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Case study in Entrepreneurship (new Business set up)
1. A Case Study in Entrepreneurship (Small Business Set Up)
- Upendra Lele/Oct 2013
In the last few decades, technology has had significant influence on day-to-day life especially of oil rich countries like Saudi Arabia. The tremendous increase in the buying power of the average Saudi consumer has promoted flooding of the Saudi markets with the latest brands and models of consumer durables, computers, mobile phones and cars.
The Government also aggressively took up computerization of its processes, which particularly raised the demand for computers to a great extent. As a result, it has become increasingly challenging for the computer suppliers and service providers to cope with this rising demand. Saudi Arabia is a vastly spread out country with population mostly localized in towns and cities. These towns are located several hundred kilometres from each other, and the offices of the computer & electronics suppliers are located in the main cities, from where they try to cater to the demand of the region around them. With increase in the number of computers, the demand for maintenance and after sales service has also grown tremendously and the geographical limitations mentioned above has severely affected the quality of service available to the consumers.
Faisal Al Buraidi is young college student, pursuing his Bachelor’s course in Business & Economics from Qassim University in Saudi Arabia. He has been observing the progress made by some of the entrepreneurs in the region and he considers them as a role model. Before joining the Business School, Faisal had completed a Diploma in Computer Science, and parallel he had worked for two years as a maintenance technician for a small firm. He had acquired good amount of experience in repairs and maintenance of printers and photocopy machines, and he is aspiring to set up his own service centre for these equipments. This also prompted him to join the Business school, to formally learn business management, before he actually starts his own business. He has also decided the name of his company to be “Qassim Electronics Company”.
Qassim province occupies a large central part of Saudi Arabia. Its capital Buraidah is well known for its dates production. Other major cities in and around Qassim include Unaizah, Majmah, Zilfi, Bukairiyah, Methnab etc. There is a sizable population of computer users in these cities. Faisal is aiming to set up his service centre in the city of Majmah, which is 150 km from Buraidah and 250 km from Riyadh, the capital of Saudi Arabia. Currently these towns depend upon support services from Buraidah and Riyadh.
Faisal has decided to start his activities with maintenance of printers and photo copy machines, and later expand it to computers and other peripherals. He made a survey of the market potential in Majmah region and the prospects looked promising. There are several schools, colleges, government offices, private companies, professionals and individual users of computers and printers who are regularly requiring maintenance services. There is also a large military base in the region that is a heavy user of these equipments.
The maintenance services for printers are rendered by companies in Buraidah and Riyadh. The current daily demand is around 10 to 12 calls per day. The calls get attended in 2 or 3 days, and sometimes they may take even one week to get resolved. The demand is expected to grow at a rate
2. of at least 10% every year. The average repair charges are SR 200 per repair, excluding the cost of spare parts.
Faisal believes that if he sets up a service centre in Al Majmah, he could have a lion’s share of the printer maintenance service business in the region on account of proximity to the customers, timely response, ability to provide temporary replacement of defective printers, competitive service rates, and Quality and Reliability of service (with warranty). He expects that his business would grow from 3 to 6 maintenance calls per day in the first six months to at least 10 calls per day by the end of the year, at a charge of 200 SR per call. Cost of spares will be additionally borne by the customers, and it will cover the value of spares, taxes if any and the transportation cost. He also expects an annual growth rate of 10% growth in his business. After two years, Faisal also wants to start sale of Canon printers. He estimates to sell 3 to 4 printers per day, with a commission of SR 400 per printer. The expected demand for maintenance services and printer sales are given in Exhibit 1.
Faisal is planning to set up his service centre at Majmah. He has estimated that he will require a space of around 100 sqm for his service centre and office. The office rent is SR 40000 per year, and the annual electricity and telephone bill is estimated to be SR 12000. Other investment is required for Furniture for the workshop and office area, Computers, photocopy machine, scanner, fax machine, internet router etc. for workshop and office, a Transport vehicle, and Maintenance Tools and spare printers for replacement.
Faisal is planning to expand the business in a phased manner. In the initial phase, he will need to invest in part of the furniture, computers, photocopy machines, scanners, fax machines, routers etc., though he will need to purchase the transport vehicle and maintenance tools and spare printers right away at the time of starting the service centre. His estimated capital requirement is shown in Exhibit 2.
The maintenance activity will be performed by trained technicians. Faisal will need to hire 2 technicians in the first phase of two years, to handle up to 5 to 7 calls per day. From the third year he will need 4 technicians when the demand goes up to 10-12 calls per day. The technician’s salary will be SR 3000 per month. Faisal will also need an Administrative cum Accounts officer and an office assistant cum driver. The salary of the Administrative Officer is expected to be 2500 and the office assistant’s salary will be 2000 per month. He has already identified a few good technicians from his previous contacts in the industry, to work with him. As a CEO, Faisal himself will draw a salary of SR 4000 per month. The expected manpower requirement is shown in Exhibit 3.
Faisal believes that in the initial days, the marketing of the company will be done by personal meetings, phone calls and distribution of leaflets. The estimated cost for this effort is SR 3000. Once the company is well established, the awareness will spread by word of mouth and references.
The expected monthly expenses on various items like rent, fuel, electricity, consumables etc. are shown in Exhibit 4.
Faisal is considering two options for raising the capital for his business. The first option is Banks which are giving loan of up to SR 50000 at 6% interest. Other option is that of Investment companies that are giving any amount of loan at a rate of 2.5%, but they expect an equity holding of 20% in the
3. Business. Faisal has SR 40000 in his savings bank account, so he needs to weigh the two options of funding carefully.
Questions:
1. Considering a 5 year time horizon, prepare marketing plan and operations plan for the proposed Qassim Electronics Company.
2. Estimate the fixed and variable funds requirements for the company for the 5 year period.
3. Evaluate the available funding options and recommend the appropriate option for the company.
4. Prepare a brief budgetary proposal for starting the Qassim Electronics Company, and comment upon its feasibility. Make suitable assumptions wherever necessary.
5. Prepare a detailed business plan for the proposed Qassim Electronics Company.