Stage 4: Focusing your ideas
Outcomes at the end of this stage:
- A succinct description of your business idea
- A well-rehearsed 5-minute presentation of your idea
- A tested business idea that you may want to move forward with
Audience: I have an idea for a social enterprise and I’m ready to do some pre-feasibility testing
Expected time commitment: 40-80 hours or 1-2 weeks
In the previous stage, you should have generated one or more ideas to bring into this stage, but the real potential of the idea is not yet clear. In this stage, you will flesh out these ideas and test them to see how likely your social enterprise idea is to succeed.
Follow the step-by-step process in this stage to focus, develop and test your business idea before deciding whether to move on to the next step – conducting a feasibility study. Remember that business development is a cumulative process. The work that you will be doing in this section will be the foundation that informs the feasibility study and the business plan. Some might be used directly in your business plan. It’s a good idea fill out the worksheets and organise them for easy access later.
Fleshing out the idea at this stage is important to ensure that you don’t invest huge amounts of time and money chasing a risky or problematic idea. The most important thing to understand at this stage is that you are building a business not a social program. Businesses respond to needs – a community childcare centre is developed because there are customers for childcare. And some businesses create needs – we didn’t need the iPod, but now that it is here we want it… we need it.
Inventing a new product and finding a market for it is a whole lot harder than finding a gap in an existing market. In this section, we will test your business idea, starting with the most important part of any business – customers. Without them, businesses cannot exist, and your social enterprise will not generate the revenue needed to achieve your social mission. This element of market testing is about finding and quantifying the market need that will ultimately sustain your social enterprise.
You will continue learning, designing and testing your business model for many months to come. Business development is a cyclical process in which the idea keeps being refined, even once your business is operating.
Remember, a business idea goes through many stages of development.
The 7-steps in this stage are:
- Industry, customers and competitors
- Team building, stakeholders and partnerships
- Finance and risk
- Enterprise design
- Developing your elevator pitch
- Options analysis
- Idea evaluation
You might notice that you’ll be asked to repeat the exercise designing your enterprise, which you did at the end of stage 3. The purpose of this is to help you understand that your business idea should and will evolve as you conduct further research and planning. This is what business planning is about. Documenting your idea at different planning stages helps keep track of the factors influencing the development of your business idea and decisions. After taking the 7 steps to focus your idea, you will evaluate your idea at the end of this stage using a framework that we’ve developed.
A few things to keep in mind before you begin:
- This pre-feasibility test should only take you a week or two at most.
- Use secondary research (online, printed materials, etc.) for customer, competitor and industry information.
- Organise your worksheets and keep them handy throughout the business planning process.
- Be objective – when describing your business, the industry, your customers and competitors, be as clear-eyed as possible. What you write in these sections may end up in your business plan, being read by potential investors and funders. Try to keep your audience in mind right from the beginning.
- With the financial estimates in this stage, the purpose is to get you accustomed to the number crunching rather than producing highly accurate numbers. The calculations are ‘back of the envelope’ but any estimates should also be realistic guesses. Detailed financial forecasts will be conducted in the feasibility study and business planning sections.
- Be honest. Especially when dealing with numbers, make assumptions that are as realistic as possible. Wishful thinking will only compromise your results and the decisions that follow from them. For example, if sales revenue forecasts are too high, this may give a false impression of how profitable the business will be.
1.0 Industry, customers & competitors
1.1 Industry analysis
Before starting any business, you must understand the context in which it operates. This exercise may reveal opportunities and threats that might affect your business. Collecting information on the broader industry and other market information will help you get a better picture of your enterprise idea.
This information can uncover trends, key success and risk factors, barriers to entry and other information that might affect the establishment or development of the enterprise. This information will also be used in the industry environment section of your business plan.
At this stage, use mainly secondary sources of information and data to collect market information related to your enterprise when you fill in the worksheet. Even if you have decided to sell your product or service only in a small geographic area, knowing what is happening across the whole industry will help you determine what to expect for your social enterprise.
In the following worksheet, you will be asked to define the industry in broad terms. Try these resources for industry information:
- Ibis Reports
- The Australian Bureau of Statistics
- Sensis Business and Consumer Reports
- Business Victoria – Business Types
- Local council economic development officers for local demographic and other data.
Optional exercise: Five Forces Analysis
This framework, developed by business strategist Michael Porter, is often used by companies to evaluate the appeal of an industry before entering. The framework helps you assess the various forces that act upon a business to determine the industry’s attractiveness (level of profitability and factors affecting it). An unattractive industry is one with high rivalry and competition, where profits for all firms are very low.
This framework is particularly helpful for larger organisations that can pick and choose the industries in which they operate, and it can help you assess the external and internal factors that affect your enterprise.
While this framework will complement the industry research that you conducted previously, it is not a compulsory exercise. If you feel like moving on, go straight to the next section.
1.2 Customer analysis
Customers are people or organisations who will buy your products or services. An enterprise cannot survive without customers, because it is through sales of goods and services that an enterprise generates most of its income. One of the most important things about business planning is to have an intimate understanding of your customer.
For MadCap Café, its target beneficiaries are people with mental health illness for whom it provides employment opportunities, while its customers are the people who come in to spend money at the cafe.
In the following worksheet, identify your potential customers. Consider specific customer segments that you might want to target. Later, in the pre-feasibility study and business planning sections, you will use market research to test the hypotheses you have developed about your customers.
1.3 Competitor analysis
All businesses face competition. Even if you do not have any direct competitors within your industry, you might want to think more broadly about businesses or organisations that are competing for your customers’ time, attention and money, such as those offering substitute goods and services. You may be the only cafe in town, but you still have to compete with cinemas, bars, cafes in neighbouring towns and other businesses for the discretionary income of your customers. They are not competitors if they are not competing for the same customers and the same dollars.
Where to find your competitors:
- Conduct a web search on the product/service that you offer – you might discover local, regional or international competitors.
- If your customers are governments or institutions, you might also think about what else they spend money on.
- If your idea is for a retail business, visit some other locations or just take a walk down the street.
- Speak to your potential customers. They will be able to tell you a lot about what they buy now and who from.
After completing the competitor analysis, you might get a sense of how competitive the industry is. You can use the information in the Porter’s Five Forces Framework to answer the question about rivalry within the industry. The competitor analysis here will be used to inform your enterprise design in step 7 of this stage.
2.0 Team and Stakeholders
2.1 Building your team
If you are an individual entrepreneur, it is very important that you think about forming a team. Starting a business is a long and lonely journey to undertake alone. In this section, you can start thinking about people who might want to join you. You can engage individuals just for the business planning process but not necessarily to help run the business. It is also crucial that you have one or more mentors who can act as a sounding board during the start up and exploration phase.
Use the following worksheet to start building your team.
2.2 Setting the Terms of Reference
If you are working with a group, it’s time to put some structure around you if you have not done so already. Groups evolve, members come and go and objectives and situations change. Establishing a framework within which your group operates can help ensure your social enterprise weathers the changes. The main issues to think about are:
- purpose and structure of the group
- membership of the group
- roles and responsibilities
- frequency of meetings
- communication between meeting
- the decision-making process
- resolving conflicts
Legally incorporated groups have legal obligations. This is discussed in Stage 5 under Organisational Feasibility. Some organisations or groups prefer consensus-based decision making, while others use the ‘majority rules’ approach. Some groups will use a combination of the two, depending on the seriousness of the decision, the extent of divided opinion and the requirements of their constitution or formal agreement.
Consensus decision making is not about everyone having to agree on everything all the time. It is about all parties being able to live with (not necessarily agree with) the group decision.
Conflict can be a by-product of developing a social enterprise; the group should be aware of this. Resolution of conflict balances the end goals with a mutually respectful decision-making process.
Hint: A common strategy in conflict resolution is to be ‘hard on the problem and soft on the person’.
This means working through issues raised, rather than challenging or questioning the individual who raises the issue.
2.3 Stakeholders and partnerships
Stakeholders are the individuals, groups or organisations that are either affected by or affect your social enterprise. Stakeholders have some sort of relationship with your social enterprise. It is important to identify a list of stakeholders early in the business planning process, so you can manage the relationships effectively in the long term. During this process, you may also identify potential allies or partners who can help you during your enterprise’s development.
Establishing strong, healthy partnerships is an important element of your social enterprise journey. Many successful businesses are formed as a result of healthy partnerships.
Green Collect would not have got where they are today without some of their corporate partnerships. BP Australia funded the initial feasibility study that eventually enabled Green Collect to start the enterprise. This relationship was maintained over time as Green Collect provided services to BP, reviewing the recycling systems at their service stations. Other partners such as Mallesons Stephen Jacques and Citipower/Powercor became interested in working with Green Collect for various reasons and in different ways. Some partners lend their expertise, whether legal or environmental or to develop services. Others join up as members. Some donate time and money through foundations.
“I think people care about the issues we care about, which is employing marginalised people, recognising that it’s not just the domain of government- funded services to address social issues. The corporate world has an understanding of being part of the community and realises that the health of that community depends on all members. If we bring together skills from the business and community sectors, you come up with a more effective model. Green Collect offers a way to tangibly support some good work in the community that corporates’ core business is far removed from.” Sally Quinn, Co-Founder and chief executive.
Green Collect has experienced some really positive partnerships. The lesson is that corporate partnerships can work.
3.0 Finance and risk
3.1 Financial analysis
In this section, you will be introduced to some of the number crunching involved in estimating the finances of your enterprise. These are back-of-the-envelope calculations, so you don’t have to go to great lengths to research the numbers. The result should, however, be a realistic estimate.
Profit is what’s left of your income after all your costs are paid. To estimate profits, you first need to estimate your costs and your income. Keep in mind that some social enterprises have greater costs because of their social mission. These can include the costs of capital, the costs of labour (productivity deficits), the costs of recruitment etc. Refer to Stage 1 for a guide to some of the extra costs attached to social enterprise.
Controlling costs is an extremely important and ongoing process in business. At this idea-testing stage, you are merely conducting a rough estimate to identify any significant barriers (intensive capital needs) that might hinder the viability of your business. You are also checking that your costs do not exceed your income.
You will conduct further and more detailed cost estimates in later stages of the business planning process. The purpose of this exercise is to help you identify the costs involved in setting up and running the enterprise.
The industry analysis and customer analysis in parts 1 and 2 of this section will help you to estimate how much product or service your business will produce. Think broadly about the different types of costs (cost categories) that might occur. As previously mentioned, don’t get too hung up about getting an accurate cost estimate, but remember that you have to be realistic. This should involve talking to people running similar businesses or people “in the know” and suppliers etc.
If you are having trouble getting an estimate of costs, it’s a good idea to visit a similar social enterprise that will not be a competitor to get some reliable information.
3.2 Estimating income
Think of your total income as all the money that will be generated through sale of products and services, and from donations and grants.
Your estimate of income from trading activity combines the total goods or hours of service you expect to sell and the price you think people are prepared to pay. Keep in mind that most people over-estimate the number of units they can sell at this stage, so being conservative is important. Ensuring that you are realistic could avoid difficulties down the track. Again, it is a good idea to check with similar businesses.
Start by estimating the number of hours of service, or quantity of goods, you think you will be able to sell each week. Then multiply this by the number of weeks per year in which you think you will be able to sell that amount.
Use the same assumptions here as were used in the cost activity above.
Profit is what’s left of your income after all your costs are paid. Achieving operating profit means achieving profit from a firm’s core business operation, and is the goal of every company.
Profit = Income – Costs
Profitability can be thought of in a couple of ways:
- Breaking even. This means that income equals costs within a given financial year. For a business to break even, total income for that period must be equal to or more than the total costs for the same period.
Profitability = Annual operating income > Annual operating costs
- Full cost recovery. This means that the total profits from the business exceed the total investments in the business, including the cost of starting up. Many new businesses take years to recoup the initial investments.
Full cost recovery = Total income from operations > Total costs (start-up costs and operating costs)
Now that you have estimated your income and costs, use the worksheet below to estimate your first year’s profits.
3.4 Risk Identification
Even the best managed businesses have to deal with the unexpected. A major source of risk comes from the uncertainty the enterprise might face in many different areas: revenues, costs, business cycles, legislation, trends, employees leaving the company, the loss of a major supplier, etc. An effective risk management plan will identify such risks and outline strategies to deal with them.
“I would never approve a new program without a risk management plan in place – a real world assessment of what are the things that could go wrong, and how we would address those risks. One of the risks could be not achieving our revenue targets; and the way to mitigate that would be to have a close down process if that happens. If you’re going to be responsible, you have to. Particularly for an organisation like ours, where the funds we have are paid to us by people who receive training and some by public funding, we have a responsibility to use that money wisely. That’s why risk management is important.” – CEO of Jobs West, John Theodorsen
The first step in developing a risk mitigation plan is to identify the potential risks – internal and external – that affect your business. Use the template below to document the potential risks faced by your business.
Optional exercise: PESTLE analysis
The PESTLE Analysis (Political, Economic, Social, Technical, Legal, and Environmental) helps you understand the external factors affecting your organisation. Through this exercise, you might also identify some risks that should be noted and included in the Risk Identification Template.
This exercise can be completed individually or with your group to assess the likely direction and social impact of your business. You may find that the outcomes generated from a group exercise are very different from those generated individually. We recommend that you involve as many stakeholders as possible in this activity. Use a whiteboard, flipchart or butcher’s paper to document the process.
Remember that the external environment, including your competitors, will constantly evolve, and your enterprise may have to evolve with it. It is good practice to use these tools as a regular feature of your project management and business planning.
Define possible effects of external factors on your organisation. Some examples are provided below:
Changes in government administration might increase/decrease support for my social enterprise.
Economic conditions (recession or boom) affect the spending habits of customers (consumers, government bodies, or other businesses) on my products/services.
An ageing population is an opportunity for provision of social care. Social and binge drinking are having a significant impact on the health service.
The pervasive use of computers and other mobile devices could be harnessed to enhance personal security, or youth mentoring.
Changes in legislation may pose risks to my social enterprise.
New environmental regulation on waste management could create new markets for my social enterprise.
4.0. Enterprise Design
How will you use the information you’ve just gathered on your chosen industry, competitors and customers to further inform and refine the design of your business?
THE DESIGN OF YOUR SOCIAL ENTERPRISE
- Industry Analysis
- Customer analysis
- Competitor Analysis
THE DESIGN OF YOUR SOCIAL ENTERPRISE
- Industry Analysis
- Customer analysis
- Competitor Analysis
“Find a gap in the margin, and the margin in the gap.” – John Montague of TREES, UK
Let’s return to one of the earlier exercises Designing your Idea and reconsider it in light of what you’ve learned since then. When thinking about the business you want to enter, bear in mind that successful businesses have found a way to do one or more of these:
- Fill a gap in the market, either in terms of a service/product not now offered, or by targeting an under-served customer group.
- Enter a market where demand outstrips supply.
- Make a business stand out from others in the same industry by offering better value or offering customers something fresh.
Don’t expect people to buy from you because you’re a social enterprise. Start by offering a decent product. If you are in the landscaping business, aim to provide the best service in the industry. If you’re in the business of producing mugs, make the best mugs in town (even though they may be made by a significantly disadvantaged group).
5. Developing your elevator pitch
Now that you’ve refined your idea further, test this idea by developing an elevator pitch and presenting it to people and getting their feedback. An elevator pitch is a concise, carefully crafted and well-practised description of your business that anyone should be able to understand in the time it would take to ride up in an elevator. Typically, an elevator pitch ranges from one to two minutes.
If you are going to pursue your enterprise idea, you will need to be able to explain it in a succinct and engaging manner. While it is best not to broadcast your idea too widely, discussing it with people you trust can greatly help to develop your proposal. The purpose of delivering the elevator pitch is to invite your audience to challenge the soundness of your idea. Constructive criticism is extremely helpful in developing a stronger business model.
Use the answers from the Enterprise Design Worksheet to develop your elevator pitch. The pitch should be succinct, and your story should be compelling. After the short pitch, your audience should have fully understood your business concept. If your audience keeps asking the same question after each pitch, you are probably omitting some important information – work that information into your pitch. The pitch should also have piqued their interest, and they should want to find out more.
Use every opportunity to practise your pitch. You are going to be telling this story to stakeholders throughout your enterprise journey, so start practising now! Deliver it to your friends, family and contacts. Aim to tell your story to at least five different people. The earlier you start, the easier it gets. And don’t forget to use your audience’s questions to fine tune your presentation.
Here’s what you’re going to do to complete this section.
- Have you developed your elevator pitch?
- Have you practised your pitch and delivered it to at least five people?
- Have you incorporated feedback from your audience to refine your pitch?
6.0 Options Analysis
Not all social enterprises have to be started from scratch. There are many social enterprise ideas that can be adapted from existing models.
Now that you’ve thought of the industry and business that you’d like to be in, and you have decided that this business idea could be a real opportunity, consider and weigh up options other than starting up a business. These include:
- Acquiring an existing business
Building a business from scratch takes a lot of hard work, time and energy. Although buying a business usually requires a higher capital investment, there are a range of advantages that reduce the risks compared with start up.
Acquiring a Business: Pros
- Less risky than starting a new business.
- Predictability of income – an existing business has already established a loyal customer base, which allows you to forecast revenues with some confidence.
- Proven processes and management – fewer glitches to work through.
- Trained staff who are already familiar with running the business.
Acquiring a Business: Cons
- Might not find a business that fits well with your social enterprise.
- You will likely need to make modifications to the existing business in order to deliver maximum financial and social outcomes.
- Finding the right business takes time.
- The right business might not be available at the right price.
Here are some examples of successful social enterprise acquisitions:
- The ABC Learning Centres were acquired by GoodStart Childcare Limited, a not-for-profit consortium formed with the goal of improving the education and care of Australian children, making this the largest social enterprise acquisition in Australia.
- The Social Roasting Company was acquired by Fair Business, a non-profit organisation whose aim is to help long-term unemployed people access permanent employment.
- In 2000, the Brotherhood of St. Laurence acquired Mod-Style, an optical frames importing and wholesale business, enabling the organisation to generate income and conduct eye health related research for low-income Australians.
By far the biggest advantage of buying a franchise is the proprietary systems, processes, brand and customer base that have already been established, but that doesn’t mean that buying a franchise has no risks. Like buying an existing business, franchising usually requires a higher investment than start-up, but it comes with a range of advantages.
- No need to reinvent the wheel:
– Established brand
– Experience and proven business model
– Access to proprietary methods.
- Marketing support – Most franchise organisations provide marketing and advertising support nationally and locally.
- Suppliers – Access to reputable suppliers and ability to obtain a lower price through bulk buying.
- Training – Franchisors often provide operations, management or technical training to franchisees to ensure uniformity.
- Support – Depending on the franchisor, financial assistance and business support are available.
- Ongoing research and development will be taken care of by the franchisor.
- You are still the boss in managing and running the franchise.
- Reduced risk – franchising is less risky for the reasons listed above.
- High initial payout – some franchises require a high franchisee fee and start-up cost. But not all franchises cost more than starting your own business.
- Royalty payments reduce profit potential.
- Marketing / advertising fees sometimes apply.
- Might have limited flexibility to choose or change suppliers.
- Limited creativity / flexibility on branding, marketing and product offering.
- Contract periods may be long, and there is a possibility that you are stuck for several years.
- Your success is dependent on the franchisor’s success – a consumer’s negative experience with another location/franchisee may affect their overall perceptions of your franchise.
- Franchising does not guarantee success – there is still much risk involved, like any business.
Some examples of social enterprise franchises are as follows:
- The Bendigo Community Bank franchise, with 264 branches across Australia, not only offers local communities access to a quality banking products and services, but also delivers local employment opportunities, keeps local capital in the community, and reinvests profits into the community.
- Starting a business
Sometimes an existing business or franchise does not offer the type of business that you intend to start, and the best way is to build from the ground up.
It is also possible to replicate another business with a proven business model, but the risks are still very high and it still involves all the hard work of starting up a business.
For example, Food Connect is a fruit and veggie box scheme that started in Brisbane in 2004 to deliver local seasonal produce to consumers. The Food Connect business has now been successfully replicated in Sydney, Melbourne and Adelaide, with new branches planned in Wollongong and Coffs Coast in Tasmania.
Start Up: Pros
- You get to design the business to fit all your requirements.
- Investment in the business can be spread out over time.
- You have more intimate knowledge and understanding of the business because of the extensive research and feasibility studies carried out.
Start Up: Cons
- Starting from scratch is hard work.
- Success of the business model is not proven (unless replicating, but there are still risks involved in properly implementing the business).
- Might take more time and financial capital to get the business model right.
Each existing business or franchise opportunity is different, therefore it is most important to evaluate each opportunity separately.
Have you considered acquiring an existing business or franchising?
Have you found any existing business or franchise opportunity that meets your social enterprise needs?
Have you evaluated the viability of the opportunities above?
Have you determined the best way forward for your social enterprise (i.e. acquiring, franchising, or starting up?)
The following are some online resources on the topics of:
- Acquiring a new business:
Decision Time: Evaluating your idea
By now, you should have developed a better understanding of your business concept. Based on the worksheet activities, new information and feedback on your elevator pitch, evaluate your business idea systematically by completing the following worksheet.
STOP / GO: Do you proceed?
Remember that what you’ve completed so far is an initial test of the business viability of this idea. If you decide to take this idea to the next stage, an in-depth feasibility study will be conducted to thoroughly evaluate the market, organisational and financial feasibility of this business. Conducting a feasibility study takes a lot of time and effort; therefore, you need to know what areas within the business need particular work. For most businesses, understanding market viability is one of the biggest hurdles. AC