ENTERPRISE AND THE GLOBAL CITIZEN Enterprise Dilemmas in Action – Style Sacs (Teacher Notes) Introduction You are a group of five friends whose dream to set up your own company became reality two years ago. You’ve all been interested in the idea of running your own business and throughout your high school years have been developing business ideas. Your interest in fashion led you to start making wallets, purses, and key rings when you were all at school together. You used leather off-cuts that you were given by a local factory. They admired your enthusiasm and energy and never charged for the materials. You begged an old sewing machine from an elderly aunt, and you managed to sell through local markets, networks of friends, and gift fairs. Two years ago, it was make or break time. If you all went off to college you knew you’d never get back to the prospect of running your own business. Working together, seeing what you could make of the business was such an exciting opportunity, college could wait! Your vision of your product has grown over the years so that you’re now less about the tacky key rings of your younger years and more about beautifully hand-sewn leather bags which your school friends have all taken off to college with them. They’re all selling on commission, and you’re confident your sales will grow.
Meet the Team Jim – 18 years old - good at engineering and maths – he wants to grow the business rapidly, sell it off in a few years when he’s made his millions and then go back to college. His parents have provided the garage where production is located – at least until you hit big time. Jas – 17 years old - the artistic, creative one. She’s got an incredible eye and her designs are great. Pricing, profits, and ‘boring production details’ (her words) are not her strong points! Sue – 17 years old - has been an organiser since she was in kindergarten. She spends a lot of time with spreadsheets and revenue projections and she’s confident that you’re all going to make it big. Raj – 17 years old - the marketing and business development guru. He can see an opportunity from a mile away and he lives and breathes the business. Paul – 18 years old - likes to think he’s the sales guy but is not that successful! He’s Jas’s cousin and has been part of the team for so long but all (apart from Paul) would admit he’s not the greatest asset. He ruined a number of materials a month or so ago by leaving them in the rain, and is slow to follow up leads.
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Start-up You’ve called the business ‘Style Sacs’ and to get it off the ground you each put in $1000 which you’d been saving as part of your college funds. Paul’s grandfather gave him an additional $5000 to invest in the company, and Sue’s mum has loaned Style Sacs $5000. Plus there was around $1250 from the key rings and purse sales phase. So there’s $16,500 and your parents have agreed to let you live rent free for a 2 year period. ‘After that, you’ll either be well on the way to supporting us, or its time to sort out the college applications’ said Jim’s dad. You’re buying your own leather now, you’ve replaced the old sewing machine, Jas has worked up some beautiful designs, you’ve got a new web site, and the latest Style Sacs are beginning to attract a lot of interest. The Finances The Style Sacs financial position for the next six months is as follows: Month 1 Month 2 Month 3 Month 4 Month 5 Month 6 Total
Revenue ($) 9000 11000 15,000 20,000 25,000 30,000 110,000
Costs ($) 6,000 6,500 7,000 10,000 12,000 15,000 56,500
Profit($) 3000 4,500 8,000 10,000 13,000 15,000 53,500
Below are some scenarios that your company encounter over the next six months. For each one, decide how you will handle the situation and submit your answers to the evaluator who will keep a tally of the impact of your progress throughout the scenario.
Month 1 – Expanding Sales Your business model currently has very low overheads. You sell through agents based in universities and colleges who gain around 30% commission on their sales. The bags are bought from you at $24 and typically sell at $32 per bag. Large orders from agents (for over 100 bags) gain an additional reduction of $2 per bag. It’s a model that seems to work well for the 18-25 year old college market and your business plan revenue projection of $200,000 for the year is based on this market alone. However, you need to grow the business as quickly as possible if it’s going to be able to support you all when the bonus of living at home rent-free is withdrawn in two years’ time. Setting up your own website and selling directly to customers will enable you to widen the market, increase sales and potentially offer a discount to customers as you will not need to pay the agent commission on direct sales. This discount will enable you to compete more effectively with a couple of other bag makers who you see as rivals. It seems an obvious next step, although Jas is concerned about the impact on the agents who have come to depend on the commission fee in meeting college expenses “They’ve turned down other opportunities to work with us, we owe them”. Jim’s view is that “they’re not on contract, we don’t have obligations to them”. The team meets to decide how best to handle the position.
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Month 2 – A New Bag All bags that have been produced so far use leather. This produces a great traditional look but is expensive to buy as a raw material. You begin to think of other options and discover the range of leather substitutes available. In particular you come across a material called Koskin which would work well on the bags and increase your margins. Sue proposes that Style sacs diversifies into two ranges - the leather one and the Koskin one ‘It’s really good’ she says ‘because the word Koskin is so close to the word for leather in some Scandinavian countries the customer might not even realise that it’s not real leather’. The team meet to decide what to do – stick with leather or move into producing bags in other materials alongside?
Month 3 - The Crocodile Bag One of your sales agents is achieving record sales in Shanghai. He understands the market, he’s got an amazing network of contacts, and the Style Sacs product is right for the Chinese consumer. He recommends that you diversify into some luxury leathers to maximise sales of the brand. He provides an industry report from ‘Hidenet’ (www.hidenet.com) that indicates Crocodile would be the best option for a luxury brand in China. Crocodile bags would increase revenue from a fast growing part of your market and a quick web search indicates a source of supply for the crocodile skin. It also identifies reports of the suffering experienced by ‘exotic animals’ in the leather trade. The team spend some time researching the background to the use of exotic skins and then meet to decide what to do in Style Sacs.
Month 4 – The Chemical Disaster As Style Sacs grows it has become the principal customer of a small leather supplier based locally. The leather quality is good and the supplier has been prompt and easy to do business with. The team has never asked too many questions about the production process and assumed that the necessary quality standards were achieved. However, as Style Sacs requirements have grown, the environmental impact of the supplier’s leather production has increased and water testing of the local river has disclosed unacceptably high levels of formaldehyde, chromium, sulphide, and solvents. The supplier has been cutting corners. The team need to decide how to manage the situation – there’s a media disaster in the offing as well as a chemical one.
Month 5 - The Rip Off Bag The team are getting frustrated by the number of ‘lookalike’ bags that are being developed by competitors. ‘I guess all this imitation is a sign of our success’ says Paul ruefully. One day though he is talking to Jon, an acquaintance who works for a well-established luxury end bag producer. Jon is unhappy at the way his employer has passed him over for promotion and offers to give Paul all the information that Style Sacs would need to develop an identical bag together with the customer data about current sales. ‘This is a goldmine’ says Paul. ‘We can be up and running almost immediately and we’ll be able to grow the business more quickly than by any other means’. ‘Given the number of rip off Style Sac bags, it’s our turn now’ says Paul cheerfully. The team meet to decide how to use the information that Paul has been given.
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Month 6 – The New Model The team attend a conference and come across ‘The Circular Economy’ an organisation committed to ‘from lines to loops’ production processes. They watch some of the videos of the Ellen Macarthur Foundation (www.ellenmacarthurfoundation.org) or of the circular economy (www.circleeconomy.com) and on Rethinking Progress: The Circular Economy (https://www.youtube.com/watch?v=zCRKvDyyHmI) The team meet to identify whether there might be a different business model where customers lease a Style Sacs bag rather than buying it outright. At the end of the lease period the bag can be returned and a new one chosen with a continuing lease charge. The team present a note about any changes to the Style Sacs model for customers and suppliers.
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