What are the Sensex & the Nifty?

The Sensex is an "index". What is an index? An index is basically an indicator. It gives you a general idea about whether most of the stocks have gone up or most of the stocks have gone down.

The Sensex is an indicator of all the major companies of the BSE.

The Nifty is an indicator of all the major companies of the NSE.

 
If the Sensex goes up, it means that the prices of the stocks of most of the major companies on the BSE have gone up. If the Sensex goes down, this tells you that the stock price of most of the major stocks on the BSE have gone down.

Just like the Sensex represents the top stocks of the BSE, the Nifty represents the top stocks of the NSE.

Just in case you are confused, the BSE, is the Bombay Stock Exchange and the NSE is the National Stock Exchange. The BSE is situated at Bombay and the NSE is situated at Delhi. These are the major stock exchanges in the country. There are other stock exchanges like the Calcutta Stock Exchange etc. but they are not as popular as the BSE and the NSE.Most of the stock trading in the country is done though the BSE & the NSE.

Besides Sensex and the Nifty there are many other indexes. There is an index that gives you an idea about whether the mid-cap stocks go up and down. This is called the “BSE Mid-cap Index”. There are many other types of indexes.

There is an index for the metal stocks. There is an index for the FMCG stocks. There is an index for the automobile stocks etc. If you are interested in knowing how the SENSEX is actually calculated...you must check-out our "How to calculate BSE SENSEX?" article! 

But, before we go ahead and try to understand "How to make money in the stock market?" you MUST read the next page....

How to calculate BSE SENSEX?

This article explains how the value of the “BSE Sensex” or “sensitive index” is calculated. If you are not sure what we mean by the Sensex or what the Sensex is all about, you can find this out by reading our “How to make money in the stock market?” article.

The Sensex has a very important function. The Sensex is supposed to be an indicator of the stocks in the BSE. It is supposed to show whether the stocks are generally going up, or generally going down.

 

To show this accurately, the Sensex is calculated taking into consideration stock prices of 30 different BSE listed companies. It is calculated using the “free-float market capitalization” method. This is a world wide accepted method as one of the best methods for calculating a stock market index.

 

Please note: The method used for calculating the Sensex and the 30 companies that are taken into consideration are changed from time to time. This is done to make the Sensex an accurate index and so that it represents the BSE stocks properly.

 

To really understand how the Sensex is calculated, you simply need to understand what the term “free-float market capitalization” means. (As we said earlier, the Sensex is calculated on basis of the “free-float market capitalization” method) But, before we understand what “free-float market capitalization” means, you first need to understand what “market capitalization” means.

What makes stock prices go "up" and "down"?

Stock prices change every day because of market forces. By this we mean that stock prices change because of “supply and demand”. If more people want to buy a stock (demand) than sell it (supply), then the price moves up!

Conversely, if more people wanted to sell a stock than buy it, there would be greater supply than demand, and the price would fall. (Basics of economics!)

Understanding supply and demand is easy. What is difficult to understand is what makes people like a particular stock and dislike another stock. If you understand this, you will know what people are buying and what people are selling. If you know this you will know what prices go up and what prices go down!

To figure out the likes and dislikes of people, you have to figure out what news is positive for a company and what news is negative and how any news about a company will be interpreted by the people

.

The most important factor that affects the value of a company is its earnings. Earnings are the profit a company makes, and in the long run no company can survive without them. It makes sense when you think about it. If a company never makes money, it isn't going to stay in business. Public companies are required to report their earnings four times a year (once each quarter).

Dalal Street watches with great attention at these times, which are referred to as earnings seasons. The reason behind this is that analysts base their future value of a company on their earnings projection. 

If a company's results are better than expected, the price jumps up. If a company's results disappoint  and are worse than expected, then the price will fall.

Of course, it's not just earnings that can change the feeling people have about a stock. It would be a rather simple world if this were the case! During the “dotcom bubble”, for example, the stock price of dozens of internet companies rose without ever making even the smallest profit. As we all know, these high stock prices did not hold, and most internet companies saw their values shrink to a fraction of their highs. Still, this fact demonstrates that there are factors other than current earnings that influence stocks.

So, what are "all the factors" that affect the stocks price? The best answer is that nobody really knows for sure. Some believe that it isn't possible to predict how stock prices will change, while others think that by drawing charts and looking at past price movements, you can determine when to buy and sell. The only thing we do know is that stocks are volatile and can change in price very very rapidly.

Just remember this: At the most fundamental level, supply and demand in the market determines stock price.

There are many types of techniques and methods that investors use to figure out whether a stock price will go up or down! We will try to give you an introduction to these techniques in this article.

But before we go into the concepts of stocks picking, and the techiques of analysis, let us understand one last basic thing....

Why does a company issue stocks?

Why would the founders share the profits with thousands of people when they could keep profits to themselves? The reason is that at some point every company needs to "raise money". To do this, companies can either borrow it from somebody or raise it by selling part of the company, which is known as issuing stock.

A company can borrow by taking a loan from a bank or by issuing bonds. Both methods come under "debt financing". On the other hand, issuing stock is called “equity financing”. Issuing stock is advantageous for the company because it does not require the company to pay back the money or make interest payments along the way.

All that the shareholders get in return for their money is the hope that the shares will someday be worth more than what they paid for them. The first sale of a stock, which is issued by the private company itself, is called the initial public offering (IPO).

It is important that you understand the distinction between a company financing through debt and financing through equity. When you buy a debt investment such as a bond, you are guaranteed the return of your money (the principal) along with promised interest payments.

 
This isn't the case with an equity investment. By becoming an owner, you assume the risk of the company not being successful - just as a small business owner isn't guaranteed a return, neither is a shareholder. Shareholders earn a lot if a company is successful, but they also stand to lose their entire investment if the company isn't successful.

It’s a tricky game!

Note that: There are no guarantees when it comes to individual stocks. Some companies pay out dividends, but many others do not. And there is no obligation to pay out dividends. Without dividends, an investor can make money on a stock only through its appreciation of the stock price in the open market.

On the downside, any stock may go bankrupt, in which case your investment is worth nothing. 

Having understood this, we now want to know what makes stock prices rise and fall? If we know this, we will know which stocks to buy. In the next section we will try to understand what makes stock prices go up and down.

Why should you invest?

You will not have to work!

You probably have heard the phrase “Let your money work for you!”. Just incase you do not understand what exactly this means, let us explain. The whole idea of investing is that you create or buy an “asset”.

What is an asset?

An “asset” is something that generates money. Just to give you an example, if you buy a flat for 4 lakh and then rent it out for Rs.3000 a month then you have created an asset. An “asset” that generates Rs.3000 a month.

However, this is just one type of asset. Assets are of many kinds. If you have a “copyright” or patent in your name, for which you get paid a certain amount when anybody uses it, then that too is called an asset. If you own a small pay phone from which you make just Rs.20 each day, then that too is called an asset!

The above given explanation is very crude, but that is the basics of investing. You want to invest the money you make in assets. Assets that generate money. The idea is that once you invest your money in enough assets, you can stop working. All your assets will make money for you. You can then use this money to enjoy life. Or you can use this money to invest in more assets that generate more money! So all this gives us the phrase, “Let your money work for you!” This is the main aim of investing. However, there are many other smaller aims of investing and we have explained them to you next...

Urban and rural life of India

Up until recently, large part of the marketing that was done in this country was done, targeting the urban population of the country. Now the marketing potential of the rural part of the country is rapidly growing. Let us get an understanding of the urban and rural break up of the country.

26% of the population lives in the cities or in urban India. The remaining 74% lives in the villages or in rural India. The population of the country is spread over the villages but is very concentrated in the cities. India has six of the largest cities in the world. These are - Calcutta, Bombay, Delhi, Madras, Bangalore and Hyderabad.

Besides these cities, there are six other cities that are growing at a very rapid rate and have a huge concentration of the population. These are - Ahmedabad, Kanpur, Pune, Nagpur, Lucknow and Jaipur. In addition to these cities, there are around 4000 towns that have concentrations of the population.

In the cities, there are a lot of jobs available now-a-days due to call centers and BPO's. This has given many more people purchasing power. Items that were luxury items a few years a go are seen in every house in the cities.

Besides the cities 74% of Indian population lives in the villages. As the standard of living in the villages also improves, many modern facilities are available in almost every house hold in the villages too.

Now a days the TV is there in most of the houses in the villages too. This has exposed them to a lot of advertising lifestyles and products. The villages have become a huge market that will be of great consequence in the near future. In the future, companies with a strong product distribution system reaching all the villages will have a very strong advantage over the rest.

The country is growing, and is a place where business will thrive in the near future. To understand this better consider the following favorable shifts that have taken place in the consumer patters of buying.

Understanding the “middle class” urban teenager as consumer

They are more adventurous than their elders and they care less for tradition and religion. The often are after a "New Look" and they seek novelties. They are quick to adopt new fashions that emerge.

They are generally more receptive to change. They believe more in spending money in the pursuit of pleasure than saving for the future. It is not easy to dupe them but it is quite easy to motivate them. Teenagers are becoming quite a distinct market segment.

They not only have products and services that been designed to cater their needs but also they are an influence on the decisions taken by adults. Some estimates show that around Rs.500 crore a year is the amount of money given to children as pocket money.

That covers a general understanding of the Indian market on the whole and the middle class of the market (which is the biggest consumer base for industries) in specific. Now let us go into a detailed understanding of how the process of marketing is done.

Understanding the Indian Consumer

Here we have tried to provide you an overview of who our Indian consumers are. How our Indians think. And a brief overview of what kind of a market India is. The next few pages will cover all this information in detail.

Note: Our country is growing at a very rapid pace. The state of job opportunities, salaries etc. is improving rapidly. Simply put the county is changing every day for the better.

So this information holds true now (as in when this article was written i.e. Jan 2nd 2006) and will be more or less true a few years from now. However, it would be a good practice to keep in touch with the latest trends in thinking of the Indian consumer.

Understanding Indian economical classes

The country is very diverse and has many different languages, cultures, beliefs etc. It is hard to categorize the Indian buyer on basis of this diversity because it is so varied.

The consumers in India can be classified on basis of their economic status to get a better idea about the populations buying behavior.

The affluent group:

The affluent group forms a very small part of the population of the country. They are negligible in percentage. A large manufacturing/marketing business cannot be supported by the consumers from this group alone. (Unless the products are especially designed, high priced luxury products.)

The middle class:

The middle class forms the customer base for most of the business in the country. India has a very large middle class. The population of the middle class exceeds the population of both Germany and France put together. This is the largest economic class in the country. Special attention is to be given to the consumers in this class and so this class will be discussed in detail a little later.

The poor:

The poor class is the second largest class in the country. They have very little purchasing power. However, now as the country is growing, and due to the work of many social, educational and economic programs, a large part of this class is slowly merging into the middle class.

"The power of compounding!"

Compounding is a very interesting and powerful thing. It has great rewards in store for people who invest when they are young. If you invest later in life you will not be able to make use of the great “power of compounding”!

Just to give you an example…assume that there are two people. Ram and Sham.

Ram invests Rs.5000 each month for 10 years from the time he became 25.

Sham invests Rs.5000 each month for “25 years” from the time he became “35”.

Note that Ram invested Rs.5000 monthly for only 10 years. Sham invested Rs.5000 monthly for 25 years! Now, who do you think will have more money when they are 60? Think about it a little! Who do you think will have more money at age 60?

Assuming that their money grows at 15% per year, at age 60 Ram will have Rs.4.6crores!!

Sham will have Rs.1.5 crores!!

A difference of Rs.3.1 crores!! Ha!!

Think about how foolish Sham has been. When he was young and 25 years of age, he had not got married yet. His expenses were low. He had a lot of money extra each month. He would generally blow it off on parties! Later he got married. His expenses grew! He had very little money to invest. Finally at the age of 35 when he again started to have some financial control, he decided to start investing. Since his friend had stared earlier than him, he tried to make up for it but investing for 25 years. (15 years more than Ram!) However, still he ended up loosing 3.1 crore!!

Don’t be a Sham! Don’t make this mistake.

If you are wondering how this can happen, you need to understand how compounding works. Suppose you invest Rs.100 today. It grows at 15% compounded rate every year, then next year you will get Rs.115 i.e. Rs.100 + Rs.15. Why Rs.15? Rs.15 is 15% of Rs.100!

Okay so now one year is passed. You have Rs.115. The next year you will get Rs.132. Why Rs.132?  Rs.115 + Rs.17. Why Rs.17 ? Because Rs.17 is 15% of Rs.115!

Now, try to use your imagination. Initially your money will grow at a slow rate. But once the money grows to a big amount the rate of growth will be very very very high! So, basically you need a lot of time to reach a very very high rate of growth. But once you reach the high growth rate then money will just start flowing! And if there is one thing the youth have, it is time!

In fact, you should invest as fast as possible. If you are not earning yet, invest your pocket money!

Just to give you an idea, if you invest Rs.1 now. You let it grow for 30 years at 15% rate, at the end of 30 years you will have Rs.67! So think of it this way. If you want a good amount of money after 30 years, invest as much money as you can invest right now. For every one rupee you invest you will have Rs.67, 30 years from now! So if you invest Rs.5000 now, you will get Rs.3,35,000 30 years from now! So what are you waiting for. Invest the money now when your expenses are low and you have the chance. You have time on your side!   

 

I guess you probably now understand the need for investing. So, let us get right into it…

The Indian middle class “house wife” as a consumer

The percentage of working women in India is growing at a steady pace. This is mainly because of the development in communication systems and growth of educational opportunities given to women. Because of this growth of working women, the women now-a-days also have an increased purchasing power. Due to this, industries that are directly related to women like cosmetics etc. have seen a major boost. Also, toiletries, food and beverages etc. have seen a growth.

The middle class house wife is generally educated and is the purchasing agent for some of the products the family buys. She is also the "gatekeeper" for many products like new cooking medium, fast food etc. that cannot enter the house without her clearance. She also decides purchases meant for children.

To get a much better understanding of the Indian house wife, consider the following characteristics of her buying decisions:

Cautious, but not averse to change:

The middle class house wife is generally educated, earns her own money or has to use money given to her on a fixed budget. This makes the middle class house wife a discriminating and cautious buyer. However, she is not averse to new ideas and things. She is willing to try new things but she will not adopt any product instantly. She will make a sample purchase, check with people who use the product, listen for guidance and then finally she may go in for purchasing the product.

Quality as well as cost cautious:

The middle class house wife is a quality as well as cost cautious buyer. She will try to purchase products that will last her for a long time. She will try to get "millage" out of every rupee she spends. She is less likely to purchase “use and throw” type of products. Besides being quality conscious, he also is cost conscious. Before buying a particular product she will first check the price with other sellers and will then go in for the lowest price.

Because of being quality and cost conscious, extra features like re-usable containers will influence her buying decision. Bonus prizes, coupons, rebates etc. will definitely attract her attention.

Instead of advertising she relies on word-of-mouth communication. She is interested in knowing what her neighbor or colleges are using. Even after she purchases a product she seeks reassurance about making the right purchase decision.

Leisure seeking:

As time passes the house wife is getting used to more and more leisure though the use of modern gadgets like washing machines and other such house hold items. She will be interested in new innovations that reduce her work time even more. She may not be able to afford all the modern gadgets that are available in the market but they still hold her interest because they are a potential for saving time and avoiding drudgery.

Sense of grooming:

Sense of beauty is a strong motive force behind several of her purchases. Soap or shampoo, vanishing cream or cleansing milk, perfumes or hair oil - selecting her brand is greatly influenced by her sense of grooming. She is generally fashion loving however she is not fashion crazy. A strong sense of traditionalism runs thought her personality. Products or ideas that uproot her basic personality or values will not find acceptance with her.

The Basics of Fundamental Analysis

Fundamental Analysis Definition

Fundamental analysis is a stock valuation method that uses financial and economic analysis to predict the movement of stock prices.

The fundamental information that is analyzed can include a company's financial reports, and non-financial information such as estimates of the growth of demand for products sold by the company, industry comparisons, and economy-wide changes, changes in government policies etc..

General Strategy

To a fundamentalist, the market price of a stock tends to move towards it's “real value” or “intrinsic value”. If the “intrinsic/real value” of a stock is above the current market price, the investor would purchase the stock because he knows that the stock price would rise and move towards its “intrinsic or real value”

If the intrinsic value of a stock was below the market price, the investor would sell the stock because he knows that the stock price is going to fall and come closer to its intrinsic value.

All this seems simple. Now the next obvious question is how do you find out what the intrinsic value of a company is? Once you know this, you will be able to compare this price to the market price of the company and decide whether you want to buy it (or sell it if you already own that stock). 

 

To start finding out the intrinsic value, the fundamentalist analyzer makes an examination of the current and future overall health of the economy as a whole.

After you analyzed the overall economy, you have to analyze firm you are interested in. You should analyze factors that give the firm a competitive advantage in it’s sector such as management experience, history of performance, growth potential, low cost producer, brand name etc. Find out as much as possible about the company and their products.

 

Do they have any “core competency” or “fundamental strength” that puts them ahead of all the other competing firms?

What advantage do they have over their competing firms?

Do they have a strong market presence and market share? 

Or do they constantly have to employ a large part of their profits and resources in marketing and finding new customers and fighting for market share?

After you understand the company & what they do, how they relate to the market and their customers, you will be in a much better position to decide whether the price of the companies stock is going to go up or down.

Having understood the basics of fundamental analysis, let us go into some more details.

When investing in the stocks, we want the price of our stock to rise. Not only do we want our stock price to rise, we want it to rise FAST! So the challenge is to figure out: which stock prices are going to rise fast?

Some stocks are cheap and some are costly. Some are worth Rs.500 and some are even worth 50paise. But the price of the stock is not important. The price of the stock does not make a stock good to buy. What is important is how much the price of the stock is likely to rise. 

If you invest Rs.500 in one stock of Rs.500 and the price goes up to Rs.540 you will make Rs.40. However, if you invest Rs.500 in a 50paise stock, you will have 1000 stocks. If the price of the stock goes up from 50paise to Rs.1, then the Rs.500 you invested is now Rs.1000. You made a profit of Rs.500.

If you understand this, you can see that the price of the stock is not important. What is important is the rise in the stock’s price. More specifically the “percentage” rise in the stock price is important.

If the Rs.500 stock becomes worth Rs.540, then that is a 8% rise. This 8% rise only makes us Rs.40. On the other hand when we invest the same Rs.500 in the 50paise stock and the stock price goes up to Rs.1, it is a 100% rise as the stock price has doubled. This 100% rise makes us Rs.500.

The point is that when picking a company, we are interested in a company whose stock price will rise by a large percentage.

Please note: Looking at the above paragraphs, it may seem like a good idea to buy all the really cheap 50paise and Rs.1 stocks hoping that their price will rise by 100% or more. This sounds good, but it can also be really really bad some times! These really small stocks are very volatile and unless you know what you are doing, do NOT get into them.

However, the point to be noted is that we are interested in stocks that will have the highest % rise in the stock price. Now the question is, how do you compare stocks. How do you compare a stock worth Rs.500 to a stock worth 50paise and figure out which one will have a higher percentage rise. 

How do you compare  two companies that are in different fields and different industries? How do you know which one is fundamentally strong and which one is week?

If you try to compare two companies in different industries and different customers it is like comparing apples and elephants. There is no way to compare them! 

So fundamental analysts use different tools and ratios to compare all sorts of companies no matter what business they are in or what they do!

Stock Picking - Which stocks to buy?

Having understood all the basics of the stock market and the risk involved, now we will go into stock picking and how to pick the right stock. Before picking the right stock you need to do some analysis.

There are two major types of analysis:

 
1.    Fundamental Analysis

2.    Technical Analysis

Fundamental analysis is the analysis of  a stock on the basis of core financial and economic analysis to predict the movement of stocks price.

On the other hand, technical analysis is the study of prices and volume, for forecasting of future stock price or financial price movements.

Simply put, fundamental analysis looks at the actual company and tries to figure out what the company price is going to be like in the future. On the other hand technical analysis look at the stocks chart, peoples buying behavior etc. to try and figure out what the stock price is going to be like in the future.

In this article we will go into the basics of “fundamental analysis”. Technical analysis is a little more complicated. It is much more of an "art" than a science. It depends more on experience and involves some statistics and mathematics, so explaining technical analysis is out of the scope of this article. 

How to “draft” the perfect business plan?

After gathering all the information in the previous steps you need to put it all down in the form of a clearly understandable business plan.

It is always good to write two business plans, a detailed one for your self and a less detailed one for any one else who wishes to review your business plan and does not need to know all the minor details about how the business shall be run.

I. Summary

          A. Business Description

               1. Name
               2. Location
               3. Product(s)
               4. Market and competition
               5. Management experience
         

B. Business definition goals and objectives

C. Summary of financial needs and application of funds

II. Market Analysis

          A. Description of total market
          B. Industry trends
          C. Target Market
          D. Competition

III. Products or Services

         A. Description of product line
         B. Proprietary position: patents, copyrights and legal issues.
         C. Comparison to competitors products, operations etc.

IV. Manufacturing Processes (If Applicable)

         A. Materials
         B. Source of supply
         C. Production methods

V. Marketing strategy

         A. Overall strategy
         B. Pricing policy
         C. Method of selling, distributing, and servicing products

VI. Management Plan

         A. Form of business organization
         B. Board of directors composition
         C. Officers: organization chart and responsibilities
         D. Resumes of key personal
         E. Staffing plan/number of employees
         F. Operating plan for the next one or two years

VII. Other Pertinent Information, Plans

Once your business plan is ready, you will want to go though it step by step and revise it. Once this is done, you may submit the business plan to investors to obtain the capital that is required for setting up the business.

During the startup process, you will have to review and revise the plan again and again. Once your business is setup, your business objectives and other such specific details will change from time to time. Change the business plan to accommodate for these changes.

How to estimate the capital required for your new business?

If you have read though and followed the instructions in the previous pages, you will have a good idea about how much idea you are going to need to set up and run your business initially.

When you decide how much money you are going to need, consider the following suggestions:

Avoid padding your estimates: You may ask for some money for some contingency expenses. However, do not penalize yourself by being too conservative.

Do not make the mistake of raising just enough funds to open the business without sufficient funds to operate the business: Remember, money is required to run the business and it may be months or years before the business becomes profitable.

Determine the funds needed at each stage of life of your business: For example, if you plan to initially purchase resale items from other manufacturers and not engage in manufacturing until the third year of operation, the initial funds needed won’t require production facilities.

Most investors (especially banks) will be more receptive to investing in stages as your business develops and proves itself rather than in a one-shot gamble.

How to make the “right” business decisions?

Once you have decided what your business objectives are, the next step would be to take appropriate steps to achieve your business objectives. These steps are your business decisions.

If you have a running company, then these business decisions are your strategies. Making the right strategies will help you reach your business objectives. However, since you are an entrepreneur, your biggest concern is “starting up” your company. You do not really have to make business strategies. You just have to start up your company.

To start up your industry, you will have to make the following decisions:

• Legal decisions
• Personnel decisions
• Production decisions
• Purchasing and inventory decisions
• Marketing decisions

In this guide we have just given you the introduction to the various decisions involved. Each of these decisions is actually very deep. There are whole books written on marketing, inventory control, production practices etc. Here we just provide you an introduction to give you an idea about what is involved.

How to form business objectives? & Why?

Before you form business objectives, the first thing you have to do is: “define your business”!

Defining your business

A business definition basically tells you ‘what kind of business’ you are in. It is a one-line summarization of your entire business. It helps you clearly communicate what your business is about to others.

A business definition is generally based upon 3 points:

• Who? : Who is your customer? To know this look at your customer description from “Understanding your business! (Situation Analysis)”
• What? : What customer needs will be satisfied by your business. Remember needs are not only physical needs. There are also other needs like the need for achievement, need for status etc.
• How? : What solution does your business offer to satisfy the needs of the customer.

For e.g. if it were a business making snacks the answers to the questions would be:

• Who? People who want to “munch” something
• What? Need to quickly quench their hunger in an enjoyable way.
• How? By providing good tasting between meals food products.

A “sample business definition” using the answers to the above questions would be:

"We will manufacture good and tasty sweet snacks to enable individuals to quickly satisfy their hunger."

After you have your business definition ready, the next step is to formulate your business objectives.

What are business objectives?

Business objectives are specific statements that give projections about growth or development to companies. For example, a business objective could be, “We must triple the sales of our product by next year.”

Why are business objectives needed?

Business objectives are important to give direction to a business. If you are running a business without any business objectives, you shall not be able to grow successfully in any direction. Having business objectives, gives you a much better understanding of where you stand, how to improve and what changes in your current method of working will be required to reach your objectives. Not having business objectives leads to an un-coordinated business that has a very low probability of being successful.

When setting business objectives, one must make sure that they are:

• Quantitative: The business objectives should be expressed in terms of numbers. It should not be expressed vaguely like, “Our sales should go up!”
• Time-frame specific: Time frames should be specified in the business objectives. This helps you to understand where you stand with respect to the completion of the current objective.
• Flexible: It is very important that your business objectives are adaptable to change. If the situation in which the business is working changes, the business objectives should change to reflect these changes.
• Understandable: The business objectives should be made in an understandable way. This helps in communicating your objectives to your investors, employees, partners etc. Without this communication of business objectives, it becomes very difficult to reach them.
• Realistic: It is important that the business objectives are realistic, or you may end up disappointing your investors and your self.

 

Examples of business objectives:

“Sell 1000 units o product A and 500 of product B by December 31, 2007”

OR

“Maintain a minimum of 5% market share in the soft drinks segment in Pune City during the whole of 2006”

What do “you” want? (Identifying personal objectives!)

This is the phase where you understand why you want to take up this new project of starting a company.

What is the purpose of this exercise?

Since YOU are starting a company, there must be some need that you would like to satisfy or some aim you would like to achieve though the company. We are not talking about business aims like “increasing market share” etc.

We are talking about personal needs and aims. Like the need for money, or the need for recognition and status in society etc. This exercise will help you understand and identify what personal needs you are trying to satisfy.

Having identified your personal needs, you have to see whether the company you are starting and the effort you take will be able to satisfy your personal needs. If the effort you put in setting up the company will not pay off and will not satisfy your personal needs then you rather not waste time, effort and money setting up the company.

Do this exercise so that you can set your personal goals and commit to yourself what you are planning to do. Besides, the most important reason to set personal objectives, is so that you have some basis to set your business objectives.

To understand your personal objectives, ask the following questions:

• What is my motivation to start a business? Is it wealth, security, self-esteem or some thing else?
• How much risk am I willing to take upon me?
• How long and hard am I willing to work?
• What is a reasonable timetable for my objectives?
• When shall my personal objectives be reached?
• Will I be able to “survive” if my objectives do not get fulfilled?

Understanding your business (Situation Analysis)

Introduction

Situation analysis is basically done to analyze your:

1. ‘Customer’ and ‘customer relation to product’

2. Location where you could set up your business

3. Competition

Situation analysis gives you a much better understanding about these three things. It is used to understand what kind of environment your company will be in, what are the factors that may affect its possibility to succeed, and what might make your business fail.

Customer & his/her relation to the product

To understand your consumer and his/her relation to your product/service, answer the following:

• Who is the likely consumer?
• Where does he/she live?
• What is his/her age?
• What is his/her income?
• What is his/her level of education?
• How many potential customers are there?
• Are customers likely to perceive a purchase risk?
• What needs does the product/service satisfy?
• How is the product going to be used?
• What are the other uses of the product?
• How many units is the customer likely to buy?
• If it is a service, will the customer have to be present when the service is provided?
• Where would the customer learn about the product/service (e.g. friends, newspaper)?
• Who actually would buy the product (e.g. Mom, Purchasing agent)?
• Who influences the buying decision? (e.g. kids, engineers etc.)
• How much would the customer be willing to pay for the product?
• How much would price change affect your customer?

Not all these questions pertain to every type of business. If they do pertain to your business, find out the answers. After finding the answers you will have a very good understanding of your customers and your product/service.

Location where you set up your business:

If you want to start a food stall or a restaurant or plan to go into the retail business, it is very important that you choose a good location for your business. It is also important to choose a good location when you are about to start a production or manufacturing house.

To evaluate the location that you have chosen, answer the following questions:

• What is the total cost of renting or acquiring the property?
• What is the estimated cost of any necessary repairs, remodeling etc.?
• Does the site provide as much space as you need?
• If customers visit your place of business-
  -Is adequate, convenient and safe parking available?
  -Is public transportation available?

• Is the location likely to develop "drop in" or "impulse" consumer traffic?
• Is the site located at a popular area (E.g. Near a movie theater or a shopping complex)?
• If not, you will have to spend a lot of money marketing your product/service and it will eat into your profits!
• What other types of businesses are located around your site? Are they going to compete with your business?
• Is fire protection close by?
• Are basic utilities available (E.g. water, electricity, sewer, gas etc.) at a reasonable cost?
• Are you going to be transporting products from one part of India to the other? If so, are the expressways located close to your location?
• What is the history of the site? What types of businesses were previously run at the site? Why are these businesses no longer there?

After seeking answers to these question you will be able to get a good judgment of how good the location you have selected is.

In some businesses some questions are more important than other questions. For E.g. If you are in the manufacturing business, you will not have too many customers coming to your site. So you do not have to bother about customer parking. If you are in the retail business, customer paring is an important factor.

If you are an entrepreneur you will generally find it most convenient to start of your business right at home. This removes a lot of overhead costs of rent, electricity bill etc.

Only if your business is so large that accommodating it at home will be difficult, think about choosing another location. In some cases, it is required that you set up at some other location, (E.g. when you are starting a restaurant) in that case, you have no choice but to choose the location wisely. Let the location questionnaire above guide you in your decision.

Competition

The following is the list of questions that will help you analyze your competition. Answer these questions and you shall know much more about your competitors and how they are going to affect your business.

(Make sure that you do not define your competition too narrowly. For E.g. when you are staring a movie theater, your competition is not only other movie theaters, but also VCD rent places etc.)

• Who are your potential competitors?
• What are their strengths and what are their weaknesses?
• Who are the customers of each competitor?
• Why might a customer buy from them instead of you?
• What is the approximate sales volume of each competitor? Are there significant trends in sales?
• What is market share of each competitor?
• What is the pricing structure of each competitor?
• Do your competitors enjoy the support of a strong franchise or parent company?
• How is each competitor positioned? This means what is the mental image that comes in your consumers mind when he/she thinks about your competitor?
• How do your competitors promote their products and services?
• What are the distribution arrangements of the competitors?
• Who are the suppliers of each competitor?
• Are there any new competitors that are going to come up in the industry?
• What are the management strengths and weaknesses of each major competitor?
• Are the competitors well financed?
• How committed is each competitor? Will they fight hard for market share?
• Will the future technological developments affect your competitor? Are they better equipped to handle the change than you?
• How do the competing products rate in terms of quality, size, appearance etc.?
• What are the credit terms of the major competitors?
• How much warrantee do the competitors give for their products?
• Do the competitors own any exclusive distribution rights that would affect your market entry?
• What are their hours of operation?
• How saturated is the competition? Is there room for a new business?

Before you go ahead, you must try to find out the answers to all the questions on this page. This will give you a good understanding of your own business. During the process of finding the answers you may realize that there are certain flaws in your thinking and your business idea. Go back and correct these flaws.

All this information will have to be documented into the business plan. Having information about your customers, competitors etc. tells you how you should run and set up your business so that you can cater to the needs of the market. Having all this is essential if you intend to approach a bank, financial institution or a venture capitalist with your idea.