Introduction
This paper is a case study of a business plan by Alice Wood to start a new clothing store in Prince George, British Columbia. It evaluates the market potential and market share of the new business. Based on the findings of this analysis, this paper also highlights possible oversights of her business plan and recommends viable strategies for addressing them. Lastly, this study shows a financial analysis of her business plan by developing a five-year income statement and computing the internal rate of return (IRR) of the proposed business.
Estimate of Market Potential
Alice’s target market is determined by the nature of competition and the type of product she wants to sell to her customers. According to the case study, Alice could enjoy a niche market because she wants to focus solely on the petite woman, as her target market. Only 20% of women fit this demographic. Similarly, only 10% of existing clothing stores stock clothes for this market. Based on these statistics, we find that Alice can only target 20% of the market (based on her demographic appeal).
What share of this market could Alice expect for the Petite Shop?
Why does this make sense?
The above section of this paper shows that the market potential for Alice’s petite shop is 20%. However, 10% of existing stores already service this market. If we extrapolate this finding to reflect the larger sample of female customers, we see that existing stores already service 10% of the 20% market share available for brands that sell petite clothing. This means that Alice’s market share is limited to 10% of the existing fashion market.
What other considerations should be brought into this Analysis?
The above analysis is subject to several factors. For example, the statistics highlighted above are only true in a perfect market (perfect competition). In an imperfect market, Alice could have a significantly lower (or higher) market share than the one described above. Advertisement is also another key issue to consider in this analysis. It often affects sales and market share. Stated differently, companies that participate in aggressive marketing campaigns command a higher market share than those that do not. Therefore, if Alice’s competitors have more aggressive advertisements than she does, she could command a small market share. Similarly, if she undertakes a more aggressive marketing campaign, compared to her competitors, she is likely to command a bigger market share than the 10% mentioned in this paper. Lastly, product demand and quality would affect Alice’s market share the same way as the advertisement and competition influences do.
Prepare an Estimated 5-Year High Level Income Statement and IRR Calculation for the Petite Shop
Income statement
An income statement outlines the revenues and expenses of Alice’s proposed business. Its details are in appendix one.
Internal Rate of Return (IRR)
16044+3456+807+173+35
Since the NPV at 9% is close to zero (35), the IRR is 9%
What Areas Have Alice Overlooked in Planning her Business?
Starting the Petite shop could be a profitable venture for Alice. However, to achieve this success, she needs to make sure she has understood all dynamics of the business. This section of the paper identifies some aspects of her business strategy that she may have overlooked.
Exit Strategy: An exit strategy refers to the course of action that Alice should take if the business fails to achieve its intended goals. Sometimes, this analogy should also cover business success because if the business succeeds, the business owner should decide what to do with the business (the same way she would decide what to do with the business if it fails). For example, Alice may decide to sell the business if it is successful, or liquefy its assets if it is not. Nonetheless, it is important for business owners, like Alice, to have a strategy of what to do with the business if it fails, or succeeds. This strategy entails proper recordkeeping, making sure there is a good relationship between the business and its associates, and making sure all business transactions appear in signed contracts. By performing these tasks, Alice would have many options regarding what to do with the business (if it fails or succeeds), as opposed to waiting until it is in the decline stage (because it will be difficult to sell it at that stage). By formulating an exit strategy, Alice would make sure she maintains the value of the business, generate potential income for retirement, or enhance the future worth of the business.
Lack of a Clear Pricing Strategy: In today’s competitive business environment, pricing is an important component of any new business strategy. It shapes customer perceptions about a business. One mistake made by new startups is the failure to price their products well. In fact, many new entrepreneurs start their businesses by setting their prices below the competition, so that they can get a significant market share. However, this is a risky strategy because they cannot increase their prices when customers have already developed a “fixed” perception about the business. Therefore, new startups should price their products, based on quality and not the competition. Alice’s business plan does not have a clear pricing strategy. This may be a serious oversight on her part. She needs to communicate her pricing strategy and compare it with the competition’s plan to know how the enterprise could survive in the competitive business environment.
Lack of a Clear Customer Communication Plan: Many businesses often stock their shops and expect customers to start streaming in when the business opens. However, this is not the case. A business needs to have a clear communication strategy that would appeal to the target market. Alice acknowledges this fact because her business plan has a provision for advertisement. However, it does not expound further on this strategy. She needs to communicate what her advertisement plan entails. For example, would she market her business through mass media (television, newspaper, and radio), or social media? She needs to articulate such details because customers need to know that her business exists. Similarly, having a clear communication strategy would enable Alice to maintain good customer relationships with her clients.
What would you recommend to Alice, Why?
Starting a new business is often a difficult and risky undertaking. In fact, many new startups collapse during the first one or two years of operation. Based on these facts, Alice needs to make sure she has evaluated all aspects of her business operations to make sure that they operate seamlessly and minimize her chances of failure. In lieu of this fact, this section of the paper recommends her to do the following:
Undertake more Market Research: Market research is the bedrock of any new business. Businesses that fail to do so often struggle to succeed. The age-old saying, “if you do not plan, you plan to fail” is true for Alice. Although her business plan outlines critical aspects of her start-up, it is abstract. Many details miss from her analysis. For example, she knows her target market (women wearing petite clothes), but does not understand how her start-up would be different from existing businesses that serve the same market. Although undertaking a market research would familiarize Alice with her market, it would also be a critical decision-making tool. This could happen by providing her with a clear picture of how the market is, and what to expect in the future. This way, Alice could prepare for current and future business occurrences by having multiple options for deciding how her business would wade through current and future market forces.
Refine the Business Idea: Many people do business because they have a “rough” idea of what they want to do. However, after starting the business, they realize that their ideas may have serious limitations, in terms of market growth, intense competition and such like factors. Such businesses fail because their owners fail to make sure the business plan is adequate to survive through the turbulent business environment. Therefore, it is important for business owners to refine their ideas. Alice has a specific business idea that she wants to implement. However, her business plan is unrefined. For example, she has identified a niche market for her products (women wearing petite clothes). Similarly, she knows that about 17 stores serve this group of customers within her locality. She intends to compete with some of them. However, her business plan needs more specifics regarding location, branding, and such like features. For example, she needs to understand where the competition operates from, and possibly find an alternative shopping destination that would still attract a large clientele, but avoid the pressures of intense competition. Therefore, she needs to refine her business idea.
Conclusion
This paper has shown that Alice’s business plan contains critical details about her proposed business. She understands her target customers, niche market, and financial plan. However, her proposal is abstract. She needs to undertake more market research and come up with more detailed plans about her marketing strategy, exit strategy, communication plan and such like factors. Adopting these recommendations would reduce her chances of failure.