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Introduction to MIS Chapter 11 Entrepreneurship Jerry Post Technology Toolbox: CAN-SPAM ACT Technology Toolbox: Projecting Financial Statements Cases: Small Business Outline             How can you use information technology to improve your organization and make it better than your competitors? How competitive is your world? What are the main factors affecting a firm’s competitive advantage? Where do you begin looking for an edge? How can you use IT to gain a competitive advantage? Where do you begin your search? How can IT support the operations of the firm to provide a competitive advantage? Why is it so difficult to convince management to make strategic changes? What are the risks of strategic decisions? Why did so many dot-com firms fail? Do their failures mean there is no viable Internet strategy? How do you start a business? How do you start an online business? How will your business be different from the existing firms? How do you turn an idea into money? Is it true that genius is 1 percent inspiration and 99 percent perspiration? What additional steps are required to start and EC firm? Entrepreneurship and Small Business Estimates 2005 2009 Employer firms (nonfarm) 5,992,400 5,815,800 Employer firm births 671,800 668,395* Employer firm terminations 544,800 592,410* 10,500,000 9,800,000 5,300,000 5,500,000 Self-employment, nonincorporated Self-employment, incorporated * Births39,201 and terminations are60,837 for 2007 Business bankruptcies A small firm has less than 500 employees. Small firms in total employ 50.7 percent of all U.S. workers. 99.9 percent of the total U.S. firms are small. http://www.sba.gov/advo/research/sb_econ2006.pdf http://www.sba.gov/sites/default/files/sb_econ2010.pdf Small Business Employees Employees 70,000,000 60,000,000 50,000,000 40,000,000 500+ Small 30,000,000 20,000,000 10,000,000 0 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 19 19 19 19 19 19 19 19 19 19 19 19 20 20 20 20 20 20 20 20 http://www.census.gov/econ/susb/historical_data.html Small Business Payrolls Payroll (Billion$) 3500 3000 2500 2000 1500 1000 500 0 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 19 19 19 19 19 19 19 19 19 19 19 19 20 20 20 20 20 20 20 20 500+ Small Receipts and Payroll Year Receipts/ Emp Payroll/ Emp 1997 64.4 % 80.8 % 2002 63.0 % 81.6 % 2007 62.9 % 79.3 % Computation: Total receipts / total employees Value for small firms / value for large firms Small firms pay less per employee than large firms. But their receipts per employee are even less. So profitability is squeezed. Turn-key Systems Vendors create standard systems for common types of business • Dentist • Physician • Veterinarian • Attorney • Accountant • Restaurant • Hotel • Theater • Many, many more Includes: hardware, software, training, and updates. Information Technology Expertise • • • • • Service contracts for hardware. Consultants for network and troubleshooting. Assign someone to do backup. Security is usually forgotten. Upgrades and decision software are rare. In 2001, Apple introduced a $500/year business support service. Keeping up with Technology past Fixed cost/paid for. Know how to use. Mostly works. Hardware failures. Limited features. Hard to repair. future New hardware features. New business methods. Improved security. High prices for new technology. Uncertain life, adoption rates. Difficult to follow tech industry. Harder to find support. Constant switching and costs. Strategic Power Use supplier and customer ERP systems to track purchases and sales and reduce the need for your own system. Big Supplier Big Customer Information Tasks Operations • Accounting • • • Sales Purchases Cash flow Basic accounting software but it must use double-entry. Possibly online ERP service. Outsource payroll. • • • Production Shipping Payroll Tactics • • • • • • Customer analyses Product analyses Employee evaluations Forecasting Growth Teamwork Often skipped because of lack of expertise. Possible with spreadsheets and SharePoint. Strategies • • • Smallest firm Minimal power Limited funds Rely on larger customers and partners. Use online services. Technology Levels Level Description Cost Perspective Build and manage technology yourself. Often necessary for leading edge ideas or to customize to your management. Expensive, difficult to control costs. Requires considerable IT expertise. Buy commercial offthe-shelf hardware and software. Relatively flexible today Mostly up-front costs and but still requires initial probably need consultants customization. at the beginning. Online service providers. More options today. Easy to share data. Less worry about security and backups. Minimal up-front costs. Flexible pricing and growth. Buy low-end tools and patch together. Many small businesses survive with Microsoft Office and an accounting package. Can be low-cost, even go with open source software. Creating a Business Idea Plan Implementation Production Chain parts supplier parts supplier warehouse supplier workers warehouse supplier retail store supplier tool manufacturer Manufacturer wholesaler distributor parts supplier wholesaler distributor retail store distributor retail store Consumers retail store Expand Your Focus Big competitor customers It might be better to sell your innovation as a service to the dominant firm or to be an intermediary for consumers. You might try to compete directly. Industry Research  Competition ◦ Number ◦ Concentration ratios ◦ Sales by firm ◦ Technology plans  Size of the market ◦ Number of customers ◦ Amount of revenue ◦ Growth rate ◦ Market comparison for substitute products ◦ Consumer focus group interviews  Production costs ◦ Startup/fixed costs ◦ Operating costs  Legal environment IT Support for Research Chapter 9: Many tools to analyze data. Problem: Finding data. Some sources ◦ Federal government  Census Bureau (Concentration ratio)  Bureau of Economic Analysis (Industry accounts)  Securities and Exchange Commission (EDGAR) ◦ Financial reports  SEC and Individual  Summaries: WSJ/Dow Jones, Yahoo, Magazines  Commercial: D&B, S&P ◦ Marketing specialist firms ◦ Scanner data Custom research ◦ Online surveys ◦ Focus groups ◦ Searching Google searches Check the Search Engines (Google) Insights http://www.google.com/insights/search/# Trends http://www.google.com/trends Zeitgeist http://www.google.com/zeitgeist Categories Seasonality Geography Properties build your own search Adwords, keyword tool and traffic estimator (link) Twitter: top tweets The point: You can see what people (as a group) are searching for—at different points in time. Adwords can help you estimate the potential number of customers. Business Plans Executive Summary Strategy, Competition, and Market Analysis Forecasts, Cash Flow, and Investment Budget Marketing Organization and Timetable tasks time Forecasting Financial Data Balance Sheet Income Statement Profit and Loss Cash Flow Customers and Sales estimate Sales revenue Marketing costs Infrastructure scale Employees Operating and selling costs Salary costs Financial statement estimates Financial statements and ratios Breakeven Analysis 1200000 Revenue 1000000 Cost 800000 600000 400000 200000 0 0 10000 Breakeven point 20000 30000 Sales 40000 50000 60000 Forming a Corporation  State Forms Commercial ◦ Articles Bank Account of Incorporation ◦ DUNS Corporate Number Bylaws  Accounting ◦ Registered System Agent (self) ◦ Business Form Purchase Registration software  State Employer Number ◦ Hire accountant  Withholding ID Sales Tax ID  Standards ◦ Additional  Additionallicenses detail ◦ Define chart of accounts   Federal ◦ DefineForms processes ◦ SS-4 Application for Employer Identification Number ◦ 2553 Election by a Small Business Corporation Financing a Startup Venture Capital Angel Investor Partners Funding for development and operations. Become owners with some control over management. Successful firm IPO: Additional funds Reward to original investors E-Business Setup: Pay Someone Else Products ◦ Use simple HTML, Amazon, eBay, or Web commerce server. ◦ Process payments through PayPal, Google, or similar third party. ◦ Hosted server is inexpensive today. ◦ Build links to get picked up by search engines. Services/Web 2.0+ ◦ Hosting: Use a hosted server or cloud computing. ◦ Software Development  Do you have the skills to hire, organize, and evaluate programmers?  Will the code have to be updated and rewritten continually?  Can the software be built using existing modules? ◦ Network effect. E-Commerce Failures Hundreds of dot-com firms failed in 2001 and 2002 Most relied on pure Internet revenue. Outsourcing production and shipping. Most relied on advertising revenue—often revenue from other dot-com firms. Many believed in the importance of being first to market and becoming the biggest, best-known firm in a niche industry. Many believed that it was not necessary to make a profit on sales. Money from advertising and stock sales would be sufficient to keep the firm alive until the world changed. Most were wrong. Around mid-2000, several social networking sites were introduced and expanded for several years. The WSJ reported that Facebook made a profit in 2009. Other companies, such as Twitter continued searching for ways to make money. Most were living off investor money, some advertising revenue, and some deals with search engines. Today, apply the same questions to newspaper sites. If they charge users, readership declines and ad revenue drops. Dot-Com Advertising Crash Outside advertising $ Cross advertising $ Outside advertising Much of the cross advertising was not real money, simply agreements that were sometimes recorded as revenue. When the outside money declined, and weak firms crashed; others crashed as well. Then they ran out of investor’s money. Dot-Com 2.0? Internet-based companies ◦ Social network sites ◦ Online services ◦ Newspapers (similar as subscriptions decline) Revenue sources? ◦ Few fees on users ◦ Depend on advertising ◦ Some have huge numbers of users (costs)  Cloud Computing Marginal cost pricing for processing, storage, and bandwidth. ◦ Pay only for what you need ◦ Minimal fixed costs ◦ Minimal long-term commitments Ultimately, at some scale, cloud marginal costs are higher than building your own. ◦ But startup costs are low. ◦ Scalability is built-in. ◦ When you grow enough you can build your own. Technology Toolbox: CAN-SPAM Act (1) All header information to be accurate. (2) Subject headings must be accurate. (3) E-mail must contain an electronic opt-out mechanism. It must be functional for at least 30 days. You must also include a valid physical (postal) address. (4) You must stop sending messages if a person opts out. You must stop sending messages within 10 business days. (5) No e-mail address harvesting. (6) Sexually explicit messages must be identified with “SEXUALLYEXPLICIT” in the subject line. (7) The Act applies to the sender and the advertiser. Even if you hire someone who sends the message, as the company or Web site being advertised, you can be held responsible for violations of the Act. 15 USC Chapter 103 Quick Quiz: CAN-SPAM 1. Has the Act reduced the level of spam? 2. Why would spammers risk violating the law? 3. What other provisions would you want to include? Technology Toolbox: Business Plan/RT Year Increase 1 2 3 4 5 Hybrid 10% 10% 10% 10% Mountain 250 275 302 332 365 $1,000 Year 1 2 3 4 5 250 275 302 332 365 Rolling Thunder Estimated Sales Number of Bicycles Race Road Tour 350 200 385 220 423 242 465 266 511 292 Average Sale Price of a Bicycle $1,500 $2,500 $2,000 Hybrid Mountain $250,000 $375,000 $275,000 $412,500 $302,000 $453,000 $332,000 $498,000 $365,000 $547,500 Track 350 385 423 465 511 50 55 60 66 72 $1,000 $2,000 Annual Total 1450 1595 1752 1926 2116 Estimated Sales Value Race Road Tour Track Annual Sales $875,000 $400,000 $350,000 $100,000 $2,350,000 $962,500 $440,000 $385,000 $110,000 $2,585,000 $1,057,500 $484,000 $423,000 $120,000 $2,839,500 $1,162,500 $532,000 $465,000 $132,000 $3,121,500 $1,277,500 $584,000 $511,000 $144,000 $3,429,000 Sales estimated while the firm was being formed. RTBusinessPlan.xls Rolling Thunder Bicycles Estimated Sales Estimated Sales $4,000,000 $3,500,000 $3,000,000 Track $2,500,000 Tour Road $2,000,000 Race $1,500,000 Mountain $1,000,000 Hybrid $500,000 $0 1 2 3 Year 4 5 Projected Income Statement Interest rate on borrow 8.00% Interest rate on short term investments 3.00% Depreciation, 5 years, straight line 0.2 Tools purchases $250,000 $50,000 $50,000 Projected Balance Sheet Assumptions Receivables as percent of sales: 10% Payables as percent of material costs: 10% Inventory as percent of material costs: 12% Projected Cash Flow Quick Quiz: Business Plan 1. How can you forecast sales? What information would you want to collect? 2. How would the financial statements be different for an EC firm (for example, a website that sells photographs)? 3. What key element would you place in the marketing section for a service firm (e.g., dentist)? Cases: Small Business Annual Revenue 2.5 $ Billion 2 PacWest Facebook 1.5 1 0.5 0 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 Net Income / Revenue 0.3 0.2 Ratio 0.1 0 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 -0.1 -0.2 -0.3 -0.4 -0.5 -0.6 -0.7 Facebook