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CleanStart Energy
- 1. CleanStart Energy Report onthe Outcome of Simulating a Clean Energy Start-up Conducted by: ConorWalsh & MikeTaylor
- 2. SECTION I Reflections onBusiness Insights Acquired from Conducting the Simulation
- 3. Overview • Showed thequarterly nature of managing business • Short term pressures forced us into unsustainable management • Graded on cumulative profit and net worth (what gets measured gets done) • Forced us to focus on these while ignoring the long term health of the business • Difficult to focus on both metrics simultaneously • Highlighted the importance of Cash Flow on business • Showed how sensitive a business can be to subtle changes
- 4. Strategy • Competitive Strategy •Pursued strategy of Focused Differentiation • Industry was competing on price • We focused on developing quality product for premium price • Hired ample staff: Mainly engineers focused on R&D and production to meet rising demand • Economy was improving: Disposable income of consumers allowed business to invest
- 5. Strategy • Directional Strategy A.Growth • Internally driven: started from scratch • SoughtVenture capital inY1 to provide working capital & allow product development • Drove sales through incentivised compensation schemes • Kept price at constant level for 7 years to encourage sales and portray consistency of strategy • Launched IPO early inY3 as sales rocketed, to ride the crest of the wave and grow confidence in the company
- 6. Strategy • Directional Strategy B.Stability • Implemented mid-project as a means of developing profitability • Cut costs where allowable: Employee growth & Compensation • Increased revenue where possible: Incremental price increases • Negatively impacted upon net worth but we built in tolerance
- 7. Functional Strategy 1. PricingStrategy • Product Leader • Relatively high price compared to competitors but consistent • Allowed for product research & development • Difficult to generate initial sales – real fear of early bankruptcy • Expected low volume of early sales, but soon picked up • Raised price once established with strong level of sales • Inflated price improved profitability in latter half of the project
- 8. Functional Strategy 2. EmployeeStructure • Chose to consistently grow employee numbers each quarter: In line with competitive and growth strategies • Began with high proportion of Engineers • To develop the R&D the product • To manufacture the product for sale • To develop the manufacturing efficiency and therefore lower the cost of production • Slowly increased the proportion of Sales personnel • To push the sales of the product • To improve customer service and therefore generate repeat sales
- 9. Functional Strategy 3. EmployeeCompensation • Part 1 • Began with salary 2/3 of Industry average: Initial Cash flow concerns • Supplemented salary with profit sharing: encourage productivity • Part 2 • Slowly raised salary to attract and retain quality employees • Slowly reduced profit sharing percentage in line with salary rise • Due to stability strategy mid-project of increasing cumulative profit
- 10. Functional Strategy 4. Finance •Seed Capital • Utilised in the first few years to establish the business and develop the product • Lack of early sales meant dwindling of reserves • Venture Capital • Sought 100k venture capital inY1 • finance working capital • tide business over until it became profitable • Didn’t seek much funds: wanted to retain as much ownership of business as possible
- 11. Functional Strategy 4. Finance •Initial Public Offering • Launched early: the quarter after the business turned profitable • Waited for growth to ensure stock price would increase the worth of the business • Didn’t give away much (10%): ensure control and positive impact on net worth • Good qualitative reason for early IPO: garner public support for the company
- 12. SECTION II Shortcomings ofthe Simulation in terms of Reflecting Real-Life
- 13. Overview • Very littlecontrol over the Balance Sheet • Project is short: physical companies need time to develop • Almost all data available is quantitative • No knowledge of the costs, financial or otherwise, of IPO orVC • No details of the real world or macro-economy beyond brief news statement • No knowledge of the industry • No idea of the marketing strategy
- 14. Functional Analysis 1. PricingStrategy • Arbitrary pricing decision: Difficult to know optimum gross profit • No marketing data available to indicate optimum price • Unrealistic ability to change price on a quarterly basis • Good-will & qualitative costs not impacted by sporadic price changes • No input on procurement costs or value for money • No feedback fromVC or stock market as to pricing strategy
- 15. Functional Analysis 2. EmployeeStructure • No sense of corporate culture: departmental rivalry • No sense of a management structure • Arbitrary hiring method: assessment of the need for staff • No sense of the requirement for ancillary staff
- 16. Functional Analysis 3. EmployeeCompensation • Assumed that compensation is directly related to employee acquisition & retention • Realistically motivation is less tangible in start-ups • Compensation is the only means to eliminate job dis-satisfaction in simulation • An option of profit sharing before the business turns profit is unrealistic • Micro management: founder would likely be more focused on more front line issues • No option to differentiate pay levels: Engineers & Sales people paid the same
- 17. Functional Analysis 4. Finance •Seed Capital • No stated cost of capital or IRR • No access to debt financing • Generally cheaper than equity & easier to access • No sense of budgets or overheads • No real control over costs other than salaries
- 18. Functional Analysis 4. Finance •Venture Capital • Not solely about generating capital: As much about advice and direction • We have no knowledge or skill in the industry as a founder • This would be essential from a venture capitalist’s point of view • Sought and acquiredVC in the space of three months • Realistically would take more time and work
- 19. Functional Analysis 4. Finance •Initial Public Offering • Costs involved not reflected in the simulation • No sense of industry stock market performance • Trends not reflected eg. Industry scandals • Didn’t reflect the inflated perception of the company by the consumer • No option to buy back share or to revert back to private company
- 20. Conclusion • Useful simulationas a learning tool • Good for demonstrating quantitative factors in a controlled setting However… • Does not reflect qualitative aspects of business adequately • Forces micro-management
- 21.