A business concept sums up the most important points of a new idea for a business, brand, product, unique selling point, product line, project and so on. Technically therefore, it can be renamed accordingly like 'product concept', 'brand concept' and so on. It is usually communicated in an official concept statement, ie a concise statement of roughly 100 words or less that answers several key questions.
Uses & Benefits of a business concept statement
The concise statement helps to effectively pitch ideas for new business development or new product development to potential investors and other stakeholders. It can therefore be used as the concise way in which you introduce yourself and business plan.
Potential investors use the concept statement to determine the 'viability' of a proposal (ie the ability of the idea to become functional, has a reasonable chance of success)
Businesses provide a concept statement to provide institutional information in a concise way to the public.
The concept statement helps everyone developing the new idea to remain on point. Business development consultants can steer small business owners to streamline the conceptualization of new business ideas. Consequently, it is often the starting point from which consultants offer their services.
The concept statement is the clear guidelines from which the worthiness of ideas that deviate can be assessed as potential pivot points. (Read about pivot points)
Contents of a business concept statement
A good business concept explains the following.
market opportunities.
market pain point or problem you can solve
no one else is fulfilling a need better than currently
industry, employees, revenue, online or brick & mortar, serving local or international markets, seasonality, innovators or followers, affiliations / friends, core values (B2B)
a niche
benefits to prospective investors
reasons for creating the idea. Example(s)
gap in the market
no current businesses cater to a certain community. (This can be compelling, especially if it relates meaningfully to your personal story)
the differentiating factor or unique value proposition (UVP) as it relates to how it provides competitive advantage over your competition
the distribution method(s) that allows customers to access your offering.
the business model, ie details the
financial side of the concept
how to make it profitable
how to experience revenue growth, like how much the product or service might cost, along with the resources to ensure its financially successful.
mission regarding performance and key milestones along the way to achieving the mission.
Example(s) of a business concept statement
New business concept. A line of luxury restaurants that cater to a broad range of customer needs including veganism and keto.
New product concept. A line of luxury cosmetics that cater to the natural and ethical skin care movements.
Breakeven analysis is used by businesses to predict the point at which a new venture will stop making a loss (as operating at a loss is normal in the earlier stages of new ventures). Technically, the breakeven point is the point at which revenues finally catch up just enough with, and are therefore precisely equal to total costs. The most common application for breakeven analyses is for finding out the minimum number of product units a business must sell in order to catch up with costs. Knowing this allows managers to evaluate the soundness of their plans are. It is therefore used to evaluate the viability of a new business, project, new product, even operations management of daily activities and so on.
Uses & Benefits
to make predictions that include the following.
minimum outputs / units you must sell in order to start operating profitably.
profitability at different output levels.
margin of safety.
to perform sensitivity analyses, ie to estimate the viability of different 'what if' scenarios to evaluate your ability to enter into and remain within the 'profit' zone. Specifically, you can contrast the predicted results (see previous point) for each of several scenarios based on changing one variable, like pricing.
What if the fixed costs rose by x, or by x% every month?
What if your variable cost per unit rose by x%?
to set performance targets. Example(s):
Management teams and the salesteam can be given sales targets to ensure the business remains safely within its safety margin)
to set profit margin targets (and establish the appropriate pricingstrategy by comparing profit margins of different strategies, whether skimming, etc and how the business' ability to comply with the requirements, tolerate the implications, etc).
Profit margin analysis (previous point) implies sales pricing and costing. Consequently, in addition to examining the sales pricing stratgey, cost analysis can lead to setting or extending limits to costs (fixed and or variable costs like materials), essentially, the analysis informs whether the breakeven point is tolerable or must be risen or lowered. Common ways of lowering the breakeven point / costs include outsourcing, technology analysis & hihg-productivity upgrades, margin analysis, price analysis & changes.
to manage 'business risk' (ie the threat of financial failure because of factors, in this case fixed costs, that lower profitability if the these factors become excessive). Example(s):
whether through routine risk-based monitoring processes or after major events (like the pandemic), the analysis may highlight the need to find less costly ways of manufacturing, advertising and so on.
To explain and justify proposals to team members or third parties in specific and relatable terms. To this end, all of the earlier usees are applied.
When applying to the bank for funding, you say, "we are expecting to breakeven after x output (while referencing the functional ways in which your operations will seek to meet the output level)."
When applying to investors, they will know when you are going to make a profit and from what point they can expect to begin getting dividends.
Key Concepts
Fixed Costs (FC). Fixed costs do not vary, regardless of business activity or inactivity. While fixed costs can change, their change are not related to production. Examples include rent expenses that remain at a fixed dollar amount of $1,000 monthly, insurance expenses, fixed salary expenses.
Outputs. Outputs refer to the number of units sold.
Variable Costs (VC). Like the name suggests, variable costs vary with how much businesses produce, ie their 'output'. This is because these costs are directly related to the production of the outputs. Examples include the cost of raw materials used in manufacturing goods, wages, transport costs.
Revenue. Revenue refers to total, gross sales earnings. It is calculated by multiplying the sale price by the number of units sold.
The BreakEven Analysis Graph & Manual Calculations
1. Collect data for the following variables.
Output. 1) Current output and 2) a suitable interval scale to represent different levels of output. The range should be realistic to your business and start from 0 and end at the maximum that you can produce. (Example: 0, 5, 10, 15 handmade dresses if you currently make 7 dresses; 0, 1000, 2000, 3000 pens if you currently make 2,000 units)
Fixed Costs / FC (Example: factory space rental expenses of $2,000, IT costs)
Variable costs / VC (Example: cost price / CP, ie the cost of making or otherwise acquiring products which includes, among other things, raw materials, 15% sales commissions)
Sale price / SP per unit produced (Example: $20 per dress or $1 per pen).
2. Using a table like the one below, fill in the blanks. To do this; apply the following details to the calculation formulas that appear in blue.
FC (rent): $2,000
SP: $2.00
CP: $0.50
After completing these calculations with the data above, the result should look like the following. It is not necessary to color code. However, I have used red for costs and green for revenues.
Create the plotted diagram either manually or in MS Excel. The y (horizontal) axis measures output levels in units only. Conversely, the x (vertical) axis measures dollar value. It is most notably used to plot 2 variables: 1) total revenue and 2) total costs, both in dollars. A 3rd variable may be the fixed costs.
The green line represents total revenue while the red line represents total costs. Notice how the cost line always starts above the green line, which visually demonstrates that the operation always starts at a loss where revenues are less than costs. However, the lines eventually intersect at the break even point before the revenue line continues to finally rise above the cost line. This new position visually illustrates how the venture enjoys a profit for the first time.
Notice too that 'total costs' always start from the level of the fixed costs. On that basis, fixed costs should be monitored closely because they are a measure of business risk. For this reason, businesses often stress on keeping fixed costs at a minimum (while being more permissive with variable costs).
3.Find the 'breakeven output', ie the output at the breakeven point. To do this visually, draw a vertical line from the breakeven point to the y 'output' axis. That output is the minimum number of units sold requried to breakeven. In this example: visibly close to 1,500 and therefore slightly under 1,500 units. Alternatively, you can calculate the precise number using the following formula.
Breakeven outputs = FC / contribution margin per unit*
Breakeven outputs = FC / (SP per unit - VC per unit)
Breakeven outputs = $2,000 / ($2 - $0.50)
Breakeven outputs = 1,333 units.
Also notice that, in addition to establishing the breakeven output, you can also predict the corresponding profit. To do this visually, draw a horizontal line between the breakeven point and the x revenue / cost axis. The profit is just under $3000.
If you want to calculate the breakeven revenue value precisely, use the following formula.
Breakeven revenue value = (fixed cost / 'contribution margin per unit'*) x SP
Breakeven revenue value = (fixed cost / (SP-VC)) x SP
Breakeven revenue value = ($2,000 / '$1.50') x $2.00
Breakeven revenue value = $2,666.70
4. Know your 'output safety margin'. For our example, let's say we have a current output of 2,500 units. Since that output exceeds the breakeven output (of 1,333 units) and is plotted to the right side of the breakeven output, we are operating at a profit. The safety margin will indicate the number of units by which our current output (of sold units) must fall before we regress to that breakeven point. On that basis, the output safety margin is calculated as follows.
Output safety margin = current output - breakeven output
Output safety margin = 2,500 units - 1,333 units
Output safety margin = 1,167 units
The safety margin suggests how likely your business will be at certain levels of sales. I think businesses may establish safety margins and use bragging rights if they have advanced far beyond a given safety margin and confortably in the profit zone. Furthermore, safety margins in risk management can be used as triggers that prompt certain types of change when businesses slip within it.
Limitations of the breakeven analysis
While a useful tool, it is based on certain assumptions that may not always hold true. Not only should you share these assumptions but also make provisions to adddress these limitations, thereby minimizing potential risks (perhaps through strategies in your 4Ps like price skimming, well designed product mix, clever distribution channels (ie place) and so on).
the figures are only predicted NOT actual data
it is assumed that one price applies to your entire business and that it remains fixed.
it assumes that you have no waste like product defects, refund requests and so on.
it assumes that cost of sales remain the same. However, as businesses grow, they often develop economies of scale that lower unit costs (like through buying larger volumes of raw materials, economies of scale by improving technical knowledge beyond a learning curve). Conversely, costs could increase through PESTLE macroenvironmental factors like economic downturns that increase inflation and causes currency devaluations.
it assumes that you sell only one product when most businesses have a range of products. In response, some businesses use an average price.
the trustworthiness of its data depends heavily on the source and collection methodology.
CONTENT RELATED TO BREAK-EVEN ANALYSIS
Break even analyses are useful in the 'Finance' section of a business plan.
* The dollar contribution margin per unit aka 'contribution margin' represents the portion of sales that contributes to covering fixed costs (after deducting variable costs). It is like thinking about the net value of commercial trading that covers fixed business costs. The contribution margin contributes to to profitability (more reliably than the mistaken way of thinking of SP - CP as profit, because it is not. It only contributes). It is a useful consideration when considering risk management because fixed costs pose a potential business risk.
If your industry's competitive landscape were a chessboard, the Porter's 5 Forces Model would be how you size up your opponents relative to yourself. Being able to measure the intensity of competitive risk, relative to your internal strengths and weaknesses will help you to plan strategically. In short, the Porter's 5 Forces Model is a tool for developing your corporate strategy.
Uses & Benefits
to help in creating items for a SWOT analysis.
to determine whether you want to enter into an industry
to continually evaluate the intensity level of competition in their current industry
to adjust and then justify strategic decisions in presentations
Using Porter's 5 Forces involves systematically answering 5 set of questions about the industry. It can therefore be converted into an internal survey requiring managers to rank each item, optionally on a Likert interval scale like 1 - low, 2 - medium and 3 - high. The lower the overall risk, the better the chance of dominance within an industry. I can not stress enough how important it is to customize your responses according to your particular business. Even businesses within a single industry can likely have very different outcomes because of their unique brand positioning strategy.
0. List industry leaders and other key competitors.
Is the market concentrated? (ie do the top 4 players account for at least 80% of all industry sales?) Do your competitors compete on the basis of differentiation thereby asking premium prices? What is customers' perception of quality among your competitors?
1. The threat of new entrants.
Are you in or thinking of entering into an industry and wonder what type of competitive threats you will or can potentially face? These questions focus on how difficult it is to enter the industry, ie 'entry barriers'.
Entry barriers
Scale economies. If current players already enjoy scale economies, they are likely to have a considerable cost advantage over new entrants who can not achieve these scale economies.
Relative Differentiation. What is your and or competitor's level of differentiation? The higher the differentiation, the harder it is for others to compete directly. For instance, if you have highly innovative products, they will be harder to immitate and therefore give you relatively low levels of risks. Equally, if your competitor is the one with highly differentiated products, your competitive risk is high.
Customers' switching costs. How easily can customers switch between you and your competitor? The concept of 'costs' should not be perceived only in terms of product price. Instead, consider switching costs from the customer perspective regarding how customers perceive value and costs. For instance, common ways in which businesses raise switching costs include legally binding purchase contracts; emotionally binding loyalty rewards programs that motivate FOMO; superior benefits like convenient distribution channels or hassle free guarantees with more accessible and empowered customer support.
Entry costs. Do new entrants need to hire research and development teams, gain specialty competencies, buy factory space and so on?
PESTLE factors. Do you and or your compeititors face restrictions and or permissions that make entry relatively harder? Examples include trade agreements, Customs regulations, embargos and so on.
If you wish to enter into a market with very large and intimidating players, avoid trying to compete in attack against them. This is too costly and futile. Your best approach will be to enter the market within a specialized niche.
2. Bargaining Power of Suppliers. Are you in a buyer's or seller's market for your supplies? Specifically, if you have multiple options for your necessary supplies, you have more power. However, the converse is true. The ideal is to have multiple suppliers. Afterall, if one supplier raises prices, your business has low switching cost, perhaps you are not contractually bound.
Case study:
While otherwise very strong in its industry, Tesla faced 'high' risk in this area because they depended on their suppliers because they had only one supplier for the majority their components. Ironically, this might have occurred because of their highly differentiated product which gives them relatively low risk regarding differentiation.
3. Bargaining Power of Buyers. As in the previous point, the lower the relative bargaining power of buyers to switch to competitors, the lower your risk.
Case study:
Interestingly, while Tesla faced 'high' risk as a buyer with its suppliers, its sheer contribution to those suppliers is so considerable that they are not that badly off overall because they also have relatively low risk as a significant customer, possibly the largest of that supplier. However, if this question were being analyzed from the perspective of those suppliers, they would suffer high risk of Tesla's relatively high bargaining power.
4. Threat of Substitution. Are there alternatives to your product? Such alternatives need not only be precisely the same. However, they should be considered. For instance, a movie theater should not only consider other movie theaters as substitutes. Since their customers are ultimately buying entertainment, the substitutes can range from video games, parks, board games and so on.
5. Rivalry among Competitors. This final question should consider all of the previous ones. To answer this question, consider signals of rivalry like price discounting.
CONTENT RELATED TO PORTER'S 5 FORCES OF COMPETITIVE THREAT
Operations management aka OM or Execution Plan involves systematically managing production processes (of goods or service) to occur at their highest possible level of productivity. In OM terminology, the function is described as 'transforming inputs into outputs' where inputs are resources that include labor, machinery, materials, capital and methodologies while outputs include products, services and their outcomes like throughput(of units produced, customers served and so on through their system). The task of OM professionals may be described as exploring changes in different input factors in search of better productivity in outputs, however it is defined; whether revenue, quality, customer satisfaction and so on. This function relies heavily on data. Furthermore, to be effective, OM requires in-depth knowledge not only of the specific system being addressed but also external factors influencing on the system and each other that can justify or negate the insular benefit for the system. In other words, this discussion (along with its popular ratios) should be considered as only one dimension of OM that requires situation-specific considerations.
For context, OM is one of the 3 key essential functions within all organizations. The 3 are marketing, finance / accounting and operations. Being cross-functional however, OM is practised within any other function; be it like human resourses management, supply chain management, customer service, quality assurance management, warehousing and so on.
Here is a diagram of the transformation process. When tackling your OM, consider how each of these points exist in your organization.
Whle all organizations, regardless of industry engage in operations management, not all do so in a very conscious and deliberate way. However, the following are ways in which the deliberate use of OM can be used and benefit organizations.
OM allows businesses to be deliberate about how goods or services are produced, ie business operations. This involves systematically learning the organizational goals, how people are organized within the organization, how products and services are produced, to deeply understand the costs associated with the production process. (Operations are very costly for businesses).
Example: this systematic approach prevents the reliance on potential misconceptions like the notion that more work hours and or having more workers are necessarily more productive.
OM answers questions like the following.
What products should be produced? What design should be applied? (Product Management). Example(s):
Standardized parts in manufacturing, even if using the mass customization model and then seeking cheaper prices from input suppliers to achieve scale economies with large orders.
Should the business produce their product entirely or at all? What is required? If the business buys, from whom? (Supply Chain Management)
In an attempt to shorten the leadtime (especially since their raw materials and food products do not have a very extended shelf life), they own several activities within the supply chain like potato farms, controlling a fleet of trucks for transporting raw materials, warehousing, distribution and delivery trucks.
How much stock should you maintain? When should you re-order? (Inventory Management)
FritoLay raw materials like oil, potatos, corn and seeds do not have a very extended shelf life. Consequently, 'holding costs' (ie the cost of holding inventory) are great (because of potential loss). In response, FritoLay mitigated that risk. They opened production facilities near to raw materials and consumers. This reduces the time needed for the product to remain on the shelf. Additionally, to produce the product, there is only one efficiency-oriented assembly line that lasts an average of only a few hours. After that point, their internal storage for each batch is only 2.5 days worth of products.
What are the short- and long-term schedules (Forecasting & Production Capacity Planning)
FritoLay base forecasts on historical sales, new product introductions,production innovations and promotions and dynamic local (tentpole-motivated) demand forecasts.
What are your needs in materials, personnel, overheads, etc? (Operations scheduling)
Caste study: Colins Title Company (below) illustrates factor analyses regarding the possible introduction of new overheads to improve outputs
Fritolay reduces staff turnover with several measures like competitive wages and paid uniforms among other things.
Which quality should be used? (Quality Management)
How should the facilty be used in production? How should the space be arranged? (Facility Management)
Presentations to explain how and why the organization functions: Business plan
Historical developments in OM that improved productivity include standardization of parts in manufacturing, assembly line design, use of statistics, process analysis and mass customization. Recently, there has been pressure for OM to also consider ethical and environmental issues.
The single-factor productivity ratio for calculating productivity is as follows.
Productivity = Outputs of goods or services produced / Inputs used
Example:
1,000 cakes produced
5 labor hours used
productivity = outputs / inputs
productivity = 1,000 cakes / 5 labor hours
productivity = 200 cakes per labor hour
As illlustrated below, when considering options for improving productivity, OM practitioners perform a 'productivity analysis' by calculating the percentage changes in inputs and outputs from the old to new systems. For a single situation, they may use whichever variable in the system as inputs or outputs and re-run the analysis as many times as they wish. More reflective of real life however, they may combine multiple factors in their calculations. However, to do this 'multiple-factor productivity' ratio, they will need to combine variables whose values can be standardized. The easiest and most common example of this is converting inputs into a dollar value.
Case study: Colins Title Company
OLD System
Inputs
Outputs
. Workers: 4
. Work hours / day: 8
. Total Wages: $640
. Overheads: $400
8 units daily
NEW System
Inputs
Outputs
. Workers: 4
. Work hours / day: 8
. Total Wages: $640
. Overheads: $800
14 units daily
Here is the contrast between old and new systems and then the productivity analysis. In the example immediately below, the practitioner is interested in productivity per work hours.
OLD
system
NEW system
productivity
= 8
units / 32 work hours
= 0.25
units per work hour
productivity
= 14
units / 32 work hours
= 0.43 units per work hour
Productivity analysis+75%*, more units per work hour
* change as a percentage of the old system:
0.43 - 0.25 units = 0.19 units
0.19 units / 0.25 = 75%
Using the same situation, the practitioner is interested in productivity regarding expenditure (and no longer work hours). Furthermore, the practitioner combines multiple costs because they have a standardized measurement, dollars.
Productivity = Outputs of goods or services produced / (Input 1 + Input 2) used
Productivity Analysis for Decision-making: Switch to the new system?
Here is an efficient format for presenting the results.
Productivity Analysis
OLD system: Without new
overheads
NEW system: With new
overheads
%
change
(+
increase, - decrease)
Units per day
8
14
+75%
in units
Overheads
per day
$1,040
$1,440
+38%
units per overheads
Labor productivity
0.25 units per hour
0.44 units per hour
+75%
units per
labor productivity
Multi-factor
productivity
0.0077
unts per dollar
0. 0097
unts per dollar
+26%
units per costs (labor, overheads)
When reporting on the results, explain whether the productivity has risen or fallen. Assuming it has risen, report specifically how this rise has occurred. For instance, increased productivity always occurs because 1) output increased while maintaining or decreasing inputs or 2) inputs decreased while maintaining or increasing outputs.
Do not perform productivity analyses on only outputs. Notice how tempting it would be to run with the large 75% results for that one variable alone. Rather consider: each single factor alone; as well as multiple factors together once they can be measured with a standardized means.
Re single-factor analyses, consider the implications of altering each individual. For instance, if the increase in overheads relates to fixed (ie versus variable) overheads, that fact should be highlighted and then specially investigated further as a matter for risk management. Afterall, increased fixed costs increase business risk (ie the threat of financial failure because of factors, in this case fixed costs, that lower profitability if the these factors become excessive).
The multi-factor analysis is likely more trustwothy because, as seen in this case, the results can be more sobering with lower overall percentage changes. However, whether multi-factor analyses are more appropriate depend on your business circumstances.
As suggested earlier, extend the bases for your decision-making process beyond these ratios. Consider in-depth knowledge of the organization and its goals. For instance, if high quality is particularly important to your type of product (such as a speciality product), ensure that you are sacrificing quality in the name of increasing productivity.
Starbucks hired analysts to find ways of saving time. The following are among the the proposed changes that translated into improved productivity by 27% or roughy 4.5% annually and , in turn, increased yearly revenue per outlet by $200,000 to $400,000 within 6 years.
> To stop requiring customer signatures on credit card purchases under $25, to save 8 seconds per transaction.
> To change the ice cream scoop size to save 14 seconds per drink.
> To get new and better espresso machines to save 12 seconds per shot.
Taco Bell improved productivity by making the following changes.
> revised the menu
> designed meals for easy preparation
> shifted some preparation to suppliers
>efficient layout and automation
>training and employee empowerment
>new water and energy saving devices
This video illustrates the OM casestudy of FritoLay.
Examples of OM-related professional societies include American Society for Quality (ASQ), Project Management Institute (PMI) and so on.
Skills required for successful OM
Previously, I discussed how the job interview process should pay special attention to the skillset required of the interviewees. The following are considerations specific to OM about OM managers.
detail oriented and analytical, especially quantitative (regarding issues that include input costs, processing costs, inventory costs, quality management costs, scale economies and so on)
people skills that can be used to influence change
tech-savviness and willingness to learn new technology
can keep in mind and honor the goal of delivering customer value.
Demand. Understanding consumer demand can help you plan the appropriate level of inventories (not too much that can become costly or too little that you can not meet growing demand.)
Throughput refers to the amount of inputs or outputs passing through the 'transformation' system or process.
A management system refers to the set of policies, processes and procedures used to fulfill required tasks. As shown in the case studies above, old and new scenarios are referred to as the old and new 'systems'.
