse” demonstrated that small companies are just as vulnerable as, if not more vulnerable than, large companies to fraud. The risk to a small company can be greater because smaller companies often have less ability to absorb the losses associated with fraud. Smaller companies are also at more risk than larger companies because they often do not have the resources for segregation of duties, external audits, computer programs, and other expensive fraud prevention measures.  The ACFE reports that in 42.1% of the cases there was no loss recovered and in 23.4% of the cases, 25% or less of the loss was recovered.

The direct monetary loss associated with fraud is the cost of the fraudulent activity itself, including the money taken, inventory stolen, or other asset loss due to the fraud.  The indirect costs include the legal representation for the company against the perpetrator in civil actions.

According to Robert Cardell¹ Donald Cressey (well known criminologist) created the Fraud Triangle in which each leg of the triangle represents a different component of what causes a white collar criminal to commit the crime. The three sides of the triangle are 1) Rationalization; 2) Perceived Opportunities; and 3) Social Pressures facing the individual.  The last leg, Perceived Opportunities, can be managed by the organization quite effectively.

There are five methods of fraud detection: external audits, internal audits, fraud training, hotlines, and surprise audits.  According to Robert Cardell in the March 2007 edition of the Nebraska Lawyer magazine the three most effective method of fraud prevention is the hotline, surprise edition and fraud education.

The hotline is generally the least expensive option of fraud detection.  An anonymous reporting system could include an anonymous email account, a drop-box outside the office door, a mail slot in the office door, a fillable form on the intra-office website or a number of other methods which employers could use to encourage the anonymous reporting of fraud.

Surprise audits can be of great use to a smaller company.  Such an audit could be limited in scope and thus be very cost effective. An audit could be limited to a time period, certain type of inventory, a susceptible account, or any other limiting factor. Surprise audits can be particularly beneficial if there is a suspected fraud regarding a single division or individual within the company.

The third way in which companies can prevent fraud is through employee education on the topic of fraud, fraud awareness, or ethics. If company management is not able to review every transaction, which most cannot, then the next best thing is having other employees who are vigilant to fraud and fraud symptoms.  Employers can provide employees with fraud awareness or ethics training in many ways. Employees could be allowed to watch a video of corporate rules regarding accounting for expenses, attend a presentation from management or accounting on proper documentation procedures, monthly emails from management on firm policies and procedures, or reminders on message boards in the employee lunchroom. The overall costs for implementing such steps are small as well when compared to the costs of fraud.

According to Robert Cardell each of the three steps of establishing a hotline, surprise audits and employee education can decrease an employees perceived opportunities.  Thus a small business can manage at-least one of the component of the fraud triangle.

Reference:

Here is the link to the ACFE report: www.acfe.com/documents/2006-rttn.pdf.

1) Cardell, Robert.  The  three steps to a fraud prevention in the workplace.  The Nebraska Lawyer March 2007 pages 16-19.

Other Links:

http://phoenix.gov/safebiz/sbfraudexcerpt.pdf

Let’s take for example McDonalds.   McDonalds runs its stores via two different models it operates its own corporate chain stores and then it leases some of it stores to individuals and sells some of it stores to individuals.  These individuals that buy the lease to the store or buy a new store are called frachisees.  They also pay management fees to McDonalds Corporation which are usually royalty fees and the training and advisory services fees.  There is also a fee for the “Disclosure” which is separate and is always a “front-end fee”.  The franchisee also pay a percentage of their gross revenues to the franchisor (McDonalds corporation) which is usually negotiated by their contract.   That percentage is usually a 3-5% range or maybe more.  The franchisor owns all the trademarks, business methods, and supplies that it allows others to use under its contract.

So in a frachisee-frachisor agreement another individual has to buy the right to run the store under the name of the corporation for a limited time and pay certain fees and gets to keep the profits after paying a percentage to the profits to the corporation.  The big corporation gets to sell somebody the right to run their store or own their brand name for a certain time, gets a certain percentage of the profits and charges management fees and other fees to the franchisor.

The advantage to the big corporation that it gets start up capital from the franchisor, motivated management, and reduced risk by shifting some of the liabilities over to the franchisor and gets a chance to grow at the expense of the franchisor.  The advantage to the franchisor (or a nascent entrepreneur) is that it gets a proven business model, low chances of failure (return on investment), established customer base, free marketing and advertising, and free training of staff.

In my opinion the key in a franchisee-franchisor agreement is the time limit of the contract and ownership of land/building.  If the big corporation is shrewd they can really tighten the noose on the franchisor if they are very profitable.  The renewed contract signed for another limited period of time will almost always have increased charges which will take a bigger chunk out of the profits of the owner.  If the owner has the lease they can increase the rent.  Thus the big corporation can force out an owner if they really want by increasing their fees and rent.  The owner who owns the land and the building has the real bargaining power because they can always they can always threaten to sell the building and the land.  Also if your contract has a longer time period then you basically delay the renegotiation to higher fees.

The failure rate for franchisees is lower than for independent businesses is because it is operating a already successful business model.  It has the benefit of getting the help and the experience of a successful corporation.  The owner is motivated to make a profit so they drive their employees to work hard.  The location that has the best chances to be profitable is picked because the big corporation has the expertise and market research capabilities to do that.

I do not know why anyone would prefer to be a manager of a company owned store? Most likely because they do not have the capital and are risk averse individuals.  They may also like the steady paycheck, chance to move up the company ladder and the ability to walk away with ease via transfer.  As a company manager you don’t get to realize the profits from all your hardwork because you just get a steady paycheck.

The reasons I want to start my own business are many.  The most important thing that drives me to do it would be the personal satisfaction of watching the fruition of your ideas.  When we think about a micro entrepreneurs and macro entrepreneurs, my goal is to be a macro entrepreneur.  It is about making a difference in the world around you and not all about making a profit.  Coming up with new ideas and systems to make things more efficient and life easier for all is the ultimate goal.  The elements that I feel are the most important is motivation, balancing family life and money.

Motivation is definitely important to starting your own business.  You need to be actively engaged, always thinking and getting ready to take the next steps.   I am always thinking about new business strategies and new ideas, but most of the time it just stays there in my head.  I do not take the next step to take that idea into fruition.  What I need to do is to actually write down my business ideas and then list the steps that it would need to take it to fruition.  Writing out the steps in detail and establishing specific timelines and goals would be important.  I need to start getting into a habit of doing that process of writing down my ideas and the specific goals with timelines that would lead that idea into fruition.

Balancing family and time management is the next difficult obstacle to establish your business.  I have a lovely wife and one year old daughter and it is difficult to find time for anything.  You need to find that right balance between pursuing your entrepreneurial goals versus creating time for your family life.  In the end it is all about the family and one should not try to forget that.  The business you are in is to provide a better life for your family.  So the key for me is to constantly assess once a month whether I am spending enough time with my family.  Maybe I need to do a self assessment and ask my wife and assess both her verbal and non-verbal cues.  Getting involved in business strategy but estranging your family is definitely not the way to go.

Capital to start a business is another obstacle to moving forward in your business goals.  How much risk do you want to take?  Is it worth it?  Am I going to come out on top, break even or take a loss?  That usually puts me in a conundrum.  I need a find a way to a do risk analysis to see how if the business venture I am thinking about would not lose me too much money.  Precisely. why I am in this masters program is to learn those techniques and get that knowledge.  Knowledge is power and more I gain puts me in a better position to make those risk assessment decisions.

So i finally created my first website and a blog site to go along with it.  It is now very exciting times.  Assignments will be posted soon.

thankyou,

manoj