What are the Pros and Cons of Doing Business Entirely Online?

The internet and related technology has opened new frontiers for entrepreneurs seeking to start new ventures. E-Commerce is not suited for every business situation. Entrepreneurs need to carefully review the pros and cons of an online business and decide if it is a good fit with their business model and personal strengths and goals.

eBusiness Pros:

Lower costs: Start-up costs are relatively cheaper than bricks and mortar businesses. If you are setting up your own website with your business plan you may only need to pay for a domain name and web hosting which could cost less than $100. More complex sites may require many thousands of dollars to develop but when compared to opening a restaurant, for example, the costs are very low. In addition to lower start-up costs, overhead, operational costs and administrative expenses are also relatively lower than other businesses due to little or no staff required as well as lower (or zero) physical location costs.

Global Web presence: International customer access is crucial to many businesses in our global economy.

Business conducted 24/7

Quick response to customers: Information that customers need can be readily available online in a convenient format. Technology also enables many automated services which makes shopping fast nad convenient for customers.

Control and flexibility: The fact that they are doing if online means they can do it anywhere, anytime, be it at the office, at the park, or from the comfort of your own living room. Work from home or remotely: Spend more time with your family.

eBusiness Cons:

No immediate customer visibility: Customers cannot see or evaluate your location. Customer awareness for your business may be slow to develop due to the considerable time and expertise required to build web traffic.

Lack of physical contact with customers: Customer loyalty is often forged with direct physical interaction with customers. Credibility and trust are also enhanced when customers know where to find you. Online is still seen as inherently riskier.

Constant need to maintain sites

Long hours: Just because there is more flexibility with an online business does not mean a reduction in working hours. In fact, owners of online businesses may find it difficult to distinguish between working hours and personal/family hours.

Competition is high: Increasingly people are becoming aware of the advantages of running an online business and also more technology savvy and are starting and growing online businesses. With the number of people starting a business online increasing at high levels there is greater competition for traffic which makes it harder to break through. Even when the entrepreneur has a winning business model, competitors can often easily copy it and therefore impact negatively on profits.

Consumers prefer to buy some products in stores: Some products are better sold in stores where they can be inspected, tried on, or tried out. (Interestingly, there is a growing segment of consumers who will inspect a product in a store and order the identical product online.) Other reasons to buy products in stores include convenience and additional services such as installation, expert advice, maintenance agreements, etc.

Useful Links

http://www3.babson.edu/Publications/JR/PastIssues/Volume81Issue4/Internet-Versus-Bricks-and-Mortar-Retailers-An-Investigation-into-Intangibility-and-its-Consequence.cfm

http://www.howtostartabusiness.ws/business-guide/pros-cons-ebusiness.php

http://www.informationweek.com/791/retail.htm

http://www.wirelessweek.com/Articles/2010/05/Devices-Online-Vs-Brick-and-Mortar/

Why are Large Firms so Slow to Change?

Large firms can be notoriously slow to change. For example, Polaroid Corporation's refusal to move into digital imaging when the photography industry was clearly becoming more digital, adversely affected the company, ultimately leading to bankruptcy.

Reasons large firms can be slow to change include:

Communication challenges: Communication can often become inefficient in large organizations due to the greater number of communication channels that develop with large size. One-on-one communication becomes impractical with large organizations leading to different groups within an organization communicating with each other but not necessarily with other groups.

Slow response time: In a large company an employee’s actions are often far removed from the results of those actions. For example, in a large manufacturing corporation, mistakes of inefficiencies in operations are often not identified until managerial cost reports are generated and analyzed weeks or months after the actions that produced the negative results. After such a time gap it is often too late to avoid the losses incurred from such inefficiencies or mistakes.

In a much smaller firm employees often know immediately if consumer preferences change, for example. Not only will the smaller firm employee be more likely to recognize a potential problem or opportunity they will often be in a better position to respond quickly to the situation. Employees in a smaller organization are also able to understand the relationship between the various operations of the firm and the results these operations produce. A large company would need to do research, create an assembly line, determine which distribution chains to use, plan an advertising campaign, etc., before any change could be made. By this time smaller competitors may well have grabbed that market niche.

Unwillingness to change: Large, older companies are often characterized by an attitude of, “we’ve always done it that way, so there's no need to ever change". Refusal to consider change, even when indicated, is toxic to a company, because changes in the industry and market conditions will inevitably require changes in the company, in order to remain competitive.

Mature market stagnation: Large firms also tend to be older and in mature markets. Both of these have negative implications for propensity to change as well as future growth potential. Additionally, firms that have been around for awhile tend to have a large retiree base, with high associated pension and health costs. Add to these costs the tendency for large corporations to be unionized and the propensity to change is further suppressed.

Burdened by bureaucracy: The larger a company becomes the more dependencies there are between decisions, which makes it natural for decision-making committees to grow in number. In addition, processes are added in layers over time, often complicating operations and requiring more employees to accomplish tasks. This result is in companies burdened by bureaucracy where 20 people are “required” to complete a task that is accomplished at a smaller, leaner competitor by 3 or 4 employees, often with better results. Over time, administrators forget that it’s possible to make things happen without talking to a committee, filling out forms, or doing extensive market research. The challenge is that it’s typically easier to add processes than it is to remove them.

Protection of Status quo / Follower mentality: For anyone interested in progress, risk taking, change or growth potential, a large corporation can be an incredibly frustrating place to work, because the dominant culture is one of playing it safe and political correctness. 

Differences in incentive systems: Medoff and Abraham (1980), who examined the pay of managerial and professional employees in two large manufacturing firms and found little differences in earnings resulting from superior performance. In addition, Lawler (1971) reviewed cites six separate studies of the relationship between pay and performance in large companies, and found that the studies generally concluded that pay is not very closely related to performance in many organizations that claim to have merit increase salary systems. The studies suggest that many business organizations do not do a very good job of tying pay to performance. While many companies claim their incentive systems are based on performance most organizations do a poor job in this regard. What is often found, however, are horizontal equity systems which are concerned with maintaining equal treatment to everyone at the same level in an organization with the objective of “fairness”. While fairness may be achieved an unintended side effect can be complacency and a perpetuation of status quo.       

By contrast, small firms are better able to lure top talent than large firms due to their comparative advantage in offering aggressive incentive packages. Such packages are more likely to reward individual contributions and therefore, are more attractive to innovators as compared to traditional, merit-based systems. In addition, at small firms, senior managers are more likely to be involved in employee recruitment and are better able to judge the quality of job applicants. Also, small size helps these firms avoid information overload while sustaining cooperation. As a result, small firms are better able to generate unique insights from their own experience to support change as compared to large firms.

Although many large corporations can be characterized by the reluctance to change as described in this blog post, it doesn’t have to be that way. Large organizations can be dynamic agents of change. Take, for example,  Apple’s incursion into the sluggish music business with the introduction of the iPod in 2001 and then the iTunes music store in 2003. At the time, Apple was faced with slow growth in the high-end computer industry. Even though industry conditions were not promising, Apple had all the resources of an established, well-run corporation: highly skilled employees, brand appeal, and access to capital. And the company was hungry for growth. Since Apple entered the music business, the company’s profit has increased more than 3,000 percent, from $57 million in 2003 to nearly $2 billion in 2006.

Useful Links

http://canback.com//archive/jmanec.pdf

http://www.scribd.com/doc/51465240/2/II-Promotion-Based-Incentive-Systems

http://en.wikipedia.org/wiki/Peter_Principle

Buying a Business

Building a business from the ground floor tests every aspect of one’s entrepreneurial ability. The challenge and potential to create a business unlike any other is part of the entrepreneurial drive and is the only option for many independent-minded entrepreneurs. However, in many circumstances starting from nothing, bootstrapping, building a customer base, and slowly building a business is the only option due to funding considerations.

Other entrepreneurs choose to purchase an existing business. When starting a business, every aspect of the business is unknown. You don't know who your customers will be; you don't know how many employees you will need; you don't even know if the business will succeed! When you buy an established business, all of those “unknown” details have been worked out by the previous owner.

In order to buy the right business or franchise, you need to do a thorough investigation of its historical performance, its operations, current status, the staff and management, competition, the industry and its future potential. Once all this analysis has been completed, you will then have to determine how it measures up with your skill, expertise and leadership. All of which is so much easier to do with an existing business. There are a number of reasons to consider the purchase of an existing business rather that starting one:

Advantages

• Risk. Buying an established business, and therefore proven concept, is less risky – as a buyer you already know the process or concept works. Consequently, financing a purchase is often easier than securing funding for a start-up business for that very reason—the business has a track record. A bank will be able to look at the historical results for the business, not just rely on projections (which they assume will be wrong anyway).
• Proven business concept and processes. Proof of concept is invaluable to an entrepreneur. With a proven model the business has immediate credibility and perception of success. There are also proven products, services, marketing and, sales strategies in place.
• Brand. When you purchase an existing business you’re buying a brand. The on-going benefits of any marketing or networking the prior owner has done will transfer to you. When you have an established name it’s easier to place cold calls and attract new business than with an unproven start-up. A brand is an intangible asset that’s difficult to put a price on.
• Relationships/Goodwill. With the purchase of an existing business, you will also be buying an existing customer base and established suppliers that may have taken years to develop. Seller support during the transition can help the buyer to establish good relations with suppliers and customers thus helping the buyer to capitalize on the goodwill that may have taken the seller years to establish.
• Growth. When you buy a business, you can start working immediately and focus on improving and growing the business immediately. The seller has already laid the foundation and taken care of the time-consuming, tedious start-up work. Starting a new business means spending a lot of time and money on basic items like computers, telephones, furniture and policies that don’t directly generate cash flow.
• Trained Employees. In an acquisition, one of the most valuable and important assets you’re buying is the people. It took the seller time to find those employees, train them and assimilate them into the company culture. With the right team in place, you will have an easier time implementing growth strategies. In addition, with seasoned employees in place it will be possible for the entrepreneur to take vacations, spend time with family, or work on other business ventures. Start-up owners are often unable to take time away from their business for years.
• Cash flow. An existing business can generate positive cash flow from day one. The sale can be structured so you can cover the debt service, take a reasonable salary, and have some left over to take the business to the next level. On the other hand, some experts say start-ups aren’t expected to make money for the first three years.

Disadvantages

• Substantial Investment. The investment necessary to buy an existing business can be substantial. In addition to acquiring the business assets there may also be substantial professional fees incurred in the transaction, including attorneys, accountants, surveyors, etc. It is important to seek the advice and guidance of business finance experts, lawyer and certified accountant before you begin your search for an acquisition target. A good “team” is necessary to put the best total package together to ensure a successful acquisition and success long term.

• Additional Investment. If the business requires a turnaround you may need to invest quite a bit more in addition to the purchase price to give it the best chance of success.

• Legal/Contractual. You may be bound by any existing contracts or other legal obligations or liabilities the previous owner leaves in place. In addition, certain contracts or licenses necessary to the success of the business may not be transferable to another owner or may take time to be transferred.
• Poor Reputation. You also need to consider why the current owner is selling up and how this might impact the business going forward. While goodwill is a desirable advantage of buying a business, if the seller has a poor reputation considerable time, effort, and money may be required to establish good relations with customers and suppliers. Good due diligence can uncover problems in this area, as well as with the other disadvantages.
• Goodness of Fit. The previous corporate culture and employees may not be a good fit for the management style of the new owner. The larger the discrepancy between the new owner’s style and the established culture, the greater the possibility of conflict. In order to buy the right business or franchise, you need to do a thorough investigation of its historical performance, its operations, current situation, the staff and management, competition, the industry and its future prospects. Once all this analysis has been completed, you will then have to determine how it measures up with your skill, expertise and leadership.

Two Ways to Buy a Business

A buyer purchasing a business has two options for structuring the deal (assuming the transaction is not a merger). The first option is an asset acquisition, in which you purchase only those assets you want. The advantage of an asset acquisition is protection from legal liabilities since instead of buying the corporation (and all its legal risks), you are buying only its assets.

The purchase of assets both tangible and intangible is a tax advantage for the buyer. Not only can you choose to purchase only the assets that you feel are necessary for the successful operation of the business, you may also reduce your company taxes through the mark up and depreciation of tangible assets. While this method is not nearly as appealing for the seller it is a clear advantage for the buyer.

The other option is a stock acquisition, in which you purchase stock. Among other things, this means you must be willing to purchase all the business assets--and assume all its liabilities.

The final purchase contract should be structured with the help of your acquisition team to reflect very precisely your understanding and intentions regarding the purchase from a financial, tax and legal standpoint. The contract must be all-inclusive and should allow you to rescind the deal if you find at any time that the owner intentionally misrepresented the company or failed to report essential information. It's also a good idea to include a no compete clause in the contract to ensure the seller doesn't open a competing operation in your area. This option is preferred if the expectation is for the business to continue operating in a relatively seamless manner which could preserve much of the customer base.

Useful Links:

http://www.businesslink.gov.uk/bdotg/action/detail?itemId=1074410852&type=RESOURCES

http://www.entrepreneur.com/startingabusiness/startupbasics/article79638.html

Considering a Franchise?

What is the difference between a franchisee and a company owned store within a franchise chain? Why might one prefer to be the franchisee or the manager of a company owned store?

A company owned store within a franchise chain is owned and operated by the corporation. A manager, employed by the corporation, runs the store. As an employee of the corporation, the manager is only as independent as the employer allows. This arrangement is most often seen in larger corporations which use retained earnings to open company-owned stores and to purchase existing stores from franchisees.

Owning a franchise gives the entrepreneur an opportunity to experience the rewards of business ownership. The rewards of ownership include self-direction (although somewhat limited by the franchisor) and the potential for high returns. Franchise owners usually have responsibilities which extend beyond managing their location. In fact, many franchisees own and oversee multiple locations.

By contrast, a store manager is employed at the discretion of the employer. Management can be a rewarding career and may provide the ideal career for the right individual. In addition, managing a chain does not put personal capital at risk. Not everyone has the skill set, the desire, or the financial resources to own their own business. Given the differences in individual makeup, it is impossible to say, in general terms, whether management or business ownership is better.

What is typically provided by a franchisor to its franchisees? Why would these be valuable to a nascent entrepreneur? Why is the failure rate lower for franchisees than it is for independent businesses?

The appeal of starting a franchised business comes from ability of an owner to start a business that is ready to go versus the uncertainty and risk of an independent startup.

Franchises offer a number of advantages including a proven business model, support systems, shortened learning curve and recognizable brand. For example, franchisors can help franchisees with financing, advertising and promotion, finding locations, negotiating leases, and managing numerous other day-to-day operational and administrative tasks. There is certainly value to buying a proven business model. Franchisors hold all locations to a consistent standard which is key to promoting consumer confidence. To assure standardization, franchisors offer and often require training and ongoing marketing for its franchise owners in order to maintain consistency and quality and to protect the overall reputation of the corporation. Providing experience and expertise is essential for the success of a nascent entrepreneur who, more often than not, requires the operational and administrative scaffolding that a franchisor can offer. While these franchisor functions are attractive, they need to be weighed against the often substantial price and fine print that comes with the franchise. Franchisees must adhere to a strict agreement detailing how they will operate their franchise as well as the franchise fee schedule which outlines the percentage of their profits, or flat fee, they must pay to the franchisor.

The failure rate is typically lower for franchises than startups due to the established name or brand of the franchise. When opening a franchise, the owner has instant credibility; customers know what to expect which leads to greater confidence in choosing the business. However, franchises still come with some risk – if you open a franchise in the wrong location, or open a store with a new or unknown franchise you could have just as much trouble as any other nonfranchise start-up. In most cases however, the franchisor does not want to see their franchisee fail because it reflects poorly on the overall brand and can be a red flag for potential owners so they will provide training upon initialization and oversight throughout operations as needed. The franchisors really don’t want their franchisees to fail. The old franchise adage holds: “You’re in business for yourself; not by yourself.”

The down side of franchises is that you’re not really an entrepreneur; it may be the next best thing, but you do have a hierarchy that you must answer to and restrictions which can be very confining. Don’t believe me? Ask some of the owners of Cold Stone Creamery franchises. A June 2008 Wall Street Journal article discussed the unusually high number of Cold Stone Creamery franchises that had been closed or put up for sale by their owners. Many of these owners suffered substantial financial losses along with severe emotional distress. The problems facing Cold Stone franchisees are not limited to that organization; they are an all too common experience for franchisees from an array of corporations.

At Cold Stone, the franchisees found that their costs were too high relative to their revenues. Some of the specific problems facing Cold Stone franchisees include: high overhead, a saturated market, and franchisor control. Franchisees complained about the way they were required to operate their businesses. For an example, the franchisor requires franchisees to buy Pepsi products from approved distributors who can be substantially more expensive than alternatives. Cold Stone does not allow franchisees to do their own advertising, and even force franchisees to honor discount coupons mailed out by the corporate office.

While examples like Cold Stone are cause for caution, it would seem to make sense that starting a business through franchising would be the safest track in many instances. It is just important for the owner to do due diligence. Make sure that the franchise you are inspecting is a good fit. Remember that just because a business is a franchise does not mean that you will automatically be successful. If a franchisee does not seek out a business opportunity that matches their interests, skills, budget constraints, and risk tolerance the probability of success diminishes. However, with all other factors being equal, the franchise will lead to quicker results and returns.

Helpful Links about Franchising

http://online.wsj.com/article/SB121321718319265569-search.html

http://franchises.about.com/od/franchisebasics/a/history.htm

http://www.entrepreneur.com/magazine/entrepreneursstartupsmagazine/2009/october/203504.html

http://www.sba.gov/idc/groups/public/documents/sba_homepage/serv_sbp_isfforme.pdf

http://www.entrepreneur.com/franchises/index.html