Thursday, 19 July 2012

PRICING YOUR PRODUCTS


The primary goal of most businesses is to make a profit. There are many factors that affect the profitability of a business, such as management, location, cost of labor, quality of product or service, market demand and competition. In our free enterprise system the right to establish a price is yours. Market demand controls the response to your product or services.
You must understand the market for your product or service, the channels of distribution and the competition before you establish prices. You must know all costs and carefully analyze them. The marketplace responds rapidly to technological advances, international competition and a knowledgeable buying public. You must constantly keep abreast of all factors that will affect pricing and be ready to make necessary changes.

Markup on cost is accomplished by adding some percentage of cost to the cost of goods (merchandise  shipping).

                        Example:

                                                               Annie's Purse Shop
                                                        Calculation of selling price

                                                Cost of one purse   € 12.00
                                                x Markup percentage 33%

                                                = Markup amount     € 4.00

                                                Cost of one purse   € 12.00
                                                + Markup amount     € 4.00

                                                = Selling price     € 16.00 for one purse

The 33 percent markup must cover all operating expenses (wages, rent, advertising, etc.) and provide some margin of profit. For example, Lisa's Purse Shop may figure 10 percent for wages, 6 percent for rent, 4 percent for advertising and 13 percent for profit.

The markup is sometimes expressed as a percentage of selling or retail price instead of cost. Most retailers prefer to express their markup as a percentage of retail price. Using the example above you would determine the retail markup percentage as follows:

                                    €4.00 =  amount of markup,
                                    ____________________________________ = 25% retail markup

                                   € 16.00 = retail selling price, 

A business might choose to use a standard markup percentage on all products, or it may have different markups for different goods. A problem with the standard markup is that it doesn't recognize cost differences in selling different products. If product A costs far more to advertise or sell than product B, a standard markup percentage may produce a loss on product A and a greater-than-average profit on product B.

It is important to maintain an overall or average percentage of markup to return the profit percentage you establish. You must also allow for markdowns. Therefore, you must establish an initial markup percentage, which becomes the average markup. The initial markup is figured as follows:

            Initial markup percentage =  Operating expenses +  desired profit
                                                                                    divided by   Net sales

Breakeven

Breakeven is simply the point at which all costs are recovered and you begin to make a profit. Once you have established an average markup, the breakeven point can be determined. There are several formulas to use in determining breakeven. One simple formula is provided here, but we recommend that you check with your accountant or an accounting textbook to fully understand how best to figure a breakeven for your business.

                                                Breakeven point =  Operating expenses
                                                Divided by         Markup percentage

example:

                        € 50,000 = operating expenses
                        _____________________________ = €166,666.67 breakeven sales

                        30% = markup percentage
                                                (average)

The breakeven price is figured the same for a service business as it is for a product-based business. However, many business owners prefer to figure breakeven for individual products or services, so they know which products to promote or discontinue.

Suggested retail price. A common pricing practice among small businesses is to follow the suggested retail prices supplied by the manufacturer. This allows the business to avoid the decision-making process and the trouble of monitoring the competition. The suggested retail price is easy to use, but it can cause problems. It may create an undesirable price image, and it doesn't consider the competition.

Competitive position refers to a strategy in which a firm bases its prices on those of its competitors. A small retailer should compare prices with similar stores. Do not try to compete with the prices set by large stores they can buy larger volumes, so their cost per unit is less. Instead, look at nonprice issues. For example, compare the services offered by the competition. Often customers will pay more for merchandise to obtain the type of service that they seek.

Pricing below competition means beating the competitor's price. Many vendors have been very successful using this pricing strategy, because they have greatly increased sales. Because this pricing strategy reduces the profit margin per sale, a firm needs to increase its sales and reduce costs.

            -          Obtain the best prices possible for the merchandise.

            -          Locate the business in an inexpensive area or facility.

            -          Closely control inventory.

            -          Limit the lines to fast-moving items.

            -          Design advertising to concentrate on price specials.

            -          Offer no or limited services

Below competition pricing is a difficult pricing policy to maintain, because every cost component must constantly be monitored and consistently adjusted. It also exposes firms to pricing wars competitors can retaliate by matching the price cutter, leaving both parties worse off.

Pricing above the competition is possible when nonprice considerations are important to buyers. Nonprice considerations that may be important enough to customers to justify higher prices include

            -          service considerations, such as delivery, speed of service, satisfactory handling of customer complaints, knowledge of product or service, and a helpful and friendly attitude;

            -          a convenient or exclusive location; and

            -          exclusive merchandise. A store may carry lines of well-known or high-quality brand names that are not available elsewhere. A store might get particular brands for a given trade area. The use of exclusive agreements avoids competitive pricing.

Markdowns, or price reductions, are a necessary part of doing business because inventory levels may become too high as a result of overbuying, seasonal merchandise, shopworn merchandise, misjudged customer responses, poor personal selling, lack of promotion and advertising or the competition's lowering the price of the same merchandise.

There are a number of theories about when it is best to take markdowns. This is a decision that will vary greatly with the type of merchandise, amount of competition, season of the year and amount of stock on hand. Every business should try to avoid being left with a lot of dated merchandise that will be difficult to sell.

Price lining refers to a marketing strategy based on price. This strategy targets a specific segment of the buying public by carrying products only in a specific price range. For example, a store may wish to attract customers willing to pay over 50 for a purse. Price lining has many advantages, among them the following:

            -          reduced errors by sales personnel;

            -          ease of selection for customers;

            -          reduced inventory by limiting the number of items in a category;

            -          reduced storage costs as a result of smaller inventory;

            -          ease of merchandise selection; and

            -          merchandise targeted to clientele.

A disadvantage to price lining is that by focusing too much on price, the store may overlook issues of quality or consumer buying trends. It also limits the ability of the business to meet competitors' prices.

Odd pricing  with figures that end in 5, 7 and most often 9 is used for psychological reasons. Consumers tend to round down a price of €39.95 to € 39, rather than rounding it up to €40. However, this is not considered to be as effective today as it was in the past.

Multiple pricing is the practice of promoting a number of units for a single price. For example, two for €1.98. This is useful primarily in low-cost, consumable products such as shampoo or toothpaste. Many stores find this to be a desirable pricing strategy for sales and year-end clearances.

Wednesday, 18 July 2012

TYPES OF VENTURE CAPITAL FIRMS



There is quite a variety of types of venture capital firms. They include:

Traditional partnerships -- which are often established by wealthy families to aggressively manage a portion of their funds by investing in small companies;

Professionally managed pools -  which are made up of institutional money and which operate like the tradi­tional partnerships;

Investment banking firms -  which usually trade in more established securities, but occasionally form in­vestor syndicates for venture proposals;

Insurance companies -  which often have required a por­tion of equity as a condition of their loans to smaller companies as protection against inflation;

Manufacturing companies -  which have sometimes looked upon investing in smaller companies as a means of supplementing their R & D programs (Some "Fortune 500" corporations have venture capital operations to help keep them abreast of technological innovations); and

Business Angels - Privates willing to invest in innovative products and services while they help in management issues.
 
In addition to these venture capital firms there are in­dividual private investors and finders. Finders, which can be firms or individuals, often know the capital in­dustry and may be able to help the small company seek­ing capital to locate it, though they are generally not sources of capital themselves. Care should be exercised so that a small business owner deals with reputable, professional finders whose fees are in line with industry practice. Further, it should be noted that venture capitalists generally prefer working directly with prin­cipals in making investments, though finders may pro­vide useful introductions.

I-City Ltd is an innovative micro-venture capital firm. We invest in your idea or your business but instead of money we provide the services that you require to accelerate development and take your business a step further. So even if you are a start-up or a well established corporation why don't you try a different approach?
For sure you will be surpirsed.
 

Wednesday, 20 June 2012

WHAT VENTURE CAPITAL FIRMS LOOK FOR


One way of explaining the different ways in which banks and venture capital firms evaluate a small business seeking funds, put simply, is: Banks look at its immediate future, but are most heavily influenced by its past. Venture capitalists look to its longer run future.

To be sure, venture capital firms and individuals are in­terested in many of the same factors that influence bankers in their analysis of loan applications from smaller companies. All financial people want to know the results and ratios of past operations, the amount and intended use of the needed funds, and the earnings and financial condition of future projections. But venture capitalists look much more closely at the features of the product and the size of the market than do commercial banks.

Banks are creditors. They're interested in the pro­duct/market position of the company to the extent they look for assurance that this service or product can pro­vide steady sales and generate sufficient cash flow to repay the loan. They look at projections to be certain that owner/managers have done their homework.

Venture capital firms are owners. They hold stock in the company, adding their invested capital to its equity base. Therefore, they examine existing or planned pro­ducts or services and the potential markets for them with extreme care. They invest only in firms they believe can rapidly increase sales and generate substan­tial profits.

Why? Because venture capital firms invest for long‑term capital, not for interest income. A common estimate is that they look for three to five times their investment in five or seven years.

Of course venture capitalists don't realize capital gains on all their investments. Certainly they don't make capital gains of 300 percent to 500 percent except on a very limited portion of their total investments. But their intent is to find venture projects with this appreciation potential to make up for investments that aren't successful.

Venture capital is a risky business, because it's difficult to judge the worth of early stage companies. So most venture capital firms set rigorous policies for venture proposal size, maturity of the seeking company, re­quirements and evaluation procedures to reduce risks, since their investments are unprotected in the event of failure.

Size of the Venture Proposal.

Most venture capital firms are interested in investment projects requiring an investment of 250,000 Pounds  to 2,500,000 Pounds. Projects requiring under 250,000 are of limited interest because of the high cost of investigation and administration; however, some venture firms will consider smaller proposals, if the investment is intriguing enough.

The typical venture capital firm receives over 1,000 pro­posals a year. Probably 90 percent of these will be rejected quickly because they don't fit the established geographical, technical, or market area policies of the firm -‑ or because they have been poorly prepared.

The remaining 10 percent are investigated with care. These investigations are expensive. Firms may hire consultants to evaluate the product, particularly when it's the result of innovation or is technologically complex. The market size and competitive position of the company are analyzed by contacts with present and potential customers, suppliers, and others. Production costs are reviewed. The financial condition of the company is confirmed by an auditor. The legal form and registra­tion of the business are checked. Most importantly, the character and competence of the management are evaluated by the venture capital firm, normally via a thorough background check.

These preliminary investigations may cost a venture firm between 2,000 and 5,000 pounds per company in­vestigated. They result in perhaps 10 to 15 proposals of interest. Then, second investigations, more thorough and more expensive than the first, reduce the number of proposals under consideration to only three or four. Eventually the firm invests in one or two of these.

Maturity of the Firm Making the Proposal.

Most ven­ture capital firms' investment interest is limited to pro­jects proposed by companies with some operating history, even though they may not yet have shown a profit. Companies that can expand into a new product line or a new market with additional funds are particularly interesting. The venture capital firm can pro­vide funds to enable such companies to grow in a spurt rather than gradually as they would on retained earn­ings.

Companies that are just starting or that have serious financial difficulties may interest some venture capitalists, if the potential for significant gain over the long run can be identified and assessed. If the venture firm has already extended its portfolio to a large risk concentration, they may be reluctant to invest in these areas because of increased risk of loss.


Management of the Proposing Firm.

Most venture capital firms concentrate primarily on the competence and character of the proposing firm's management. They feel that even mediocre products can be suc­cessfully manufactured, promoted, and distributed by an experienced, energetic management group.

They look for a group that is able to work together easi­ly and productively, especially under conditions of stress from temporary reversals and competitive pro­blems. They know that even excellent products can be ruined by poor management. Many venture capital firms really invest in management capability, not in pro­duct or market potential.

Obviously, analysis of managerial skill is difficult. A partner or senior executive of a venture capital firm normally spends at least a week at the offices of a com­pany being considered, talking with and observing the management, to estimate their competence and character.

Venture capital firms usually require that the company under consideration have a complete management group. Each of the important functional area - pro­duct design, marketing, production, finance, and control - must be under the direction of a trained, experienced member of the group. Responsibilities must be clearly assigned. And, in addition to a thorough understanding of the industry, each member of the management team must be firmly committed to the company and its future.

The "Something Special" in the Plan.

Next in impor­tance to the excellence of the proposing firm's manage­ment group, most venture capital firms seek a distinc­tive element in the strategy or product/market/process combination of the firm. This distinctive element may be a new feature of the product or process or a par­ticular skill or technical competence of the manage­ment. But it must exist. It must provide a competitive advantage.

...to be continued

Monday, 11 June 2012

Is your management growing with your business?


Effective management is the key to the establishment and growth of the business. The key to successful management is to examine the marketplace environment and create employment and profit opportunities that provide the potential growth and financial viability of the business. Despite the importance of management, this area is often misunderstood and poorly implemented, primarily because people focus on the output rather than the process of management.
Toward the end of the 1990s, business managers became absorbed in improving product quality, sometimes ignoring their role vis-a-vis personnel. The focus was on reducing costs and increasing output, while ignoring the long-term benefits of motivating personnel. This shortsighted view tended to increase profits in the short term, but created a dysfunctional long-term business environment.
 Simultaneously with the increase in concern about quality, entrepreneurship attracted the attention of business. A sudden wave of successful entrepreneurs seemed to render earlier management concepts obsolete. The popular press focused on the new cult heroes Steve Jobs and Steve Wozniack (creators and developers of the Apple Computer) while ignoring the marketing and organizing talents of Mike Markula, the executive responsible for Apple's business plan. The story of two guys selling their Volkswagen van to build the first Apple computer was more romantic than that of the organizational genius that enabled Apple to develop, market and ship its products while rapidly becoming a major corporation.
In large businesses, planning is essential for developing a firm's potential. However, many small businesses do not recognize the need for long-range plans, because the small number of people involved in operating the business implies equal responsibility in the planning and decision-making processes. Nevertheless, the need for planning is as important in a small business as it is in a large one.

Few decades ago, Alvin Toffler suggested that the vision of the citizen in the tight grip of an omnipotent bureaucracy would be replaced by an organizational structure of "ad-hocracy." The traditional business organization implied a social contract between employees and employers. By adhering to a fixed set of obligations and sharply defined roles and responsibilities, employees received a predefined set of rewards.
 The organizational structure that Toffler predicted in 1970 became the norm 20 years later, and with it came changed concepts of authority. As organizations became more transitory, the authority of the organization and firm was replaced by the authority of the individual manager. This entrepreneurial management model is now being replicated throughout society. As a result, the individual business owner must internalize ever increasing organizational functions.
 Another change in today's business environment is dealing with government agencies. Their effect on the conduct of business most recently appears to have increased. As industries fail to achieve high levels of ethical behavior or individual businesses exhibit specific lapses, the government rushes in to fill the breach with its regulations.



Thursday, 7 June 2012

The Underground Economy

There is a bustling and shadowy world where jobs, services, and business transactions are conducted by word of mouth and paid for in cash to avoid scrutiny by government officials. It is called the “underground economy,” which is as old as government itself.
It springs from human nature that makes man choose between given alternatives. Facing the agents of government and their exactions, man will weigh the alternatives  and may choose to go “underground.”
In our era, man has again become a subject under the watchful eye of government.
When government intervention fails to satisfy him, or even works evil, he is slow to relinquish his notions and prejudices. He may cling to them with tenacity and perseverance, but may seek to avoid the ill effects through circumvention, evasion, and escape.He may find his way to the “black market,” where economic transactions
take place in violation of price control and ration laws. Or he may descend to the “underground” where political edicts are ignored and exactions avoided through word-of- mouth dealings and cash transactions.
The underground economy must be distinguished clearly and unmistakably from the criminal activities of the underworld.
Government officials and agents are ever eager to lump both together, the criminals and their organization with the producers in the underground. Both groups are knowingly violating laws and regulations and defying political authority.
But they differ radically in the role they play in society. The underworld comprises criminals who are committing acts of bribery, fraud, and racketeering, and willfully inflicting wrongs on society. The underground economy involves otherwise law-abiding citizens who are seeking refuge from the wrongs inflicted on them by government. They are employers and employees who are rendering valuable services without a license or inspection sticker, or failing to report their productive activities to the political authorities.
Underground activities can be grouped into four main categories:
  1. Economic activity yielding income that is not reported to the tax authorities.
  2. Economic production that violates one or several other mandates, such as compulsory government licensing and rate making, inspection and label laws, labor laws, government regula tions of agriculture, export and import controls, government control over money and banking, governmental control of energy production and distribution, andcountless others. Violators may or may not evade taxes, but they all work illegally, hiding from swarms of government inspectors.
  3. Productive activity by transfer beneficiaries who draw Social Security benefits or receive public assistance. Their freedom to work is severely restricted.
  4. Productive activity by illegal aliens without residence status. They may pay income taxes and other taxes, but must remain underground for fear of deportation
Many people enter the labor market via the underground. As young children they may earn their pocket money through odd chores that make  them think, and teach them to be attentive, industrious, and confident.
Many parents are convinced that children should labor to be healthy and happy. But if they should work they probably violate some child- labor law. And if they should neglect to file an income tax return and fail to pay
the levies, the children are actually working in the underground. Surely, there is a minimum amount that is exempt from income taxation.
In a climate of economic stagnation and decline the underground economy serves a useful economic and social function. It provides jobs to millions of willing workers, affords opportunities for learning and
training, and teaches the importance of individua l initiative. It constitutes an important safety valve that relieves discontent and tension in a world wracked by political disruptions.

Thursday, 31 May 2012

Some more M.B.O.


INSTALLING THE MBO PROGRAM

When installing an MBO program, start by asking your managers to define their jobs, including their major responsibilities. Then, for each responsibility, you and your managers must decide the most effective way to measure performance in terms of results. The outcome of this exercise may surprise you. You and your managers may not agree on the major responsibilities of a certain position. Also, you may find that no one is performing some functions that you consider important. If the MBO system is to succeed, you must show interest from the beginning and set the example for your subordinate managers.

The education of your managers may be a formidable task. Until this time, they have thought in terms of specific functions managing a sales department, directing a credit office, etc. rather than in terms of goals that contribute to the organization.

One way to introduce the MBO system to your managers is in a seminar conducted by you or i-City However, if you choose i-City, be sure that you are present for the entire seminar. In this way, you will communicate to your managers that the MBO system is a management priority.

During the seminar, ask each participant to prepare an actual goal. Also, in small group sessions, have your managers review each other's work plans and offer suggestions to improve them. The experience of setting and reviewing goals makes MBO a learning experience for all employees.

Encourage your managers to express their doubts, reservations or opposition to MBO. They should get their feelings out in the open as soon as possible. You, the consultant or other participants can help to ease their concerns.

In the beginning of your MBO program, your managers will have to learn to measure their own performance accurately, anticipate real problems that will thwart their progress and take steps to solve delays and other problems. During this learning period, your managers should set fewer goals than would usually be expected, perhaps three or four. After they develop and achieve these goals, they can extend the number and area covered by each goal.

MBO may look simple on the surface, but it requires experience and skill to make it work effectively. If managers set annual goals, it may take three to four years before good results from this new system appear.

THREATS TO AN MBO PROGRAM

Not all MBO programs are successful. Some of the reasons why programs fail to reach their potential are 
  • Top management does not become involved.
  • Corporate objectives are inadequate.
  • MBO is installed as a crash program.
  • It is difficult to learn the system because the nature of MBO is not taught
WE CAN MAKE IT HAPPEN
By trusting your MBO to i-City our team of experts is capable to determine specific objectives under "The Big Think Approach"  that has been succesfully implemented by a variety of organizations. We will make sure that from your "Centric Vision" will be converted to specific WHATs, HOWs and WHOs so you will manage thoroughly the performance and achievement of the actions toward achieving your objectives.

Tuesday, 29 May 2012

Management By Objectives


Setting Goals

Long‑range business goals will be the cornerstone of your company's MBO program. To achieve these goals, you must have a method to communicate them to your managers and employees. One way is to bring managers and employees into the process by asking them to help formulate the company's short‑ and long‑range goals. If they have a role in establishing the goals, they will be more committed to achieving them.

All goals should relate to and support the long‑range objectives for the company. In this way, you can ensure that the goals of all levels of management are consistent. If goals are incompatible, you may find that employees feel like the middle manager of a research and development company who exclaimed in a seminar, How can I set my goals when I don't know where top management wants to go?

Types of Goals

What areas of your managers' work are suitable for goal setting? Ask managers to identify the most important aspects of their work. In each area, they should set both short‑ and long‑term goals. Carefully developed goals, if attained, should give the manager better control of the job. Each manager should define one or two goals in each of the following categories: 

  • Regular work goals.
  • Problem‑solving goals.
  • Innovative goals.
  • Development goals.
By asking your managers to set at least one goal in each of these four areas, you may open their eyes to new possibilities they had not seen before. The goal‑setting process can be a very useful educational step.

Regular Work Goals

These include the major part of the manager's responsibilities. For example, the head of production should focus on the quantity, quality and efficiency of production and the head of marketing should concentrate on developing and conducting the market research and sales programs. In defining their regular work goals, employees should include ways of 
  • Operating more efficiently.
  • Improving the quality of the product or service. 
  • Expanding the total amount produced or marketed.

Problem‑Solving Goals

These provide managers an opportunity to define their major problems and to set a goal to solve each one. There is no danger of ever running out of problems; new problems or new versions of old problems are always present.

Innovative Goals

Because of the push for new products and new methods in today's marketplace, innovation now gets much attention in seminars and publications for top managers. Managers and workers should seek new and better production methods, explore better ways to serve customers and propose new products for the company. Managers will need to use innovative approaches to make the company competitive in a fast‑changing national and international economic environment.

Development Goals

In setting development goals, you and your managers recognize the importance of acquiring new skills. Managers should plan for the continued growth of each employee, both in technical areas and in work relations with fellow employees.

Devising a Work Plan

You and your managers should use a miniature work plan to develop goals that are complete and useful (see Exhibit 1). In developing the plan, the following five areas should be addressed:
  • Goal
    •  Be specific and concise.
  • Measurement 
    • What benchmarks will you use to measure whether you have achieved your goals? These usually can be expressed in quantitative terms.
  • Major problems anticipated.
    • Work steps -- List three or four of the most essential steps. Give completion dates for each.
  • Supervisor's goals 
    • Employees should identify which of their manager's goals relate to their own goals.