Prudens Information Resources for the Internet


E-Business Planning and Analysis

E-Business

A Prudens E-Report

After the Dot-Com Era | Introducing e-Business into an Existing Organization
Starting an e-Business from Scratch | Startup Challenges | Starting Up Different Types of e-Businesses
e-Business Plan Evaluation | e-Business Analysis | Summary



After the Dot-Com Era

In the late 1990s, some entrepreneurs claimed that there was an unusual opportunity for new companies to gain a foothold in the online marketplace, since existing "bricks and mortar" companies were generally slow to move online and were dismissed in the press and by industry analysts as "out of touch" and "out of date". However, many traditional companies weren't concerned about the upstart Dot-Coms and didn't try to move at "Internet time". Their online initiatives started slowly to "test the waters". After all, at the time e-business was only a small fraction of the business conducted offline. Their cautious approach seems justified since many traditional companies have continued their steady growth and now dominate the top ranks of online business. As for the Dot-Coms, there a few spectacular successes and a large number of failures. But surprisingly, most of them slowly succeeded in one form or another.


Dot-Com and Other Business Failures

According to WebMergers, 4,854 dot-com companies went out of business from 2000 to 2003. Nearly 4,000 of these investor-owned firms were acquired or made a major shift in their business model to undertake new activities, some more than once. The publicity surrounding these changes left an impression that online business wasn't viable when the real problem was careless investing and faulty investment regulation. Even though investors were protected by SEC regulations, they were enticed by company officers, analysts, and financiers to put funds into companies that had little chance of success.

The closure rate of dot-coms must also be put into perspective with the realization that, according to the Small Business Administration, approximately 45,000 businesses fail in the U.S. each year. Of those businesses, 85 percent are less than 5 years old and are believed to fail due to bad planning or management.

Part of the unintended legacy of the Dot-Coms is confusion about the value of business planning. Planning, even management, was ignored by some Dot-Coms, which is possible when operating funds don't have to earned, but are supplied by investors. When a company's key business strategy is an exit strategy, and when the interest of managers, suppliers and even customers focused on stock options rather than performance, planning became cumbersome. But the real risk for investors became apparent as many of these businesses failed or were taken over by other companies.

In contrast to the freewheeling days of the Dot-Coms, today's survivors emphasize the relative value of each expenditure. They emphasize return on investment (ROI) decision making, where funds are put into programs and projects with the highest estimated payoff. This approach is safe, but doesn't encourage innovation.


Starting An e-Business

The restructuring of a business to include e-business activities, or the startup of a new e-business are unique processes that require planning. In an existing business, the plan for a new division or program is sometimes called an implementation plan. The initial plan for a start-up is known as a business plan.

There is a distinction between starting an online business activity in an existing organization and starting a brand new e-business. Existing organizations with skilled workers, market intelligence, a range of resources and available funding appear to have an advantage, but that's not always the case. In fact, an e-business starting within an existing corporate structure is doomed to fail unless it is carefully supported.


Introducing e-Business into an Existing Organization

Turning a traditional business into an e-business, or just adding an e-business component, is a surprisingly difficult task.1 Some established companies rushed into e-business it was touted to significantly reduces costs, or simply because their competitors were doing it. Nearly every company has begun to make some changes to accommodate online activities and has found that the move is difficult and may take a significant amount of time and resources to accomplish. The process is facilitated with an implementation plan, which delineates the steps to be taken and the resources required to start a new "business" within an existing business. It also addresses the challenges to be faced such as system integration, security, and corporate culture.


Planning for e-Business

One classic case of underestimating user demand and the failure of scaling was the opening of Encyclopedia Britannica's Web site in 1999. Ten times the expected number of visitors caused the Web site to crash on its opening day. The company subsequently invested $37 million to upgrade its site to handle 15 million or more hits a day and reopened the following month.

System Integration

Any company in business for more than 20 years is likely to have several different computer systems, each using customized software. These so-called legacy systems perform particular tasks well and many are still used today! One of the major challenges of installing information or communications systems across an enterprise is to integrate these systems into an over-reaching network that allows access to their files throughout the company.

The process of planning and integrating corporate-wide systems is known as Enterprise Resource Planning (ERP). Just a few years ago ERP was the mantra of corporate America. However, the speed with which the Internet evolved as a business tool caused many ERP efforts to be suspended and sent companies back to the drawing board to determine how their systems should operate in an e-business environment. After establishing an Internet presence, some companies are implementing Business Process Management (BPM).

Security

Organizing an e-business where corporate computer systems are linked to a publicly accessible network such the Internet, presents a major security risk. But the failure to take that risk presents business risk of being out-performed by competitors. The response of management to the dilemma has been inconsistent, which indicates that many companies don't appreciate either the potential benefits of online business or the importance of security.

The use of the Internet is essential for business because it can increase efficiency and greatly lower costs by providing a free global network for data transfer. Corporations first realized that commercial transactions over the Internet can replace EDI applications that run on expensive virtual private networks. However, financial institutions still maintain private networks to provide extra security.

Organizations use software and hardware technology, known as a firewall, to increase security on the Internet. It controls access from the public network to an adaptation of the Internet within the company, known as an Intranet. Over the Internet, buyers and sellers link their Intranets to form exclusive networks that extend beyond corporate boundaries and include other enterprises. While corporate partners have access through a firewall to some information on another company's web site, they are excluded from other important files by yet another firewall.

An emerging approach to providing access and security is by identity management and the use of directories. Whereas anyone with the correct passwords can enter through a firewall, the directory regulates firewall passage and access to various files based on the identity of the individual, obtained, for example, by biometric means. After the identity of the user is authenticated, the directory provides him or her with the access permissions needed to perform a defined task.

Channel Conflict

Established enterprises must be careful not to upset existing sales channels when an e-business component is introduced. One approach is to add an e-market component to each existing channel, which would allow channel partners to benefit as well.


Channel Conflict is Final Blow to Compac Computer

Compaq Computer never fully recovered from its attempt to bypass its sales channels to sell PCs directly to the public over the Internet, like its competitor Dell Computer. Compaq's sales channels, including stores and Value Added Resellers (VARs) rebelled and refused to compete with online sales. Compaq was forced to backtrack and de-emphasize its online approach. Not only did it lose sales, it also lost the trust and support of its channel partners. Compac never recovered and was eventually acquired by Hewlett Packard.

Corporate Culture

Perhaps the biggest problem facing established businesses is the reluctance by managers, engendered by corporate culture, to make the changes needed to fully and successfully implement an online business activity. Various approaches have been used in cases where entrenched activities tend to thwart new activities. One possibility is to physically separate the activities - the entrenched from the new. Hewlett Packard did this to develop its ink jet printing technology while remaining an industry leader in laser printing technology.

Other approaches are to start a new e-business, buy out an e-business, form a partnership with an existing e-business, or to form an e-business subsidiary. However, if a company is trying to change itself into an e-business, its future may depend on management allowing a corporate "shakeup" by expeditiously implementing a different business model. A few corporations, such as Charles Schwab & Co., Inc., have made this bold step, have been transformed, and have maintained an industry leadership position.

A final approach is to outsource the e-business channel. Some online retailers, for example, have Amazon.com handle their online presence - a form of compliment about Amazon's competencies.


Starting an e-Business from Scratch

The first steps in starting a business are to have a business concept and to prepare a business plan around the concept. The business plan will show the goals, requirements and assumptions of the new business, and describe how it will startup and operate in its first few years. The e-business concept describes the opportunity and offerings based on a knowledge of the market of interest to the business. The goals of an organization describe its overall direction in very general terms and are often encapsulated in a mission statement. The intended future of the organization may also be described in a vision statement, or simply "vision". Finally, specific and measurable objectives, or performance criteria, guide managers and measure the company's success in meeting its goals.

The purpose of the business plan is to insure, to the extent possible, a predictable and realistic start for a business, to review and document all of the important factors necessary for the start of the business, and to convince others, such as investors, employees, and customers of its likely success.

e-Business Roadmap

The factors that are important in starting a business, and their relationship to each other are shown in the following figure, A Roadmap to Start an e-Business. The roadmap uses the same terminology used to described the e-business model in another e-Report.

Figure: A Roadmap for Starting an e-Business


As indicated in the roadmap, keeping abreast of the behavior of potential consumers and competitors is one of the fundamental considerations when starting an e-business. Once the required activities and resources for the business are identified, costs can be estimated, and the funding required for startup and operation can be determined. A schedule is used to show the sources and uses of funds over time. If the business doesn't seem to be viable, then improvements can be made to try to improve the potential success of the business. Criteria such as the return on equity for investors, or the need for a realistic schedule, can help determine how much the plan can be changed and remain viable. The plan must also have internal consistency. If, for example, the business plan calls for a significant amount of revenue at a particular time, yet has no Web site, or no advertising, or little or no sales personnel, then the plan isn't valid.

Elements of a Business Plan

There are many sources of information about business plans2 , but in general, a business plan will have the following elements:

Business Plan Outline
  • Executive Summary: The opportunity and a summary of the important aspects of the business that will be established to fulfill the opportunity

  • Business Concept: The concept in terms of its opportunity and market basis, value proposition, analysis of offerings (products or services), intellectual property, pricing, goals/vision, and business strategy

  • Market Analysis: Target market or market niche, market research, including value of markets based on willingness to pay, competitive analysis, forecasts of user demographics and Web site traffic volumes

  • Sales: Sales strategy; channel analysis including web site(s); sales projections, advertising plans

  • Operations: Primary and supporting activities, including manufacturing activities, quality assurance, and the resources required to sustain operations and provide a competitive advantage

  • Technology: The technology required to support operations, including integration and scaling; research & development

  • Schedule: Key decision points and milestones; basis for revenue and cost schedules

  • The Team: Key managers and other personnel and organizational requirements; Advisors and Board of Directors

  • Finance: Profit requirement, financing plan, available resources, estimated revenues and costs, cash flow analysis, and proforma documents

  • Ownership and Capitalization: Stock ownership, including allowances for growth; schedule of funding and use of funds; analysis of return to investors

  • Additional Information: Strategic alliances, partners, and special legal or regulatory concerns, if applicable

  • Assumptions & Risks: A review of potential problems and associated monetary value for potential owners


Challenges for the Startup Company

Sales Barriers

One of the prominent barriers for the success of a new firm is to gain access to existing sales channels used by competing firms. This is particularly obvious in the software business where different software markets have different channels. For example, to sell enterprise software a startup must establish a knowledgeable and experienced team just to have access and close deals with corporate decision makers. On the other hand to sell into a consumer market, a team familiar with consumer advertising and teaming with wholesale and retail chains is required.

Startup businesses can target new customers in a rapidly expanding or under-served market. However, if the starup serves a slowly growing market, then the it must force buyers to change their buying habits!


Online Pet Food Stores Eaten Up!

Online pet food stores are a good example of poorly planned online competition. Prior to the Internet, the vast majority of pets in the United States were well cared for, and the sale of pet food and other pet items represented a traditional slow-growth market. Online pet stores had to break into a completely served market, and compete with each other and traditional sources of pet food as they tried to convince pet owners to change their existing purchasing habits to online sources of pet supplies! While some people might prefer to buy pet supplies online, did the market really justify the startup of five competing online pet stores? Apparently not; they're all out of business or have been purchased by their traditional rivals, even though the Pet.com puppet has survived as a successful advertising icon!

Market Stability and Disruption

When a startup company is based on a technology that is disruptive, that is, less costly, more efficient, or otherwise relatively advantageous compared to an existing technology used by competitors, this presents an obvious risk to the existing companies since technical disruptions can cause businesses to fail, particularly those organizations unprepared or unwilling to change. However, there is a risk for the new industry leader, as well, since in addition to competing with the existing companies, the new company must recognize that it is in an inherently risky business and should expect to be challenged by other startups with even newer technologies. For example, how many spreadsheet companies were there before Microsoft cornered the market with Excel. But will this stable market eventually be disrupted by a new product, for example, from the Open Source movement?

Speed of Diffusion

When high-speed optical networking was developed, many of the existing networking companies were slow to recognize its potential or miscalculated the time required to deploy the technology. As a result, new firms began meet the demand for glass fiber and switching components, and competed successfully with communications manufacturing companies, such as Lucent, that didn't change.

Sometimes the speed of diffusion is fast, as in optical networking, but at other times it is slow. The facsimile (fax) machine provides an interesting example. Every large corporation and news organization had a fax machine from the 1950s on, but its popularity didn't take off until the early 1980s when Japanese businessmen began to use them to send messages hand-written in Japanese. The rapid growth in the use of fax machines eliminated the use of the telex messaging technology. The use fax machines dramatically tapered off after the introduction of the Internet, which offers several messaging technologies including email.

Solar electricity is another disruptive technology which is taking a long time to become competitive. Solar panels, including solar photovoltaic panels, which convert sunlight directly into electricity, have been available since the early 1970s. The cost of solar energy is slowly dropping as research and development continues, and when combined with government subsidy programs may even be competitive in certain situations. But who can doubt that it will eventually become competitive on its own merits as billions of dollars are spent on solar related technologies, including nanotechnology, each year. At the same time the total price of petroleum-based technologies is rising, thus setting the stage for a major disruption in the energy market - a real paradigm shift in the generation of energy, where there will be major winners and losers.

Startup and Operational Costs

Although capital costs may be high, and to some extent recoverable from an accountant's point of view, they are just part of the costs of starting a new company. The question is how much investors will be required to put into a company before the breakeven point where revenues are sufficient to cover expenses. This is why a business plan should have cost schedules, and milestones, which trigger drawdowns in capital to cover expenses.

Investment Climate

Over time the willingness of companies and individuals to invest in startup companies waxes and wanes. During the Dot Com boom, there was a laxness in investment criteria and in upholding SEC investment criteria as money flowed into startup companies. In the following years investment dried up as companies went out of business and losses mounted. Recently startup investments are again on the rise but with the important difference being the need for some level of success, such as a product that is being sold or a prototype that works.

Most often the funding to demonstrate success is provided by founders and by "friends and family". Larger amounts of investment needed to begin "production" are most likely to come from angels, private individuals who have knowledge or at least an appreciation for a particular technology. It is very unlikely that funding will come from venture capitalists.


The VC Myth

Why are only a small percentage of startup firms funded by venture capital firms (VCs)? Are VCs unappreciative of great technologies and great opportunities? The answer lies in understanding what VCs do.

VC firms raise large investment funds, in the order of $50 - $500 million, on the pretext that they will provide a substantial return, sometimes as much as a ten times return, within a 5 - 10 year period. The VCs are looking for firms that can have a very large revenue stream in a very short period, and therefore are very unlikely to spend their time and resources on other startups. Once they find such a firm and convince themselves that the market for rapid expansion exists, they will make substantial investments (funding and expertise) in the firm and will usually attempt to control the firm in order to protect these resources. Many firms that attract VC funding are set up by managers who have been involved in VC startups and know what the VCs require. One interesting facet of VCs is that they are subject to a "herd mentality" along with various market and business analysts. This tends to affect the types of firms they seek out, and helps them leverage risk with other VCs. It also adds to the long-term risk of their investments, and to the VC industry as a whole.

On the good side, it isn't difficult for entrepreneurs to meet VC analysts, since they scour incubators, non-profit groups that provide small business assistance, and universities, in search of companies meeting their criteria. In addition, VCs have established the "gold standard" for the content of a business plan, which is helpful in business environments where many types of investment opportunities exist. Even if a startup doesn't seek VC funding, it benefits by producing a business plan to VC standards.


Starting Up Different Types of e-Businesses

Different types of businesses have different requirements and these are reflected in both their planning and operation. Consider two types of business startups: software and nanotechnology. Of course within these categories there are numerous possibilities of services, but here we consider a basic business where a product is made and sold.

Software Business

While software seems like a simple business - to write and sell code, it is actually fragmented and has numerous specializations. One of the first things a software entrepreneur has to do is know which software niche to target. This will determine who can use the software, what languages it can be written in, and how it can be sold.

Recently, in an respectable online magazine a writer saw six unemployed programmers and wondered why they didn't start a software company. It sounds simple, but it might be more akin to "mission impossible". Running a successful business and writing successful code are two different sets of skills not usually found in a single individual. A successful software business is not necessarily a company that sells the best software. This sort of mistake - thinking six programmers can start and operate a business - happens a lot in technology.

It is extremely difficult to start up a successful software company today. The markets for enterprise and commercial software are mature and have well-established channels that are dominated by existing firms. But its not difficult to startup a struggling software company. Look at all the companies selling software on Digital River, or giving code away for free!

In today's market two possibilities exist; to be bought by an established software company or to license your product to a software company that needs it to fill out a comprehensive set of offerings. Or one could take advantages of changes occurring in the software market. Open source is one existing possibility, but the road to success isn't clear. Others have turned to developing Internet software for cell phones and personal digital assistants. In any case the company will need to begin in a niche, or preferably to be the first in the next niche.

Nanotechnology Business

Nanotechnology is totally different than software. It is a huge undefined realm where breakthroughs occur everyday and where the potential for success is enormous but where successful products are few. Everyone recognizes that more breakthroughs and more fundamental shifts lie ahead. Nanotech is in a nascent stage, but it is also a disruptive technology that could destroy any company that ignores it.

Basic questions persist. Is it an industry or is it one or more technologies that serve all industries? In a sense it is like the Internet, which serves every industry, but which has also created an "Internet" industry.

Examples of successful implementations can be found in the textile and clothing industries where nanotechnology has been used to develop "non-stain" clothing or super textiles, including some that conduct electricity under certain conditions!

Another recent area of interest is the production of photovoltaic cells that convert solar energy into electricity more efficiently than current technologies. Several companies have recently received funding to pursue the ambitous objective of making solar energy economically competitive with fossil fuel technologies. This would be a disruptive breakthrough in the housing, industry and transportation sectors for a start!

Those who perform research have steady work and others are engaged to a lesser extent, but what about those who want to start a company that takes advantage of a nanotech finding or product. One approach, for those that can afford it, is to build up a portfolio of patents. Whether this is a good strategy depends on how many more patents will be forthcoming in a particular market sector.

A recent concern throughout the nanotechnology realm is the possibility that certain nano-materials or processes may be hazardous to human health or the environment. Many studies to explore these concerns are underway but the vast number of possible materials, molecules and pathways presented by nanotechnology will necessarily require that safety be an on-going concern, even after major hazards are identified. In the meantime, the purse strings of potential investors have been drawn even tighter.

In this investment climate startups will need significant funding, while investors are unlikely to provide it. In order to stimulate some interest, startups will need:

In addition to the high level of startup costs there are risks of manufacturing a product at a low enough cost to make it profitable, and of being made obsolete and uneconomic by a new breakthrough that produces the same product at a lower cost, and with different equipment (meaning that you can't adapt without another capital infusion for new equipment). At this time starting a nanotech company has major barriers, including financing. But these barriers should become smaller over time.


e-Business Plan Evaluation

Typical Errors Found in Business Plans

While each business plan may have its own, unique shortcomings, over time some errors seem to recur, even in professional looking business plans. They are often related to how a company will develop a revenue stream.

First, the company's market may not be adequately explained or understood by the entrepreneur. Markets are fickle and changing. Understanding who needs the company's offering and what they will pay for it are essential.

The second error concerns sales. How will the offering be made available to the prospective buyer? What channels will be used, how large a sale force will be required, and what partners, if necessary, will help capture buyers.

Related to marketing and sales is an in-depth knowledge of the competition, including competition that is new or in the startup phase. Sometimes a need can be met with a different type of technology, which should be addressed in a competitive analysis. For example, data communications security can primarily rely on a hardware solution, such as a proxy server where messages are trapped and analyzed, or it may depend primarily on a software solution such as a grid environment where only authenticated users are allowed to send and receive messages. Hybrid solutions may exist as well. Therefore a new offering in the communications security space must address these different types of competition.

The final problem found in business plans is inconsistency, where the plan doesn't describe a viable business. A typical example is that the plan states that the company will have $4 million in revenue by year 3, yet only has three persons in the sales department. This may be possible, but it takes time to set up an effective sales team with supporting services, to meet prospective customers, and to make sales. Additionally, there is the question as to whether the company can make or provide the offerings needed to generate $4 million in year 3. The inconsistency problem disappears when common sense is used in planning the business.

Final Thoughts About Business Planning

In writing the business plan, entrepreneurs are forced to carefully delineate and refine important points about the new business. This effort provides interested parties with information about the business as part of an attempt to persuade them to fund or join the company. Eventually the plan may evolve into a prospectus, as required under SEC regulations when "public" investments are sought.

Everyone should understand two things about business plans. First, there are many types of plans, usually with different purposes, formats, and content. Its preparation need not be a long formal process, and the plan itself doesn't need to be a large document. It simply needs to fulfill its objective.

Second, the plan, as any plan, is meant to be an aid to decision makers. Even those who disparage business plans often perform many of the important aspects of business planning and call it something else. Others treat the business plan as an important "document," when in reality, planning is an important "process". When the plan is no longer useful in aiding decisions, it should revised, replaced with an implementation plan, or discarded.


Summary




Dr. James E. Burke is a Principal in Burke Technology Services (BTS). BTS provides business assistance to startup technology companies, or organizations planning or integrating new technologies; develops and manages technology projects; performs technology evaluation and commercialization, and assists in technology-based economic development.

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