Report - University of Texas at Dallas



University of Texas - Dallas

IT-EMBA Class 2002

Group 226

“Flowers Online”

E-Business Plan Evaluation

A Thorough Analysis of “Flowers Online’s” New e-Business Plan

Tim Pitt

Mary Milan

Lynn Murphy

Thercio Brandao

Seper Shahidzadeh

Ken Hollingsworth

Introduction

Flowers Online is the new venture of an established, two and a half-year old company, First Flower Company. First Flower Company has been hugely successful as a seller of fresh flowers via mail order. Their primary business has come via their color catalogues that are mailed to existing and potential customers six times per year. They have targeted a high-end market segment, focusing on busy professionals, hotel and corporate accounts, and event coordinators. By building strong relationships with over thirty growers and Federal Express, First Flower Company has been able to essentially remove the distributor and wholesaler from the process of bringing freshly cut flowers from the grower to the consumer. For the consumer, this has meant having access to the freshest flowers available. For the growers and Federal Express, it has meant access to new business channels. For First Flower Company, it has meant revenues in excess of $10 million.

The company’s central office is located in San Francisco. The number of employees varies from 5 to 60, depending on the season (Valentine’s Day and Mother’s Day being the busiest times). The executive management team consists of Ruth Pitt as President and CEO, Fran Hollingsworth as Vice-President of Operations and Ann Brandao as Vice-President of Marketing. They each have MBAs from UTD and several years of experience in the mail order business. They now want to take their business online in order to reach an even greater number of flower consumers. Their new B-C e-business model will be the merchant model, incorporating B-B integration for better management of knowledge and supply to/from their key partners, i.e., their primary growers/suppliers and FedEx. They are asking their original investors, who should be very pleased with the results of the business thus far, for an additional $5 million to fund the rollout and establishment of the required IT infrastructure and business operations for this new online venture. This paper presents a fictitious business proposition, as outlined above, and proceeds to analyze it from the point of view of the venture capitalists that are being asked for funding. The paper tries to ask the questions that would be important to the venture capitalists, and answers them so that the investors are satisfied. The business proposition is loosely based on a real company, Calyx and Corolla, an online florist.

The Management Team and Business Partner Matrix

First and perhaps foremost when reviewing a business plan, be it e-commerce or otherwise, one must begin with the people -- the people who will run the company as well as the people who will supply the company’s inputs in order to run the company. Arthur Rock, a venture capital legend, states: “I invest in people, not ideas…If you can find good people, even if they are wrong about the product, they will switch, so what good is it to understand the product they are talking about in the first place.”

When looking at the management team one should have a set of questions in mind. Some suggestions are: Where are the founders from? Where have they been educated? Where have they worked, and for whom? What are their accomplishments? What is their reputation in the business community? What experiences do they have in the area they are pursuing? What skills, abilities and knowledge do they have? How committed are they to this venture? What are their motivations? Once these questions are asked one should have a set of expectations for their answers. Is it prudent to invest in someone with a high school education, or do your tolerances run higher than this? Once the investor has these tolerances established he can begin to analyze the “people piece” of the equation. Further calibration of these tolerances is needed to fine-tune the overall processes.

As stated in the introduction, this is an evaluation of Flowers Online, an e-commerce venture based on First Flower Company. They see a need and an opportunity to venture into online commerce in order to grow their business. From the people perspective, the questions can be a little more pointed. The CEO is a UTD MBA with great connections in the mail-order business. She has assembled a team, inclusive of another UTD graduate with whom she has worked at a reputable and successful direct mail order organization. She has also added another twenty-year veteran of catalog retailing. What seems to be missing from this team is someone with an IT background who can help take the existing business and establish a “selling over the web” strategy.

A second consideration beyond the people running this business is that of the partners with whom Flowers Online is currently aligned. From the growers to the delivery service each should be carefully looked at in terms of whether or not they can provide the support for the new business model. As far as the growers are concerned it will deal with availability of inventory for expected increased demand. Do they have any systems issues? Are they even up and running with computers? As for the delivery service, are they prepared to partner toward faster, better, cheaper?

Overall, the passion of the people driving the business will determine just how far it will go. Measuring passion is more art than science. It again goes back to what tolerances one has set for oneself and the risks one is willing to take.

The Opportunity

The opportunity is centered around being able to reach a much larger market than the current catalogue market of First Flower Company. Further, it enhances the product offering and streamlines the business-to-business, as well as business-to-consumer processes.

The need for information technology has never been greater as it is now in the Internet age. To achieve the competitive advantage in the online space, substantial investment to build the infrastructure is required. This technology supports the level of information processing to provide the services that have become industry standards and create innovative ideas to set the business services and products apart from the competition.

Having a strong alliance with one’s suppliers is a crucial factor necessary to provide timely, quality products and services. It is a best practice to diversify the number of suppliers. This allows sales to the company by the growers to represent no more than 25% of any one grower’s business and have contracts to prohibit them from supplying any other direct business. Additionally, educating the growers to execute retail responsibilities accurately, quickly and providing them with shipping boxes, cards, labels, vases and etc, have enabled this floral business to be more streamlined. However, by building applications that will match demand forecast with growers’ inventory / crop information and provide real-time information on state-of-the-art systems, the business can greatly improve efficiency. Custom applications can be processed if the business establishes an extranet infrastructure with its growers, suppliers and shippers. The growers will be able to access order information as they are received by the business in a real-time mode, minimizing order processing time and creating a continuous process flow. This technology can help the growers / suppliers utilize their excess inventory, enabling them to manage costs better and provide competitive pricing to the consumer and create higher profit margins.

A quality web-site for online retailing can minimize the need for hardcopy catalogues and will decrease the sales and marketing expenses for catalogue production and mailing. A lesson learned from other mail-order business is to not simply transfer the catalog information to the business web-site but to create systems that will provide a user-friendly and informative site, enhancing the whole buying experience.

The relationship with shipping companies such as FedEx provides negotiated price that varies little by weight. FedEx tracking data is valuable information that can be tied to each order that is shipped. Therefore, to enhance customer service on the business web-site, this information can be made available to allow customers to view their order status along with account information. The most important item of the business web-site is its capability to provide quality, descriptive information of its products along with images. The web-site has extreme revenue potential due to the fact that 70% of sales were originated by the catalogue sales. The online space and the business web-site provide the outreach that catalogue distributions can not possibly provide. Online advertising is necessary by utilizing banners and links with department stores, retail and online partners selling items such as gifts, chocolates and stationery. This could also enhance the entry barriers for new competition by establishing exclusive relationships with business partners and utilize many of the business practices used by the mail-order catalog that have proven to be successful.

The Transition Plan

Most companies have probably already begun to experiment with the Internet and the Web. Small-scale exploration and experimentation, however, is very different from a serious commitment to change your company from a traditional business to an Internet or Web-based business. The commitment to change is a commitment to reengineer the company, to change company business processes, and to create new systems and new ways of doing business that will take advantage of the Internet. Some theorists now distinguish between first-generation Web applications and second-generation e-business applications. First-generation Web applications can be constructed without making major changes to a company’s existing enterprise systems. In effect, a Web application is simply a Web site that is more or less independent of the company’s other applications. E-business applications, however, require much more extensive changes, and they normally need to be integrated with a company's legacy applications. Thus, the decision to create a company Web site is easy, but the decision to undertake major changes in core business processes and to develop second-generation e-business systems is a serious matter.

A serious effort cannot begin or proceed without the commitment of senior management. Companies that are serious about making the transition usually begin by creating a committee that includes the CEO, COO, CIO, and most of the company's division or department heads. If one is talking about changing the very nature of the company, all of these individuals must be involved in the discussions that lead up to the commitment. Once a commitment is made, a subcommittee is typically created and empowered to draw up more specific plans and, once they are approved, to oversee implementing them. In many cases, an individual especially hired for the job heads the subcommittee. The task of heading a transition committee requires a rare mix of skills. The individual has to be equally sensitive to the business problems and the information systems problems involved in the transition. In addition, if the company decides to acquire new e-business companies, or to set up a subsidiary, this individual needs to be able to help plan very high-level corporate strategies.

Once the company has made a commitment and set up a committee to oversee the actual transition process, the committee turns to the actual work of business process reengineering (BPR).

Business Process Reengineering, in General

Business processes tend towards horizontal integration. A single process integrates everything that is required to move from the original customer request to the fulfillment of the customer request. When possible, companies often try to achieve vertical integration as well. In this case, they seek to link to suppliers to extend the control the company can exert over the performance of the task. Most computer manufacturers, for example, have good horizontal control, moving from order to assembly to delivery in a systematic way. They do not, however, have vertical control, since they depend on others for the chips and other hardware elements that they use to actually assemble the computers they sell.

The key element in most BPR efforts is the identification and analysis of business processes. Companies seek to reduce the number of steps in their processes while increasing their efficiency. At the same time, they try to focus on customer needs and what makes customers happy. The goal is to be the best at providing a particular product or service by perfecting the business process involved. At the same time, however, the focus should be on processes that embody the company's real expertise and to subcontract secondary processes and even some internal processes to other companies that can specialize in those processes.

Achieving the Competitive Advantage

In order to achieve true competitive advantage, Flowers Online requires accurate information on elements outside itself. Lowering activity costs only achieves advantage if the firm possesses information on its competitor’s cost structures. While reducing isolated costs can improve profits temporarily, it does not provide a clear competitive advantage unless the firm can lower its costs below a competitor’s. Doing so enables Flowers Online to lower its prices so as to grow its market share.

The value chain framework suggests that competition stems from two sources: lowering the cost to perform activities and adding value to a product or service so that buyers will pay more. Following this definition of competitiveness, Flowers Online has to rethink each activity of the value chain in terms of e-business. The new or improved processes have to bring down the costs of performing the same activities and add more value by increasing the quality and the response time through the innovations and technology of an online retailer model.

Improvements to Inbound Logistics

• Specific password protected areas will be available

in real-time via web to growers and suppliers.

• The company can share marketing promotions and

forecasts with suppliers to meet peak demand periods.

• The company can receive growers’ / suppliers’ inventory information to schedule seasonal promotions and sales.

• Orders to each grower will include detailed information about shipping, types of flowers, packaging, personal notes, etc.

Improvements to Operations

• There will be better control over information, more

transparency and trust between Flowers Online and

suppliers.

• The cycle time from order to delivery will be reduced.

• There will be a more continuous flow of supplies and less chance of stock-outs.

Improvements to Outbound Logistics

• The company will have the ability to provide its entire

selection online, reducing the number of needed

customer service representatives.

• There will be reduced risk of error in the order acquisition process and decreased order time.

• The customers will have the ability to track their own shipment through links to FedEx’s web site.

• Different shipping options can be made available to customers during ordering.

• The growers and suppliers can track shipments at any time.

Improvements on Marketing and Sales

• Promotions can be created and displayed at a very

low cost through the web pages.

• Company banners and ads can be placed in other

well known or strategic sites, with a pay-per-click model.

• Links and tie-in programs with corporate partner sites (Bloomingdale’s, SmithKline Beecham, etc.) can be created.

• Customer behavior can be tracked and the information used to drive new promotions and focus the product offering.

• Data mining tools can easily detect patterns in sales.

Improvements to Services

• Returns and complaint forms can be made available

online, reducing the need for numerous and costly

customer representatives.

• Instantaneous customer feedback after the ordering process can be obtained, helping assure quality service and customer satisfaction.

Improvements to support activities

• Flowers Online will need to use IT consultants to

help implement the transition plan and provide

just-in-time training.

• The transition team or departmental champions must communicate the transition plan throughout the organization to facilitate a knowledge transfer.

• Pilot projects and alpha/beta tests can test the system before going live.

A Transition Plan

Some organizations set up a group within the existing organization or even try to convert the entire existing organization more or less simultaneously to oversee their entry into the e-business arena. Others hire separate companies to help them achieve this. This is the approach that First Flower Company should take with Flowers Online since they do not have the necessary IT expertise. However, no matter what type of transition a company plans to undertake, it will have major implications for the IT organization. As shown in the figure below, a typical transition is divided into four phases: Initiation, Pilot development, Conversion and Continuation. The figure provides an overview that shows the phases, the generic tasks, and some of the specific activities that must occur during the transition. Flowers Online should follow this model.

In Phase 1 the transition plan is created. In Phase 2 the conversion is begun by developing the architecture and infrastructure needed, incorporating a set of pilot projects. This should be an iterative process, addressing the highest risks early on and gradually building the component architecture through successive pilot projects. When the pilot phase ends, the company has a core of trained developers and a basic distributed component architecture and infrastructure. During Phase 3 a more extensive transition takes place, and the majority of the IS / IT developers are trained and assigned to appropriate projects. Everything that was started in Phase 2 is extended and made more robust in Phase 3. Phase 3 ends when the IT organization is fully up to speed on e-business development and ready to support any new development efforts the company may choose to undertake. Phase 4 is simply the ongoing management of an e-business IT organization.

Architecture and Infrastructure

Strategy drives architecture, which drives infrastructure. Strategic business goals dictate the IT architecture requirements. These requirements provide an extensible blueprint suggesting which infrastructure components will best facilitate the realization of the strategic goals. Ruth Pitt’s role is to understand how to plan IT in order to realize the business goals. With this knowledge, she can facilitate the process of translating business goals to IT architecture and then modifying the selection of infrastructure components as necessary.

Flowers Online will use a logical framework to guide them during the translation from business strategy to IS design. This translation is simplified by categorizing components into broad classes (hardware, software, network, data), which make up both IT architecture and infrastructure. While translating strategy into infrastructure, the company will realize the importance of knowing the state of their existing architecture and infrastructure in order to weigh current against future requirements, and to analyze the financial consequences of the various systems options under consideration.

Making infrastructure and architecture decisions involve joint discussion with business managers and IS professionals. Decisions such as whether to buy a software package from a vendor or to build a system in-house often have wider implications than just solving the initial business need. Flowers Online can solve that dilemma by choosing to use an outside consulting firm to help in the initial steps and also to bring the competence in house during the transition plan.

As IT becomes more crucial to creating and sustaining a competitive advantage, so does the need for managers to effectively translate business strategy into IT infrastructure. The framework presented by the company in the Initiation phase facilitates that translation.

The Context

The opportunities that are available to Flowers Online will be limited but can also be expanded by the boundaries or conditions specific to the business. These boundaries or conditions define the context of the business and the business objectives. Through understanding the context of the business, the managers at Flowers Online will have additional tools that can be used to make the necessary changes, implemented at the proper times to meet and exceed objectives.

The context of Flowers Online will be affected by demographic trends, local, domestic and foreign economies. Economic activity, inflation rates, exchange rates, interest rates and tax policy as well as other government rules and regulations will have a profound effect on the entrepreneurial process through the business context. Flowers Online will be contained by the limits of technology and they will also be limited by their ability to raise the necessary capital for expansion. Recognizing the existence of the above factors and their effects on the Flowers Online business, context will assist the management team during the decision process. The intent of Flowers Online is to address all of the pertinent questions that the venture capitalist should be asking while evaluating the business. The sections that follow will further define some of the contextual issues that affect Flowers Online and will also present some of the questions that should be asked.

Demographic Trends

Demographic changes or trends within society may drive the flower industry in one direction or another. As an example, a negative shift in the identity of some species of flower that has been tied to some bad occurrence or a growing process that is identified as destructive in the eyes of the public can have an adverse affect on the business. This negative stigma can persist even to the point of causing the business to fail. A change in society’s taste in flowers can be either good or bad and Flowers Online must be aware of the changes and react accordingly. In defining these contextual boundaries of Flowers Online, the management team has attempted to reassure investors that they understand the demographics of the new company. The following questions will help set the demographic context. What are the customer boundaries? What is the target market? What are the demographic trends that will drive the character of the company? What are the boundaries of the business as defined by the trends of society?

Economic Conditions and Activity

Of course, the condition of the economy will have a profound affect on Flowers Online as people will usually search for the best value in tougher times and spend easier when it is strong. Investors looking at Flowers Online can rest assured that company management will keep appraised of the state of the United States economy and foreign country suppliers’ economies. During inflationary times or times of recession, the contextual boundaries of Flowers Online will fluctuate based on these conditions. Managers at Flowers Online recognize the constraints that could exist during these times and they remain set to change as necessary. Exchange rates along with the other economic indicators will have some affect on Flowers Online primarily due to the use of international purchases through foreign markets as in Columbia and Thailand. Flowers Online will maintain a tight company policy that deals directly with the problems that arise in international business dealings. The large daily fluctuations in the currency exchange rate is a major contributor to the problems that arise when dealing in foreign currency. Currency problems for Flowers Online will be reduced or eliminated by using dollars exclusively when negotiating international business deals. Some of the questions that must be constantly reviewed by management and investors are listed below. How are the contracts with foreign suppliers from outside the U.S. set for payment? Are there specific requirements in the contracts that payment can be made with foreign currency?

Flowers Online will require a $5 million investment up-front and management should time the online implementation to coincide with lower interest rates to whatever extent possible. This could be an advantage or a disadvantage for the company as the extremely low rates could indicate a slump in the economy and signal difficulties.

Government Rules and Regulations

Flowers Online completely evaluated the impact of procuring roses from Columbia and orchids from Thailand. The following questions have been addressed by the managers at Flowers Online and should be a concern for the venture capitalist. Are there state-mandated regulations on transporting plants across state borders? What countries and international companies are direct vendors or flower suppliers? What is the state of relations with the countries that are identified as suppliers? What are the current laws associated with the import of plants and flowers from these countries?

Tax Policy

Understanding tax laws of the United States, Columbia and Thailand will be a major consideration for Flowers Online. As an established catalogue business going online, the new company must maintain expertise with regard to current laws. Questions that would benefit the venture capitalist follow: Where can we realize an advantage regarding taxes at the Federal, State and Local levels? What incentives are being offered to locate in a particular area? What are the standard procedures in the involved foreign countries? What are the unwritten laws?

Technologically Defined Limits

A look at the limits of technology and the availability of the technology is important for the new company and for its investors. The application of technology in the flower business is not usually one of the top priorities. It is important here, though, to ensure that the best online services are provided to the customer. Potential investors should investigate the computer system and the service providers selected by the new company to insure that the benefits are solid. First Flower Company has been very successful in the mail order catalogue business. Using a mail order company as a basis for setting up an on line florist is logical.

Context Recognition

The venture capitalist must be ready with the questions that will provide him with the contextual boundaries of the business. Knowing the context of the business and knowing what causes the boundaries that exist for Flowers Online are extremely important to both management and investor. The managers at Flowers Online will use their knowledge of the floral business to influence or drive the business to a more favorable context if over time the company’s condition shifts towards the unfavorable. No plan will cover absolutely all of the eventualities that are part of going online, though every effort must be expended to ensure that problems during the change from pure catalogue sales to being online are minimized. Defining the context boundaries for the new plan will move the company closer to its goals and will move the venture capitalist closer to their goals. There will always be the business necessities that require changes to the original plan when the business context changes.

Risks and Rewards

Risks

One of the great myths about entrepreneurs is that they are risk seekers. To the contrary, astute business people want to avoid risk if at all possible. As Harvard Business School professor Howard Stevenson says, true entrepreneurs want to capture all the reward and give all the risk to others. Unfortunately, risk is unavoidable, however it can be minimized with some forethought, foresight, and good planning. There is an old saying, “ If you don’t know where you are going, any road will get you there.” The exact opposite is true; you must know exactly where you are going and have a map laid out to get you there.

First Flower Company understands the risks that are involved in a highly competitive industry that deals in commodity goods that have a relatively short shelf life. It is their industry experience and market knowledge that give them the advantage over potential competitors. They have had the financial successes along with the subtle failures in their previous business ventures that have helped the management team hone their skills. The following are risks that are necessary to address. Comfort comes in knowing that they have the abilities to overcome these risks if and when they should ever become realities.

The new business model is dependent on having strong relationships with a varied cast of suppliers from different regions of the world who are capable of complementing the full line of products. By establishing these exclusive agreements with five to six growers, Flowers Online has spread its risk thin enough to not be effected by the loss of any one or two suppliers. In other words, they have not put all their eggs in one basket. Any one of their suppliers could at any time lose the ability to meet their obligations to Flowers Online due to government restrictions, customs, weather-related damage, or simple management failure. The management team is aware of these possibilities and has structured their business arrangements to reflect this.

Seeing as the business is reliant on the agricultural industry, it could be at the mercy of Mother Nature and her wicked sense of humor. As mentioned above, weather-related catastrophes and natural disasters are risks that cannot be overlooked in the floral business. There have been news accounts of crops being ravaged by storms, flooding, insect infestations, fungus and disease. Flowers Online has considered this.

Another advantage to having their suppliers spread out across geopolitical boundaries is in confronting the possibilities of political instability and / or government intervention. Some of the finest growing areas in the world happen to be in some of the most unstable countries in the world. Understanding the fact that governments can change over night in some of these regions, Flowers Online has to be prepared in the event that a particular supplier is suddenly cut-off from them. These same instabilities can also account for exchange rate fluctuations that may be beneficial to Flowers Online under certain circumstances, but may be detrimental under other circumstances. For numerous reasons, it is only good business sense to establish relationships with, and contract with multiple growers.

Competition is always a concern for any viable interest. However, it is the new company’s contention that by having established a strong customer base through their catalogue format over the last several years, they can transition not only that customer base but also an entire new market to their unique, high-end product line and buying experience. First Flower Company has never been just the corner flower shop that offered the basic line-up of flowers in a generic package. They intended to and succeeded in establishing themselves as a venue for upper-income customers to find not only the best quality basic flower lines, but to also find the highest quality exotic flowers all packaged in unique, luxurious fashions. They have become an experience for the discriminating buyer. By building that same experience into their online web site, they have an advantage that any subsequent competitor will have to overcome.

Another risk that Flowers Online has addressed which is paramount to success is the issue of on-time delivery and shipping. Their customers demand the speed and convenience of the corner flower market while wanting the unmatched quality and variety that Flowers Online can deliver. In order to deliver customers’ orders overnight while the flowers are still their freshest, Flowers Online has to have an established, cost-effective shipping alliance with at least one of the more reputable providers in the market place. Flowers Online has come to terms with FedEX and they are proposing to make arrangements with a second company, such as UPS or HDL. This would support a portion of their deliveries so that in the event one or the other company poses a problem either price-wise or service-wise in the future, Flowers Online will be well positioned to have uninterrupted delivery service.

Another risk is the reliance on the new IT structure that will take them successfully into the e-commerce arena. Being a fully viable internet commerce player means going high tech. Due to the risk of being reliant solely on computers, software, and server connectivity, it is in Flowers Online’s best interests to initially outsource all their IT needs to an extremely competent consulting group. Eventually they should have an in-house maintenance staff to deal with basic troubleshooting. They should have a contingency plan for systems failures, and based on their success in the catalogue sales, using catalogues as a backup system would behoove them.

Although every venture is at risk to some degree, Flowers Online is well prepared to avoid the risks that would lead to failure. However, things can happen beyond their control and they have structured their business plan to deal with those contingencies. Ultimately, the payoff will be in realizing the tremendous economic rewards associated with their well-defined and executed business plan. These rewards are many beyond just what is listed next.

Rewards

Flowers Online’s sojourn into the e-commerce environment is simply an enhancement to their already successful catalogue business. The tremendous opportunities lie in their ability not only to strengthen their existing market share but also to increase that exponentially. Through the catalogue business the barriers have been the inability to reach more of the market via cost-efficient methods which could give them equal if not greater ROI. With the proper allocation of marketing and advertising dollars they should be able to greatly increase their effectiveness in reaching the demographics within their market niche as well as extracting more sales from each individual customer. Not only will their annual gross revenues grow, but more importantly, so will their net income and profit margins.

The greatest reward is in realizing a viable exit strategy. Flowers Online’s objective is to see double-digit growth over the next five years with profit margins increasing to the double-digit range as well. This type of growth pattern in a market that has not yet seen anywhere close to it’s full potential realized should make them an IPO candidate within two years. That is the goal. Worst case scenario is that they become a very attractive acquisition for one of the industry behemoths out there either as a threat to their existing business or as a very nice compliment. Their ability to effectively utilize a proper IT infrastructure along with perfecting the order acquisition, tracking and shipping processes is key to their continued growth and success. They are poised to perform.

References

1. “How to Write a Great Business Plan”

William A. Sahlman, Harvard Business Review, August 1997

2. “Calyx & Corolla”

Case Study prepared by David Wylie, Harvard Business School, 1991

3. “Managing and Using Information Systems, A Strategic Approach”

Keri E. Pearlson, John Wiley and Sons, Inc., 2001

4. “Developing e-Business System Architectures”

Paul Harmon, Michael Rosen, Michael Juttman

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