MODULE 1 â€“BUSINESS MODEL
UNIT 1 â€“HOW TO GENERATE A FEASIBLE BUSINESS MODEL
As we stated in the training fiche related to business models and planning, there are certainly a number of tools that can be used to develop and validate your business idea. In this unit, we intend to provide general information on some of the tools used. Ultimately, you will need to do some trials to validate which tool is more appropriate for your characteristics, idea, sector, product or serviceâ€¦
SECTION 1: CANVAS MODEL
Ted Greenwald in the Forbes newsletter provides a good example of how using a new business model can make a great difference between failure and success. He explains the case of Xerox 914, that in 1959, â€ś... the first dry-process, plain-paper copier was a potential game-changer â€” but it cost six times the price of alternatives. Potential partners wouldnâ€™t touch it. So, the company developed a new business model. Rather than selling the machine, they leased it for $95 a month and charged a few cents per copy for copies in excess of 2000 a month. Thanks to the 914?s speed and convenience, customers soon were making tens of thousands of copies in the same period, and the copier that couldnâ€™t be sold suddenly became a huge revenue generator.â€ť
So the focus was changed on the customer. It is what is called a customer centred approach that we can summarized in the following steps:
â€˘ Customer segment or to whom are you addressing your product. The customer is at the core of this model, therefore you need to develop a deep knowledge on them.
? Which classes are you creating values for?
? Who is your most important customer?
â€˘ Value proposition, or what are you going to offer. Closely linked to the first step, this second one suggests a seamless and profound reflection on what difference your product makes.
? What core value do you deliver to the customer?
? Which customer needs are you satisfying?
â€˘ Distribution channels, or how are you going to reach your customers, how are you going to deliver your products.
? Through which channels that your customers want to be reached?
? Which channels work best? How much do they cost? How can they be integrated into your and your customersâ€™ routines?
â€˘ Customer relationships, or what sort of bonds are you going to create with your customers. It is about the service you are going to provide to them.
? What relationship that the target customer expects you to establish?
? How can you integrate that into your business in terms of cost and format?
â€˘ Revenues or incomes, or how is your product or your service valued by your customers, how much they are willing to pay for them. It is also relevant to estimate how the business is getting the income, regularity, etc.
? For what value are your customers willing to pay?
? What and how do they recently pay? How would they prefer to pay?
? How much does every revenue stream contribute to the overall revenues?
â€˘ Key resources, in terms of what is needed to provide value to customers, such as, machinery, human resources, etc.
? What key resources does your value proposition require?
? What resources are important the most in distribution channels, customer relationships, revenue streamâ€¦?
â€˘ Key activities, in relation to all what it takes to provide value to the customer.
? What key activities does your value proposition require?
? What activities are important the most in distribution channels, customer relationships, revenue streamâ€¦?
â€˘ Key partners, sometimes they are not given the relevance they deserve. They are critical on the medium and long term. We talk about funding organisations, investors, suppliers and those stakeholders that have an impact on your business.
? Who are your key partners/suppliers?
? What are the motivations for the partnerships?
â€˘ Cost structure, what it needs to be paid and when.
? What are the most cost in your business?
? Which key resources/ activities are most expensive?
SECTION 2: LEAN START UP MODEL
This new model is based on validating learning or how to get customer input as soon as possible so that you do not waste your resources into a product or service that might not be worthy to your potential customers. One of their main objectives is to eliminate uncertainty in the product development process. Instead of building in isolation from users, start-ups regularly expose the product to customers throughout the development cycle. In doing so, teams produce a product development methodology able to make more informed decisions about what to build, from core product functions to what colour a button should be.
Originally conceived for technology start-ups, this model based on the Eric Ries book, The Lean Startup: How Today's Entrepreneurs Use Continuous Innovation to Create Radically Successful Business, has these main features:
â€˘ Its main objective is to reduce as much as possible the inner risk when launching a new product.
â€˘ It is about ongoing learning always bearing in mind the reactions of the market where the product is launched. Thatâ€™s why it is important to keep communication channels with the customers wide opened to get their feedback about how they perceive the new product or service.
â€˘ Launching the MVP or Minimum Viable Product, as soon as possible, with the lowest cost involved so as to get market feedback the sooner the better. In this way, you either validate or improve your product, reducing production costs.
Itâ€™s about â€śthink big, start small, scale fastâ€ť
SECTION 3: VALUE CHAIN ANALYSIS
Another tool employed in business management is the analysis of the value chain within the activities of the company. It is based on a model figured out by Michael Porter in his book â€śCompetitive Advantage: Creating and Sustaining Superior Performanceâ€ť.
It therefore involves a through and in-depth knowledge of the main activities and processes in the company so that you can have an overview on your main strengths and weaknesses. In a way, it implies a SWOT analysis about your company activities so that you can gain a competitive edge.
The company activities within this model are broken down into two different categories:
? Primary activities, that are those that gives value to the product directly, such as inbound logistics, operations, outbound logistics, marketing and sales and service.
? Support activities, which provide value in an indirect way are for instance human resource management, procurement, technology or the infrastructure.
According to Porterâ€™s model, companies create value in two different ways.
â€˘ Cost advantage, by decreasing costs of activities, mainly primary ones so that they can reduce prices without reducing profits
â€˘ Differentiation, which mainly involve support activities where businesses can focus on their competitive advantage. Investing in activities adapted as sources of competitive advantage allows the business to increase the quality of their products and services and sell them for higher prices.
UNIT 2 â€“BUSINESS PLAN
SECTION 1: GENERAL CONSIDERATIONS
Though some might consider it as a step previous to setting up a company, the business plan can also guide you through your business development and consolidation. As we explained in its training fiche the business plan is commonly considered as the traditional tool when creating a business. Still, it is a suitable way to know, improve and develop your business idea. On top, as we said earlier, it represents your business card for potential investors, public administration, funding entities and stakeholders.
There are a number of elements that should be part of your business plan, depending on the authors. As we have already mentioned, it should be a reflection process for yourself as to whether you have or not the necessary resources for the enterprise and where to pick them up.
SECTION 2: MAIN ELEMENTS OF THE BUSINESS PLAN
The elements that should be part of your business plan are:
If you are a sole trader, this section can be substituted with a personal reflection on whether you are ready for such an experience and if you have the skills and the knowledge needed. On the other hand, if you have partners on board, you must prove that your business initiative needs them by showing skill and functional complementarity.
â€˘ Business opportunity and sector analysis.
Any business stems from the detection of an opportunity. In your business plan, you must state clearly the customer problems or needs and how you are going to meet them.
In addition to this, you must specify the economic value of the opportunity you are willing to put in practice. Some questions you need to resolve at this stage are:
o What do customers do in an inefficient way?
o What needs could be met in a better way?
o What is the economic value of my solution?
At the same time, in order to define the sector and its growing potential, you should accurately describe the market where you are going to compete, entry barriers and any aspect you might consider relevant.
â€˘ Product and Production Plan.
In this section, you will have to explain in detail what makes your business different, what sort of innovations you add, your product / service advantages and whether or not there are already the same type of products or services in the market. In relation to the production plan, it is critical, among other factors, to identify the resources you need to produce your goods and your production capacity limits.
â€˘ Market, customer and competition analysis
You will have to make references to you real and potential market, if you need to develop market segmentations and what are the consequences. Competitors identification is yet again crucial. At this stage, you need to undertake a thorough study on their products / services, how they reach their customers and why their customers purchase their goods.
â€˘ Marketing and communication plan
This section is as important as the others. It focuses on the tools you are going to employ to market your product or service. In relation to Marketing Plan, we advise you to have a look to the training fiche in the platform.
â€˘ Economic and Financial Plan
Figures and figures, estimates and forecasts. Once we have reached this stage, it is imperative you figure out initial investment in as much detail as possible and how you are going to fund it. We agree that estimates are estimates, but nevertheless, the closer to reality you get, the better. It is a good idea to get comfortable with terms such as assets and liabilities (balance), profit and loss statements, cash flow plan and break-even point, or the point where you start to make profits.
UNIT 3 â€“LEGAL REQUIREMENTS TO SETTING UP A BUSINESS
SECTION 1: GENERAL CONSIDERATIONS ON LEGAL REQUIREMENTS
The European Union is aware of the difficulties across all member states when entrepreneurs wish to create their companies. Recent Commission Communications and strategies have unveiled all these mismatches such as:
â€˘ Regulatory burdens that entrepreneurs must face from the beginning of their project,
â€˘ Red tape that affects directly to microenterprises in their daily operations
â€˘ Excessive difficulties in tax management and payment processes.
Member states have been invited amid other actions to â€średuce time for licensing and other authorisations necessary to start a business to one monthâ€ť. Progress has been made in some countries, but more efforts need to be put in place to achieve this goal.
Generally speaking the main legal requirements to create your company will depend upon the business structure you consider for your business idea. Some of the factors that might have an impact on that decision can be the following:
? The extent of your obligations or liabilities within your company operations.
? The number of promoters of your business initiative. Some legal forms might require a certain number of partners taking part in order to reach legal registration minimum.
? Tax regime and fiscal obligations might also become a relevant factor when making the choice. It is not certainly the same situation at the start of your company, where the turnover is low and hopefully starting to grow than when you run a consolidated company reaching certain income thresholds.
? Type of activity might also influence your decision. In the sector we are addressing with this training fiche, crafts and CCIs, sole traders and limited companies are quite used though social enterprises are also being employed to operate in this sector.
SECTION 2: LEGAL FORMS
As we said earlier the legal form you pick for your business ideas has direct consequences in many different aspects on the life of your project, from liability to tax regime.
This is an area where there is a wide range of forms to choose depending on the country you want to set up your business. For the sake of summarising, you can find bellow a chart with the main companiesâ€™ types you can encounter and some of its main characteristics.
LEGAL FORM BUSINESS LIABILITY
SOLE TRADER You take your own decisions. Your run your business.
Generally speaking, they are easier to set up as they require less formalities. You have personal responsibility for your business debts and obligations.
LIMITED COMPANY They are formed by the directors of the company. In some cases, it might be only one director. They are more complex to set up than the former. As a Director, your liability for debt will be limited to the capital you have invested in the business.
SOCIAL ENTERPRISES (COOPERATIVES) It is required a number of partners and the elaboration of the statues of the company. Each member of the cooperative has a vote. Generally, the liability is also limited to the capital invested at the start of the company.
Please, bear in mind that, as we said earlier, a wider range of types may apply depending on the country you wish to set up your business. For that purposes, we advise you to get in touch with national agencies that will provide assistance in these matters. Alternatively, you can have a look at Your Europe portal, where links to national support agencies for businesses are supplied and very useful. http://europa.eu/youreurope/business/start-grow/start-ups/index_en.htm#
SECTION 3: TAXATION
Taxes and annual accounts. You need to register your company at your national tax office. Understanding your taxes obligations is key to ensure you run your operations smoothly and without any problems with tax public administration. Do not underestimate them. It is important to keep accurate records of all your operations, expenses and profits, as you will have to pay accordingly. At this point, professional advice from an accountant might be worthwhile as we do not have to be experts in all matters, and this is a complicated one. Not in vain, the Commission suggests that reducing tax compliance costs would improve the business environment for small firms and in its 2020 Entrepreneurship Action Plan, makes an invitation to member states to â€śâ€¦make the national tax administration environment more favourable to early stagebusiness. Reduce the cost of tax compliance by simplifying tax filing and taxpaymentâ€¦â€ť
Register for VAT. As you probably know by now, VAT stands for Value Added Tax, which is charged upon sales throughout the European Union. VAT is what you â€śextraâ€ť charge to your customers (output tax) and it is also what you â€śextraâ€ť paid to your suppliers (input tax). The difference is what you get â€“ VAT refunds- or have to pay to your national tax administration.
The standard rate for VAT depends on each country national authority, though the European VAT Directives set the minimum standard VAT rate. In 2016 is at 15%. The 28 member states are otherwise free to set their standard VAT rates from that amount on. There are goods with a lower rate or even exempt items. The EU also permits a maximum of two reduced rates.You should check what rate applies to the goods you produce or the services you deliver. In some member states, for instance, cultural services have a lower VAT rate as it is an indirect way of promoting this sector.
You can register to get your VAT number from your national tax office. Normally, if you are registered for VAT and you make sales to other businesses, you must issue a VAT invoice â€” either in paper or electronic form. VAT is normally added to the price of the goods or services on your invoice. Your VAT identification number must be shown on all invoices you give to customers, as well as the amount of VAT being charged and other standard items. Though this rule has exceptions.
For cross border â€“ VAT, when you buy or sell products or services within other EU countries, different rules apply. New legislation is currently in force for this type of VAT that aims to tackle fraud in cross border transactions. A distinction needs to be made whether we are dealing with goods or services. You do not charge VAT If you are selling products to other businesses with valid VAT number. If they do not have it, then you must charge it. They must provide that information beforehand or, alternatively, the EU has a database where you can verify businesses VAT number existence (VIES).
If you are selling your product to end users, you need to register in the country you are selling your product and charge the VAT in force in that country. You do not have to do so if the total amounts of sales in that country do not reach a limit set by each country that can be either 35.000 â‚¬ or 100.000 â‚¬. For instance, in the countries where OER Craft project partners come from, the limit is, in all of them, of 35.000 â‚¬. Any sales over this amount will imply for your company to register for VAT in the country and apply the national rate, with the implications you might foresee.
On the other hand, if your company provide services, which is the case for many cultural and creative industries, you do not charge VAT but your business customer will have to pay it with their national applicable rate (reverse charge procedure). In any case, you can still deduct the VAT you had to pay in order to provide the services for that customer. Again, if it is an end-consumer the one you are providing your service for, you can charge VAT at your country rate, except for telecommunications, broadcasting and electronic services where the rule is to apply the consumer tax law.
All these rules have many exceptions. As you can see it might be worthwhile to look for professional assistance and expertise to help you through with these administrative issues
SECTION 4: OTHER LEGAL REQUIREMENTS
Register for the appropriate Social Security System. In some cases, national authorities have in place specific Social Security Schemes for individuals to register to, either as sole traders or as directors of limited companies. In some other cases, these directors are classified as mere employees and therefore they need to be registered as such. Some member states apply turnover thresholds over which there is an obligation of registration. Again, you should contact national authorities to check out for the best formula.
Application for licenses. There is considerable variation in the number and type of licences required across the different member states. It also depends on the type of activity you are undertaking. The licenses may also stem from different administrative level, local to regional and national. However, you should take them into consideration as the lack of them may result in delays for the start of your operations.
Member states and the European Union have acknowledged the need to reduce and facilitate the legal requirements for starting a business. They are aware of the critical role that SMEs play in the economic growth and employment generation all throughout Europe. The Commission together with member states are monitoring start up time costs at national level. As a summary for the OER Craft partnersâ€™ countries this is the information on these two questions from a study on compliance by Member States on the time needed to get licences and permits to take up and perform the specific activity of an enterprise (2014):