Small enterprises

noreply@blogspirit.com (Russell Davison) — Fri, 27 Oct 2006 16:10:58 +0200

I originally wrote this article, “Small enterprises” in October 2003

CASE STUDY : BURT’S BEES

An opportunity is defined as consisting of an idea and other components. The following enterprise case study allows comparison with other companies in the industry and shows little investment, small market share, low wages and low productivity for Burt’s Bees. It is explained that the company's success is due to it's uniqueness, Roxanne's qualities, her family, marketing and resource management. The company should keep to it's plan of producing in North Carolina to allow the value of the company to continue to grow, prior to harvesting. According to Timmons and Spinelli (2003:106):

“Roxanne Quimby sat in the president's office of Burt's Bees newly relocated manufacturing facility in Raleigh, North Carolina. She was surrounded by unpacked boxes and silence from the unmoving machines with no one there to operate them. Quimby looked around and asked herself, "Why did I do this?" She felt lonely and missed Maine, Burt's Bees' previous home. Quimby had founded and built Burt's Bees, a manufacturer of beeswax-based personal care products and handmade crafts, in central Maine and wasn’t convinced she shouldn't move it back there. She explained:

“When we got to North Carolina, we were totally alone. I realized how much of the business existed in the minds of the Maine employees. There, everyone had their mark on the process. That was all lost when we left Maine in 1994. I just kept thinking 'Why did I move Burt's Bees?' I thought I would pick the company up and move it and everything would be the same. Nothing was the same except that I was still working 20-hour days.”

Quimby had profound doubts about this move to North Carolina and was seriously considering moving back to Maine. She needed to make a decision quickly because Burt's Bees was in the process of hiring new employees and purchasing a great deal of manufacturing equipment. If she pulled out now, losses could be minimized and she could hire back each of the 44 employees she had left back in Maine, since none of them had found new jobs yet. On the other hand, it would be hard to ignore all the reasons she had decided to leave Maine in the first place. If she moved Burt's Bees back, she would face the same problems that inspired this move. In Maine, Burt's Bees would probably never grow over $3 million in sales, and Quimby felt it had potential for much more.”

The difference between an idea and an opportunity

An opportunity consists of a market, timing, resources, networks and an idea. An idea is a component, or part, of an opportunity. An idea is of academic interest only when, judged in isolation and is inert, until combined with the other factors to create an opportunity.

Idea creation is the entrepreneur’s first step to realizing a favourable opportunity. An idea needn't be owned by the entrepreneur and could be regarded as a tool. It could be licensed from another company or establishment. An idea must interact with other components to create an opportunity, but many ideas need to assessed till the right one is chosen to become part of an opportunity. It might be a great innovation or may simply be a more effective way of doing something. Insight or exploration may generate an idea or it may be accidentally stumbled upon.

Opportunity construction is the next step in the entrepreneurial process where the idea is positioned in the real world. The idea is combined with marketing and economic factors to form the opportunity and to determine the likelihood that a gap between market needs and wants can be filled. A real need in the market must be satisfied or created and the timing should be right. An opportunity should add value for the buyer and both profit and growth potentials should be high for the entrepreneur.

It could be argued that opportunities, the real world viability of ideas, are more important than the ideas themselves.

What can be learned from the case study?

Five facts can be learned from the case study, in comparing Burt's Bees with other companies in the same industry. Investment, market share, sales per employee, value added and wages are all very different between Burt's Bees and the industry average.

Investment by Burt's Bees is significantly lower than the industry average of $13,898 per production worker. This is evident in the company's description of un-automated processes.

Market share for Burt's Bees is only 0.015% of the total toilet preparation industry. This should not attract the major market player's attention to compete.

Sales per employee for Burt's Bees’ 44 workers is only 21% of the industry average.

Value added per Burt's Bees' production workers is significantly less than the industry average of $377,541 per production worker due to no investment in automation and an unproductive, unskilled workforce - as described in the case study.

Wages for Burt's Bees' production workers are less than half the $10.93 per hour average for the industry.

Other information could be derived from the case study, but not with certainty. Assets cannot be compared because it's not known if Burt's Bees leases or has bought, for example, vehicles for the sales representatives. Additionally, the ratio of production to non-production workers can't be compared as the number of sales representatives for Burt’s Bees is not stated in the case study. It's anticipated that there are proportionately less non-production workers at Burt's Bees than the average for the industry.

Why has the company succeed so far?

The company success is due to the company's uniqueness, Roxanne's qualities, her family, marketing and resource management.

The facts given within the case study show that Burt's Bees is very different from other companies within the industry. The company's financial strategy creates a competitive advantage against similar sized companies.

Roxanne brings many desirable qualities to the company, acquired through her unforgiving background and because of her character. Roxanne worked hard throughout her childhood in small independent ventures to raise money for college and afterwards, prior to forming Burt's Bees. According to Roxanne, "I liked buying and selling things well, adding value. Loved [the] freedom of starting a business, of not knowing how it would turn out.”

The interaction between the family, Roxanne and Burt, and Burt's Bees is favourable to the company. The family's need for liquidity is low and profits have been retained within the company. There is no conflict between the family and the business, and Burt's readiness in agreeing with Roxanne to relocate from Maine to North Carolina demonstrates an ability to adapt to the changing requirements of the business and shows that the couple share the same perspectives. Roxanne says about Burt that, "he's my main sounding board and [he] gives me a lot of moral and psychological support ... there's never been a conflict between us."

Burt's Bees' marketing of the product contributes to the success of the company. Being first in the market and positioning the new product in an un-served market niche helps. Roxanne knows her customers and that there are consumers living in urban areas who have "an unconscious desire for more simplicity and our products speak to that need." The product line was expanded to include other hand made crafts and beeswax products like lip balm to appeal to the same market niche.

Resources are carefully controlled by the company. A bootstrapping approach is used to finance the company from retained profits. This means that the company has no debts and actually refuses to sell products to retailers who don't pay their bills within thirty days. The resources of the North Carolina Commerce Department were used to identify new premises on favourable terms. During the growth of Burt's Bees, the minimal amount of resources is used at each stage. New employees are hired only when sales increase. Household kitchen appliances are used to manufacture the product and, without a telephone, messages were received from a local health food store. Roxanne's willingness to sleep in the back of a truck at trade shows, the rental of the derelict school house as a factory and low production worker wages are further examples of the efficient use of resources. According to Roxanne, "Since the beginning of Burt's Bees, the company had never once dipped into the red, had always turned in a profit and it's profits had always increased.”

What should Roxanne and Burt do now?

Roxanne and Burt have three options. They can sell the business, return to Maine or remain in North Carolina. They should remain in North Carolina, as explained below.

Sell the business
Roxanne does not want to be at Burt's Bees forever and has other ambitions to fulfil, like living in India. Burt's Bees will be sold by Roxanne and Burt at some time in its business cycle. Now would not be the best time because the company continues to grow rapidly and it's foreseeable that revenues could be more than ten times their current levels if the business is allowed to grow. The company has no tangible assets and the only asset is intangible 'goodwill'. The company could be currently sold to a willing buyer for, say, a few million dollars. However, with the company's continued growth, it could be sold for several tens of millions of dollars within a few years. It is not advisable to harvest the business at this moment in time.

Return to Maine
The production workers at Maine have a good attitude. Yet, they are unskilled and this, combined with no automation, creates the low productivity in comparison to the industry average. Roxanne spent most of her time alongside the production workers to give supervision and to supplement the workforce. This left no time for Roxanne to focus on broad management issues. New management could not be attracted to the Maine environment. The production facility could hardly meet current demand and sales were determined by the limited production capacity. The Maine facility incurs high transportation and payroll taxes. It is not wise to retum to Maine, where company growth would be difficult and Roxanne would be frustrated.

Remain in North Carolina
Burt's Bees remaining in North Carolina is the only alternative that allows the company to grow, realize its full potential and become ready for harvesting for a price which is fair to Roxanne and Burt. Transportation costs and payroll taxes are lower in North Carolina than in Maine. The location is more attractive to hire a management team to support Roxanne. This would release her to consider broad management issues, rather than involve herself in direct supervision of the production workers. Operations in North Carolina require a change in production methods from manual to automated manufacture. This is necessary to control labour costs and to ensure that future revenue is not limited by the means of production, as it was in Maine. A large percentage of the country's population lives within a twelve hour drive from the North Carolina plant and this places Burt's Bees closer to the majority of its customer base. Additionally, there is a greater supply of labour in North Carolina that is skilled. Although more expensive on a wages per hour basis, it is expected that productivity gains, by using skilled workers, will more than offset the higher hourly wages.

NEW ASIAN VENTURE BRIEF

A new venture is proposed for the sale of Asian artefacts through conventional high street retailing and export to Australia, North America and Europe. Typical products include hand carved furniture and ornaments from Indonesia and pottery from China. A market is already established and the new venture has a competitive advantage by using targeted marketing and a low rental outlet. There are competitive, technical and financial risks involved and strategies are required to be developed to reduce the impact of these risks. Supplier relationships need to be developed and a shop layout is required. A business plan needs to be created with monthly and quarterly budgets.

Market assessment

There is a market of Caucasian customers who purchase Asian artefacts whilst on vacation, or residing, in the South East Asia region. The Singapore market is currently served by very small souvenir shops or medium sized retailers located in prime, but expensive, shopping locations. Passing trade accounts for most of the business. A majority of the medium sized businesses have ceased trading and have closed in the previous two years. This is a result of lower revenues caused by less travellers to the region recently and the migration of expatriates to their home countries during the recession. Continually high shop rental prices accelerated closure of the medium sized businesses. The new venture will be located outside of expensive shopping areas and will compensate for lower passing trade by attracting customers to the outlet through specialized marketing at tourist hotels events and expatriate residential areas. The economic and highly available Singapore transport system is an attribute. Additionally, export of goods via the Internet, using international courier, will complement over-the-counter shop sales. The local market will expand over the next three years of the economic cycle from it's current trough.

Risk determination

The competitive risks of the new venture are that medium sized retailers will return to the market in prime shopping locations and now use Internet technology for export of their goods.

The technical risks involve the compromise between high shop rental and passing trade, import/export procedures, inventory range/value, web site structure/maintenance and payment mechanisms.

The financial risks are commitments to fixed rental payments for a period, inventory investment, supplier reliability, customer receivables and assured revenues.

Production planning

Agreements need to be signed with up to six suppliers in ASEAN countries. The contracts are to cover logistics, product ranges, import/export procedures, scheduling, payment, cancellations, defaults, quality, agreement enforcement and contract termination.

The new venture shop layout and telecommunication methodology need to be defined to support both the local and international aspects of the business. A register of non-current assets needs to be created to help cost estimation.

Advice and guidance need to be sought from acquaintances in non-competing, but similar, existing businesses.

Cost estimation

A business plan needs be created to provide a good estimate of initial costs, expenses and projected revenues for the new enterprise. The anticipated fixed costs are shop rental, fixtures, fittings, utilities, minimum inventory, minimum staff, telecommunications, computer hardware and software. Variable costs are expected to be turned-over inventory, shipping, marketing and additional staff. Monthly budgets need to be created for the first twelve months, followed by quarterly budgets for the next two years.

Feasibility evaluation

Finally, the above mentioned risks to the success of the new venture are required to be analyzed to determine how they could be managed and controlled. Strategies to reduce the impact of competitive, technical and financial risks to the business need to be formulated. An opportunity screening task is required to be done for the proposed business before the decision is made whether or not to proceed with the venture.

References

Timmons, J.A. Spinelli, S. 2003, New Venture Creation, Mc Graw Hill 2003

Russell Davison - small_enterprises

Small enterprises