- Complex value proposition: one-stop, high-quality dog care product /dog care enrivonment and resources – the best; unique combination of dog hotel with a shop, medical care and vet pharmacy that are sold both on-site and online/;
- Innovation through new market oferrings (grooming and dog-related entertainment since Y2);
- Constant enrichment and expansion of the the service line (i.e. swimming pool oferring since Y2, vet pharmacy introduced in Y3). Contrary to other market participants, our PM team is tighly focused on continuous development;
- Superior product quality based on customer service, flexibility and upscale environment with conference facility with camers, swimming pool etc.
COMPETENCES
Core competences
In order to complete our strategy development, we list below the entity’s core competences (Kaplan and Norton, 2008):
Ability to grow: phased-out implementation (see section 7.6.).
Ability to adapt: three-stage growing model, which incorporates the main and auxiliary services. Amont the main adaptivity traits, we consider flexibility (transportation to and from the hotel) and on-the-spot merchandising delivery. Further, the PM team claims that the business is able to adapt to the emerging trends (see section 7.2.).
Powerful network: strategic partnership with vet cliniques (phase 1) and with a delivery company (phase 2).
Distinctive competences
A distinctive competence is a competitively valuable activity that a company performs better than its rivals and signifies even greater proficiency than a core competence (Thompson et al., 2008).
STRATEGIC AND FINANCIAL OBJECTIVES
The second element of the management system is translation of strategy into specific objectives (Kaplan and Norton, 2008). Borrowed from Thompson (2008), objectives setting process plays an important role in crafting and executing strategies, as it converts the PM vision into real performance targets. We approach the objectives from competitive edge perspective, trying to underscore the differentiated positioning.
Strategic objectives
Strategic objectives are those targeted outcomes that indicate company strengthens its market share, competitive vitality and its future business prospects.
Capacity utilization: Less than 1% of pet owners currently use dog kennels. In this respect, our target market share level translates into a leading figure of the annual utilization rate, which underpins our optimistic scenario. The capacity utilizations will be considerd success for the following three years: Y1 – 35.8%, Y2 – 47.3% and Y3 - 51.3%. This represents a net result of Y1- EUR (-12 964), Y2 – EUR 17 990 and Y3 - EUR 32 885.
Achieving maximum customer satisfaction. We aim at long-term, loyal customers.
Outcompeting the quality of rivals: The uniqueness of the layout and the expected expansion in capacity, creates opportunities for economies of scale, which together with the evolution of the learning curve effects, will reduce the relative price, compared to the quality of the service offered. We will measure this strategic objective by the number of new clients.
Attracting first-time users: Our main target is to promote the service to a fisrt-time users and to retain them.
Constant service expansion: The aim of maintaining a creative environment with constant service enrichment is a prerequisite for business growth. This will strengthen our company’s brand name appeal.
Financial objectives
To achieve our financial objectives, AMIGOS seek a combination of medium-term commercial loan and PM funding (App. 18). These external funding will be used to cover the initial investment costs (App. 21). Based on the strategic objectives, we target the following financial goals:
- Steady increase of annual sales at min. 35% p.a. (App. 2)
- Keep the gross margin on services higher then 82% (App.12)
- Minimum capacity utilization of 43% at end-Y3 (App. 6)
- No debt leverage by Y3 (App. 17)
MARKET SEGMENT, GENERIC AND COMPETITIVE GROWTH STRATEGIES
Marketing research
As advised by Carson and Coviello (1996), we based our information gathering on the following pool of formal and informal methods for data collection:
- Informal interviews with dog owners;
- Discussions with members of professional societies (i.e. breed-based clubs);
- Market observations (i.e. visits to existing dog hotels);
- Advisory services ensured by a an external part-time consultant;
- Follow-up of a specialized press (publications, press releases, advertisements, web pages, competitors’ sites and best worldwide practice).
Marketing trends
Increasing number of people raise pets: Pet owners are increasingly treating their pets with more and more care. Hence, customers are more knowledgeable and demanding about the living conditions for their dogs and willing to pay price premium to have their pets cared in a mirror-home surrounding. Therefore, the suppliers subsribe for relationship marketing in order to attain market share (Brodie et al., 1997) and develop strategic partnerships with vet cliniques.
Customers are increasingly focused on quality rather than price: This means that ninche players with upscale products are welcome. Moreover, it reveals substantial profit opportuities that would inevitably call for stronger rivalry amongst the service suppliers and invite new market entrants.
Tendency to work longer and travel more frequently: As a direct implication of the globalized contemporary society and increased worldwide business competition, there is a need to have pets cared for over long periods of time while their owners are away. In response, the majority of existing dog care businesses develop loyalty programmes to encourage repeat purchases.
Lack of specific market target: Although we observe monopolistic competition, the particupants actually play for the whole market segment (mass marketing).
Low use of technology: The majority of suppliers suppliers perform all the functions in their business model manually. The use of technology is highly limited in operations and marketing sense.
Market segment
Market segmentation: AMIGOS pursue a niche marketing strategy that is focused on a specific subgroup of above-average income dog owners. This narrow segment is estimated to be 3% of dog owers in Sofia (150.000), which means 4.500 customers. Taking into account maximum capacity (35 to 45 dog houses from Y1 to Y3), our aim is to go for 1% of the potential clients. Currently, there is no particular competitor in this market ninche, as all market participants target the whole market of dog owners with no speciflized offering. We claim that our differentiation approach meet the requirements for effective segmentation, as the segmented market is clearly measureable in size and profile, accessible, large enough, differentiable and actionable.
We based our consumer market segmentation on the following variables:
- Geographic (the population of Sofia district is appr. 2 MN, 150.000 dog owners);
- Demographic (families/singles above 30 years old with above-average income);
- Psychographic (frequent travelers);
- Bihavioral – grounded on the following factors:
- Knowledge: owners are increasingly demanding about the living conditions for their pets;
- Attitude: pet-loving;
- Benefit sought – convenience and satisfaction of taking care for their pets;
- Readiness for usage;
- Occasions – weekends, vacations, national holidays and business trips.
Market targeting: As target market we aim at particular sub-set of the dog owners that belong to above-average income bracket. Hence, we adopt a concentrated marketing coverage strategy. Thus, we would focus on urban professionals and wealthy individuals. Regarding dogs per se, we target registered, vaccinated, not aggressive pets, older than 6 months. An obligatory condition for the dog is to be in good health that will be proven by medical examination before entering the hotel.
Market positioning
In order to best utilize its competitive advantage and to benefit from the emerging market trends, AMIGOSt decides to promote the following distinctive business traits:
- Complex value proposition (one-stop, high-quality product);
We choose particular these two business characteristics, as they are important for the customers, superior compared to the competition offerings, communicable to the clients and profitable. Our overall positioning strategy is to offer more value for the same price.
Detailed business model implementation
The third element of the management system is strategy implementation, which links strategy with operations through various tools throughout the business cycle (Kaplan and Norton, 2008). Here, we include resource planning (see Operations section), sales plan (see Marketing section), and budgeting (see Finance section).
The activity of dog hotel AMIGOS will be developed on three stages as each one of the stages, as stated in the business model. In the second and third year the number of the offered activities and services will rise, aiming at a complex oferring (Shine et al., 2007)
How to grow the business: By offering higher quality to the potential clients when in the same time keeping our price rates. It is necessary to constantly try to get to know the specific requirements of the clients, their needs and desires. In order to improve decision making process and rise red flags about important competitors’ actions, we ensisage to create a marketing Information System that would comprise two main marketing tools for information gathering: market intelligence through company’s employess and the overall supply chain network, as well as an internal database that would keep all the records for business users.
How to please customers: By providing more than expected. In particular, we aim to reach our potential clients through precise targeting, active advertising campaign and positive image.
How to outcompete rivals: In a situation of rising competition in the market, it is vital to know well your competitors - their strengths, weaknesses, capabilities, customer base, revenues, profit margins growing, promotional and marketing strategies, current offerings and their future goals. All this information will allow us to review strategic and tactical moves, according to key characteristics and actions of their competitors. According to Porter (1985), there are two types of competitive advantage: cost advantage and competitive advantage and from the state of competition in the market depends on our choice of which company to choose the right path.
How to respond to changing market conditions: Through the timely preparation of makro-analysis and careful monitoring of factors suggesting a change in the political-legal, economical, socio-cultural and technological environments.
How to manage each functional piece of the business (R&D, production, marketing, HR, finance, and so on): By systematic process review and improvement, implementation of new techniques and systems to lift up functional units’ performance.
How to achieve targeted levels of performance: Through systematic review and update of company’s strategic maps.
Generic Strategies
As AMIGOS would service clients in the region of Sofia, we pursue a Focused Differentiation Strategy. This leads to higher levels of customer satisfaction, which is a serious competitive edge and guarantees a successful business development. With this strategy, we make sure that there are plenty of customers who have different desires, i.e. that there is a valid basis for differentiation. Focused Differentiation Strategy is suitable for small niche markets with high growth potential, as is the market of dog hotels in the town of Sofia. If the segment is profitable, for a short while competition will increase significantly. This shows that the management of dog hotel AMIGOS should be very flexible and should closely monitor the reactions of other firms in the industry. Moreover, for the success of the chosen strategy is an important endeavor for the company to be more innovative, to be more efficient.
Growth Strategies
The forth element of management system is continuous review of operations and strategy based on performance results (Kaplan and Norton, 2008).
Basically, as a new market entrant, dog hotel AMIGOS adopts a Developing Growth strategies for market penetration.
Figure 10: Developing growth strategies
Source: Adapted from Ansoff Matrix (1965)
According to Ansoff (1957) Market penetration is an effort to increase company sales without departing from an original product-market strategy. The company seeks to improve business performance either by increasing the volume of sales to its present customers or by finding new customers for present products. Kotler (2008) also explains that Market Penetration is a strategy for company growth by increasing sales of current products to current market segments.
As stated by Ansoff (1957), the growth strategy includes the pursuit of the management to convince the existing clients to use more often the offered services, to try to attract clients of the rivalry or to try to convince the not-using to buy the service. According to Richardson and Evans (2007), in this case, there will be an emphasis on competitive pricing through loyalty schemes and more effective use of marketing communication.
Market penetration strategy includes the following major management tasks:
- Maintain or increase the market share of current products – this can be achieved by a mix of competitive pricing strategies, advertising and sales promotion;
- Restructure a mature market by driving out competitors; this would require a much more aggressive promotional campaign, supported by a pricing strategy;
- Increased usage by existing customers (i.e. by introducing loyalty schemes).
The AMIGOS Strategy includes penetration the market using the three-phased implementation plan, as follows:
Figure 11: Growh plan
MARKETING
The major milestone of the operations planning, the third element of management system, is translation of strategic objectives into specific marketing plan (Kaplan and Norton, 2008).
Overall, we try to develop the concept of relationship marketing in the service business. Hence, we perceive the client-supplier relationship as the main marketing pillar, based on trust and personal interaction (Gronroos, 1994).
To Influence on rate of adoption, we pay close attention to four product traits: competitiveness; complexity; divisibility and communicability. We ascertain that our product can be easily tried on a limited basis, has disctinct competitive edge, is easy-to-try, explan, understand, and can be quickly observed for results. Hence, we assert that AMIGOS has all grounds to expect strong influence on adoption rate.
Main marketing aims
Our marketing aims are to create a strong brand through active campaigning, to establish references, which is critical for a start-up business, and to make popular the human notion of taking care about the pets.
Brand name: the PM team choose AMIGOS as a brand name as to underscope the important social value of the whole enterprise. Consistent with the market trend, we would to acknowledge the close relationship between the pet owners and their dogs, as well as to communicate our aim of creating the pet-friendly and home-mirroing environment. Besides, it is a private brand that is created and owned by the PM team.
Slogan: Our slogan “AMIGOS – Happy Barks” is effective and easy to remember.
Marketing Strategy
Being a service retailer, our marketing strategy is customer satisfaction that would be achieved through a wide spectrum of marketing tools (product line expansion, promotion, e-marketing, public relations etc.), which are enumerated in the 7Ps analysis below. In a nutshell, our marketing statement is to capture the target market through direct marketing
Marketing strategy statement: We aim at people with above-average income that would be attracted to our product due to its complex value proposition, constant service enrichment and superior quality. Our profit goals are to reach a positive bottom-line by the end of Y2 and to gain min. 16.5% net profit margin by Y3. We envisage a constant annual up-scale re-pricing (from EUR 9 to EUR 11) of the main product line (dog hotel business), which is consistent with the market development. Besides, the PM relies mainly on direct service distribution. The marketing budget allotment stands at EUR 6.600 for Y1 and 3.000 p.a. for Y2 and Y3.
Commercialization: the products will be launched at end-M2, after the completion of the complex. The promotion area is Sofia and we opt for a one-shot rollout plan.
Seven Ps of service business’ marketing mix
Product
Our brand strategy is to use AMIGOS as to introduce additional items in a given product category under the same brand. Thus, aligned with the growth strategy, we would gradually extend the brand from the main product line (dog care) to supplementary activities, as follows:
Figure 12
In tune with our strategic objectives, the main focus is to emphasize on customer service, and to build a relationship-based enterprise. To provide the latter, we rely on service reliability, convenience, speed of delivery, quality consistency and constant innovation. Our main aim is to create a memorable experience and distinctive image.
Product levels:
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The core product: It is a shopping-type product, which is less frequently purchased and customers are wiling to compare it carefully on quality, style and price, as well as ready to spend a buying effort. Hence, we would create value through promotion of a problem-solving benefit (providing a dog care while the dog owners are away). Morever, we would underline the emotional connection that is based on customers’ satisfaction (dog owners are at ease while traveling or spending their time away from their pets).
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Actual product: As long as the service business is highly dependant on the service design (Frei, 2008), we pay particular attention to superior quality, convenient location, trained staff and 24/7 vet service as the main product features.
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Augmented product: In the form of additional benefits, we would offer online-based reservation system, transport from a to the hotel, transportation for the training courses, medical check-ups etc.
Price
With average market price of 8 EUR, AMIGOS are priced at the upper edge of the spectrum (EUR 9-11), where product quality and image support the higher unit price. Hence, the pricing strategy for the main business line (dog hotel) is market-skimming. Price is defined as based on molopolistic competition type of market, market information. In particular, the pricing strategy sets a price floor, based on a breakeven point, and a price ceiling, grounded on customer perceptions of the product value.
For the main business line (dog hotel), the pricing varies with the PLC. Therefore, we adopt a step-by-step increase throughout the years, starting from EUR 9 for Y1 (introduction stage) to EUR 10 in Y2 (growth stage) and EUR 11 in Y3. Moreover, we adopt the captive product pricing for products that are used along with a main product, such as transportation for the hotel, medical checks for all hotel residents etc. Besides, we offer additional discount for 3 and 5 days offered packages.
For some services (i.e. grooming and trimming for hotel residents) we adopt product-bundle pricing, offering a combination of several products (grooming, triminning and hotel care) at a reduced pricing since Y2. In this case, the cost is covered by the marketing budget.
Our competitive advantage will be high quality of service at the good price and offering additional products and services as: trainings for dogs and owners, pet`s food and accessories, medical and transportation services.
Place
Channels: It’s a B2C service with direct marketing channels and indirect distribution through online marketing. In addition, special blog, as a from of discussion forum, in the web site will take feedback from the first adopters and will answering of their FAQs. Taking into account the higher-than-EU average Internet penetration ratio for Bulgaria, we claim that this channel would be efficient. In general, though, we subscrube for the disintermetiation conpect as the main distribution channel in order to avoid delays.
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Direct marketing tools: AMIGOS would use outbound telemarketing (calls to potential customers) and direct-mail marketing through e-mails and letters to all registered pet owners in Sofia.
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E-marketing: The PM team is planning to exploit online advertising through banners in most pet’s websites, online promotions via games, web can video and clips, as well as links with internet communities.
Marketing data sources: the PM team would gradually build a customer mailing list (a set of names, phone numbers and addresses), as well as a customer database to profile customers in terms of past purchases, personal information etc. The database could be used for campaing management, loyalty programmes, etc.
Location: AMIGOS would take a significant marketing advantage of its convenient location - in the village of Bojurishte, only 3 km away from Sofia in the west direction. The area has a mild climate and is declared environmentally clean, which makes it attractive for dog hotel business. At the same time, the property has to be relatively close to dog owners, providing easy access. The village of Bojurishte offers all these advantages, being closely located to some of the largest condominium areas of Sofia, and having both bus and train routes getting to it. Also, the village is fully gasified and renting real estates there is relatively inexpensive compared to the southern and eastern areas of Sofia. Further, there are no other dog hotels close to the western parts of Sofia within a vast area around Bojurishte.
Promotion
Our promotion strategy is consisten with the PLC. We launch the products in the introduction stage, spending heavily on promotion, and envisage slow growth in sales and capacity utilization. In the growth stage (Y2-Y3), we present to the market our extended products offerings and expect the sales to start climbing quickly, resulting in a positive net profit. Promotion costs are spread over larger volume and decreasing. Apart from various concessions, some promotional items would be used as collars and coffee mugs with AMIGOS’s lofo imprinted. Overall, we adopt a pull strategy – a promotion approach that reqiores high spending on advertising and promotion to build up consumer demand, which pulls the product through the channels.
Our 3-year marketing budget (EUR 14.000) is set on percentage-of-sales method and is allocated for advertising and promotions as to establish strong brand awareness and to attract clients. The main expenditures are allotted in the opening months.
Figure 13 Marketing budget by category
The advertising campaign covers various BTL and ATL channels of communication.
Figure 14 Advertising campaign by months
Advertising channels:
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BTL promotions: leaflets, brochures, catalogs, price lists with special offers etc. Our target POS will be all pets shops, schools, kinder gardens, veterinary clinics, pharmacie, beauty saloons, and glosely stores. Further, we design promotional packages (i.e. a 3-day package – 5% discount and a 5-day package – 10% discount with transport included). Moreover, with special events, organized in the parks, we will demonstrate to our prospective clients our social responsibility.
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ATL promotions: radio, magazines, blog and Internet banners. Here, the main goal is to communicate clearly our marketing message.
Furthermore, we would use a combination of personal and non-personal communication channels. The former would emphasize on direct communication with the prospective cliend via phone calls, e-mail, Internet, word-of-mouth influence and opinion leaders. In contrast, non-personal channels would carry messages through specific atmosphere and event marketing tools. For the latter, we would on celebrity endorsers and on credible information transmitters (i.e. vets, pharmacists etc).
Promotional marketing tools: advertising.
- Advertising in the professional press, TV, newspapers, radio, Internet, outdoor.
Media selection is based on audience relevance and attention, editorial quality, cost and timing.
- Distribution of brochures, leaflets, flyers and business cards.
- Online marketing through our commercial website, created by “Glide design” Ltd.
- Online B2C electronic commerce
Our aim is to develop a “click stream tracking tool” (Laudon and Laudon, 2006, p. 121) in order to collect data about our customer by asking them to “register” prior buying.
We plan to use a celebrity (i.e. popular singers, sportman etc.) to promote the product.
The PM goal is to conclude an agreements with vet clinique (vertical integration), as an illustration of a network marketing (Johnston and Lawrence, 1988). Here, we intent to to gain a larger market share thorugh resources exchange with the partnering firm.
AMIGOS will be offering on spot and online consultancy on dog-related topics (i.e. health, care, reproduction, buying etc.). The advice will be provided by our vet, supervisors and the professional consultant. On-line discussions will also be held.
Promotional marketing tools: PR.
- Contacts with the media representatives to popularize business experience
- Free demonstrations of dog care in the hotel and in the district park areas.
- Entertainment event in the district park areas (i.e. on Sunday, every fothnight, under the patronage of the district major)
- Visits by the city kindergardens to the dog hotel complex in order to popularize the product, as well as to reduce childrens’ aggression and to nurture love and affection to the hosted animals. The transportation will be provided by AMIGOS.
Promotional marketing tools: sales promotions.
- Accomodation promotional packages selling with 5% and 10% discount based on longer stay in the hotel.
- Promotional package for longer stay: dogs that stay at the hotel for a month is oferred a free training class.
- Price concessions for online purchase above EUR 200.
- Concessions for loyal customers for off-peak season (a frequent client program).
- Discount for a second pet of the already known customer (a loyalty program).
- Loyalty club cards for collecting scores.
- Free events (i.e. birthdays in the hotel complex for Y2; paid since Y2).
- Advertising specialty: useful articles, calendars, collars and pens with an advertiser's name, given as a gift.
- Promotional events (i.e. park gatherings) that give consumers the chance to win coffee mugs, buiskits etc.
- Bonuses: the price includes a free medical check and disinfestations for all hotel residends.
People
According to Frei (2008) companies often live or die on the quality of their workforce but this is even more the case in the service businesses, which are typically more people intensive. Therefore, we aim at hiring and training better people than competitors do. Consequently, our main goal is to attract high-skilled professionals that would ensure service quality and would simulated post-purchase behavior. Thus, we would reduce both cognitive dissonance and service variability. In order to manage service productivity, we design a training system and create continious training environment. Besides, to guarantee quality, the PM team would watch the performance closely and on a regular basis. Further, the workforce motivation would be stimulated by annual pay rise, grounded on performance assessment and 360-degree feedback. More details are presented in the Operations section.
Processes
The process of customer satisfaction is based on high quality of our services. The PM team implements a processes cycle delivering system in the developed CRM module. Further information is presented in the Operations section.
Phisical evidence
Here, we consider the importance of physical environment and service positioning. Foremost, our service is positioned in the upper-market segment with very comfortable environment for dogs living.In addition, the environment is not only ecologically-friendly and pet-friendly, but also provides a close resemblance to the animal’s home area. For more information, explore the Operations section.
OPERATIONS
According to Kaplan and Norton (2008) the successful strategy execution requires translating strategy into operational actions and, more specifically, conversion of strategic objectives into particular business processes.
Project Start Up
Prior to starting the actual operations we will have to set up a commercial company, carry out construction and repairs and obtain a license for the business with the Sofia Regional Veterinarian Service. The transforming resources (staff, equipment and supplies) will have to be ensured. A complete list of pre-start up activities, their timing and co-relation is presented in a Gantt Chart, as follows:
Figure 15
The Gantt Chart is an effective visual tool for planning and monitoring project implementation (Basu, 2009) and will help us to carry out all necessary activities in a timely manner.
We expect that we will meet our first customers within two months after making the decision to go ahead with the business.
Hotel design and equipment.
Property
To minimize the risk at start-up it was agreed to run AMIGOS dog hotel project on a rented property.
The chosen real estate is situated just before the entrance of the village of Bojurishe, with the nearest houses - more than 600 meters away from it in compliance with the statutory requirements for hygiene protection zones. The estate consists of approximately 2 ½ decars of land and a non-furnished building of 150 square meters. The property is fully fenced with a massive fence.
AMIGOS will enter into five-year rental agreement with an option for three-year extension.
Principal Design Concept
AMIGOS hotel complex will accommodate its dog customers into separate doghouses and offer them sufficient opportunity to walk and play outdoors into both the doghouse open area and in the large playground areas adjacent to the doghouses.
The concept of dog houses as opposed to dog crates was developed after visiting three dog hotels in Sofia, careful consideration of professional advice and dog owners’ opinion, thorough study of web-sites of many dog hotels worldwide and several brainstorming sessions during which PM team members embraced the confusion and contradictory thoughts as real strategic thinkers (Keelin and Arnold, 2002).
The individual doghouses concept was considered to be the only way to provide customers with upscale service, thus inducing superior customer satisfaction.
Facility Layout
When deciding on the detailed design of the hotel complex, PM team primary consideration was to make it fully compliant with the detailed requirements of the recently adopted, effective 1st July 2009, Regulation on the requirements for facilities, where pets are boarded, bred or offered for sale.
AMIGOS hotel complex was designed to have a functional layout, conforming to the needs and convenience of the functions performed by the transforming resources, which constitute the processes (Slack, et al., 2007, p.189). Similar resources will be located together to improve their utilization, thus contributing to the overall efficiency.
When elaborating on the facility design some valuable recommendations, given by Wye (2009) and at eHow (2009) and MySmallBiz (2009), were used.
Dog Area
The dog area of AMIGOS hotel complex will initially include twenty-eight individual doghouses, and seven playgrounds, situated as shown on the dog area layout (App. 23).
The doghouses will differ in size and colour and will be grouped into three zones. The Yellow Zone comprises the smallest five square meters houses - for the hotel smallest guests. Houses in the Red Zone are big six square meters and are for the mid-size dog customers. Large-size occupants will be accommodated into the Blue Zone houses, each of which is seven square meters big.
The rented real estate is large enough to allow building additional doghouses in each zone as the business expands.
Each zone of doghouses has two big playgrounds, adjacent to it. Moreover, there is another, bigger playground, for fun and training activities. The play areas will be covered with grass, equipped with variety of fun facilities and surrounded with mesh-type light fence. Right next to the big training yard there is a free space, where AMIGOS plan to build a swimming pool at the beginning of Y2.
Two service rooms with showers for washing dogs’ paws after playtime, will be built at both sides of the middle lot of houses (the Red Zone).
Every doghouse will have big covered area and small open area, where the dog can stay, rest and roam in an open air. The houses will be constructed from isolation-panels, with hard plastic wood-resembling lining, ceramic tiles on the floor in the covered area and polished concrete in the open space. The materials were specifically chosen following the recommendation of Wye (2009) to keep the occupants cool in the summer and warm in the winter, to be resistant to scratching, biting, food and drink spillage and allow easy cleaning. Each house will has autonomous sewerage system facilitating proper sanitation, gas heating, electricity and sufficient natural lighting, which is critical for dogs health. The doghouse outlook is presented in (App. 24)
The total area of the doghouses is approximately 180 square meters and of the seven playgrounds - about one decar.
Administrative Building
The existing administrative building, located on the rented property, will be refurbished as to fit to the business needs.
A reception will be placed in the large lobby. The existing four rooms will be subdivided by light walls into smaller rooms to make:
- Vet’s room,
- Room for isolation of sick dogs;
- Bath and grooming room;
- Service rooms for staff: toilet, bathroom, restroom, kitchen
- Small shop;
- Storage area;
- Archive room;
- Disinfecting room;
- Kitchen.
The administrative building interior layout is shown in Appendix 25.
Equipment
The following equipment will be required at the business start-up:
All the equipment required for the service performance will be of excellent quality and long-lasting materials.
Process Design
Service Lines Process Description
Dog-Care
24/7 hotel dog-care is our core and distinctive competence.
Our canine guests will be cared for with love and attention and their daily regime will be as follows:
Upon owners request the dog can be fed more than twice a day, let out on specific hours or provided some special care. If the dog is on particular diet, the owners can bring the special food or ask AMIGOS to provide it.
In addition to the hotel dog-care, upon request, AMIGOS will be providing hourly in-home dog-care. This will include feeding, watering and walking the dog out for up to 3 hours per day. Initially this service will be available to the loyal customers only, but as the business develops, the in-home dog-care will be offered to broader range of customers. We will put a particular emphasis on this type of dog-care during the periods of lower demand for the hotel dog-care.
Behaviour Training
AMIGOS will offer two types of dog behaviour training - for beginners and for advanced learners. The training courses will include basic obedience commands and will be developed using the experience of leading trainers worldwide.
A standard training course will take a month. Dogs will be trained by professional training instructor in groups and in periods of weak demand - individually. Groups will include maximum four dogs. Group classes will take two hours, while individual classes will be one hour. Maximum training time per day for each dog will be two hours.
In order the dog-training to be efficient, four hours of handover lessons have to be given to the dog-owner to help him understand the process, learn to issue the commands and allow the dog to get used hearing the commands from its owner. Pet-owners will be trained at weekend-based sessions.
With the training becoming known to customers and gaining popularity, AMIGOS plan to expand the service in Y3 by training up to four groups of four pets each per month in average.
Grooming
Grooming includes brushing, bathing, toenail clipping, ear and eye care (Vito, 2008).
AMIGOS will offer grooming services on-site upon customer’s specific request. Grooming will be provided as part of the regular dog-care service to all occupants, who stay at the hotel longer than a week. The business will seek to expand with offering grooming in-home of our customers as of Y2.
Vet Services
Vet services will be provided by AMIGOS veterinarian and in Y1 will include medical check-ups of dog customers upon their arrival at the hotel and basic veterinarian care for the occupants during their stay with us. Operations and hospitalization will be outsourced to an external vet clinic.
Once customers get to know us, they may chose to refer to our vet for additional medical check-ups, vaccination, disinfestation, and other non-emergency manipulations.
In addition, the vet will be helping our customers to “talk” to their dog on a video-conference facility set in his cabinet.
Retail Sales
AMIGOS will trade with dog food, equipment, accessories, toys and books in a small shop on site and through an on-line catalogue shopping. Thus, we will offer our customers the convenience to buy goods that they most often need for their canine companions, and also the opportunity to learn about new products and receive a professional advice related to product characteristics and use. AMIGOS will not keep large stocks in the shop, but will be able to ensure delivery of any ordered goods within maximum 48 hours. The delivery will be through a courier at customer’s cost.
To sell dog products AMIGOS will enter into sales contracts with local producers or local representatives of world leading dog-product producers.
We plan to expand the sales activities by adding new offerings such as dog-fashion in Y2 and vet pharmacy in Y3.
Entertainment
As of Y2 AMIGOS will organize for its customers dog birthday and other parties, either at the hotel training playground or at another location of customer’s choice. The service will expand with offering other types of events, such as contests, etc, in Y3.
Overall Process Design and Objectives
As all other operations, service ones transform inputs into outputs. In the case of AMIGOS the transformed resources are the dog customers, which will be provided with accommodation, care and sometimes training. The transformation process takes place with the help of transforming resources – AMIGOS personnel and facilities.
AMIGOS is a service shop as it falls between the extremes of professional service and mass customization, offering medium volumes and customization (Slack, et al., 2007).
Following the model of five basic performance objectives, as described by Slack, et al., (2007), AMIGOS process design objectives were defines as follows:
FIGURE 18
In order to reach a consensus regarding all steps in the overall process of accommodating a dog for hotel-care or training at AMIGOS and to better understand and design the process, a process flowchart was prepared, as follows:
FIGURE19
The flowchart will be used as a training aid for our staff and in the future will help to identify potential problem area for improvement (Basu, 2009, p.57).
Supplementary Activities Description
Reservation & Registration
We will strongly recommend prior reservation by phone or on-line.
AMIGOS will not take dogs that are less than six months old, not vaccinated or not disinfested and female dogs during their mating period. Upon verifications that the dog meets the admission requirements, the reservation will be confirmed and the dog-owner will be asked to sign a contract agreeing to hand over the dog to AMIGOS, committing to take it back after an agreed period of time and granting his consent for having the dog treated by a veterinarian in case of emergency when the owner cannot be reached. Further, the dog owner will be required to provide information for the dog registration file, such as dog’s name, feeding and walking schedule, any special needs and habits, other statutory defined data.
Dog passport check and dog medical check-up by the vet will be performed. Upon confirmation that dog is in good condition, it will be walked to its doghouse.
In addition to the dog’s electronic registration file, an individual card, showing dog’s name, special feeding and playing requirements, if any, will be prepared. The card will remain hung on the doghouse door until the entire service process.
Activities at End-of-Stay
At the end of the dog’s stay with AMIGOS, customers will be asked to sign a dog-collection form and fill in an exit questionnaire, answering questions about the service they received. Thus, we hope to receive valuable advice which will help us achieve greater customers’ satisfaction in the future. AMIGOS will consider any complaint or recommendation and will be proud with any positive feedback and praise. Further, our web-site will provide an on-going opportunity to customers to express their opinion or ask questions.
When asking for customers’ input, we will always have in mind that “customers only know what they have experienced, and rather that be asked for solutions they should be asked what they want the service to do for them (Ulwick, 2002).
Transportation
Upon customers’ request we can pick up their dog and bring it to the hotel or drop it off home at the end of its stay at AMIGOS. The transportation service will be provided between 8.00-10.30 a.m. and 6.00-8.30 p.m., by our driver, in a minivan, equipped with dog barrier and transportation crates.
As customers get to know us we expect more dog-owners to take advantage of our transportation service and plan to buy a second minivan in Y3.
Sanitation-clean res,
Keeping our hotel perfectly clean is a primary objective related to the quality of our service. According to Wye (2009) when it comes to dog hotels, cleanliness is godliness – the hotel reputation, revenue; every critical aspect of the company’s existence revolves around an excellent and utterly-adhered-to sanitation plan.
AMIGOS sanitation plan will include daily cleaning of each doghouse, all playgrounds, common rooms and facilities with hospital-grade sanitation materials. Dog dishes, inventory and the van will also be washed and disinfected at least once per day and, if required, even more often.
Purchasing
According to Meredith and Shafer (2007), every organization depend heavily on purchasing activities to help it achieve its supply chain strategy, where the supply chain generally refers to all activities involved in supplying end users with product or a service.
The following products and materials will be required on a regular basis to secure the normal business operation of AMIGOS:
- Dog food of two premier brands (RoyalCanine and Eucanuba) for different size dogs of main breeds - monthly purchases;
- Dog washing and bathing consumables –monthly purchases;
- Cleaning materials – weekly or monthly purchases;
- Office stationery – monthly purchases;
- Vaccination, disinfestation, and sanitary materials – monthly purchases;
- Diesel fuel – daily purchases;
- Utilities – continuous supplies.
AMIGOS do not intend to keep large inventories, because most materials, which the business needs on a regular basis, are readily available on the market, abrupt price hikes are not likely, cost of holding inventory is high and the hotel complex does not have a big storage area. We will have min-max system of inventory control, which according to Ballou (2004, p. 365) is probably the most popular of all pull inventory control procedures. We will have a supplier selection and performance measurement system based primarily on indicators such as cost, quality and dependability records and innovation capability (Slack, et al., 2007, p.408). We will also apply other main principles of successful supply chain management such as building relationship of trust with suppliers (Kirby, 2003) and establishing with them on-going communication in order to share information about the satisfaction of our staff and customers with suppliers’ products, and to obtain quality goods and materials at the right time and at best possible price. This will bring significant value to our business as “relatively small cost reductions gained in the acquisition of materials, can have a greater impact on profits than equal improvements in other cost-sales areas of the organization (Ballou, 2004, p. 447).
Technology
Information System
Accurate and timely information is critical for the successful strategy execution (Thompson, et al., 2008). According to Meredith and Shafer (2007) the information system has strategic effect on the organization’s ability to deliver value to customers as its ultimate goal is to make available to all participants in the supply chain all the information needed and at the time needed.
AMIGOS will have information system covering the following areas: customers, operations, employees and financial performance. Detailed data about the services provided and the time for performance of various activities, related to these services, will be kept. Accurate records of purchased goods and materials will be maintained. All this will help us to achieve efficient operations and cost-control. Further, the system will allow us to better manage our customers relationship.
Web-site
Having a web-site will allow us to be at any time in touch with our dog-owner customers for reservations, asking and answering questions, discussions, sale, and any other type of information related to dogs – the focus of our attention and business.
Cameras and Video-conference Facility
Four web cameras will be located at AMIGOS dog area, in particular, at the outside corners of playgrounds of Yellow and Blue house zones. Cameras will provide dog-owners with the opportunity to see their dogs playing by logging into the internet and will add value to our services by giving customers a peace of mind. Besides, it will communicate the message that AMIGOS have nothing to hide and will help persuading dog-owners to leave their beloved pets with us.
Further, AMIGOS will have a video-conference facility set in the vet’s room and will gladly offer to its customers the comfort to hear their dog barking happily and even “talk” to their canine friend.
Human Resources Management
According to Thompson, et al., (2008) another main component of successful strategy execution is building a capable organization, which includes recruiting people with the required technical or interpersonal skills, developing them in performing strategy-critical value chain activities and correctly structuring the organization and work effort by assigning the staff with the necessary decision-making authority.
Hiring and Training
“No process can be better than the people who have to make it work” (Mankins and Steele, 2000, p.5). Considering that professional dog-care does not have a long-established tradition in Bulgaria, AMIGOS will need to invest significant efforts in finding the right staff and developing its skills. PM team will look at employing an experienced supervisor and training instructor and also young people who love dogs, team-oriented, eager to learn - for the dog-care handler positions. An ongoing in-service training programme will be set for knowledge transfer from the experienced staff (supervisor and training instructor) to all other employees aiming at developing in them a comprehensive set of skills required by the business. Further, a summer apprentice programme will be organized, during which vet students will be coming on site to develop practical skills while looking after dogs and helping our staff. At the same time, the students will transfer professional knowledge to AMIGOS dog-care handlers.
For the near future, AMIGOS will aim at development of a signature experience as a way to foster “enthusiastic, committed, mission-aware employees” throughout the organization (Erickson and Gratton, 2007). This will be achieved via team-based hiring, where the current staff will vote for permanent employment of new recruits after the expiration of their trial period.
Job Design
AMIGOS staff by positions, job duties and working hours is shown in the table below:
In addition to the employees, AMIGOS will hire a consultant to provide professional advice on all business-related issues.
The number of AMIGOS staff by positions, including the consultant, without distinguishing between full and part-time employees, will be as follows:
In the pessimistic scenario of lower demand AMIGOS will not hire another part-time employee (dog-care handler) in Y2 and a second training instructor in Y3.
HR Policies
To boost employees’ motivation, AMIGOS will apply the job-enrichment model - allocating larger number of tasks to individuals, and job enlargement model – giving employees greater autonomy and control over the job (Slack et al., 2007, p. 272) as HR policy tools. As an illustration, the dog-care handles will be offered the possibility to share their job with the receptionist or to assume part-time job in the company’s shop. Thus, the employees will perform different functions which will broaden their business perspective. Regular staff meetings will be conducted to discuss operations, resolve issues and share ideas. The purpose of all these practices, will be to motivate staff, to lessen workforce turnover and to ensure substitutability of resources.
AMIGOS HR policy will provide for overtime work when this is required to cope with the varying levels of demand for the offered services. The overtime will be compensated with a time off, flexible working hours during the period of waker demand and longer paid annual leave.
Further, our HR management policy will envisage performing annual written performance appraisal of employees and providing annual pay-rise based on the results. Special programme for employee recognition will be developed.
Policies and Procedures
Instituting the right policies and procedures facilitates strategy execution (Thompson, et al., 2008). PM team will envisage developing policies and procedures related to various aspects of the operations in order to provide guidance, enforce consistency, achieve higher efficiency and better internal control. At the same time the management will be careful not to restrict creativity, deprive employees of the healthy autonomy in performing their duties, thus causing demotivation.
Continuous Improvement
As in the case with most business processes, and even more so, the new ones, AMIGOS operation processes are expected to require some corrections. To achieve operating excellence we will aim to apply the concept of continuous improvement, a strategy which calls for “endless effort for improvement, involving everyone in the organization” (Malik and YeZhuang, 2006, cited in Singh and Singh, 2009).
Deming’s Plan-Do-Check-Act cycle will be used as a tool for achieving continuous improvement as it represents a quality improvement model, consisting of a logical sequence of four repetitive steps for continuous improvement and learning (Watson, 1986, cited in Singh and Singh, 2009). After the completion of the “Plan” and “Do” stages of the cycle, during which a change, respectively a new process, have been planned and implemented, Scholtes (1992, p.5-31) suggests that questions be asked “what worked or went well, what didn’t work well, what resources, training or knowledge is needed in order to do a better job”. This is effectively the “Check” stage, during which data collection and analysis is required. After its accomplishment, the “Act” stage starts, when the main question to ask should be “How can the change be refined?” (Scholtes, 1992, p.5-47). What has been learned, will be incorporated into the next iteration of the cycle, which will then begin with a new “Plan” stage.
By applying the PDCA cycle we will be making incremental steps forward towards achieving a success.
PROJECT RISKS
We evaluated the following project risks:
Lack of role knowledge
The project is assigned to a capable Project Management (PM) Team with diversed professional background. Moreover, a qualified business consultant is hired. Thus, we aim to overcome the “lack of role knowledge” (Reich, 2007) risk.
Team selection risk
To curbe decision failure, the PM team is entitled to take important decisions and to appoint competent staff with strong incentives – team selection risk (Reich, 2007).
Insufficient funding
Our financial back-up plan envisage that each PM team would invest additional EUR 7.000 in case we are denied access to bank resources.
Project discipline threats
This risk is countered by contingency planning, close milestones and frequent implementation reviews.
Lack of budget discipline
Budget discipline requires regular costs reporting. Therefore, suppliers are selected for their expertise, commitment, and usability of their products.
People failure risks
Strong collaboration amongst project stakeholders is vital to overcome people failure.
Other possible risks
To fight with other possible project risks we ensure strong management team commitment, set clear, measurable and achievebale goals, constantly invest in business growth, and track performance on a regular basis (Oracle, 2006).
Clearly, there are purely financial risks, in additional to the ones that are mentioned above. To overcome them, we rely on thorough annual financial review.
FINANCE
The key ingredient of the operations planning, the third element of management system, is translation of strategic objectives into dynamic budgeting (Kaplan and Norton, 2008). Below, we present the fundamentals of the company’s financial strategy.
Accounting strategy
Accounting policies: The accounting framework that is used in the paper rests on conservatism as an accounting principle. Besides, we applied depreciation policy, expense vs. capitalize policy, inventory policy and other disclosures.
Depreciation policy: Company’s long-lived assets are grouped according to their expected useful life, as stated in App. 9.
Expense vs. capitalize policy: Equipment and accessories with a purchase value lower than EUR 50 is expensed in the year of acquisition. Marketing and business establishemtn costs are expensed when incurred.
Inventory accounting policy: Inventories are booked under FIFO method.
Other disclosures: Liabilities due within 12 months, following the reporting date, are considered short-term. Besides, the current portion of the long-term debt is accounted as a short-term liability as well.
Accounting format: For P&L and BS, we use standardized statements (Palepu et al., 2004). For CF, we followed the direct method and the format (Needles et al., 2006). We attach 3-year forecasted statements (App. 10), financial ratios, graphs and tables (App. 2-19), as well as common-size reports (App. 20).
Financial overview
We elaborate on three scenarios for the business development (pessimistic, realistic and optimistic), which stem from market research, professional consultant’s opinion, and general market information. The projections are grounded on 18% average deviation in capacity utilization (App. 2), However, in all cases we do not envisage less than 31.4% occupation, Y1 or more than 51.3%, Y3.
Seen from financial perspective, this is a viable business, which ensures a positive net return at end-Y2 and generates stream of dividends for Y2-Y3 under all scenarios. Further, in both realistic and optimistic hypothesis it is able to repay all the debt financing at end-Y3. The company operations are financed through lending by the PM team (EUR 10.000), bank loan (EUR 27.000 - EUR 35.000 under different scenarios) and profit reinvestment. Moreover, it is a cash-rich enterprise, which accumulates no accounts receivable. Simultaneously, due to commission-based trading, no cash is tight in inventory. Thus, the entity is able to ensure high liquidity protection, balanced gearing, and, subsequently, a stable capital structure. However, the PM decides to invest the free CF in capacity extension, and to buy food in bulk as to take a price discount. This approach not only improves P&L bottom line, but also hedges against imminent price hikes (we forecast 6% annual inflation).
Prospective analysis – Profit and Loss account.
Under all scenarios, the company sales grow at 66-75% for Y2 and 35-39% for Y3. (App. 2). It is supported by constant capacity additions, higher utilization and price hikes of the main service (dog hotel). Gradually, the net profit margin for Y2 turns positive (12%-17%) for all cases and get more stable (16.5%-19.9%) for Y3. The first two months of Y1 are set aside for construction and repairs, hence the business starts generating revenue in the third month (App. 5).
Sales structure:
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Seen from the 3-year P&L (App. 10) and income structure (App. 11), more than 89% of revenue comes from service-based activities, in particular from pet kennel (54% of total service proceeds). Here, we assume that average stay in the hotel is 7 days for boarding only and 30 days for training. The price per night in the hotel ranges from EUR 9, Y1 to EUR 11, Y3. Service receipts provides 29.6%, (P) to 33.8%, (O) of service income. We forecast gradual increase of training service use (25%, Y1; 30%, Y2; 35%, Y3) out of the total boarding residents, as we not foresee any external trainees. The price per training course for pets remains unchanged at EUR 250 per month, whilst the price for training of pet owners is fixed at EUR 50 for a session. Concessions for longer stay and frequent visitors are paid by the marketing budget. The remaining services (i.e. hotel transportation, medical checks and grooming) are negligible in volume.
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Earnings from trading (accessories, books, equipment and vet pharmacy) account for only 6.9% -7.7% in Y1 and are temporarily discontinued in Y2.
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Commission-based income relates to trade activity that entirely replaced actual purchase of these items after Y1. Thus, the PM team was able to improve the liquidity position and to benefit from broader spectrum of items. This firm operates under 15% flat fee.
Gross profit margin shows that the company earns 82.5% to 89.1% from its main revenue source (services) and 13%-16.7% from trading (App. 12). The trend of surging gross profit margin from service under all scenarios is due to slightly faster increasing price per night in the dog kennel compared to the pace of growth of expenses.
Cost structure: With SG&A-to-sales higher than 56%, SGA is the main expense (App. 11). The ratio has been declining under all scenarios as a result of the economy of scope and economy of scale.
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Clearly, staff expenses are of the utmost importance (App. 13), as seen by above 47% personnel/sales ratio. With the expansion of the business, accruals increased automatically in absolute terms (Brigham et al., 1999), but salaries/sales ratio has been declining in all cases due to the upward sloping learning curve. However, staff/sales coefficient is also affected by the dynamics of personnel hiring (App. 8). Therefore, new hirings increase the ratio under the optimistic scenario in Y2 and, likewise, under the realistic one in Y3. Throughout the years, the firm gradually employed 13 people and provided them with an annual pay rise (App. 13).
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General and administrative outlays (a hotel rent, utilities, and insurance expenditures) to sales also decrease, as business matures (12%, Y1; 8.6%, Y2; 6.5%, Y3).
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Marketing expenses to income dwindles (10.7% to 1.8%), as the PM team put a strain on the brand development in Y1 (EUR 6.700) and went on supportive mode afterwards (EUR 3.000 p.a.).
Apart from SGA, we accounted for interest expense and for 10% corporate profit tax. As the firm rents the dog kennel space, we pay no property taxes.
Profit structure: Overall, the company has been strengthening its financial performance under all scenarios. Nonethless, for Y1, the firm reports negative margins for EBITDA, EBIT, and Net Profit to sales. It stems from underutilized capacity and high marketing and personnel expenses compared to income. No dividends are paid.
Despite unsatisfactory results in Y1, in Y2 the enterprise benefits from its better brand recognition, and new service offerrs, ending at a net profit in all cases (App. 14). Therefore, 15% dividend is distributed. Although it appears that the company performs better under realistic scenario compared to optimistic one, it is due to higher SGA/Sales that affect the profitability indicators.
Aligned with the growth strategy, the enterprise expand the auxiliary business with opening a vet pharmacy in Y3. Consequently, the Net profit margin for Y3 is higher relative to Y2, because of the decreased interest expenses due to declining debt. Again, due to higher SGA/Sales ratio, the firm actually underperforms in EBITDA under realistic scenario compared to the pessimistic one.
Return indicators
ROE and ROA shows constant improvement (App. 14) due to continuous debt repayment, gradual equity formation, and steady accumulation of assets.
The negative figures for Y1 mainly result from unfavorable margins in all profitability ratios. We should point out that higher net assets under pessimistic scenario compared to the remaining two cases are entirely due to higher external funding amount/cash outlow ratio under pessimistic hypothesis. Hence, the firm is left with more cash at the end of Y2 in the pessimistic case relative to the other scenarios. The difference in net assets has been continuously present throughout the period.
In Y2, ROA and ROE recover under both realistic and optimistic scenarios, which is not a sign of business strength, but rather an effect of low equity/net assets ratio (2.6%-10.3%). Further, there is a fivefold difference in favor of ROE under realistic scenario compared to optimistic one, which is caused by 5-time variation in equity/net assets ratio in both cases. Besides, personnel hirigns are the reason for higher net profit before interest in realistic case compared to optimistic one. Consequently, ROA in optimistic case is lower than under realistic scenario. Similar to Y1, relatively higher casn balance under pessimistic scenario, explains the repetitive overestimation of net assets relative to realistic case.
Finally, stabilization of ROA and ROE Y3 mirrors the solid equity fundamentals and effective capacity utilization (App. 13). The close resemblance between both indicators in realistic and optimistic cases is explained by high equity/assets ratio (79%-98%). Here, high cash balances are again the explanation behind overstated net assets under the pessimistic scenario if compared to the realistic case. An additional explanation is that the ratio of debt-related payments to sales is much higher under realistic hypothesis relative to the remaining two for Y2-Y3.
Break-even point
To derive the break-even sales, we calculate sales levels that equal the gross profit to the remaining running expenses under realistic hypothesis. It is assumed that prices per unit of service are identical for BEP and forecast modelling. Having in mind the gross profit margin and volume of other business outlays, we conclude that sales at BEP are 29.4% higher that forecasted for Y1, 81% lower for Y2, and 80% lower for Y3 (App. 15). As a result, BEP has the following serious implications for the capacity utilization: capacity at BEP is 29.4% higher for Y1, 19% lower for Y2, and 20% for Y3. To summarize, the business forecast is more conservative than the break-even point analysis for Y1 and, to a lesser extent, turns more optimistic afterwards.
Cash Flow
We accept that revenue is paid upon transaction. Hence, income and cashflow from operations are equal. Further, we booked interest outlays under CFO. As already mentioned, business revenue is generated from M3 onwards. With regard to outflow, though, we accounted all payments since the very beginning and, consequently, operating cash outlays outstrip operating expenses. The outcome is that Net CFO has been lagging behind EBDA at a diminishing rate (App. 16). The difference is explained by accumulation of advances (i.e. prepaid insurance and marketing expenses), inventory (i.e. food and vet pharmacy stock) and accrued expenses (i.e. overheads and salaries for the last month of Y3). We consider growing Net CFO as a proof of business stabilitization. Furthermore, Net CFO follows closely business dynamics and is strictly positive after Y1 in all cases.
On the other hand, net CF has been continuously declining under both pessimistic and realistic hypothesis and remains stable in the optimistic case (App. 15). The logic behind is that the PM teams supports its ambitious investment programme by external financing (Y1) and by its own means (Net CFO). Under optimistic scenario, though, net CF keeps rising, as a reflection of the better cash-generating ability of the firm in a higher sales volume environment.
Finally, surging CF balances indicate a growth-based company. However, as a result of additional HR hirings and large debt payments-to-sales proportion, this is not confirmed in Y3 under realistic scenario. In any case, the enterprise operates with a cash balance of minimum EUR 2.431 and reports cash/assets ratio higher than 8.7%. Hence, there is a reasonable cash provision in order to support operational liquidity needs.
Balance Sheet
Long-term tangible assets turnover has been substantially improving (App. 17), which is fully in tune with rising sales. This fact indicates better utilization of resources and successful strategy implementation. At end-Y3, long-term assets are more than 60% of overall assets in all cases, which asset structure is typical of service companies.
Another example of the service nature of the business we find in net working capital (App. 17). It reveals the sources of funding, especially at the beginning of business activity. Due to relatively large volume of short-term portion of the attracted financing, the net working capital is negative for Y1 and Y2. Under pessimistic scenario, the amount of debt outstanding, booked as a current liability, hinders the growth in working capital. Compared to the volume of income, total assets, and long-term assets, the amount of working capital is trifle, which underscores the service-type of the enterprise.
Last, net worth formation matches with the after-dividends profits for Y1-Y3. The ability of the enterprise to accumulate growing net worth under all scenarios underlines its strong competitive positioning.
Funding
We describe an entirely debt-financed venture. In Y1, the PM team attracted external financing (App. 18) and reinvested profit, as follows:
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A bank credit line that is paid in installments at the end of Y2 and Y3 (under the realistic and optimistic scenarios) and at the end of Y2-Y4 in the pessimistic case. The pricing (7.70% p.a.) is aligned with the reference annual interest rate for up to a 5-year business loan (App. 19).
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Funding by the PM team (EUR 10.000). The cost (10.56%) is consistent with reference annual rate for up to a 5-year loans, extended by non-financial institutions (App. 19). It is a bullet-payment obligation, due at the end of Y3.
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Net profit reinvestment, which is accumultated for Y2-Y3, after dividend payouts.
The total debt was used to pay for EUR 36.100 start-up investments (App. 21) and for operating expenses. The cost of funding (WACC) is 7.50%-7.63% (App. 2), and takes into account 10% effective interes rate. We should point out that WACC is at least twice lower than the business net profit margin under all scenarios (App. 13) and at least 7% lower than the IRR over a 9-year horizon (App. 22).
Seen from App. 18, the capital structure is steadily enhancing with equity/assets going up to 98% under optimistic hypothesis. It is a clear indication of debt repayment capacity and systematically gained financial independence. Meanwhile, the firm was obliged to comply with debt covenants, imposed by the bank (App. 18). Bottom-line, at the end of Y3 the company reports positive net worth in all cases and is debt-free under realistic and optimistic scenarios.
Rate of return
For the first three years, each of manager actually doubled its investment (App. 22). Return proceeds come as principal repayment, interest, and dividend payouts. Given the risk profile of the enterprise, we consider 84-108% rate of a 3-year return to be fairly rewarding.
Overall return on capital invested (ROCI) for both PM funding and the bank loan is strictly positive after Y1 and economic value added (EVA) to the company has been contantly growing in all cases. This is one of the main grounds for investing in this business.
Valuation
At end-Y3, the PM team pursue a business valuation as to establish a reasonable price in case of possible investment appetitive. We value the company on a going-concern basis. Particularly, we applied the two-stage CF method (Chisholm, 2009, p. 183), discounting FCF at WACC. After Y3, we assume constant, zero-growth FCF, which is aligned with our strategy for continuous expansion. Hence, the PV of equity is higher than EUR 115.000 in all cases (App. 22). If assumed that PV of equity equals market value of equity, than it translates into higher than 6.5 price-to-book value multiple. Bearing in mind the business fundamentals (continuous sales and net income growth, impeccable credit record, zero-debt capital structure, cash-rich business, solid long-term assets base and capable PM team), we assert that the valuation is sound.
Last, we valued the company under payback period, NPV, and IRR methods at the respective WACC. As a result, it takes 64 months for the business to recover the initial investment. Also, NPV turns positive at the end of Y6-Y9, depending on the scenario. Finally, over 9-year investment horizon, the company generates IRR consistently higher than 8% compared to 7.50%-7.63% cost of capital. Hence, in all cases, the firm generates positive return over cost of financing, which is a valid reason for investing.
EXIT STRATEGY
At Y3, the PM team has two options: to cash-out or to continues pursuing the business.
Business exit
Here, our aim is to maximize the value we can obtain from selling the business to potential investors. To achieve this, we access the company under different valuation methods (see the Finance section) and present the main selling arguments.
After complex business assessment, we embark on the following major selling points: strong brand, solid customer base, cash-rich business, and no leverage.
As an exit strategy, we agreed to approach the following possibilities:
- Complete business divestment (selling the business);
- Partial business divestment (selling 50% of the business).
Complete divestment: As customers are the heart of our business, the value as well as the number of customer relationships are essential to our business. The customer-focused approach of our business is consistent with our differentiaton strategy and represents a strong negotiation point by the means of true sell. The viability of our model stems from the financial report figures, which reads for strong positive return on capital invested after Y2 under all scenarios. Our targeted price for the sell of AMIGOS, at the end of year 3 will be 7 times the projected EBITDA, as this represent the average for the service sector in Bulgaria. The absolute value of the company, calculated at 7 times EBITDA, will be minimum EUR 200.000 under the realistic case. Besides, the PM team would put an equity premium for selling the whole business as a package in order to compensate for the lack of any investment and current financial income in the future.
Partial divestment: At end-Y3, each PM member will gain 84-108% ROI, depending on the scenario. Thus, we aim to attract a venture capitalist to enter the business in order to expand capacity and market share, as well as to boost financial performance. However, we would lead not only to changes in the ownership structure, but would also require a representative seat in the company’s management board. The price is set at minimum EUR 100.000 under the realistic case. No equity premium is forecasted.
Business continuation
If the PM opt for business continuation, the following prospects for future growth will be pursued: trade with small dogs, delivery of self-made food, and exploration of the click-based tracking tool for marketing campaigns.
CONCLUSIONS
The PM team develops a coherent management system that, at first place, comprises of strategy development (Kaplan and Norton, 2008). In particular, we frame company’s mission and vision, perform a SWOT analysis, and list company’s core competences. As a result, we embark on ability to grow, to adapt and to create powerful network.
Further, we adopt a strategic planning approach regarding business scope (assumptions about market trend, new entrants, changes in customer needs, diversification, market segment definition), choices (aggressive growth strategy) and processes (to support strategic initiatives) as to ascertain that the PM team members share a common understanding on the growth strategy and agree on the model assumptions (Kaplan and Beinhocker, 2003). Thus, we are able set objectives. We position our business on its complex value proposition and superior quality, targeting above-average income dog owners in Sofia. The model assumptions refer to time to start operations, capacity utilization, cost of capital, inflation rate, currency exhange rate, and corporate tax rate. Business and financial objectives relate to achievement of maximum customer satisfaction, attraction of first-time users, steady increase of annual sales, provision of positive bottom-line resuts by end-Y2 and repayment of debt financing by end-Y3. The growth strategy is based on a three-stage rollout plan with constant products’ expansion.
Afterwards, we create an implementation framework. In oder to evaluate necessary resources, we try to answer two strategic questions: is the business profitable and is this the right way to approach it (Bower and Gilbert, 2007). By doing so, we align performance goals with operations design, set a specific guideline for capital budgeting decisions and develop a marketing plan. To forecast the business expansion more efficiently, we identify three basic scenarios (pessimistic, realistic and optimistic) and analyze the pattern of company’s growth for each of them (Saffo, 2007). As we do not have past business history to rely on, our three scenarios are entirely based on market research, professional consultant’s opinion, industry information and a systematic “application of common sense” (Saffo, 2007, p. 131). To link the strategic initiatives with budgets, we forecast balance sheet, income statement, cash flow, and break-even point, as well as evaluate various financial ratios.
In addition, we foresee annual financial and environmental review (Kaplan and Beinhocker, 2003) and access the project risks.
Last, we try to access the company’s strategy with respect to sustainability of assumptions (Kaplan and Norton, 2008). Thus, we constitute an exit strategy that contains business continuation or selling the enterprise between the end of Y3-Y9.
In conclusion, we try to bring a distinctive element of an organizational activity that not only creates business value, but also epithomises the entity culture (Erickson and Gratton, 2007). By doing so, we demonstrate that the carefully-thought management strategy can turn into successful business venture, when comprehended as a complex of managerial skills, professional expertise and strong market awareness.
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Appendix 1
DOG HOTEL WEB SITES
Appendix 2
MAIN FINANCIAL ASSUMPTIONS
* Capacity for Y1 is based on 2 months business start and 10 months operational.
** WACC stands for weighted-average cost of capital.
The following abbreviation of scenarios is adopted throughout:
P – pessimistic scenario
R – realistic scenario
O – optimistic scenario
Appendix 3
MAIN FINANCIAL HIGHLIGHTS
Revenue is generated since the 3rd month of Y1.
Appendix 5
DYNAMICS OF MONTHLY SALES /realistic scenario/
Appendix 6
A FORECAST OF CAPACITY UTILIZATION AND DOG HOUSES EQUIPMENT
Equipment needed is based on maximum capacity utilization.
All equipment purchases are done at the beginning of the respective year.
Appendix 7
PET BOARDING: DURATION OF SERVICE USED AND TRANSPORTATION REVENUE FORECAST
Appendix 8
PERSONNEL FORECAST
Appendix 9
AMORTIZATION AND DEPRECIATION POLICIES /under all scenarios/
Notes:
The construction would be completed for 1 month in Y1 and within M1 in Y2-Y3. Thus, we amortized the cost for 11 months in Y1 and for 12 months in Y2-Y3.
The repair would be completed in one month, following the construction in Y1 (meaning, in M2). Therefore, we amortized these costs over 10 months in Y1.
In Y1, all equipment is purchased at the end of M2 and depreciated over 10 months. For Y2 and Y3, the depreciation is spread across 12 months.
Appendix 10
STANDARDIZED FINANCIAL STATEMENTS /in EUR/ - PESSIMISTIC SCENARIO
BS value stands for Balance Sheet value
D&A stands for Depreciation and Amortization
While cumulative figures are stated in columns D&A and BS value, the remaining columns (unit price, quantity and cost) are updated with the newly acquired assets/due liabilities within the respective year.
The first year is ten months long as during the first two months repairs and construction workds are performed.
STANDARDIZED FINANCIAL STATEMENTS /in EUR/ - REASLISTIC SCENARIO
BS value stands for Balance Sheet value
D&A stands for Depreciation and Amortization
While cumulative figures are stated in columns D&A and BS value, the remaining columns (unit price, quantity and cost) are updated with the newly acquired assets/due liabilities within the respective year.
The first year is ten months long as during the first two months repairs and construction workds are performed.
STANDARDIZED FINANCIAL STATEMENTS /in EUR/ - OPTIMISTIC SCENARIO
BS value stands for Balance Sheet value
D&A stands for Depreciation and Amortization
While cumulative figures are stated in columns D&A and BS value, the remaining columns (unit price, quantity and cost) are updated with the newly acquired assets/due liabilities within the respective year.
The first year is ten months long as during the first two months repairs and construction workds are perform
Appendix 11
REVENUE AND PROFITABILITY
Appendix 12
GROSS PROFIT AND COST STRUCTURE
Appendix 13
SELLING, GENERAL AND AMINISTRATIVE EXPENSES
Appendix 14
RETURN AND PROFITABILITY
Appendix 15
BREAK-EVEN ANALYSIS /realistic scenario/
Appendix 16
THE MAIN CASHFLOW INDICATORS
Appendix 17
THE MAIN BALANCE SHEET INDICATORS
Appendix 18
CAPITAL STRUCTURE AND DEBT-RELATED INDICATORS
IR: 7.70 % p.a. for the credit lines and 10.56% for the PM funding under all scenarios
Collateral: mortgage for the credit lines and no collateral for the PM funding under all scenarios
Appendix 19
INTEREST RATES ON LOANS TO NON-FINANCIAL CORPORATIONS AND HOUSEHOLDS
Source: Bulgarian National Bank
Appendix 20
COMMON-SIZE INCOME STATEMENT AND BALANCE SHEET
/pessimistic scenario/
Al amounts are in EUR.
COMMON-SIZE INCOME STATEMENT AND BALANCE SHEET
/realistic scenario/
Al amounts are in EUR.
COMMON-SIZE INCOME STATEMENT AND BALANCE SHEET
/optimistic scenario/
Al amounts are in EUR.
Appendix 21
COSTS PROJECTION - INITIAL INVESTMENT
/under all scenarios/
Appendix 22
BUSINESS VALUATION AND RETURN
Appendix 23 Dog Area Layout
Appendix 24 Doghouse Outlook
Appendix 25 Administrative Building Interior Layout
P&L – Profit and Loss Account
We use the following abbreviations throughout: P – pessimistic, R – realistic, O – optimistic.
SG&A – Selling, General and Administrative expenses
WACC – weighted-average cost of capital
Net capital expenditures = Capital expenditures – D&A (Damodaran, 2002, p. 255). This is the first component of the reinvestments.
Increase in non-cash working capital = +Increase/-Decrease in (inventory, other non-cash current assets)+ Decrease/-Increase in (accounts payable, other non-interest bearing current liabilities). This is the second component of the reinvestment (Damodaran, 2002, p. 262).
FCF is the remaining cashflow that is available to shareholders (dividends, stock repurchase etc.) and debtors (payments related to interest-bearing liabilities).