Financial and Strategic Analysis of a Product based Start-up [DigiTeck Solutions] Kailash Kotwani Instructor: Jeff Morris GE 598, Dec 2006 Acknowledgement I am grateful to Prof. Jeff Morris for his consistent guidance and useful instructions to write this project. Lectures and material covered in class provided deep insight for understanding financial aspects of a start-up company. I am thankful to my friend and classmate Krishna for working together and providing useful suggestions on several of issues. Points to be covered I. Table of Contents I. Table of Contents ..................................................................................................... II. Executive Summary ................................................................................................. III. Product Description and Reason for choosing it ................................................. IV. Market Research, Market Size, Demographics ………………………………….. V. Cost & Sales Price Analysis (Break Even analysis)……………………………… VI. Marketing Plan (SWOT Analysis) ........................................................................ VII. Operational Plan, Start-up and Operational expenses ...................................... VIII. Financial Statements ................................................................................................ IX. Economic Value additoin and Future Growth Plans ……………………………. II. Executive Summary DigiTeck Solutions is a small; Chicago based Startup Company specializing in distribution high-teck low cost innovative products. For initially establishing business, company will launch Bluetooth headset with inbuilt MP3 Player and Flash Drive. Through small size and minimal operational cost, DigiTeck Solutions, will try to consolidate its position in market by offering quality products at competitive prices. The company's strategy is to consolidate its excellent customer and client service and quality products by making timely deliveries and having a competitive pricing structure. DigiTeck Solutions will focus mainly on the distribution headset initially in Chicago and surrounding area and later in whole United States. In addition, the company will provide establish relationship with big retailers for supplying them products. Companies with whom we compete are Motorola, Jabra and Plantronics who have established markets in bluetooth headsets. Based on success in initial product lines, in the future, the company plans to diversify into other kinds of range of electronic utility products. III. Product Bluetooth® MP3 Player Headset with Flash Drive 1. Product Description This product is a completely new high tech innovative concept of bringing in several devices in one headset. It is a 3-in-1 gadget integrating all or most of the features of a MP3 Player, a Flash Drive and a Bluetooth Headset. Discreetly built into the lightweight headset frames are, on one side, an MP3 player (also plays WMA files), and on the other side a Bluetooth headset which can be paired with a mobile phone (or any other Bluetooth enabled device) to enable consumers talk while they listen music or drive car. Fully adjustable earphones with very sensitive microphone built into the frame can be used recording voice and playing FM radio same time. Customers can choose between ranges of size of flash memory onboard depending upon their requirement (256 MB, 512 MB or 1 GB). Main Features Listen to music - MP3, WMA, or WAV formats 1 Gigabyte storage in flash memory Bluetooth functionality, enabling to talk and listen wirelessly / handsfree for any Bluetooth cell-phone Ringtone indicating call when listening music to avoid missed calls Other features: voice recorder, store numbers, create directories, built in equalizer Simple transfer of files to the memory, using USB extension cable or wirelessly using high-speed Bluetooth 2.0 Standard Bluetooth specification enabling to pair up with any Bluetooth enabled device like notebook, car-kit, media TV or gaming unit. Record phone calls using the voice record function Internal rechargeable battery, recharges via USB Fig. 1 The Product Easy controls and volume changing Accessories included - see below Accessories (contained in a box) USB extension cable. Wall socket-to-USB charger. Driver software on a mini-CD plus a music file converter program. 12 month period warranty card English language manual Further Detailed Technical Specifications Digital formats supported: MP3/WAV /WMA PC and MAC interface supported: USB2.0 Full charge play time: 5 hours Battery: Built-in Li-ion /3.7v, 150mAh Maximum input power rating: 5VDC,150mA Voice output power: 55mW Earphone output frequency: 5mw Voice output frequency: 20Hz-20Khz THD: Less than 0.05% Recharging time: 3 hours Memory Flash: 1GB Signal-to-noise ratio: 87.2dB Earphone impendence: 16ohm Dimensions Weight: 40g Dimensions: 92 x 85 x 40mm Extended Length of Earphone fixed lever: 18mm Rotary degree of earphone fixed lever: 270 degrees Rotary degree of earphone: 90 degrees Manufacturer and Origin of Product: Chinavasion Wholesale Ltd. 3A, Xinbaohui Building, Nanhai Main Road, Nanshan District 518054 Shenzhen China www.chinavasion.com Tel: +86-755-26451869 Fax: +86-755-26451879 Brief Terms settled during quotation process a. For bulk order of 1000 Pcs or over discounted price offered equal to $24.9. b. For first order, 30% TT in advance for order rest before shipment. Credits may be offeredif business continued. c. Packaging information 1pc in a color box, 40pcs in a carton Carton size:70*51.5*38.7cm N.W.:9KG/CTN G.W.:10KG/CTN d. For the bulk order of 1000 or over manufacturer ready to provide, customized packaging with company name and logo etc on it. No extra cost. e. Warranty for 1 year. If due to transport, pcs get damaged, ready to replace them. Ready to repair/replace defective pcs under warranty period. 2. Why this product?? In order to maintain the almost-constant contact that has become commonplace in today’s society, people have taken to carrying their cell phones virtually everywhere. There is almost a feeling of disconnect that can be experienced when caught without it. This new trend, and the subsequent car accidents – of course, has led to the creation of laws banning the use of hand-held cell phones while driving. The answer to this problem? Bluetooth technology and Bluetooth headsets paired with cell phones. Bluetooth headsets offer a convenient wireless connection to a Bluetooth-enabled cell phone or computer. This hands-free capability allows users to access their cell phone to answer or make calls while leaving their hands free for driving. It also allows a user to walk freely about their office while dictating to a voice-activated word processing program in their PC. The freedom permitted by Bluetooth technology makes for a safer, more productive world, while still maintaining the pace we’ve become accustomed to. Built in flash drive eliminates the need for carrying extra pen-drive, jocky or flash disk for data carrying purpose. One can listen to Music peacefully without the fear of missing calls. One can pair it up with Bluetooth enabled Mobile-TV and watch favorite shows sitting in any corner of living room without disturbing others. Instead of Using built in built in MP3 player this can also be paired with better quality portable MP3 Players like ipod providing large range of features. All in all this high teck gadget works complement for several other electronics gadgets at the same time this fully eliminates need of carrying several other gadgets. E.g. it can work as complement to following Bluetooth enabled devices… Cell-phone Laptop, Notebook Ipod Mobile TV Car Music System and several others At the same time it replaces following devices fully MP3 player Flash disk Head-phone and Mic set Voice Recorder As DigiTeck Solutions is committed to its goal of delivering High-Teck Low Cost goods. New innovative gizmos bring in lot of attention and make the marketing job much easier at first place. Multi-utilities, multi-functions, ergonomic design and cost of this product makes it very attractive. This Product fits very well for establishment and growth of a new entrant in the Market. 3. A Word about Bluetooth® Technology (Some Technicalities) Very often, we are asked if Bluetooth is going to be the next “killer app” that will “change the world.” Unfortunately, Bluetooth is a technology and not a “killer app” in and of itself. Even if “killer apps” were easy to identify, they would not be that easy to quantify. Depending upon how we define “change the world,” however, we believe Bluetooth is certainly going to have an impact on how human beings do things. We have watched Bluetooth for several years now, trying to identify within it, perhaps not a “killer app” but a beachhead application or usage model that could highlight the technology’s value proposition in a way that spurs further consumer adoption. Bluetooth is a short-range wireless technology that is intended to provide low-cost Fig. 2 Bluetooth Logo wireless networking—within a person’s vicinity—hence its classification as a personal area network (PAN) technology. Although most of the wireless industry has been focused on cellular phones and PDAs as the dominant application for Bluetooth. It is believed that in-vehicle or on-walk hands-free communications and music has the potential to be the most strategic application for Bluetooth technology. Bluetooth was designed to provide low-cost, short-range radio links between mobile phones, mobile PCs and other portable devices. Its biggest attraction is the prospect of providing a single, global standard for this type of link, enabling different equipment types from different manufacturers to communicate together anywhere in the world. To achieve this objective, a Special Interest Group (SIG) was set up by the original founding companies: Ericsson, IBM, Intel, Nokia and Toshiba. More than 5000 companies have now signed agreements and become SIG “members”. The Bluetooth specification includes both simple point-to-point and point-to- multi-point operation. In point-to-multi-point mode, each Bluetooth “unit” will be able to communicate with up to seven other units to form a “piconet” or “personal area network (PAN)” – i.e. a small network of Bluetooth-compliant devices. Moreover, a single device is able to belong simultaneously to a number of different piconets. A huge number of potential applications have been proposed for Bluetooth and one of the problems in analysing the market is deciding which applications will adopt Bluetooth in the long term and which will not, either because they eventually use a competing wireless technology or because they stay with a traditional wired approach. The list of potential and actual applications includes mobile handsets, headsets, PDAs, notebooks, desktop PCs, printers, automotive, HIDs, digital cameras, gaming equipment, portable digital media players, audio/HiFi, cordless phones, access points and modems (domestic, corporate/office and public), add-in cards, industrial and medical applications and list goes endless. So far now as many as 30 different profiles for bluetooth devices have been defined and implemented and several others are being developed. Here we will discuss those profiles which have use for a Flash Drive based MP3 Player Bluetooth Headset. a) Advanced Audio Distribution Profile (A2DP) A2DP is designed to transfer a 2-channel stereo audio stream, like music from an MP3 player, to a headset or car radio. This profile relies on AVDTP and GAVDP. It includes mandatory support for low complexity Sub Band Codec (SBC) and supports optionally: MPEG-1,2 Audio, MPEG-2,4 AAC and ATRAC, and is extensible to support manufacturer defined codecs. Most bluetooth stacks implement the SCMS-T copyright protection. In these cases it is not possible to connect the A2DP headphones for high quality audio. E.g. the Motorola HT820 can be used for high quality audio only with certain versions of the Toshiba bluetooth stack. b) File Transfer Profile (FTP) Provides access to the file system on another device. This includes support for getting folder listings, changing to different folders, getting files, putting files and deleting files. It uses OBEX as a transport and is based on GOEP. c) Hands-Free Profile (HFP) This is commonly used to allow car hands-free kits to communicate with head sets and mobile phones in the car. It uses SCO to carry a mono, PCM audio channel. It is considered to be the killer app for Bluetooth as more Governments are passing legislation to ban the direct use of mobile phones while driving. Currently in version 1.5. Operational Range and Power Consumption Bluetooth is a radio standard and communications protocol primarily designed for low power consumption, with a short range (power class dependent: 1 metre, 10 metres, 100 metres) based around low-cost transceiver microchips in each device. Bluetooth lets these devices communicate with each other when they are in range. The devices use a radio communications system, so they do not have to be in line of sight of each other, and can even be in other rooms, so long as the received transmission is powerful enough. Maximum Permitted Power Maximum Permitted Power Range Class (mW) (dBm) (approximate) Class 1 100 mW 20 dBm ~100 meters Class 2 2.5 mW 4 dBm ~10 meters Class 3 1 mW 0 dBm ~1 meter IV. Market Research 1. Objective The original objective of this market research is to forecast sales figures, analyze consumer behavior and reasons to help setting up sales prices. As the product selected in previous section do not have long presence in market and is very new, available data is inadequate to come to any conclusion. But definitely we can make certain assumptions and then try to relate and extrapolate. We know this product is mix of features of mainly following three products. 1) Portable MP3 Player 2) Bluetooth Headset 3) Flash Drive These products have long presence in market and their data is widely published. We will try to analyze market figures for above three products and then try to conclude estimates for our product. As the product is designed in the form of a headset, for our analysis we can assume that predominantly its bluetooth headset. MP3 Player and Flash Drive are secondary features of this product. At the end of this section we will try to do SWOT analysis to have feel of DigitTeck Solutions situation in current market scenario. In this section our goal is to get answers of following questions first for these three products and then extrapolate them for our product? i) What is the total size of market? ii) Current demand in target market iii) Trends in target market—growth trends, trends in consumer preferences, and trends in product development iv) What percent share of the market will DigiTeck Solutions have?. v) Growth potential and opportunity for a business of this size. vi)What barriers to entry do company face in entering this market as a new company with a new product? In following sections, glimpse of market research have been given for MP3 Player, Flash Drives and Bluetooth Headsets. 2. Portable MP3 Player This section presents some of short surveys and news articles to capture the overall essence of Portable digital MP3 Player US market. Numbers slightly vary from survey to survey either due to sampling error or Time-Frame error. A) Piece of Consumer Behavior Report by www.PriceGrabber.com April 2006 Mobile Lifestyles: MP3 Player Trends It’s not just a fashion statement, 75% of respondents say they did or would buy an Apple iPod because they believe it is the best technical MP3 player, and only 25% say it was because it was the “in” brand. Apple continues to be the dominant leader for MP3 players holding 61% share of the market based on referred dollars and 49% of the market based on clickthrus to merchants, a 29% increase in market share y-o-y. Fig 3: Apple iPods vs. non-Apple MP3 players: Market Share and Average Prices Year Manufacturer Referred Dollars Clickthrus Avg Price 2006 Apple 61% 49% $244 2006 non-Apple 39% 51% $188 2005 Apple 47% 38% $281 2005 non-Apple 53% 62% $215 Source: Market Reporter PriceGrabber.com 2006 * Share based on referred dollars and clickthrus to merchant as of Q1 2006 and Q1 2005 ** Non-Apple MP3 player manufacturers consists of over 12 major manufacturers B) Excerpt of News Article: Rio Exits the MP3 Player Business (PC Magazine, August 2005) Rio was the first major brand to enter the market portable MP3 Player market in 1998, and will be the first to leave when D&M Holdings Inc. shutters its Rio division at the end of this September. Last year, Apple Computer Inc.'s iPod racked up an eighty percent market share, making itself by far the dominant force in the market (September 2005). The departure of the player who invented the game raises the question, "Can anybody other than Apple make money on MP3 players?" Creative Labs Inc. has also been taking a beating in the MP3 player business. The company posted a $31.9 million loss for the quarter ending in June and has been rumored to be seeking an injection of new capital to stay afloat. Companies that are likely to hang on in the MP3 player market will be those with compelling reasons to be there other than simply selling MP3 players. One bright spot in the picture is the size of the untapped market that remains. Only 11 percent of Americans own an MP3 player, and even fewer people outside the United States have bought one. C) Excerpt of News Article: SanDisk is Number Two in US MP3 Player Market (www.i4u.com, Feb 2006) SanDisk rose to the number two spot in the MP3 player market during the holiday season in the United States. SanDisk sold 1 million of their low cost flash based mp3 players. We reported recently that Creative is the number two in the mp3 player market with 2.6 million players sold. I think that number is global. That means SanDisk is the distant number two in the US and Creative is the distant number two world-wide in the MP3 player market. Nobody is able to touch Apple right now; they sold 14 million players in the same time frame. D) Excerpt of News Article: Dell withdraws from MP3 player market (22nd August 2006 www.macc.com) Dell has apparently conceded defeat in the MP3 player market, as reports indicate that the company is no longer selling any of its MP3 players and has removed most referencs to its DJ Ditty MP3 player from the Dell website. Electronista notes that the Texas-based Dell originally entered the digital audio player market in late 2003 to capitalize on the rapidly expanding popularity of Apple's iPod; however, despite attempts to compete with Apple on features and price, Dell has consistently struggled to find significant marketshare. Fig. 4. MP3 Player Pricing Trends Summary of MP3 Player Market Research The worldwide market for Flash-based and Hard Disk Drive (HDD)-based players reached 140 million units in 2005, up from 35 million units in 2004. Expectations for this market are high, with In-Stat forecasting unit shipments to reach 286 million by 2010. US market reached 54 Millions units in 2005. Apple is very dominant in US market with more than 75% of share (sales 39.8 Million units). Apple’s presence is so dominant that big players like Dell, Rio and Creative found it hard to survive in this market. Consumers buy non Apple MP3 players only if either they are very cheap or if they provide many other features like large flash drives at low cost. Still large part of the US market is untapped, only 11% of Americans owns a MP3 player. Sales growth figure shows this market has huge potential. Consumer can get good branded 1GB MP3 Player anything from $61 (Creative Nano) to $138 (iPod Nano). Consumer ready to pay large price for technology and brand. 3. Bluetooth headset Sales and market of bluetooth headset is completely driven by presence of bluetooth chips in various other devices like cell-phones, Notebook or car kit. First we will look at bluetooth chip market and then we will go ahead on other applications. A) Excerpt from News Article: BLUETOOTH® WIRELESS TECHNOLOGY SURPASSES ONE BILLION DEVICES (13-Nov-2006 Bluetooth SIG www.bluetooth.com ) Installed base of more than one billion products gives consumers more than five billion ways to use the global wireless standard. Bluetooth enabled products are now in the hands of one billion consumers worldwide said the Bluetooth Special Interest Group (SIG) today. Citing shipment information from ABI Research, the trade association announced that the installed base of Bluetooth devices reached one billion in early November. Weekly shipments of the wireless devices continue at a pace of 12 million per week. "To put this number in perspective, one billion is greater than the number of PC users in the world and equal to the number of mobile phones shipped this year," said Michael Foley, Ph.D., executive director, Bluetooth SIG. "Reaching the one billion milestone is a huge win for the Bluetooth industry and we want to congratulate and thank our 6,000 member companies whose innovation and products got us here. These are the same companies, along with new members, that will drive us towards our next goal of shipping two billion devices IN ONE YEAR in 2010. Exciting things are shaping up for Bluetooth wireless technology and with the advent of several new uses of the technology in 2007 in the home entertainment, medical and gaming arenas, I feel confident that Bluetooth technology will continue to surpass expectations." Cellular handsets continue to dominate shipment numbers, along with audio headsets. Stereo headsets, vehicles, media players, notebooks/PCs, and mice/keyboard devices also contribute to shipment numbers. Medical devices, gaming devices, camcorders, projectors and digital cameras are expected to grow in volume after the introduction of the high-speed Bluetooth specification in 2007. "One change in the marketplace we see really driving adoption of Bluetooth stereo headsets and contributing to that next billion devices is the growth of mobile TV," said Yoram Solomon, director of strategic marketing and industry relations, Texas Instruments, and president of the Mobile DTV Alliance. "It's pretty simple -- people want good quality sound when watching TV and the speaker built into mobile phones isn't going to cut it. Bluetooth stereo headsets provide the key quality component to the mobile TV experience." November has been declared "Bluetooth Music Month" by the Bluetooth Special Interest Group (SIG) in order to highlight the many ways consumers can listen to Hi-Fi stereo music wirelessly. B) News: Bluetooth and Wireless LAN 2002. “Bluetooth shipments have now overtaken 802.11b shipments. The time has come for the two standards to stop fighting and agree that both are successful and complementary. The reality is that by the end of 2006, Bluetooth will ship as many products in one week as Wi-Fi ships in the entire year.” Fig. 5 Exponential Growth in sales of bluetooth chips from 2001 to 2006 C) Article from instat.com: Bluetooth Chip Makers (2006) CSR and Broadcom dominated Bluetooth chip sales last year, with a combined 80 percent of the market (see chart), but several other vendors—including Infineon, Marvell, Philips, RF Micro Devices, STMicrodevices and Texas Instruments (TI)—are also vying for sales. TI appears to be the third-largest vendor, and Amir Faintuch, TI's Bluetooth business director, claims that his company has been gaining market share this year. Bluetooth chip set prices have fallen in recent years from more than $5 to the low $2 range. But Faintuch vows to drive prices even lower with aggressive integration and size reductions. "You'll see a $1 device eventually," he says, adding that Bluetooth chips are becoming "a saturated, commodity market" in which only the biggest, most efficient suppliers will survive. The industry's next competitive front is likely to be chips combining Bluetooth with FM radio, WiFi and ultra-wideband (UWB) networking. Fig. 6: Bluetooth Chip Suppliers Market Share D) Bluetooth in Mobile handset: In-stat Research Article According to In-Stat Research, streaming music is the most accepted multimedia service offered by wireless carriers. Bluetooth devices that are able to wirelessly stream high- quality music are enabled with the Advanced Audio Distribution Profile (A2DP) which ensures interoperability among devices with the same profile. Many new phones on the market include the A2DP profile, enabling consumers to download songs to their phone and listen to CD-quality sound wirelessly through their Bluetooth stereo headset or other audio playback devices. Samsung, LG, Nokia and Motorola are just a few of the manufacturers that offer A2DP enabled phones. A few of the phones available today include the LG Chocolate, the LG LX 550 and the Nokia 8810. Fig. 7 below shows number of bluetooth qualified models release by major companies last year. Fig. 7 Bluetooth qualified models released by major cell-phone manufacturers last year E) Bluetooth in Vehicles in European Market Bluetooth, a very prominent technology in the European telematics and infotainment market, currently is the widely established PAN (personal area networking) standard in the European automotive market. Currently 66 vehicle models (40 Million Vehicles) in Europe are equipped with a Bluetooth module, either independently or integrated with the navigation system. Bluetooth currently has a penetration level of close to 20 percent in Europe, and this is expected to reach 90 percent in 2010. Fig 8 shows the penetration of Bluetooth in vehicles since 2001, projected to 2010. Fig 8. Penetration rate and vehicles equipped with bluetooth in European Market F) Bluetooth Headset Market Players Motorola, Jabra and Plantronics were the world's big three Bluetooth headset vendors, taking a combined 57 percent share of total global sales in 2005, according to the latest research from Strategy Analytics. Motorola, the world's second biggest mobile phone maker, controlled 28.2 percent of the Bluetooth headset market, while Denmark's Jabra unit was second with 16.3 percent and Plantronics came in third with 12.3 percent market share. Driven by market demand for music phones, approximately one in every eight Bluetooth phones sold in 2006 will support A2DP (Advanced Audio Distribution Profile), a new profile allowing consumers to enjoy wireless music by beaming stereo sound to a stereo Bluetooth headset. Fueled the by falling prices of Bluetooth headsets, as well as traffic laws requiring handsfree calling while driving, global sales rose 153 percent to 33 million units in 2005, and are expected to grow 70 percent in 2006. G) Share of Bluetooth headsets and Penetration in Cell phones: ABI News Article “very, very buoyant at the moment," says Stuart Carlaw, a wireless analyst with ABI Research. He expects about 540 million Bluetooth chips to be shipped this year, up 70 percent from 317 million in 2005, with shipments growing to 1 billion units annually by 2009. What's fueling the growth? "Two words," says InStat analyst Brian O'Rourke: "Mobile phones," (InStat is a division of EB's parent company.) Handset makers initially dragged their feet on adding Bluetooth capabilities, but that started to change by 2004 as chip costs fell and interoperability problems between Bluetooth and WiFi networks were resolved. Bluetooth was used first in expensive multimedia phones such as flagship Razr from Motorola (Broadcom's biggest Bluetooth chip customer) but now is making inroads into midrange and even some lower-cost phones. O'Rourke estimates that about one third of the GSM handsets shipped in 2005 were Bluetooth-enabled, compared to 10 to 20 percent of CDMA phones, the prevalent U.S. mobile standard. Analysts expect up to 90 percent of phones eventually to be Bluetooth- equipped. Bluetooth headset sales also are growing fast. InStat forecasts that shipments of Bluetooth mono headsets will increase from 33 million in 2005 to 55 million in 2006. Summary for Bluetooth Headset Market Research Bluetooth Headset Market is mainly driven by other bluetooth enable complementary gadgets like cell-phones, in-vehicle bluetooth module, Notebook, MP3 Players etc. Sales of bluetooth chips are rising exponentially at average annual rate between 60 to 70%. Expected to reach sales of more than one billion units in just 2009 and Two billions in 2010. Technological improvements are steadily bringing down bluetooth chipset prices. It has reached to $2 at current level and expected to drop in future too. These developments are making this technology available to Mass Levels. At present 33% of all GSM cell-phones are bluetooth enabled. Analysts expect up to 90 percent of all phones eventually to be Bluetooth-equipped by 2009 to 2010. Legislative laws against direct use of cell-phones in vehicles are heavily boosting use of bluetooth headsets in cars too. At present 10% of all bluetooth chips are used headsets. In 2006, 55 Million Units of bluetooth heads were sold. It is expected to grow these sales at steady rate of 70% reaching sales of 450 Million units in 2010. 4. Flash Drive In this section we will try capture price changes in Flash Drive. Its Market Size, Sales Revenues and other trends. Fig 9: Change in price/Mbyte from 1988 to 1996 Fig 10: Change in price/Mbyte from 2004 to 2009 Fig 11: Change in sales revenues of flash drive market from 2001 to 2009 Fig 12: Monthly Price Variation from Jan-04 to May-06 for Flash Memory cards For Q2 2006, the average price for flash memory cards was $74, a 12% y-o-y decrease from Q2 2005. Comparing Q2 2006 to average prices at Q2 2004 showed a 21% decrease. Flash memory manufacturers continue to push out new products with higher storage capacity which keeps the marketplace active. A year ago, the average price for the top 1GB memory cards was $81 as compared to $49 today. �� May and June 2006 shows a further declining trend, dipping below the $70 - $90 range that the flash memory market maintained for almost two years. �� According to the top 15 flash memory cards, the average price by memory capacity is as follows: 2GB = $90 1GB = $49 �� Ten out of the top 15 are produced by SanDisk. SanDisk continues to be the main manufacturer, holding 44% of the market share based on referred dollars and 41% share of the market based on clickthrus to merchant as of Q2 2006. (www.pricegrabber.com) Fig 13. Prices of top 15 Flash Cards 2006 Summary Flash Drive Market: Market size for 2006 year was 150 Million units. Sales Revenues are increasing at average rate of 70%. Price per/mbyte is steadily falling at 50% rate One can get branded 1GB card for anything from $26 to $47 5. Estimating DigiTeck Solutions Sales As product selected is mainly a bluetooth headset we will assume that most of the sales (85 %) will come from headset market share, partial from Flash drive market (15%). In our recent market research study we concluded that MP3 Player market is completely monopolized by Apples iPod with lot of barriers for new players. Hence we will assume no market share in MP3 Player. Presence of MP3 Player in product will mainly add as feature to attract customers looking for bluetooth headset or Flash Drive. Estimated Sales of bluetooth headset in 2007 = 93 Millions Estimated Sales of Flash Drives in 2007 = 200 Millions Through sales and marketing efforts, DigiTeck Solution will be able to pick up 0.0035% share of bluetooth headset market and 0.0005% share of flash drive market. Expected sales = 93 M x0.0035%+200x0.0005%= 3990 units So DigiTeck Solution is expecting to achieve sales of around 3990 units in 2007 financial year. It is expecting growth of around 20% in coming years. V. Cost Analysis and Pricing Strategy Estimating cost of goods sold The inventory is acquired from a Chinese manufacturer periodically. After having enquired with various manufacturers in China, Digiteck Soluations has finalized the best deal from Chinavasion, Shenzhen. The quotations that they have submitted for us are as follows: The minimum quantity that is to be ordered is 1000 pieces. They can also make a trial order of 10 pieces for testing the quality of the products initially. No additional cost need to be paid for the inspection because the manufacturer’s Quality Control department will totally check the goods before shipping them to us. They guarantee 100% quality for headsets. They have agreed to the terms that they would replace for free in case of defect for first three months and repair free in one year (with the shipping costs on them). Also, they will do customized packaging for my company with company name and logo on box if minimum quantity is 1000pcs. They also do custom graphics on the products totaling to about 10cents/piece. They have agreed to deliver the product Shenzhen seaport for free as they have their own delivery trucks. The payment terms agreed upon are 30% T/T (telegraphic transfer) deposit and 70% balance before shipment We intend to get the quality control done by another neutral company in order to ensure quality of the products. A quality control firm was contacted Shenzhen for quality testing purpose. They charge 50 cents per piece for normal standardized quality testing which would be useful as we cannot trust this new relationship forming a new manufacturer. Quality firm’s officer will visit Chinavision’s specified location for testing product and putting ‘tested and checked’ logo on each product. Also, the estimated charge for shipping the inventory by sea to New-York sea port would be USD 300.00 for 1000 pieces with a lead time of 15-17 days. On the other hand, the air shipping will be 4.6USD/Kg with a lead time of 5-6 working days. We will prefer getting it shipped through seaport as it is cheaper method. Finally, the customs duties had been determined to be in the range of USD 50.00 – 70.00/bill (for importing 1000 pieces of headsets). The taxes may be in the range of 2-5% (this is a rough estimate decided after calling up the U.S. customs office, officers at the Port of Chicago and checking out the website www.customs.gov). And the cost for shipping the freight from the port of New-York to the office would amount to approximately 25 cents/unit (inventory is near the office in Chicago) for 1000 pieces. Obviously, the shipping charge depends on the volume and weight of the package Adding all mentioned costs above to estimate cost of single unit roughly. Sr.no Expenditure Type Amount (USD) 1 Cost of basic single headset 24.9 2 Insurance expense while in courier 0.1 3 Cost of custom graphic design on unit 0.1 4 Quality Control expense per unit 0.5 5 Courier charge Seaport from Shenzhen to New York 0.3 6 Customs and Taxes per unit 1.1 7 Courier from Seaport to office 0.25 Total 27.25 For initial inventory of 1000 units, cost = 27.25*1000=27250 USD BREAK EVEN Analysis Very few companies enjoy “Price Freedom”. Unless our company has product monopoly, COMPETITION will be a limiting factor on the price one can set for product. As long as customer has a choice of a range of products in industry, from inexpensive to expensive, we will not have price freedom. In this section we are assuming Gross Profit Margin of 40% based for this kind of industry based on research done previous section. He we will be estimating number of minimum units required to be sold in first year to break even or cover the minimum business fixed costs. We assume 40% as gross profit margin. Therefore GMR = Gross Margin Ratio = 0.4 Selling Price = COGS/(1-GMR) Therefore, Sales Price = 27.25/(1-0.4) = $45.4 Now, fixed annual operating expenses estimated in operating expenses sheet = 32,060 USD Number of units to break even = Operating Expenses/(Sales price – COGS) = 39260/(45.5-27.25) = 2151 This means that minimum of 2151 units are required to be sold in first year to break even or to cover fixed operating expenses. In our previous Market Research Section we estimated it is possible to achieve sales of around 4000 units ($0.18 Million as revenues) in first year. At this stage this business looks promising if all the estimates, assumptions and predictions go along. VI. Marketing Plan 1. SWOT Analysis Strengths Weaknesses 1.New High Tech Product 1.New in industry, No experience 2.Several Secondary Features 2.Set-up and Start-up delays 3.Low Cost Product 3.New Product, Lack of faith from 4.Technical Knowledge Expertise consumers 5.Small size company, small payroll bill 4.No brand reputation 6.Low Operational expenses Opportunities Threats 1.Potential growing Market of product 1.Emergence of New Technology, making 2.Increasing Applications of product this product obsolete 3.Advantages of first entry. 2.Steadily falling prices, risk associated with maintaining inventory 3.Steadily falling prices, cutting margins 4.New product, risk of complete rejection by consumer 2. Sales Model Products in this marketplace are typically purchased through catalogs, web-sites and trade shows. The purchase decision is a simple matter of comparing the estimated number of instance of use to the purchase price. To the customer, products are not readily available if they are not listed among common sources such as catalogs, etc. In the case of specialty products however, a simple descriptive web presence along with appropriate search engine listings suffice. A considerable portion of our advertising budget will be used for Internet advertising such as banners and site-promoting services. We also plan on a mass postcard mailing media blitz to electronic shops like Best Buy, Circuit City etc. and to advertise in most of the major in-line computer magazines. 3. Sales & Marketing Plans DigiTeck Solutions market approach plan for the products will consist of development of formal distribution channels and partners, and public relations and advertising activities designed to create awareness and product interest. 4. Distribution Channels Our channel development efforts will focus forming strong relationships with sales brokers or agents. Company may hire outside salespersons to assist in setting up distribution relationships. Company will pay them on commission basis. Commissions per unit offers are usually lucrative as it provides incentives equivalent to efforts. Also focus on creating equitable partnerships with equipment retailers. Organizations which publish catalogs and web sites that serve our target will provide the line share of needed sales efforts for company to be successful. These strategic relationships are meant to allow faster dissemination for the technology and provide funding for market-by-market commercialization efforts. Once the sales have achieved sufficient mass, company can hire experienced sales-and-marketing director to handle this function. VII. Operational Plan Start-up and Operating Expenditures Startup Expenditure Given below is a detailed list of the startup expenditure possible for the company. Please note that this is a conservative estimate and the actual cost may vary depending on various conditions. Start-up Investemtn Equity Investments: Company has an equity investor in the form of the founder, Kailash Kotwani. According to the analysis of initial startup expenses, it was found that company would require a total initial investment of $75,000. Out of this, $40,000 would be put by the founder and the rest is taken on loan. Starting initial investment will be sufficient enough to pay all the expenses (including loan and interest payments). Also expecting to maintain positive cash flow at any point of time throughout the course of business Loan Proceeds: Business loan amounting to $35,000. Real-Estate Loans: Not Applicable Security Deposits (i) Rent (last month's): Initially home apartment will be used for office space and warehousing purpose. The partial rent of an apartment space around southern (or northern) suburbs is considered as $1400/month (Full rent is around 2800 USD for 1000 sq feet). Source: http://www.officespaces.us/cgi-bin/officespaces/details.cgi?ID=1222 http://www.instant- offices.com/results.asp?country=35&dist=381%2C288%2C290&cid=&rgns=&cit ydropdown=299-7-35&pc=®iondropdown= (ii) Telephone Deposit: None. The charge for a new broadband telephone line is $49.99 plus taxes from Vonage. But, let us approximate the deposit to $200. Source: http://www.vonage.com/services_premium_sb.php http://www.whitefence.com/WebObjects/WhiteFence.woa/216/wo/Mjpd855eFSRRo1yu Nzbko0/220.127.116.11.0.0.21.0.18.104.22.168.0.2.0.4.0.0.8.0.1.0.0?477965825 (iii) Utilities Deposit: Approximately $300. Source: http://www.psnh.com/SharePDFs/Summary_of_Rates.pdf http://www.chicagoartistsresource.org/?q=node/253 (iv) Other deposits: Set aside $500 for miscellaneous charges. Startup expenses (i) Accounting fees: Typically, it would cost about $1000 for the first year and increases with the sales. (ii) Activation Fee: Typically around $300 in Illinois state. Source: http://www.gather.com/viewArticle.jsp?articleId=281474976718557 (iii) Corporate Fees & Taxes: 150 USD (iv) Federal Tax ID: 30 USD (v) Fictitious Name Costs: 50 USD (vi) Insurance: Depending on the level of coverage, insurance can vary from $2000 to $10,000 per year. Let us assume an average value of $250 for pre-startup Annual insurance costs = 2400 paid in installments of 2 Source: http://www.digital- web.com/articles/building_your_own_startup_technology_company_part_2/ (vii) Legal & Consulting Fees: In between $1500-$5000 depending on the level of service. Let us assume a value of $2000 for our situation as we do not need high level of guidance. Source: http://www.digital- web.com/articles/building_your_own_startup_technology_company_part_2/ (viii) Meals & Entertainment: Estimated at $600 per year. This would serve well for business meals with potential customers. (ix) Office Supplies: Office supplies –$720 annually for paper, pens, pencils, stapler etc. Source: http://www.officedepot.com/ (x) Payroll Expenses (training/setup): NA (xi) Salaries & Wages: Kailash Kotwani is the sole owner of stock of DigiTeck Solutions which is a S corp. and since owner works part-time on this business, company would not consider employment of any sort in the near future. But based on the growth/ performance assessment of the company after one year, a decision would be taken whether to start hiring employees or not. (xii) Payroll Taxes: NA (xiii) Benefits: NA (xiv) Pre-opening advertising: Estimated at $2000 for free T-shirts, sposoring a community event to publicize the company. First Years Advertisement Expenditure was estimated as $9,200 (xv) Printing (cards, stationery and brochures): estimates the total charge to be around $500 for printing banners and brochures at pre-start-up stage. (xvi) Sales Tax Permit: As the information from the source mentions there are no sales taxes permit fees for retailers. Source: http://www.revenue.state.il.us/publications/pubs/pub-113.pdf (xvii) Other Start-up Expenses: Company has allotted about $1000 for miscellaneous start-up expenses. (xviii) Opening Inventory: Since the business would be slow in the beginning and would take some months to develop the good client relationship, company believes an investment of about $27,250 for buying 1000 units as initial inventory. Capital Expenditures (i) Computer Equipment: company intend to buy a laptop costing around $1000 which could serve well during traveling and also for accounting purposes. Source: http://www.dell.com/content/products/compare.aspx/inspn_lo?c=us&cs=04&l=en&s=bsd (ii) Equipment/Machinery: Printer and fax machine other scanning instruments (2 in1 machine)- $1000 Source: http://www.amazon.com/Fax-Machines-Office- Electronics/b?ie=UTF8&node=172582 http://www.dell.com/content/products/compare.aspx/colorlaser?c=us&cs=04&l=en&s=bs d (iii) Furniture & Fixtures: An office table, chair and accompanying couch for visitors for $1500. Source: http://www.staples.com/webapp/wcs/stores/servlet/StaplesProductDisplay?ts=116389976 1643&storeId=10001&productId=155203&catalogId=10051&langId=- 1&cmArea=FEATURED:SC2:CG33 http://www.furniture.com/common/product/ProductInfo.aspx?itemid=143128&ChildId=1 39608&xs=593c5b8c651-8021-4730-b98a-c8a72d23a13b (iv) Vehicles: company intends to buy a second hand BMW car which would serve as an office vehicle. This would cost about $5,000. Source: http://motors.listings.ebay.com/Cars- Trucks_BMW_W0QQfromZR4QQsacatZ6006QQsocmdZListingItemList (v) Leasehold Improvements: Company does not intend to improve any lease holding. We intend to use home aparment as office as well as warehouse. Depending on the profitability of the business, decision will be taken later whether to move into a bigger warehouse or not. Also, effort is made to find the warehouses which lease out yearly rather than long term leases. (vi) Buildings: Company does not intend to buy or lease any building for at least first 3-5 years of operation or till the net profits reach 3MM which ever is earlier. (vii) Land: Similar to above, we do not intend to buy or lease any land. Operational Plan For proper execution of daily operations of Company, it was determined to maintain the following percentage of sales to customers paying cash and the rest of the sales are made to the customers on credit. These percentages would be useful in order to attract more customers who typically need the goods for credit. And we intend to collect the credit sales within 3months to make sure that company is running on healthy cash flows. Also, Year 1 Year 2 Year 3 Percent Cash Sales 40% 50% 60% Percent Credit Sales 60% 50% 40% Company estimates that 0.5% would run into bad debts. Also, we expect that about 3% of the products are returned back into the inventory and resold. Sales Assumptions First, let us assume that company starts its operations from January 2007. The following are the major assumptions made for forecasting the sales. 1. Assumed very small sales in first two months of start of business. 2. The publicity and advertising for the company started at least one month before the opening of the company in January, 2007. This means that Company registers sales from the first month of operation itself. 3. The sales increase slowly in the first 6 months as it takes time to develop the customer confidence. So, the inventory required would be less initially. 4. The sales are expected to increase at 20% each year. 5. The sales tend to stagnate a bit in the summer June and July and will catch up slowly in August. 6. Sales increases at the start of holiday season in November And finally it would peak in December 7. Sales price is brought down when sales decreases. Discount of 5% during holiday seasons in the month of November and December. 8. Inventory is bought when the cost of product are the cheapest. The gross profit margin would be maintained at 40%. 9. Since the present market price of the bluetooth head set is about $60.00, we would try to make an introductory offer starting at $45.99. Assuming Low prices as weapon to enter in market. MP3 Player with flash drive will work as motive to attract customers. 10. The growth rate would be slow in the first year and would pick up by the end of third year. 11. Company estimates that 0.5% would run into bad debts. Also, we expect that about 3% of the products are returned back into the inventory and resold . Monthly Sales Revenue 35,042 30,042 25,042 Sales $ 20,042 15,042 10,042 5,042 42 0 5 10 15 year 2007 MonthYear 2009 Year 2008 Above graph shows variation of monthly sales revenues for three years.The following graph shows the variation in the sales price of headset with time. For simplicity of analysis, it will be assumed that the seasonal variation in price of the flash drive is the same for all the three years. Monthly Avg. Sales Price Variation 47 46.5 46 45.5 Unit Price $ 45 44.5 44 43.5 43 42.5 42 0 2 4 6 8 10 12 14 Month Inventory Assumptions 1. Initial Inventory bought before Start-up business is bought on Cash. As the relationship develops with supplier, he agrees to provide 2 months credit on 60 % of total payment and rest 40% on cash. 2. Inventory is ordered in summer or off-season times as the manufacturing cost would be less. 3. Inventory Purchase cost includes all costs mentioned in following table. Hence other production costs are kept zero. Sr.no Expenditure Type Amount (USD) 1 Cost of basic single headset 24.9 2 Insurance expense while in courier 0.1 3 Cost of custom graphic design on unit 0.1 4 Quality Control expense per unit 0.5 5 Courier charge Seaport from Shenzhen to New York 0.3 6 Customs and Taxes per unit 1.1 7 Courier from Seaport to office 0.25 Total 27.25 4. Less amount of inventory is ordered for about four five times a year. This is because costs of headset keep fluctuating due to several reasons. Not to block large amount of cash in inventory as there value cost associated with money. 5. The inventory projections would increase slowly from the first year to the third year as the business picks up momentum. 6. Repairs and Maintenance cost includes cost of custom graphic design on unit and cost for quality control =0.1+0.5=0.6 cents per unit . 7. Freight in Total charges = 0.3+0.25 = 0.55 cents per unit 8. Customs and Total Taxes add up to $1.1 per unit. These expense are mentioned into other production expense item section VIII. Financial Statements (Click this link for all Financial Statements) IX. Ratio Analysis, NPV and Value addition, Future Growth Plans Values of different Profitability Ratios obtained from Financial Project Template Ratio 2007 2008 2009 Operating Margin 11.50% 23.42% 29.47% Net Margin 10.51% 23.30% 29.47% Return on Assets (ROA) 26.13% 52.25% 53.19% Return on Equity (ROE) 34.80% 57.00% 57.52% Above ratios Shows Company is posing decent Net Margin of 10.51% in first year its and increasing to 29.47% in 2009. ROA and ROE are also improving year by year. These numbers point to healthy start-up which poses decent growth in coming years. Present Value analysis: Expected Net Income 2007 before taxes= 18,404 Expected Net Income 2008 before taxes = 50,161 Expected Net Income 2009 before taxes = 84,733 Present Value of Future cash flows = 18404/(1+0.7) + (50161/1+0.7)2 + 84733/(1+0.7)3 = 17200+43812.56+69167 = 130,179 USD Present value = 130,179 USD (Here discount rate of 7% was assumed). This is consistent with the information found from balance sheet where Total Equity of company is growing from $52,8883 at the end 2007 to $147,309 at the end of 2009. We are getting decent number for present value of future cash flows. We can assume the same as Net Present Value of this business project as Net Income already takes into account the initial investment. Also it was assumed that company will continue to sell same and one product with increasing annual growth rate of 20%. As company is settled and shows growth rates, company can diversify into various other product lines. So in actual net profit posed by company will be more than the ones we have estimated in this analysis. Based on above analysis following Future Growth Plans are suggested 1.Company should diversify in other electronic product lines from the start of second year to show excellent growth in profit rates. 2.Company can seek loans to fulfill goal of investing in other product lines this will also ensure companies liquidity. 3. For first year company was run from home apartment, it can start its business from its own office premise from second year and can invest in real estate at the end of third year. DigiTeck Solutions can also consider option of its own retail outlets at couple of places in Business Areas. 4. In future course of action, company can think of horizontal and vertical integration. E.g it can assemble product by purchasing raw materials from various other companies. E.g. it can purchase display from one company, flash memory from other company and headset speakers from third and get it assembled by fourth company all in China. 5. Targeting different market locations and distributing warehouses in those areas will cut down the transport cost and provide fast access to markets remotely located.
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