Develop a business proposal based on an actual or potential opportunity which has not yet been exploited
1.0 Introduction
Innovations and new business ideas are the cornerstone of business development and wealth creation in an economy (Drucker, 1993). As such, the creation of robust business proposals and plans to exploit these opportunities is likewise vital to ensuring ongoing economic success. This piece will analyse three potential entrepreneurial business opportunities, decide which one has the most potential, and then apply relevant economic theories and models to create business plans and financial projections for said opportunity, along with a discussion of any risks and considerations for this business to address.
2.0 Opportunity selection
2.1 Creative thinking model
Walls (1926) creative thinking model contains five stages: preparation, incubation, intimation, illumination and verification. However, in line with Wiener’s (1971) analysis, this piece will condense this model to a four stage model, ignoring the intimation stage, which can be argued to represent a sub stage of the process.
Idea 1: Mobile Grocery Retail Service
Preparation: In many rural areas there are significant distances between shops, and many people do not have access to local shops selling a wide variety of products. The small size of many villages also makes it impractical to serve them with a large scale brick and mortar supermarket or by requested online delivery.
Incubation: The idea was mainly developed from the author’s experience of living in a rural community, where village shops tended to be poorly stocked, and hence rural dwellers tended not to have access to the same level of choice as people in urban centres.
Illumination: The concept of a mobile grocery retail service, with a wide range of groceries sold direct to consumers from the back of a van was seen as the only feasible way to serve scattered rural communities with no major supermarkets of their own. This would take advantage of existing wholesale and distribution facilities set up across the country.
Verification: Research from Datamonitor (2007) indicates that the grocery sector is very large and competitive, but that no store manages to maintain a significant level of loyalty amongst its customer, with over eighty per cent of customers using more than one brand of grocery retailer. As such, customers tend to be very flexible about where they buy groceries, thus creating an attractive niche market and meets verification criteria.
Idea 2: Farm selling its own branded range of organic products
Preparation: As with the grocery service, past experience of living in a rural community led to the conclusion that many farms are struggling because they fail to make use of all their available opportunities.
Incubation: After considering various diversification ideas, the idea of selling farm made goods in shops developed as the only one yet to be fully exploited. This led to the idea of developing a distinctive brand appeal and partnering with a major supermarket chain.
Illumination: Research by Trobe (2001) indicated that consumers have an increasing preference for locally grown, organic and ethical food, and that they want to source it from the manufacturer to be sure of its organic credentials. As such, a farm branded product would provide the required level of assurance, above that offered by a supermarket corporation.
Verification: MarketWatch (2005) indicates that consumers are willing to pay significantly higher prices for organic food they know is grown in the local area. In addition, the Soil Association (2008) demonstrated that the organic food market in the UK grew by around 22% in 2006, and that growth was predicted to continue in the future. This makes the market very valuable for new entrants. However, the fact that this opportunity would need to be undertaken in partnership with existing supermarket chains would likely make it difficult to create a business plan without first finding a retail partner.
Idea 3: Small screen cinema business
Preparation: The film entertainment business is very volatile, with some films making huge revenues whilst others take very little. As such, the author tried to work out a way to minimise this volatility by creating an offering with a steady cash flow and no ‘box office flops’.
Incubation: Unfortunately, in a creative industry such as film entertainment, there is no way to find opportunities which are guaranteed to succeed. As such, the aim was to find a way of extracting more revenue and value from existing successful films.
Illumination: The current lifecycle for a film goes from cinema to DVD to pay television to standard television. This means that only a quarter of the lifecycle is spent in the cinema, whilst the remaining three quarters is spent in people’s homes. This reduces the extent to which the film can be shown to large groups. As such, the aim was to extend the lifecycle for large groups, by showing films on smaller screens in smaller cinemas before they go to DVD, making a more exclusive environment than standard cinemas.
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Verification: Unfortunately, in this area there was little research available to indicate that the opportunity was likely to succeed. Many filmmakers are reluctant to adjust their model for fear of undermining their mainstream box office revenues, and also resist making films widely available before they go to DVD due to the risk of piracy. As such, this idea did not achieve verification or present itself as a viable opportunity.
2.2 Opportunity assessment
Based on the analysis above, there was insufficient data to assess the third opportunity, which indicates that it does not fulfil Casson’s (1982) criteria of providing new goods or services at greater than their cost of production or Shane’s (1996) definition of recombining resources to produce a profit. As such, the only two ideas to be assessed are the first and second. Of these, the second idea cannot be pursued in depth at this stage, as it requires a significant degree of commitment from a partner organisation before it can be investigated in detail and financial resources can be determined. This implies that idea one is the one which should be taken forward.
3.0 Analysis of business concept
“Setting up a mobile grocery retail service with the aim of serving communities with a wide range of groceries in convenient local locations”
Food 2 You is a new venture which will look to service local communities which do not have access to a large supermarket or shop. The venture will operate a number of refitted lorries which will contain a wide range of groceries beyond that which would be available in a typical village shop. The mobility of this service will make such a range cost effective because Food 2 You will not be limited by the geographic distribution radii possessed by most local stores. Instead, the lorries will be able to visit numerous villages; thus achieving economies of scale similar to a supermarket whilst maintaining all the convenience of a local store.
3.1 Difa analysis
According to Rae’s (2007) argument, the existence of a demand and the ability to fill it is key to the success of any innovation. As such, the Difa model will be used to assess the level of demand, the innovation of the model, the feasibility of supplying the market and the attractiveness of the potential segment.
Demand – The UK grocery industry is forecast to grow by 35% from 2007 to 2012, a compound annual growth rate of over 6% (Datamonitor, 2008). In addition to this, Cotterill (2006) reports on the findings of various studies into the competitive nature of grocery retailing markets, finding that customers often lack choice about the services available to them. As such, a completely new service which is unlike any previous offerings could succeed in attracting a large number of customers.
Innovation – As discussed above, the main innovation in this offering is that it is unique in grocery retailing. Currently, customers have the choice of either visiting a shop, which requires time and effort, or ordering online which requires extra delivery expense and the risk of the wrong goods being packed or supplied. Food 2 You offers the certainty of making selections from a shop, whilst also providing the convenience of local food delivery.
Feasibility – A MarketWatch (2007) report indicates that consumers are more active in choosing where to shop for food when compared to any other retail sectors. Indeed, shoppers for food and groceries regularly use three stores, on average, to fill all their shopping requirements. This implies that it is feasible to fit this service into existing demand and make a profit from it.
Attractiveness – Ketzenberg and Ferguson (2008) argue that one of the key issues facing many shops is how to handle the slow moving perishable items which have higher levels of waste and lower revenues. By combining all such items into one mobile store, and selling them in a variety of locations, Food 2 You can access a niche which is not particularly profitable for other shops. This will help it develop rapidly with little competition from the established players, who have little profits to defend in this area.
3.2 Business model
See Appendix 1 for the business model
3.3 Market potential & segmentation
Datamonitor (2007) claims that grocery customers are very flexible regarding the locations and times at which they shop, with low levels of brand loyalty. As such, they are very likely to switch supplier if there is a more convenient option available. As a result, this business will be based strongly on providing a convenient solution, giving customers what they want, when and where they want it. The expectation is that customers will be willing to pay a small premium for this additional convenience, and thus this service will be able to extra significant rents.
The service will likely have three target customer segments:
Families where one or both parents work, and hence they are under significant time pressure and regular shopping trips increase this pressure further. In addition, these families would tend to have higher income levels, due to both parents working, and will thus be able to afford to pay the premium.
Elderly or retired people who will find it challenging to go to the shops on a regular basis. As such, they will often be limited to local shops with a very poor selection and quite high prices due to a lack of economies of scale. As such, this segment would potentially not see higher shopping bills due to using the service, but will benefit from increased convenience.
Homemakers and people who work from home. These people may have chosen to stay at home because they have small children, something which can make shopping in a large store very difficult. In addition, they do not commute to work, and hence have a lower geographic range when shopping. Also, as this segment is not constrained by time, and is growing due to the increase in flexible working (Vant, 2003), it could be one of the largest growing market segments in the coming years.
4.0 Resources, returns, & risks
4.1 Financial plan & forecasts
See Appendix 2 for detailed financial plan and forecasts.
4.2 Proposed investment & anticipated returns
The service is such that it can be started out on a small scale and can grow further as its profile and demand rise. As such, an initial investment of £200,000 should be sufficient. £100,000 of this could be used to purchase the first two lorries and refit them to carry goods including refrigerated food. The remaining £100,000 would be used to buy groceries on the wholesale markets and to provide ongoing cashflow. Given the anticipated demand for this service, this capital should be fully recouped within eight years.
4.3 Required human capabilities
The main human capabilities needed are in two areas. The first of these is the ability to source and negotiate groceries at or near to wholesale prices. This could be quite difficult, as the supermarkets in the UK tend to have significant power over the distribution networks for groceries. As such, it would be ideal to either recruit someone with supermarket experience, or to enter into a supply partnership with a supermarket or a major grocery supplier in order to purchase groceries on the same terms as other major players (Kumar, 2008).
The second capability required is rather more mundane: the service needs drivers who can also operate their lorries as mobile shops. It is envisioned that the lorries will operate by opening one side completely, so that customers can see all products within the store. However, this will not allow a significant number of customers to enter the lorry at any one time. As such, the driver will also need to fetch most goods for the customer, bag them and perform all other customer service actions. This will require a somewhat unique combination of human capabilities.
4.4 Risk assessment
There are several risks to this venture:
Lack of acceptance from customers over established brands
Failure to launch in a local market with sufficient customer demand
Failure to negotiate partnerships or supply deals with wholesalers
Rising costs such as petrol prices
Inadequate start up capital
Mitigation strategies are as follows:
Carry out local advertising prior to launch
Conduct studies of market demographics to determine which are the best areas for the target market
If supply deals cannot be negotiated, the venture will not be cost competitive and will likely have to be abandoned
Rising petrol prices should drive up grocery prices across the board hence prices can be raised to absorb the additional cost
Additional drawdown facilities should be negotiated to provide additional cash flow in case of difficulties
5.0 Start-up & marketing plan
As discussed above, the initial actions will focus on using demographic, social and economic analyses to determine the best markets for the service to launch into. Households in these areas will then be surveyed to determine the likely response to the service and generate word of mouth publicity. This is consistent with Collinson and Shaw’s (2001) view that entrepreneurial organisations should structure their activities around the market.
5.1 Internal evaluation
Food 2 You’s main strength will be its flexibility and responsiveness, as well as the relationships it can build up with the local communities. For example, customers will be given the opportunity to place orders for goods they want, which can be sourced through the supply deals and be collected by the customer the next time the lorry is serving the area. However, the main weakness of the service is that it will not have the marketing and buyer power of the main supermarkets, and thus will not be able to match them for price. Also, in the early stages of launch, it will not have the reputation and awareness amongst consumers, and thus it may be difficult to establish the service.
5.2 Competitor analysis
As discussed above, the main competitors will be the big supermarkets, whose buyer power allows them to keep their prices at lower levels that Food 2 You’s. In addition, local shops may oppose the service, seeing it as a threat to their business. Of these, Tesco is likely to represent the main threat, as it has stores in every UK postcode area and thus will be the only company to challenge the potential geographic reach of Food 2 You.
5.3 Porters five forces
Porter’s (1980) five forces model is one of the most used and recognised methods for analysing the competitive environment acting in a market. The forces tend to act at the microeconomic level, which means that they will impact on Food 2 You differently in each region served. However, in general the five forces will act as follows:
New Entrants
Whilst the market is very attractive for Food 2 You to enter, this will also apply for any other potential entrants, particularly if Food 2 You’s offering proves profitable. Indeed, the low entry costs: all new entrants require is refurbished lorries and the ability to buy groceries at wholesale prices, will also make the market more attractive to potential new entrants. As such, and due to the small growth speed of the service due to the need to analyse a region before entering it, it is likely that Food 2 You will soon face several competitors and will not be able to dominate the market.
Potential Substitutes
As discussed above, the main substitutes are shopping in a standard store or ordering groceries online from a major supermarket chain. Shopping in a standard store is the dominant mode of purchasing groceries, but has significant time and travel requirements, particularly for those who do not live near a store. Online ordering reduces the time and travel requirement, but leaves customers unable to choose their own produce, at the risk of errors by the supermarket, and having to pay a delivery charge.
Buyers
Given the wide range of choice and the ability of consumers to switch supplier at will, consumers represent the dominant force in the grocery market. As such, this service aims to play on this by offering consumers a service close to their homes, with a wide selection, and at a convenient time. It is hoped that this will attract consumers away from stores.
Suppliers
In the early stage, the service is likely to be dependent on one major supplier, which means the supplier will have significant power. This could be countered by making the supplier a partner in the service, giving said supplier an incentive to grow the service and make it profitable. If this does not prove to be possible, then as the service grows it should look to work with more suppliers to reduce this level of power.
Competitive Rivalry
The UK supermarket industry has very strong competitive rivalry, however the rivalry is lower in home delivery as there are fewer suppliers and the market is not large enough for the major supermarkets to pay much attention to it (Boyer and Hult, 2006; Teller et al, 2006). However, with the low barriers to entry, if Food 2 You proves popular the market and the number of competitors in it could grow rapidly.
5.4 Marketing objectives
The main marketing objective will be to build relationships with the villages or towns identified as being worthwhile locations in which to operate. These locations will be segmented according to their demographic, social and economic characteristics and the residents will be surveyed to find out their times and dates. Each part of the town or village will then be allocated a delivery slot based on their espoused interest.
5.5 Product strategy
The service will aim to stock the products which will be most in demand in specific areas, focusing on high quality, high margin products in affluent areas and more basic products in poorer areas. However, in general the service will aim to provide higher quality items in order to justify its price premium.
5.6 Price strategy
As discussed with the products, the company will pursue a pricing strategy based on providing maximum convenience in terms of time and distance. As such, the service will not be aiming to compete on price, and thus will have more flexibility to set premium prices and extract additional surplus from time pressured consumers. This will likely reduce the size of the target market for the service, but at the same time increase its value and profitability.
5.7 Place strategy
The service will look to select locations in each town or village based on the locations which are easiest to reach for the majority of target customers. This will also require some consideration of where lorries can be parked most easily, as well as some consultation with local authorities to ensure that roads are not blocked and the public are not inconvenienced.
5.8 Promotion strategy
The promotional activity of Food 2 You will concentrate on showing consumers the value that the company offers to them, in terms of not needing to spend lots of time and effort travelling to supermarkets. It will focus strongly on developing word of mouth advertising around the convenience of the stores and will also look to build relationships through allowing consumers to place orders for their favourite products and have a say in their delivery times.
6.0 Growth & exit
6.1 Growth strategy
The main growth strategy for the company will be to develop sufficient word of mouth in its chosen launch locations to allow it to develop into nearby geographical areas and hence to expand its fleet of mobile stores (Bolton and Drew, 1991). As this word of mouth begins to reach its limits in terms of reach and effectiveness, it can be supplemented by effective PR, such as arranging for local newspapers to write stories about the impact of the delivery service (Klein, 2007). Once the company’s brand image has grown significantly, it can also help grow itself through internet promotions, such as setting up a website through which potential customers can request the company provide services to their local area (Mayzlin, 2006). This will then help the company grow from being a local to a national company, thus allowing it to better compete with other stores on price.
6.2 Exit strategy
The exit strategy for the venture is likely to be contingent on the level of success it experiences, and the reactions of other players in the grocery industry to its success. Should the company be launched in partnership with a major supermarket chain or supplier, then a takeover of Food 2 You by said partner would be a likely exit strategy. However, if the company launches alone and experiences significant success then it may still be purchased by one of the major players, as this would help the buyer increase their market share and access this segment of the industry without having to start their own offering. If this does not come to pass, then the most likely exit strategy would be an IPO by the owners, who could then decide whether to stay on as managers to the company or whether to exit completely. Alternatively, depending on the relationships the company builds with the communities in which it operates, the company could be taken over by these communities and run as a co-operative, or even taken over by its employees.
7.0 Conclusion
The market analysis indicates that there is significant potential demand for this service, and that it can fill a sizeable existing gap in the grocery market. However, the main criteria for the success of the company is that it is able to partner with an existing major grocery retailer or supplier in order to obtain wholesale prices for its groceries. If it can do this, then it will be able to remain relatively price competitive, and thus can compete aggressively on convenience for consumers. However, in the initial two years of operation the venture will be quite high risk, particularly in terms of the locations in which it chooses to operate and its level of customer exposure. As such, it is vital that the company is careful when researching and selecting its start up locations, and also has significant cash flow to get it through the initial start up period where sales may be low. However, the innovative and convenient nature of the service should mean that, once it is through the initial period, it will rapidly develop a significant following and will grow into a successful and sustainable business venture.
8.0 References
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Appendix 1: Business Model
Appendix 2: Detailed Financial Plan and Forecasts
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