Sunday, May 2, 2010

SYB VALUE PROPOSITION CLASS NOTES

  1. Almost all of you said that you are here to really learn how to start a business in less than next 3 years. Nikita was the only exception. If so, having a plan is a must ! You will need at least a financial plan ( Profit and Loss statement and the Balance Sheet) for the first year at least. Ideally for 3 years : year wise. Unless you have a plan you will not have an early signal of whether, and to what extent, and in which area, you are succeeding or failing. Also a plan helps in attracting investors and employees and vendors
    • From Gayatri's presentation we saw that more of the class was willing to invest when her ideas were converted into a financial plan
  2. We saw actual survey data on what new businesses fail. This is an "inverse list" of why new businesses succeed.
    • no plan, no milestones
    • no need, no differentiation, no customers
    • no money because it costed more than you thought and/or it sold less than what you thought
    • no manpower, no organization, no competence
  3. We discussed why "not having an idea" is not listed as a reason for failure. Because, an idea needs to be converted into action and only then it can be implemented.
  4. We took a general format of a P&L account and wrote down the main headings as 
    • Sales Revenue - Taxes - Channel Margins = Net Realization
    • Net realization - Material Costs - Processing Costs - Mfg Overheads = Manufacturing Margin
    • Manufacturing Margin - Sales Force Expenses - Sales Expenses - Sales Promotion Costs = Marketing Margin
    • Marketing Margin - HO Overheads - Depreciation - Interest Costs = PBT (Profit Before Tax)
  5. We discussed that your objective should be begin making a positive PBT from 12-18 month from set up. Otherwise all round demotivation will set in and you may find going difficult.
  6. We saw that probably the most important line in the financial plan is the "Sales Revenue" line and decided to devote the whole day to discussing how to work out the line. I liked your question "how to make a sales forecast when we do not know what to make and we have no experience?". This actually was the purpose of the whole day's proceedings. There does exist a way to - not only work out a good sales forecast - but also to simultaneously decide how much it will cost to make and sell it.
  7. The sales forecast depends on the following factors which need to be analyzed by you and factual research needs to be done by you 
    • Macro level market definition and characteristics ( How attractive is the market ): size and growth rate of existing market, how many customers are in what readiness to buy, whether your product (means service also) forces them to make a change from what they are used to doing. By looking at two presentations we saw that defining the market needs to be done very carefully. When the market was defined as "Corporate Training", the figure came to Rs 650 Crores but then we realized that this aggregate figure actually consists of several smaller markets (example of a market being :  entry level induction training in companies who do not have their own trainers). The moment we come "closer" to the market, we start seeing it much better and then we can begin making better strategies to enter the market and begin making better sales forecasts.
    • Micro level market connect : ( How attractive is YOUR VALUE PROPOSITION) and it has four components
      • The type of customer you have chosen to serve ( called as Target Audience). The mistake done most often in start-ups is to define the target market too broadly - dont say everyone needs my product - the real test is to say who wants it the most and the soonest? Create a business plan for such customers first - they are your "low hanging fruit" - pluck that first !! And only then go after other types of customers.  
      • What are they doing now ( called as Existing Habit)  :  it is necessary to identify the Target Audience - in as vivid a detail as possible - because then it automatically tells you how to serve it better than what they are doing now. For this purpose you may like to segrgate your target audience into 3 groups (1)  they have a need but do nothing (2) they are using some other category of product to satisfy the same need (3) or using a competitor. For example, if you are selling woolen night wear, what the customers who feel cold at bedtime can be divided into the 3 groups as (1) do not use any special product for the cold they feel (2) people who pull a bedsheet or duvet (3) people who wear warm nightwear of a competing brand. 
      • What is the product / service you offer (called as Product / Service Description)
      • How is it better than what they are doing now? ( called as Differentiation) Here you must pick up a specific group (normally the largest) from your "existing habits" answer and then decide why such customers should choose you rather than what they are doing now. 
      • Here let me give you a good example of a good value proposition developed by one of your colleagues :
        • Target Audience : Similarly we also saw a very good way of defining the market at the macro level as providing well reserached medical content, on a per page charge basis, to SME in pharma business who cannot afford to have in-house specialists for this work. 
        • Existing Habit : Almost all such companies rely on different types of external doctors for different speciality products
        • Offer : Doorstep service to SME customers from a medical content center staffed with specialists
        • How is it different :  SMEs will save time because they are dealing with a single company which provides medical content for all types of medial speciality subjects. Instead of the SME company going to doctors, they will get service delivered at their desk. The doctors may not do such a good job because their focus is on practice but the company will do a better job because the staff will be Ph D and focused only on this work.
    • Macro level definition HOW COMPETITIVE IS THE INDUSTRY  (This tells you the prices / margin / sales pressure you will feel ) . This is the Porter's 5 Forces analysis as follows (1) How intense is the competition between various players in the industry - particularly those who are directly competing with you (2) How strong is the bargaining power of your vendors - are any of them likely to come into your business through forward integration. This may happen if you are a large customer for them and if the benefit to them is more than what it will costs them (3) How strong is the bargaining power of your customers - are any of them likely to come into your business through backward integration. This may happen if what they buy from you reflects a large part of what they spend and if they are likely to save a lot of money by doing themeselves what you are now doing for them (4) What is the probability of substitute products which will eat into your business (5) What is the probability of new entrants coming into the industry and eating into your business.
        • to continue the examples used above we can conclude that (1) there is no other existing rival (2) but the vendors (employees themselves) are likely to get into the business once they know the customers (3) the customers are unlikely to get into the business till they reach a level of business where they can afford to employ a specialist only for content generation (4) there are no easily substitutable products (5) new entrants are unlikely.    
    • Micro level sustainability ( HOW SUSTAINABLE IS YOUR BUSINESS)  Based on the above analysis the steps that could be taken will be (1) bind employees through non-compete agreements and giving delayed bonuses, to frequently change people working on each client account, to monitor the workload for each client and reduce the rates once he reaches a level when he can afford to employ a specialist only for content generation. In general your business is more sustainable if your core competence ( that separates you from your competitors and imparts you with the power to hold your customers and pricing better than your competitors)  
    • Go To Market Strategy : Even if all the 4 above factors are present (1) large and attractive market (2) attractive and differentiated value proposition for your target customers (3) the industry is not very competitive (4) the business has built in competence that enables it to retain the customers and pricing better than competition; THERE STILL IS LEFT  the crucial task of "going to market".
      • For standard products the following sequential steps are involved in "go-to-market" strategy (A) Locating target customers and qualifying them as worthy of further and more contact (PROSPECTING ) (B) Contacting and communicating with them (PRESENTING) (C) Overcoming objections, negotiating and getting an order (CLOSING) (D) Conducting the transaction, delivering and collecting (TRANSACTING) (E) Installing, Commissioning and Training (SUPPORT) (F) After sales service including maintenance, upgradation, repair, disposal, replacement etc (CUSTOMER RELATIONSHIP)
      • For customized products the following sequential steps are involved in "go-to-market" strategy of 4 Ds (A) Discovery and exploration of customer business (B) Diagnosis based on the previous stage and concurrence of the customer (C) Design of the solution based on the diagnosis (D) Delivery or implementation of the design.   
  8. Going through the above process of not only ensures that your sales forecast has better chances of coming out close but it also ensures that you become ready to do business in a better fashion because the process forces you to consider important fundamentals as above.        
I request each one of you to write back to me individually and give me a feedback
  1. How useful did you find the day ?
  2. Which were the most useful concepts you learnt that you did not know before ?
  3. Which of these concepts did you find most useful for your project ?
  4. Did the day bring you closer to your project plan?
  5. What improvements could I have done ?  

Dear SYB 07 Batch
It was a pleasure to discuss the topic as applicable to your various ideas. Let me walk you quickly through the main points we made yesterday and the flow of the thought : 
  1. Almost all of you said that you are here to really learn how to start a business in less than next 3 years. Nikita was the only exception. If so, having a plan is a must ! You will need at least a financial plan ( Profit and Loss statement and the Balance Sheet) for the first year at least. Ideally for 3 years : year wise. Unless you have a plan you will not have an early signal of whether, and to what extent, and in which area, you are succeeding or failing. Also a plan helps in attracting investors and employees and vendors
    • From Gayatri's presentation we saw that more of the class was willing to invest when her ideas were converted into a financial plan
  2. We saw actual survey data on what new businesses fail. This is an "inverse list" of why new businesses succeed.
    • no plan, no milestones
    • no need, no differentiation, no customers
    • no money because it costed more than you thought and/or it sold less than what you thought
    • no manpower, no organization, no competence
  3. We discussed why "not having an idea" is not listed as a reason for failure. Because, an idea needs to be converted into action and only then it can be implemented.
  4. We took a general format of a P&L account and wrote down the main headings as 
    • Sales Revenue - Taxes - Channel Margins = Net Realization
    • Net realization - Material Costs - Processing Costs - Mfg Overheads = Manufacturing Margin
    • Manufacturing Margin - Sales Force Expenses - Sales Expenses - Sales Promotion Costs = Marketing Margin
    • Marketing Margin - HO Overheads - Depreciation - Interest Costs = PBT (Profit Before Tax)
  5. We discussed that your objective should be begin making a positive PBT from 12-18 month from set up. Otherwise all round demotivation will set in and you may find going difficult.
  6. We saw that probably the most important line in the financial plan is the "Sales Revenue" line and decided to devote the whole day to discussing how to work out the line. I liked your question "how to make a sales forecast when we do not know what to make and we have no experiece?". This actually was the purpose of the whole day's proceedings. There does exist a way to - not only work out a good sales forecast - but also to simultaneoulsy decide how much it will cost to make and sell it.
  7. The sales forecast depends on the following factors which need to be analyzed by you and factual research needs to be done by you 
    • Macro level market definition and characteristics ( How attractive is the market ): size and growth rate of existing market, how many customers are in what readiness to buy, whether your product (means service also) forces them to make a change from what they are used to doing. By looking at two presentations we saw that defining the market needs to be done very carefully. When the market was defined as "Corporate Training", the figure came to Rs 650 Crores but then we realized that this aggregate figure actually consists of several smaller markets (example of a market being :  entry level induction training in companies who do not have their own trainers). The moment we come "closer" to the market, we start seeing it much better and then we can begin making better strategies to enter the market and begin making better sales forecasts.
    • Micro level market connect : ( How attractive is YOUR VALUE PROPOSITION) and it has four components
      • The type of customer you have chosen to serve ( called as Target Audience). The mistake done most often in start-ups is to define the target market too broadly - dont say everyone needs my product - the real test is to say who wants it the most and the soonest? Create a business plan for such customers first - they are your "low hanging fruit" - pluck that first !! And only then go after other types of customers.  
      • What are they doing now ( called as Existing Habit)  :  it is necessary to identify the Target Audience - in as vivid a detail as possible - because then it automatically tells you how to serve it better than what they are doing now. For this purpose you may like to segrgate your target audience into 3 groups (1)  they have a need but do nothing (2) they are using some other category of product to satisfy the same need (3) or using a competitor. For example, if you are selling woolen night wear, what the customers who feel cold at bedtime can be divided into the 3 groups as (1) do not use any special product for the cold they feel (2) people who pull a bedsheet or duvet (3) people who wear warm nightwear of a competing brand. 
      • What is the product / service you offer (called as Product / Service Description)
      • How is it better than what they are doing now? ( called as Differentiation) Here you must pick up a specific group (normally the largest) from your "existing habits" answer and then decide why such customers should choose you rather than what they are doing now. 
      • Here let me give you a good example of a good value proposition developed by one of your colleagues :
        • Target Audience : Similarly we also saw a very good way of defining the market at the macro level as providing well reserached medical content, on a per page charge basis, to SME in pharma business who cannot afford to have in-house specialists for this work. 
        • Existing Habit : Almost all such companies rely on different types of external doctors for different speciality products
        • Offer : Doorstep service to SME customers from a medical content center staffed with specialists
        • How is it different :  SMEs will save time because they are dealing with a single company which provides medical content for all types of medial speciality subjects. Instead of the SME company going to doctors, they will get service delivered at their desk. The doctors may not do such a good job because their focus is on practice but the company will do a better job because the staff will be Ph D and focused only on this work.
    • Macro level definition HOW COMPETITIVE IS THE INDUSTRY  (This tells you the prices / margin / sales pressure you will feel ) . This is the Porter's 5 Forces analysis as follows (1) How intense is the competition between various players in the industry - particularly those who are directly competing with you (2) How strong is the bargaining power of your vendors - are any of them likely to come into your business through forward integration. This may happen if you are a large customer for them and if the benefit to them is more than what it will costs them (3) How strong is the bargaining power of your customers - are any of them likely to come into your business through backward integration. This may happen if what they buy from you reflects a large part of what they spend and if they are likely to save a lot of money by doing themeselves what you are now doing for them (4) What is the probability of substitute products which will eat into your business (5) What is the probability of new entrants coming into the industry and eating into your business.
        • to continue the examples used above we can conclude that (1) there is no other existing rival (2) but the vendors (employees themselves) are likely to get into the business once they know the customers (3) the customers are unlikely to get into the business till they reach a level of business where they can afford to employ a specialist only for content generation (4) there are no easily substitutable products (5) new entrants are unlikely.    
    • Micro level sustainability ( HOW SUSTAINABLE IS YOUR BUSINESS)  Based on the above analysis the steps that could be taken will be (1) bind employees through non-compete agreements and giving delayed bonuses, to frequently change people working on each client account, to monitor the workload for each client and reduce the rates once he reaches a level when he can afford to employ a specialist only for content generation. In general your business is more sustainable if your core competence ( that separates you from your competitors and imparts you with the power to hold your customers and pricing better than your competitors)  
    • Go To Market Strategy : Even if all the 4 above factors are present (1) large and attractive market (2) attractive and differentiated value proposition for your target customers (3) the industry is not very competitive (4) the business has built in competence that enables it to retain the customers and pricing better than competition; THERE STILL IS LEFT  the crucial task of "going to market".
      • For standard products the following sequential steps are involved in "go-to-market" strategy (A) Locating target customers and qualifying them as worthy of further and more contact (PROSPECTING ) (B) Contacting and communicating with them (PRESENTING) (C) Overcoming objections, negotiating and getting an order (CLOSING) (D) Conducting the transaction, delivering and collecting (TRANSACTING) (E) Installing, Commissioning and Training (SUPPORT) (F) After sales service including maintenance, upgradation, repair, disposal, replacement etc (CUSTOMER RELATIONSHIP)
      • For customized products the following sequential steps are involved in "go-to-market" strategy of 4 Ds (A) Discovery and exploration of customer business (B) Diagnosis based on the previous stage and concurrence of the customer (C) Design of the solution based on the diagnosis (D) Delivery or implementation of the design.   
  8. Going through the above process of not only ensures that your sales forecast has better chances of coming out close but it also ensures that you become ready to do business in a better fashion because the process forces you to consider important fundamentals as above.        
I request each one of you to write back to me individually and give me a feedback
  1. How useful did you find the day ?
  2. Which were the most useful concepts you learnt that you did not know before ?
  3. Which of these concepts did you find most useful for your project ?
  4. Did the day bring you closer to your project plan?
  5. What improvements could I have done ?  

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