MODULE 4
PRODUCT DEVELOPMENT
OPERATIONS AND FINANCIAL PLAN
• The business plan will not be complete if the
operations and financial plan are not included.
These two play a crucial role in ensuring that
the business is operationally feasible and
financially viable.
Fundamentals of Product Development
• Before commercializing a new product or
service, the entrepreneur must focus first on
refining the product or service and validate its
market acceptability.
• This new product can be a totally new
product, a new product line from the existing
business of the entrepreneur, a product line
extension, an enhancement, or a repositioning
of an existing product.
Fundamentals of Product Development
• Product development is the process of
developing, testing, and commercializing a
product or service with the ultimate objective
of solving the problem of the primary target
market. It is composed of four sequential
steps:
a) developing a product or service description
b) creating a prototype
c) testing the prototype, and
d) validating the market.
Product or Service Description
• The product or service description simply
describes how a product or service works and
how it benefits the customers.
• A clear product or service description is
important because this will serve as the
blueprint of all business operations.
The entrepreneur has to take note of the
following regarding the product or service
description:
1. It should directly address the primary target
market in personal manner using everyday
language. The entrepreneur should put
himself or herself in the customer’s shoes,
where the product description will be
addressed to.
• 2. It should highlight the features that
will cater to the customer’s needs or
address the customer’s problems.
• 3. Realistic superlatives should be used
for the product description. Motherhood
statements such as “world-class service
or product excellence” may not matter to
the customers at all.
Creating a Prototype of the Product or Service
• A prototype is a preliminary model or sample
of a new product or service that is created to
test a product concept or service process. The
entrepreneur’s creativity and ingenuity will be
used in creating the prototype.
• According to entrepreneur
(www.entrepreneur.com) creating a prototype
lessens implementation/commercialization
risks and provides the entrepreneur a bunch
of advantages as follows:
1. Creating a prototype enables the
entrepreneur to engage in trial-and-error,
provides room for improvements, and refines
the functionality of the product design or
service process. It is very expensive and riskintensive to commercialize a product without
creating a prototype.
• 2. Creating prototype provides the
entrepreneur window to test the
performance and specifications of
various materials and service
processes. Every detail of the product
or service should be scrutinized
carefully, and all flaws be addressed
right away before commercialization.
• 3. A prototype helps the entrepreneur
effectively describe the product or service
to the product team. Members of the
product team include marketing,
operations, engineers, supplies, business
partners, and legal and human resources.
It provides the product team the
information needed to create the right
product or service as planned.
• 4. Creating a prototype elicits
respects from key stakeholders and
customers. At the same time, a
prototype gives credibility to the
entrepreneur. Some entrepreneurs
only present vague and big ideas but
no details as to its feasibility and
implementation.
• Creating a prototype is the stage
where the entrepreneur can
experiment, develop, and make
some improvements in the potential
product or service. The objective of
the entrepreneur at this stage is to
verify if the product or service
concept will work at the simplest,
fastest, and cheapest way.
TECHNIQUES IN CREATING A PROTOTYPE
1. studying the competitor’s product or service.
The entrepreneur will try to scrutinize the
parts and functions, as well as the design and
other attributes of that product, in hopes
that he or she will be able to address some
problems in the competitor’s products and
come up with the most efficient and effective
prototype.
TECHNIQUES IN CREATING A PROTOTYPE
2. As for the service, the entrepreneur may try
availing the competitor’s services and will take
note of their operations, such as service
delivery, location, facilities, and ambiance. He or
she will then take note of the pros and cons of
the service to create the prototype, simulate the
service by trying it with his or her friends or
relatives, and then get their feedback.
• 3. Some entrepreneurs create a video
presentation or a miniature prototype, so they
will be able to explain the details, if the
product is to be viewed by a panel of specialist
(e.g., engineers, developers, scientists).
Testing the Product Prototype
• Testing the prototype is a vital process before
an actual product or service is launched to the
market.
• Testing the prototype will uncover the final
loopholes that need to be fixed before
commercialization.
Testing the Product Prototype
• It gives the entrepreneur a leeway to examine
and scrutinize the prototype and provide
feedback as to what can be improved before
the launch. These improvements and changes
must be completed first before moving
forward to the next step.
• For a prototype that has already been refined,
testing it for the last time after the changes
have been made will validate its readiness for
commercialization.
The following testing methods are
applied by the entrepreneur:
1. Focus group discussion – The participants will
provide relevant insights about the new
product or service. The objective of the FGD
is to identify errors, deficiencies, and issues
that may impede the success of the product.
Participants also need to provide suggestions
and practical solutions on how to improve
these deficiencies.
The following testing methods are
applied by the entrepreneur:
• 2. Legality and ethical test – Prior to launching,
the entrepreneur must ensure that the product
or service complies with all relevant laws and
regulations and has a necessary license or permit
to operate a particular business. For example,
food products must be cleared first with Bureau
of food and drugs (BFAD) before they are offered
to the public. The entrepreneur must also make
sure that the manufacturing/production of goods
or offering of the service does not generate
ethical issues such as being threats to health,
safety, and environment.
The following testing methods are
applied by the entrepreneur:
• 3. Safety test – the entrepreneur must ensure
that the product is safe to use, safe to be
consumed (food and beverages), and safe to be
applied (cosmetic products). The product should
not in any way harm the customer or put the
customer in peculiar situations. in services, the
entrepreneur must ensure that the processes to
be performed by the service provider must not
be detrimental to the safety and health of the
customer.
The following testing methods are
applied by the entrepreneur:
• 4. Product costing test – the entrepreneur
must examine every stage of the
manufacturing process or every process of the
service blueprint to evaluate and finalize the
cost involved. This is the time when the
entrepreneur can match the expected costs
versus his or her budget. Modification in the
manufacturing process or service blueprint
can still be made at this point to align with the
cost objective of the entrepreneur.
The following testing methods are
applied by the entrepreneur:
• 5. Component test – Each component of the
product or service must be tested
independently to identify component failures
for goods or service failures for services. Any
failure identified must be redesigned and
tested again until it becomes fully operational
and functional.
The following testing methods are
applied by the entrepreneur:
• 6. Competitors’ product/service test – the
entrepreneur must test a similar line of
products or the competitors’ product or
service itself to compare and get the best
practices to be applied to the new product or
service.
Testing the product prototype
• is mandatory to ensure that the product or
service will not fail to the customers and will
deliver is definitive purpose.
• will elicit customer satisfaction and, eventually,
customer loyalty and retention.
• is the time to prove that the concept formulated
by the entrepreneur will work and is feasible in
real life. All the mistakes accounted for and the
improvements to be fixed should be performed
first prior to commercialization of the product or
service.
Validation of Market Acceptability
• is the process of finding out if the intended
primary target will be buying the product or
availing the service.
• Market acceptability is a critical factor that the
entrepreneur must validate before launching the
product or service, because this can strongly
suggest if the business will be successful or not. It
either validates or disconfirms the perception if
the entrepreneur about the suitability of the
chosen primary target market.
Validation of Market Acceptability
• It also tests whether the value proposition and
unique selling proposition are appropriate or
there’s a need to improve on them.
• This is also the time to deeply understand the
value that the product or service brings to the
customer and their prospective purchase
behavior, because it helps the entrepreneur
build a more relevant and meaningful product
or service.
Objective questions to be
answered in the whole process of
marketing acceptability validation
1. Will the primary target market like the
product or service?
2. Will the primary target market buy the
product or service when it is already in the
market?
These questions can easily be answered if
the entrepreneur will perform the
following activities:
1. Use the most strategic marketing research
tool (FGD), survey, observation, interview,
online survey, e-mail, or a combination of
these research tools), wherein the
entrepreneur can get the most relevant
answers in the cheapest way possible.
These questions can easily be answered if
the entrepreneur will perform the
following activities:
2. Prepare relevant open-ended questions that
answer the objectives above. Do not go around
the bush and be straight to the point. Keep the
questions to a minimum because target market
might get bored and not finish the whole
questionnaire.
These questions can easily be answered if the
entrepreneur will perform the following activities:
• 3. Find market experts who also target the same
market but are not directly competing with the
entrepreneur. For instance, a market expert sells cars
to a specific market segment and it so happens that an
entrepreneur sells real estate. The entrepreneur can
leverage on the knowledge of the market expert
regarding that market segment because they almost
have the same demographic data requirements. The
entrepreneur can use these data to improve the
product service. Collate all the data, analyze them, and
prepare a summative report that answers the objective
questions that were mentioned earlier.
The 4Ms of Operations
• The operations plan is an important part of
the business.
• Operations management, on the other hand,
controls the implementation of the business
plan.
• A strong operations plan should have the four
operational aspects—the 4Ms of operations:
methods, manpower, machines, and
materials.
The 4Ms of Operations
1. Methods - the process to be followed in
effectively manufacturing or delivering a
product or service;
2. Manpower - the right human resources who
will handle certain business operations;
3. Machines - the technology used in efficiently
operating the business, and
4. Materials to be used in creating a product or
performing service, which includes supply
chain management.
Methods
• The methods aspect represents the day-to-day
operations of business.
• It describes how an entrepreneur will run the
business from all facets of the business such
as manufacturing of goods, service delivery
process, distribution of goods and service,
logistics for delivery of goods, and inventory
management, to name a few.
Methods
• The entrepreneur must also set standard
operating procedures (SOPs) both in
manufacturing goods and rendering of
services. These SOPs must be monitored to
validate compliance. The entrepreneur must
also critically consider the effects of these
processes to the environment and to the
public.
Methods
1. Manufacturing of goods
2. Service delivery process
3. Distribution method
4. Payment process
Manufacturing of goods (Shaper and
Volery, 2004)
• The entrepreneur who will engage in
producing his/her own products will have to
consider the basic guidelines and principles in
manufacturing.
• Manufacturing is the process of translating
raw materials into finished goods that are
acceptable to the customer’s standards.
3 Elements in Manufacturing of Goods
• Inputs – the materials or ingredients to be
used in creating the product
• Process – the transformation phase where
inputs are processed by manpower and
machines to come up with the final product.
• Output – the final product of the process
stage, which is intended to be sold to target
customers.
• The entrepreneur must also consider the most
efficient in which the manufacturing process
will take place. Depending on the
entrepreneur’s objective and financial
capacity, he or she can opt to have any of the
following manufacturing sites:
1. Home-based
2. Commercial space for rent
3. Commercial space purchase
Once the entrepreneur has chosen a manufacturing
site, he/she should consider the following:
a) location, where the delivery of raw materials
and finished goods will be conducted. It should
be accessible to major types of transport
vehicles and must operate in an environmentfriendly manner so as not to contribute to
various types of pollution in the environment.
b) transportation routes from or the manufacturing
raw site should be efficient, so that the delivery
of raw materials and finished goods will be
seamless.
• The internal layout or the floor plan of the
manufacturing site must also be critically done by
the entrepreneur because it affects the efficiency
of the business operation. Each space should be
maximized to save on manufacturing costs
(specifically overhead costs). An efficient floor
plan illustrates how raw materials and finished
goods can efficiently be transferred, processed,
and released from one processing unit to
another.
Two Options for the Floor Plan
1. the product-based layout, where the facilities
are prearrange according to the flow of the
manufacturing operations, and
2. the process-based layout, where the facilities
are grouped according to their function.
• Last, the entrepreneur must prepare a
manufacturing process flow, which serves as a
step-by-step guide of the employees and the
manufacturing equipment.
• The objective of the process flow is to ensure
that the right inputs are properly used in
production, that the process is performed
according to the set standards, and that
acceptable outputs are produced.
• Not having a process flow will result
inconsistencies in the process, high expenses,
and disagreements among employees.
• The entrepreneur’s ultimate objective for all
the operational processes is to ensure that
maximum efficiency are met – from the
requisition of materials to processing them
into finished goods up to the distribution to
the customers.
Manpower
1. Job description
2. Employee qualification
3. Preparatory selection of job applicants
4. Selection of job applicants
5. Job offer
6. Employee development
Manpower
1. The entrepreneur him/herself and/or his/her
partner handles all aspects of the business at
the beginning.
2. As it grows, the entrepreneur will need the
expertise of qualified employees that can
handle operational functions.
3. The entrepreneur needs to plot a table of
organization based on his business
objectives.
Manpower
Job Description – enumerates the duties and
responsibilities of the potential employee,
including the scope, limitations, and terms and
conditions of employment.
a) Job title
b) Compensation and benefit range
c) Duties
d) Responsibilities and accountabilities
e) Work schedules and hours
Manpower
Employee Qualification – with the following
criteria:
a) Educational background
b) Work experience
c) Specific skills or knowledge
d) Work attitude
Manpower
Preparatory Selection of Job Applicants
1. Human Resource Department – handle the
selection and recruitment of candidates
2. others consider employment/manpower
agencies
3. Headhunters
4. Recommendations and referrals
5. Business networks
6. Digital media
Manpower
Selection of Job Applicants
• Screening and picking the most qualified and
most suited for the job
• Some establishments conduct qualifying
examinations in Math, English, Logic and
psychology tests before hiring an employee.
• Interview
Sample questions for interview
1. What are your strengths that you can
contribute to our organization?
2. What are your weaknesses that can prevent
you from working effectively in our
organization?
3. What exactly did you do in your previous
job/s? How will these past experiences
contribute to our organization?
Sample questions for interview
• 4. What were your significant milestones in
your previous job/s, and why do you consider
them as such?
• 5. Can you discuss the things you know about
our organization? Why are you interested to
join our organization?
Sample questions for interview
• 6. What are your career plans for the next five
years if given the chance to work with our
organization?
• 7. Can you describe your work ethic? How do
you work with a team and with your superior?
Manpower
Job Offer
Job contract – generally summarizes the terms and
conditions of the candidate’s employment with the
business which usually includes the following
details:
a) Rank or position of the candidate
b) List of responsibilities or deliverables and its
scope and limitations
c) Salary and benefits including vacation and sick
leaves
d) Work schedule
Manpower
Job Offer
Job contract – generally summarizes the terms
and conditions of the candidate’s employment
with the business which usually includes the
following details:
e. Probationary period if any and qualifications
to become a regular employee
f. The duration of the contract
g. Resignation procedure
Manpower
Employee Development - Training people
1. Employee orientation
2. Buddy system
3. Mentor-mentee program
4. Succession plan
5. Online learning programs or Webinars
Manpower
Strategies for Talent Management
1. Provide a very competitive salary package
including bonuses, performance bonuses,
commissions, and other monetary incentives
Manpower
Strategies for Talent Management
2. Nonmonetary benefits such as medical coverage,
different types of leaves (vacation leave, sick leave,
emergency leave, birthday leave,
maternity/paternity leave, study leave), decent and
notable job titles, flexibility in work schedule,
awards and recognition for excellent performance,
inspirational leaders, transparency and fairness in
employee performance evaluation, and channels to
which employees can provide constructive feedack
without the risk of being fired.
Manpower
Strategies for Talent Management
3. Additional (Optional) benefits such as annual
trips (international or local), work-from-home
opportunities, scholarships, transportation and
communication allowances, free meals and
drinks, fitness programs, sports programs, and
other work-life balance programs.
Machines
• can be described as the “best friend” of
manpower in producing goods and offering
services. They go hand in hand.
• sometimes can even replace employees.
• have become one of the 4Ms because they
are very important aspect of goods and
service production, and they have changed
the way entrepreneurs conduct business.
Machines
• are not only limited to physical equipment but
can also pertain to new technologies that help
business operations become standardized and
seamless.
• Without it, business operations will be
cumbersome, costly, and with low quality.
Machines
1. Equipment and other facilities
2. Telecommunications and information
technology
Machines
1. Equipment and other facilities
-must be strategically placed in the
manufacturing site or in the service delivery
area.
-sizes and shapes affect the entire operations
process, so the site must adapt to how big/small
the pieces of equipment are.
Machines
1. Equipment and other facilities
-should all be compliant with safety
requirements to prevent accidents.
-to be used to their full capacity to minimize the
manufacturing or service delivery costs.
Machines
2. Telecommunications and information
technology
-is mandatory, regardless of any business the
entrepreneur will venture into.
-include mobile phones or smartphones, tablet
computers, phablets (phone and tablet in one),
landline phones, laptops or desktop computers,
POS machines, software programs, and business
Web sites.
Advantages of having telecommunications
and IT equipment in a business
1. Landline phones – order-taking,
telemarketing, and teleconferencing with
business partners and customers.
Advantages of having telecommunications
and IT equipment in a business
• 2. Mobile phones (smartphones, tablet
computers, phablets) – mobile application for
order-taking, mobile application for payments,
mobile marketing, social media marketing,
teleconferencing with business partners and
customers, marketing research, mobile
banking, and Internet promotions.
Advantages of having telecommunications
and IT equipment in a business
• 3. Laptop and desktop computers – ordertaking, Internet marketing, making conference
calls with business partners and customers,
marketing research, online banking, preparing
reports such as financial statements, business
case, inventory reports, and legal and
compliance reports.
Advantages of having telecommunications
and IT equipment in a business
• 4. POS machines – charging customers’ debit
or credit card, tracking sales, storing data,
analyzing purchases
• 5. Accounting and inventory software –
accounting all business transactions and
profitability, monitoring sales and inventory.
Advantages of having telecommunications
and IT equipment in a business
• 6. Web site – order-taking, 24/7 marketing,
having online conversations with customers,
tracking customer activities online, collecting
customer information.
Materials
• The entrepreneur must pinpoint a number of
dependable suppliers of quality raw materials
and supplies.
• The supplier must have a consistent and
sufficient amount of raw materials and
supplies that can accommodate the demand
of the entrepreneur.
Materials
• The selection of suppliers depends largely on
how the suppliers will not cause interruption
in the production of goods or serving the
customers.
• The entrepreneur should decide on what
route to choose when it comes to materials
requisitioning.
Materials
Ways to acquire materials
1. Manufacturing own products or offer
services
2. Outsourcing of manufacturing or service
activities to a third party
3. Purchasing own product or service from
present suppliers.
Materials
Ways to acquire materials
1. Manufacturing own products or offer
services – a huge chunk of capital must be
prepared because all the expenses in
manpower, machines, and materials will be
borne by the entrepreneur.
Materials
Ways to acquire materials
2. Outsourcing – is the process of appointing a third
party manufacturer to do the manufacturing
operations of the business. Outsourcing saves the
entrepreneur from buying expensive machines,
renting locations, or hiring manpower.
-It provides the entrepreneur a chance to provide
the operation details to the third party.
-
How an entrepreneur can protect
his/her product
• Patent – is the right to protect the
entrepreneur regarding the product or
service.
• Trademark – is a sign or symbol that helps
distinguish the product from others.
• NDA (nondisclosure agreement) states that
the third party will be given full access to any
confidential information provided that it
should not be disclosed to anyone else.
Advantages of having multiple
outsource parties
1. It helps continue the operation even if one of
the third parties stops.
2. The entrepreneur will have greater
bargaining power on the price and scope of
the product.
3. The entrepreneur may have a choice to
switch to other parties if one of them does
not perform well.
Materials
3. Purchasing own product or service from
present suppliers.
• Purchasing finished products from a
manufacturer or offering the services of
another company is another viable option for
the entrepreneur.
Materials
3. Purchasing own product or service from
present suppliers.
• In this setup, the entrepreneur cannot own
the brand name of the product or service.
• Moreover, the manufacturer or the original
service provider is allowed to sell to the
entrepreneur’s competitors.
• It also spares the entrepreneur of the costs of
machines and full-time manpower.
Materials
• Logistics
• Entrepreneurs/manufacturers can also venture
into distributing their products on their own
without the aid of a distributor or agent. This is
where the entrepreneur must understand and
implement efficient logistics management.
• Entrepreneur/manufacturer is responsible for
manufacturing, warehousing, transportation,
inventory management, marketing, and selling
the product or service.
Warehousing
• is storing the finished goods manufactured in
a facility until they are distributed to end
users. Warehousing cost is usually substantial.
Therefore, the entrepreneur should think of
ways on how to reduce the cost of
warehousing by either buying an economical
warehouse, or renting an inexpensive space.
Transportation
• will also be a major cost in logistics
management.
• is the process of efficiently transferring the
products to retailers or consumers.
• The entrepreneur/manufacturer must
purchase energy-efficient vehicles that can
carry a reasonable amount of merchandise to
prevent inefficient trips.
Distribution hub
• is where the entrepreneur/manufacturer
combines the goods before delivery to retailers or
end consumers.
• Consolidating different products in the
distribution hub elicits efficiency because, more
often than not, a manufacturer carries multiple
products.
• Instead of delivering per product to retail outlets,
the entrepreneur/manufacturer can consolidate
all the products needed by the retail outlet and
deliver just once.
Inventory
• should be tracked religiously by the
entrepreneur/manufacturer. Each of the
inventories in the warehouse, distribution
hubs, and manufacturing sites should be
monitored.
• The law of supply and demand must always be
taken into account.
Inventory
• There shouldn’t be a surplus of inventory
especially if the entrepreneur is selling
perishable goods.
• The entrepreneur must be knowledgeable
about the life span of the products that will be
sold.
Inventory
• The entrepreneur/manufacturer also ensure
that there is enough space to store/stock
inventory, depending on storage
requirements.
• The key with inventory management is
understanding the historical and current
demand data as well as future trends to avoid
unnecessary costs in producing too many
products.
The Business Model
• The entrepreneur must adapt the dynamics of
traffic lights in developing the business model.
These are 3 “green lights” or the positive
signals that can help entrepreneurs to develop
ideal business models and eventually succeed.
On the other hand, there are 3 “red lights” or
negative signals that entrepreneurs must be
wary of. (by Don Deebalak in “Developing a
Great Business Model” on the Entrepreneur
Website.
The Green Lights
1. Target high-value customers – someone who
• is easy to find.
• is willing to pay a price that will reasonably
profit the entrepreneur.
• is easy to persuade with the least promotional
effect.
The Green Lights
1. Target high-value customers – someone who
• can join the bandwagon of customers that,
when consolidated, can generate a substantial
amount of revenues aligned with the profit
objectives of the entrepreneur.
The Green Lights
Customers do not only mean end customers or
retail customers; they can also be partner
retailer, distributors, or corporate customers.
The entrepreneur’s objective is to find these
customers. If unable to do so, he/she can choose
to tie up with strategic partners who fit the
profile of a high value customer.
The Green Lights
2. Offer products or services with great value
• The value proposition and unique value
proposition should always kick in as
compelling reason for customers to choose
your product or your service. Without these,
the entrepreneur cannot develop a successful
business model.
The Green Lights
2. Offer products or services with great value
• The entrepreneur
o must position the unique attribute(s) of
his/her product/service.
o must also devise an efficient distribution
system where the flow of goods/service
delivery is convenient, fast, and available
when needed.
The Green Lights
2. Offer products or services with great value
• The entrepreneur
o can also collaborate and synergize with
relevant partners to offer excellent customer
experience to customers.
o should also offer products/services with great
value coupled with attractive and reasonable
prices as a result of lean manufacturing.
The Green Lights
2. Offer products or services with great value
• Aside from the core product or service, the
entrepreneur, considering the influx of
technological advancements such as the
internet, third party outsourcing, and
synergies between businesses, the arena of
the entrepreneurs around the world has
become ultracompetitive.
The Green Lights
2. Offer products or services with great value
o can also provide customers with other related
products or services and customization
options to complete the overall value of the
product or service being offered. must always
be in the lookout on whether his or her
product or service still provides value or is
already outpaced by the competition.
The Green Lights
3. Offer products or services with reasonable profits
• Two ways of achieving reasonable profits:
1. increasing markup and
2. decreasing operational costs – is the most
practical way to achieve reasonable profits. This
is because increasing the markup, as compared
with the prices of competitors, will decrease the
attractiveness and competitiveness of the
product/service. Therefore, profitability cannot
be maximized.
The Green Lights
• 3. Offer products or services with reasonable profits
• As discussed in the 4Ms of operations, the
entrepreneur should
1. devise an efficient distribution system
2. lessen unnecessary manpower efforts as much as
possible
3. apply lean manufacturing processes
4. add support products or auxiliary services that can
increase revenue without adding substantial cost.
The Red Lights
1. Satisfying the customer becomes too costly
and irrational
• The entrepreneur must calculate the cost and
profit associated with serving the customer
before pursuing the business.
The Red Lights
• There are times when entrepreneurs are
blinded by how big the profit margin can be
for a sale of a particular product or service but
a little do they know that there are numerous
associated after sales cost that can even
exceed the profit margin derived from the
actual sale.
The Red Lights
• In marketing, the term “lifetime value of a
customer” was coined to understand the
potential value that a customer can bring to
the business in the long run.
The Red Lights
• But there are obvious red flags, which are
collectively called customer satisfaction costs,
that can impede the success of an
entrepreneur. These are as follows:
1. Warranty – because some products are as
sturdy as they should be, the business will
incur unnecessary warranty costs that can
even surpass the cost and profit margin of
the product.
The Red Lights
2. After sales costs – some products or services
require extensive technical support, installation,
and customer service. These after sales cost
might even surpass the actual sales price of the
product or service.
The Red Lights
Once the costs are identified, the entrepreneur
will rectify the situation by transferring the cost
to another party or through outsourcing to
lessen the cost of servicing the customers. He
can also instruct his sales team to just focus on
business aspects that do not require too much
customer satisfaction.
The Red Lights
2. Being a market leader is difficult to sustain.
• One of the characteristics of an ideal business
model is capitalizing on the business’ stature
as a market leader through improving the
features and benefits of its existing products
or services, adding new product lines or
services, or expanding by tapping new
customers.
The Red Lights
• However, there are signs that it will be difficult
to sustain being a market leader if the
following conditions exist:
1. if there are major customers purchasing the
entrepreneur’s product or services;
2. If there are major players in the industry that
control the majority of the distribution
network;
The Red Lights
3. if technology has changed the way the
entrepreneur operates the business, compelling
him or her to invest on rigorous product
research and development;
4. if technology replaces the need for the
entrepreneur’s product or service, and
The Red Lights
5. if the competitors can easily tap the market of
the entrepreneur. Maintaining the market
position has a large dependency on the overall
condition of the market.
The Red Lights
3. Return on investment (ROI) takes too long and
too small.
• Entrepreneurs did venture in a business
enterprise because they want to earn profits
for the purpose of sustainability.
• ROI is very important to the entrepreneur
because it validates that the business is doing
well and that money is flowing in as expected
during the planning stage.
The Red Lights
• An ideal business model is characterized by a
reasonable ROI earned at the right time and
with the right amount. However,
1. if reports say that ROI is less than
approximately 25% in the first three years of
business operations, it is a sign that the
entrepreneur is not operating an ideal
business model.
The Red Lights
2. Another sign is that production of additional
products or services requires an ample amount
of additional capital.
3. Moreover, only less than 50% of the capital
required will be allocated to revenue-generating
activities such as selling and manufacturing.
The Red Lights
4. It is also a red flag if the present capacity is
also not capable to produce or handle new
commitments; therefore, additional investments
must be made again to accommodate the new
demands.
5. The last sign is the uncontrollable industry
factor where generally everyone in the industry
always has unacceptable ROIs.
The Final Financial Plan
• One of the most difficult parts of the business
plan is the financial plan.
• Not all entrepreneurs are adept with
accounting procedures, rules, and reporting
policies.
• However, there is no choice for the
entrepreneur but to be familiar with numbers.
The Final Financial Plan
• The sustainability of a business depends on a
meticulous monitoring of finances. This is the
portion of the business plan that speaks of the
product or service performance. It also
provides the entrepreneur financial data such
as liquidity, cash flow, and financial standing of
the business.
The Final Financial Plan
• The financial plan also gives the entrepreneur
bases for his or her decisions on financial
matters such as offering credit terms to
customers, applying for a bank loan, expand,
or sell the business.
• Without proper accounting of business
activities and transactions, the entrepreneur
will be at a loss on where his or her business is
leading him or her.
• Financial management begins when the
entrepreneur starts to raise capital for the
business venture. Capital is the money that
will be allocated by the entrepreneur to
establish a business. It shouldn’t be mixed
with the personal money of the entrepreneur.
A business is a separate entity and should not
be mixed with the personal finances of the
entrepreneur.
• A number of entrepreneurs produce capital
out of their personal savings. This money
came from a disciplined habit of consistently
saving when the entrepreneur used to be an
employee.
• Some of the budding entrepreneurs borrow
money from families or friends, whereas some
look for interested investors or stakeholders.
• The entrepreneurs turn to blanks or financial
institutions for capital, but they usually
require collaterals and base their credit
decisions on the business performance (i.e.,
the net income of the business) some startups
may find it difficult to secure a loan from
banks because of the performance angle as
one of the qualifications.
Collateral
• refers to a high value asset that is submitted
by the business to the bank when applying for
a loan and will be subject for repossession if
the business defaults.
• Regardless of where the capital was sourced,
putting this capital at risk is one of the major
reasons that most entrepreneurs are afraid to
engage in a business venture.
Collateral
• But those who take the risks also gain the
experience and use this experience to
succeed.
• Not all entrepreneurs became successful the
first time they ventured into business.
• All of them experienced failures and used
these failures to their advantage.
Factors Affecting Estimation of
Revenue
• A business opportunity can only be considered
a real one when the entrepreneur recognizes
that the opportunity may bring him or her
revenue.
Factors Affecting Estimation of
Revenue
Revenue is
• the output of a sale wherein the sales price
exceeds the cost to produce the product or
render the service.
• considered earned when the product is already
sold or service has been rendered regardless if
the business is paid in cash or credit.
• considered deferred when the product or service
has not yet been delivered or sold but the
customer already paid in advance.
Factors Affecting Estimation of
Revenue
• After establishing that the business
opportunity will really bring revenue, the end
next step is to estimate how big the revenue is
on an annual basis.
• This will give the entrepreneur an inkling on
where his or her hard-earned money will go.
Factors Affecting Estimation of
Revenue
• It is not easy to estimate potential revenue, as
it requires a thorough analysis of external and
internal factors that can affect the business.
• All of these external and internal factors must
be incorporated in the projection computation
so that it will appear realistic and will not
mislead the entrepreneur.
Factors Affecting Estimation of
Revenue
1. The economy and the external primary target
market – similar to finding business
opportunities, estimating revenue is greatly
affected by the entire economy and the
behavior of the primary target market.
• The entrepreneur must be able to incorporate
the overall health of the economy in its
estimation of projected revenue.
Factors Affecting Estimation of
Revenue
• The entrepreneur needs to know if the
economy is either booming, stable, or slowing
down.
• However, there will be times when the overall
economy is not a reflection of what the
entrepreneur’s primary target market is
experiencing.
Factors Affecting Estimation of
Revenue
• 2. The external competitors – the
entrepreneur must devise a comprehensive
competitive profile matrix—a chart that
details the relevant date of both direct and
indirect competitors and how these factors
affect profitability.
Factors Affecting Estimation of
Revenue
• 2. The external competitors
• Direct competitors are those that offer exactly
the same product/product lines or services as the
entrepreneur. Indirect competitors are those that
do not offer exactly the same products or
services but influence or affect the
entrepreneur’s market share (e.g., if the
entrepreneurs sells soft drinks, his or her market
share will affected by those who sell other
beverages products such as mineral water, iced
tea, juices, or alcoholic drinks).
Factors Affecting Estimation of
Revenue
• When entering a market with weaker and
smaller competitors, the challenging is to
compete with them directly. Unlike the first
one, however, there is a bigger chance here to
succeed and take away the market shares of
the competitors.
Factors Affecting Estimation of
Revenue
• The entrepreneur can also enter a market with no
competitors.
• This rarely happens though; these days, there are
virtually no unique products or services, or there are
only few entrepreneurs who want to venture in an
entirely different market that no one has tried yet.
• An example of this is venturing in a war-stricken area
where the risk is very high but the opportunity is also
very high because the entrepreneur has no
competitors to share his or her market with.
Factors Affecting Estimation of
Revenue
• The entrepreneur can also enter a market with
no competitors.
• Also, entrepreneurs can impose unreasonable
prices, as the buyers have no bargaining
power because they have no choice.
• Aside from basic financial data, the
entrepreneur must also be vigilant in
reviewing an assessing the business marketing
strategies of the competitors.
Factors Affecting Estimation of
Revenue
3. The internal business –
• To asses potential revenue, the entrepreneur must also
devise his/her own marketing strategies based on
external and internal scan from the competitive profile
matrix. With these data, the entrepreneur can now
craft effective strategies that can outweigh those of the
competitors.
• However, the entrepreneur must always be on the
lookout because competitors do not just sit and wait to
be beaten.
• They will always react to what their competitors are
doing.
Factors Affecting Estimation of
Revenue
3. The internal business –
• They can always resort to cut prices, improve
features and benefits of their product or service
that can differentiate them from the rest, or
implement more strategic and effective
marketing tactics.
• Each of the players in the market is thinking
ahead and monitors the moves of the others.
• To keep at pace, the entrepreneur must always be
alert and reactive to all kinds of contingencies, or
else the revenue will suffer.
Computation of Gross Revenue
• Once all the influences above are identified,
the entrepreneur can now calculate and
project the potential revenue numbers for five
years.
Computation of Gross Revenue
• Step 1: compute for the market universe or
total market.
• The entrepreneur must derive the figure that
represents the market universe or the total
market to understand how big the market is.
This is represented by the size of the potential
customers and how often they will use or
consume the product or how often they will
avail the service.
Computation of Gross Revenue
Example: Mr. Antonio Castro owns a big sari-sari store
named Antonio Castro store in Brgy. Bacani, San Miguel,
Bulacan. He noticed a number of his customers get their
remittances from the OFW relatives in the city proper.
They use the remittance afterward to buy basic goods
from Mr. Castro. With this, Mr. Castro became interested
with the remittance business, because he thinks he will
have a substantial number of customers who will claim
remittance through him. Moreover, he thinks that the
remittance center and the sari-sari store are
complementary business, because after claiming the
remittance, the beneficiary will also buy from his store.
Mr. Castro wants to know the market size for remittances.
Computation of Gross Revenue
Mr. Castro will have an easy time because the data
are readily available from the Bangko Sentral ng
Pilipinas (BSP). BSP reports that remittances to the
Philippines reached $24.3 billion in 2014. That’s
how big the market is in the Philippines. He has to
break it down though to Bulacan remittances so he
can determine the share of his province in the
remittance pie in his town, and then his barangay.
From here, he can calculate the potential market
share.
Computation of Gross Revenue
• To illustrate the computation of market size, assume
that Mr. Castro became interested also in selling
cellphone prepaid load, because 95% of the people in
his barangay have cellphones and most of them are on
prepaid. Mr. Castro wants to know the market size of
the prepaid load business in his barangay. He has the
following data:
• Cellphone owners in Barangay Bacani—5,000
• Number of times the customers buy load per week—2
• Average amount of load customers buy—PHP100
Computation of Gross Revenue
• Market size = total number of customers x
number of times the customers buy the product
or avail the service per year x average amount
per purchase/service availment
• Market size = 5,000 x (2 times in a week x 4
weeks = 8 times per month x 12 months = 96) 96
x Php100 per load purchase
• Market size of cellphone prepaid load in Barangay
Bacani = Php48,000,000
Computation of Gross Revenue
• Step 2: Compute the market share of the
competitors.
• According to the competitive scan of Mr. Castro,
there are 5 stores in his barangay that dominate
the prepaid load market. Their total combined
market share is 80%. They are the same in terms
of store size, and all of these stores are
wholesales. Aside from these five, there are 4
retailer stores in the community that haven’t
ventured yet in the prepaid load business.
Therefore, Mr. Castro still has 20% of the overall
market size to tap, which is equivalent to
PHP9,600,000 competing with the four retailers.
Computation of Gross Revenue
• Step 3: Plan to capture remaining market share.
• Mr. Castro must devise business strategies on
how to tap the remaining market and not let the
new retailers overtake him. Some of the
strategies that he can employ is to provide
marketing promos to customers (e.g., for every
Php30 load, they can get one free candy or
loyalty reward where customers can get Php30
free load when they load Php100 for 5 times).
Computation of Gross Revenue
• This is an application of a differentiation
strategy. If competitors will try to copy it, Mr.
Castro must think of another strategy to
differentiate his service. He can focus on
customer experience, whereby customers ,
even without going to the store, can buy load
using their social media accounts. This saga of
creating various differentiation strategies will
be an iterative process just to capture and
maintain the remaining market share.
Computation of Gross Revenue
• If the differentiation strategy is really
compelling, Mr. Castro can even acquire the
market share of the market leaders. It is good
to set targets, but these target will be
dependent on the external and internal
factors previously mentioned. Assume in this
example that Mr. Castro sets the target at 40%
of the remaining market share is
Php9,600,000 x 40% = Php3,840,000.
Computation of Gross Revenue
• Step 4: Prepare a realistic five-year projected
annual revenue.
• Mr. Castro must set a realistic and achievable
five-year projection that incorporates the
contingencies and the external/internal factors
discussed.
• He must monitor the growth or decline of both
the market size and his market share.
• If the movement in marketing size and market
share is not proportional, then Mr. Castro can
already glean roughly what is happening.
Computation of Gross Revenue
• Step 4: Prepare a realistic five-year projected
annual revenue.
• If the market size is growing but the market
share is not growing, then there is something
wrong with the strategies of Mr. Castro. If
market size is not growing but the market
share is growing, then Mr. Castro must be
doing a good job in serving the customers;
thus, he is eating the market share of the
competitors.
Computation of Gross Revenue
• Step 4: Prepare a realistic five-year projected
annual revenue.
• Assuming Mr. Castro is optimistic that he will
be able to differentiate and grow the business,
he is looking at a 5% growth in year 1 due to
adjustments and difficulties he will encounter,
15% growth in years 2 and 3, and 20% growth
in years 4—5.
Computation of Gross Revenue
Table 4.2 shows Mr. Castro’s projected annual
gross revenues from his prepaid load business.
Year 1 Year 2 Year 3 Year 4 Year 5
Php4,0 Php4,6 Php5,3 Php6,3 Php7,6
32,000 36,800 32,320 98,784 78,541
Computation of Gross Revenue
The numbers in table 4.2 are quite attractive to
look at, especially on the perspective of a retail
entrepreneur. But Mr. Castro shouldn’t be
overwhelmed by these numbers, as these are
just gross revenues and the values of the
product (load) as well as other expenses
associated with the sale have not yet been
incorporated.
Income Statement
• As discussed, the real income or net revenue
is only realized when all expenses have been
already deducted from the gross revenue.
• Therefore, the entrepreneur must prepare an
income statement, which is financial
statement and details the computation net
revenue by deducting cost of sales, expenses,
and taxes from the gross revenues generated.
Income Statement
• In the example concerning Mr. Castro, despite the
attractiveness of the gross revenue figures in retail
perspective, he is still not sure if he is earning from this
venture.
• The sustainability of the business largely depends on
the net revenues because this increase the value of a
business.
• These increments are used to fund product research,
development initiatives, and business expansion.
• Financial institutions also base their credit decisions on
the bottom line (net income) and not on gross
revenues of businesses.
• Because the gross revenues have been already
identified for the next five years, it is now time to
account the costs the expenses associated with
the sale of prepaid load:
• Cost of prepaid load—95% of the selling price
• Marketing cost, cost of mobile phone, and other
administrative costs—1% of the selling price
• Income tax is assumed to be 20%of gross profit.
Sample projected 5-year income statement
(in Php) for Mr. Castro’s load business
sales
Year 1
Year 2
Year 3
Year 4
Year 5
4 032 000.00 4 636 800.00 5 332 320.00 6 398 784.00 7 678 541.00
Less: cost 3 830 400.00 4 404 960.00 5 065 704.00 6 078 844.80 7 294 613.95
of sales
Gross profit 201 600.00 231 840.00 266 616.00 319 939.20 383 927.05
Less
40 320.00
operating
expenses
Net income 161 280.00
before tax
Less:
32 256.00
income tax
Net
129 024.00
revenue
after tax
46 368.00
53 323.20
63 987.84
76 785,41
185 472.00
213 292.80
255 951.36
307 141.64
37 094.40
42 658.56
51 190.27
61 428.33
148 377.60
170 634.24
204 761.09
245 713.31
• Mr. Castro’s business model is very simple; thus,
the income statement is not at all complicated
too.
• In the manufacturing business, the cost of sales
portion is more complicated because there is a
need to input balances for raw materials
inventory, work-in process inventory, and finished
goods inventory.
• Moreover, the cost of labor and factory overhead
are also incorporated in the total manufacturing
cost.
• In services, instead of cost of sales, the
entrepreneur needs to input cost of services
(labor or systems cost).
• Before Mr. Castro became a fully dedicated
sari-sari store, remittance, and load center
owner, he incurred business startup costs.
Common Costs Associated with
Starting Up a Business
1. Business registration fees to be paid to the
municipality or city hall
2. Business name registration with the DTI
3. In some cases, accountant or lawyer fees to
assist in establishing the business
Common Costs Associated with
Starting Up a Business
4. Cost of machines for manufacturing or
delivery of services including transportation
vehicles
5. Factory or building rental fee or acquisition
cost of factory or building
6. Overhaul cost of factory or building
Common Costs Associated with
Starting Up a Business
7. Working capital that can last for a minimum
of 3 months. This money is allocated strictly for
the business to avoid shortage of cash in the
first 3 months of operations.
Cash is the most important asset of a business.
The entrepreneur must be an expert in handling
cash. Thus, a statement of cash flow should
always be prepared and monitored.
Balance Sheet
• The entrepreneur must also prepare a balance
sheet to account for the assets, liabilities, and
capital of the business.
• Balance Sheet 2
• Balance Sheet 3
Balance Sheet
• is a core financial statement that describes the
financial position of the business. The
entrepreneur must separate his/her personal
assets and liabilities and only account for what
assets are attributable to the business. The
business should be a separate and distinct
personality.
3 Elements of a Balance Sheet
1. Assets
2. Liabilities
3. Owner’s equity or capital
3 Elements of a Balance Sheet
1. Assets – represent the resources of the
business that are expected to have future
economic value. It is divided into:
• Current assets – are mostly the liquid assets
that can be exchanged to cash within one
year.
• Noncurrent assets – are long-term assets that
can be exchanged to cash for more than one
year.
3 Elements of a Balance Sheet
2. Liabilities – are what the business owes to
another person, a financial institution, or any
creditor.
3. Owner’s equity or capital – is the funds
allocated by the entrepreneur to run the
business.
The accounting equation should always be
balanced as represented by the formula:
Assets = liabilities + owner’s equity
Balance Sheet
• It is ideal to prepare a balance sheet every
year so that the entrepreneur can analyze the
financial position of his/her business.
Cash Flow Statement
• Another very important financial statement is
the statement of cash flow.
• Because cash flow is the most important asset
of a business, the entrepreneur must be
vigilant in monitoring its whereabouts.
• It may look as if the business is earning
enough as seen in the income statement, but
it doesn’t mean that the business has no cash
flow issues.
Cash Flow Statement
• Some possible issues on cash flow
1. The business could have many pieces of
equipment but doesn’t have enough cash to
pay its creditors on time.
2. The business can be selling on credit instead
of cash, thus it is not liquid enough to pay its
suppliers.
Cash Flow Statement
• Cash Flow Statement 1
• Cash Flow Statement 2
• Cash Flow Statement 3
Cash Flow Statement
Cash Flow Statement
Income Statement, Balance Sheet, and
Statement of Cash Flow
• are the basic financial statements that should
be religiously prepared, monitored, and
analyzed by entrepreneurs no matter what
type of business they are in.
• are tools that help them direct their business
decisions to be strategic and effective.
Entrepreneurs should not leave all of these tasks
to their accountant or a trusted officer. They
have to know their numbers by heart.
REFLECTION #1
Based on what you have
observed, do you think the
Filipino entrepreneurs test their
products or services before
launching them to the public?
Why?
REFLECTION #2
Assume that you have available capital that
can finance any original product/service you
have in mind. Using your original
product/service, apply what you have learned
in product development.
1. Prepare a product/service description.
2. What will be your game plan for your
product/service prototype? How will you
test it?
3. How will you execute your market
acceptability validation?
REFLECTION #3
Choose one Filipino entrepreneur
who really inspired you on the aspect
of product management. Did he/she
create a prototype of the product or
service and validated the market
before commercialization? Cite
his/her best product management
practices.
REFLECTION #4
Based on your personal
experience, cite 3 service
businesses and 3 product
businesses that gave you an
impressive experience because
employees were properly trained.
What made you say employees
were really trained?