Business Intelligence and Inventory:

A Case Study of Dick’s Sporting Goods Weekend warriors and fitness fanatics alike can find all their gear at Dick's Sporting Goods. But until the retailer revamped how it analyzes its product lines, building and tracking reports for sales and inventory took a marathoner's effort.

Until 2003, the company relied on merchandise management software that tracked inventory for its stores and distribution points. The software could compile sales figures for athletic gear and clothing into a report, but it couldn't aggregate and drill down, for instance, on how products were being sold and stored in different regions, according to Miles Mewherter, vice president of application development and enterprise reporting.

Beyond that, Dick's had no single repository where reports and figures were kept, says Mark Schroer, the chain's director of enterprise business intelligence and reporting. Instead, employees kept their own sales and inventory analyses, derived from the merchandising system, within their own business units and often on their own computers. There was no standard formatting of sales and inventory reports. And the company hadn't put in place any format for naming reports, so some were lost by the people who had created the reports because they couldn't remember the file names, Schroer says.

Still, employees insisted on using the system, shunning attempts by information-technology managers to push tools from Cognos, a maker of business intelligence software, which helps companies mine, analyze and report corporate data. "They were used to it," Mewherter says of the merchandising system. And since Dick's didn't set up a formal training program, users found it easy to ignore the new tools, he adds.

To move toward standardizing reports, the team at Dick's decided to build a data warehouse a single repository to store all of the company's sales and inventory statistics with an Oracle database. The chain then deployed business intelligence software from MicroStrategy to mine the warehouse and create standard reports displaying, among other things, how apparel and equipment were selling from store to store and in different regions across the country. At the same time, the company initiated a training program to promote user adoption. And to make sure users embraced the new system, Dick's got rid of the merchandising system and its reporting tools.

The company built the business intelligence and data warehouse system, Schroer says, with a key purpose in mind: "Our goal was to have it be the place to go, for anyone in the business, when they wanted information." How it got there, though, is a lesson for all companies and particularly mid-market firms looking to grow in change management, systems planning and, above all, finding the sweet spot in data analysis.

Business intelligence software wasn't around at the retailer's humble beginnings, when Dick Stack, at the spry young age of 18, left his job at an upstate New York Army/Navy store in 1948 to open his own bait-and-tackle shop. According to company lore, Stack's former boss scoffed when the young employee suggested expanding the store's product line to include fishing supplies, telling the teen he'd "never make a good merchant."

Turns out the boss underestimated the entrepreneur. Nearly 60 years later, Stack's company now publicly traded and led by his son, Edward offers everything from cricket bats to yoga mats across the U.S. The chain now boasts 268 stores in 34 states, with $3.11 billion in revenue in the 2006 fiscal year.

But as Dick's grew, it needed a game plan for analyzing how it inventoried and sold its various product lines.

Back in 2003, the company had some basic reporting tools included in a merchandising system from STS, a specialty vendor acquired in December 2000 by the U.K.-based NSB Group, a competitor in the retail software market.

While acknowledging that the STS system is not primarily a reporting system, Schroer says it took too long to create reports. Gathering data to run a report required several steps, he says. To start, an employee had to go to a computer connected to a Microsoft Access database, where financial reports and statistics were stored. Once there, the employee had to define the specific data he wanted for instance, how batting gloves were selling in the stores.

Then the system sent that data through a Unix server to the employee's personal computer, where it had to be downloaded into an Access database or Microsoft Excel spreadsheet and checked for accuracy. If the employee needed another data set, he had to start all over again.

The entire process, on average, took up to an hour, Schroer says. But for more complex analysis for instance, incorporating separate data sets, like how those batting gloves were selling in off-season months, or what regions sold more that could stretch several times over. Beyond that, though, the quality of the data in those reports was questionable. Since there was no warehouse storing all the company's statistics, there was no telling whether the data sources used to create a report were accurate, Mewherter says.

Dick's had deployed some business intelligence tools, including Cognos Business Intelligence Series 7, as well as Crystal Reports (a product of Business Objects) and Brio (now owned by Hyperion, which was bought in April by Oracle). But users never embraced the software.

Mewherter says it was an internal issue namely, the absence of a training program and not technological blips that forced out Cognos, Crystal Reports and Brio. "We had tools that were being poorly used because we hadn't trained people well," he says. That led employees to think the Cognos tools didn't work.

Part of the problem was that users weren't included in mapping out how Dick's would use the software to mine data and create reports, Schroer says. The dismissal by users meant going back to the drawing board. "Instead of taking what we had with Cognos, which in their mind was a failed package, we decided to go through the whole process again," he says.

That effort began with the data warehouse. Under Mewherter, Dick's built the warehouse on an Oracle 8i database, with customized capabilities to extract data, transform it to meet business requirements and load it into the warehouse. (They've since upgraded to 9i and were moving to 10g at press time.)

Then Dick's set up a bake-off between business intelligence vendors. "We said, 'Let's involve business users and do the whole selection process the way it should have been done all along,'" Schroer says

Mewherter and Schroer agreed that MicroStrategy's flexibility along with its experience with retailers put the software over the top of other big-name competitors, like Cognos, Brio and Business Objects, who were also brought in for testing.

The vendor's technology, in fact, does set it apart from the competition. MicroStrategy uses relational online analytical processing, or ROLAP, which works directly with a relational database. The MicroStrategy server sits between the user and the relational database that powers the data warehouse and calculates data based on the dimensions the employee prescribes; it thus changes the relational data into multidimensional data, or data combined from various sources, according to Boris Evelson, principal analyst for business intelligence with Forrester Research. MicroStrategy is the only large ROLAP vendor today, Evelson says, though Business Objects and Microsoft have experimented with the technology.

Right out of the box, Schroer saw improvements in how users created reports. Since MicroStrategy interfaces directly with the data warehouse, employees no longer had to download figures or statistics to their computers, as they did with the STS system.

MicroStrategy allows Dick's to create two types of reports: "canned" and "self-service." For "canned" reports, the team analyzed thousands of reports created via the STS system taking into account the specific needs of each business unit, based on their past reporting experience and winnowed them down to templates. Those templates were organized around business functions like ordering and receiving or sales and margin analysis. Users could then narrow the focus by region, department or product, Mewherter says. Dick's went from more than 2,000 reports derived from STS to about 200 on MicroStrategy. The chain has since cut that to 50 since upgrading to the latest version, MicroStrategy 8, Schroer says.

Customization became a big plus for users, he points out. Instead of going back into the system to add levels of granularity, the MicroStrategy tool lets users expand their options. For instance, if an analyst wants to examine how one store's sales stacked up against others in the district, or how that district compared with the entire chain, he can add those fields right into the report. Before, he had to locate reports, plug in the data and then re-run the report. That was one of the scenarios Schroer says took hours. With MicroStrategy, in most cases, the same task takes less than five minutes, because the figures and statistics all come from the data warehouse instead of being scattered in different databases.

The vendor also offers a "self-service" report tool that walks users through a series of prompts, asking them which elements they'd like to include. For example, the tool might ask the employee if he wants to track sales of a specific item, by its style or color, at a range of stores. "It's really looking at the elements available and seeing if that's what you want," Schroer says.

Still, even after all that effort, the team watched as users retreated to STS, for no other reason than a high comfort level with the system's tools, despite requiring more steps and time. "The difficulty we had was that it was too easy for them to go back to the old way of doing things," he explains.

Initially, the team tried to find managers with influence in departments like allocation, planning, procurement, replenishment and store operations to use and promote the software to their teams. "You can't involve everyone," Schroer says. "But you have that person help in the design, and they can go back to their area and say, 'Look at all the things this can do.'"

Still, the plan had only marginal success, he says: Only about 25 employees became users. But the team at Dick's anticipated a bit of an uphill battle, since they had both systems implemented at once. So, right as they finished deploying the software, Mewherter, Schroer and company

launched a computer-based training program for the MicroStrategy software. Employees got at least three hours of instruction on how to create, customize and run reports, Schroer says.

As they learned the new system, Dick's, as planned, began phasing out the STS system and implementing new JDA merchandise management software. "That forced adoption," Schroer says, noting that the number of users on the MicroStrategy system jumped tenfold, from about 25 to 250, in less than a year. They've since added at least 50 more users, he says.

Dick's would not reveal how much it paid for MicroStrategy's suite or any estimated return on investment. (Both Mewherter and Schroer say that management has never requested one.) But recent financial results show that Dick's has improved its operations while boosting revenue.

Earnings have more than doubled since the business intelligence initiative began, according to regulatory filings. In the fiscal year ended Jan. 31, 2004, Dick's pulled in $1.47 billion in net sales. In the most recent annual filing, for the year ended Feb. 3, 2007, the company reported $3.11 billion in revenue.

And Dick's operating income has grown year over year by at least 20% since going with MicroStrategy. In the 2005 fiscal year the first full year since the deployment operating income rose 28%, to $110.87 million, from $86.33 million the previous year. In its most recent filing, Dick's reported a whopping 49% jump, approaching $200 million in the 2006 fiscal year.

Instead of drawing a direct line between the business intelligence project and the company's operational improvements, Mewherter calls the initiative an "enabler" a system that helps users fine-tune their reports. "Rather than saying here's Mike's purchase order reports and Betsy's purchase order reports, now we have one report that users can customize and make their own," Mewherter says. "That's business intelligence."

In 2003, the national retailer deployed business intelligence software to improve operations by better analzying the way it sold and stored items across its stores. Since then, the company's annual operating margins have bested the average of its top competitors.

Business Intelligence: Will It Improv e Inventory? (continued) Dick's Sporting Goods Base Case Company : DICK'S SPORTING GOODS Headquarters : 300 Industry Drive, RIDC Park W., Pittsburgh, PA 15275 Phone Number : (724) 273-3400 URL: www.dickssportinggoods.com Business : Sells athletic equipment and apparel in 268 stores in 34 states. In February, Dick's acquired Golf Galaxy, a specialty retail chain with 65 stores and $274.7 million in sales. Financials for 53-week fiscal year ended Feb. 3, 20 07: Revenue of $3.1 billion, an increase of 18.7% over the previous 52-week year; net income of $112.6 million, an increase of 54.3%. VP, Application Development and Enterprise Reportin g: Miles Mewherter Director, Enterprise Business Intelligence and Repo rtin : Mark Schroer Challenge : Upgrade data analysis and reporting capabilities—and get employees to come along for the ride. Baseline Goals :

• Gather thousands of disparate inventory and merchandise reports into a single data warehouse, with a single business intelligence tool to mine it.

• Reduce the number of available reports by 50% or more. • Cut the time it takes to build an ad-hoc or customized report from at least an hour to a

matter of minutes

Business Plan Document

IMPORTANT

What is given in this is just a guideline and may be modified suitably according to the context

of the business.

The intent in preparing this note was to cover all possible issues a business plan document

should contain in as much detail as possible. However, for this note to be useful, it had to be

as short as can be meaningfully digested without having the need to go through a fat book on

business management. With the above contradictory objectives, this note makes an attempt to

deal with generic issues in writing a business plan, albeit in differing degree of detail, that

need to be covered in a business plan. A lot more can be said about each of the topics. This

note does not claim to cover all the issues in great detail and in great theoretical rigor for

which several management books are available. The treatment given to some of the topics

may be cursory and may not at all be sufficient.

Some of what is written in this note may not appear to be directly relevant. At a very high

level of abstraction, most of it should be applicable. The entrepreneur would have to think

through it to before finally leaving it as not applicable to his/her business.

For some entrepreneurs who have some kind of formal training in management, lot of what is

written in this note may seem obvious. However, the note is also meant for the consumption

of some of the budding entrepreneurs who do not have such formal training.

It may not be possible to obtain the information required to produce the business plan

document below without external help or without spending inordinate amount of time by the

entrepreneurs (which they can ill afford given the multiplicity of the tasks that they need to

manage in parallel). However, the purpose of the note is make the entrepreneur aware about

the issues that need to be understood (and covered in a business plan) and that the

entrepreneur would need be better off if he has considered these issues while he interacts with

the possible financers or makes his business strategy.

Most of what is prescribed in this note has been done by most of the entrepreneurs who have

submitted the business plans atleast to some degree of detail. However, it has been included in

this note to enable the entrepreneur to make the business plan in a bit a more systematic

manner. It is also understood that the given the time and other constraints during the

Enterprise KGP event, it may not have been possible for the entrepreneurs to cover every

aspect of the business in the business plan they had submitted to the panelists.

Ideally all the aspects of the business that are covered below should be included in a business

plan. However, in the context of the entrepreneurs approaching VCs, the entrepreneurs may

get some advice and inputs from the VCs in some of the general or specific aspects of

business (and accordingly the entrepreneur may not fret over them, if they are not able fill

those details in the business plan). For example, elaborate financial or demand modeling may

be desirable but not strictly necessary if the idea is good enough to catch VC’s attention.

Evolving a business plan is a detailed iterative process which is an ongoing activity even once

when the business is established. The manner in which a business plan is presented as given

below may suggest that it is a linear process but it is not. At every stage one has to revisit the

plan made earlier and revalidate the information, analysis and the assumptions made.

The views expressed in this note are personal to the author and do not represent Deloitte’s

viewpoint on the same.

PREPARING FOR QUESTIONS THAT MAY ARISE

Evolving a business plan involves asking yourself hard questions about the question. Some of

the general questions are given below. While being convinced yourself would be the first step,

preparing for these questions would help you to convince others. And expect counter-

arguments.

� Who is your customer?

o Why will he use your offering or any similar offering?

o How is your offering different from other offerings?

o When will he use your offering? How many such occasions arise when he

thinks your product/offering is useful?

o What alternatives will he consider?

o How does he decide to purchase your or any other offering? What

information does he seek? Who influences the decision? How much does he

think before purchasing? Is it a low involvement purchase or high

involvement purchase? What does he lose if he does not find the product to

be upto his satisfaction?

o How will you spread awareness about your product?

o Where will he access your services?

o Can he afford your service? Alternatively, can he pay a little more?

o Is your offering convenient enough? Are you offering him a small discount in

monetary terms when he has to spend lot more time to use/purchase your

product? Is it more convenient to forego the benefit the offering offers rather

than spend enormous amount of time to avail it (assuming it is cheaper)? Or

on the other hand, is it worth the extra premium your consumer pays you

rather than avail the alternative solution which is cheaper but has more

hassle?

o If the business is online business, does your consumer have access to internet

when he wishes to avail of the service? Or is it that most often when he will

decide to use the product/service, he is hanging out with his friends when a

telephone call is more convenient? Or most often he decides to avail that

service when at home where he does not have access to internet or even if he

has, booting the computer/laptop connecting to internet etc. is more hassle

than simply calling the service provider?

o What value does your service bring to him?

� How much volume do you expect? At those volumes do you expect to break even?

� Is the information, on which the business plan is made, right and from reliable

sources?

� Are the conclusions right? What are the assumptions? How do we know that the

assumptions are right? What validation has been done?

� Can the business be easily copied? How will one prevent some bigger player with

better brand recall and more financial muscle not to copy the business model

(assuming it is profitable)

� Why will the business model work? Has anyone tried and failed before? If it has not

worked earlier when someone else tried, why will it will work now?

� Is it one of those great ideas which as a consumer you will definitely take it if is

offered free but don’t see the need to pay for it?

� If it is in a business which is essentially an intermediary between the customer and

some other business, think of what the business partner will say - “My customer will

come to me anyway. Why should I pay you to ‘route’ my own customers to me!”

There should be strong case for the business partner to use your “intermediation”

services.

� Does the offering complicate the way a customer solves his problem? Instead of

availing your offering, if the customer can as well pay a few rupees more or go for a

less optimal solution than go for the ‘optimal’ or ‘only little more optimal’ solution

that you offer, why would he come to you?

SOME GENERAL POINTS ABOUT DOCUMENT WRITING

Writing about something also clarifies the thought process. So a well written business plan

would also clarify the business plan. It offers you opportunity to ask yourself several

questions to revalidate the information.

Structure the document so that all the relevant aspects of the business plan are covered and

each of them get appropriate coverage (not necessarily long or short but as per the importance

of the topic). Avoid duplication of the content.

One must be clear about what is an information, what is an analysis/inference and what is an

assumption. Though this looks obvious, in reality one often finds, in a not so well written

document, (even those written by premier B-School MBA passouts) information is presented

as analysis and assumptions are presented as information. Sources of information have to be

provided and as long as they are from reliable sources, they lend lot more credibility to your

business plan.

BUSINESS PLAN DOCUMENT STRUCTURE

Executive Summary of the Business Plan Chapter 1 Need for the offering and overall concept

The need for the offering and the details of the offering should be explained before going on

to discuss about the other elements of the business plan. The ‘big’ idea should emerge from

this chapter.

Chapter 2 Market Analysis

This chapter should discuss

� Overall Market size and growth � Relevant Demographic data with sources/Relevant Demographic Trends � Competitive scenario � Segmentation Analysis of the market � Profile of Target customers � Positioning of your product/offering vs. competition - Key differentiators � Industry Trends/ Future Outlook � Policy environment if applicable � Other similar business models

Notes

The overall market could be defined broadly in the sense this may form the universal set (your

offering/other offerings in the market being the subsets of this universal set) This could also

be offerings which are not a direct competition to the proposed offering.

Demographic trends/data could reveal insights into trends in the consuming population in the

market. Hence these are indicators to broader consumption trends in the overall market.

However it is important to use only relevant demographic trends. The relevancy may be with

respect to the geography e.g. If your offering is limited to Metros or top tier cities, the trends

should be related to these cities only to the extent possible, unless of course, the trends are

universal and can be easily extended to your target segment. These trends would subsequently

form inputs to your demand estimation exercise.

Competitive scenario could profile the existing offerings/business models in the market. The

definition of competition should be broad enough to include those products/services which,

with some modifications or extension of the functionality of its own product/service can

easily substitute the proposed product/offering. The offerings could be in the same market,

same segment within the market or in some other segment of the market. The profiles should

ideally contain all relevant information about the competition such is publicly available or

that can be reasonably inferred from the information available. Some analysis (say SWOT

analysis) about the competition based on the information available is useful here. Profiling the

competitors can help understand the current positioning of the existing players and the

existing segmentation in the market. The information presented in this section should be

enough to evaluate the threat to the proposed business from the existing players.

Segmentation of the market and Targeting the right segment and Positioning your offering

(STP, in marketing jargon) is one of the most important activities in evolving a market

strategy. This exercise leads to answers to several fundamental questions about a business. A

market can be segmented across several parameters or dimensions. Some of the parameters

used frequently to segment a consumer (B2C) market often are gender, socio economic class,

age, occupation, attitude towards life, and several other parameters. Similarly in a B2B

market, there are several segments e.g. organized, small, medium, large etc. Segmenting the

market is the first step to evolving a marketing strategy in a given market. In a market where

there are existing players, analyzing their offering and positioning would also throw some

light on the existing segmentation in the market. This is not to mean that one has to follow the

existing segmentation in the market. Many successful products/offerings both by new

entrepreneurs as well by existing players have redefined the segmentation in the market.

Once the market is segmented, and the existing players profiled and their positioning in the

respective segments identified, an analysis of the players and the segments can be done to

assess the relative attractiveness of the segments. This would involve, identifying which

segments are crowded, have competition with deeper pockets, segments with entrenched

competition (better brand name), high and low growth segments, underserved segments,

profitable segments, segments with high and low barriers etc. Once the Segmentation

Analysis is done, defining your strategy for the chosen segment becomes relatively easier.

This is not to suggest that the segmentation exercise should be done before you dream about

the ‘big idea’. But it is extremely important to know which segment will find your offering

attractive enough to pay for it.

It is important to profile the target customers. This is one of the most important phases of

evolving a market strategy. Profiling should be done to as much detail as possible. Profiling

should contain all the details which will help you to put the customer in one segment or in a

different segment. If this is carefully done, you may realize that your customers come from

two or more distinctly different segments. In such a case you may have to have a different

strategy for each segment. Profiling the customers also helps understanding the whole

purchase process right from the felt need, to awareness about offerings in the market, to

purchase decision, payment, repeat purchase, after sales support, if applicable. In a B2B

market the whole process would be different than from a B2C business. For example in a B2B

business, one has to understand who in the organization will be initiating the purchase order,

who will approve and who will place the order and who will pay. What are the priorities of

these people who will be involved? If the problem you are solving is not high amongst his

priorities, the attention he pays you will be to that extent diluted and the effort will have to be

that much more. All these aspects have to be factored into the strategy at some point in some

manner.

Uniquely positioning your product/service differently is the next step in evolving the market

strategy. Typically for VC fundable projects, uniqueness in the positioning is highly desirable,

though lack of unique positioning does not mean that is not a profitable business idea. (This

perhaps only mean that it wont satisfy VC’s (normally higher) return expectations.) The

Segmentation Targeting and Positioning exercise allows you to identify who is your customer

and more importantly who is not – thus allowing you to find out what he wants and fine tune

your offering. In other words, it allows you to firm up the Unique Selling Proposition (USP)

of your offering. Offerings without a USP generally tend to be low margin/slow

growth/commoditized businesses unless backed by other organizational strengths which for

an upcoming entrepreneur is difficult to achieve. Or alternatively in a commoditized business,

players try to differentiate through better service, better quality, relationships, better design

and so on.

Industry trends and future outlook could be in terms of shifts in consumption trends,

demographic trends, technology trends and any other trends. These trends are very critical to

be analyzed to ensure that you have the right offering and the right strategy. These trends are

also useful inputs the demand estimation.

It is necessary to study the legal framework that could be applicable for the business. Atleast

identify the laws that could be applicable and if necessary fine tune your strategy based on

any legal restrictions. For some businesses, (say for example energy saving devices) studying

the regulatory framework is necessary so that the entrepreneur can suitably avail of the

incentives offered by the government.

The offerings present in some other market (say internationally) which are in no way a

competition to your service but could be used to learn about the business model due to

similarity can be profiled. The information presented in this section should lead to learnings

from their business models.

Chapter 3 Market Research

An entrepreneur generally begins with an idea with a hunch that it will succeed in the market

place – the way he has conceived. It may be a good idea and a workable proposition but not

necessarily in the manner the entrepreneur has conceived. Hence it is important that the

business plan is backed by adequate market research. Market research is a vast subject by

itself but the fundamental principles are

� Construction of the hypothesis

� Adequate sample size

� Proper design of the survey instrument and choice of the method

� Questions that give unambiguous answers

� Use of statistical tools

� Skilled interviewers

� Questions that support or refute the hypothesis

� No bias in the sample

An entrepreneur may not have the time or the resources to conduct a rigorous market research

exercise but whatever research has been done, it may be useful to document. More

importantly, it is necessary that research is done. If the entrepreneur is doing this himself, it is

important that he meets as many unknown people/parties as possible. People who know you

may be inclined to give you a biased feedback. Or worse, they may be from the same socio-

economic segment of the population that you are from – and this segment may not be what

your offering is targeted at. In such case such research has limited utility.

In this section it is also useful to document of customer feedbacks obtained through websites,

direct mails, appreciation letters etc.

In this section, it is also important to document the feedback of your important business

partners e.g. if you are engaging a large number of small retailers, you have to document their

feedback. This feedback should not only include their view of how the product/offering will

fare in the market but also about their terms of business i.e. in terms of margins, responsibility

and liability, investments to be made by them, their concerns if any, as applicable.

Chapter 4 Demand Estimation Model

This chapter should deal with:

� Key Parameters � Key Assumptions � Research methodology used to validate the concept/assess demand � Feedback on the product/service offering

Notes

Demand estimation essentially involves capturing the market segments in terms of size,

growth, in terms of value and in physical numbers/units sold etc. It must be noted that that

demand estimation would be only for the relevant market. For example, if your offering is

only being launched in the metros, it should capture only metro demand. It involves using

some input parameters about the market and some reasonable assumptions to convert the

input parameters to arrive at the potential demand.

For existing offerings in the market, if the data is available, this is relatively easier. However,

for new offerings/concepts, demand estimation is more difficult and surrogate demand

parameters have to be relied upon. Demand estimation using surrogates could mean making

the assumption say y% of the consumers of product X will purchase my product. So defining

the X becomes more crucial – both from the point of view of getting demand data for X as

well as from the point of the assumption that y% of the consumers of X will purchase your

product. Some market research can also be directed at finding the percentage conversion y%

through actual research.

Alternatively, demand estimation could involve making an assumption that y% of type of

population (say IT employees) between say of age between 22 and 40 would use your product

twice a day. Here it is important to be clear about what an ‘IT employee’ means and whether

their population is the right parameter. Does it also include Call center workers? Does it also

include IT enabled engineering services people? Does it also include HR/Admin staff of IT

companies? Should it also include employees with families, if yes what is the family size? Is

the term ‘IT employee’ is loosely being used for young people with higher disposable

income? If yes, then in that case should it also include employees in other industries say

financial services? Should it be limited to employees or it could include other walks of life?

Say housewives or small time businessmen or students? All these answers are also will lead to

clarity about the offering as well as clarity about the segment. In the above example, it might

be difficult to get the IT employees in a city like Bangalore. Even if this is available, it would

be difficult to get data about the population within that age. And it would be even more

difficult to validate the fact that an average customer who is in this segment will use it twice a

day. So one has to make assumptions based on several factors and data obtained from

different sources and doing some primary research.

It is true that demand estimation is based on several assumptions and validating them beyond

a point appears difficult, given the limited resources at disposal. However, it is important that

you must be clear of the assumptions made. And as long as the assumptions are reasonable, it

is good enough. At the end of the day a demand estimate is just that – an estimate. One can

argue this way or that way but as long as it is reasonable it is fine.

Chapter 5 Market Strategy

This chapter should include the 4 P’s of marketing strategy

� Product

� Price

� Place

� Promotion

Once the Segmentation, Targeting and Positioning is completed and the offering, the four Ps

of marketing strategy viz., Product, Price, Place, Promotion need to be fine-tuned. Without

clarity on the segments to be targeted and positioning of your offering, finalizing the

marketing strategy could be counterproductive or plainly ineffective. The subsequent

marketing strategy can be evolved on this basis.

The product can be fine-tuned based on the market feedback and the dynamics of the chosen

segment. It is necessary that the offering contains all (or most) the attributes/features that are

necessary to operate in the segment. The offering attributes/features often determine the cost

of the offering and hence the price. Hence it is also necessary, that the offering does not

contain attributes which that targeted particular segment of customer may not pay for and

which may make the offering costlier.

Pricing a product should take into account several factors. Some of the factors are price of the

other competing offerings in the market, economic benefit delivered, saving to the customer,

cost of offering, willingness to pay. While pricing a product one must have an idea of the

fixed and the variable costs. One must also have an idea of the sensitivity of the demand for

the product/offering with respect to price. This has to be backed by adequate research as this

will also feed into breakeven analysis. Needless to say, the pricing has to suit the target

consumer and his spending habits.

Place refers to the distribution channel through which your offerings will reach the customer.

Depending upon the nature of the product and your strategy, it could be online, it could have a

brick and mortar interface, or it could be telephonic. If you are planning to use franchisee

formats or any other formats where business partners will be play an important role, your

marketing strategy should recognize the value they bring to your business, identify the risks

they take vs. the risks taken by you and how you will reward them. You should have a plan on

how you will convince them to stock your products and to promote your products to end

consumers. If any investment is required at a distributors/ place, you should plan the

investment required and your business plan should provide a clear answer to what is the

investment required, who makes the investment, and what are the returns on that marginal

investment. How the risks and rewards are shared between you and the business partner needs

to be clearly delineated. Investment need not be limited to capital investment it could also be

in terms of training of resources to explain your offering to the customer. Here also, as

mentioned earlier it is just not adequate to conceptualize the whole thing. It is important that it

should be validated through market research.

Promotion Strategy should clearly address how the awareness will be created and the

financial implications/assumptions made. For a promotional campaign to be cost - effective, it

has to be provide as much awareness within the target population while minimizing the spend

overflow to non target segments. The link between the target segment, promotional spend

and your revenues should be understood. Initial promotional offers should be given

Chapter 6 Operations Strategy

The operations strategy could widely vary depending upon the business. It could include any

or all the following, as relevant:

� Manufacturing/service setup and network as applicable � Choice/Suitability of location � Facility and technology requirements including key equipment � Technology Choices and comparison � Quality aspects � Outsourcing of manufacturing/services � Utilities, power, water, sanitation, effluent, if relevant � Environmental aspects, if relevant � Raw Material Availability, if relevant � Capital requirements (project costs)

Anything that has an explicit or implicit cost implication has to be discussed. Similarly

anything that relates to physical infrastructure that is needed to execute the whole idea of the

business plan needs to be discussed in detail in the operation strategy. Importantly, any

outsourcing arrangements/contracts you propose to enter into have to be discussed in detail.

The key inputs to the business, such as raw materials, need to be discussed in detail if

applicable.

How you propose to keep tab on the quality of the product/service is a crucial aspect you need

to discuss. If there are several outsource partners, the overall experience of the customer will

be greatly influenced by the quality of output of your outsourcing partners. Hence it is crucial

to have a clear strategy on this. If too many aspects of your business are outsourced, one must

be clear about the value one is adding in between and whether this is a sustainable position.

Assuming that the business offers good margins, it is possible that the outsourcing partners

eat into your customer base by offering the same service – in which case your position is not

sustainable.

Chapter 7 Human Resource Strategy � Founding Team � Board of Directors/ Advisors � Management Team (if applicable) � Organization Structure, Staffing, skill sets, compensation, and other Human

Resource aspects if applicable to the scale of business

Notes

This chapter should contain brief writeups/CVs of the founding team/advisory team and key

management personnel, if applicable. This section should strive to give confidence to the

investor that the team is right. Even if the idea is right, VCs would also love to see if the team

can actually deliver- they wont put their money on a team who they think may not deliver.

Advisors should be those who are ready to formally spend time on the business and are

involved.

Any relevant details of organization structure, staffing compensation etc. that is applicable

and clear at the stage of business as going to the financer, can be provided in the chapter. The

manpower required to be hired, if necessary, has to be identified.

Chapter 8 Financial Analysis � Break even analysis � Projected Balance Sheet, Profit and Loss and Cash flow Statement for the

next five years � IRR, RoE, ROCE, NPV, payback period and other return benchmarks � Proposed capital structure if applicable � Phasing of investment, if applicable � Sensitivity analysis � Burn Rate

Notes

The financial model, like the demand model, will also be subject to various assumptions

about various one-time and recurring costs. It may not be possible to get quotations for all the

project costs and reasonable approximations would suffice. However, needless to say, more

accurate estimates are more desirable. However it is more important to capture all the cost

elements even if some accuracy is compromised. Though the financer will anyway thoroughly

scrutinize your assumptions in case he is convinced about the idea, reasonably accurate

projections will help you to plan better.

Break even analysis will give insights to whether the volumes are adequate to cover the fixed

costs and whether the pricing of the products is appropriate enough to cover the overall costs

and make a reasonable profit.

A well built financial model will be truly reflective of the business. The financial model could

be used to analyze the sensitivity of various demand, price and cost assumptions and assess

the (quantitative) key success and risk factors for the business. In order to analyze the

sensitivity of the project return parameters to various business parameters, the financial model

should parameterize the various aspects of the business and feed it into the financial model in

the form of a quantifiable input parameter.

A critical aspect of the financial planning, which is an integral part of the overall business

plan, will be to see if the investment into the business can be phased over installments. This

reduces the risks for the investor. The form of the investment should also be looked into i.e.

debt vs. equity vs. quasi equity. However for startups, which anyway do not have the assets to

serve as collateral for debt, this may not be a great issue. However, valuation of the equity and

the percent the entrepreneur is willing to share for a given quantum of funds is an issue one

has to give adequate thought to.

Chapter 9 Present Status and Way Forward � Present status � Way forward and Time frame for key milestones � Risk factors and mitigating strategies identified by the entrepreneur � Critical success factors identified by the entrepreneur � Any other issue like legal form of the entity, clearances etc. � Expectations from Financiers

Notes

The present status should discuss in detail on what stage each of the elements of the overall

strategy that have been described earlier are. This could include the cash invested in the

business, sources of cash, time invested in the business, the market acceptance, business

volume, state of the product development, market research findings etc.

The timelines for the key milestones need to be identified by the entrepreneur and have to be

realistic enough and should gel with the market realities and the overall strategy, keeping in

view the constraints faced by the entrepreneur. To the extent possible, an attempt should be

made to link the level of funding necessary in order to reach a specific milestone. The

milestones should also define the volume of business that should get achieved for a particular

investment. It would also be useful to have some plan on when you will say ‘quits’ and stop

further investment in the business should the critical milestones not be reached.

This concluding chapter would also talk about the risk factors and success factors as the

entrepreneur sees them. The risk and success factors as identified by the entrepreneur, of

course, will be suitably supplemented by the VC’s experience and insights but an attempt has

to be made by the entrepreneur. The risk mitigating measures could include developing

standard terms and conditions for product use. It would be advisable to take professional help

for technology related risks particularly if your offering contains payment gateways etc. Risks

and threats arising out of business partners, if applicable, need to be assessed. A concluding

section on expectations from VCs would be useful.