Quiz 7: Starting a New Business


Summary: LS, being a high-school senior, did not get any guidance to gain information about colleges for his further studies. After much toil to get information, he chose CM to pursue his studies. LS partnering with JR did a business project to gather information on schools. They made that idea into a business, with information and ratings of colleges based on academics, dormitory facility, food, Greek life, drug scene, and also the hotness of the girls and guys. It started under the assistance of a former professor and fund was given by two angel investors who contributed $5,000 each. Revenue hit by $500,000 in 2005. The reasons for starting up CP were to create content on college and universities, help people to select the right colleges, and finally CP to be financially successful. To generate more income, they advertised heavily, hired a marketer, and also created a web page in the format of the book, which could be accessed by paying $39.95 per year. They earned marginal revenue during 2007, but it was less than a million. Many new competitors entered and the universities also started providing information for free on their websites. After attending National Association for College Admission Counseling (NACAC), he thought to give away the content and shift to lead generation, which was more income generating. Inference: Advantages and disadvantages of giving content away: Advantages: • The business based on content about colleges and universities was of no use due to introduction of university's official website. • There were many competitors providing information about colleges and universities free of cost; therefore, it is better to quit it. • It would be a wise move because the scenario has changed, the colleges have started to purchase student's resume and approach them for admission. • The company would be able to focus on lead generation, which is revenue generating rather than wasting its resources on content. Disadvantages: • Collecting content was the core business for which CP was started for, and it would be difficult for an overhaul of the service. • Their efforts and the resources used for collecting that content would be in vain if they have to give it up. • If the company has to shift to lead generation, it would take a lot of time, energy, and effort to adapt and get started. • Even if they shift to it, there are already many players offering leads, and it would be a tough competition.

Criteria that differentiate idea from an opportunity: A business idea is a thought or conception that is present in the mind for the improvement of the business. On the other hand, a business opportunity is attractive, timely and anchored in a product or service that adds value for the users. There is no rational or irrational idea; any idea that is welcomed by the customers results in success. Every idea that is thought of cannot become a business opportunity. An entrepreneur must constantly think of ideas to improve a product or service until he comes across an idea which suits his passion and skill set. The analyses to be taken in order to convert a business idea into a business opportunity to measure its feasibility are: Market analysis: This analysis contains the data on the demand for the product, the potential market and the potential customers for the product or service. Further, it also has information on the customer traits, customer's purchasing power and buying behavior. Competitive analysis: This analysis is done so as to attain a competitive advantage over the competitors of the business. The process carried over by other businesses and how they have been perceived must also be determined. The parameters on which the business must be valued are: • Startup cost - The expenses must be prioritized and itemized before the funding process. • Capital equipment asset - The equipment needed for the business must be added along with the initial investment. Decisions like purchase or leasing of the equipment must also be taken into account. • Legal form of business - Decisions on the form of business such as sole proprietorship, partnership and corporation must be considered. • Location of business - The locality of the business, and its closeness to the customers must be determined. • Marketing plan - The ways to reach the potential customers, the availability of the product, and the cost must also be analyzed and decided. The results of these analyses show the viability of the idea and the latent potential for its future growth.

Types of new businesses: • Service business • Manufacturing business • E - Business o Home based business Advantages and disadvantages of starting a business from the scratch: Service business: Advantages of starting up a service business: • A small amount of investment is sufficient to start a service business as compared to a manufacturing business. • There is no manufacturing or inventory needed, the service is provided and consumed simultaneously. The feedback can be obtained in real time. • The skill sets are difficult to be replicated. Disadvantages of starting up a service business: • It is hard to determine the exact level of satisfaction of the customers. • The value of firm is difficult to be analyzed as it is purely based on the level of service rendered and the sales record of the business and mostly not on the valuables it possesses. • It is labor intensive business. Manufacturing business: Advantages of starting up a manufacturing business: • The quality of the product and the customer satisfaction can be easily determined. • The products can have a Unique Selling Proposition by its attributes which are patented and are difficult to replicate. • The value of firm can be analyzed based on the physical assets and the products produced. Disadvantages of starting up a manufacturing business: • Huge amount of investments are needed to start a manufacturing business. • There is a huge need for high end manufacturing techniques and equipment for the effective use of resources. • This model of business requires the most of land, labor and capital resources. E - Business: Advantages of starting up an E - Business: • The investment needed to start an E - Business is very low. • It has the widest reach than any other type of business. • There is no need for land or labor to a large extent, so the cost incurred is very less. • Any type of business can be started at a low cost in this model. Disadvantages of starting up an E - Business: • Customers are new to this type of business and the time taken for their adaptation is of a huge concern. • There is a lack of touch and feel aspect in the purchase of a product.